# EDGAR Filing Document

**Accession Number:** 0000859070
**File Stem:** 0001437749-23-001243
**Filing Date:** 2023-1
**Character Count:** 2680590
**Document Hash:** 4124a11118ba85db42886c4c20b559ea
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001437749-23-001243.hdr.sgml**: 20230118

**ACCESSION NUMBER**: 0001437749-23-001243

**CONFORMED SUBMISSION TYPE**: S-4

**PUBLIC DOCUMENT COUNT**: 44

**FILED AS OF DATE**: 20230118

**DATE AS OF CHANGE**: 20230118

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** FIRST COMMUNITY BANKSHARES INC /VA/
- **CENTRAL INDEX KEY:** 0000859070
- **STANDARD INDUSTRIAL CLASSIFICATION:** STATE COMMERCIAL BANKS [6022]
- **IRS NUMBER:** 550694814
- **STATE OF INCORPORATION:** VA
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** S-4
- **SEC ACT:** 1933 Act
- **SEC FILE NUMBER:** 333-269294
- **FILM NUMBER:** 23535117

**BUSINESS ADDRESS:**
- **STREET 1:** PO BOX 989
- **CITY:** BLUEFIELD
- **STATE:** VA
- **ZIP:** 24605
- **BUSINESS PHONE:** 3043236300

**MAIL ADDRESS:**
- **STREET 1:** 29 COLLEGE DRIVE
- **STREET 2:** P O BOX 989
- **CITY:** BLUEFIELD
- **STATE:** VA
- **ZIP:** 24605

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** FIRST COMMUNITY BANCSHARES INC /NV/
- **DATE OF NAME CHANGE:** 19971121

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** FCFT INC
- **DATE OF NAME CHANGE:** 19930328

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**As filed with the Securities and Exchange Commission on January 18, 2023.**

**Registration No. ___-______**

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION** 

**WASHINGTON, D.C. 20549** 

**FORM S-4** 

**REGISTRATION STATEMENT** 

***UNDER***

***THE SECURITIES ACT OF 1933***

**FIRST COMMUNITY BANKSHARES, INC.**

**(Exact Name of Registrant as Specified in Its Charter)** 

---

| | | |
|:---|:---|:---|
| **Virginia** | **6022** | **55-0694814** |
| **(State or Other Jurisdiction of Incorporation or Organization)** | **(Primary Standard Industrial**<br> **Classification Code Number)** | **(I. R. S. Employer**<br> **Identification Number)** |

---

**P.O. Box 989**

**Bluefield, Virginia 26405-0989**

**(276) 326-9000**

**(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant**'**s Principal Executive Offices)** 

**William P. Stafford, II**

**First Community Bankshares, Inc.** 

**29 College Drive**

**Bluefield, Virginia 26405**

**(276) 326-9000**

**(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)** 

***with copies to:***

Sandra M. Murphy, Esq. Bowles Rice LLP 600 Quarrier Street P.O. Box 1386 Charleston, West Virginia 25325 (304) 347-1131 Robert A. Singer, Esq. Brooks, Pierce, McLendon, Humphrey & Leonard, LLP 230 North Elm Street 2000 Renaissance Plaza Greensboro, North Carolina 27401 (336) 271-3123

Approximate date of commencement of proposed sale to the public: as soon as practicable after this registration statement becomes effective.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒ <br> Non-accelerated filer ☐ Smaller reporting company ☐ <br> Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☐

**The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.** 

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**Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This document shall not constitute an offer to sell or the solicitation of any offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.**

**<u>PRELIMINARY-SUBJECT TO COMPLETION-DATED JANUARY 18</u><u>, 2023</u>**

![fcbc20230113b_s4img001.jpg](fcbc20230113b_s4img001.jpg)

**<u>MERGER PROPOSED-YOUR VOTE IS VERY IMPORTANT</u>**

Dear Shareholder:

On November 17, 2022, Surrey Bancorp (which we refer to as "Surrey") and First Community Bankshares, Inc. (which we refer to as "First Community") entered into an Agreement and Plan of Merger (which, as it may be amended, supplemented or modified from time to time, we refer to as the "merger agreement"), pursuant to which Surrey will merge with and into First Community (which we refer to as the "merger"). Immediately following the completion of the merger, Surrey Bank & Trust, Surrey's wholly-owned bank subsidiary, will merge with and into First Community Bank, First Community's wholly-owned bank subsidiary, with First Community Bank continuing as the surviving bank (which we refer to as the "bank merger").

In the merger, each share of Surrey common stock and Class A common stock issued and outstanding immediately prior to the completion of the merger (other than certain excluded shares as described in the attached proxy statement/prospectus) will be converted into the right to receive 0.7159 (the "exchange ratio") shares of First Community common stock (which we refer to as the "merger consideration"). Based on First Community's closing price of $38.43 per share on November 17, 2022, the 0.7159 exchange ratio represented an implied value of approximately $27.51 for each share of Surrey common stock and Surrey Class A common stock.

**We encourage you to obtain current market quotations for the common stock of First Community and Surrey before you vote.** First Community common stock is currently quoted on the Nasdaq Global Select Market (which we refer to as the "NASDAQ") under the symbol "FCBC." Surrey common stock is currently quoted on the OTC Pink Marketplace (which we refer to as the "OTC Pink") under the symbol "SRYB."

Based on the number of shares of Surrey common stock and Class A common stock outstanding on [●], 2023, the record date for the Surrey special meeting, we expect that holders of shares of Surrey common stock and Surrey Class A common stock outstanding as of immediately prior to the closing of the merger will hold, in the aggregate, approximately [15.6]% of the issued and outstanding shares of First Community common stock immediately following the closing of the merger (including shares received in respect of Surrey restricted stock awards and without giving effect to any shares of First Community common stock held by Surrey shareholders prior to the merger). As a result, current First Community shareholders will hold, in the aggregate, approximately [84.4]% of the outstanding shares of First Community common stock immediately following the closing of the merger. An increase or decrease in the number of outstanding shares of Surrey common stock and Surrey Class A common stock prior to completion of the merger could cause the actual number of shares issued upon completion of the merger to change.

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The merger is intended to be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (which we refer to as the "Code") and holders of Surrey common stock or Class A common stock are not expected to recognize any gain or loss for United States federal income tax purposes on the exchange of shares of Surrey common stock or Surrey Class A common stock for shares of First Community common stock in the merger, except to the extent holders receive cash in lieu of any fractional shares of First Community common stock.

Surrey will hold a special meeting of its shareholders in connection with the merger. Holders of Surrey common stock and Surrey Class A common stock, voting as separate groups, will be asked to vote to approve the merger agreement and to approve related matters, as described in the attached proxy statement/prospectus.

The special meeting of Surrey shareholders will be held on [●], 2023 at [●] [a.m./p.m.] (local time) at [●].

**Your vote is important.** We cannot complete the merger unless the holders of Surrey common stock and Surrey Class A common stock approve the merger agreement. Approval of the merger agreement requires the affirmative vote of the holders of (1) a majority of the outstanding shares of Surrey common stock entitled to vote on the proposal and (2) a majority of the outstanding shares of Surrey Class A common stock entitled to vote on the proposal. **Regardless of whether or not you plan to attend the special meeting, please take the time to vote your shares in accordance with the instructions contained in the enclosed proxy statement/prospectus.**

**The Surrey board of directors unanimously recommends that holders of Surrey common stock and holders of Surrey Class A common stock vote** "**FOR**" **the approval of the merger agreement and** "**FOR**" **the other matters to be considered at the Surrey special meeting.**

The enclosed proxy statement/prospectus describes the special meeting, the merger, the documents related to the merger and other related matters. **Please carefully read the entire proxy statement/prospectus, including the section entitled** "***<u>Risk Factors</u>*,**" **for a discussion of the risks relating to the proposed merger.** You also can obtain information about the proposed merger and First Community from documents that First Community has filed with the Securities and Exchange Commission that are attached as appendices to this proxy statement/prospectus and about Surrey in Surrey's annual reports by accessing Surrey's website at www.surreybank.com under the tab "About Us" and then under the heading "Investor Relations" and "Shareholder Relations".

If you have any questions concerning the merger, please contact Edward C. Ashby, III, 145 N. Renfro Street, Mount Airy, North Carolina, 27030 at (333)783-3900. We look forward to seeing you at the special meeting.

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| |
|:---|
| Sincerely, |
| Robert H. Moody |
| Chairman of the Board of Directors  |
| Surrey Bancorp  |

---

**Neither the Securities and Exchange Commission nor any state securities commission or any bank regulatory agency has approved or disapproved the securities to be issued in the merger or determined if the enclosed proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.**

**The securities to be issued in the merger are not deposit accounts or other obligations of any bank or non-bank subsidiary of either First Community or Surrey, and they are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.**

The date of the enclosed proxy statement/prospectus is [●], 2023, and it is first being mailed or otherwise delivered to the shareholders of Surrey on or about [●], 2023.

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![fcbc20230113b_s4img002.jpg](fcbc20230113b_s4img002.jpg)

**NOTICE OF SPECIAL MEETING OF SHAREHOLDERS**

To the Shareholders of Surrey Bancorp:

Surrey Bancorp (which we refer to as "Surrey") will hold a special meeting of shareholders on [●] 2023 at [●] (local time) at [●], to consider and vote upon the following matters:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) For the holders of Surrey common stock, voting as a separate class from the holders of Surrey Class A common stock, to approve the Agreement and Plan of Merger, dated November 17, 2022, between Surrey and First Community Bankshares, Inc. (as such agreement may from time to time be amended, which we refer to as the "merger agreement"). We refer to this transaction as the "merger" and this proposal as the "common shareholder merger proposal."

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) For the holders of Surrey common stock, voting as a separate class from the holders of Surrey Class A common stock, to approve one or more adjournments of the special meeting, if necessary or appropriate to permit further solicitation of proxies from the holders of Surrey common stock in favor of the common shareholder merger proposal. We refer to this proposal as the "common shareholder adjournment proposal."

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) For the holders of Surrey Class A common stock, voting as a separate class from the holders of Surrey common stock, to approve the merger agreement. We refer to this proposal as the "Class A common shareholder merger proposal."

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4) For the holders of Surrey Class A common stock, voting as a separate class from the holders of Surrey common stock, to approve one or more adjournments of the special meeting, if necessary or appropriate to permit further solicitation of proxies from the holders of Surrey Class A common stock in favor of the Class A common shareholder merger proposal. We refer to this proposal as the "Class A common shareholder adjournment proposal."

The affirmative vote of the holders of a majority of the outstanding shares of Surrey common stock, voting as a separate class from the holders of Surrey Class A common stock, is required to approve the common shareholder merger proposal. The affirmative vote of a majority of the votes cast by the holders of Surrey common stock is required to approve the common shareholder adjournment proposal.

The affirmative vote of the holders of a majority of the outstanding shares of Surrey Class A common stock, voting as a separate class from the holders of Surrey common stock, is required to approve the Class A common shareholder merger proposal. The affirmative vote of a majority of the votes cast by the holders of Surrey Class A common stock is required to approve the Class A common shareholder adjournment proposal.

Surrey will transact no other business at the special meeting except for business properly brought before the special meeting or any adjournment thereof.

The merger cannot be completed unless Surrey common shareholders approve the common shareholder merger proposal and Surrey Class A common shareholders approve the Class A common shareholder merger proposal. The proxy statement/prospectus accompanying this notice describes the merger agreement and the transactions contemplated thereby, as well as the proposals to be considered at the special meeting. Please review the proxy statement/prospectus carefully.

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We have fixed the close of business on [●], 2023 as the record date for the determination of shareholders entitled to notice of, and to vote at, the Surrey special meeting (which we refer to as the "Surrey record date"). Only holders of record of Surrey common stock or Surrey Class A common stock at the close of business on that date are entitled to notice of, and to vote at, the Surrey special meeting or any adjournment thereof.

**The Surrey board of directors has unanimously approved the merger agreement and the merger and unanimously recommends that holders of Surrey common stock vote** "**FOR**" **the common shareholder merger proposal and the common shareholder adjournment proposal. The Surrey board of directors also unanimously recommends that holders of Surrey Class A common stock vote** "**FOR**" **the Class A common shareholder merger proposal and the Class A common shareholder adjournment proposal.** 

**Your vote is very important.** We cannot complete the merger unless holders of Surrey common stock and holders of Surrey Class A common stock, voting separately, approve the merger agreement.

**Whether or not you plan to attend the Surrey special meeting, we encourage you to execute and return the enclosed proxy card promptly in the enclosed self-addressed envelope or to vote your shares in advance of the Surrey special meeting by Internet or phone, as described in the accompanying proxy statement/prospectus. If you decide to attend the Surrey special meeting, then you may, if you desire, revoke the proxy and vote your shares in person. If you hold your shares in** "**street name**" **through a bank, broker or other nominee, please follow the instructions on the voting instruction card furnished by the record holder.** 

**You have the right to assert appraisal rights with respect to the merger and demand in writing that First Community Bankshares, Inc. pay the fair value of your shares of Surrey common stock or Surrey Class A common stock under applicable provisions of North Carolina law. In order to exercise and perfect appraisal rights, you must give written notice of your intent to demand payment for your shares to Surrey before the vote is taken on the merger agreement at the special meeting and you must not vote in favor of the merger. A copy of the applicable North Carolina statutory provisions is included in the proxy statement/prospectus as *Appendix C* and a description of the procedures to demand and perfect appraisal rights is included in the section entitled** "***The Merger - Dissenters***' ***Appraisal Rights for Surrey Shareholders***" **beginning on page [**•**].**

The enclosed proxy statement/prospectus provides a detailed description of the Surrey special meeting, the merger, the documents related to the merger and other related matters. We urge you to read the proxy statement/prospectus, including any documents attached to this proxy statement/prospectus, and its appendices carefully and in their entirety.

If you have any questions concerning the merger or the proxy statement/prospectus, would like additional copies of the proxy statement/prospectus or need help voting your shares of Surrey common stock or Surrey Class A common stock, please contact Surrey's proxy solicitor, Regan & Associates, Inc., (1) by mail at 505 Eighth Avenue- Suite 800, New York, NY 10018; or (2) by phone at (800) 737-3426.

On behalf of the Surrey board of directors, thank you for your prompt attention to this important matter.

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| |
|:---|
| **BY ORDER OF THE BOARD OF DIRECTORS** |
| Robert H. Moody |
| *Chairman of the Board of Directors* |

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**REFERENCES TO ADDITIONAL INFORMATION** 

**This document includes important business and financial information about First Community that is included in documents filed with the U.S. Securities and Exchange Commission (which we refer to as the** "**SEC**"**) that have been attached as appendices to this proxy statement/prospectus.** 

**In addition, documents filed with the SEC by First Community are available free of charge through the SEC website (http://www.sec.gov) or by requesting them in writing or by telephone from First Community or Surrey at the following addresses:** 

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| | |
|:---|:---|
| First Community Bankshares, Inc.<br> 29 College Drive<br> Bluefield, Virginia 24605-0989<br> Attention: David D. Brown<br> Telephone: (276) 326-9000 | Surrey Bancorp<br> 145 N Renfro Street<br> Mount Airy, North Carolina 27030<br> Attention: Edward C. Ashby, III<br> Telephone: (336) 783-3900<br>Regan & Associates, Inc.<br> 505 Eighth Avenue, Suite 800<br> New York, NY 10018<br> Attention: Artie Regan<br> Telephone: (800) 737-3426 |

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You will not be charged for any of these documents that you request. Surrey shareholders requesting documents should do so by [•], 2023, in order to receive them before their special meeting.

This proxy statement/prospectus attaches as appendices documents that First Community previously filed with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as set forth below. Any statement contained in such a document shall be deemed to be modified or superseded for purposes of this proxy statement/prospectus to the extent that a statement contained in this proxy statement/prospectus or in an appendix hereto consisting of a document filed with the SEC subsequent to such document modifies or replaces such statement.

Set forth below is a list of the documents previously filed with the SEC by First Community under the Exchange Act that are attached as appendices to this proxy statement/prospectus.

● Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 3, 2022 ( ***Appendix D***);

● Definitive Proxy Statement on Schedule 14A filed with the SEC on March 16, 2022 ( ***Appendix E***);

● Quarterly Reports on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 10, 2022, for the quarter ended June 30, 2022 filed with the SEC on August 5, 2022 and for the quarter ended September 30, 2022 filed with the SEC on November 8, 2022 ( ***Appendix F***); and

● Current Reports on Form 8-K, filed with the SEC on March 14, 2022, April 1, 2022, May 2, 2022, May 31, 2022, June 17, 2022, November 18, 2022 and December 1, 2022 ( ***Appendix G***).

You should rely only on the information contained in or attached to this document. No one has been authorized to provide you with information that is different from that contained in, or attached to this document. This document is dated [•], 2023, and you should assume that the information in this document is accurate only as of such date. You should assume that the filings with the SEC attached as appendices to this document are accurate as of the date of such filing. Neither the mailing of this document to Surrey shareholders nor the issuance by First Community of shares of First Community common stock in connection with the merger will create any implication to the contrary.

Information on the websites of First Community or Surrey, or any subsidiary of First Community or Surrey, is not part of this document. You should not rely on that information in deciding how to vote.

**This document does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Except where the context otherwise indicates, information contained in this document regarding Surrey has been provided by Surrey and information contained in, or attached to, this document regarding First Community has been provided by First Community.** 

See "Where You Can Find More Information" beginning on page [•].

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**TABLE OF CONTENTS**

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| | |
|:---|:---|
|  | **<u>Page</u>** |
| [**<u>QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SURREY SPECIAL MEETING</u>**](#questions) | [1](#questions) |
| [**<u>SUMMARY</u>**](#summary) | [8](#summary) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Information Regarding First Community and Surrey</u>](#inforegarding) | [8](#inforegarding) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>The Merger</u>](#themerger) | [9](#themerger) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Closing and Effective Time of the Merger</u>](#closingandeff) | [9](#closingandeff) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Merger Consideration</u>](#mergerconsiderations) | [9](#mergerconsiderations) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Conversion of Shares; Exchange of Certificates</u>](#conversion) | [10](#conversion) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Material U.S. Federal Income Tax Consequences of the Merger</u>](#material) | [10](#material) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Dissenters</u><u>'</u> <u>Appraisal Rights for Surrey Shareholders</u>](#dissentersappraisal) | [11](#dissentersappraisal) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Opinion of Surrey</u><u>'</u><u>s Financial Advisor</u>](#opinion) | [11](#opinion) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Recommendation of the Surrey Board of Directors</u>](#recommendation) | [11](#recommendation) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Interests of Surrey Directors and Executive Officers in the Merger</u>](#interestsofdirectors) | [12](#interestsofdirectors) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Treatment of Surrey Restricted Stock</u>](#treatment) | [12](#treatment) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Regulatory Approvals</u>](#regulatoryapprovals) | [12](#regulatoryapprovals) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Conditions of Completion of the Merger</u>](#conditions) | [13](#conditions) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Agreement Not to Solicit Other Offers</u>](#agreementnottosolicit) | [14](#agreementnottosolicit) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Termination of the Merger Agreement</u>](#terminationofagreeement) | [14](#terminationofagreeement) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Termination Fee</u>](#terminationfee) | [15](#terminationfee) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Public trading Markets</u>](#publicmarkets) | [15](#publicmarkets) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Surrey Special Meeting</u>](#surreyspecialmeeting) | [15](#surreyspecialmeeting) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Surrey Voting Agreements</u>](#surreyvoting) | [17](#surreyvoting) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Comparison of Shareholders</u><u>'</u> <u>Rights</u>](#comparison) | [17](#comparison) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Risk Factors</u>](#riskfactors) | [17](#riskfactors) |
| [**<u>EQUIVALENT PRO-FORMA MARKET VALUE OF COMMON STOCK</u>**](#equivalentproforma) | [18](#equivalentproforma) |
| [**<u>RISK FACTORS</u>**](#riskfactors2) | [19](#riskfactors2) |
| [**<u>CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS</u>**](#cautionarystatement) | [26](#cautionarystatement) |
| [**<u>INFORMATION ABOUT THE SURREY SPECIAL MEETING</u>**](#inforaboutsurreymeeting) | [27](#inforaboutsurreymeeting) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Time, Date, and Place</u>](#timedateplace) | [27](#timedateplace) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Purpose of the Special Meeting</u>](#purpose) | [27](#purpose) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Recommendation of the Surrey Board of Directors</u>](#recommendation2) | [28](#recommendation2) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Required Vote</u>](#requiredvote) | [28](#requiredvote) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Treatment of Abstentions; Failure to Vote</u>](#treatmentabstentions) | [28](#treatmentabstentions) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Record Date and Quorum</u>](#recorddatequorum) | [28](#recorddatequorum) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>How to Vote</u>](#howtovote) | [29](#howtovote) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Shares Held in</u> <u>"</u><u>Street Name</u><u>"</u><u>; Broker Non-Votes</u>](#sharesheld) | [30](#sharesheld) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Revocation of Proxies</u>](#revocation) | [30](#revocation) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Shares Subject to Voting Agreements</u>](#sharessubjectto) | [30](#sharessubjectto) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Shares Held by Directors and Executive Officers</u>](#sharesheldby) | [31](#sharesheldby) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Solicitation of Proxies</u>](#solicitation) | [31](#solicitation) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Attending the Surrey Special Meeting</u>](#attendingthemeeting) | [31](#attendingthemeeting) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Questions and Additional Information</u>](#questionsandaddtlinfo) | [31](#questionsandaddtlinfo) |
| [**<u>SURREY PROPOSALS</u>**](#surreyproposals) | [32](#surreyproposals) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Proposal No. 1: Common Shareholder Merger Proposal</u>](#proposalno1) | [32](#proposalno1) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Proposal No. 2: Common Shareholder Adjournment Proposal</u>](#proposal2) | [32](#proposal2) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Proposal No. 3: Class A Common Shareholder Merger Proposal</u>](#proposal3) | [32](#proposal3) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Proposal No. 4: Class A Common Shareholder Adjournment Proposal</u>](#proposal4) | [33](#proposal4) |
| [**<u>THE MERGER</u>**](#themerger2) | [34](#themerger2) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Terms of the Merger</u>](#termsofthemerger) | [34](#termsofthemerger) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Background of the Merger</u>](#backgroundofthemerger) | [34](#backgroundofthemerger) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Recommendation of the Surrey Board of Directors and Surrey</u><u>'</u><u>s Reasons for the Merger</u>](#recommendationofthesurreyboardofdirectors) | [36](#recommendationofthesurreyboardofdirectors) |

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| | |
|:---|:---|
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>First Community</u><u>'</u><u>s Reasons for the Merger</u>](#firstcommunitysreasonsforthemerger) | [39](#firstcommunitysreasonsforthemerger) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Opinion of Surrey</u><u>'</u><u>s Financial Advisor</u>](#opinionofsurreysadvisor) | [41](#opinionofsurreysadvisor) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Certain Surrey Unaudited Prospective Financial Information</u>](#certainsurreyunaudited) | [48](#certainsurreyunaudited) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Interests of Surrey Directors and Executive Officers in the Merger</u>](#interestsofsurreydirectorsinthemerger) | [49](#interestsofsurreydirectorsinthemerger) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Public Trading Markets</u>](#publictradingmarkets) | [51](#publictradingmarkets) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>First Community</u><u>'</u><u>s Dividend Policy</u>](#firstcommunitysdividendpolicy) | [51](#firstcommunitysdividendpolicy) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Regulatory Approvals</u>](#reguatoryapprovals) | [52](#reguatoryapprovals) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Dissenters</u><u>'</u> <u>Appraisal Rights for Surrey Shareholders</u>](#dissappralrights) | [53](#dissappralrights) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Board of Directors and Management of First Community Following the Merger</u>](#bdofdirectors) | [56](#bdofdirectors) |
| [**<u>THE MERGER AGREEMENT</u>**](#themergeragreement2) | [56](#themergeragreement2) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Explanatory Note Regarding the Merger Agreement</u>](#explanatorynote) | [57](#explanatorynote) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Terms of the Merger</u>](#termsofthemerger) | [34](#termsofthemerger) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Effect of the Merger</u>](#effectofthemerger) | [57](#effectofthemerger) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Closing and Effective Time</u>](#closingandeffectivetime) | [57](#closingandeffectivetime) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Merger Consideration</u>](#mergerconsideration) | [58](#mergerconsideration) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Fractional Shares</u>](#fractionalshares) | [58](#fractionalshares) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Treatment of Surrey Restricted Stock Awards</u>](#treatmentofsurrey) | [58](#treatmentofsurrey) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Conversion of Shares; Exchange of Certificates</u>](#conversionofshares) | [58](#conversionofshares) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Withholding</u>](#withholding) | [59](#withholding) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Dividends and Distributions</u>](#dividendsanddist) | [59](#dividendsanddist) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Organizational Documents of the Surviving Corporation</u>](#organizationaldocs) | [59](#organizationaldocs) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Board of Directors</u>](#boardofdirectors) | [59](#boardofdirectors) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Representations and Warranties</u>](#representationsandwarranties) | [59](#representationsandwarranties) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Conduct of Business Pending the Completion of the Merger</u>](#conductofbusiness) | [61](#conductofbusiness) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Regulatory Matters</u>](#regulatorymatters) | [66](#regulatorymatters) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Employee Benefits Matters</u>](#employeebenefits) | [66](#employeebenefits) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Dividends</u>](#dividends) | [68](#dividends) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Loan Program Credentialing</u>](#loanprogramcredntialing) | [68](#loanprogramcredntialing) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Director and Officer Indemnification and Insurance</u>](#directorandofficer) | [68](#directorandofficer) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Surrey Shareholder Meeting and Recommendation of the Surrey Board of Directors</u>](#surreysharehldermeeting) | [69](#surreysharehldermeeting) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Agreement Not to Solicit Other Offers</u>](#agreement) | [69](#agreement) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Conditions to Completion of the Merger</u>](#conditionstocompletionofthemerger) | [70](#conditionstocompletionofthemerger) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Termination of the Merger Agreement</u>](#terminationofthemergeragreement2) | [71](#terminationofthemergeragreement2) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Termination Fee</u>](#terminationfee2) | [72](#terminationfee2) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Effect of Termination</u>](#effectofterm) | [73](#effectofterm) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Expenses and Fees</u>](#expensesandfees) | [73](#expensesandfees) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Amendment, Waiver and Extension of the Merger Agreement</u>](#awandeofthemergeragreement) | [73](#awandeofthemergeragreement) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Surrey Voting Agreements</u>](#surreyvoting2) | [73](#surreyvoting2) |
| [**<u>ACCOUNTING TREATMENT</u>**](#accountingtreatment) | [73](#accountingtreatment) |
| [**<u>MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER</u>**](#materialusfedincometax) | [74](#materialusfedincometax) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Tax Consequences of the Merger Generally</u>](#taxconequences) | [75](#taxconequences) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [U.S. Federal Income Tax Consequences of the Merger to U.S. Holders of Surrey Common Stock <u>and Surrey Class A Common Stock</u>](#usfedincometax) | [75](#usfedincometax) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Cash Instead of Fractional Shares</u>](#cashinstead) | [76](#cashinstead) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Cash Received on Exercise of Dissenter</u><u>'</u><u>s Appraisal Rights</u>](#casgreceived) | [76](#casgreceived) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Information Reporting and Withholding</u>](#inforeporting) | [76](#inforeporting) |
| [**<u>THE COMPANIES</u>**](#thecompanies) | [77](#thecompanies) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>First Com</u>](#firstcommunity)[<u>munity</u>](#firstcommunity) | [77](#firstcommunity) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [<u>Surrey</u>](#surrey) | [78](#surrey) |
| [**<u>SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SURREY</u>**](#securityownership) | [80](#securityownership) |
| [**<u>DESCRIPTION OF FIRST COMMUNITY BANKSHARES, INC. CAPITAL STOCK</u>**](#descriptionoffirstcomm) | [81](#descriptionoffirstcomm) |
| [**<u>COMPARISON OF SHAREHOLDERS</u>**<u>'</u> **<u>RIGHTS</u>**](#comparisons) | [83](#comparisons) |
| [**<u>LEGAL MATTERS</u>**](#legalmatters2) | [92](#legalmatters2) |
| [**<u>EXPERTS</u>**](#experts2) | [92](#experts2) |

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|:---|:---|
| [**<u>DEADLINES FOR SUBMITTING SHAREHOLDER PROPOSALS</u>**](#deadlines) | [92](#deadlines) |
| [**<u>WHERE YOU CAN FIND MORE INFORMATION</u>**](#wheremoreinfo) | [93](#wheremoreinfo) |

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| **APPENDICES:** | Page |

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|:---|:---|:---|
| **Appendix A** - | [Agreement and Plan of Merger dated November 17, 2022 by and between First Community Bankshares, Inc. and Surrey Bancorp](#appendixa) | [A-1](#a-one) |
| **Appendix B** - | [Opinion of Raymond James & Associates, Inc.](#appendixb) | [B-1](#appendixb) |
| **Appendix C** - | [Provisions of North Carolina Business Corporation Act Relating to Dissenters' Appraisal Rights](#appendixc) | [C-1](#appendixc) |
| **Appendix D -**  | [First Community Bankshares, Inc. Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 3, 2022](#appendix_d) | [D-1](#appendix_d) |
| **Appendix E -**  | [First Community Bankshares, Inc. Definitive Proxy Statement on Schedule 14A filed with the SEC on March 16, 2022](#appendixe) | [E-1](#appendixe) |
| **Appendix F -**  | [First Community Bankshares, Inc. Quarterly Reports on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 10, 2022, for the quarter ended June 30, 2022 filed with the SEC on August 5, 2022 and for the quarter ended September 30, 2022 filed with the SEC on November 8, 2022](#appendixf) | [F-1](#appendixf) |
| **Appendix G -**  | [First Community Bankshares, Inc. Current Reports on Form 8-K filed with the SEC on March 14, 2022, April 1, 2022, May 2, 2022, May 31, 2022, June 17, 2022, November 18, 2022 and December 1, 2022](#appendix_g) | [G-1](#appendix_g) |

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**QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SURREY SPECIAL MEETING**

The following are some questions that you may have about the merger and the Surrey special meeting and brief answers to those questions. We urge you to read carefully the remainder of this proxy statement/prospectus because the information in this section does not provide all of the information that might be important to you with respect to the merger and the Surrey special meeting. Additional important information is also contained in the documents attached as appendices to this proxy statement/prospectus. See the section entitled "*Where You Can Find More Information*" beginning on page [●].

