FIRST COMMUNITY BANKSHARES INC /VA/ (FCBC) FY 2021 MD&A

Item 7. 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. 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 December 31, 2021, the Bank operated 49 branches in Virginia, West Virginia, North Carolina and Tennessee. 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 supplemented by retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities.

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management (“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 commissions on assets under management and investment advisory fees. As of December 31, 2021, the Trust Division and FCWM managed and administered $1.32 billion in combined assets under various fee-based arrangements as fiduciary or agent.

Our acquisition and divestiture activity during the last three years includes the December 31, 2019, acquisition of Highlands Bankshares, Inc. (“Highlands”), headquartered in Abingdon, Virginia with total assets of $563 million. The completion of the transaction resulted in total consolidated assets increasing to $2.80 billion immediately after the transaction. For additional information, see Note 2, “Acquisitions and Divestitures,” to the Consolidated Financial Statements in Item 8 of this report.

Operating, Accounting, and Reporting Considerations Related to COVID-19 and the CARES Act

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. and global economy and has disrupted banking and other financial activity in the areas in which the Company operates. COVID-19 has the potential to create widespread business continuity issues for the Company.

Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act was 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”). The package also included extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s operations and could continue to impact operations going forward.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While progress has been made on the vaccine front, if the global response to contain COVID-19 is prolonged or is unsuccessful, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

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, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", ("CECL"), which had the effect of increasing our allowance for credit losses by $13.11 million largely due to the uncertainty around the impact of COVID-19 which adversely affected the economic forecasts that were utilized in the adoption. In 2021, the economic forecasts improved significantly and credit quality remained strong; with both factors contributing to a reversal of provision for credit losses of $8.47 million.  However, should economic conditions or forecasts worsen and credit quality deteriorate, we could experience further increase in our required allowance for credit losses and record additional provision for credit.  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.  However, as lock-down restrictions have either eased or been lifted, the Company is beginning to experience an upward trend in these fees.  Recovering from a negative trend throughout the last half of 2020 and the first quarter of 2021, service charges on deposits increased $427 thousand or 3.28%, year to date from 2020.   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 December 31, 2021 the Company carried $2.87 million of accrued interest income and fees on outstanding deferrals made to COVID-19 affected borrowers compared to $3.47 million in 2020. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

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Capital and liquidity

As of December 31, 2021, the Company 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 on a fully phased-in basis, if such requirements were in effect, as of December 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 including wholesale funding markets.  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 judgments 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.

As of December 31, 2021, our goodwill was not impaired. A goodwill step 1 analysis was performed as of October 31, 2021.  The goodwill analysis did not identify any goodwill impairment for our one reporting unit. There were no events that occurred after the annual analysis of goodwill, that would indicate to management any impairment of goodwill as of December 31, 2021. COVID-19 could cause a decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

As of December 31, 2021, we did not have any impairment with respect to our other intangible assets. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our other intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2021 we had other intangible assets of $5.62 million, representing approximately 1.31% of equity.

Impairment charges related to certain long-term investments in land and buildings totaled $781 thousand in 2021 and $812 thousand in 2020

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 WHO’s 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 as a result of COVID-19. At December 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 December 31, 2021, we don’t 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 included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19 national emergency.  The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.  The Company elected to adopt this provision of the CARES Act.  Through December 31, 2021, we have modified 4,066 commercial and consumer loans totaling $475.82 million.  Those modifications were generally short-term payment deferrals and are not considered TDR's based on the CARES Act.  Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.  As of December 31, 2021, current COVID-19 loan deferrals stood at $2.92 million, compared with $32.26 millionas of December 31, 2020.  It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated Appropriations Act of 2021 ("CAA") signed into law on December 27, 2021, 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.

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With the passage of the PPP, administered by the Small Business Administration (“SBA”) small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP. The PPP opened on April 3, 2020, and on or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on April 24, 2020. As part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act") enacted on December 27, 2020, in January, 2021, the SBA released applications for the second round of PPP loans for second draw loans for borrowers who received funding in the first round and first draw loans to first time borrowers.  As of December 31, 2021 we have funded approximately 1,429 loans with original principal balances totaling $92.58 million through the PPP program.  Through December 31, 2021, $56.86 million, or 93.20%, of the Company’s first round PPP loan balances had been forgiven by the SBA. Current PPP loan balances at December 31, 2021, which include second round originations, were $20.64 million. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an allowance for credit loss through additional credit loss expense charged to earnings.

