# First Community Bankshares Inc: Form 10-Q for the period ended Mar 31, 2021

- Company: [First Community Bankshares Inc](/companies/fcbc.md) (CIK 859070)
- Form: 10-Q
- Filed: 2021-05-07
- Accepted by EDGAR: May 7, 2021, 15:05 ET
- Period: 2021-03-31
- Accession: 0001437749-21-011304
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/859070/000143774921011304/fcbc20210331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/859070/000143774921011304/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2021-01-01 to 2021-03-31 | $869.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-01-01 to 2021-03-31 | $4.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-01-01 to 2021-03-31 | $14.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-01-01 to 2021-03-31 | $0.82 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-01-01 to 2021-03-31 | $0.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-01-01 to 2021-03-31 | 17,729,185 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2021-01-01 to 2021-03-31 | $12.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2021-01-01 to 2021-03-31 | $922.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2021-01-01 to 2021-03-31 | $4.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2021-01-01 to 2021-03-31 | $5.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2021-03-31 | $3.14bn | us-gaap:Assets |
| Total liabilities | at 2021-03-31 | $2.71bn | us-gaap:Liabilities |
| Long-term debt | at 2021-03-31 | $0 | us-gaap:LongTermDebt |
| Shareholders' equity | at 2021-03-31 | $426.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 68,724 characters.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

### Executive Overview

First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of March 31, 2021, the Bank operated 50 branches as First Community Bank in Virginia, West Virginia, North Carolina and Tennessee. As of March 31, 2021, full-time equivalent employees, calculated using the number of hours worked, totaled 621. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of March 31, 2021, the Trust Division and FCWM managed and administered $1.23 billion in combined assets under various fee-based arrangements as fiduciary or agent.

### Recent Events: COVID-19

The outbreak of COVID-19 has significantly disrupted local, national, and global economies and has adversely impacted a broad range of industries in which the Company's customers operate and could impair their ability to fulfill their financial obligations to the Company. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. The goal of these actions has been to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program (PPP). In addition to the general impact of COVID-19, certain provisions of legislative and regulatory relief efforts have had a material impact on the Company's operations and could continue to impact operations going forward.

The PPP loan program was extended and amended through additional legislation during 2020. The Consolidated Appropriations Act of 2021 was adopted in December, 2020, to provide additional COVID-19 relief and among other measures, extended weekly unemployment benefits, provided another round of economic stimulus payments to individuals and families, lengthened temporary suspensions and modifications of several bank-related provisions and provided more aid to small businesses. The 2021 Consolidated Appropriations Act reauthorized and appropriated up to $284.5 billion for the PPP for both first-time and second-time borrowers to receive loan disbursements for a period ending March 31, 2021, expanded the list of eligible PPP expenses and created a simplified loan forgiveness application for loans under $150 thousand.

During the first quarter of 2021, President Biden signed a number of executive orders relating to stimulus and relief measures. These orders include, among other things, (i) an extension, through March 31, 2021, of the moratorium on evictions and foreclosures on federally-backed mortgages, (ii) an extension, through September 30, 2021, of the deferral of federal student loan payments and interest and (iii) an extension, through June 30, 2021, of certain mortgage forbearance programs and guidelines.

On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARP Act”) was enacted, implementing a $1.9 trillion package of stimulus and relief proposals. Among other things, the ARP Act provides (i) additional funding for the PPP program and an expansion of the program for the benefit of certain nonprofits, (ii) funding for the Small Business Administration (“SBA”) to make targeted grants for restaurants and similar establishments, (iii) direct cash payments of up to $1,400 to individuals, subject to income provisions, (iv) an increase in the maximum annual Child Tax Credit, subject to income limitation provisions, (v) $300 a week in expanded unemployment insurance lasting through September 6, 2021 and makes $10,200 in unemployment benefits tax free for households, subject to income limitation provisions, (vi) tax relief making any student loan forgiveness incurred between December 31, 2020, and January 1, 2026, non-taxable income, and (vii) funding to support state and local governments; K-12 schools and higher education; the Centers for Disease Control; public transit; rental assistance; child care; and airline industry workers.

On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was enacted, extending the bankruptcy relief provisions enacted in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act of 2020 bill until March 27, 2022. These provisions provide financially distressed small businesses and individuals greater access to bankruptcy relief.