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|:---|:---|
| Q: | **What are Surrey shareholders being asked to vote on?** |

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|:---|:---|
| A: | Holders of Surrey common stock, voting as a separate class from the holders of Surrey Class A common stock, are being asked to vote on the following proposals: |

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● to approve the merger agreement (which we refer to as the "common shareholder merger proposal"); and

● to approve one or more adjournments of the special meeting, if necessary or appropriate to permit further solicitation of proxies from the holders of Surrey common stock in favor of the common shareholder merger proposal (which we refer to as the "common shareholder adjournment proposal").

Holders of Surrey Class A common stock, voting as a separate class from the holders of Surrey common stock, are being asked to vote on the following proposals:

● to approve the merger agreement (which we refer to as the "Class A common shareholder merger proposal"); and

● to approve one or more adjournments of the special meeting, if necessary or appropriate to permit further solicitation of proxies from the holders of Surrey Class A common stock in favor of the Class A common shareholder merger proposal (which we refer to as the "Class A common shareholder adjournment proposal").

The merger cannot be completed unless Surrey common shareholders approve the common shareholder merger proposal and Surrey Class A common shareholders approve the Class A common shareholder merger proposal.

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|:---|:---|
| Q: | **What vote is required to approve each proposal at the special meeting?** |

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|:---|:---|
| A: | *Common Shareholder Merger Proposal:* The affirmative vote of the holders of a majority of the outstanding shares of Surrey common stock as of the record date and entitled to vote thereon is required to approve the common shareholder merger proposal. |

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*Common Shareholder Adjournment Proposal:* The affirmative vote of a majority of the votes cast by the holders of Surrey common stock on the common shareholder adjournment proposal is required to approve the common shareholder adjournment proposal.

*Class A common shareholder Merger Proposal*: The affirmative vote of the holders of a majority of the outstanding shares of Surrey Class A common stock as of the record date and entitled to vote thereon is required to approve the Class A common shareholder merger proposal.

*Class A common shareholder Adjournment Proposal:* The affirmative vote of a majority of the votes cast by the holders of Surrey Class A common stock on the Class A common shareholder adjournment proposal is required to approve the Class A common shareholder adjournment proposal.

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| Q: | **How does the Surrey board of directors recommend that I vote?** |

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|:---|:---|
| A: | The Surrey board of directors recommends that holders of Surrey common stock vote "**FOR**" the common shareholder merger proposal and "**FOR**" the common shareholder adjournment proposal (if necessary or appropriate), and recommends that holders of Surrey Class A common stock vote "**FOR**" the Class A common shareholder merger proposal and "**FOR**" the Class A common shareholder adjournment proposal (if necessary or appropriate). |

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|:---|:---|
| Q: | **What will I receive in the merger?** |

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|:---|:---|
| A: | If the merger is completed, you will receive 0.7159 shares (which we refer to as the "exchange ratio") of First Community common stock for each share of Surrey common stock and Surrey Class A common stock that you hold immediately prior to the merger (which we refer to as the "merger consideration"). First Community will not issue any fractional shares of First Community common stock in the merger. Instead, a Surrey shareholder who otherwise would have received a fraction of a share of First Community common stock will receive an amount in cash rounded to the nearest whole cent. This cash amount will be determined by multiplying (1) the fraction of a share of First Community common stock to which the holder would otherwise be entitled by (2) the average closing price of First Community common stock reported on the Nasdaq Global Select Market (which we refer to as "NASDAQ") for the 30 consecutive full trading days ending on the trading day immediately prior to the later of the date on which the last regulatory approval is received (disregarding any waiting period) or the date on which the common shareholder merger proposal and Class A common shareholder merger proposal are approved (which later date we refer to as the "determination date"; and which average closing price we refer to as the "First Community average closing price"). See the section entitled "*The Merger Agreement-Terms of the Merger-Merger Consideration*" beginning on page [●]. |

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Based on First Community's closing price of $38.43 per share on November 17, 2022, the last trading day before the announcement of the merger agreement, the merger consideration represented an implied value of approximately $27.51 per share of Surrey common stock and Surrey Class A common stock. Based on First Community's closing price of $[●] per share on [●], 2023, the last practicable trading day before the mailing of this proxy statement/prospectus, the merger consideration represented an implied value of approximately $[●] per share of Surrey common stock and Surrey Class A common stock.

**We encourage you to obtain current market quotations for the common stock of First Community and Surrey before you vote.**

If the merger is completed, Surrey shareholders will be entitled to receive dividends with a record date after the effective time of the merger on shares of First Community common stock received in the merger. See the section entitled "*The Merger Agreement-Terms of the Merger-Dividends and Distributions*" on page [●].

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|:---|:---|
| Q: | **What equity stake will First Community and Surrey shareholders hold in First Community immediately following the merger?** |

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|:---|:---|
| A: | As a result of the merger, based on the number of shares of Surrey common stock and Surrey Class A common stock outstanding on [●], 2023, the Surrey record date, we expect that holders of shares of Surrey common stock and Surrey Class A common stock as of immediately prior to the closing of the merger will hold, in the aggregate, approximately [15.6]% of the issued and outstanding shares of First Community common stock immediately following the closing of the merger (including shares received in respect of Surrey restricted stock awards and without giving effect to any shares of First Community common stock held by Surrey shareholders prior to the merger). As a result, current First Community shareholders will hold, in the aggregate, approximately [84.4]% of the outstanding shares of First Community common stock immediately following the closing of the merger. |

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|:---|:---|
| Q: | **Will the value of the merger consideration change between the date of this proxy statement/prospectus and the time the merger is completed?** |

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|:---|:---|
| A: | The value of the merger consideration may fluctuate between the date of this proxy statement/prospectus and the completion of the merger based upon the market value for First Community common stock. The exchange ratio in the merger is a fixed number of shares of First Community common stock. Any fluctuation in the market price of First Community common stock after the date of this proxy statement/prospectus and before the effective time of the merger will change the value of the shares of First Community common stock that Surrey shareholders will receive. |

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Surrey shareholders should obtain current stock price quotations for First Community common stock. First Community common stock is traded on NASDAQ under the symbol "FCBC."

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|:---|:---|
| Q: | **How will the merger affect Surrey equity awards?** |

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|:---|:---|
| A: | At the effective time of the merger, (which we refer to as the "effective time"), each share of restricted stock awarded to any employee or service provider of Surrey and its subsidiaries under Surrey's 2017 Long-Term Stock Incentive Plan (which we refer to as the "restricted stock plan") that is unvested and subject to restrictions (which we refer to as an "unvested Surrey restricted stock award") shall fully vest in accordance with the terms of the restricted stock plan and the applicable award agreement and shall be canceled and converted automatically into the right to receive the merger consideration payable pursuant to the merger agreement on the shares of Surrey common stock subject to the unvested Surrey restricted stock award, treating the shares of Surrey common stock subject to such unvested Surrey restricted stock award in the same manner as all other shares of Surrey common stock for such purposes. |

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|:---|:---|
| Q: | **When and where is the special meeting?** |

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A: The Surrey special meeting will be held on [●], 2023 at [●] (local time) at [●].

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|:---|:---|
| Q: | **Who can vote at the special meeting of shareholders?** |

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|:---|:---|
| A: | Holders of shares of Surrey common stock and Surrey Class A common stock at the close of business on [●], 2023, which is the date that the Surrey board of directors has fixed as the record date for the Surrey special meeting, are entitled to vote at the Surrey special meeting. |

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|:---|:---|
| Q: | **What do I need to do now?** |

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|:---|:---|
| A: | After you have carefully read this proxy statement/prospectus and have decided how you wish to vote your shares, please vote your shares promptly so that they are represented and voted at the Surrey special meeting. |

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If you are a shareholder of record of Surrey as of the Surrey record date, you may submit your proxy before the special meeting in one of the following ways:

● Use the toll-free number shown on your proxy card;

● Visit the website shown on your proxy card to vote via the Internet;

● Complete, sign, date and return the enclosed proxy card in the enclosed postage-paid envelope; or

● Cast your vote in person at the special meeting.

If your shares are held in "street name" through a broker, bank or other nominee, that institution will send you separate instructions describing the procedure for voting your shares. "Street name" shareholders who wish to vote at the special meeting will need to obtain a proxy form from their broker, bank or other nominee.

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| Q: | **What constitutes a quorum for the special meeting?** |

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|:---|:---|
| A: | For the special meeting of Surrey shareholders, (i) the presence, in person or by proxy, of holders of a majority of the outstanding shares of Surrey common stock entitled to vote at the Surrey special meeting will constitute a quorum for the transaction of business, and (ii) the presence, in person or by proxy, of holders of a majority of the outstanding shares of Surrey Class A common stock entitled to vote at the Surrey special meeting will constitute a quorum for the transaction of business. |

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Abstentions and broker non-votes, if any, will be included in determining the number of shares of Surrey common stock or Surrey Class A common stock, as applicable, present at the Surrey special meeting for the purpose of determining the presence of a quorum.

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|:---|:---|
| Q: | **Why is my vote important?** |

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|:---|:---|
| A: | If you do not return your proxy, it will be more difficult for Surrey to obtain the necessary quorum to hold the special meeting and to obtain the approval of the common shareholder merger proposal and the Class A common shareholder proposal. In addition, your failure to submit a proxy or vote in person, or failure to instruct your bank, broker or other nominee how to vote, or abstention will have the same effect as a vote "**AGAINST**" the common shareholder merger proposal and the Class A common shareholder merger proposal. |

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The merger agreement must be approved by the affirmative vote of (i) a majority of the outstanding shares of Surrey common stock as of the record date and entitled to vote on the merger agreement and (ii) a majority of the outstanding shares of Surrey Class A common stock as of the record date and entitled to vote on the merger agreement.

The Surrey board of directors unanimously recommends that Surrey common shareholders vote "**FOR**" the common shareholder merger proposal and that Surrey Class A common shareholders vote "**FOR**" the Class A common shareholder merger proposal.

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|:---|:---|
| Q: | **If my shares of Surrey common stock and/or Class A common stock are held in** "**street name**" **by my bank, broker or other nominee, will my bank, broker or other nominee automatically vote my shares for me?** |

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|:---|:---|
| A: | No. If your bank, broker or other nominee holds your shares of Surrey common stock and/or Class A common stock in "street name," your bank, broker or other nominee will vote your shares only if you provide instructions on how to vote by filling out the voter instruction form sent to you by your bank, broker or other nominee with this proxy statement/prospectus. **Any such shares for which you do not give voting instructions will constitute a broker non-vote and will have the effect of a vote** "**AGAINST**" **the common shareholder merger proposal or the Class A common shareholder merger proposal, as applicable.** |

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|:---|:---|
| Q: | **Can I attend the special meeting and vote my shares in person?** |

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|:---|:---|
| A: | Yes. All shareholders of Surrey, including shareholders of record and shareholders who hold their shares through banks, brokers or other nominees, are invited to attend the special meeting. If you are not a shareholder of record, you must obtain a proxy, executed in your favor, from the record holder of your shares, such as a bank, broker or other nominee, to be able to vote in person at the special meeting. Please bring proper identification to the special meeting, together with proof that you are a record owner of Surrey common stock or Surrey Class A common stock, as the case may be. If your shares are held in street name, please bring acceptable proof of ownership to the special meeting, such as a letter from your broker or an account statement showing that you beneficially owned shares of Surrey common stock or Surrey Class A common stock, as applicable, on the record date. |

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| Q: | **What will happen if I return my proxy or voting instruction card without indicating how to vote?** |

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|:---|:---|
| A: | Except as described below, if you sign and return your proxy or voting instruction card without indicating how to vote on any particular proposal, the shares represented by your proxy will be voted as recommended by the Surrey board of directors. Unless you check the box on your proxy card to withhold discretionary authority, the proxy holders may use their discretion to vote on other matters relating to the special meeting, as applicable. |

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| Q: | **Can I change my vote?** |

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A: Yes. If you are the record holder of your shares, you may revoke your proxy in any of the following ways:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. submitting another valid proxy card bearing a later date;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. prior to the special meeting, by logging onto the Internet website specified on your proxy card in the same manner you would to submit your proxy electronically or by calling the telephone number specified on your proxy card, in each case if you are eligible to do so, and following the instructions on the proxy card;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. attending the special meeting and voting your shares in person; or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. delivering prior to the Surrey special meeting a written notice of revocation to Surrey at the following address: 145 N Renfro Street, Mount Airy, North Carolina 27030, Attention: Edward C. Ashby, III.

If you choose to send a completed proxy card bearing a later date or a notice of revocation, the new proxy card or notice of revocation must be received by [●] (local time) on [●], 2023. Attendance at the special meeting will not, in and of itself, constitute revocation of a proxy. If you hold your shares in street name with a bank, broker or other nominee, you must follow the directions you receive from your bank, broker or other nominee to change your vote.

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|:---|:---|
| Q: | **Who may solicit proxies on Surrey behalf?** |

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|:---|:---|
| A: | In addition to solicitation of proxies by Surrey by mail, proxies may also be solicited by Surrey directors and employees personally, and by telephone, facsimile or other means. Surrey has also made arrangements with Regan & Associates, Inc. to assist in soliciting proxies. For more information on solicitation of proxies in connection with the special meeting, see "*Information About the Surrey Special Meeting - Solicitation of Proxies*" beginning on page [●]. |

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|:---|:---|
| Q: | **What are the U.S. federal income tax consequences of the merger to Surrey shareholders?** |

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| | |
|:---|:---|
| A: | The merger is intended to qualify as a "reorganization" within the meaning of Section 368(a) of the Code, and First Community and Surrey will each be a party to that reorganization within the meaning of Section 368(b) of the Code for U.S. federal income tax purposes. It is a condition to the respective obligations of First Community and Surrey to complete the merger that each of First Community and Surrey receives a legal opinion to that effect. Neither First Community nor Surrey currently intends to waive this opinion condition to its obligation to consummate the merger. If either First Community or Surrey waives this opinion condition after this proxy statement/prospectus is declared effective by the Securities and Exchange Commission (the "SEC"), or if the U.S. federal income tax consequences of the merger to Surrey shareholders have materially changed, First Community and Surrey will recirculate appropriate soliciting materials to resolicit the votes of Surrey shareholders. Accordingly, holders of Surrey common stock and holders of Surrey Class A common stock are not expected to recognize any gain or loss for U.S. federal income tax purposes on the exchange of shares of Surrey common stock or Surrey Class A common stock, as applicable, for shares of First Community common stock in the merger, except with respect to any cash received in lieu of fractional shares of First Community common stock. |

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For further information, see the section entitled "*Material U.S. Federal Income Tax Consequences of the Merger*" beginning on page [●].

**The U.S. federal income tax consequences described above may not apply to all holders of Surrey common stock or Surrey Class A common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your independent tax advisor for a full understanding of the particular tax consequences of the merger to you.**

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|:---|:---|
| Q: | **Am I entitled to appraisal rights?** |

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| | |
|:---|:---|
| A: | Yes. Surrey shareholders have the right to assert appraisal rights with respect to the merger and to demand in writing that First Community pay the fair value of their shares of Surrey common stock and Surrey Class A common stock under applicable provisions of North Carolina law. In order to exercise and perfect appraisal rights, a Surrey shareholder must give written notice of his, her or its intent to demand payment for his, her or its shares to Surrey, as applicable, before the vote is taken on the merger at the Surrey special meeting, as applicable, and must not vote in favor of the merger. A copy of the applicable North Carolina statutory provisions is included in this proxy statement/prospectus as ***Appendix C***. |

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A description of the procedures to demand and perfect appraisal rights is included in the following section: "*The Merger - Dissenters*' *Appraisal Rights for Surrey Shareholders*" beginning on page [●].

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| | |
|:---|:---|
| Q: | **If I am a Surrey shareholder, should I send in my Surrey stock certificates now?** |

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| | |
|:---|:---|
| A: | No. Please do not send in your Surrey stock certificates with your proxy. After the completion of the merger, an exchange agent agreed upon by First Community and Surrey will send you instructions for exchanging Surrey stock certificates for the merger consideration. See the section entitled "*The Merger Agreement-Terms of the Merger-Conversion of Shares; Exchange of Certificates*" beginning on page [●]. |

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|:---|:---|
| Q: | **What should I do if I hold my shares of Surrey common stock or Surrey Class A common stock in book-entry form?** |

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| | |
|:---|:---|
| A: | You are not required to take any special additional actions if your shares of Surrey common stock or Surrey Class A common stock are held in book-entry form. After the completion of the merger, the exchange agent will send you instructions for converting your book-entry shares into the merger consideration. |

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|:---|:---|
| Q: | **What should I do if I receive more than one set of voting materials?** |

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|:---|:---|
| A: | Surrey shareholders may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold shares of Surrey common stock or Surrey Class A common stock in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold such shares. If you are a holder of record of Surrey common stock or Surrey Class A common stock and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive or otherwise follow the voting instructions set forth in this proxy statement/prospectus to ensure that you vote every share of Surrey common stock or Surrey Class A common stock that you own. |

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| | |
|:---|:---|
| Q: | **When do you expect to complete the merger?** |

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| | |
|:---|:---|
| A: | First Community and Surrey expect to complete the merger in the second quarter of 2023. However, neither First Community nor Surrey can assure you of when or if the merger will be completed. Surrey must first obtain the approval of Surrey shareholders for the merger and First Community and Surrey must each satisfy certain other closing conditions, including receipt of necessary regulatory approvals. For further information, see the section entitled "*The Merger Agreement-Conditions to Completion of the Merger*" beginning on page [●]. |

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|:---|:---|
| Q: | **What happens if the merger is not completed?** |

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| | |
|:---|:---|
| A: | If the merger is not completed, Surrey common and Class A common shareholders will not receive any consideration for their shares of Surrey common stock or Surrey Class A common stock in connection with the merger. Instead, Surrey will remain an independent company and Surrey common stock and Surrey Class A common stock will remain outstanding. In addition, if the merger agreement is terminated in certain circumstances, Surrey may be required to pay a termination fee. See the section entitled "*The Merger Agreement-Termination Fee*" beginning on page [●], for a complete discussion of the circumstances under which a termination fee will be required to be paid. |

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|:---|:---|
| Q: | **Are there any risks that I should consider in deciding whether to vote for the approval of the merger agreement?** |

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| | |
|:---|:---|
| A: | Yes. You should read and carefully consider the risk factors set forth in the section entitled "*Risk Factors*" beginning on page [●]. You also should read and carefully consider the risk factors of First Community contained in the documents that are attached as appendices to this proxy statement/prospectus. See the section entitled "*Where You Can Find More Information*" beginning on page [●]. |

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|:---|:---|
| Q: | **Whom should I call with questions or to obtain additional copies of this proxy statement/prospectus?** |

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| | |
|:---|:---|
| A: | If you have any questions concerning the merger or this proxy statement/prospectus, would like additional copies of this proxy statement/prospectus or need help voting your shares of Surrey common stock or Surrey Class A common stock, you should contact Regan & Associates, Inc., (1) by mail at 505 Eighth Avenue- Suite 800, New York, NY 10018; or (2) by phone at (800) 737-3426. |

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**SUMMARY**

*The following summary highlights selected information from this proxy statement/prospectus. It does not contain all of the information that is important to you. Each item in this summary refers to the page where that subject is discussed in more detail. You should carefully read the entire proxy statement/prospectus, including the documents attached as appendices to this proxy statement/prospectus and the other documents to which we refer to understand fully the merger. See the section entitled* "*Where You Can Find More Information*" *beginning on page [*●*] on how to obtain copies of those documents. In addition, the merger agreement is attached as* ***Appendix A*** *to this proxy statement/prospectus. We encourage you to read the merger agreement because it is the legal document that governs the merger.*

*Unless the context otherwise requires throughout this proxy statement/prospectus,* "*First Community*" *and the* "*Company*" *refers to First Community Bankshares, Inc.,* "*Surrey*" *refers to Surrey Bancorp and* "*we,*" *and* "*our*" *refer collectively to First Community and Surrey.*

**Information Regarding First Community and Surrey:**

**First Community Bankshares, Inc. (see page** [●]**)**

29 College Drive

Bluefield, Virginia 24605

Attention: David D. Brown

Phone: (276) 326-9000

First Community, a financial holding company, was founded in 1989 and incorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company's state of incorporation from Nevada to Virginia. The reincorporation was completed on April 24, 2018. The Company's principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly-owned subsidiary First Community Bank, a Virginia-chartered banking institution founded in 1874. First Community Bank has branch offices in Virginia, West Virginia, North Carolina and Tennessee. First Community Bank offers wealth management and investment advice through its Trust Division and wholly-owned subsidiary First Community Wealth Management.

First Community focuses on building financial partnerships and creating enduring and complete relationships with businesses and individuals through a personal and local approach to banking and financial services. First Community strives to be the bank of choice in the markets it serves by offering impeccable service and a complete line of competitive products that include:

● demand deposit accounts, savings and money market accounts, certificates of deposit, and individual retirement arrangements;

● commercial, consumer, and real estate mortgage loans and lines of credit;

● various credit card, debit card, and automated teller machine card services;

● corporate and personal trust services; and

● investment management services.

As of September 30, 2022, on a consolidated basis, First Community had total assets of $3.16 billion, total deposits of $2.71 billion, total net loans of $2.33 billion, and shareholders' equity of $412 million.

Additional information about First Community is included in documents attached as appendices to this proxy statement/prospectus. See the section entitled "*Where You Can Find More Information*" beginning on page [●].

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**Surrey Bancorp (see page [**●**])**

145 N Renfro Street

Mount Airy, North Carolina 27030

Attention: Edward C. Ashby, III

Phone: (336) 783-3900

Surrey Bancorp is a bank holding company organized under the laws of North Carolina in 2003 and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (which we refer to as the "BHCA"). Surrey conducts the majority of its business operations through its wholly-owned bank subsidiary, Surrey Bank & Trust. Surrey's single direct subsidiary is Surrey Bank & Trust, which is a North Carolina state-chartered bank that was incorporated in 1996. Surrey Bank & Trust provides comprehensive individual and corporate financial services through its main and branch offices in Mount Airy, North Carolina and branch offices in Stuart, Virginia, and Pilot Mountain, North Wilkesboro and Elkin, North Carolina. These services include demand and time deposits as well as commercial, installment, mortgage and other consumer lending services, insurance and investment services. Surrey Bank & Trust offers retail and commercial banking products and services to individuals, businesses and local government customers.

At September 30, 2022, Surrey had total consolidated assets of $500 million, net loans of $244 million, deposits of $436 million and stockholders' equity of $57 million. Surrey common stock is quoted on the OTC Pink under the symbol "SRYB."

**The Merger (see page [**●**])**

The terms and conditions of the merger are contained in the merger agreement, a copy of which is included as ***Appendix A*** to this proxy statement/prospectus and is incorporated by reference herein. You should read the merger agreement carefully and in its entirety, as it is the legal document governing the merger.

In the merger, Surrey will merge with and into First Community, with First Community as the surviving corporation in the merger. Immediately following the effective time of the merger, Surrey Bank & Trust will merge into First Community Bank, with First Community Bank as the surviving bank in the bank merger.

**Closing and Effective Time of the Merger (see page [**●**])**

The closing date is currently expected to occur in the second quarter of 2023. On the closing date, First Community will file articles of merger with the State Corporation Commission of the Commonwealth of Virginia and the North Carolina Secretary of State. The merger will become effective at such time as the articles of merger are filed or such later time as may be specified in the articles of merger (which we refer to as the "effective time"). Neither First Community nor Surrey can predict the actual date on which the merger will be completed because it is subject to factors beyond each company's control, including whether or when the required regulatory approvals and Surrey shareholder approvals will be received.

**Merger Consideration (see page** [●]**)**

Under the terms of the merger agreement, each share of Surrey common stock and Surrey Class A common stock issued and outstanding immediately prior to the completion of the merger (other than dissenting shares as described below and shares of Surrey common stock owned and Surrey Class A common stock owned directly or indirectly by First Community, Surrey or their wholly-owned subsidiaries (in each case, other than shares of Surrey common stock and Surrey Class A common stock held in a fiduciary capacity or in connection with debts previously contracted) (together, the "excluded shares")) will be converted into the right to receive 0.7159 shares of First Community common stock.

First Community will not issue any fractional shares of First Community common stock in the merger. Instead, a Surrey shareholder who otherwise would have received a fraction of a share of First Community common stock will receive an amount in cash rounded to the nearest whole cent. This cash amount will be determined by multiplying the fraction of a share of First Community common stock to which the holder would otherwise be entitled by the First Community average closing price.

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First Community common stock trades on NASDAQ under the symbol "FCBC." Surrey common stock trades on the OTC Pink under the ticker symbol "SRYB." The following table presents the closing price of First Community common stock and Surrey common stock on November 17, 2022, the last trading day before the date of the public announcement of the merger agreement, and [●], 2023, the last practicable trading day prior to the mailing of this proxy statement/prospectus. The table also presents the equivalent value of the merger consideration per share of Surrey common stock on those dates, calculated by multiplying the closing sales price of First Community common stock on those dates by the exchange ratio.

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|:---|:---|:---|:---|
| **Date**<br>| **First** <br> **Community** <br> **closing**<br> **sale price** | **Surrey closing**<br> **sale price** | **Equivalent** <br> **Surrey per**<br> **share value** |
| November 17, 2022 | $38.43 | $15.00 | $27.51 |
| [●], 2023 | [●] | [● ] | [●] |

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Although the exchange ratio is fixed, the value of the shares of First Community common stock to be issued in the merger will fluctuate between now and the closing date of the merger. Surrey shareholders should obtain current stock price quotations for First Community common stock.

**Conversion of Shares; Exchange of Certificates; Book Entry Shares (see page** [●]**)**

Promptly after the effective time of the merger, First Community's exchange agent will mail to each holder of record of Surrey common stock and Surrey Class A common stock that is converted into the right to receive the merger consideration a letter of transmittal and instructions for the surrender of the holder's Surrey stock certificate(s) for the merger consideration (including cash in lieu of any fractional First Community shares).

Please do not send in your certificate(s) until you receive these instructions.

You will not be required to take any special additional actions if your shares of Surrey common stock or Surrey Class A common stock are held in book-entry form. After the effective time of the merger, First Community's exchange agent will send you instructions for converting your book-entry shares into the merger consideration.

**Material U.S. Federal Income Tax Consequences of the Merger (see page** [●]**)**

The merger is intended to qualify as a "reorganization" within the meaning of Section 368(a) of the Code and it is a condition to the respective obligations of Surrey and First Community to complete the merger that each of Surrey and First Community receives a legal opinion to that effect. Accordingly, the merger will generally be tax-free to holders of Surrey common stock and Surrey Class A common stock for U.S. federal income tax purposes on the exchange of shares of Surrey common stock and Surrey Class A common stock for shares of First Community common stock in the merger, except with respect to any cash received instead of fractional shares of First Community common stock that such holder of Surrey common stock and Surrey Class A common stock would otherwise be entitled to receive. For further information, see the section entitled "*Material U.S. Federal Income Tax Consequences of the Merger*" beginning on page [●].

**The U.S. federal income tax consequences described above may not apply to all holders of Surrey common stock and Surrey Class A common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your tax advisor for a full understanding of the particular tax consequences of the merger to you.**

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**Dissenters**' **Appraisal Rights for Surrey Shareholders (see page [**●**] and *Appendix C*)**

Each Surrey shareholder has the right to assert appraisal rights with respect to the merger and demand in writing that he, she or it be paid the fair value of the shares of his, her or its Surrey common stock or Surrey Class A common stock under the applicable provisions of North Carolina law following the consummation of the merger. There are specific requirements that shareholders must follow to assert and perfect their appraisal rights.

A copy of the applicable North Carolina statutory provisions is included in the proxy statement/prospectus as ***Appendix C***, and a description of the procedures to demand and perfect appraisal rights is included in the section entitled "*The Merger - Dissenters*' *Appraisal Rights for Surrey Shareholders*" beginning on page [●].

Due to the complexity of the procedures for exercising dissenters' right to seek appraisal, Surrey shareholders who are considering exercising such rights are encouraged to seek the advice of legal counsel. Failure to strictly comply with the applicable North Carolina statutory provisions will result in the loss of the right of appraisal.

**Opinion of Surrey**'**s Financial Advisor (see page [**●**] and *Appendix B*)**

At the November 17, 2022 meeting of the Surrey board of directors, representatives of Raymond James & Associates, Inc. (which we refer to as "Raymond James") rendered Raymond James' oral opinion, which was also confirmed in writing on November 17, 2022, as to the fairness of the merger consideration, as of such date, from a financial point of view, to the holders of Surrey's outstanding common stock, based upon and subject to the qualifications, assumptions and other matters considered in connection with the preparation of its opinion.