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover compensation during such absences.

It is impossible to predict the full extent to which COVID-19 and the resulting measures to prevent its spread will affect the Company’s operations.  Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of COVID-19, the Company’s management believes its financial position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.

Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with generally accepted accounting principles (“GAAP”) in the U.S. and prevailing practices in the banking industry. Our accounting policies, as presented in Note 1, “Basis of Presentation and Accounting Policies,” to the Consolidated Financial Statements in Item 8 of this report are fundamental in understanding MD&A and the disclosures presented in Item 8, “Financial Statements and Supplementary Data,” of this report. Management may be required 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. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates used, we have identified the allowance for loan losses and goodwill as the accounting areas that require the most subjective or complex judgments or are the most susceptible to change.

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 Annual Report on Form 10-K for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 6 — "Allowance for Credit Losses" in this Annual Report on Form 10-K, “Provision for Credit 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 are not comparable

The Company uses a number of economic variables to estimate the allowance for credit losses, with the most significant driver being a forecast of the national unemployment rate. In the December 31, 2021, estimate, the Company assumed an unemployment forecast range of 4.1%% to 3.6%, which has improved from a range of 6.6% to 5.6% utilized in the January 1, 2021, estimate.  Based on a sensitivity analysis as of December 31, 2021, an increase of 1% in the unemployment forecast would result in an increase in the allowance for credit losses of approximately 11.6%.

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Goodwill

Goodwill is tested for impairment annually, on October 31st, or more frequently if events or circumstances indicate there may be impairment.  We have one reporting unit, Community Banking.  If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference. We performed a quantitative assessment for the annual test on October 31, 2021, which resulted in no goodwill impairment.   For additional information, see Note 8, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this report.

Non-GAAP Financial Measures

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this report include certain financial measures presented on a fully taxable equivalent (“FTE”) basis. While we believe certain non-GAAP financial measures enhance the understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.

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. FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory income tax rate of 21% for periods after January 1, 2018. 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:

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Performance Overview

Highlights of our results of operations in 2021, and financial condition as of December 31, 2021, include the following:

Results of Operations

Net Income

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

2021 Compared to 2020. Pre-tax income increased $20.42 million, or 44.27%, primarily due to a reversal of $8.47 million in the allowance for credit losses in 2021 compared to $12.67 million in provision recorded in 2020.  The decrease in credit loss provisioning increased pre-tax income $21.14 million and is primarily due to significantly improved economic forecasts in the current year, as well as strong credit quality metrics, versus prior year provisioning driven by the pandemic.  The increase was offset by a decrease in net interest income of $6.10 million, or 5.62%, driven by the current historically low interest rate environment, as well as a $3.33 million decrease in accretion on acquired loans. Income tax expense increased $5.17 million from 2020 primarily as a result of the increase in pre-tax income.

2020 Compared to 2019. Pre-tax income decreased $3.68 million, or 7.40%, due to an increase in noninterest expense of $9.86 million, an increase in the provision for loan losses of $9.10 million, and a decrease in noninterest income of $3.84 million.  The decreases to income were offset by a increase in net interest income of $19.12 million. Income tax expense decreased $808 thousand primarily as a result of the decrease in pre-tax income.

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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” above. The following table presents the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:

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The following table presents the impact to net interest income on a FTE basis due to changes in volume (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:

2021 Compared to 2020. Net interest income comprised 74.92% of total net interest and noninterest income in 2021 compared to 78.45% in 2020. Net interest income decreased $6.10 million, or 5.62%, decreased $6.31 million, or 5.77%, on a FTE basis. The FTE net interest margin decreased 62 basis points and the FTE net interest spread decreased 57 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 as well as a decrease in purchase accounting accretion from acquired loans.