On March 30, 2021, the PPP Extension Act of 2021 was enacted, extending the Paycheck Protection Program from its previous expiration date of March 31, 2021 to June 30, 2021. Beginning June 1, 2021, the SBA may only process applications submitted prior to that date, and it may not accept any new loan applications. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.

#### Financial position and results of operations

In 2020, COVID-19 had a material impact on our allowance for credit losses. While we did not experience any significant charge-offs related to COVID-19, our allowance calculation and resulting provision for credit losses were significantly impacted by governmental reactions and forced shutdowns. On January 1, 2021, we adopted ASU 2016-13, ("CECL"), which had the effect of increasing our allowance for credit losses by $13.11 million. In the first quarter of 2021, the economic forecasts improved significantly, resulting in a reversal of provision for credit losses of $4.00 million. However, should economic conditions or forecasts worsen, we could experience further increase in our required allowance for credit losses and record additional credit loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

The Company's fee income has been reduced due to COVID-19. Consumer spending behavior has proven to be very conservative during the pandemic resulting in a decrease in overdraft behavior that generates NSF and other fee income. Should the pandemic and the global response escalate further, it is possible that the Company could see further decreases in fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.

The Company's interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of March 31, 2021, the Company carried $3.40 million of accrued income and fees on outstanding deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognized the breadth of the economic impact may affect its borrowers' ability to repay in future periods.

#### Capital and liquidity

As of March 31, 2021, the Company and Bank continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events that would change the Bank's classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of March 31, 2021. While we believe that we have sufficient capital, our reported and regulatory capital ratios could be adversely impacted by loan losses and other negative trends initiated by the pandemic. We rely on cash on hand as well as dividends from the Bank to pay dividends to our shareholders. If our capital deteriorates such that the Bank is unable to pay dividends for an extended period of time, we may not be able to pay dividends to our shareholders.

We maintain access to multiple sources of liquidity. Wholesale funding markets remain open to us, however, short-term funding rates have been volatile throughout the pandemic. If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin. In addition, if an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

#### Asset Valuation

Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgements will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

#### Our processes, controls and business continuity plan

The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics. Upon the pandemic declaration, the Company's Enterprise Risk Management team implemented its Board approved Business Continuity Plan. The Company appointed an internal pandemic preparedness task force comprised of the Company's management to address both operational and financial risks posed by COVID-19. Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. The Company's preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations. At March 31, 2021, a significant portion of our backroom operations employees continue to work remotely with no disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods.

As of March 31, 2021, we do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.

#### Lending operations and accommodations to borrowers

The CARES Act as amended included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31, 2021, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act. Through March 31, 2021, we have modified a total of 3,812 commercial and consumer loans totaling $466.59 million. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of March 31, 2021, current COVID-19 loan deferrals stood at $17.48 million. It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated Appropriations Act of 2021, signed into law on December 27, 2020, that extended the ability to provide necessary loan modifications to our customers and not consider these troubled debt restructurings. However, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown.

### Critical Accounting Estimates

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

### Allowance for Credit Losses or "ACL"

The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 1 – Basis of Presentation - Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 5 — Allowance for Credit Losses in this Quarterly Report on Form 10-Q, “Provision for Loan Losses and Nonperforming Assets” in this MD&A. Periods prior to the January 1, 2021, adoption of ASU 2-16-13 follow prior accounting guidance for estimated loan losses and may not be comparable.

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this report. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2021, and in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2020 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2020 Form 10-K.

### Performance Overview

Highlights of our results of operations for the three months ended March 31, 2021, and financial condition as of March 31, 2021, include the following:

- Net income for the quarter increased $6.73 million to $14.60 million compared to the same quarter of 2020. The large increase is primarily attributable to the reversal of $4.00 million in allowance for credit losses due to improved economic forecasts from those seen at year-end 2020.
- On January 26, 2021, the Board of Directors approved a new plan to repurchase, on the open market at prevailing prices, up to 2.4 million shares of the Company's common stock through January 26, 2024. During the quarter, the Company repurchased 187,700 common shares for $4.99 million.
- Diluted earnings per share increased $0.38 to $0.82 compared to the same quarter of 2020.
- Return on average assets increased to 1.94% compared to 1.16% from the same quarter of 2020; return on average equity increased to 13.94% compared to 7.49% from the same quarter of 2020 as well.
- Net charge-offs for the first quarter of 2021 were $725 thousand and the allowance for credit losses remains very strong at 1.61% of total loans.
- Book value per common share at March 31, 2021, was $24.22, an increase of $0.14 from year-end.