The full text of the written opinion of Raymond James, dated November 17, 2022, which sets forth, among other things, the various qualifications, assumptions and limitations on the scope of the review undertaken, is attached as ***Appendix B*** to this proxy statement/prospectus. Raymond James provided its opinion for the information and assistance of the Surrey board of directors (solely in its capacity as such) in connection with, and for purposes of, its consideration of the merger and its opinion only addresses whether the merger consideration to be received by the holders of the common stock in the merger pursuant to the merger agreement was fair, from a financial point of view, to such holders. The opinion of Raymond James did not address any other term or aspect of the merger agreement or the merger contemplated thereby. The Raymond James opinion does not constitute a recommendation to the Surrey board of directors or any holder of Surrey common stock as to how the Surrey board of directors, such shareholder or any other person should vote or otherwise act with respect to the merger or any other matter.

For further information, see the section entitled "*The Merger-Opinion of Surrey*'*s Financial Advisor"* beginning on page[●] .

**Recommendation of the Surrey Board of Directors (see page [**●**])**

The Surrey board of directors has determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of Surrey and its shareholders and has unanimously adopted the merger agreement and approved the merger.

The Surrey board of directors unanimously adopted the merger agreement and approved the merger and unanimously recommends that Surrey common shareholders vote "**FOR**" the common shareholder merger approval and the adjournment proposal and that Surrey Class A common stock shareholders vote "**FOR**" the Class A common shareholder merger proposal and the Class A common shareholder adjournment proposal.

For the factors considered by the Surrey board of directors in reaching its decision to approve the merger agreement, see the section entitled "*The Merger-Recommendation of the Surrey Board of Directors and Surrey*'*s Reasons for the Merger*" beginning on page [●].

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**Interests of Surrey Directors and Executive Officers in the Merger (see page** [●]**)**

In considering the recommendation of the Surrey board of directors with respect to the merger agreement, Surrey shareholders should be aware that some of Surrey' directors and executive officers have interests in the merger that are different from, or in addition to, the interests of Surrey shareholders generally. Interests of officers and directors that may be different from or in addition to the interests of Surrey shareholders include, among others:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. The merger agreement describes the acceleration of vesting of shares of the unvested Surrey restricted stock granted under Surrey's restricted stock plan and the conversion of such shares into shares of First Community common stock in connection with the merger. Certain officers have restricted stock awards.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. Edward C. Ashby, III, the Chief Executive Officer of Surrey and Surrey Bank & Trust, and a director of Surrey, Pedro A. Pequeno, II, the President of Surrey and its subsidiary, Surrey Bank & Trust, and Mark H. Towe, Senior Vice President and Chief Financial Officer of Surrey and Surrey Bank & Trust, have interests that exist because of, among other things, their employment and change in control agreements with Surrey, rights under Surrey's benefit and deferred compensation plans, and agreements and arrangements with First Community and its subsidiary First Community Bank, respecting continued service as an employee, contractor and/or director after the merger.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. Current Surrey directors, Edward C. Ashby, III and Robert H. Moody, will join the board of First Community Bank upon completion of the merger. Members of the First Community Bank board are expected to receive compensation consistent with the compensation paid to current non-employee directors of First Community Bank. For 2022, such compensation included an annual retainer fee with a value of approximately $22,500 paid in cash and $22,500 paid in restricted stock units vesting over one year.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. Surrey' directors and executive officers are entitled to continued indemnification and director and officer insurance coverage under the merger agreement.

These interests are discussed in more detail in the section entitled "*The Merger-Interests of Surrey Directors and Executive Officers in the Merger*" beginning on page [●]. The Surrey board of directors was aware of the different or additional interests set forth herein and considered such interests along with other matters in adopting and approving the merger agreement and the transactions contemplated thereby, including the merger.

**Treatment of Surrey Restricted Stock (see page** [●]**)**

At the effective time of the merger, referred to as the effective time, each share of restricted stock awarded to any employee or service provider of Surrey and its subsidiaries under Surrey's restricted stock plan that is unvested and subject to restrictions (which we refer to as an "unvested Surrey restricted stock award") shall fully vest in accordance with the terms of the restricted stock plan and the applicable award agreement and shall be canceled and converted automatically into the right to receive the merger consideration payable pursuant to the merger agreement on the shares of Surrey common stock underlying the unvested Surrey restricted stock, treating the shares of Surrey common stock subject to such unvested Surrey restricted stock in the same manner as all other shares of Surrey common stock for such purposes.

**Regulatory Approvals (see page** [●]**)**

Completion of the merger and the bank merger are subject to various regulatory approvals and notifications, including approvals from the Board of Governors of the Federal Reserve System (which we refer to as the "Federal Reserve Board" or the "Federal Reserve"), the Virginia State Corporation Commission Bureau of Financial Institutions and the North Carolina Office of the Commissioner of Banks. First Community and Surrey have agreed to use their reasonable best efforts to obtain all requisite regulatory approvals.

On January 11, 2023 First Community and Surrey and/or their respective subsidiaries filed the necessary applications and notifications to obtain these regulatory approvals. Although the parties currently believe they should be able to obtain all regulatory approvals in a timely manner, they cannot be certain when or if they will obtain them or, if obtained, whether they will contain terms, conditions or restrictions not currently contemplated that will be detrimental to or have a material adverse effect on the combined company after the completion of the merger. However, in no event will First Community be required, or will Surrey be permitted (without First Community's prior written consent), to agree to any condition or restriction that would so materially and adversely impact the economic or business benefits to First Community of the transactions contemplated by the merger agreement that, had such condition or requirement been known, First Community would not, in its reasonable judgment, have entered into the merger agreement (we refer to such condition as a "burdensome condition"). The regulatory approvals to which the completion of the merger and bank merger are subject are described in more detail under the section entitled "*The Merger-Regulatory Approvals*" beginning on page [●].

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**Conditions to Completion of the Merger (see page** [●]**)**

The completion of the merger depends on a number of conditions being satisfied or, where permitted, waived, including:

● the approval of the merger agreement by holders of Surrey common stock and Surrey Class A common stock;

● receipt of all required regulatory approvals, consents or waivers to permit the consummation of the transactions contemplated by the merger agreement, and the expiration or termination of all statutory waiting periods;

● the absence of any order, decree, injunction or proceeding by any governmental entity of competent jurisdiction prohibiting or enjoining the consummation of the merger or the bank merger, and the absence of any statute, rule or regulation that prohibits or makes illegal the consummation of the merger or the bank merger;

● the effectiveness of the registration statement of which this proxy statement/prospectus is a part with respect to the First Community common stock to be issued upon the consummation of the merger under the Securities Act of 1933, as amended (the "Securities Act"), and the absence of any proceedings pending or threatened by the SEC to suspend the effectiveness of the registration statement;

● the authorization of the listing of the First Community common stock to be issued upon the consummation of the merger on NASDAQ, without objection to the listing from NASDAQ;

● receipt by each of First Community and Surrey of an opinion of its respective legal counsel as to certain tax matters;

● the accuracy of the representations and warranties of each other party in the merger agreement as of November 17, 2022 and as of the closing date as though made at and as of the closing date, subject to the materiality standards provided in the merger agreement (and the receipt by each party of certificates from the other party to such effect);

● the performance by the other party in all material respects of all obligations required to be performed by it at or prior to the effective time of the merger under the merger agreement (and the receipt by each party of certificates from the other party to such effect); and

● the absence of a material adverse effect on the other party.

In addition, First Community's obligation to complete the merger is subject to the following conditions:

● none of the requisite governmental approvals will contain a requirement or condition that would so materially and adversely impact the economic or business benefits of the merger or the bank merger to First Community that, had such requirement or condition been known, First Community would not have entered into the merger agreement;

● Edward C. Ashby, III shall have entered into a consulting agreement with First Community and not taken any action to cancel or terminate such agreement; and

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● First Community Bank shall have been qualified with the U.S. Small Business Administration (which we refer to as the "SBA"), the U.S. Department of Agriculture (which we refer to as the "USDA") and any other lending program of a governmental entity in which Surrey Bank & Trust participated as of November 17, 2022.

No assurance is given as to when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

**Agreement Not to Solicit Other Offers (see page** [●]**)**

Surrey has agreed to a number of limitations with respect to soliciting, negotiating and discussing acquisition proposals involving persons other than First Community, and to certain related matters. The merger agreement does not, however, prohibit Surrey from considering an unsolicited bona fide acquisition proposal from a third party if certain specified conditions are met. Surrey's non-solicitation obligations are discussed in more detail in the section entitled "*The Merger Agreement-Agreement Not to Solicit Other Offers*" beginning on page [●].

**Termination of the Merger Agreement (see page** [●]**)**

The merger agreement can be terminated at any time prior to completion of the merger by mutual consent, or by either party in the following circumstances:

● Surrey shareholders do not approve the merger agreement at the Surrey special meeting, except that this right to terminate is only available to Surrey if it has materially complied with its obligation to use reasonable best efforts to obtain the Surrey shareholders' approval;

● any required regulatory approval has been denied and such denial has become final and non-appealable, or a governmental authority or court has issued a final, unappealable order permanently prohibiting consummation of the transactions contemplated by the merger agreement, unless the failure to obtain the requisite approval was due to the failure of the party seeking to terminate the merger agreement to perform or observe the covenants and agreements in the merger agreement;

● the merger has not been consummated by July 31, 2023 (which we refer to as the "outside date"), except that this right to terminate will not be available to the party whose failure to perform or observe the covenants and agreements in the merger agreement is the reason for the failure to complete the merger by the outside date; or

● there is a breach by the other party of any covenant or agreement contained in the merger agreement, or any representation or warranty of the other party becomes untrue, in each case such that the conditions to closing would not be satisfied and such breach or untrue representation or warranty has not been or cannot be cured by the earlier of the outside date or within 30 days after the giving of written notice to such party of such breach, except that this right to terminate will not be available to the party seeking to terminate if it is then in material breach of the merger agreement.

First Community may also terminate the merger agreement if:

● Surrey breaches in any material respect its obligations not to solicit other acquisition proposals, or its obligation to submit the merger agreement to Surrey shareholders for approval and to use reasonable best efforts to obtain the Surrey shareholders' approval; or

● if the Surrey board of directors does not unanimously publicly recommend in this proxy statement/prospectus that Surrey shareholders approve the merger agreement or withdraws or revises its recommendation in a manner adverse to First Community.

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Surrey may also terminate the merger agreement if, within the five day period following the determination date, both of the following conditions are satisfied:

● the First Community average closing price (which is the average of the closing sales price of First Community common stock reported on NASDAQ over the 30 consecutive trading days ending on the later of (A) the date on which the last regulatory approval necessary is received (disregarding any waiting period) or (B) the date on which the Surrey shareholders approve the merger (which we refer to as the "determination date")) is less than $27.14; and

● the ratio, the numerator of which is the First Community average closing price and the denominator which is $31.93 is less than 85% of the index ratio calculated by dividing the average of closing price for the NASDAQ Bank Index for the 30 consecutive full trading days ending on the trading date immediately prior to the determination date by $4,269.44

However, if Surrey chooses to exercise this termination right, First Community has the option, within five days of receipt of notice from Surrey, to increase the exchange ratio or pay an additional cash payment with respect to each share of Surrey common stock and Class A common stock as part of the merger consideration and prevent termination under this provision.

**Termination Fee (see page** [●]**)**

Surrey will pay First Community a $4.0 million termination fee if the merger agreement is terminated in the following circumstances:

● First Community terminates the merger agreement because (1) Surrey breaches its obligations in any material respect regarding the solicitation of other acquisition proposals or submission of the merger agreement to Surrey shareholders or (2) the Surrey board of directors does not unanimously publicly recommend in this proxy statement/prospectus that Surrey shareholders approve the merger agreement or withdraws or revises its recommendation in a manner adverse to First Community; or

● if (1) the merger agreement is terminated (A) by either party because the Surrey shareholder approvals have not been obtained at the Surrey shareholders' meeting, or (B) by either party because the merger has not occurred by the outside date and the Surrey shareholder approvals have not been obtained, or (C) by First Community because of an uncured material breach by Surrey, (2) an acquisition proposal has been publicly announced or communicated and (3) within 12 months of such termination Surrey consummates or enters into an agreement with respect to an acquisition proposal (whether or not it is the same acquisition proposal).

Except in the case of fraud or a willful and material breach of the merger agreement, the payment of the termination fee will fully discharge the party paying such fee from any losses that may be suffered by the other party arising out of the termination of the merger agreement.

**Public Trading Markets (see page** [●]**)**

First Community will cause the shares of First Community common stock to be issued to the holders of Surrey common stock and Surrey Class A common stock in the merger to be authorized for listing on NASDAQ, subject to official notice of issuance, prior to the effective time of the merger.

**Surrey Special Meeting (see page** [●]**)**

The special meeting is being held for the following purposes:

● for the holders of Surrey common stock, voting as a separate class from the holders of Surrey Class A common stock, to approve the merger (which we refer to as the "common shareholder merger proposal");

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● for the holders of Surrey common stock, voting as a separate class from the holders of Surrey Class A common stock, to approve one or more adjournments of the special meeting, if necessary or appropriate to permit further solicitation of proxies from the holders of Surrey common stock in favor of the common shareholder merger proposal (which we refer to as the "common shareholder adjournment proposal");

● for the holders of Surrey Class A common stock, voting as a separate class from the holders of the Surrey common stock, to approve the merger (which we refer to as the "Class A common shareholder merger proposal"); and

● for the holders of Surrey Class A common stock, voting as a separate class from the holders of Surrey common stock, to approve one or more adjournments of the special meeting, if necessary or appropriate to permit further solicitation of proxies from the holders of Surrey Class A common stock in favor of the Class A common shareholder merger proposal (which we refer to as the "Class A common shareholder adjournment proposal").

The Surrey board of directors has fixed the close of business on [•], 2023 as the record date for determining the holders of Surrey common stock and the holders of Surrey Class A common stock entitled to receive notice of and to vote at the special meeting.

As of the record date, there were [4,099,788] shares of Surrey common stock outstanding and entitled to vote at the Surrey special meeting held by [●] holders of record and [87,095] shares of Surrey Class A common stock outstanding and entitled to vote at the Surrey special meeting held by [●] holders of record. Each share of Surrey common stock entitles the holder thereof as of the record date to one vote at the special meeting on each proposal to be considered at the special meeting by the common shareholders. Each share of Surrey Class A common stock entitles the holder thereof as of the record date to one vote at the special meeting on each proposal to be considered at the special meeting by the Class A common shareholders.

A total of [●] shares of Surrey common stock, representing approximately [●]% of the outstanding shares of Surrey common stock entitled to vote at the Surrey special meeting and [●] shares of Surrey Class A common stock, representing [●]% of the outstanding shares of Surrey Class A common stock entitled to vote at the Surrey special meeting, are subject to voting and support agreements among First Community, Surrey and each of Surrey's directors (which we refer to collectively as the "Surrey voting agreements"). Pursuant to the Surrey voting agreements, each director has agreed to, on the terms and subject to the conditions set forth therein, vote the shares of Surrey common stock and Class A common stock, as applicable, beneficially owned by him or her in favor of the merger agreement and against any proposal made in competition with the merger, as well as certain other customary restrictions with respect to the voting and transfer of his or her shares of Surrey common stock and Class A common stock.

The holders of a majority of the outstanding shares of Surrey common stock, present in person or represented by proxy, will constitute a quorum for purposes of the matters being voted upon by the common shareholders. The holders of a majority of the outstanding shares of Surrey Class A common stock, present in person or represented by proxy, will constitute a quorum for purposes of the matters being voted upon by the Class A common shareholders.

The affirmative vote of the holders of a majority of the outstanding shares of Surrey common stock entitled to vote thereon is required to approve the common shareholder merger proposal. The affirmative vote of the holders of a majority of the outstanding shares of Surrey Class A common stock entitled to vote thereon is required to approve the Class A common shareholder merger proposal. The affirmative vote of a majority of the votes cast by the holders of Surrey common stock is required to approve the common shareholder adjournment proposal. The affirmative vote of a majority of the votes cast by the holders of Surrey Class A common stock is required to approve the Class A common shareholder adjournment proposal.

The merger cannot be completed unless the Surrey common shareholders approve the common shareholder merger proposal and the Surrey Class A common shareholders approve the Class A common shareholder merger proposal. Therefore, it is essential that Surrey common shareholders approve the common shareholder merger proposal and that Surrey Class A common shareholders approve the Class A common shareholder merger proposal. If Surrey common shareholders fail to approve the common shareholder adjournment proposal or if Surrey Class A common shareholders fail to approve the Class A common shareholder adjournment proposal, the merger may nonetheless occur provided that Surrey common shareholders approve the common shareholder merger proposal and Surrey Class A common shareholders approve the Class A common shareholder merger proposal.

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**Surrey Voting Agreements (see page [**●**])**

Each of the directors of Surrey has entered into a Surrey voting agreement with First Community and Surrey, in which each such person agreed, on the terms and subject to the conditions set forth therein, to vote the shares of Surrey common stock and Surrey Class A common stock beneficially owned by him or her in favor of the common shareholder merger proposal and the Class A common shareholder merger proposal, as applicable, and against any proposal made in competition with the merger, as well as certain other customary restrictions with respect to the voting and transfer of his or her shares of Surrey common stock and Surrey Class A common stock.

For more information regarding the Surrey voting agreements, see the sections entitled "*Information About the Surrey Special Meeting-Shares Subject to Voting Agreements*" on page [●] and "*The Merger Agreement-Surrey Voting Agreements*" beginning on page [●].

**Comparison of Shareholders**' **Rights (see page [**●**])**

The rights of Surrey shareholders who become First Community shareholders after the merger will be governed by the articles of incorporation and bylaws of First Community rather than the articles of incorporation and bylaws of Surrey. For more information, see the section entitled "*Comparison of Shareholders*' *Rights*" beginning on page [●].

**Risk Factors (see page [**●**])**

Before voting at the Surrey special meeting, you should carefully consider all of the information contained or attached to this proxy statement/prospectus, including the risk factors set forth in the section entitled "Risk Factors" or described in First Community's reports filed with the SEC, which are attached as appendices to this proxy statement/prospectus. For more information, see the sections entitled "*References to Additional Information*" and "*Where You Can Find More Information*" beginning on page [●].

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**EQUIVALENT PRO FORMA MARKET VALUE OF COMMON STOCK**

First Community common stock is listed and trades on NASDAQ under the ticker symbol "FCBC." As of [●], 2023, there were [●] shares of First Community common stock outstanding and approximately [●] holders of record.

Surrey common stock is quoted on the OTC Pink under the ticker symbol "SRYB." As of the Surrey record date, there were [4,099,788] shares of Surrey common stock outstanding and approximately [●] holders of Surrey common stock of record and [87,095] shares of Surrey Class A common stock outstanding and approximately [●] holders of Surrey Class A common stock of record.

The following table sets forth historical per share market values for First Community common stock (i) on November 17, 2022, the last trading day prior to public announcement of the merger agreement, and (ii) on [●], 2023, the most recent practicable date before the printing and mailing of this proxy statement/ prospectus. The table also shows the equivalent pro forma market value of Surrey common stock on those dates.

The equivalent pro forma market value of Surrey common stock is obtained by *multiplying* the historical market price of First Community common stock by the exchange ratio. Accordingly, the pro forma market value (i) on November 17, 2022 is determined by *multiplying* $38.43 by the exchange ratio of 0.7159 and (ii) on [●], 2023 is determined by *multiplying* $[●] by the exchange ratio of 0.7159.

The historical market prices represent the last sale prices on or before the dates indicated. The market price of First Community common stock at the time of the merger may be higher or lower than the closing prices of First Community common stock on the dates shown in the table and, therefore, the market value of the First Community common stock that you receive may be higher or lower than the equivalent pro forma market value shown in the table.

**Historical Market Price**

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| | | | |
|:---|:---|:---|:---|
|  | **First** <br> **Community** <br> **closing**<br> **sale price** | **Surrey closing** <br> **sale price** | **Equivalent** <br> **Surrey** <br> **Pro Forma**<br> **Market Value** |
| November 17, 2022 | $38.43 | $15.00 | $27.51 |
| [●] | [●] | [●] | [●] |

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Once the merger is completed, there will be no further private or public market for Surrey common stock.

The market prices of both First Community common stock and Surrey common stock will fluctuate prior to the merger. Surrey shareholders should obtain current stock price quotations for First Community common stock.

**COMPARATIVE MARKET PRICES AND DIVIDENDS** 

The following table sets forth for the periods indicated:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• the high and low closing sales prices of Surrey common stock as reported on the OTC Pink; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• semi-annual and special cash dividends paid per share by Surrey.

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| | | | |
|:---|:---|:---|:---|
|  | Surrey Common Stock | Surrey Common Stock | Surrey Common Stock |
| Quarter Ended | High | Low | Dividend <sup>1</sup> |
| *2020:* | | | |
| March 31 | $15.25 | $9.30 | $0.105 |
| June 30 | 11.60 | 9.91 | 0.105 |
| September 30 | 12.24 | 11.00 | 0.105 |
| December 31 | 11.62 | 11.00 | 0.205 |
| *2021:* | | | |
| March 31 | $12.75 | $11.62 | $0.105 |
| June 30 | 15.50 | 12.67 | 0.105 |
| September 30 | 15.00 | 14.65 | 0.105 |
| December 31 | 17.30 | 14.90 | 0.225 |
| *2022:* | | | |
| March 31 | $16.87 | $15.00 | $0.105 |
| June 30 | 15.75 | 14.01 | 0.105 |
| September 30 | 14.70 | 14.00 | 0.105 |
| December 31 | 25.90 | 14.10 | 0.255 |
| *2023:* |  |  |  |
| March 31 (January 1 through January 17) | $24.15 | 23.70 |  |

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<sup>1</sup> Surrey Class A common stock received a dividend preference of $0.03 per share. 

**RISK FACTORS**

In addition to general investment risks and the other information contained in or attached to this proxy statement/prospectus, including the matters described under the caption "Risk Factors" in the Annual Report on Form 10-K filed by First Community for the year ended December 31, 2021, attached hereto as ***Appendix D***, and the matters addressed under the section entitled "*Cautionary Statement Regarding Forward-Looking Statements*," beginning on page [●]. Surrey shareholders should consider the matters described below carefully in determining whether to vote to approve the merger agreement.

**Risks Related to the Merger and First Community**'**s Business Upon Completion of the Merger**

***Because the sale price of the First Community common stock may fluctuate, you cannot be sure of the value of the merger consideration that you will receive in the merger.***

Under the terms of the merger agreement, each share of Surrey common stock and Surrey Class A common stock issued and outstanding immediately prior to the completion of the merger (other than (1) dissenting shares as described below and (2) shares of Surrey common stock and Surrey Class A common stock owned directly or indirectly by Surrey, First Community or their wholly-owned subsidiaries (in each case, other than shares of Surrey common stock or Surrey Class A common stock held in a fiduciary capacity or in connection with debts previously contracted (together, the "excluded shares")) will be converted into the right to receive 0.7159 shares of First Community common stock.

The market price of First Community's common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding First Community's operations or business prospects, including market sentiment regarding First Community's entry into the merger agreement. These risks may be affected by:

● operating results that vary from the expectations of First Community management or of securities analysts and investors;

● developments in First Community's business or in the financial services sector generally;

● regulatory or legislative changes affecting First Community's industry generally or its business and operations;

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● operating and securities price performance of companies that investors consider to be comparable to First Community;

● changes in estimates or recommendations by securities analysts or rating agencies;

● announcements of strategic developments, acquisitions, dispositions, financings, and other material events by First Community or its competitors; and

● changes in global financial markets and economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.

Many of these factors are beyond the control of First Community and Surrey. We make no assurances as to whether or when the merger will be completed. Surrey shareholders should obtain current sale prices for shares of First Community common stock before voting their shares of Surrey common stock and Surrey Class A common stock at the Surrey special meeting.

***The market price of First Community common stock after the merger may be affected by factors different from those affecting the shares of Surrey or First Community currently.***

Upon completion of the merger, holders of Surrey common stock and Surrey Class A common stock will become holders of First Community common stock. First Community's business differs from that of Surrey, and, accordingly, the results of operations of the combined company and the market price of the combined company's shares of common stock may be affected by factors different from those currently affecting the independent results of operations of each of First Community and Surrey. For a discussion of the business of First Community and of certain factors to consider in connection with First Community's business, see the documents attached as appendices to this proxy statement/prospectus or described elsewhere in this proxy statement/prospectus.

***First Community may fail to realize all of the anticipated benefits of the merger.***

First Community and Surrey have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on First Community's ability to successfully combine and integrate the businesses of First Community and Surrey in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company's ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company's ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect First Community's ability to successfully conduct its business, which could have an adverse effect on First Community's financial results and the value of First Community common stock. If First Community experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause First Community and/or Surrey to lose customers or cause customers to remove their accounts from First Community and/or Surrey and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of First Community and Surrey during this transition period and for an undetermined period after completion of the merger on the combined company. In addition, the actual cost savings of the merger could be less than anticipated.

The success of the merger will also depend on First Community's ability to:

● Maintain existing relationships with depositors of Surrey to minimize withdrawals of deposits prior to and subsequent to the merger;

● Maintain and enhance existing relationships with borrowers to limit unanticipated losses of loans made by Surrey;

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● Control its non-interest expense to maintain overall operating efficiencies; and

● Compete effectively in the communities served by First Community and Surrey and in nearby communities.

First Community may not be able to manage effectively its growth resulting from the merger.

***Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.***

Before the transactions contemplated by the merger agreement, including the merger and the bank merger, may be completed, various approvals must be obtained from bank regulatory authorities. In determining whether to grant these approvals the regulators consider a variety of factors, including the regulatory standing of each party and the factors described under the section entitled "*The Merger-Regulatory Approvals*" beginning on page [●]. An adverse development in either party's regulatory standing or these factors could result in an inability to obtain approval or delay their receipt. These regulators may impose conditions on the completion of the merger or the bank merger or require changes to the terms of the merger or the bank merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or the bank merger or imposing additional costs on or limiting the revenues of the combined company following the merger and the bank merger, any of which might have an adverse effect on the combined company following the merger. See the section entitled "*The Merger-Regulatory Approvals*" beginning on page [●].

The regulatory approvals may not be received at all, may not be received in a timely fashion, and may contain conditions on the completion of the merger that are not anticipated or cannot be met. If the consummation of the merger is delayed, including by a delay in receipt of necessary governmental approvals, the business, financial condition and results of operations of each company may also be materially adversely affected.

***First Community may fail to realize the cost savings estimated for the merger.***

Although First Community estimates that it will realize from the merger pre-tax cost savings of approximately $3.69 million annually (excluding one-time costs and expenses associated with the merger) when fully phased in, it is possible that the estimates of the potential cost savings could turn out to be incorrect. In addition, future business developments may require First Community to continue to operate or maintain some facilities or support functions that are currently expected to be combined or reduced. The cost savings estimates also depend on First Community's ability to combine the businesses of First Community and Surrey in a manner that permits those costs savings to be realized. If the estimates turn out to be incorrect or First Community is not able to combine the two companies successfully, the anticipated cost savings may not be fully realized or realized at all, or may take longer to realize than expected.

***The combined company may be unable to retain First Community and/or Surrey personnel successfully after the merger is completed.***

The success of the merger will depend in part on the combined company's ability to retain the talents and dedication of key employees currently employed by First Community and Surrey. It is possible that these employees may decide not to remain with First Community or Surrey, as applicable, while the merger is pending or with the combined company after the merger is consummated. If key employees terminate their employment, or if an insufficient number of employees is retained to maintain effective operations, the combined company's business activities may be adversely affected and management's attention may be diverted from successfully integrating Surrey to hiring suitable replacements, all of which may cause the combined company's business to suffer. In addition, First Community and Surrey may not be able to locate suitable replacements for any key employees who leave either company, or to offer employment to potential replacements on reasonable terms.

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***Surrey***'***s directors and executive officers have interests in the merger that may differ from the interests of Surrey shareholders.***

Surrey shareholders should be aware that some of Surrey's directors and executive officers have interests in the merger that are different from, or in addition to, those of Surrey shareholders generally. The Surrey board of directors was aware of these interests and considered these interests, among other matters, when making its decision to approve the merger agreement, and in recommending that Surrey shareholders vote in favor of approving the merger agreement.

For a more complete description of these interests, see the section entitled "*The Merger-Interests of Surrey Directors and Executive Officers in the Merger*" beginning on page [●].

***Termination of the merger agreement could negatively impact First Community and Surrey.***

The merger may be terminated as a result of factors beyond First Community's and Surrey's control. See the section entitled "*The Merger Agreement-Termination of the Merger Agreement*" beginning on page [●] for a complete discussion of the circumstances under which the merger agreement may be terminated. If the merger agreement is terminated, there may be various consequences. For example, First Community's or Surrey's businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of the First Community common stock or the Surrey common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. If the merger agreement is terminated under certain circumstances, subject to conditions and exceptions, Surrey may be required to pay to First Community a termination fee of $4.0 million. See the section entitled "*The Merger Agreement-Termination Fee*" beginning on page [●], for a complete discussion of the circumstances under which any such termination fee will be required to be paid.

If the merger agreement is terminated and a party's board of directors seeks another merger or business combination, such party's shareholders cannot be certain that such party will be able to find a party willing to engage in a transaction on more attractive terms than the merger.