Average earning assets increased $260.05 million, or 10.22%, primarily due to an increase in average interest-bearing deposits and average loans offset by a decrease in average debt securities. The yield on earning assets decreased 74 basis points as the yields decreased primarily due to the historically low rate environment. Average loans increased $10.46 million, or 0.49%, and the average loan to deposit ratio decreased to 80.71% from 88.08% in 2020.  Non-cash accretion income related to PCI loans decreased $3.33 million, or 41.73%, to $4.66 million due reduced balances in the PCI portfolios. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 17 basis points compared to 31 basis points in the prior year.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $126.24 million, or 7.31%, primarily due to an increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 17 basis points.  Average interest-bearing deposits increased $126.23 million, or 7.32%, with increases of $105.01 million, or 14.75%, in average savings deposits, $90.72 million, or 16.31%, in average interest-bearing demand deposits, offset by a decrease of $69.51, or 15.22%,  in average time deposits.

2020 Compared to 2019. Net interest income comprised 78.45% of total net interest and noninterest income in 2020 compared to 72.65% in 2019. Net interest income increased $19.12 million, or 21.37%, compared to a increase of $18.92 million, or 20.95%, on a FTE basis. The FTE net interest margin decreased 30 basis points and the FTE net interest spread decreased 28 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 partially offset by purchase accounting accretion from the Highlands portfolio as well as accelerated paydowns of acquired loans.

Average earning assets increased $575.82 million, or 29.25%, primarily due to an increase in average loans and average interest-bearing deposits offset by a decrease in average debt securities. The yield on earning assets decreased 36 basis points as the yields on interest-bearing deposits and debt securities decreased primarily due to the historically low rate environment. Average loans increased $420.22 million, or 24.40%, and the average loan to deposit ratio decreased to 88.08% from 93.35%. The increase in average loans was primarily due to the addition of Highlands.  Non-cash accretion income related to PCI loans increased $4.76 million, or 147.37%, to $7.99 million due the addition of Highlands and the fourth quarter payoff of a large acquired loan relationship. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 31 basis points compared to 17 basis points in the prior year.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $343.45 million, or 24.84%, primarily due to an increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 8 basis points.  Average interest-bearing deposits increased $348.51 million, or 25.32%, which was driven by the December 31, 2019, Highlands acquisition with increases of $207.75 million, or 41.21%, in average savings deposits, $102.46 million, or 22.58%, in average interest-bearing demand deposits, and $38.31 million, or 9.15%, in average time deposits.

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Provision for Credit/Loan Losses

2021 Compared to 2020. The provision charged to operations decreased $21.14 million, or 166.87%.  The decrease was primarily due to significantly improved economic forecasts in the current year, as well as strong credit quality metrics, versus prior year provisioning driven by the pandemic.  The most significant forecast variable in our allowance model is unemployment. The forecast used for December 31, 2021, ranged from 4.1% to 3.6%. That forecast was much stronger than that used for January 1, 2021, that ranged from 6.6% to 5.6% over the forecast period.

2020 Compared to 2019. The provision charged to operations increased $9.10 million, or 254.75%.  The increase was primarily related to the economic uncertainty caused by the coronavirus pandemic.

Noninterest Income

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

2021 Compared to 2020. Noninterest income comprised 25.08% of total net interest and noninterest income in 2021 compared to 21.55% in 2020. Noninterest income increased $4.47 million, or 14.98%, primarily due to an increase in other service charges of $2.09 million, or 20.22%, due primarily to an increase in net interchange income of $1.90 million, compared to 2020.  In addition, a recovered amount of $1.00 million was recieved and recorded in other operating income during the second quarter of 2021 for the recovery of an acquired loan from a failed bank acquisition that had been written down prior to acquisition.  Additional increases occurred in wealth management income and service charges on deposits of $436 thousand and $427 thousand, respectively.

2020 Compared to 2019. Noninterest income comprised 21.55% of total net interest and noninterest income in 2020 compared to 27.35% in 2019. Noninterest income decreased $3.84 million, or 11.41%, primarily due to $7.00 million received in litigation settlements in 2019. Service charges on deposits decreased $1.58 million, or 10.79%; the decrease was primarily attributable to pandemic shutdowns throughout 2020.  Other service charges and fees increased $2.05 million, or 24.78%, primarily from an increase in net interchange income for the addition of Highlands accounts.  Other operating income increased $1.57 million, or 55.81%, and was primarily driven by third party incentives associated with debit cards.