### Results of Operations

#### Net Income

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

*(Amounts in thousands, except per*

| share data) | Three Months Ended March 31, 2021 | 2020 | Increase (Decrease) | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net income | $14,602 | $7,872 | $6,730 | 85.49% |
| Basic earnings per common share | 0.83 | 0.44 | 0.39 | 88.64% |
| Diluted earnings per common share | 0.82 | 0.44 | 0.38 | 86.36% |
| Return on average assets | 1.94% | 1.16% | 0.78% | 67.24% |
| Return on average common equity | 13.94% | 7.49% | 6.45% | 86.11% |

*Three-Month Comparison.* Net income increased $6.73 million in the first quarter of 2021 largely due to a $7.50 million decrease in the provision for credit losses as a result of recovering $4.00 million of credit loss provision to recognize the impact of significantly improving economic forecasts. Additional increases resulted from $1.89 million in residual merger expenses that were recognized in the first quarter of 2020. These increases were offset by a decreases of $1.40 million in net interest income, reflective of the current historic low rate environment; and $700 thousand in service charges on deposits reflective of conservative spending behavior of customers during the pandemic.

#### 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)

*(Amounts in thousands)*

| Assets Earning assets | Three Months Ended March 31, 2021 Average Balance | Interest(1) | Average Yield/ Rate(1) | 2020 Average Balance | Interest(1) | Average Yield/ Rate(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans(2)(3) | $2,165,054 | $26,582 | 4.98% | $2,081,132 | $28,105 | 5.43% |
| Securities available for sale | 83,634 | 573 | 2.78% | 136,109 | 1,060 | 3.13% |
| Interest-bearing deposits | 468,067 | 118 | 0.10% | 163,483 | 535 | 1.31% |
| Total earning assets | 2,716,755 | 27,273 | 4.07% | 2,380,724 | 29,700 | 5.02% |
| Other assets | 331,483 |  |  | 353,647 |  |  |
| Total assets | $3,048,238 |  |  | $2,734,371 |  |  |
| **Liabilities and stockholders' equity** |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Demand deposits | $613,003 | $39 | 0.03% | $502,603 | $90 | 0.07% |
| Savings deposits | 778,430 | 91 | 0.05% | 679,656 | 414 | 0.24% |
| Time deposits | 412,986 | 739 | 0.73% | 485,085 | 1,322 | 1.10% |
| Total interest-bearing deposits | 1,804,419 | 869 | 0.19% | 1,667,344 | 1,826 | 0.44% |
| Borrowings |  |  |  |  |  |  |
| Retail repurchase agreements | 1,234 | - | N/M | 1,459 | 2 | 0.59% |
| FHLB advances and other borrowings | - | - |  | 134 | 1 | N/M |
| Total borrowings | 1,234 | - | N/M | 1,593 | 3 | 1.70% |
| Total interest-bearing liabilities | 1,805,653 | 869 | 0.19% | 1,668,937 | 1,829 | 0.44% |
| Noninterest-bearing demand deposits | 777,876 |  |  | 600,636 |  |  |
| Other liabilities | 39,926 |  |  | 42,174 |  |  |
| Total liabilities | 2,623,455 |  |  | 2,311,747 |  |  |
| Stockholders' equity | 424,783 |  |  | 422,624 |  |  |
| Total liabilities and stockholders' equity | $3,048,238 |  |  | $2,734,371 |  |  |
| Net interest income, FTE(1) |  | $26,404 |  |  | $27,871 |  |
| Net interest rate spread |  |  | 3.88% |  |  | 4.58% |
| Net interest margin, FTE(1) |  |  | 3.94% |  |  | 4.71% |

(1) Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%.

(2) Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual.

(3) Interest on loans includes non-cash and accelerated purchase accounting accretion of $1.19 million and $1.95 million for the three months ended March 31, 2021 and 2020, respectively.