***First Community and Surrey will be subject to business uncertainties and contractual restrictions while the merger is pending.***

Uncertainty about the effect of the merger on employees, customers, suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of Surrey and/or First Community. These uncertainties may impair First Community's or Surrey's ability to attract, retain and motivate key personnel, depositors and borrowers pending the consummation of the merger, as such personnel, depositors and borrowers may experience uncertainty about their future roles following the consummation of the merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us. In addition, competitors may target each party's existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.

Each of First Community and Surrey has a small number of key personnel. The pursuit of the merger and the preparation for the integration may place a burden on each company's management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on each company's business, financial condition and results of operations.

In addition, the merger agreement restricts each party from taking certain actions without the other party's consent while the merger is pending. These restrictions may, among other matters, prevent such party from pursuing otherwise attractive business opportunities, selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the merger agreement, entering into other transactions or making other changes to such party's business prior to consummation of the merger or termination of the merger agreement. These restrictions could have a material adverse effect on each party's business, financial condition and results of operations. See the section entitled "*The Merger Agreement-Conduct of Business Pending the Completion of the Merger*" beginning on page [●] for a description of the restrictive covenants applicable to Surrey and First Community.

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***The merger may distract management of First Community and Surrey from their other responsibilities.***

The merger could cause the respective management groups of First Community and Surrey to focus their time and energies on matters related to the transaction that otherwise would be directed to their business and operations. Any such distraction on the part of either company's management, if significant, could affect its ability to service existing business and develop new business and adversely affect the business and earnings of First Community or the business and earnings of the combined company.

***If the merger is not completed, First Community and Surrey will have incurred substantial expenses without realizing the expected benefits of the merger.***

Each of First Community and Surrey has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of filing, printing, and mailing this proxy statement/prospectus, and all filing and other fees paid to the SEC in connection with the merger. If the merger is not completed, First Community and Surrey would have to recognize these expenses without realizing the expected benefits of the merger.

***Failure to complete the merger could negatively affect the market price of Surrey common stock.***

If the merger is not completed for any reason, Surrey will be subject to a number of material risks, including the following:

● The market price of Surrey common stock may decline to the extent that the current market prices of its shares reflect a market assumption that the merger will be completed;

● Costs relating to the merger, such as legal, accounting and financial advisory fees, and, in limited circumstances, termination fees, must be paid even if the merger is not completed;

● The diversion of management's attention from the day-to-day business operations and the potential disruption to Surrey's employees and business relationships during the period before the effective time of the merger may make it difficult to regain financial and market positions if the merger does not occur; and

● If Surrey's board of directors seeks another merger or business combination, Surrey shareholders cannot be certain that Surrey will be able to find a party willing to pay an equivalent or greater consideration than that which First Community has agreed to pay in the merger.

***The merger agreement limits Surrey***'***s ability to pursue alternative acquisition proposals and requires Surrey to pay a termination fee of $4.0 million under limited circumstances, including circumstances relating to acquisition proposals.***

The merger agreement prohibits Surrey from soliciting, initiating, inducing or encouraging, or taking any action to facilitate certain third-party acquisition proposals. See the section entitled "*The Merger Agreement-Agreement Not to Solicit Other Offers*" beginning on page [●]. The merger agreement also provides that Surrey will be required to pay a termination fee in the amount of $4.0 million in the event that the merger agreement is terminated under certain limited circumstances, including an adverse recommendation change by the Surrey board of directors. See the sections entitled "*The Merger Agreement-Termination of the Merger Agreement*" beginning on page [●] and "*The Merger Agreement-Termination Fee*" beginning on page [●]. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of Surrey from considering or proposing such an acquisition.

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***The merger will not be completed unless important conditions are satisfied.***

Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger. If the conditions are not satisfied or waived, to the extent permitted by law or stock exchange rules, the merger will not occur or will be delayed and each of First Community and Surrey may lose some or all of the intended benefits of the merger. The following conditions, in addition to other closing conditions, must be satisfied or waived, if permissible, before First Community and Surrey are obligated to complete the merger:

● The merger agreement and merger must be duly approved by the requisite vote of the shareholders of Surrey;

● All required regulatory approvals must be obtained;

● The absence of any law or order by a court or governmental authority that prohibits, restricts or makes illegal the merger;

● First Community Bank shall have been qualified with the SBA, USDA and any other lending program of a governmental entity in which Surrey Bank & Trust participated on November 17, 2022;

● The registration statement on Form S-4 shall become effective under the Securities Act and no stop order shall have been issued or threatened by the SEC; and

● To the extent required, the shares of First Community common stock to be issued in the merger must be approved for listing on NASDAQ.

***The shares of First Community common stock to be received by Surrey shareholders as a result of the merger will have different rights from the shares of Surrey common stock and Surrey Class A common stock.***

Upon completion of the merger, Surrey shareholders will become First Community shareholders and their rights as shareholders will be governed by the First Community articles of incorporation and bylaws. The rights associated with Surrey common stock and Surrey Class A common stock are different from the rights associated with First Community common stock. See the section entitled "*Comparison of Shareholders*' *Rights*" beginning on page [●] for a discussion of the different rights associated with First Community common stock.

***First Community shareholders and Surrey shareholders will have a reduced ownership and voting interest in the combined company after the merger and will exercise less influence over management, as compared to their ownership and voting interests in First Community and Surrey, respectively.***

First Community shareholders and Surrey shareholders currently have the right to vote in the election of the board of directors and on other matters affecting First Community and Surrey, respectively. Upon completion of the merger, each Surrey shareholder who receives shares of First Community common stock will become a First Community shareholder, with a percentage ownership of First Community that is smaller than such shareholder's percentage ownership of Surrey. Based on the number of shares outstanding on the Surrey record date, we expect that holders of shares of Surrey common stock and Surrey Class A common stock as of immediately prior to the closing of the merger will hold, in the aggregate, approximately [15.6]% of the issued and outstanding shares of First Community common stock immediately following the closing of the merger (including shares received in respect of Surrey restricted stock awards and without giving effect to any shares of First Community common stock held by Surrey shareholders prior to the merger). As a result, current First Community shareholders will hold, in the aggregate, approximately [84.4]% of the outstanding shares of First Community common stock immediately following the closing of the merger. Because of this, Surrey shareholders will have less influence on the management and policies of First Community than they now have on the management and policies of Surrey.

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***If the merger and the bank merger do not constitute a reorganization under Section 368(a) of the Code, then each Surrey shareholder may be responsible for payment of U.S. income taxes related to the merger.***

The United States Internal Revenue Service, or the IRS, may determine that the merger does not qualify as a nontaxable reorganization under Section 368(a) of the Code. In that case, each Surrey shareholder receiving First Community common stock would recognize a gain or loss equal to the difference between the (i) the sum of the fair market value of First Community common stock and the amount of cash consideration, if any, received by the Surrey shareholder in the merger and (ii) the Surrey shareholder's adjusted tax basis in the shares of Surrey common stock or Surrey Class A common stock exchanged therefor.

***The opinion of Surrey***'***s financial advisor delivered to its board of directors prior to the signing of the merger agreement will not reflect changes in circumstances following the date of the opinion.***

The Surrey board of directors received an opinion (rendered verbally and confirmed in a written opinion, dated November 17, 2022, from its financial advisor regarding the fairness of the merger consideration, from a financial point of view as of the date of such opinion to the holders of Surrey common stock. Subsequent changes in the operation and prospects of First Community or Surrey, general market and economic conditions and other factors that may be beyond the control of First Community or Surrey may significantly alter the value of First Community or Surrey or the prices of the shares of First Community common stock or Surrey common stock and Surrey Class A common stock by the time the merger is completed. The opinion of Surrey's financial advisor did not address the fairness of the merger consideration, from a financial point of view at the time the merger is completed, or as of any other date other than the date of such opinion. For a description of the opinion of Surrey's financial advisor, see the section entitled "*The Merger-Opinion of Surrey*'*s Financial Advisor*" beginning on page [●].

***Litigation against Surrey or First Community, or the members of the Surrey board of directors or First Community board of directors, could prevent or delay the completion of the merger.***

Purported shareholder plaintiffs may assert legal claims related to the merger. The results of any such potential legal proceeding would be difficult to predict and such legal proceedings could delay or prevent the merger from being completed in a timely manner. The existence of litigation related to the merger could affect the likelihood of obtaining the required approval from Surrey shareholders. Moreover, any litigation could be time consuming and expensive, and could divert the attention of the respective management teams of Surrey and First Community away from their companies' regular business. Any lawsuit adversely resolved against Surrey, First Community or the members of the Surrey board of directors or First Community's board of directors could have a material adverse effect on each party's business, financial condition and results of operations.

One of the conditions to the consummation of the merger is that neither First Community nor Surrey shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the merger or the bank merger and no governmental entity shall have instituted any proceeding to enjoin or prohibit the consummation of the merger, the bank merger or any transactions contemplated by the merger agreement. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a governmental authority issues an order or other directive enjoining or prohibiting the completion of the transactions contemplated by the merger agreement, including the merger, then such injunctive or other relief may prevent the merger from being completed in a timely manner or at all.

***There are certain risks relating to First Community***'***s business.***

You should read and consider risk factors specific to First Community's business that will also affect the combined company after the merger. These risks are described in the section entitled "Risk Factors" in First Community's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in other documents attached as appendices to this proxy statement/prospectus. See the section entitled "*Where You Can Find More Information*" beginning on page [●].

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

This proxy statement/prospectus, including information included in, or attached to, this proxy statement/prospectus, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to: (1) statements about the benefits of the merger, including future financial and operating results and cost savings that may be realized from the merger; (2) statements about our respective plans, objectives, expectations and intentions and other statements that are not historical facts; and (3) other statements identified by words such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "project," "projection," "forecast," "goal," "target," "would" and "outlook," or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond First Community's and Surrey's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Accordingly, actual results may differ materially from those expressed in, or implied by, the forward-looking statements.

Some of the factors that may cause actual results or earnings to differ materially from those contemplated by the forward-looking statements include, but are not limited to, those discussed under the section entitled "*Risk Factors*" and those discussed in the filings of First Community with the SEC that are attached as appendices to this proxy statement/prospectus, as well as the following:

● the inability to close the merger and the bank merger in a timely manner;

● the failure to complete the merger due to the failure of Surrey shareholders to approve the merger;

● the failure to obtain the requisite regulatory approvals and meet other closing conditions to the merger on the expected terms and schedule;

● the potential impact of announcement or consummation of the merger on relationships with third parties, including customers, employees and competitors;

● business disruption following the merger;

● First Community's potential exposure to unknown or contingent liabilities of Surrey;

● the challenges of integrating, retaining, and hiring key personnel;

● the failure to attract new customers and retain existing customers in the manner anticipated;

● the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to the merger;

● changes in First Community's share price before closing, including as a result of the financial performance of First Community and Surrey prior to closing, or more generally due to broader stock market movements and the performance of financial companies and peer group companies;

● the expected cost savings, synergies and other financial benefits from the merger might not be realized within the expected time frames or at all as a result of, among other things, changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the markets in which First Community and Surrey operate;

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● Surrey's business may not be integrated into First Community's business successfully, or such integration may take longer to accomplish than expected;

● operating costs, customer losses and business disruption following the merger, including adverse developments in relationships with employees, may be greater than expected; and

● management time and effort may be diverted to the resolution of merger-related issues.

Because these forward-looking statements are subject to assumptions and uncertainties, First Community's and the combined company's actual results may differ materially from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this proxy statement/prospectus or the date of any document attached to this proxy statement/prospectus. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement/prospectus, and attributable to First Community, Surrey or any person acting on their behalf, respectively, are expressly qualified in their entirety by the cautionary statements contained or referred to in this "*Cautionary Statement Regarding Forward-Looking Statements*" beginning on page [●]. Neither First Community nor Surrey undertakes any obligation to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events, unless obligated to do so under the federal securities laws.

**INFORMATION ABOUT THE SURREY SPECIAL MEETING**

This section contains information about the special meeting that Surrey has called to allow Surrey common shareholders to vote on the common shareholder merger proposal and the common shareholder adjournment proposal and to allow the Surrey Class A common shareholders to vote on the Class A common shareholder merger proposal and the Class A common shareholder adjournment proposal.

The Surrey board of directors is mailing this proxy statement/prospectus to you, as a Surrey shareholder, on or about [●], 2023. Together with this proxy statement/prospectus, the Surrey board of directors is also sending to you a notice of the special meeting of Surrey shareholders and a form of proxy that the Surrey board of directors is soliciting for use at the Surrey special meeting and at any adjournments or postponements of the Surrey special meeting.

**Time, Date, and Place**

The special meeting is scheduled to be held on [●], 2023 at [●] (local time) at [●].

**Purpose of the Special Meeting**

The special meeting is being held for the following purposes:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. for the holders of Surrey common stock, voting as a separate class from the holders of Surrey Class A common stock, to approve the common shareholder merger proposal;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. for the holders of Surrey common stock, voting as a separate class from the holders of Surrey Class A common stock, to approve the common shareholder adjournment proposal;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. for the holders of Surrey Class A common stock, voting as a separate class from the holders of Surrey common stock, to approve the Class A common shareholder merger proposal; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. for the holders of Surrey Class A common stock, voting as a separate class from the holders of Surrey common stock, to approve the Class A common shareholder adjournment proposal.

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**Recommendation of the Surrey Board of Directors**

The Surrey board of directors recommends that holders of Surrey common stock vote "**FOR**" the common shareholder merger proposal and "**FOR**" the common shareholder adjournment proposal (if necessary or appropriate); and recommends that holders of Surrey Class A common stock vote "**FOR**" the Class A common shareholder merger proposal and "**FOR**" the Class A common shareholder adjournment proposal (if necessary or appropriate). See "*The Merger-Recommendation of the Surrey Board of Directors and Surrey*'*s Reasons for the Merger*" beginning on page [•].

**Required Vote**

*Common Shareholder Merger Proposal*

The affirmative vote of the holders of a majority of the outstanding shares of Surrey common stock as of the record date and entitled to vote thereon is required to approve the common shareholder merger proposal.

*Class A Common Shareholder Merger Proposal*

The affirmative vote of the holders of a majority of the outstanding shares of Surrey Class A common stock as of the record date and entitled to vote thereon is required to approve the Class A common shareholder merger proposal.

*Common Shareholder Adjournment Proposal*

The affirmative vote of a majority of the votes cast by the holders of Surrey common stock on the common shareholder adjournment proposal is required to approve the common shareholder adjournment proposal.

*Class A Common Shareholder Adjournment Proposal*

The affirmative vote of a majority of the votes cast by the holders of Surrey Class A common stock is required to approve the Class A common shareholder adjournment proposal.

**Treatment of Abstentions; Failure to Vote**

For purposes of the special meeting, an abstention occurs when a Surrey shareholder attends the Surrey special meeting, either in person or by proxy, but abstains from voting on one or more proposals.

● For the common shareholder merger proposal and the Class A common shareholder merger proposal, an abstention or failure to vote will have the same effect as a vote cast "**AGAINST**" such proposals.

● For the common shareholder adjournment proposal and the Class A common shareholder adjournment proposal, an abstention or failure to vote will have no effect on the outcome of the vote. For each of these proposals, abstentions are not treated as votes cast and will have no effect on the outcome of the vote, though abstentions are counted towards establishing a quorum.

**Record Date and Quorum**

[●], 2023 has been fixed as the record date for the determination of Surrey shareholders entitled to notice of, and to vote at, the Surrey special meeting and any adjournment thereof. At the close of business on the Surrey record date, there were [4,099,788] shares of Surrey common stock outstanding and entitled to vote at the Surrey special meeting held by [●] holders of record and [87,095] shares of Surrey Class A common stock outstanding and entitled to vote at the Surrey special meeting held by [●] holders of record.

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The presence at the Surrey special meeting, in person or by proxy, of holders of a majority of the outstanding shares of Surrey common stock entitled to vote at the Surrey special meeting will constitute a quorum for purposes of the matters being voted upon by the common shareholders. The presence at the Surrey special meeting, in person or by proxy, of holders of a majority of the outstanding shares of Surrey Class A common stock entitled to vote at the Surrey special meeting will constitute a quorum for purposes of the matters being voted upon by the Class A common shareholders. All shares of Surrey common stock and Surrey Class A common stock present in person or represented by proxy, including abstentions and broker non-votes, if any, will be treated as present for purposes of determining the presence or absence of a quorum for all matters voted on at the Surrey special meeting.

**How to Vote**

Each copy of this proxy statement/prospectus mailed to holders of Surrey common stock and Class A common stock is accompanied by a form of proxy with instructions for voting.

If you are a shareholder of record of Surrey as of the Surrey record date, you should complete and return the proxy card accompanying this proxy statement/prospectus, regardless of whether you plan to attend the Surrey special meeting.

● *Toll-Free Number.* You may use the toll-free number shown on your proxy card to vote your shares.

● *Voting by Internet.* You may vote your shares by visiting the website shown on your proxy card to vote via the Internet.

● *Voting by Proxy*. Your proxy card includes instructions on how to vote by mailing in the proxy card. If you choose to vote by proxy, please mark each proxy card you receive, sign and date it, and promptly return it in the envelope enclosed with the proxy card. If you sign and return your proxy without instruction on how to vote your shares, your shares of Surrey common stock will be voted "**FOR**" the common shareholder merger proposal and "**FOR**" the common shareholder adjournment proposal, and your shares of Surrey Class A common stock will be voted "**FOR**" the Class A common shareholder merger proposal and "**FOR**" the Class A common shareholder adjournment proposal.

● *Voting in Person*. If you are a shareholder of record, you can vote in person by submitting a ballot at the Surrey special meeting. *Nevertheless*, we recommend that you vote by proxy as promptly as possible, even if you plan to attend the Surrey special meeting. This will ensure that your vote is received. If you attend the Surrey special meeting, you may vote by ballot, thereby canceling any proxy previously submitted.

If you hold your shares in "street name" through a bank, broker or other nominee, you must direct your bank, broker or other nominee how to vote in accordance with the instructions you have received from your bank, broker or other nominee.

All shares represented by valid proxies that Surrey receives through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card. If you make no specification on your proxy card as to how you want your shares voted before signing and returning it, your proxy for your shares of Surrey common stock will be voted "**FOR**" the common shareholder merger proposal and "**FOR**" the common shareholder adjournment proposal, and your proxy for your shares of Surrey Class A common stock will be voted "**FOR**" the Class A common shareholder merger proposal and "**FOR**" the Class A common shareholder adjournment proposal. No matters other than the matters described in this proxy statement/prospectus may be presented for action at the Surrey special meeting or at any adjournment of the Surrey special meeting.

**YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND PROMPTLY RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE. SHAREHOLDERS WHO ATTEND THE SURREY SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.**

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**Shares Held in** "**Street Name**"**; Broker Non-Votes**

If your bank, broker or other nominee holds your shares of Surrey common stock or Surrey Class A common stock in "street name," your bank, broker or other nominee will vote your shares only if you provide instructions on how to vote by filling out the voter instruction form sent to you by your bank, broker or other nominee with this proxy statement/prospectus. **Any such shares for which you do not give voting instructions will constitute a broker non-vote, and will have the effect of a vote** "**AGAINST**" **the common shareholder merger proposal or the Class A common stock merger proposal, as applicable.** Broker non-votes will have no effect on the outcome of the common adjournment proposal or the Class A common stock merger proposal.

**Revocation of Proxies**

You can revoke your proxy at any time before your shares are voted. If you are a shareholder of record, then you can revoke your proxy by:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. submitting another valid proxy card bearing a later date;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. prior to the Surrey special meeting, logging onto the Internet website specified on your proxy card in the same manner you would to submit your proxy electronically or by calling the telephone number specified on your proxy card, in each case if you are eligible to do so and following the instructions on the proxy card;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. attending the Surrey special meeting and voting your shares in person; or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. delivering prior to the Surrey special meeting a written notice of revocation to Surrey at the following address: 145 N. Renfro Street, Mount Airy, North Carolina 27030.

If you choose to send a completed proxy card bearing a later date or a notice of revocation, the new proxy card or notice of revocation must be received by [●] [●] (local time) on [●], 2023. Attendance at the Surrey special meeting will not, in and of itself, constitute revocation of a proxy. If you hold your shares in street name with a bank, broker or other nominee, you must follow the directions you receive from your bank, broker or other nominee to change your vote.

**Shares Subject to the Surrey Voting Agreements**

A total of [●] shares of Surrey common stock, representing approximately [●]% of the outstanding shares of Surrey common stock entitled to vote at the Surrey special meeting and [●] shares of Surrey Class A common stock, representing [●]% of the outstanding shares of Surrey Class A common stock entitled to vote at the Surrey special meeting, are subject to the Surrey voting agreements. Pursuant to the Surrey voting agreements, each director has agreed to, on the terms and subject to the conditions set forth therein, vote the shares of Surrey common stock and Class A common stock as applicable, beneficially owned by him or her in favor of the merger agreement and against any proposal made in competition with the merger, as well as certain other customary restrictions with respect to the voting and transfer of his or her shares of Surrey common stock and Class A common stock.

The foregoing description of the Surrey voting agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the Surrey voting agreements, a form of which is included as Exhibit A to the merger agreement attached to this proxy statement/prospectus as ***Appendix A***.

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**Shares Held by Directors and Executive Officers**

As of the Surrey record date, Surrey's directors and executive officers and their affiliates beneficially owned and were entitled to vote, in the aggregate, a total of (1) [●] shares of Surrey common stock, representing approximately [●]% of the outstanding shares of Surrey common stock entitled to vote at the Surrey special meeting, and (2) [●] shares of Surrey Class A common stock, representing approximately [●]% of the outstanding shares of Surrey Class A common stock entitled to vote at the Surrey special meeting. For more information about the beneficial ownership of Surrey common stock and Surrey Class A common stock by each greater than 5% beneficial owner, each director and executive officer of Surrey, and all Surrey directors and executive officers as a group, see the section entitled "*Security Ownership of Certain Beneficial Owners and Management of Surrey*" on page [●].

**Solicitation of Proxies**

Proxies for the Surrey special meeting are being solicited on behalf of the Surrey board of directors. Surrey will bear the entire cost of soliciting proxies from you. Surrey will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the beneficial owners of Surrey common stock and Surrey Class A common stock. Proxies will be solicited principally by mail, but may also be solicited by the directors, officers, and other employees of Surrey in person or by telephone, facsimile or other means of electronic communication. Directors, officers and employees will receive no compensation for these activities in addition to their regular compensation but may be reimbursed for out-of-pocket expenses in connection with such solicitation. Surrey has also made arrangements with Regan & Associates, Inc. to assist it in soliciting proxies and has agreed to pay it approximately $12,500 for these services.

**Attending the Surrey Special Meeting**

All holders of Surrey common stock and Surrey Class A common stock, including shareholders of record and shareholders who hold their shares through banks, brokers, nominees or any other holder of record, are invited to attend the Surrey special meeting. Shareholders of record can vote in person at the Surrey special meeting. If you are not a shareholder of record, you must obtain a proxy executed in your favor from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the Surrey special meeting. If you plan to attend the Surrey special meeting, you must hold your shares in your own name or have a letter from the record holder of your shares confirming your ownership. In addition, you must bring a form of personal photo identification with you in order to be admitted. Surrey reserves the right to refuse admittance to anyone without proper proof of share ownership and without proper photo identification. The use of cameras, sound recording equipment, communications devices or any similar equipment during the Surrey special meeting is prohibited without Surrey's express written consent.

**Questions and Additional Information**

If you have more questions about the merger or how to submit your proxy or vote, or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card or voting instructions, please contact Surrey at:

Surrey Bancorp 145 N Renfro Street Mount Airy, North Carolina 27030 Attention: Edward C. Ashby, III Phone: (336) 783-3900 Regan & Associates, Inc. Eighth Avenue - Suite 800 New York, NY 10018 Attention: Artie Regan Phone: (800) 737-3426

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**SURREY PROPOSALS**

**PROPOSAL NO. 1: COMMON SHAREHOLDER MERGER PROPOSAL**

Surrey is asking its common shareholders to approve the common shareholder merger proposal. Holders of Surrey common stock should read this proxy statement/prospectus carefully and in its entirety for more detailed information concerning the merger agreement and the merger. A copy of the merger agreement is attached to this proxy statement/prospectus as ***Appendix A***.

The Surrey board of directors has determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of Surrey and its shareholders and has unanimously adopted the merger agreement and approved the merger. See the section entitled "*The Merger-Recommendation of the Surrey Board of Directors and Surrey*'*s Reasons for the Merger*" beginning on page [●] for a more detailed discussion of the recommendation of the Surrey board of directors.

**The Surrey board of directors unanimously recommends a vote** "**FOR**" **the common shareholder merger proposal.**

**PROPOSAL NO. 2: COMMON SHAREHOLDER ADJOURNMENT PROPOSAL**

The Surrey special meeting may be adjourned to another time or place, if necessary or appropriate, to permit, among other things, further solicitation of proxies if necessary to obtain additional votes in favor of the common shareholder merger proposal.

If, at the Surrey special meeting, the number of shares of Surrey common stock present or represented and voting in favor of the common shareholder merger proposal is insufficient to approve such proposal, Surrey intends to move to adjourn the Surrey special meeting in order to solicit additional proxies for the approval of the common shareholder merger proposal.

In this proposal, Surrey is asking its common shareholders to authorize the holder of any proxy solicited by the Surrey board of directors on a discretionary basis to vote in favor of adjourning the Surrey special meeting to another time and place for the purpose of soliciting additional proxies, including the solicitation of proxies from Surrey common shareholders who have previously voted.

**The Surrey board of directors unanimously recommends a vote** "**FOR**" **the common shareholder adjournment proposal.**

**PROPOSAL NO. 3: CLASS A COMMON SHAREHOLDER MERGER PROPOSAL**

Surrey is asking its Class A common shareholders to approve the Class A common shareholder merger proposal. Holders of Surrey Class A common stock should read this proxy statement/prospectus carefully and in its entirety for more detailed information concerning the merger agreement and the merger. A copy of the merger agreement is attached to this proxy statement/prospectus as ***Appendix A***.

The Surrey board of directors has determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of Surrey and its shareholders and has unanimously adopted the merger agreement and approved the merger. See the section entitled "*The Merger-Recommendation of the Surrey Board of Directors and Surrey*'*s Reasons for the Merger*" beginning on page [●] for a more detailed discussion of the recommendation of the Surrey board of directors.

**The Surrey board of directors unanimously recommends a vote** "**FOR**" **the Class A common shareholder merger proposal.**

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**PROPOSAL NO. 4: CLASS A COMMON SHAREHOLDER ADJOURNMENT PROPOSAL**

The Surrey special meeting may be adjourned to another time or place, if necessary or appropriate, to permit, among other things, further solicitation of proxies if necessary to obtain additional votes of Class A common stock in favor of the Class A common shareholder merger proposal.

If, at the Surrey special meeting, the number of shares of Surrey Class A common stock present or represented and voting in favor of the Class A common shareholder merger proposal is insufficient to approve such proposal, Surrey intends to move to adjourn the Surrey special meeting in order to solicit additional proxies for the approval of the Class A common shareholder merger proposal.

In this proposal, Surrey is asking its Class A common shareholders to authorize the holder of any proxy solicited by the Surrey board of directors on a discretionary basis to vote in favor of adjourning the Surrey special meeting to another time and place for the purpose of soliciting additional proxies, including the solicitation of proxies from Surrey Class A common shareholders who have previously voted.

**The Surrey board of directors unanimously recommends a vote** "**FOR**" **the Class A common shareholder adjournment proposal.**

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**THE MERGER**

**Terms of the Merger**

Each of the First Community board of directors and the Surrey board of directors has unanimously approved the merger agreement. The merger agreement provides for the merger of Surrey with and into First Community, with First Community continuing as the surviving corporation. Immediately following the completion of the merger, Surrey Bank & Trust will merge with and into First Community Bank, with First Community Bank continuing as the surviving bank.

In the merger, each share of Surrey common stock and Surrey Class A common stock issued and outstanding immediately prior to the completion of the merger (other than the excluded shares) will be converted into the right to receive the merger consideration.

First Community will not issue any fractional shares of First Community common stock in the merger. Instead, a Surrey shareholder who otherwise would have received a fraction of a share of First Community common stock will receive an amount in cash rounded to the nearest whole cent. This cash amount will be determined by multiplying the fraction of a share of First Community common stock to which the holder would otherwise be entitled by the average closing price of First Community common stock reported on the Nasdaq Global Select Market (which we refer to as "NASDAQ") for the 30 consecutive full trading days ending on the trading day immediately prior to the later of the date on which the last regulatory approval is received (disregarding any waiting period) or the date on which the common shareholder merger proposal and Class A common shareholder merger proposal are approved (which later date we refer to as the "determination date"; and which average closing price we refer to as the "First Community average closing price"). For a discussion of the treatment of restricted stock awards outstanding under Surrey's restricted stock plan as of the effective time, see the section entitled "*The Merger Agreement-Treatment of Surrey Equity Awards*" beginning on page [●].

Surrey shareholders are being asked to approve the merger agreement. See the section entitled "*The Merger Agreement*" beginning on page [●] for additional and more detailed information regarding the legal documents that govern the merger, including information about the conditions to the completion of the merger and the provisions for terminating or amending the merger agreement.

**Background of the Merger**

The following chronology summarizes the key meetings and events that led to the signing of the merger agreement. In this process, management and representatives of Surrey and First Community had many conversations, both by telephone and in person, about the potential transaction and alternatives. The chronology below covers only key events leading up to signing of the merger agreement and does not purport to catalogue every related conversation among or between the parties.