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Noninterest Expense

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

2021 Compared to 2020. Noninterest expense decreased $907 thousand, or 1.14%.  The decrease was primarily due to residual merger expenses of $1.89 million recoginized in the first quarter of 2020.  In addition, other operating expense decreased $673 thousand.  These decreases were offset by increases in other service fees, FDIC premiums and assessments, professional fees and salaries and employee benefits of $659 thousand, $406 thousand, $300 thousand, and $234 thousand, respectively.

2020 Compared to 2019. Noninterest expense increased $9.86 million, or 14.14%.  The increase was primarily due to an increase in salaries and benefits of $6.86 million, or 18.46%, which was largely due to the addition of Highlands employees.  In addition, occupancy and furniture and equipment expense increase a combined total of $1.81 million and was primarily driven by the addition of branch locations acquired in the Highlands transaction.

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.

2021 Compared to 2020. Income tax expense increased $5.17 million or 50.80%, and is primarily attributable to the increase in pre-tax net income.  The effective tax rate increased to 23.09% in 2021 compared to 22.09% in 2020.

2020 Compared to 2019. Income tax expense decreased $808 thousand, or 7.35%, and  is primarily attributable to the decrease in pre-tax net income.  The effective tax rate increased to 22.09% in 2020 compared to 22.08% in 2019.

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Financial Condition

Total assets as of December 31, 2021, increased $183.38 million, or 6.09%, to $3.19 billion from $3.01 billion as of December 31, 2020. The increase is primarily attributable to the increase in overnight funds of $231.28 million, or 58.44%. In addition, total liabilities as of December 31, 2021, increased $182.34 million, or 7.06%, to $2.77 billion from $2.58 billion as of December 31, 2020. The increase is primarily the result of an increase in total deposits of $183.14 million, or 7.19%.  The increase in deposits is primarily attributable to the significant increase in demand deposits due to the unprecedented level of stimulus payments from the federal government in response to the pandemic.

Investment Securities

Our investment securities are used to generate interest income through the deployment of excess funds, to fund loan demand or deposit liquidation, to pledge as collateral where required, and to make selective investments for Community Reinvestment Act purposes. 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 December 31, 2021, decreased $7.07 million, or 8.48%, compared to December 31, 2020. The decrease was primarily attributable to $27.26 million from maturities, prepayments, and calls offset by purchases of $22.39 million.  The market value of debt securities available for sale as a percentage of amortized cost was 100.02% as of December 31, 2021 compared to 101.71% as of December 31, 2020. There were no held-to-maturity debt securities as of December 31, 2021or December 31, 2020  The following table presents the amortized cost and fair value of debt securities as of the dates indicated:

The following table provides information about our investment portfolio as of the dates indicated:

There were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders’ equity as of December 31, 2021 or 2020.

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The following table presents the amortized cost, fair value, and weighted-average yield of available-for-sale debt securities by contractual maturity, as of December 31, 2021. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

On January 1, 2021, we adopted ASU 2016-13, CECL. 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. Based on the application of the new standard, and that all debt securities available for sale in an unrealized loss position as of December 31, 2021continue to perform as scheduled; we do not believe that a provision for credit losses is necessary in 2021. We recognized no impairment charges in earnings associated with debt securities in 2020. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Item 8, of this report.

Loans Held for Investment

Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Effective September 28, 2021, the Company terminated its remaining loss share agreement with the FDIC associated with Waccamaw Bank and received a payment of $176 thousand in consideration.  The termination elimates the FDIC guarantee on particular loan losses associated with Waccamaw Bank and removes future responsibility related to the agreement.  Prior to the termination, certain loans acquired in the FDIC-assisted transaction were covered under the loss share agreement and noted as covered loans.  Covered loans were $9.68 million at year-end 2020.  The general characteristics of each loan segment are as follows:

Total loans held for investment, net of unearned income, as of December 31, 2021, decreased $21.06 million, or 0.96%, compared to December 31, 2020.  We had no foreign loans or loan concentrations to any single borrower or industry, which are not otherwise disclosed as a category of loans that represented 10% or more of outstanding loans, as of December 31, 2021 or 2020. For additional information, see Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this report.