38

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:

*(Amounts in thousands)*

| Interest earned on(1) | Three Months Ended March 31, 2021 Compared to 2020 Dollar Increase (Decrease) due to Volume | Rate | Rate/ Volume | Total |
| --- | ---: | ---: | ---: | ---: |
| Loans | $1,124 | $(2,321) | $(326) | $(1,523) |
| Securities available-for-sale | (405) | (119) | 37 | (487) |
| Interest-bearing deposits with other banks | 989 | (489) | (917) | (417) |
| Total interest earning assets | 1,708 | (2,929) | (1,206) | (2,427) |
| Interest paid on |  |  |  |  |
| Demand deposits | 20 | (57) | (14) | (51) |
| Savings deposits | 60 | (331) | (52) | (323) |
| Time deposits | (195) | (443) | 55 | (583) |
| Retail repurchase agreements | - | (2) | - | (2) |
| FHLB advances and other borrowings | - | - | (1) | (1) |
| Total interest-bearing liabilities | (115) | (833) | (12) | (960) |
| Change in net interest income(1) | $1,823 | $(2,096) | $(1,194) | $(1,467) |

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

*Three-Month Comparison*. Net interest income comprised 77.64% of total net interest and noninterest income in the first quarter of 2021 compared to 78.57% in the same quarter of 2020. Net interest income on a GAAP basis decreased $1.40 million, or 5.06%, compared to a decrease of $1.47 million, or 5.26%, on a FTE basis. The net interest margin on a FTE basis decreased 77 basis points and the net interest spread on a FTE basis decreased 70 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment.

Average earning assets increased $336.03 million, or 14.11%, primarily due to an increase in interest-bearing deposits and an increase in average loans. Average interest-bearing deposits increased $304.58 million or $186.31%. This increase is primarily due to unprecedented levels of federal government stimulus during the pandemic. Average loans increased $83.92 million, or 4.03%. These increases were offset by a decrease in securities available-for-sale of $52.48 million, or 38.55%. The decrease was primarily attributable to the sale of the Highlands portfolio in the first quarter of 2020. The yield on earning assets decreased 95 basis points or 18.92%, primarily due to the historically low rate environment. The average loan to deposit ratio decreased to 83.84% from 91.76% in the same quarter of 2020. Non-cash accretion income decreased $767 thousand, or 39.25%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $136.72 million, or 8.19%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 25 basis points. Average interest-bearing deposits increased $137.08 million, or 8.22%, which was driven by unprecedented levels of federal government stimulus during the pandemic. Interest-bearing demand deposits increased $110.40 million, or 21.97%, and savings deposits increased $98.77 million, or 14.53%. These increases were offset by a decrease in time deposits of $72.10 million, or 14.86%.

#### Provision for Credit Losses

*Three-Month Comparison*. The provision charged to operations decreased $7.50 million, or 214.31%, in the first quarter of 2021 compared to the same quarter of 2020. The decrease in the provision was primarily due to significantly improved economic forecasts. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.

#### Noninterest Income

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

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2021 | 2020 | Increase% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: |
| Wealth management | $881 | $844 | $37 | 4.38% |
| Service charges on deposits | 3,031 | 3,731 | (700) | -18.76% |
| Other service charges and fees | 3,022 | 2,231 | 791 | 35.45% |
| Net gain on sale of securities | - | 385 | (385) | -100.00% |
| Net FDIC indemnification asset amortization | (280) | (486) | 206 | -42.39% |
| Other operating income | 915 | 844 | 71 | 8.41% |
| Total noninterest income | $7,569 | $7,549 | $20 | 0.26% |

*Three-Month Comparison*. Noninterest income comprised 22.36% of total net interest and noninterest income in the first quarter of 2021 compared to 21.43% in the same quarter of 2020. Noninterest income increased $20 thousand, or 0.26%. The increase was primarily due to an increase in net interchange income of $822 thousand included in other service charges and fees and a reduction in net FDIC indemnification asset amortization of $206 thousand. These increases were offset by a decrease in service charges on deposits of $700 thousand resulting from pandemic shutdowns throughout 2020 and the first quarter of 2021 and a gain on the sale of securities of $385 thousand in the first quarter of 2020.

#### Noninterest Expense

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

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2021 | 2020 | Increase% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $10,884 | $11,386 | $(502) | -4.41% |
| Occupancy expense | 1,275 | 1,315 | (40) | -3.04% |
| Furniture and equipment expense | 1,367 | 1,384 | (17) | -1.23% |
| Service fees | 1,335 | 1,523 | (188) | -12.34% |
| Advertising and public relations | 335 | 512 | (177) | -34.57% |
| Professional fees | 466 | 233 | 233 | 100.00% |
| Amortization of intangibles | 357 | 361 | (4) | -1.11% |
| FDIC premiums and assessments | 199 | - | 199 | N/M |
| Merger expense | - | 1,893 | (1,893) | -100.00% |
| Other operating expense | 2,602 | 3,057 | (455) | -14.88% |
| Total noninterest expense | $18,820 | $21,664 | $(2,844) | -13.13% |

*Three-Month Comparison*. Noninterest expense decreased $2.84 million, or 13.13%, in the first quarter of 2021 compared to the same quarter of 2020. The decrease was largely due to $1.89 million in residual merger expenses recognized in the first quarter of 2020. In addition, salaries and benefits decreased $502 thousand, or 4.41%, primarily due to branch closures. Other operating expense decreased $455 thousand, or 14.88% and was primarily driven by decreases in expenses related to credit impaired loans.