As part of Surrey's continuing efforts to enhance shareholder value, the Surrey board of directors, in consultation with management and its financial and other advisors, has periodically evaluated various strategies, including continued independence, merging with similarly-sized banks, and being acquired by another financial institution. After several discussions over the course of several months, the Surrey board directed management to engage Raymond James, an investment banking firm, to formally advise Surrey on the status of the bank merger market and potentially represent it in the event the Surrey board determined to pursue a strategic transaction. Before Surrey determined to engage Raymond James as its exclusive financial advisor, the board considered, among other things, Raymond James' knowledge of Surrey and the North Carolina and Virginia markets, as well as Raymond James' experience as a nationally recognized investment banking firm with significant experience in mergers and acquisitions, including bank mergers and acquisitions. On July 7, 2022, Surrey executed an engagement letter with Raymond James setting forth the terms of its engagement.

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The Surrey board of directors invited Raymond James to present at the board's strategic planning session on August 8, 2022, held offsite at the Greensboro, N.C. offices of its general counsel, Brooks, Pierce, McLendon, Humphrey & Leonard, LLP (which we refer to as "Brooks Pierce"). Raymond James provided an update on industry trends and the bank merger market generally, the potential capacity to pay of various potential acquirers and the profiles of those potential acquirers. Raymond James also shared with the Surrey board that, prior to the meeting, it had been approached by a representative of Performance Trust Capital Partners, LLC (which we refer to as "Performance Trust"), the financial advisor to the First Community board of directors, conveying First Community's interest in pursuing a negotiated acquisition of Surrey. Representatives from Brooks Pierce then reviewed with the Surrey board its fiduciary duties in connection with its consideration of a strategic transaction. After considering First Community's interest and the ability of other financial institutions to acquire Surrey, the Surrey board directed Raymond James to contact four financial institutions, including First Community, to gauge their level of interest in pursuing a potential business combination with Surrey.

Raymond James then began contacting potential business combination partners on behalf of Surrey. Raymond James also worked with Surrey's management and Brooks Pierce to prepare a detailed presentation to be distributed to potential bidders. Of the four financial institutions contacted, two of the institutions declined to consider a potential transaction; however, the two other institutions, including First Community, entered into nondisclosure agreements with Surrey and were provided access to an online data room containing confidential information on Surrey. In August and September 2022, Raymond James and Surrey's management had numerous conversations with representatives of the two institutions. Also, during August 2022, Surrey's management had two in-person meetings with the senior management of one of these institutions, which institution we refer to as Institution A, as they explored a possible combination of Institution A and Surrey.

On August 18, 2022, Raymond James invited First Community and Institution A to submit an indication of interest before 5:00 p.m. on September 9, 2022. Prior to the deadline, the chief executive officer of Institution A advised Mr. Ashby that Institution A did not intend to submit an indication of interest, explaining that he believed Institution A was unable to offer a price that Surrey would find acceptable, but that should Surrey be dissatisfied with the outcome of the current bid process, Institution A would be willing to proceed with a directly negotiated transaction.

On September 8, 2022, Surrey received First Community's initial indication of interest, proposing a 100% stock transaction, with each share of Surrey common stock and Surrey Class A common stock being exchanged for 0.7203 shares of First Community common stock. Based on First Community's then 10-day volume-weighted average closing price of $31.93 per share, this exchange ratio represented an implied value of approximately $23.00 for each share of Surrey common stock and Surrey Class A common stock, or an aggregate price of $96.3 million.

On September 13, 2022, the Surrey board scheduled a meeting to evaluate the results of the request for indications of interest conducted by Raymond James. In advance of the board meeting, Raymond James requested that First Community supplement its September 9 indication of interest in order to provide the Surrey board with greater detail in advance of the board meeting. First Community provided the requested supplemental information on September 12. At the September 13 board meeting, Raymond James reported on its discussions with the four financial institutions previously identified to the board, including First Community, as well as the responses to the request for indications of interest. The board then reviewed with Raymond James and Brooks Pierce the terms of First Community's indication of interest including, among other things, the proposed consideration, exchange ratio, double trigger walk-away right, termination fee, corporate governance, personnel considerations, and estimated timeline for the proposed combination. Representatives from Raymond James also provided a detailed analysis of First Community, including, among other things, First Community's historical financial results, loan and deposit totals by products, stock price metrics, stock price performance versus major stock indices, loan and deposit composition on a standalone and combined basis, yields and costs on a standalone and combined basis, and a proforma of the branch network.

Representatives from Brooks Pierce then reviewed with the members of the Surrey board of directors their fiduciary duties in connection with consideration of a business combination transaction.

The Surrey board asked questions of Raymond James and Brooks Pierce throughout the meeting, and the members discussed, among other things, opportunities to conduct reverse due diligence, the current state of the economic environment, execution risk for a potential transaction, the protections offered by a double trigger walk-away right, the income tax consequences for Surrey's shareholders, and the ability for Surrey to pay a special dividend to its shareholders in 2022.

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Following these discussions, and based on the presentation by Raymond James and the terms of the indication of interest of First Community (which addressed First Community's typical dividend practices), the board unanimously concluded that it was in the best interests of Surrey and its shareholders to accept First Community's indication of interest and proceed to negotiate a definitive agreement. On September 13, 2022, Surrey signed the indication of interest with First Community committing to a 60-day exclusivity period, following which First Community conducted additional due diligence on Surrey and Surrey performed reverse due diligence on First Community. Meetings and merger negotiations between the management teams of each company continued throughout the due diligence period both on an impromptu and scheduled basis and via both telephone and in-person meetings. In addition, each company exchanged materials and information in an online data room and scheduled and conducted on-site meetings to facilitate mutual due diligence.

On October 17, 2022, First Community's counsel provided an initial draft of the definitive merger agreement. Over the next month, the parties exchanged drafts of the definitive merger agreement, disclosure schedules and other ancillary transaction documents and engaged in negotiations about various aspects of the draft documents. Mr. Ashby continued to keep the Surrey board advised of the progress of discussions and negotiations.

On November 8, 2022, senior management of First Community met with the Surrey board and management to discuss First Community's history, financial data, products and services, strategic objectives and culture.

As First Community concluded its due diligence, it sought to confirm estimated transaction costs, including the early termination fees payable to Surrey's core processor. In doing so, First Community concluded that the actual transaction costs would be approximately $750,000 higher than originally anticipated. Following extensive discussion between the parties' respective management and financial advisors, First Community and Surrey agreed to reduce the exchange ratio from 0.7203 to 0.7159, equating to approximately 17 cents per share, based on First Community's closing price of $38.43 per share on November 17, 2022.

On November 13, 2022, drafts of the merger agreement, the disclosure schedules and the consulting agreement for Mr. Ashby were provided to Surrey's directors for their review. Four days later, Surrey's board and management met with Raymond James and Brooks Pierce to discuss the definitive transaction documents and the status of the proposed transaction. Representatives of Raymond James provided a detailed analysis of the financial aspects of the proposed merger and delivered Raymond James' opinion, orally and in writing, that the merger consideration was fair, from a financial point of view, to the holders of Surrey's outstanding common stock and Class A common stock. A copy of Raymond James' written opinion is attached to this document as ***Appendix B*** and a summary of the fairness opinion is included below in "*Opinion of Surrey*'*s Financial Advisor*," beginning on page [•].

Representatives of Brooks Pierce then reviewed the merger agreement, the ancillary agreements and applicable legal concepts, highlighting any recent changes made to the draft documents circulated on November 13, 2022. After a thorough discussion and deliberations about the proposed transaction, upon a motion duly made and seconded, Surrey's board unanimously adopted the merger agreement and the ancillary documents and approved the transactions contemplated by such documents, including the merger.

Also on November 17, 2022, the First Community board unanimously adopted the merger agreement and approved the merger, following which Surrey and First Community executed the definitive merger agreement and ancillary agreements.

On November 18, 2022, the parties issued a joint press release publicly announcing the transaction prior to the opening of the financial markets.

**Recommendation of the Surrey Board of Directors and Surrey**'**s Reasons for the Merger**

After careful consideration, the Surrey board, at a meeting held on November 17, 2022, unanimously determined the merger agreement and the transactions contemplated thereby to be fair and in the best interest of Surrey and its shareholders. Accordingly, the Surrey board unanimously adopted the merger agreement, approved the merger and recommends that Surrey's shareholders vote "**FOR**" the approval of the merger agreement.

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In evaluating the merger agreement and reaching its decision to adopt the merger agreement, approve the merger and recommend that Surrey's shareholders approve the merger agreement, Surrey's board consulted with Surrey's management, as well as its outside legal and financial advisors, and considered a number of factors, including the following material factors (not in any relative order of importance):

● the Surrey board's knowledge and understanding of Surrey's business, operations, financial condition, asset quality, earnings and prospects, and of First Community's business, operations, financial condition, asset quality, earnings and prospects, taking into account the conversations had with, and the presentations made by, First Community's senior management as part of Surrey's reverse due diligence review and information provided by Surrey's financial advisors;

● its understanding of First Community's commitment to enhancing its strategic position in Surrey's market area, its prospects for the future and its projected financial results, and the Surrey board's belief that the combined enterprise would benefit from First Community's ability to take advantage of economies of scale and grow in the current economic environment;

● First Community's earnings track record and the market performance of its common stock;

● the ability of Surrey's shareholders to benefit from First Community's potential growth and stock appreciation since it is more likely that the combined entity will have superior future earnings and prospects compared to Surrey's earnings and prospects on an independent basis due to greater operating efficiencies and better penetration of commercial and consumer markets;

● the perceived ability of First Community to complete a merger transaction from a financial and regulatory perspective, including its recent history of a successful merger transaction;

● the financial and other terms of the merger agreement, including the amount and nature of the merger consideration proposed to be paid, which Surrey's board reviewed with its outside financial and legal advisors, including:

● that it does not preclude a third party from making an unsolicited acquisition proposal to Surrey and that, under certain circumstances, Surrey may furnish non-public information to and engage in discussions with such a third party regarding an acquisition proposal, as more fully described under the section entitled "*The Merger Agreement-Agreement Not to Solicit Other Offers*," beginning on page [•];

● the ability of the Surrey board of directors to submit the merger agreement to shareholders without a favorable recommendation or any recommendation, as more fully described under the section entitled "*The Merger Agreement-Surrey Shareholder Meeting and Recommendation of the Surrey Board of Directors*," beginning on page [•];

● Surrey's ability to terminate the merger agreement if the trading price of First Community common stock declines under circumstances provided for in the merger agreement, as more fully described under the section entitled "*The Merger Agreement-Termination of the Merger Agreement*," beginning on page [•];

● First Community's agreement to use its reasonable best efforts to obtain regulatory approval.

● the fact that the outside date under the merger agreement allows for sufficient time to complete the merger; and

● the Surrey board's belief that the proposed merger with First Community will generally be a tax-free transaction to Surrey's shareholders with respect to First Community common stock received by virtue of the merger.

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● the potential expense-saving and revenue-enhancing opportunities in connection with the merger, the related potential impact on the combined company's earnings and the fact that the nature of the stock consideration would allow former Surrey shareholders to participate in the potential future upside as First Community shareholders;

● the anticipated effect of the acquisition on Surrey's retained employees and the terms of severance for employees who would not be retained;

● the long-term and short-term interests of Surrey and its shareholders, and the interests of Surrey's employees, customers, creditors and suppliers, and the community and societal considerations of the communities in which Surrey maintains offices;

● the financial analyses provided by Raymond James, Surrey's financial advisor, regarding the merger, and its opinion, delivered to Surrey's board on November 17, 2022, to the effect that, as of that date and subject to the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Raymond James in rendering its opinion, the merger consideration to be received under the terms of the merger agreement was fair, from a financial point of view, to Surrey's shareholders;

● its knowledge of the current environment in the financial services industry, including national, regional and local economic conditions, continued industry consolidation, increased regulatory burdens, evolving trends in technology and increasing nationwide and global competition, the current financial market conditions, the current environment for community banks, particularly North Carolina and the surrounding states, and the likely effects of these factors on Surrey's and the combined company's potential growth, development, productivity, profitability and strategic options, and the historical prices of Surrey and First Community common stock;

● its knowledge of Surrey's prospects as an independent entity, including challenges relating to increasing regulatory burdens and overhead expense;

● its knowledge of the strategic alternatives available to Surrey, including the challenges for organic growth by a financial institution of Surrey's size; and

● its belief that the merger is more favorable to Surrey's shareholders than the alternatives to the merger, which belief was formed based on the careful review undertaken by the Surrey board, with the assistance of its management and outside legal and financial advisors.

Surrey's board also considered potential risks and a variety of potential negative factors in connection with its deliberations concerning the merger agreement and the merger, including the following material factors (not in any relative order of importance):

● the fact that, while Surrey expects that the merger will be consummated, there can be no assurance that all conditions to the parties' obligations to complete the merger agreement will be satisfied, including the risk that certain regulatory approvals, the receipt of which are conditions to the consummation of the merger, might not be obtained, and, as a result, the merger may not be consummated;

● the restrictions on the conduct of Surrey's business prior to the completion of the merger, which are customary for merger agreements involving financial institutions, but which, subject to specific exceptions, could delay or prevent Surrey from undertaking business opportunities that may arise or any other action it would otherwise take with respect to the operations of Surrey absent the pending completion of the merger;

● the significant risks and costs involved in connection with entering into or completing the merger, or failing to complete the merger in a timely manner, or at all, including as a result of any failure to obtain required regulatory approvals or shareholder approval, such as the risks and costs relating to diversion of management and employee attention from other strategic opportunities and operational matters, potential employee attrition, and the potential effect on business and customer relationships;

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● the fact that Surrey would be prohibited from soliciting acquisition proposals after execution of the merger agreement, and the possibility that the $4.0 million termination fee payable by Surrey upon the termination of the merger agreement under certain circumstances could discourage other potential acquirers from making a competing bid to acquire Surrey;

● the fact that some of Surrey's directors and executive officers have other interests in the merger that are different from, or in addition to, their interests as Surrey shareholders generally, as more fully described under the section entitled "*-Interests of Surrey* ' *Directors and Executive Officers in the Merger*," **  beginning on page [•]; and

● the possibility of litigation in connection with the merger.

Based on the factors described above, the Surrey board determined that the merger of Surrey with First Community and the merger of Surrey Bank & Trust with First Community Bank would be advisable and in the best interests of Surrey and its shareholders, and adopted the merger agreement, approved the merger and resolved to recommend its approval to the shareholders of Surrey.

**The foregoing discussion of the material information and factors considered by the Surrey board of directors is not intended to be exhaustive.** The Surrey board of directors evaluated the above factors and unanimously determined that the merger was in the best interests of Surrey and its shareholders. In reaching its determination to approve the merger and recommend that Surrey shareholders approve the merger, the Surrey board of directors considered the totality of the information presented to it and did not assign any relative or specific weights to any of the individual factors considered, although individual directors may have given different weights to different factors. The Surrey board of directors considered these factors, including the potential risks, uncertainties and disadvantages associated with the merger, in the aggregate rather than separately and determined the benefits of the merger to be favorable to and outweigh the potential risks, uncertainties and disadvantages of the merger. This explanation of the Surrey board of directors' reasoning and certain other information presented in this section are forward-looking in nature and, therefore, should be read in the context of the factors discussed under "*Cautionary Statement Concerning Forward-Looking Statements*," beginning on page [•].

**Accordingly, the Surrey board of directors unanimously adopted the merger agreement and approved the merger, and unanimously recommends that the Surrey common shareholders vote** "**FOR**" **the common shareholder merger approval and the common shareholder adjournment proposal, and that the Surrey Class A common shareholders vote** "**FOR**" **the Class A common shareholder merger proposal and the Class A common shareholder adjournment proposal.** 

**First Community**'**s Reasons for the Merger**

After careful consideration, the First Community board of directors, at a series of meetings, culminating with a meeting held on November 17, 2022, unanimously determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of First Community and its shareholders.

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In reaching its decision to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement, the First Community board of directors evaluated the merger agreement and the merger in consultation with First Community management, as well as with First Community's outside financial and legal advisors, and considered a number of factors, including the following material factors:

● each of First Community's, Surrey's and the combined company's businesses, operations, financial condition, asset quality, earnings and prospects. In reviewing these factors, the First Community board of directors considered its view that Surrey's financial condition and asset quality are sound, that Surrey's business and operations complement those of First Community, and that the merger and the other transactions contemplated by the merger agreement would result in a combined company with a larger and more diversified market presence and a more attractive funding base, than First Community on a stand-alone basis. The First Community board of directors further considered that Surrey's earnings and prospects, and the synergies potentially available in the proposed merger, create the opportunity for the combined company to have superior future earnings and prospects compared to First Community's earnings and prospects on a stand-alone basis. In particular, the First Community board of directors considered the following:

● the strategic rationale for the merger, given its potential of increasing First Community's market share in the Northwestern North Carolina market and the overlap of Surrey's and First Community's existing franchises;

● its belief that the merger will combine two strong banking institutions to create a leading regional banking franchise with enhanced commercial and community banking expertise and complementary product sets, bolstering First Community's presence and filling gaps in First Community's footprint in Northwestern North Carolina;

● the potential for bringing together seasoned bank operators having a common vision with similar values, with talented, motivated workforces and compatible corporate cultures; and

● the expanded possibilities, including organic growth and future acquisitions, that would be available to the combined company given its larger size, asset base, capital, and footprint.

● the anticipated pro forma impact of the merger on the combined company, including the expected positive impact on certain financial metrics;

● its understanding of the current and prospective environment in which First Community and Surrey operate, the competitive environment for financial institutions generally and the likely effect of these factors on First Community both with and without the merger;

● its review and discussions with First Community management concerning the due diligence examination of Surrey's business;

● its expectation that First Community will retain its strong capital position and asset quality upon completion of the merger;

● the continued employment of certain of Surrey's senior executive officers and many of Surrey's other employees and the participation of two of Surrey's directors as directors of First Community Bank, which the First Community board of directors believed will enhance the likelihood of realizing the strategic benefits that First Community expects to derive from the merger;

● the opinion, dated November 17, 2022, of Performance Trust, the financial advisor to the First Community board of directors, to the effect that, as of that date and subject to the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Performance Trust, as set forth in such opinion, the exchange ratio in the proposed merger was fair, from a financial point of view, to First Community; and

● its review with its outside legal advisor, Bowles Rice LLP, of the terms of the merger agreement, including the tax treatment, deal protection and termination provisions.

The First Community board of directors also considered potential risks relating to the merger, including the following:

● First Community may not realize all of the anticipated benefits of the merger, including the possibility of encountering difficulties in achieving anticipated cost synergies and savings in the amounts estimated or in the time frame contemplated;

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● the possibility of encountering difficulties in successfully integrating Surrey's business, operations and workforce with those of First Community;

● the regulatory and other approvals required in connection with the merger and the bank merger and the risk that such regulatory approvals will not be received in a timely manner or may impose unacceptable conditions;

● the substantial costs that First Community will incur in connection with the merger even if it is not consummated; and

● the diversion of management attention and resources from the operation of First Community's business and toward the completion of the merger.

While the First Community board of directors considered the foregoing potentially positive and potentially negative factors, the First Community board of directors concluded that, overall, the potentially positive factors outweighed the potentially negative factors. Accordingly, the First Community board of directors unanimously determined the merger agreement to be fair, advisable and in the best interests of First Community and its shareholders.

**The foregoing discussion of the information and factors considered by the First Community board of directors is not intended to be exhaustive, but includes the material factors considered by the First Community board of directors.** In view of the wide variety of the factors considered in connection with its evaluation of the merger and the complexity of these matters, the First Community board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, the individual members of the First Community board of directors may have given different weight to different factors. The First Community board of directors considered all these factors as a whole and considered the factors overall to be favorable to, and to support, its determination.

The foregoing explanation of the First Community board of directors' reasoning and all other information presented in this section contains information that is forward-looking in nature, and therefore should be read in light of the factors discussed in "*Cautionary Statement Regarding Forward-Looking Statements*" beginning on page [●].

**Opinion of Surrey**'**s Financial Advisor**

Surrey retained Raymond James as its financial advisor on July 7, 2022. Pursuant to that engagement, the Surrey board of directors requested that Raymond James evaluate the fairness, from a financial point of view, to the holders of outstanding Surrey common stock and Surrey Class A common stock of the merger consideration to be received by such holders pursuant to the merger agreement. Surrey selected Raymond James as its financial advisor based upon Raymond James' knowledge of Surrey and the North Carolina and Virginia markets, as well as Raymond James' experience as a nationally recognized investment banking firm with significant experience in mergers and acquisitions, including bank mergers and acquisitions.

At the November 17, 2022 meeting of the Surrey board of directors, representatives of Raymond James rendered its oral opinion, confirmed by delivery of a written opinion to the Surrey board of directors dated November 17, 2022, as to the fairness, as of such date, from a financial point of view, to the holders of outstanding Surrey common stock and Surrey Class A common stock of the merger consideration to be received by such holders in the merger pursuant to the merger agreement, based upon and subject to the qualifications, assumptions and other matters considered in connection with the preparation of its opinion.

The full text of the written opinion of Raymond James is attached as ***Appendix B*** to this proxy statement/prospectus. The summary of the opinion of Raymond James set forth below is qualified in its entirety by reference to the full text of such written opinion. Holders of Surrey common stock and Surrey Class A common stock are urged to read this opinion in its entirety.

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Raymond James provided its opinion for the information of the Surrey board of directors (solely in its capacity as such) in connection with, and for purposes of, its consideration of the merger and its opinion only addresses whether the merger consideration to be received by the holders of Surrey common stock and Surrey Class A common stock in the merger pursuant to the merger agreement was fair, from a financial point of view, to such holders as of the date of such opinion. The opinion of Raymond James does not address any other term or aspect of the merger agreement or the merger contemplated thereby. The Raymond James opinion does not constitute a recommendation to the Surrey board of directors or to any holder of Surrey common stock and Surrey Class A common stock as to how the Surrey board of directors, such shareholder or any other person should vote or otherwise act with respect to the merger or any other matter. Raymond James does not express any opinion as to the likely trading range of First Community common stock following the merger, which may vary depending on numerous factors that generally impact the price of securities or on the financial condition of First Community at that time.

In connection with its review of the proposed merger and the preparation of its opinion, Raymond James, among other things:

● reviewed the financial terms and conditions as stated in the draft of the merger agreement electronically distributed to Surrey's executive officers and legal counsel by counsel to First Community on November 16, 2022 (which we refer to in this section as the "draft agreement");

● reviewed certain information related to the historical condition and prospects of Surrey, as made available to Raymond James by or on behalf of Surrey, including, but not limited to, financial projections prepared by the management of Surrey (which we refer to in this section as the "projections");

● reviewed Surrey's: (a) audited consolidated financial statements for the years ended December 31, 2021, December 31, 2020 and December 31, 2019; and (b) unaudited consolidated financial statements for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022;

● reviewed Surrey's recent publically available regulatory filings and certain other publicly available information regarding Surrey;

● reviewed the financial and operating performance of Surrey and those of other selected public companies that Raymond James deemed to be relevant;

● considered certain publicly available financial terms of certain transactions Raymond James deemed to be relevant;

● reviewed the current and historical market prices and trading volume for Surrey's common stock and the current market prices of the publicly traded securities of certain other companies that Raymond James deemed to be relevant;

● conducted such other financial studies, analyses and inquiries and considered such other information and factors as Raymond James deemed appropriate;

● received a certificate addressed to Raymond James from a member of senior management of Surrey regarding, among other things, the accuracy of the information, data and other materials (financial or otherwise) provided to, or discussed with, Raymond James by or on behalf of Surrey; and

● discussed with members of the senior management of Surrey and First Community certain information relating to the aforementioned and any other matters which Raymond James deemed relevant to its inquiry including, but not limited to, the past and current business operations of Surrey and First Community and the financial condition, future prospects and operations of Surrey and First Community, respectively.

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With Surrey's consent, Raymond James assumed and relied upon the accuracy and completeness of all information supplied by or on behalf of Surrey, or otherwise reviewed by or discussed with Raymond James, and Raymond James did not undertake any duty or responsibility to, nor did Raymond James, independently verify any of such information. Furthermore, Raymond James did not undertake any independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which Surrey or First Community is a party or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which Surrey or First Community may be subject. With Surrey's consent, Raymond James made no assumption concerning, and its opinion therefore did not consider, the potential effects of any such litigation, claims or investigations or possible assertions.

Raymond James did not make or obtain an independent appraisal of the assets or liabilities (contingent or otherwise) of Surrey. Raymond James is not an expert in accounting principles generally accepted in the United States of America (which we refer to as "GAAP") or the evaluation of loan and lease portfolios for purposes of assessing the adequacy of the allowances for loan and lease losses or any other reserves of either of Surrey and First Community; accordingly, Raymond James assumed that such allowances and reserves are in the aggregate adequate to cover such losses.

With respect to the projections and any other information and data provided to or otherwise reviewed by or discussed with Raymond James, Raymond James, with Surrey's consent, assumed that the projections and such other information and data were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of management of Surrey, and Raymond James relied upon Surrey to advise Raymond James promptly if any information previously provided became inaccurate or was required to be updated during the period of its review. Raymond James expressed no opinion with respect to the projections or the assumptions on which they were based.

Raymond James relied upon and assumed, without independent verification, that the final form of the merger agreement would be substantially similar to the draft agreement reviewed by Raymond James in all respects material to its analysis, and that the merger would be consummated in accordance with the terms of the merger agreement without waiver of or amendment to any of the conditions thereto. Furthermore, Raymond James assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the merger agreement were true and correct and that each party will perform all of the covenants and agreements required to be performed by it under the merger agreement without being waived. Raymond James also relied upon and assumed, without independent verification, that (i) the transaction would be consummated in a manner that complies in all respects with all applicable international, federal and state statutes, rules and regulations, and (ii) all governmental, regulatory or other consents and approvals necessary for the consummation of the transaction would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or waivers made that would have an effect on the merger or Surrey that would be material to its analysis or opinion.

Raymond James expressed no opinion as to the underlying business decision to effect the merger, the structure or tax consequences of the merger, or the availability or advisability of any alternatives to the merger. The Raymond James opinion is limited to the fairness, from a financial point of view, of the merger consideration to be received by the holders of Surrey common stock and Surrey Class A common stock. Raymond James expressed no opinion with respect to any other reasons (legal, business, or otherwise) that may support the decision of the Surrey board of directors to approve or consummate the merger. Furthermore, no opinion, counsel or interpretation was intended by Raymond James on matters that require legal, accounting or tax advice. Raymond James assumed that such opinions, counsel or interpretations had been or would be obtained from appropriate professional sources. Furthermore, Raymond James relied, with the consent of Surrey, on the fact that Surrey was assisted by legal, accounting and tax advisors, and, with the consent of Surrey relied upon and assumed the accuracy and completeness of the assessments by Surrey and its advisors, as to all legal, accounting and tax matters with respect to Surrey and the merger, including, without limitation, that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Code.

In formulating its opinion, Raymond James considered only the merger consideration to be received by the holders of Surrey common stock and Surrey Class A common stock, and Raymond James did not consider, and its opinion did not address, the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of Surrey, or such class of persons, in connection with the merger whether relevant to the merger consideration or otherwise. Raymond James was not requested to opine as to, and its opinion did not express an opinion as to or otherwise address, among other things: (1) the fairness of the merger to the holders of any class of securities, creditors or other constituencies of Surrey, or to any other party, except and only to the extent expressly set forth in the last sentence of its opinion or (2) the fairness of the merger to any one class or group of Surrey's or any other party's security holders or other constituents vis-à-vis any other class or group of Surrey's or such other party's security holders or other constituents (including, without limitation, the allocation of any consideration to be received in the merger amongst or within such classes or groups of security holders or other constituents). Raymond James expressed no opinion as to the impact of the merger on the solvency or viability of Surrey or First Community or the ability of Surrey or First Community to pay their respective obligations when they come due.

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*Material Financial Analyses*

The following summarizes the material financial analyses reviewed by Raymond James with the Surrey board of directors at its meeting on November 17, 2022, which material was considered by Raymond James in rendering its opinion. No company or transaction used in the analyses described below is identical or directly comparable to Surrey, First Community or the merger.