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The following table presents loans, net of unearned income and by loan class, as of the dates indicated:

The following table presents the percentage of loans to total loans in the portfolio, by loan class, as of the dates indicated:

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The following table presents the maturities and rate sensitivities of the loan portfolio as of December 31, 2021:

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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. The Company has a loan review function independent of credit administration that performs a risk-based review of a sample of loans and loan relationships in the Company's commercial portfolio, and conducts analytical review of credit quality on the Company's non-commercial portfolios.

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and other real estate owned ("OREO"). Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 5, “Credit Quality,” to the Consolidated Financial Statements in Item 8 of this report.

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

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Nonperforming assets as of December 31, 2021, decreased $1.33 million, or 5.42%, from December 31, 2020, primarily due to decreases of  $1.24 million, or 5.61%, in nonaccrual loans, $1.07 million, or 51.27%, in OREO, offset by a $1.18 million increase, or 631.02%, increase non-performing troubled debt restructurings.  OREO, which is carried at the lesser of estimated net realizable value or cost, consisted of 15 properties with an average holding period of 12 months as of December 31, 2021. The net loss on the sale of OREO was $231 thousand in 2021, $316 thousand in 2020, and $1.25 million in 2019. The following table presents the changes in OREO during the periods indicated:

As of December 31, 2021, nonaccrual loans were largely attributed to single family owner occupied (43.13%) and non-farm, non-residential (21.86%) loans. As of December 31, 2021, approximately $3.45 million, or 16.63%, of nonaccrual loans were attributed to performing loans acquired in business combinations. 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.

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms.  Certain TDR's 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 satification of the obligations occurs.  Accruing TDRs as of December 31, 2021, decreased $1.60 million, or 15.57%, to $8.65 million from December 31, 2020. Nonperforming accruing TDRs as of December 31, 2021, increased $1.18 million, or 631.02%, to $1.37 million from December 31, 2020. Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 15.81% as of December 31, 2021, compared to 1.82% as of December 31, 2020. There were no specific reserves on TDRs as of December 31, 2021, compared to $233 thousand as of December 31, 2020. When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms.

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  December 31, 2021, we had modified a total of 4,066 loans for $475.82 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 has upgraded 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 December 31, 2021, current COVID-19 loan deferrals stood at $2.92 million, down significantly from $32.26 million at December 31, 2020.

Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $33.10 million as of December 31, 2021, an decrease of $2.61 million, or 7.32%, compared to $35.72 million as of December 31, 2020. Delinquent loans as a percent of total loans totaled 1.53% as of December 31, 2021, which includes past due loans (0.57%) and nonaccrual loans (0.96%), compared to 1.64% as of December 31, 2020.

Allowance for Credit Losses (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. 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

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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 - "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. See Note 1 – "Basis of Presentation - Significant Accounting Policies" for further details. As of December 31, 2021,  the balance of the ACL for loans was $27.86 million, or 1.29% of total loans. The ACL at December 31, 2021, increased $1.68 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 $8.47 million and net charge-offs for the twelve months of $2.96 million. The reversal in provision for the twelve months ended December 31, 2021, was due largely to significantly improved forecasts for unemployment from those used at year-end 2020 .

At December 31, 2021, the Company also had an allowance for unfunded commitments of $678 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 2021, the provision for credit losses on unfunded commitments was $103 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 financial assets during 2021.

Management considered the allowance adequate as of December 31, 2021; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see “Allowance for Loan Losses” in the “Critical Accounting Policies” section above and Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

The following table presents net charge-offs, by loan class, and the ratio to average loans during the periods indicated:

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The following table presents the allowance for loan losses, by loan class, as of the dates indicated:

Deposits

Total deposits as of December 31, 2021, increased $183.14 million, or 7.19%, compared to December 31, 2020.  Savings deposits, which consist of money market accounts and savings accounts, increased $100.81 million, interest-bearing demand deposits increased $78.11 million, noninterest-bearing demand deposits increased $69.99 million, time deposits, which consist of certificates of deposit and individual retirement accounts, decreased $65.76 million, as of December 31, 2021, compared to December 31, 2020.  We attribute the significant increase in demand deposits to the unprecedented level of stimulus payments from the federal government in response to the pandemic.  We had no material deposit concentrations to any single customer or industry that represented 10% or more of outstanding deposits as of December 31, 2021 or 2020.