#### Income Tax Expense

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

*Three-Month Comparison*. Income tax expense increased $2.24 million, or 101.82%, primarily due to the increase in pre-tax earnings. The effective tax rate increased to 23.28% in the first quarter of 2021 from 21.80% in the same quarter of 2020.

### Non-GAAP Financial Measures

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

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:

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Net interest income, GAAP | $26,282 | $27,682 |
| FTE adjustment(1) | 122 | 189 |
| Net interest income, FTE | 26,404 | 27,871 |
| Net interest margin, GAAP | 3.92% | 4.68% |
| FTE adjustment(1) | 0.02% | 0.03% |
| Net interest margin, FTE | 3.94% | 4.71% |

(1) FTE basis of 21%.

### Financial Condition

Total assets as of March 31, 2021, increased $128.93 million, or 4.28% from December 31, 2020. The increase in assets was primarily driven by a increase in overnight funds of $174.73 million, or 44.15%. In addition, total liabilities as of March 31, 2021, increased $129.66 million, or 5.02% from December 31, 2020. The increase in liabilities was primarily the result of an increase in total deposits of $126.85 million, or 4.98%.

#### Investment Securities

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

Available-for-sale debt securities as of March 31, 2021, decreased $4.29 million, or 5.14%, compared to December 31, 2020. The market value of debt securities available for sale as a percentage of amortized cost was 100.67.% as of March 31, 2021, compared to 101.71% as of December 31, 2020.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of March 31, 2021 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.

#### Loans Held for Investment

Loans held for investment, which generates the largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). Total loans held for investment, net of unearned income, as of March 31, 2021, decreased $39.99 million, or 1.83%, compared to December 31, 2020. Covered loans decreased $639 thousand, or 6.60%, as the covered Waccamaw portfolio continues to pay down. Covered loans were $9.04 million, $9.68 million, and $12.12 million at March 31, 2021, December 31, 2020, and March 31, 2020, respectively. For additional information, see Note 3, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

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

*(Amounts in thousands)*

| Loans held for investment Commercial loans | March 31, 2021 Amount | Percent | December 31, 2020 Amount | Percent | March 31, 2020 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Construction, development, and other land | $45,328 | 9.00% | $44,674 | 2.04% | $53,348 | 2.54% |
| Commercial and industrial | 162,227 | 7.56% | 173,024 | 7.91% | 129,728 | 6.19% |
| Multi-family residential | 105,592 | 4.92% | 115,161 | 5.27% | 110,202 | 5.26% |
| Single family non-owner occupied | 187,896 | 8.75% | 187,783 | 8.59% | 187,965 | 8.96% |
| Non-farm, non-residential | 718,830 | 33.49% | 734,793 | 33.60% | 726,666 | 34.66% |
| Agricultural | 9,723 | 0.45% | 9,749 | 0.45% | 11,303 | 0.54% |
| Farmland | 19,014 | 0.89% | 19,761 | 0.90% | 26,045 | 1.24% |
| Total commercial loans | 1,248,610 | 58.17% | 1,284,945 | 58.76% | 1,245,257 | 59.40% |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 92,095 | 4.29% | 96,526 | 4.41% | 114,690 | 5.46% |
| Single family owner occupied | 665,128 | 30.98% | 661,054 | 30.24% | 606,132 | 28.90% |
| Owner occupied construction | 18,376 | 0.86% | 17,720 | 0.81% | 13,946 | 0.65% |
| Total consumer real estate loans | 775,599 | 36.13% | 775,300 | 35.46% | 734,768 | 35.02% |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 117,904 | 5.49% | 120,373 | 5.50% | 112,127 | 5.35% |
| Other | 4,527 | 0.21% | 6,014 | 0.28% | 4,573 | 0.22% |
| Total consumer and other loans | 122,431 | 5.70% | 126,387 | 5.78% | 116,700 | 5.57% |
| Total loans held for investment, net of unearned income | 2,146,640 | 100.00% | 2,186,632 | 100.00% | 2,096,725 | 100.00% |
| Less: allowance for credit losses | 34,563 |  | 26,182 |  | 21,137 |  |
| Total loans held for investment, net of unearned income and allowance | $2,112,077 |  | $2,160,450 |  | $2,075,588 |  |