*Selected Companies Analysis.* Raymond James analyzed the relative valuation multiples of 15 publicly-traded financial institutions that satisfied the following criteria: (i) headquartered in North Carolina, South Carolina, or Virginia; (ii) had total assets between $300 million and $800 million; and (iii) had last twelve months return on average assets greater than 0.50%. This group excluded targets of announced mergers and mutual holding companies. The selected companies that Raymond James deemed relevant included the following:

**Selected Companies for<br> Surrey Bancorp**

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PB Financial Corporation (PBNC)

Village Bank and Trust Financial Corp. (VBFC)

Bank of Botetourt (BORT)

Community First Bancorporation (CFOK)

Bank of South Carolina Corporation (BKSC)

Touchstone Bankshares, Inc. (TSBA)

Citizens Bancorp of Virginia, Inc. (CZBT)

Oak Ridge Financial Services, Inc. (BKOR)

KS Bancorp, Inc. (KSBI)

Lumbee Guaranty Bank (LUMB)

M&F Bancorp, Inc. (MFBP)

Oak View Bankshares, Inc. (OAKV)

Lifestore Financial Group, Inc. (LSFG)

blueharbor bank (BLHK)

The Farmers Bank of Appomattox (FBPA)

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Raymond James calculated various financial multiples for each company, including: (i) price to tangible book value per share; (ii) price to tangible book value per share excluding accumulated other comprehensive income; (iii) price to last-twelve-months earnings per share; (iv) and price to last quarter annualized earnings per share. Raymond James reviewed the mean, median, 25<sup>th</sup> percentile and 75<sup>th</sup> percentile relative valuation multiples of the selected public companies and compared them to corresponding valuation multiples for Surrey implied by the merger consideration. The results of the selected public companies' analysis are summarized below:

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | Surrey | Deal | Mutiple Range | Mutiple Range | Mutiple Range | Mutiple Range |
|  | Statistic | Metric | 25th Percentile | Mean | Median | 75th Percentile |
| Price/Tangible Book Value per Share | $13.66 | 202% | 100% | 133% | 115% | 148% |
| Price/TBVPS (ex AOCI) | 13.68 | 202% | 83% | 101% | 95% | 119% |
| Price/LTM EPS | 1.52 | 18.2x | 7.6x | 9.0x | 8.9x | 9.1x |
| Price/LQA EPS | 2.03 | 13.6x | 7.0x | 8.2x | 7.6x | 9.3x |

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Furthermore, Raymond James applied the mean, median, 25<sup>th</sup> percentile and 75<sup>th</sup> percentile relative valuation multiples for each of the metrics to Surrey's actual financial results and determined the implied equity price per share of Surrey common stock, including the Surrey Class A common stock, and then compared those implied equity values per share to the implied value of the merger consideration, as of November 16, 2022, of $27.64 per share. The results of this are summarized below:

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | Surrey | Deal | Mutiple Range | Mutiple Range | Mutiple Range | Mutiple Range |
|  | Statistic | Metric | 25th Percentile | Mean | Median | 75th Percentile |
| Price/Tangible Book Value per Share | $13.66 | 202% | $13.70 | $18.10 | $15.64 | $20.15 |
| Price/TBVPS (ex AOCI) | 13.68 | 202% | 11.38 | 13.88 | 12.95 | 16.30 |
| Price/LTM EPS | 1.52 | 18.2x | 11.48 | 13.61 | 13.47 | 13.89 |
| Price/LQA EPS | 2.03 | 13.6x | 14.25 | 16.71 | 15.51 | 18.78 |
| Merger Consideration | $27.64 |  |  |  |  |  |

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*Selected Transaction Analysis.* Raymond James analyzed publicly available information relating to selected regional transactions announced since January 1, 2021 involving financial institution targets headquartered in the Southeast, which includes Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia, with total assets between $300 million and $800 million and return on average assets over the last twelve months greater than 0.50%. Raymond James also analyzed publicly available information relating to selected national transactions announced since January 1, 2022 involving financial institutions headquartered in the United States with total assets between $300 million and $800 million and return on average assets over the last twelve months greater than 0.50%. Both regional and national transactions excluded: (i) transactions without publicly disclosed deal value or sufficient financial information; (ii) merger of equals; and (iii) transactions in which less than 100% of equity ownership was acquired. The selected national and regional transactions (with respective transaction announcement dates shown) used in the analysis included:

***National Transactions:***

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• City Holding Company/ Citizens Commerce Bancshares, Inc. – October 18, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Taichung Commercial Bank Co., Ltd./ American Continental Bancorp – September 30, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• TowneBank/ Farmers Bankshares, Inc. – August 18, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• MVB Financial Corp./ Integrated Financial Holdings, Inc. – August 12, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Bank First Corporation/ Hometown Bancorp, Ltd. – July 26, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• HomeTrust Bancshares, Inc./ Quantum Capital Corp. – July 25, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Somerset Savings Bank, SLA/ Regal Bancorp, Inc. – July 25, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• CrossFirst Bankshares, Inc./ Farmers & Stockmens Bank – June 13, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Middlefield Banc Corp./ Liberty Bancshares, Inc. (Ada, OH) – May 26, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Cambridge Bancorp/ Northmark Bank – May 23, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• DFCU Financial/ First Citrus Bancorporation, Inc. – May 12, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Nmb Financial Corp/ Noah Bank – April 13, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Arizona Federal Credit Union/ Horizon Community Bank – March 10, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• BAWAG Group AG/ Peak Bancorp Inc. – February 2, 2022

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Bank First Corporation/ Denmark Bancshares, Inc. – January 19, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Civista Bancshares, Inc./ Comunibanc Corp. – January 10, 2022

***Selected Regional Transactions:***

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• TowneBank/ Farmers Bankshares, Inc. – August 18, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• MVB Financial Corp./ Integrated Financial Holdings, Inc. – August 12, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• HomeTrust Bancshares, Inc./ Quantum Capital Corp. – July 25, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• DFCU Financial/ First Citrus Bancorporation, Inc. – May 12, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• SouthPoint Bancshares, Inc./ Merchants Financial Services, Inc. – August 25, 2021

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Seacoast Banking Corporation of Florida/ Sabal Palm Bancorp, Inc. – August 23, 2022

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Lake Michigan Credit Union/ Pilot Bancshares, Inc. – June 16, 2021

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• United Community Banks, Inc./ Aquesta Financial Holdings, Inc. – May 27, 2021

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Colony Bankcorp, Inc./ SouthCrest Financial Group, Inc. – April 22, 2021

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• SmartFinancial, Inc./ Sevier County Bancshares, Inc. – April 14, 2021

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Seacost Banking Corporation of Florida/ Legacy Bank of Florida – March 23, 2021

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• BancorpSouth Bank/ FNS Bancshares, Inc. – January 13, 2021

Raymond James examined valuation multiples of transaction value compared to the target companies': (i) most recent quarter tangible common equity at announcement; (ii) most recent quarter tangible common equity excluding accumulated other comprehensive income at announcement; (iii) last twelve months net income at announcement; and (iv) premium to core deposits (total deposits less time deposits greater than $100,000). Raymond James adjusted earnings of subchapter S corporations using an effective tax rate of 21%. Raymond James reviewed the mean, median, 25<sup>th</sup> percentile and 75<sup>th</sup> percentile relative valuation multiples of the selected transactions and compared them to corresponding valuation multiples for Surrey implied by the merger consideration. Furthermore, Raymond James applied the mean, median, 25<sup>th</sup> percentile and 75<sup>th</sup> percentile relative valuation multiples to Surrey's tangible common equity, tangible common equity excluding accumulated other comprehensive income, last twelve months net income, and core deposits to determine the implied equity price per share and then compared those implied equity values per share to the implied value of the merger consideration, as of November 16, 2022, of $27.64 per share. The results of the selected transactions analysis are summarized below:

***National Transactions***

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| | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | Surrey | Deal | Mutiple Range | Mutiple Range | Mutiple Range | Mutiple Range | Implied Values Range | Implied Values Range | Implied Values Range | Implied Values Range |
|  | Statistic | Metric | 25th Percentile | Mean | Median | 75th Percentile | 25th Percentile | Mean | Median | 75th Percentile |
| Price/Tangible Book Value per Share | $57006 | 204% | 131% | 164% | 164% | 193% | $17.82 | $22.23 | $22.28 | $26.24 |
| Price/TBVPS (ex AOCI) | 57089 | 203% | 124% | 154% | 156% | 180% | 16.86 | 20.94 | 21.22 | 24.45 |
| Price/LTM EPS | 6345 | 18.3x | 11.3x | 15.7x | 15.3x | 18.3x | 17.05 | 23.71 | 23.07 | 27.71 |
| Price/LQA EPS | 407266 | 14.5% | 4.2% | 7.7% | 7.2% | 9.8% | 17.69 | 21.03 | 20.53 | 23.03 |

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***Regional Transactions***

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| | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | Surrey | Deal | Mutiple Range | Mutiple Range | Mutiple Range | Mutiple Range | Implied Values Range | Implied Values Range | Implied Values Range | Implied Values Range |
|  | Statistic | Metric | 25th Percentile | Mean | Median | 75th Percentile | 25th Percentile | Mean | Median | 75th Percentile |
| Price/Tangible Book Value per Share | $57006 | 204% | 149% | 171% | 169% | 192% | $20.26 | $23.23 | $22.87 | $26.01 |
| Price/TBVPS (ex AOCI) | 57089 | 203% | 146% | 163% | 156% | 185% | 19.88 | 22.16 | 21.17 | 25.17 |
| Price/LTM EPS | 6345 | 18.3x | 11.0x | 13.4x | 12.6x | 17.3x | 16.69 | 20.30 | 19.10 | 26.16 |
| Price/LQA EPS | 407266 | 14.5% | 4.8% | 7.8% | 6.7% | 9.7% | 18.25 | 21.10 | 20.10 | 22.98 |

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*Discounted Cash Flow Analysis.* Raymond James performed a discounted cash flow analysis of Surrey based on projections provided by management of Surrey. Raymond James used tangible common equity in excess of a target ratio of 8.0% of tangible assets at the end of each projection period for free cash flow. Consistent with the periods included in the projections, Raymond James used calendar year 2026 as the final year for the analysis and applied multiples, ranging from 11.5x to 13.5x, to calendar year 2026 net income in order to derive a range of terminal values for Surrey in 2026.

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The projected free cash flows and terminal values were discounted using rates ranging from 16.5% to 14.5%. Raymond James arrived at its discount rate ranges by using the 2021 Duff & Phelps Valuation Handbook. The resulting range of present equity values was divided by the number of diluted shares outstanding. Raymond James reviewed the range of per share prices derived in the discounted cash flow analysis and compared them to the implied value of the merger consideration, as of November 16, 2022, of $27.64 per share. The results of the discounted cash flow analysis indicated a range of values from $22.67 per share to $26.24 per share. The results of the discounted cash flow analysis are summarized below:

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| | | |
|:---|:---|:---|
|  | Implied | Implied |
|  | per Share Value | per Share Value |
|  | Low | High |
| Implied per Share Value | $22.67 | $26.24 |

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*Additional Considerations.* The preparation of a fairness opinion is a complex process and is not susceptible to a partial analysis or summary description. Raymond James believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering the analyses taken as a whole, would create an incomplete view of the process underlying its opinion. In addition, Raymond James considered the results of all such analyses and did not assign relative weights to any of the analyses, but rather made qualitative judgments as to significance and relevance of each analysis and factor, so the ranges of valuations resulting from any particular analysis described above should not be taken to be the view of Raymond James as to the actual value of Surrey.

In performing its analyses, Raymond James made numerous assumptions with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond the control of Surrey. The analyses performed by Raymond James are not necessarily indicative of actual values, trading values or actual future results which might be achieved, all of which may be significantly more or less favorable than suggested by such analyses. Such analyses were provided to the Surrey board of directors (solely in its capacity as such) and were prepared solely as part of the analysis of Raymond James of the fairness, from a financial point of view, to the holders of Surrey common stock other than any excluded shares to be received by such holders in connection with the merger pursuant to the merger Agreement. The analyses do not purport to be appraisals or to reflect the prices at which companies may actually be sold, and such estimates are inherently subject to uncertainty. The opinion of Raymond James was one of many factors taken into account by the Surrey board of directors in making its determination to approve the merger. Neither Raymond James' opinion nor the analyses described above should be viewed as determinative of the Surrey board of directors' or Surrey management's views with respect to Surrey, First Community or the merger. Raymond James provided advice to Surrey with respect to the merger. Raymond James did not, however, recommend any specific amount of consideration to the Surrey board of directors or that any specific merger consideration constituted the only appropriate consideration for the merger. Surrey placed no limits on the scope of the analysis performed, or opinion expressed, by Raymond James.

The Raymond James opinion was necessarily based upon market, economic, financial and other circumstances and conditions existing and disclosed to it on November 16, 2022, and any material change in such circumstances and conditions may affect the opinion of Raymond James, but Raymond James does not have any obligation to update, revise or reaffirm that opinion. Raymond James relied upon and assumed, without independent verification, that there had been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of Surrey since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to Raymond James that would be material to its analyses or its opinion, and that there was no information or any facts that would make any of the information reviewed by Raymond James incomplete or misleading in any material respect.

Raymond James has not provided any other investment banking services to Surrey in the two years preceding the date of its opinion. During the two years preceding the date of its opinion, (i) Raymond James has engaged in certain fixed income trading activity with First Community Bank for which it has earned income and (ii) an affiliate of Raymond James provided services to First Community Bank relating to its wealth management business, for which Raymond James has received commissions and fees.

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For services rendered in connection with the delivery of its opinion, Surrey paid Raymond James a fee of $250,000 upon delivery of its opinion. Surrey will also pay Raymond James a customary fee for advisory services in connection with the merger equal to approximately $1.4 million (less the fee paid upon delivery of the opinion, the amount of which shall be deducted), which is contingent upon the closing of the merger. The actual amount of the fee Surrey will pay Raymond James for its advisory services is subject to the final amount of the merger consideration at closing. Surrey also agreed to reimburse Raymond James up to $35,000, unless a greater amount is authorized by Surrey, for its expenses incurred in connection with its services, including the fees and expenses of its counsel, and will indemnify Raymond James against certain liabilities arising out of its engagement.

Raymond James is actively involved in the investment banking business and regularly undertakes the valuation of investment securities in connection with public offerings, private placements, business combinations and similar transactions. In the ordinary course of business, Raymond James may trade in the securities of Surrey and First Community for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. Raymond James may provide investment banking, financial advisory and other financial services to Surrey and/or First Community or other participants in the merger in the future, for which Raymond James may receive compensation.

**Certain Surrey Unaudited Prospective Financial Information** 

Surrey does not as a matter of course publicly disclose forecasts or internal projections as to future performance, revenues, earnings, financial condition or other results because of, among other reasons, the inherent uncertainty of the underlying assumptions and estimates. However, Surrey is including in this proxy statement/prospectus certain limited unaudited prospective financial information for Surrey. Such information contains unaudited prospective financial information for Surrey on a stand-alone, pre-merger basis, respectively, to give Surrey shareholders access to certain information that was provided to the Surrey board of directors and to Raymond James in connection with its fairness opinion. We refer to such prospective information as "prospective information". The prospective information may differ in certain respects from what Surrey uses for its internal purposes.

The prospective information provided was prepared in good faith on a reasonable basis based on the best available information at the time, but was not prepared for the purpose of public disclosure. As such, the inclusion of such information in this proxy statement/prospectus should not be regarded as an indication that Surrey or any other recipient of such information considered, or now considers, such information to be necessarily predictive of actual future results. The Surrey prospective financial information was not prepared with a view toward complying with the guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation or presentation of financial information. Neither Elliott Davis, PLLC, FORVIS LLP, nor any other independent registered public accountants or independent accountants has compiled, examined or performed any procedures with respect to such information, or expressed any opinion or any other form of assurance on such information or their achievability.

The prospective financial information reflects numerous estimates and assumptions made by Surrey with respect to industry performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters specific to Surrey's business, all of which are difficult to predict and many of which are beyond Surrey's respective control. Such information also reflects assumptions as to certain business decisions that are subject to change. The prospective financial information reflects subjective judgment in many respects and is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Accordingly, such information constitutes forward-looking information and is subject to risks and uncertainties that could cause actual results to differ materially from the results forecasted in such prospective information, including, but not limited to, First Community's and Surrey's performance, industry performance, general business and economic conditions, customer requirements, competition, adverse changes in applicable laws, regulations or rules, and the various risks set forth in this proxy statement/prospectus and in the reports filed by First Community with the SEC. For other factors that could cause the actual results to differ, see the sections entitled "*Risk Factors*" and "*Cautionary Statement Regarding Forward-Looking Statements* beginning on page [●]."

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The prospective information does not take into account any circumstances or events occurring after the date they were prepared, including the transactions contemplated by the merger agreement, and do not take into account the effect of any possible failure of the merger to occur. Neither Surrey nor its financial advisors nor its affiliates intend to, and each of them disclaims any obligation to, update, revise or correct the prospective financial information if they are or become inaccurate, even in the short-term. The inclusion of such information in this proxy statement/prospectus is not and should not be deemed an admission or representation by Surrey that such information is viewed by Surrey as material information of Surrey, particularly in light of the inherent risks and uncertainties associated with such information. The prospective information presented below is not meant to influence your decision whether to vote in favor of the common shareholder merger proposal, the Class A common shareholder merger proposal or any other proposal to be considered at the special meeting but is being presented solely because it was made available to and considered by Surrey's board of directors and financial advisor in connection with the merger.

The following prospective financial information was utilized by Raymond James, with Surrey's consent, in performing financial analyses in connection with its fairness opinion:

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **12 Months Ended** | **12 Months Ended** | **12 Months Ended** | **12 Months Ended** |
|  | **December 31,** <br> **2022** | **December 31,** <br> **2023** | **December 31,** <br> **2024** | **December 31,** <br> **2025** |
| Net Income ($MMs) | $7.3 | $8.3 | $8.4 | $8.9 |
| Earnings Per Share | $1.74 | $1.99 | $2.00 | $2.11 |
| Common Dividends Per Share | $0.62 | $0.48 | $0.48 | $0.48 |
| Total Assets ($MMs) | $484.4 | $471.4 | $492.7 | $520.3 |

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**Interests of Surrey Directors and Executive Officers in the Merger**

In the merger, the directors and executive officers of Surrey will receive the same merger consideration for their Surrey shares as the other Surrey shareholders. In considering the recommendation of the Surrey board of directors that you vote to approve the merger agreement, you should be aware that some of the executive officers and directors of Surrey may have interests in the merger and may have arrangements, as described below, that may be considered to be different from, or in addition to, those of Surrey shareholders generally. The Surrey board of directors was aware of these interests and considered them, among other matters, in reaching its decision to adopt and approve the merger agreement and to recommend that you vote in favor of approving the merger agreement. See the section entitled "*-Background of the Merger*" and "*-Recommendation of the Surrey Board of Directors and Surrey*'*s Reasons for the Merger*" beginning on page [●]. Surrey shareholders should take these interests into account in deciding whether to vote "**FOR**" the common shareholder merger proposal and "**FOR**" the Class A common shareholder merger proposal. These interests are described in more detail below, and certain of them are quantified in the narrative below.

For purposes of this disclosure, Surrey's executive officers are: Edward C. Ashby, III, Pedro A. Pequeno, II, and Mark H. Towe.

*Employment and Change of Control Agreements*

Surrey and Surrey Bank & Trust have entered into employment and change of control agreements with each of their executive officers: Edward C. Ashby, III, Pedro A. Pequeno, II, and Mark H. Towe. These agreements provide that each executive is entitled to receive a change-of-control payment, if such executive is terminated (other than for cause) or terminates his employment for good reason within 24 months after the consummation of the merger, of 2.99 times Executive's "average annual base compensation" as defined under Section 280G(b) of the Code, plus reimbursement for certain welfare benefits for the executive and his dependents for 12 months or until such time as executive obtains substantially similar coverages, whichever is earlier, all subject to reduction if such payments, and any other compensation to be received by executive in connection with the merger, would otherwise be an 'excess parachute payment' under Code Section 280G.

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In the alternative, each executive is entitled to receive a lump sum termination payment if such executive is terminated (other than for cause) or terminates his employment for good reason, other than in connection with a change of control, equal to the amount of base salary that would have been due and payable through the end of the term of his agreement, i.e., three years, plus pro-rated bonus and reimbursement for certain welfare benefits for the executive and his dependents for 12 months or until such time as the executive obtains substantially similar coverages, whichever is earlier.

In exchange for those payments, for a two year period commencing on the date of such termination of employment, each executive agreed not to (1) solicit customers of Surrey or Surrey Bank & Trust or their successors, including First Community and First Community Bank, as applicable, for any competing insured depository institution, (2) solicit employees of Surrey or Surrey Bank & Trust or their successors, including First Community and First Community Bank, as applicable, to terminate their employment with any of the foregoing companies, and (3) compete against Surrey or Surrey Bank & Trust or their successors, including First Community and First Community Bank, as applicable, within a 25-mile radius of the main office or any branch office of Surrey Bank & Trust, and, if the executive continues employment after the effective time, the main office or any branch office of First Community and First Community Bank.

The parties have agreed that certain lump sum cash payments will be made to Messrs. Ashby, Pequeno and Towe in exchange for termination of the above-described agreements, provided that (i) the executive enters into a mutually satisfactory release at the effective time and (ii) the two year period during which the executive agrees not to solicit customers, solicit employees or compete against Surrey or Surrey Bank & Trust or their successors, as described above, shall commence at the effective time. The lump sum cash payments have been calculated based on the alternative (termination of the agreement not in connection with a change of control, other than for cause or resignation for good reason) described above, but still subject to the 280G cutback. The lump sum cash payments are estimated as follows: (i) for Mr. Ashby, the total lump sum settlement payment is calculated to be [$816,318] (after taking into account an anticipated 280G cutback, which will be finalized prior to the effective time); (ii) for Mr. Towe, the total lump sum settlement payment is calculated to be [$495,530] (after taking into account an anticipated 280G cutback, which will be finalized prior to the effective time); and (iii) for Mr. Pequeno, the total lump sum settlement payment is calculated to be $[793,036] (with no 280G cutback).

*Salary Continuation Agreements, Certain Life Insurance Benefits.* 

Ashby, Pequeno, and Towe have also each entered into Executive Salary Continuation Agreements with Surrey Bank & Trust. Each of the executives will vest in the full benefit, payable for life in monthly installments commencing on the first day of the month after such executive retires or attains age 65, whichever is later. In addition, Ashby, Pequeno, and Towe each are parties to a split dollar agreement and a supplemental life insurance agreement, which provide for the payment of certain death benefits to their beneficiaries. The split dollar agreements provide for 100% vesting upon a change of control.

*Board of Directors*

Current Surrey directors, Edward C. Ashby, III and Robert H. Moody, will join the board of First Community Bank upon completion of the merger. Members of the First Community Bank board are expected to receive compensation consistent with the compensation paid to current non-employee directors of First Community Bank. For 2022, such compensation included an annual retainer fee with a value of approximately $22,500 paid in cash and $22,500 paid in restricted stock units that cliff-vest over one year after the grant date.

*Indemnification and Insurance*

As described under the section entitled "*The Merger Agreement-Director and Officer Indemnification and Insurance*" beginning on page [●] from and after the completion of the merger, First Community will indemnify and hold harmless all current and former directors, officers and employees of Surrey or any of its subsidiaries against all liabilities arising out of the fact that such person is or was a director, officer or employee of Surrey or any of its subsidiaries if the claim is based in or arises out of any matter of fact existing or occurring at or before the effective time of the merger (including the merger and the other transactions contemplated by the merger agreement), regardless of whether such claims are asserted before or after the effective time, to the fullest extent such person would have been indemnified under articles of incorporation and bylaws of Surrey as in effect on November 17, 2022 and as permitted by applicable law.

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The merger agreement requires First Community to maintain for a period of six years after completion of the merger Surrey's currently existing directors and officers liability insurance policy, or policies having at least the same coverage and amounts and containing terms and conditions that are no less favorable in any material respect to the insured persons than the existing policy, with respect to claims arising from facts or events that occurred prior to the completion of the merger, and covering such individuals who are currently covered by such insurance. However, First Community is not required to spend in the aggregate an amount more than 200% of the annual premium payment on Surrey's current directors and officers liability insurance policy. If First Community is unable to maintain a policy as described for less than that amount, First Community will obtain as much comparable insurance as is available for that amount. In lieu of such a policy, after consultation with First Community, Surrey may (1) substitute a six-year "tail" prepaid policy with terms no less favorable in any material respect to the indemnified parties than Surrey's existing policy as of November 17, 2022 or (2) obtain extended coverage for the six-year period under Surrey's existing insurance programs. If First Community (or any of its successors or assigns) merges with another person and is not the continuing entity, or if First Community transfers or conveys all or substantially all of its properties or assets to another person, then First Community will ensure that its successors and assigns assume First Community's indemnification and insurance obligations.

*[Employment of Executive Officer*

In connection with the merger, First Community Bank has made an offer to Mr. Pequeno to serve as the Senior Vice President & Regional Manager of First Community Bank following consummation of the merger.]

*Engagement as Consultant*

Also, in connection with the merger, First Community Bank has entered into a consulting agreement with Mr. Ashby, whereby he has agreed to provide consulting services to First Community Bank, as an independent contractor, for a period of 12 months following the effective time of the merger, unless sooner terminated by either party. If First Community Bank terminates the consulting agreement prior to expiration of the twelve-month period (other than for intentional misconduct or repeated failure to perform services), Mr. Ashby will receive the consulting fees of $12,500.00 per month for the remainder of the period, subject to reduction by the amount of earnings of Mr. Ashby from other employment or consulting fees during such remaining period.

First Community Bank has also offered Mr. Towe an opportunity to provide consulting services to First Community Bank, as an independent contractor, for a period of four months, unless sooner terminated by either party. Mr. Towe will receive a consulting fee of $[●] per month.

**Public Trading Markets**

The First Community common stock is listed for trading on NASDAQ under the symbol "FCBC," and the Surrey common stock is quoted on the OTC Pink under the symbol "SRYB." Upon completion of the merger, the Surrey common stock will no longer be quoted on the OTC Pink. Following the merger, shares of First Community common stock will continue to be traded on NASDAQ.

Under the merger agreement, First Community will cause the shares of First Community common stock to be issued or reserved for issuance in the merger to be approved for listing on NASDAQ, subject to notice of issuance. The merger agreement provides that neither First Community nor Surrey will be required to complete the merger if such shares are not authorized for listing on NASDAQ, subject to notice of issuance.

**First Community**'**s Dividend Policy**

On October 25, 2022, the First Community board of directors declared a quarterly cash dividend of $0.29 per share on First Community common stock, which was paid on November 18, 2022 to shareholders of record as of the close of business on November 4, 2022. Historically, First Community has paid a regular quarterly dividend to holders of its common stock in February, May, August and November of each calendar year.

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First Community's principal source of cash flow is derived from dividends paid by First Community Bank. There are various restrictions by regulatory agencies related to dividends paid by First Community Bank to First Community and dividends paid by First Community to its shareholders. The payment of dividends by First Community and First Community Bank may be limited by certain factors, such as requirements to maintain capital above regulatory guideline minimums.

Prior approval from the Federal Reserve Board is required for First Community Bank to declare or pay a dividend to First Community if the total of all dividends declared in any given year exceed the total of First Community Bank's net profits for that year and its retained profits for the preceding two years, less any required transfers to surplus or to fund the retirement of preferred stock. Dividends paid by First Community to shareholders are subject to oversight by the Federal Reserve Board. Federal Reserve Board policy states that bank holding companies generally should pay dividends on common stock only from income available over the past year if prospective earnings retention is consistent with the organization's expected future needs, asset quality, and financial condition.

Regulatory agencies have the authority to limit or prohibit First Community and First Community Bank from paying dividends if the payments are deemed to constitute an unsafe or unsound practice. The appropriate regulatory authorities have stated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only from current operating earnings. In addition, First Community Bank may not declare or pay a dividend if, after paying the dividend, First Community Bank would be classified as undercapitalized. In the current financial and economic environment, the Federal Reserve Board has discouraged payout ratios that are at maximum allowable levels, unless both asset quality and capital are very strong, and has noted that bank holding companies should carefully review their dividend policy. Bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries.

No assurances can be given that any dividends will be paid by First Community or that dividends, if paid, will not be reduced or eliminated in future periods. Special cash dividends, stock dividends or returns of capital may, to the extent permitted by the policies and regulations of the Federal Reserve Board, be paid in addition to, or in lieu of, regular cash dividends. Dividends from First Community will depend, in large part, upon receipt of dividends from First Community Bank, and any other banks which First Community acquires, because First Community will have limited sources of income other than dividends from First Community Bank and earnings from the investment of proceeds from the sale of shares of common stock retained by First Community. The First Community board of directors may change its dividend policy at any time, and the payment of dividends by bank holding companies is subject to legal and regulatory limitations as discussed above.

**Regulatory Approvals**

First Community and Surrey have agreed to use their reasonable best efforts to take promptly all actions and to do promptly all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by the merger agreement. However, in no event will First Community be required, or will Surrey and its subsidiaries be permitted (without First Community's prior written consent), to agree to any condition or restriction that would so materially and adversely impact the economic or business benefits to First Community of the transactions contemplated by the merger agreement that, had such condition or requirement been known, First Community would not, in its reasonable judgment, have entered into the merger agreement (we refer to such condition as a "burdensome condition").

*Federal Reserve Board*. The transactions contemplated by the merger agreement require approval by the Federal Reserve pursuant to Section 3 of the BHCA unless the Federal Reserve waives that requirement, and pursuant to Section 18(c)(2)(B) of the Federal Deposit Insurance Act (which we refer to as the "Bank Merger Act").

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The Federal Reserve takes into consideration a number of factors when acting on applications filed under Section 3 of the BHCA and the Bank Merger Act. These factors include the effect of the merger on competitiveness in affected banking markets, the financial and managerial resources (including consideration of the capital adequacy, liquidity, and earnings performance, as well as the competence, experience and integrity of the officers, directors and principal shareholders, and the records of compliance with applicable laws and regulations) and future prospects of the combined organization. The Federal Reserve also considers the effectiveness of the applicant in combatting money laundering, the convenience and needs of the communities to be served, as well as the extent to which the proposal would result in greater or more concentrated risks to the stability of the U.S. banking or financial system. The Federal Reserve has the authority to deny an application if it concludes that the combined organization would have inadequate capital. In addition, the Federal Reserve can withhold approval of the merger if, among other things, it determines that the effect of the merger would be to substantially lessen competition in the relevant market. Further, the Federal Reserve must consider whether the combined organization meets the requirements of the Community Reinvestment Act of 1977 (which we refer to as the "CRA") by assessing the involved entities' records of meeting the credit needs of the local communities in which they operate, consistent with the safe and sound operation of such institutions.