The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2021:

Borrowings

Total borrowings as of December 31, 2021, increased $572 thousand, or 59.34%, compared to December 31, 2020. Total borrowings for 2021 were comprised entirely of short-term borrowings, which consist of retail repurchase agreements.  The weighted average rate decreased 27 basis points to 0.07% as of December 31, 2021, compared to December 31, 2020.

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The following table presents the balances and weighted average rates paid on short-term borrowings for the periods indicated:

Long-term borrowings consisted of a $40 thousand amortizing advance with the FHLB of Atlanta that was assumed in the Highlands transaction. That small borrowing was repaid early in 2020. In the first quarter of 2019, the Company’s remaining wholesale repurchase agreement of $25.00 million with a weighted average rate of 3.18% matured.

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of our ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial instituition to meet its current financial obligations is a function of its balance sheet structure that draws together all sources and uses of liquidity. The objective of our liquidity management is to manage cash flow and liquidity reserves so that tthey are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds throught asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet.

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 of December 31, 2021, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addtion, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on the Company.

In the ordinary course of busisness we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to the Consolidated Financial Statements in Item 8 of this report for the expected timing of such payments as of December 31, 2021. These include payments related to (i) operating leases (Note - 7 Premises, Equipment, and Leases ), (ii) time deposits with stated maturity dates (Note 9 - Deposits), and (iii) commitments to extend credit and standby letters of credit (Note - 19 Litigation, Commitments, and Contingencies).

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 December 31, 2021, the Company’s cash reserves and short-term investment securities totaled $17.65 million.  The Company’s cash reserves and investments provide adequate working capital to meet obligations and projected dividends to shareholders 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 December 31, 2021, our unencumbered cash totaled $677.44 million, unused borrowing capacity from the FHLB totaled $411.23 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $90.00 million, and unpledged available-for-sale securities totaled $54.14 million.

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Cash Flows

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

2021 Compared to 2020. Cash and cash equivalents increased $220.88 million compared to a increase of $239.55 million in the prior year. The increase was primarily due to an increase in both interest-bearing and noninterest-bearing deposits for a total of $183.14 million as well as $27.47 million received for repayment of loan balances.  The increase in deposits was largely due to the significant inflow of unprecedented government stimulus in response to the COVID-19 pandemic and changes in consumer spending.  The repayment of loan balances is primarily due to proceeds from the SBA for debt forgiveness for loans originated throught the Small Business Administration's Paycheck Protection Lending program.

2020 Compared to 2019. Cash and cash equivalents increased $239.55 million compared to an increase of $140.14 million in the prior year. The increase was primarily due to an increase in both interest-bearing and noninterest-bearing deposits for a total of $216.34 million.  The increase in deposits was largely due to the significant inflow of unprecedented government stimulus in response to the COVID-19 pandemic and changes in consumer spending.

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 December 31, 2021, increased $1.05 million, or 0.24%, to $427.78 million from $426.73 million as of December 31, 2020.  The Company earned $51.17 million, which was offset by repurchasing 949,386 shares of our common stock totaling $28.88 million and declaring dividends on our common stock of $18.06 million. Our book value per common share increased $1.26 to $25.34 as of December 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.  Our current minimum required capital ratios are as follows:

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

As of December 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 on a fully phased-in basis, if such requirements were in effect, as of December 31, 2021. For additional information, see “Capital Requirements” in Part I, Item 1 and Note 20, “Regulatory Requirements and Restrictions,” to the Consolidated Financial Statements in Item 8 of this report.

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 and third-party simulation 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.

During 2021, the Federal Open Market Committee maintained the benchmark federal funds rate at a range of 0 to 25 basis points. 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. Due to the current target Fed Funds rate as of December 31, 2021, we do not reflect a decrease of more than 100 basis points from current rates in our analysis.

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We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As of December 31, 2021, we feel our exposure to interest rate risk was adequately mitigated for the scenarios presented.