Total loans decreased $39.99 million compared to December 31, 2020. The decrease was primarily attributable to a decrease in the total commercial loan category of $36.33 million; comprised of decreases of $15.96 in commercial real estate, $10.80 in commercial and industrial, and $9.57 million in the multi-family. During the second quarter of 2020, we began participating as a Small Business Administration Paycheck Protection Program lender. The decrease in commercial loans from December 2020 to March 2021 is primarily attributable to $28.79 million received from the SBA for debt forgiveness. At March 31, 2021, the PPP loans had a current balance of $50.75 million, and were included in commercial and industrial loan balances. Remaining deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, totaled $3.27 million at March 31, 2021, were also recorded. During the first quarter of 2021, we recorded amortization of net deferred loan origination fees of $922 thousand on PPP loans. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.

#### Commercial Loans Modified Under CARES Act

As of March 31, 2021, total COVID-19 loan deferrals stood at $17.48 million; down significantly from our peak of $436.11 million at June 30, 2020. The March 31, 2021, total included $14.55 million in commercial loan deferrals. Commercial loan COVID-19 deferrals continue to decrease from our peak of $340.00 million at June 30, 2020 and year-end 2020 of $26.54 million.

#### Risk Elements

We seek to mitigate credit risk by following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $4.00 million annually and at various times during the year. Smaller commercial and retail loans are sampled for review during the year.

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Prior to the adoption of ASU 2016-13 ("CECL"), loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 4, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

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

*(Amounts in thousands)*

| Nonperforming | March 31, 2021 | December 31, 2020 | March 31, 2020 |
| --- | ---: | ---: | ---: |
| Nonaccrual loans | $26,106 | $22,003 | $20,408 |
| Accruing loans past due 90 days or more | 171 | 295 | 329 |
| TDRs(1) | 308 | 187 | 623 |
| Total nonperforming loans | 26,585 | 22,485 | 21,360 |
| OREO | 1,740 | 2,083 | 2,502 |
| Total nonperforming assets | $28,325 | $24,568 | $23,862 |
| **Additional Information** |  |  |  |
| Total Accruing TDRs(2) | 9,027 | 10,248 | 9,052 |
| **Asset Quality Ratios:** |  |  |  |
| Nonperforming loans to total loans | 1.24% | 1.03% | 1.02% |
| Nonperforming assets to total assets | 0.90% | 0.82% | 0.87% |
| Allowance for loan losses to nonperforming loans | 130.01% | 116.44% | 98.96% |
| Allowance for loan losses to total loans | 1.61% | 1.20% | 1.01% |

(1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $2.09 million, $1.18 million, and $2.31 million for the periods ended March 31, 2021, December 31, 2020, and March 31, 2020, respectively. They are included in nonaccrual loans.

(2) Total accruing TDRs exclude nonaccrual TDRs of $3.48 million, $1.81 million, and $2.62 million for the periods ended March 31, 2021, December 31, 2020, and March 31, 2020, respectively. They are included in nonaccrual loans.

Nonperforming assets as of March 31, 2021, increased $3.70 million, or 15.22%, from December 31, 2020, primarily due to an increase in nonaccrual loans of $4.04 million, or 18.62%, offset by a decrease in OREO of $343 thousand. As of March 31, 2021, nonaccrual loans were largely attributed to single family owner occupied (36.92%), non-farm, non-residential (28.33%), and single family non-owner occupied loans (14.10%). Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.

Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $33.05 million as of March 31, 2021, a decrease of $2.71 million, or 7.62%, compared to $35.62 million as of December 31, 2020. Delinquent loans as a percent of total non-covered loans totaled 1.54% as of March 31, 2021, which includes past due loans (0.34%) and nonaccrual loans (1.20%).

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs as of March 31, 2021, decreased $1.22 million, or 11.91%, to $9.03 million from December 31, 2020. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of March 31, 2021, increased $121 thousand compared to December 31, 2020. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 3.41% as of March 31, 2021, compared to 1.82% as of December 31, 2020. There were no specific reserves related to TDRs as of March 31, 2021, compared to $353 thousand as of December 31, 2020.