In addition, a period of 15 to 30 days must expire following approval by the Federal Reserve before completion of the merger is allowed, within which period the United States Department of Justice and the Federal Trade Commission may file objections to the merger under the federal antitrust laws.

*Virginia Department of Financial Institutions.* To complete the merger and the bank merger, First Community and First Community Bank are required to submit applications to, and receive approval from, the Virginia State Corporation Commission Bureau of Financial Institutions (which we refer to as the "VBFI"). The VBFI will review the application to determine whether the merger and the bank merger complies with Virginia law. The criteria considered by the VBFI are similar to those considered by the Federal Reserve Board.

*North Carolina Office of the Commissioner of Banks.* To complete the merger and the bank merger, First Community and First Community Bank are required to submit applications to, and receive approval from, the North Carolina Office of the Commissioner of Banks (which we refer to as the "NCCOB"). The NCCOB will review the application to determine whether the merger and the bank merger complies with North Carolina law. The criteria considered by the NCCOB are similar to those considered by the Federal Reserve.

First Community has filed an application with the Federal Reserve for approval under the Bank Merger Act and filed a request for a waiver of the prior approval requirement under Section 3 of the BHCA using procedures outlined in applicable regulations. Applications were also filed by First Community with the VBFI and NCOCB. Based on information available as of the date hereof, First Community and Surrey believe that the merger does not raise significant regulatory concerns and that we will be able to obtain all requisite regulatory approvals. However, neither First Community nor Surrey can assure you that all of the regulatory approvals described above will be obtained and, if obtained, we cannot assure you as to the timing of any such approvals, First Community's ability to obtain the approvals on satisfactory terms, or the absence of any litigation challenging such approvals. In addition, there can be no assurance that such approvals will not impose conditions or requirements that would reasonably be expected to have a material adverse effect on the financial condition, results of operations, assets, or business of the surviving corporation and its subsidiaries, taken as a whole, after giving effect to the merger.

Neither First Community nor Surrey is aware of any material governmental approvals or actions that are required for completion of the merger other than those described above. It is presently contemplated that if any such additional governmental approvals or actions are required, those approvals or actions will be sought. There can be no assurance, however, that any additional approvals or actions will be obtained.

**Dissenters**' **Appraisal Rights for Surrey Shareholders**

Surrey shareholders will have the right to assert appraisal rights with respect to the merger and demand in writing to be paid the fair value of their shares of Surrey common stock or Surrey Class A common stock under applicable provisions of North Carolina law following consummation of the merger by First Community as the surviving company following the merger. In order to exercise and perfect appraisal rights, you must generally give written notice of your intent to demand payment for your shares to Surrey before the vote is taken on the merger at the Surrey special meeting and you must not vote in favor of the merger. A copy of the applicable provisions of the North Carolina Business Corporation Act (which we refer to as the "NCBCA") is included in this proxy statement/prospectus as ***Appendix C***.

The following is only a summary of the rights of a dissenting Surrey shareholder, is not a complete statement of law pertaining to appraisal rights under the NCBCA, and is qualified in its entirety by reference to the full text of the provisions of the NCBCA pertaining to appraisal rights, a copy of which is attached as ***Appendix C*** hereto and incorporated into this discussion by reference. If you intend to exercise your right to dissent, you should carefully review the following summary and comply with all requirements of the NCBCA. You should also consult with your attorney.

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The NCBCA provides in detail the procedure you must follow if you wish to exercise your appraisal rights. In summary, to exercise appraisal rights, you must satisfy the following conditions:

● You must be entitled to vote on the merger.

● You must deliver to Surrey before the vote on the merger agreement is taken at the special meeting of Surrey shareholders written notice of your intent to demand payment for your shares if the merger is completed.

● You must not vote your shares in favor of the merger agreement at the Surrey special meeting.

In other words, you do not have to vote against the merger agreement, or even vote at all, in order to exercise appraisal rights, but you may not vote in favor of the merger agreement, and in all cases you must give the required written notice. If you fail to satisfy these requirements, you will not be entitled to exercise appraisal rights or to receive payment for your shares under the provisions of the NCBCA pertaining to appraisal rights. Even if you vote against the merger agreement (either in person or by proxy), you still have to send the required notice of intent in order to exercise appraisal rights. You should remember that, as described in the sections entitled, "*Information About the Surrey Special Meeting - How to Vote*" beginning on page [●], if you return a signed proxy card but fail to provide instructions as to the manner in which your shares are to be voted, you will be considered to have voted in favor of the merger agreement and you will not be able to assert appraisal rights. If you do not return a proxy card or otherwise vote at all at the Surrey special meeting, as applicable, you will not be treated as waiving your appraisal rights as long as you have given the required notice of intent as described above.

If you are a Surrey shareholder and you intend to assert your appraisal rights, your notice of intent should be mailed or delivered to Surrey's corporate secretary at Surrey's corporate office located at 145 N Renfro Street, Mount Airy, North Carolina, 27030, or it may be hand delivered to Surrey's corporate secretary at the Surrey special meeting (before the voting on the merger agreement begins).

If you deliver a timely notice of intent, do not vote in favor of the merger agreement and the merger agreement is approved by Surrey shareholders at the Surrey special meeting (or any adjournment of the Surrey special meeting), then, within ten days following the effective date of the merger, First Community, as the surviving company, will send you a written notice called an appraisal notice to your address shown in Surrey's current record of shareholders, as long as you have satisfied the requirements to exercise appraisal rights. The appraisal notice will include another copy of the provisions of the NCBCA, pertaining to appraisal rights and will:

● include a form you can use for demanding payment that will (i) specify the first date of any announcement to Surrey shareholders of the terms of the merger, (ii) require you to certify whether you acquired beneficial ownership of your shares of Surrey common stock or Surrey Class A common stock before that date, and (iii) require you to certify that you did not vote for or consent to the merger;

● state where Surrey share certificates for certificated shares must be deposited and the date by which those certificates must be deposited;

● specify where the form described above must be sent and the date by which First Community must receive the form (which may not be fewer than 40 nor more than 60 days after the date of mailing of the appraisal notice), and state that you will have waived the right to demand appraisal with respect to your shares unless the form is received by First Community by such date;

● state First Community's estimate of the fair value of the shares;

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● state that, if requested in writing, First Community will provide, to the shareholder, within 10 days after the date by which First Community must receive the form, the number of shareholders who returned the form by the specified date and the total number of shares owned by them; and

● state the date by which the notice to withdraw must be received, which date must be within 20 days after the date by which First Community must receive the form.

After receipt of the appraisal notice, you must deliver to First Community a written payment demand and, in the case of certificated shares, deposit your Surrey share certificates with First Community by the date set forth in and in accordance with the terms and conditions of the appraisal notice, and certify whether you acquired beneficial ownership of your shares of Surrey common stock and/or Surrey Class A common stock before the announcement date. Otherwise, you will not be entitled to payment for your shares. Additionally, if you were not the beneficial owner of your shares of Surrey common stock and/or Surrey Class A common stock on the announcement date as set forth in the appraisal notice, First Community may elect to withhold payment. If you deliver a payment demand, certify your beneficial ownership and, and in the case of certificated shares, deposit your share certificates, as required by the appraisal notice, you will lose all rights as a Surrey shareholder to receive the merger consideration, unless you withdraw your payment demand by the date specified in the appraisal notice.

Within 30 days after the form is due, First Community will pay you (provided that you have satisfied all requirements to exercise appraisal rights) the amount First Community estimates to be the fair value of your shares, plus interest accrued to the date of payment. First Community's payment will be accompanied by:

● the annual financial statements of Surrey, which shall be as of a date ending not more than 16 months before the date of payment, or, if such annual financial statements are not available, First Community shall provide reasonably equivalent information;

● the latest available quarterly financial statements of Surrey;

● a statement of First Community's estimate of the fair value of the shares, which estimate must equal or exceed First Community's estimate given in the appraisal notice; and

● a statement of your right to demand further payment if you are not satisfied with the payment and that failure to demand further payment within a specified time will be deemed acceptance of First Community's estimate as full payment.

If you believe that the amount paid by First Community, or the amount of First Community's payment offer, as described above is less than the fair value of your shares of Surrey common stock or Surrey Class A common stock or that the interest due is incorrectly calculated, then you may notify First Community in writing of your own estimate of the fair value of your shares of Surrey common stock or Surrey Class A common stock and may demand payment of your estimate plus interest. A shareholder offered payment who is dissatisfied with that offer must reject the offer and demand payment of the shareholder's estimate of the fair value of the shares plus interest. If you fail to take any such action within the 30 days after First Community makes or offers payment for your shares, you will be deemed to have waived your rights to demand payment and shall be entitled only to the payment of fair value as calculated by First Community.

If you have taken all required actions and your demand for payment remains unsettled, First Community may file a lawsuit within 60 days after receiving the payment demand and petition the Superior Court Division of the General Court of Justice to determine the fair value of the shares and accrued interest. If First Community does not begin the action within the 60-day period, it will pay each shareholder who asserts appraisal rights whose demand remains unsettled the amount demanded. In the court proceeding described above, the court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. In addition, First Community will make all shareholders who assert appraisal rights whose demands remain unsettled parties to the proceeding. Each shareholder who asserts appraisal rights made a party to the proceeding must be served with a copy of the complaint and will be entitled to judgment for the amount, if any, by which the court finds the fair value of his, her or its shares, plus interest, to exceed the amount paid by First Community, or for the value, plus accrued interest, of his, her or its after-acquired shares for which First Community elected to withhold payment.

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The court will determine the cost of any court proceeding, including reasonable compensation and reimbursement of expenses for appraisers appointed by the court. Those costs will be assessed against First Community unless the court determines that some or all of the shareholders who assert appraisal rights acted arbitrarily, vexatiously or not in good faith in demanding payment, in which event the court may assess costs against those shareholders. The court may assess the fees and expenses of experts and counsel against First Community if it finds that it did not substantially comply with the requirements of the statutes, or against any party who acted arbitrarily, vexatiously or not in good faith in asserting or defending against appraisal rights. If the court finds that the services of counsel for any shareholder who asserts appraisal rights were of substantial benefit to other shareholders similarly situated, the court may award counsel fees, to be paid out of the amounts awarded the shareholders who asserted appraisal rights who were benefited. If a shareholder who asserts appraisal rights must bring an action against First Community to require it to pay the amount First Community estimates to be the fair value of the shares plus interest, and the shareholder is successful, the court will assess costs against First Community.

**Board of Directors and Management of First Community Following the Merger**

Under the merger agreement, First Community has agreed, prior to the closing date, to appoint two members of the current board of directors of Surrey, selected by First Community in consultation with Surrey (which we refer to as the "Surrey Designees"), to the board of directors of First Community Bank. First Community has selected Edward C. Ashby, III, and Robert H. Moody, as the Surrey Designees. The directors of First Community holding office immediately prior to the effective time, will continue to serve as the directors of the surviving corporation from and after the effective time of the merger and will hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal.

The executive officers of First Community immediately prior to the effective time of the merger will be the executive officers of the surviving corporation and will hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal.

Information regarding the executive officers and directors of First Community is contained in documents filed by First Community with the SEC and attached as appendices to this proxy statement/prospectus, including First Community's Annual Report on Form 10-K for the year ended December 31, 2021 attached hereto as ***Appendix D*** and its definitive proxy statement on Schedule 14A for its 2022 annual meeting, filed with the SEC on March 16, 2022 and attached hereto as ***Appendix E***. See the section entitled "*Where You Can Find More Information*."

Information regarding the directors of Surrey is included in this proxy statement/prospectus under the section entitled "*Security Ownership of Certain Beneficial Owners and Management of Surrey*" beginning on page [●].

**THE MERGER AGREEMENT**

The following describes certain aspects of the merger, including certain material provisions of the merger agreement. The following description of the merger agreement is subject to, and qualified in its entirety by reference to, the merger agreement, which is attached to this proxy statement/prospectus as ***Appendix A*** and is incorporated by reference into this proxy statement/prospectus. We urge you to read the merger agreement carefully and in its entirety, as it is the legal document governing the merger.

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**Explanatory Note Regarding the Merger Agreement**

The merger agreement and this summary of terms are included to provide you with information regarding the terms of the merger agreement. Factual disclosures about First Community and Surrey contained in this proxy statement/prospectus or in the public reports of First Community filed with the SEC and attached as appendices to this proxy statement/prospectus may supplement, update or modify the factual disclosures about First Community and Surrey contained in the merger agreement. The merger agreement contains representations and warranties by First Community, on the one hand, and by Surrey, on the other hand. The representations, warranties and covenants made in the merger agreement by First Community and Surrey were qualified and subject to important limitations agreed to by First Community and Surrey in connection with negotiating the terms of the merger agreement. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purpose of establishing circumstances in which a party to the merger agreement may have the right not to consummate the merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the merger agreement, rather than establishing matters as facts. The representations and warranties also may be subject to a contractual standard of materiality different from that generally applicable to shareholders and reports and documents filed with the SEC and some were qualified by the matters contained in the confidential disclosure schedules that First Community and Surrey each delivered in connection with the merger agreement and certain documents filed with the SEC. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement/prospectus, may have changed since November 17, 2022.

For the foregoing reasons, the representations and warranties or any descriptions of those provisions should not be read alone or relied upon as characterizations of the actual state of facts or condition of First Community or Surrey or any of their respective subsidiaries or affiliates. Instead, such provisions or descriptions should be read only in conjunction with the other information provided elsewhere in this proxy statement/prospectus or in the documents attached as appendices to this proxy statement/prospectus. See the section entitled "*Where You Can Find More Information*" beginning on page [●].

**Terms of the Merger**

*Effect of the Merger*

Each of the First Community board of directors and the Surrey board of directors has unanimously adopted the merger agreement and approved the merger. Pursuant to the merger agreement, Surrey will merge with and into First Community with First Community surviving the merger as the surviving corporation. We sometimes refer to First Community following the merger as the "surviving corporation." As a result of the merger, there will no longer be any publicly held shares of Surrey common stock or Surrey Class A common stock. Surrey shareholders will participate in the surviving corporation's future earnings and potential growth only through their ownership of First Community common stock. All of the other incidents of direct ownership of Surrey common stock or Surrey Class A common stock, such as the right to vote on certain corporate decisions, to elect directors and to receive dividends and distributions from Surrey, will be extinguished upon completion of the merger but will become analogous rights in First Community. First Community is a Virginia corporation and governed by Virginia law. Surrey is a North Carolina corporation and governed by North Carolina law. Your rights under Virginia law, the First Community articles of incorporation and the First Community bylaws will differ in some respects from your rights under North Carolina law, the Surrey articles of incorporation and the Surrey bylaws. For more detailed information regarding a comparison of your rights as a shareholder of Surrey and First Community, see the section entitled "*Comparison of Shareholders*' *Rights*" beginning on page [●].

From and after the effective time, the surviving corporation will possess all of the properties, rights, privileges, powers and franchises of Surrey and be subject to all debts, liabilities and obligations of Surrey.

*Closing and Effective Time*

On the closing date, the surviving corporation will effect the merger by filing articles of merger with the State Corporation Commission of the Commonwealth of Virginia and the North Carolina Secretary of State. The merger will become effective as of the date and time of filing the articles of merger or, if mutually agreed upon by the parties, at a later time specified in such articles of merger (which we refer to as the "effective time").

The merger will be completed only if all conditions to the merger discussed in this proxy statement/prospectus and set forth in the merger agreement are either satisfied or waived. See the section entitled "*-Conditions to Completion of the Merger*" beginning on page [●]. It currently is anticipated that the completion of the merger will occur in the second quarter of 2023, subject to the receipt of regulatory approvals and other customary closing conditions, but neither Surrey nor First Community can guarantee when or if the merger will be completed.

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*Merger Consideration*

Under the terms of the merger agreement, each share of Surrey common stock and Surrey Class A common stock issued and outstanding immediately prior to the completion of the merger (other than (1) dissenting shares as described below and (2) shares of Surrey common stock and shares of Surrey Class A common stock owned directly or indirectly by Surrey, First Community or their wholly-owned subsidiaries (other than shares of Surrey common stock or Surrey Class A common stock held in a fiduciary capacity or in connection with debts previously contracted) (together, the "excluded shares")) will be converted into the right to receive 0.7159 shares of First Community common stock (which we refer to as the "exchange ratio").

If the shares of common stock of either First Community or Surrey are increased, decreased or changed into or exchanged for a different number or kind of shares or securities before the merger is completed as a result of a stock dividend, stock repurchase, subdivision, reclassification, recapitalization, split, combination, exchange of shares or similar change in capitalization, or if there is any extraordinary dividend or distribution paid, then the merger consideration will be proportionately adjusted to give holders of Surrey common stock and Surrey Class A common stock the same economic effect as contemplated by the merger agreement prior to such event.

*Fractional Shares*

First Community will not issue any fractional shares of First Community common stock in the merger. Instead, a Surrey shareholder who otherwise would have received a fraction of a share of First Community common stock will receive an amount in cash rounded to the nearest whole cent. This cash amount will be determined by multiplying the fraction of a share of First Community common stock to which the holder would otherwise be entitled by the First Community average closing price.

*Treatment of Surrey Restricted Stock Awards*

At the effective time of the merger, referred to as the "effective time," each restricted stock award held by any employee or service provider of Surrey and its subsidiaries under Surrey's 2017 Long-Term Stock Incentive Plan (which we refer to as the "restricted stock plan") that is unvested and subject to restrictions (which we refer to as an "unvested Surrey restricted stock award") shall fully vest in accordance with the terms of the restricted stock plan and the applicable award agreement and shall be canceled and converted automatically into the right to receive the merger consideration payable pursuant to merger agreement on the shares of Surrey common stock underlying the unvested Surrey restricted stock award, treating the shares of Surrey common stock subject to such unvested Surrey restricted stock award in the same manner as all other shares of Surrey common stock for such purposes.

*Conversion of Shares; Exchange of Certificates*

The conversion of Surrey common stock and Surrey Class A common stock into the right to receive the merger consideration will occur automatically at the effective time of the merger. After completion of the merger, the exchange agent will exchange certificates representing shares of Surrey common stock and Surrey Class A common stock or book-entry shares for the merger consideration, with any cash in lieu of fractional shares, and any unpaid dividends and distributions on the First Community common stock deliverable in respect of each share of Surrey common stock and Surrey Class A common stock to be exchanged pursuant to the terms of the merger agreement.

As soon as reasonably practicable after the effective time, the exchange agent will mail appropriate transmittal materials and instructions to those persons who were holders of record of Surrey common stock or Surrey Class A common stock. These materials will contain instructions on how to surrender shares of Surrey common stock and Surrey Class A common stock in exchange for the merger consideration, with any cash in lieu of fractional shares, and any unpaid dividends and distributions on the First Community common stock deliverable in respect of each share of Surrey common stock that the holder is entitled to exchange under the merger agreement.

If a certificate for Surrey common stock or Surrey Class A common stock has been lost, stolen, mutilated or destroyed, the exchange agent will issue the merger consideration, with any cash in lieu of fractional shares, and any unpaid dividends and distributions on the First Community common stock deliverable in respect of each share of Surrey common stock or Surrey Class A common stock upon receipt of (1) an affidavit of that fact by the claimant and (2) such bond as the exchange agent may direct as indemnity against any claim that may be made against it with respect to such lost, stolen, mutilated or destroyed certificate.

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After the effective time of the merger, there will be no further transfers on the stock transfer books of Surrey.

*Withholding*

First Community and the exchange agent will be entitled to deduct and withhold from the merger consideration otherwise payable to any Surrey shareholder such amounts as First Community or the exchange agent, as applicable, is required to deduct and withhold under any applicable federal, state, local or foreign tax law. If any such amounts are withheld, these amounts will be treated for all purposes of the merger agreement as having been paid to the Surrey shareholders from whom they were withheld.

*Dividends and Distributions*

Whenever a dividend or other distribution is declared by First Community on First Community common stock, for which the record date is after the effective time of the merger, the declaration will include dividends or other distributions on all shares of First Community common stock issuable under the merger agreement, but such dividends or other distributions will not be paid to the holder thereof until such holder has duly surrendered or transferred his, her or its Surrey stock certificates or book-entry shares.

*Organizational Documents of the Surviving Corporation*

The articles of incorporation and bylaws of First Community that are in effect immediately prior to the effective time will be the articles of incorporation and bylaws of the surviving corporation.

*Board of Directors*

Prior to the closing date, First Community Bank will appoint the Surrey Designees to the board of directors of First Community Bank. The directors of First Community holding office immediately prior to the effective time will continue to serve as the directors of the surviving corporation from and after the effective time. The directors of First Community Bank holding office immediately prior to the effective time, including the Surrey Designees, will continue to serve as directors of the surviving corporation from and after the effective time.

**Representations and Warranties**

The merger agreement contains customary representations and warranties of First Community and Surrey relating to their respective businesses. The representations and warranties in the merger agreement will not survive the effective time of the merger.

The representations and warranties made by Surrey to First Community relate to a number of matters, including the following:

● corporate matters, including due organization, qualification and the organizational structure;

● capitalization;

● authority relative to execution and delivery of the merger agreement and the absence of conflicts with, violations of, or a default under organizational documents or other obligations as a result of the merger;

● governmental filings and consents necessary to complete the merger;

● the timely filing of regulatory reports;

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● financial statements;

● undisclosed liabilities;

● the absence of any event or action that would, or would reasonably be expected to, constitute a material adverse effect since December 31, 2021;

● litigation matters;

● the absence of regulatory actions;

● compliance with applicable laws;

● tax matters;

● certain material contracts;

● intellectual property and IT systems;

● labor matters;

● employee benefit plans;

● real and personal property;

● receipt of a fairness opinion regarding the merger consideration;

● brokers or financial advisor fees;

● environmental matters;

● loan portfolio matters;

● anti-takeover provisions;

● interests of certain persons in Surrey's business;

● insurance;

● investment securities and derivatives;

● indemnification;

● corporate documents and records;

● Community Reinvestment Act and regulatory compliance matters;

● internal controls;

● tax treatment of the mergers; and

● related party transactions.

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Certain representations and warranties of First Community and Surrey are qualified as to "materiality" or "material adverse effect."

For purposes of the merger agreement, a "material adverse effect" when used in reference to Surrey or First Community, means an effect, circumstance, occurrence or change that, individually or in the aggregate, (1) is material and adverse to the business, financial condition or results of operations of such party and its subsidiaries taken as a whole, or (2) materially prevents, impairs or threatens the ability of such party to perform its obligations under the merger agreement or timely consummate the transactions contemplated by the merger agreement; however in the case of clause (1) of this sentence only, a material adverse effect will not be deemed to include any effect, circumstance, occurrence or change resulting from:

● changes, after November 17, 2022, in laws, rules or regulations, GAAP or regulatory accounting requirements or interpretations thereof that apply to financial and/or depository institutions and/or their holding companies generally, except to the extent that the effects of such changes are materially disproportionately adverse to the business, financial condition or results of operations of such party and its subsidiaries, taken as a whole, as compared to comparable U.S. banking organizations;

● changes, after November 17, 2022, in economic conditions affecting financial institutions generally, including changes in the general level of market interest rates, except to the extent that the effects of such changes are materially disproportionately adverse to the business, financial condition or results of operations of such party and its subsidiaries, taken as a whole, as compared to comparable U.S. banking organizations;

● actions and omissions of First Community or Surrey required under the merger agreement including expenses incurred by the parties in consummating the transactions contemplated by the merger agreement;

● worsening of national or international political or social conditions, including the engagement by the United States in hostilities or the occurrence of any military or terrorist attack upon or within the United States, except to the extent that the effects of such changes are materially disproportionately adverse to the business, financial condition or results of operations of such party and its subsidiaries, taken as a whole, as compared to comparable U.S. banking organizations;

● natural disaster or other force majeure event, except to the extent that the effects of such changes are materially disproportionately adverse to the business, financial condition or results of operations of such party and its subsidiaries, taken as a whole, as compared to comparable U.S. banking organizations; or

● the facts and circumstances giving rise or contributing to failure to meet internal or other estimates, predictions, projections or forecasts of financial performance, except to the extent such facts or circumstances are themselves excepted from the definition of material adverse effect.

**Conduct of Business Pending the Completion of the Merger**

Surrey has agreed that, until the effective time of the merger and unless permitted by First Community, or to the extent required by laws or regulation of any governmental entity, or as expressly contemplated or permitted by the merger agreement or as required by law, it will not and will not permit any of its subsidiaries to:

*General Business*

● conduct its business other than in the ordinary course consistent with past practice;

● fail to use its reasonable best efforts to maintain and preserve intact its business organization, properties, leases, loans, deposit accounts, employees and advantageous business relationships and retain the services of its key employees;

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● take any action that would adversely affect or materially delay the ability to perform its obligations under the merger agreement or to consummate the transactions contemplated by the merger agreement;

*Indebtedness*

● incur, modify, extend or renegotiate any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any person, other than deposits in the ordinary course of business consistent with past practice;

● prepay any indebtedness or other similar arrangements to cause Surrey to incur any prepayment penalty;

● purchase any brokered certificates of deposit;

*Capital Stock*

● adjust, split, combine or reclassify its capital stock;

● make, declare or pay any dividends or make any other distribution on its capital stock;

● grant any person any right to acquire any shares of its capital stock or make any grant or award under the Surrey restricted stock plan;

● issue any additional shares of capital stock or any securities or obligations convertible or exercisable for any shares of its capital stock;

● redeem or otherwise acquire any shares of its capital stock other than a security interest or because of the enforcement of a security interest and other than provided in the merger agreement;

*Dispositions* 

● other than in the ordinary course of business consistent with past practice (including the sale, transfer or disposal of other real estate owned (which we refer to as "OREO") if the loan associated with the OREO is $100,000 or more or the proposed sale, transfer or disposal would result in a discount of the loan associated with the OREO of 25% or more), sell, transfer, mortgage, encumber or otherwise dispose of any of its real property or other assets to any person other than to its subsidiary, or cancel, release or assign any indebtedness to any such person or claims to any such person;

*Investments*

● make any equity investment, either by purchase of securities, contributions to capital, property transfers, or purchase of any property or assets of any other person, or form any new subsidiary;

*Contracts*

● renew, amend or terminate any material contract, make any change in its material contracts or enter into any contract that would constitute a material contract under the merger agreement;

*Loans*

● except for loans or commitments for loans that have previously been approved by Surrey prior to November 17, 2022, make, renegotiate, renew, increase the amount of, extend the term of, modify or purchase any loans, or make any commitment in respect of any of the foregoing, except with respect to any secured loan or commitment (in either case that does not involve a guaranty from a governmental entity, including, but not limited to the USDA or SBA) wherein the total credit exposure is less than $2,000,000 or any unsecured loan or commitment (in either case that does not involve a guaranty from a governmental entity, including, but not limited to the USDA or SBA) wherein the total credit exposure is less than $350,000 which is made in conformity with existing lending practices to a borrower, and with collateral located within Surrey's primary geographic service area;

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● make any new loan, or commit to make any new loan, to any director or executive officer of Surrey, Surrey Bank & Trust or related entity, or, amend, renew or increase any existing loan, or commit to do so, with any director or executive officer of Surrey, Surrey Bank & Trust or related entity, in either case, without first consulting with First Community, where such loan, commitment, modification or renewal would require prior approval by the Surrey's Board of Directors pursuant to the policies of the Surrey or Surrey Bank & Trust or applicable law;

*Benefit Plans*

● except as required by any Surrey benefit plan in effect on November 17, 2022, (1) increase the compensation or benefits payable to any employee or director, (2) pay, or commit to pay, any bonus, change in control, retention, pension, retirement allowance or contribution, except for payment of annual cash bonuses in respect of the fiscal year in effect as of November 17, 2022 in the ordinary course of business consistent with past practice, or (3) fund any rabbi trust or similar arrangement;

● except as required by any Surrey benefit plan in effect on November 17, 2022, become a party to, renew or amend any employee benefit, compensation plan, employment severance, or change in control agreement, except for amendments that are required by law;

● except as required by any Surrey benefit plan in effect on November 17, 2022, amend, modify or revise the terms of any outstanding Surrey stock option or stock-based compensation or voluntarily accelerate the vesting of, or the lapsing of restrictions with respect to, any Surrey stock-based compensation; or make any contributions to any defined contribution plan or Surrey benefit plan that are not made in the ordinary course of business consistent with past practice;

● except as required by any Surrey benefit plan in effect on November 17, 2022, elect to any office with the title of vice president or higher any person who does not hold such office as of November 17, 2022 or nominate to the Surrey board of directors any person who is not a member as of November 17, 2022;

● except as required by any Surrey benefit plan in effect on November 17, 2022, hire or terminate any employee with an annualized salary that exceeds $50,000, other than terminations for "cause";

*Litigation and Settlement*

● commence any action or proceeding other than to enforce any obligation owed to Surrey and in accordance with past practice, or settle any claim, action or proceeding against it involving payment of money damages in excess of $50,000 that would not impose any material restrictions on Surrey's operations;

*Governing Documents*

● amend the governing documents of Surrey or its subsidiaries;

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*Deposits*

● increase or decrease the rate of interest paid on time deposits or on certificates of deposit, except in the ordinary course of business consistent with past practice;

*Debt Security*

● purchase any debt security, including mortgage-backed and mortgage- related securities, other than U.S. government and U.S. government agency securities with final maturities of less than two years;

*Capital Expenditures*

● make any capital expenditures in excess of $50,000 other than existing binding commitments as of November 17, 2022 and ordinary course immaterial expenditures reasonably necessary to maintain existing assets in good repair;

*Branches*

● establish or commit to establish any new branch office or file any application to relocate or terminate any banking office;

*Futures and Similar Financial Actions*

● enter into any futures contract, option, swap agreement, interest rate cap, interest rate floor, interest rate exchange agreement, or take any other action for purposes of hedging the exposure of its interest-earning assets or interest-bearing liabilities to changes to market rates of interest;

*Policies*

● make any changes in policies in any material respect in existence on November 17, 2022 with regard to: the extension of credit, or the establishment of reserves with respect to possible loss thereon or the charge off of losses incurred thereon; investments; asset/liability management; deposit pricing or gathering; underwriting, pricing, originating, acquiring, selling, servicing or buying or selling rights to service, loans; its hedging practices and policies; or other material banking policies, in each case except as may be required by changes in applicable law or regulations, GAAP, or at the direction of a governmental entity;

*Communications*

● except as required by law or for communications in the ordinary course of business consistent with past practice that do not relate to the merger: (1) issue any communication of a general nature to employees without prior consultation with First Community and, to the extent related to employment, benefit or compensation information addressed in the merger agreement or related to the transactions contemplated by the merger agreements, without the prior consent of First Community; or (2) issue any communication of a general nature to customers without the prior approval of First Community;

*Environmental Assessments*

● except with respect to foreclosures in process as of November 17, 2022, foreclose upon or take a deed or title to any commercial real estate (1) without providing prior notice to First Community, if requested by First Community, and conducting a Phase I environmental assessment of the property, or (2) if the Phase I environmental assessment reflects the presence of any hazardous material or underground storage tank;

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*Taxes*

● make, change or rescind any material tax election concerning Surrey's taxes or tax returns, change an annual tax accounting period, adopt or change any material tax accounting method, file any amended tax return, settle any material tax claim or assessment or surrender any right to claim a tax refund;

*Accounting*

● implement or adopt any change in its accounting principles, practices or methods, other than as may be required by GAAP or regulatory guidelines;

*New Lines of Business*

● enter into any new lines of business;

*Mortgage Loan Servicing*

● purchase or sell any mortgage loan servicing rights other than in the ordinary course of business consistent with past practice;

*Merger or Liquidation*

● merge or consolidate Surrey Bank & Trust or any subsidiary with any other person or restructure, reorganize or completely or partially liquidate or dissolve itself or any of its subsidiaries;

*Tax-Free Reorganization*

● knowingly take action that would prevent or impede the merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code;

*Other Agreements*

● take any action that is intended or would reasonably be likely to result in any of Surrey's representations and warranties set forth in the merger agreement being or becoming untrue in any material respect at any time prior to the effective time, or in any of the closing conditions not being satisfied or in a violation of any provision of the merger agreement; or

● agree to take, commit to take or adopt any resolutions in support of any of the actions prohibited by the section in the merger agreement governing Surrey's conduct of business until the completion of the merger.