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2021 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

Through March 31, 2021, we had modified a total of 3,812 loans for $466.59 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of March 31, 2021, current COVID-19 loan deferrals stood at $17.48 million, down significantly from our peak of $436.11 at June 30, 2020.

The balance of non-accrual loans was higher at March 31, 2021, due mainly to the conversion of $5.70 million in loans from purchased credit impaired to purchased credit deteriorated status as a result of the Company's adoption of CECL coupled with the migration of a $972 thousand commercial and industrial loan relationship during the quarter.

OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $343 thousand, or 16.47%, as of March 31, 2021, compared to December 31, 2020, and consisted of 20 properties with an average holding period of approximately 18 months. The net loss on the sale of OREO totaled $316 thousand for the three months ended March 31, 2021, compared to a net loss of $300 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Beginning balance | $2,083 | $3,969 |
| Additions | 460 | 377 |
| Disposals | (593) | (1,453) |
| Valuation adjustments | (210) | (391) |
| Ending balance | $1,740 | $2,502 |

#### Allowance for Credit Losses

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

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

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

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

With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loans from an incurred loss method to a life of loan method. See Note 1 – Basis of Presentation - Significant Accounting Policies for further details. As of March 31, 2021, the balance of the ACL was $34.56 million, or 1.61% of total loans. The ACL at March 31, 2021, increased $8.38 million from the balance of $26.18 million recorded before the adoption of the new standard on January 1, 2021. This increase included a $13.11 million cumulative adjustment for the adoption of ASU 2016-13 offset by a reversal of provision of $4.00 million and net charge-offs for the quarter of $725 thousand. The reversal in provision was due to significantly improved economic forecasts for unemployment, GDP growth, and home prices from those used at year-end 2020.

At March 31, 2021, the Company also had an allowance for unfunded commitments of $465 thousand which was recorded in Other Liabilities on the Balance Sheet. With the adoption of ASU 2016-13 effective January 1, 2021, the Company increased its allowance for credit losses on unfunded commitments by $509 thousand. During 2020, the provision for credit losses on unfunded commitments was $66 thousand which was recorded in the provision for credit losses on the Statement of Income. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financials asset during 2021.

The following table presents the changes in the allowance for credit losses during the periods indicated:

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Beginning balance | $26,182 | $18,425 |
| Cumulative effect of adoption of ASU 2016-13 | 13,107 | - |
| Provision for (recovery of) loan losses charged to operations |  | - |
| Charge-offs | (4,001) | 3,500 |
| Recoveries | (1,730) | (1,194) |
| Net charge-offs | 1,005 | 406 |
| Ending balance | (725) | (788) |
|  | $34,563 | $21,137 |

#### Deposits

Total deposits as of March 31, 2021, increased $126.85 million, or 4.98%, compared to December 31, 2020. The increase was largely attributable to savings and noninterest-bearing demand deposits which increased $54.49 million, or 7.22% and $51.78 million, or 6.70%, respectively. Interest-bearing demand deposits also reflected growth with an increase of $36.80 million, or 6.15%. These increases were offset by a decrease in time deposits of $16.22 million, or 3.86%. We attribute a significant amount of the increase in deposits to the unprecedented level of federal government stimulus during the first quarter of 2021.

#### Borrowings

Total borrowings as of March 31, 2021, increased $555 thousand, compared to December 31, 2020.

### Liquidity and Capital Resources

#### Liquidity

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

As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of March 31, 2021, the Company’s cash reserves totaled $12.29 million. The Company’s cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of March 31, 2021, our unencumbered cash totaled $628.75 million, unused borrowing capacity from the FHLB totaled $267.02 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $85.00 million, and unpledged available-for-sale securities totaled $50.51 million.

#### Cash Flows

The following table summarizes the components of cash flow for the periods indicated:

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $12,615 | $11,373 |
| Net cash provided by investing activities | 41,442 | 80,487 |
| Net cash provided by (used in) financing activities | 118,127 | (67,256) |
| Net increase in cash and cash equivalents | 172,184 | 24,604 |
| Cash and cash equivalents, beginning balance | 456,561 | 217,009 |
| Cash and cash equivalents, ending balance | $628,745 | $241,613 |

Cash and cash equivalents increased $172.18 million for the three months ended March 31, 2021, compared to an increase of $24.60 million for the same period of the prior year. The increase in cash and cash equivalents during the quarter was due largely to the significant inflow of non-maturity deposits from unprecedented government stimulus.

#### Capital Resources

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of March 31, 2021, decreased $731 thousand, or 0.17%, to $426.00 million from $426.73 million as of December 31, 2020. The change in stockholders’ equity was largely due to the cumulative effect adjustment resulting from the adoption of ASU 2016-13, "Financial Instruments--Credit Losses (Topic 326) of $5.87 million, the repurchase of 187,700 shares of our common stock totaling $4.99 million and dividends declared on our common stock of $4.43 million offset by net income of $14.60 million. In accordance with current regulatory guidelines, accumulated other comprehensive income/(loss) is largely excluded from stockholders’ equity in the calculation of our capital ratios. Our book value per common share increased $0.14 or 0.58% to $24.22 as of March 31, 2021, from $24.08 as of December 31, 2020.

#### Capital Adequacy Requirements

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III. A description of the Basel III capital rules is included in Part I, Item 1 of the 2020 Form 10-K. Our current required capital ratios are as follows:

- 4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 7.00% including the capital conservation buffer)
- 6.0% Tier 1 capital to risk-weighted assets (effectively 8.50% including the capital conservation buffer)
- 8.0% Total capital to risk-weighted assets (effectively 10.50% including the capital conservation buffer)
- 4.0% Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”)

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

|  | March 31, 2021 Company | Bank | December 31, 2020 Company | Bank |
| --- | ---: | ---: | ---: | ---: |
| Common equity Tier 1 ratio | 14.53% | 13.69% | 14.28% | 13.57% |
| Tier 1 risk-based capital ratio | 14.53% | 13.69% | 14.28% | 13.57% |
| Total risk-based capital ratio | 15.79% | 14.95% | 15.53% | 14.82% |
| Tier 1 leverage ratio | 10.04% | 9.46% | 10.24% | 9.73% |

Our risk-based capital ratios as of March 31, 2021, increased from December 31, 2020, due to a decrease in our risk-weighted assets. The decrease in risk-weighted assets was primarily due to the decrease in total loans from year-end 2020. . As of March 31, 2021, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of March 31, 2021.

### 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:

*(Amounts in thousands)*

|  | March 31, 2021 | December 31, 2020 |
| --- | ---: | ---: |
| Commitments to extend credit | $234,828 | $229,408 |
| Standby letters of credit and financial guarantees (1) | 182,259 | 179,022 |
| Total off-balance sheet risk | $417,087 | $408,430 |
| Reserve for unfunded commitments | $465 | $66 |

(1) Includes FHLB letters of credit

### Market Risk and Interest Rate Sensitivity

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

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

As of March 31, 2021, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 0 to 25 basis points. Given the current level of benchmark interest rates, a complete downward shock of 100 basis points is rendered meaningless; accordingly, a downward rate scenario is only presented for the prior year end. In the downward rate shocks presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

*(Dollars in thousands)*

| Increase (Decrease) in Basis Points | March 31, 2021 Change in Net Interest Income | Percent Change | December 31, 2020 Change in Net Interest Income | Percent Change |
| ---: | ---: | ---: | ---: | ---: |
| 300 | $12,551 | 12.33% | $8,429 | 8.50% |
| 200 | 8,628 | 8.48% | 5,912 | 6.00% |
| 100 | 4,489 | 4.41% | 3,130 | 3.20% |
| (100) | N/A | N/A | (4,749) | -4.80% |

47

### Inflation and Changing Prices

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

In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) at the end of 2021, the Company has developed a LIBOR transition plan. In 2018, the Company discontinued the use of LIBOR as a reference rate in new loan originations. Additionally, the Company has the ability to substitute an alternative referenced rate for most adjustable rate loans originated prior to 2018.

## Market risk

As filed, 139 characters.

The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 2 of this report.

## Controls and procedures

As filed, 2,522 characters.

### Evaluation of Disclosure Controls and Procedures

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of March 31, 2021, our disclosure controls and procedures were effective.

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

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

### Changes in Internal Control over Financial Reporting

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2021, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,262 characters.

The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2020 discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included in our annual report on Form 10-K for the year ended December 31, 2020 before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, such risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2020.

Filed May 7, 2021.
Source: SEC EDGAR, the filing index for accession 0001437749-21-011304. Last ingested by Listed: Nov 6, 2026, 14:30 ET. No prices; not investment advice.