First Community has agreed that, until the effective time of the merger and unless permitted by Surrey, or to the extent required by laws or regulations of any governmental entity, or as expressly contemplated or permitted by the merger agreement or as required by law, it will not and will not permit any of its subsidiaries to:

● conduct its business other than in the ordinary course consistent with past practice;

● fail to use its reasonable best efforts to maintain and preserve intact its business organization, properties, leases, employees and advantageous business relationships and retain the services of its key employees;

● take any action that would adversely affect or materially delay the ability to perform its obligations under the merger agreement or to consummate the transactions contemplated by the merger agreement, including causing any other application to a bank governmental entity for approval of a merger to be submitted for filing before the application related to the merger is filed with such bank governmental entity;

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● take any action that is intended or expected to result in any of First Community's representations and warranties set forth in the merger agreement being or becoming untrue in any material respect at any time prior to the effective time, or in any of the closing conditions not being satisfied or in a violation of any provision of the merger agreement;

● knowingly take any action that would prevent or impede the merger from qualifying as reorganization under the Code;

● amend or repeal its articles of incorporation or bylaws in a manner that would adversely affect Surrey or any Surrey shareholder relative to other holders of First Community common stock or the transactions contemplated by the merger agreement; or

● agree to take, commit to take or adopt any resolutions in support of any of the actions prohibited by the section in the merger agreement governing First Community's conduct of business until the completion of the merger.

**Regulatory Matters**

First Community and Surrey will use their reasonable best efforts to take promptly all actions and to do promptly all things necessary, proper or advisable, under applicable laws and regulations, to consummate and make effective the transactions contemplated by the merger agreement. First Community and Surrey have filed all necessary applications, notices and other filings with any governmental entity, the approval of which is required to complete the merger and related transactions. However, in no event will First Community be required, or will Surrey and its subsidiaries be permitted (without First Community's prior written consent), to agree to any condition or restriction that would so materially and adversely impact the economic or business benefits to First Community of the transactions contemplated by the merger agreement that, had such condition or requirement been known, First Community would not, in its reasonable judgment, have entered into the merger agreement (we refer to such condition as a "burdensome condition"). First Community and Surrey have also agreed to furnish each other with all information reasonably necessary or advisable in connection with any statement, filing, notice or application in connection with the transactions contemplated by the merger agreement.

**Employee Benefits Matters** 

At the sole discretion of First Community, First Community may maintain Surrey's health and welfare plans for employees of Surrey and its subsidiaries immediately before the effective time and whose employment is not terminated before the effective time (which we refer to as "Surrey continuing employees") through the end of the calendar year in which the effective time occurs.

Notwithstanding the foregoing, if First Community determines to terminate one or more of Surrey's health and/or other welfare plans, then, at the request of First Community, made at least 30 days before the effective time, Surrey or its subsidiaries shall adopt resolutions, to the extent required, providing that Surrey's applicable health and welfare plans will be terminated effective immediately before the effective time (or such later date as requested by First Community in writing or as may be required to comply with any applicable advance notice or other requirements contained in such plans or provided for by law) and shall arrange for termination of all corresponding insurance policies, service agreements and related arrangements effective on the same date to the extent not prohibited by the terms of the arrangements or applicable law.

No coverage of any of the Surrey continuing employees or their dependents shall terminate under any of Surrey's health and welfare plans before the time the Surrey continuing employees or their dependents, as applicable, become eligible to participate in the health and welfare plans, programs and benefits common to similarly-situated employees of First Community and its subsidiaries and their dependents and, consequently, no Surrey continuing employee shall experience a gap in coverage.

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Subject to the terms of the merger agreement, Surrey continuing employees shall, if applicable, be subject to the employment terms, conditions and rules applicable to other similarly situated employees of First Community. First Community shall use commercially reasonable efforts to ensure that Surrey continuing employees who become covered under health and welfare plans, programs and benefits of First Community or any of its subsidiaries shall (i) receive credit for any co-payments and deductibles paid under Surrey's health and welfare plans for the plan year in which coverage commences under First Community's health and welfare plans and (ii) shall not be subject to any pre-existing conditions under any such plans or arrangements, in each case, to the same extent as applied under Surrey's health and welfare plans immediately prior to the effective time. Surrey employees who are not Surrey continuing employees and their qualified beneficiaries will have the right to continued coverage under group health plans of First Community only in accordance with COBRA.

The merger agreement provides that all Surrey and Surrey Bank & Trust employees whose employment is eliminated as a result of the bank merger, except for employees with individual agreements that provide for payment of severance under certain circumstances (which we refer to as "affected Surrey employees") will be eligible to participate in First Community Bank's severance policy (which we refer to as the "First Community Bank severance policy"). The First Community Bank severance policy applies to all full-time and part-time employees.

The standard severance benefit for each affected Surrey employee is two weeks of base pay and payment of all accrued but unused vacation. An additional tier of enhanced severance benefits may be available to affected Surrey employees who timely sign (and do not revoke) a severance agreement and waiver, which will describe in detail the benefits to be provided and will also include a release of all claims that might exist. Affected Surrey employees who timely sign (and do not revoke) a severance agreement and waiver may receive two forms of additional benefits. First, the eligible affected Surrey employee will receive an additional severance payment that is based upon length of service with Surrey. Part-time employees will receive severance pay on a pro-rated scale in accordance with their regularly scheduled hours.

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| | |
|:---|:---|
| &nbsp;&nbsp; Length of Service<br>| &nbsp;&nbsp; Severance Period |
| &nbsp;&nbsp; Five years or less<br>| &nbsp;&nbsp; 2 weeks |
| &nbsp;&nbsp; Six to nineteen years<br>| &nbsp;&nbsp; 1 week per year |
| &nbsp;&nbsp; Twenty or more years<br>| &nbsp;&nbsp; 24 weeks |

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All severance payments will be subject to all required federal and state payroll taxes and will be paid over the duration of the severance period unless the affected Surrey employee requests to receive a lump sum. Second, if the affected employee is a participant in the group health and dental insurance plans, the enhanced severance benefit also includes an extension of existing health insurance (provided the affected employee agrees to withholding of the employee portion of the insurance premium from the severance pay), for the applicable severance period or partial payment of the premium associated with the continuation of such coverage under COBRA, all subject to certain additional terms and conditions set forth in the First Community severance policy.

First Community and Surrey may jointly elect, in amounts mutually satisfactory to First Community and Surrey, to enter into retention bonus agreements with key employees of Surrey, with an aggregate bonus pool of up to $200,000.00. No retention bonus payment will be made that would constitute an "excess parachute payment" within the meaning of Section 280G of the Code.

First Community will credit continuing Surrey's employees for their service with Surrey under First Community's benefit plans for purposes of eligibility and vesting (but not benefit accrual) to the same extent such service was credited under Surrey's benefit plans, except that First Community will not credit continuing Surrey employees for service (1) to the extent it would result in a duplication of benefits under First Community benefit plans, (2) to the extent accrued but unused vacation is paid to Surrey's employees at the effective time, (3) if similarly situated employees of First Community do not receive service credit under First Community benefit plans, or (4) with respect to any First Community benefit plan which is grandfathered or frozen.

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With respect to First Community's health and welfare plans, First Community will use commercially reasonable efforts to ensure that continuing Surrey employees who become covered under First Community's health and welfare plans will (1) receive credit for co-payments and deductibles paid under Surrey's health and welfare plans for the plan year in which such continuing Surrey employee commences participating in First Community's health and welfare plans and (2) not be subject to any pre-existing conditions under First Community's health and welfare plans, in each case, to the same extent as applied under Surrey's health and welfare plans immediately prior to the effective time.

If requested by First Community at least 60 days in advance of the effective time, the Surrey Bank & Trust 401(k) Contributory Savings Plan will terminate immediately prior to the effective time.

**Dividends**

First Community and Surrey shall coordinate with each other regarding the declaration, setting of record dates, and payment dates of dividends with respect to shares of Surrey common stock, Surrey Class A common stock and First Community common stock.

**Loan Program Credentialing**

First Community and Surrey have agreed to cooperate with one another and exercise reasonable best efforts to qualify First Community Bank with the SBA, USDA and any other lending program of a governmental entity in which Surrey Bank & Trust participates as of November 17, 2022 so that First Community Bank may participate in any such programs after the effective time.

**Director and Officer Indemnification and Insurance**

The merger agreement provides that from and after the completion of the merger, First Community will indemnify and hold harmless all current and former directors and officers of Surrey or any of its subsidiaries against all liabilities arising out of the fact that such person is or was a director or officer of Surrey or any of its subsidiaries if the claim is based in or arises out of any matter of fact existing or occurring at or before the effective time of the merger (including the merger and the other transactions contemplated by the merger agreement), regardless of whether such claims are asserted before or after the effective time, to the fullest extent such person would have been indemnified under Surrey's articles of incorporation and bylaws as in effect on November 17, 2022 and as permitted by applicable law.

The merger agreement requires First Community to maintain for a period of six years following the effective time of the merger Surreys' currently existing directors and officers liability insurance policy, or policies of at least the same coverage and amounts and containing terms and conditions that are no less favorable in any material respect to the insured persons than the existing policy, with respect to claims arising from facts or events that occurred prior to the completion of the merger, and covering such individuals who are currently covered by such insurance. However, First Community is not required to spend in the aggregate an amount more than 200% of the annual premium payment on Surrey's current directors' and officers' liability insurance policy (which we refer to as the "premium cap"). If First Community is unable to maintain a policy as described for less than that amount, First Community will obtain as much comparable insurance as is available for that amount. In lieu of such a policy, after consultation with First Community, Surrey may (1) substitute a six-year "tail" prepaid policy with terms no less favorable in any material respect to the indemnified parties than Surrey's existing policy as of November 17, 2022 or (2) obtain extended coverage for the six-year period under Surrey's existing insurance programs, in either case, to the extent that such policy coverage may be obtained for an aggregate amount of not more than the premium cap. If First Community (or any of its successors or assigns) merges with another person and is not the continuing entity, or if First Community transfers or conveys all or substantially all of its properties or assets to another person, then First Community will ensure that its successors and assigns assume First Community's indemnification and insurance obligations.

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**Surrey Shareholder Meeting and Recommendation of the Surrey Board of Directors**

Surrey has agreed to hold a special meeting of its shareholders for the purpose of voting upon approval of the merger agreement as promptly as practicable. Among other things, Surrey will (1) through its board of directors, recommend that its common shareholders and Class A common shareholders approve the merger agreement and (2) use its reasonable best efforts to obtain from its shareholders the requisite shareholder approval of the merger agreement.

Notwithstanding the foregoing, before the Surrey shareholder approval is obtained, the Surrey board of directors may withdraw or modify or change in a manner adverse to First Community its recommendation (which we refer to as a "change in company recommendation") if: (1) the Surrey board of directors concludes in good faith (after consultation with its outside legal advisors) that the failure to do so would be reasonably likely to result in a violation of its fiduciary duties under applicable law; (2) Surrey has complied in all material respects with its non-solicitation obligations described below; and (3) Surrey has provided First Community at least three business days' prior written notice of the intention of the Surrey board of directors to take such action. In addition, the Surrey board of directors may make a change in company recommendation relating to an acquisition proposal only if (1) during the three business day period following Surrey's delivery of written notice to First Community, Surrey has considered any adjustments or modifications to the merger agreement proposed by First Community and engaged in good faith discussions with First Community regarding such adjustments or modifications, and (2) at the end of such period, the Surrey board of directors nevertheless determines in good faith (after consultation with its outside legal counsel, and taking into account any proposals, amendments or modifications made or agreed to by First Community) that the acquisition proposal continues to constitute a superior proposal. In the event there is an amendment to any material term of the acquisition proposal, Surrey is also required to notify First Community of the amendment and to consider any proposed adjustments or modifications to the merger agreement proposed by First Community, but the notification and proposal period described in the preceding sentence will be two business days instead of three business days.

**Agreement Not to Solicit Other Offers**

From November 17, 2022 until the effective time of the merger, Surrey will not, and will not authorize or permit any of its subsidiaries or any of its subsidiaries' officers, directors, employees, and any investment banker, financial advisor, attorney, accountant or other representative, directly or indirectly: (1) solicit, initiate, induce or knowingly encourage, or knowingly take any action to facilitate, any inquiries, offers, discussions or the making of any proposal that constitutes or could reasonably be expected to lead to, an acquisition proposal by a third party; (2) furnish any confidential or non-public information regarding Surrey, or afford access to any such information or data, to any person in connection with or in response to an acquisition proposal by a third party or an inquiry or indication of interest that could reasonably be expected to lead to such an acquisition proposal; (3) continue or otherwise participate in any discussions or negotiations, or otherwise communicate in any way with any person other than First Community, regarding an acquisition proposal by a third party; (4) approve, endorse or recommend any acquisition proposal by a third party; (5) release any person from, waive any provisions of, or fail to use its reasonable best efforts to enforce any confidentiality agreement or standstill agreement to which Surrey is a party; or (6) enter into or consummate any agreement, agreement in principle, letter of intent, arrangement or understanding contemplating any acquisition proposal by a third party or requiring Surrey to abandon, terminate or fail to consummate the transactions contemplated by the merger agreement.

An "acquisition proposal" is a proposal that could lead to any of the following transactions:

● any merger, consolidation, share exchange, business combination or other similar transaction involving Surrey or its subsidiaries;

● any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more of the consolidated assets of Surrey in a single transaction or series of transactions;

● any tender offer or exchange offer for 20% or more of the outstanding shares of Surrey capital stock or the filing of a registration statement under the Securities Act in connection therewith;

● any transaction that is similar in form, substance or purpose to any of the foregoing transactions; or

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● any public announcement, notice or regulatory filing or a proposal, plan or intention to do any of the foregoing transactions or any agreement to engage in any of the foregoing transactions.

Surrey will be responsible for any violation of the non-solicitation obligations set forth in the merger agreement by its representatives.

However, Surrey and its representatives may, before the Surrey shareholder approval is obtained, engage in discussions and negotiations with, or provide any nonpublic information or data to, a third party in response to an unsolicited bona fide written acquisition proposal by such person if (1) the Surrey board of directors determines in its good faith, after consultation with its outside legal counsel, that the acquisition proposal constitutes or is reasonably likely to lead to a superior proposal, (2) Surrey is not then in breach of its non-solicitation obligations (as described above), (3) the Surrey board of directors determines in its good faith, after consultation with its outside legal counsel, that the failure to take such action would reasonably be expected to violate the directors' fiduciary obligations to Surrey shareholders under applicable law, (4) before taking such action Surrey provides written notice to First Community and enters into a confidentiality agreement having provisions that are no more favorable to such person than the confidentiality agreement between First Community and Surrey is to First Community and (5) Surrey substantially concurrently provides to First Community any information furnished to such third party that was not previously provided to First Community. Other than the confidentiality agreement described in the prior sentence, during the term of the merger agreement, Surrey will not, and will cause its subsidiaries and its and their representatives not to on its behalf, enter into any definitive transaction agreement relating to any acquisition proposal.

As used in the merger agreement, a "superior proposal" is an unsolicited, bona fide written offer or proposal made by a third party to consummate an acquisition proposal that: (1) the Surrey board of directors determines in good faith, after consulting with its outside legal counsel and its financial advisor, would, if consummated, result in a transaction that is more favorable to the Surrey shareholders than the transactions contemplated by the merger agreement (taking into account all factors relating to such proposed transaction deemed relevant by the Surrey board of directors and any adjustments to the terms and conditions of such transactions proposed by First Community in response to such acquisition proposal); (2) is for 100% of the outstanding shares of Surrey common stock and Surrey Class A common stock or all or substantially all of the assets of Surrey; and (3) is reasonably likely to be completed on the terms proposed, in each case taking into account all legal, financial, regulatory and other aspects of such acquisition proposal.

If Surrey receives an acquisition proposal or information request from a third party or enters into negotiations with a third party regarding a superior proposal, Surrey must notify First Community orally within one business day, and within two business days in writing, of the receipt of the acquisition proposal or information request and provide First Community with information about the third party and its proposal or information request. Surrey will keep First Community informed of any developments of any such acquisition proposals orally within one calendar day, and within two days in writing.

Finally, Surrey has agreed to cease immediately and terminate any and all existing activities, discussions or negotiations with any third parties with respect to any acquisition proposal or alternative transaction or similar transaction, and terminate access to all non-public information furnished by or on behalf of Surrey to third parties.

**Conditions to Completion of the Merger**

First Community's and Surrey's respective obligations to complete the merger are subject to the fulfillment or waiver of the following conditions:

● the approval of the merger agreement by holders of Surrey common stock and holders of Surrey Class A common stock;

● receipt of all required regulatory approvals, consents or waivers to permit the consummation of the transactions contemplated by the merger agreement, and the expiration or termination of all statutory waiting periods;

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● the absence of any order, decree, injunction or proceeding by any governmental entity of competent jurisdiction prohibiting or enjoining the consummation of the merger or the bank merger, and the absence of any statute, rule or regulation that prohibits or makes illegal the consummation of the merger or the bank merger;

● the effectiveness of the registration statement of which this proxy statement/prospectus is a part with respect to the First Community common stock to be issued upon the consummation of the merger under the Securities Act, and the absence of any proceedings pending or threatened by the SEC to suspend the effectiveness of the registration statement;

● the authorization of the listing of the First Community common stock to be issued upon the consummation of the merger on NASDAQ, without objection to the listing from NASDAQ;

● receipt by each of First Community and Surrey of an opinion of its respective legal counsel as to certain tax matters;

● the accuracy of the representations and warranties of each other party in the merger agreement as of November 17, 2022 and as of the closing date as though made at and as of the closing date, subject to the materiality standards provided in the merger agreement (and the receipt by each party of certificates from the other party to such effect);

● the performance by the other party in all material respects of all obligations required to be performed by it at or prior to the effective time of the merger under the merger agreement (and the receipt by each party of certificates from the other party to such effect); and

● the absence of a material adverse effect on the other party.

In addition, First Community's obligation to complete the merger is subject to the following conditions:

● none of the requisite governmental approvals will contain a requirement or condition that would so materially and adversely impact the economic or business benefits of the merger or the bank merger to First Community that, had such requirement or condition been known, First Community would not have entered into the merger agreement;

● Edward C. Ashby, III shall have entered into a consulting agreement with First Community and shall have not taken any action to cancel or terminate such agreement; and

● First Community Bank shall have been qualified with the SBA, USDA and any other lending program of a governmental entity in which Surrey Bank & Trust participates as of November 17, 2022.

Neither Surrey nor First Community can provide assurance as to when or if all of the conditions to the merger can or will be satisfied or waived by the appropriate party. As of the date of this proxy statement/prospectus, neither Surrey nor First Community has reason to believe that any of these conditions will not be satisfied.

**Termination of the Merger Agreement**

The merger agreement can be terminated at any time prior to completion of the merger by mutual consent, or by either party in the following circumstances:

● Surrey shareholders do not approve the merger agreement at the Surrey special meeting, except that this right to terminate is only available to Surrey if it has materially complied with its obligation to use reasonable best efforts to obtain the Surrey shareholders' approval;

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● any required regulatory approval has been denied and such denial has become final and non-appealable, or a governmental authority or court has issued a final, unappealable order permanently prohibiting consummation of the transactions contemplated by the merger agreement, unless the failure to obtain the requisite approval was due to the failure of the party seeking to terminate the merger agreement to perform or observe the covenants and agreements in the merger agreement;

● the merger has not been consummated by July 31, 2023 (which we refer to as the "outside date"), except that this right to terminate will not be available to the party whose failure to perform or observe the covenants and agreements in the merger agreement is the reason for the failure to complete the merger by the outside date; or

● there is a breach by the other party of any covenant or agreement contained in the merger agreement, or any representation or warranty of the other party becomes untrue, in each case such that the conditions to closing would not be satisfied and such breach or untrue representation or warranty has not been or cannot be cured by the earlier of the outside date or within 30 days after the giving of written notice to such party of such breach, except that this right to terminate will not be available to the party seeking to terminate if it is then in material breach of the merger agreement.

First Community may also terminate the merger agreement if:

● Surrey breaches in any material respect its obligations not to solicit other acquisition proposals, or its obligation to submit the merger agreement to Surrey shareholders for approval and to use reasonable best efforts to obtain the Surrey shareholders' approval; or

● if the Surrey board of directors does not unanimously publicly recommend in this proxy statement/prospectus that Surrey shareholders approve the merger agreement or withdraws or revises its recommendation in a manner adverse to First Community.

Surrey may also terminate the merger agreement if, within the five-day period following the determination date, both of the following conditions are satisfied:

● the First Community average closing price (which is the average of the closing sales price of First Community common stock reported on NASDAQ over the 30 consecutive trading days ending on the later of (A) the date on which the last regulatory approval necessary is received (disregarding any waiting period) or (B) the date on which the Surrey shareholders approve the merger (which we refer to as the "determination date")) is less than $27.14; and

● the ratio, the numerator of which is the First Community average closing price and the denominator which is $31.93 is less than 85% of the index ratio calculated by dividing the average of closing price for the NASDAQ Bank Index for the 30 consecutive trading days ending on the trading date immediately prior to the determination date by $4,269.44.

However, if Surrey chooses to exercise this termination right, First Community has the option, within five days of receipt of notice from Surrey, to increase the exchange ratio or pay an additional cash payment with respect to each share of Surrey common stock and Surrey Class A common stock as part of the merger consideration and prevent termination under this provision.

**Termination Fee**

Surrey will pay First Community a $4.0 million termination fee if the merger agreement is terminated in the following circumstances:

● First Community terminates the merger agreement because (1) Surrey breaches its obligations in any material respect regarding the solicitation of other acquisition proposals or submission of the merger agreement to Surrey shareholders or (2) the Surrey board of directors does not unanimously publicly recommend in this proxy statement/prospectus that Surrey shareholders approve the merger agreement or withdraws or revises its recommendation in a manner adverse to First Community; or

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● if (1) the merger agreement is terminated (A) by either party because the Surrey shareholder approval has not been obtained at the Surrey shareholders' meeting or (B) by either party because the merger has not occurred by the outside date and Surrey shareholder approval has not been obtained or (C) by First Community because of an uncured material breach by Surrey, (2) an acquisition proposal has been publicly announced or communicated and (3) within 12 months of such termination Surrey consummates or enters into an agreement with respect to an acquisition proposal (whether or not it is the same acquisition proposal).

**Effect of Termination**

If the merger agreement is terminated, it will become void, except that both First Community and Surrey will remain liable for any fraud or willful and material breach of the merger agreement and designated provisions of the merger agreement will survive the termination, including those relating to payment of fees and expenses and the confidential treatment of information.

**Expenses and Fees**

Except as set forth above, each of First Community and Surrey will be responsible for all costs and expenses incurred by it in connection with the negotiation and completion of the transactions contemplated by the merger agreement.

**Amendment, Waiver and Extension of the Merger Agreement**

Before the effective time of the merger, First Community and Surrey may agree to waive, amend or modify any provision of the merger agreement. However, after the vote by Surrey shareholders, First Community and Surrey can make no amendment or modification that would reduce the amount or alter or change the kind of consideration to be received by Surrey shareholders or that would contravene any provisions of the Virginia Stock Corporation Act and the NCBCA, as amended or applicable state and federal banking laws, rules and regulations.

**Surrey Voting Agreements**

A total of [●] shares of Surrey common stock, representing approximately [●]% of the outstanding shares of Surrey common stock entitled to vote at the Surrey special meeting and [●] shares of Surrey Class A common stock, representing [●]% of the outstanding shares of Surrey Class A common stock entitled to vote at the Surrey special meeting, are subject to the Surrey voting agreements. Pursuant to the Surrey voting agreements, each Surrey director has agreed to, on the terms and subject to the conditions set forth therein, vote the shares of Surrey common stock and Class A common stock as applicable, beneficially owned by him or her in favor of the merger agreement and against any proposal made in competition with the merger, as well as certain other customary restrictions with respect to the voting and transfer of his or her shares of Surrey common stock and Class A common stock.

The foregoing description of the Surrey voting agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the Surrey voting agreements, a form of which is included as Exhibit A to the merger agreement attached to this proxy statement/prospectus as ***Appendix A***.

**ACCOUNTING TREATMENT**

The accounting principles applicable to this transaction as described in FASB ASC 805-10-05-01 provide transactions that represent business combinations are to be accounted for under the acquisition method. The acquisition method requires all of the following steps: (1) identifying the acquiror; (2) determining the acquisition date; (3) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; and (4) recognizing and measuring goodwill or a gain from a bargain purchase.

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The appropriate accounting treatment for this transaction is as a business combination under the acquisition method. On the acquisition date, as defined by ASC 805, First Community (the acquiror) will record at fair value the identifiable assets acquired and liabilities assumed, any noncontrolling interest, and goodwill (or a gain from a bargain purchase). The results of operations for the combined company will be reported prospectively after the acquisition date.

**MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER**

Subject to the limitations, assumptions and qualifications described herein, the following discussion and legal conclusions contained herein constitute and represent the opinion of Bowles Rice LLP, counsel to First Community, as to the anticipated material U.S. federal income tax consequences of the merger to "U.S. holders" (as defined below) of Surrey common stock and of Surrey Class A common stock that exchange their respective shares of Surrey stock for the merger consideration in the merger. The following discussion is based upon the Code, the U.S. Treasury regulations promulgated thereunder and judicial authorities, rulings and decisions, all as in effect as of the date of this proxy statement/prospectus. These authorities may change, possibly with retroactive effect, and any such change could affect the accuracy of the statements and conclusions set forth in this discussion. This discussion does not address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, any withholding considerations under the Foreign Account Tax Compliance Act of 2010 (including the U.S. Treasury Regulations issued thereunder and intergovernmental agreements entered into pursuant thereto or in connection therewith) nor does it address any tax consequences arising under the laws of any state, local or foreign jurisdiction, or under any U.S. federal laws other than those pertaining to the income tax.

The following discussion applies only to U.S. holders of Surrey common stock and Surrey Class A common stock who hold such shares as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). Further, this discussion does not purport to consider all aspects of U.S. federal income taxation that might be relevant to U.S. holders in light of their particular circumstances and does not apply to holders subject to special treatment under the U.S. federal income tax laws (such as, without limitation, dealers or brokers in securities, commodities or foreign currencies; traders in securities that elect to apply a mark-to-market method of accounting; banks and certain other financial institutions; insurance companies; mutual funds; tax-exempt organizations; holders subject to the alternative minimum tax provisions of the Code; persons who are required to recognize income or gain with respect to the merger no later than such income or gain is required to be reported on an applicable financial statement under Section 451(b) of the Code; partnerships, S corporations or other pass-through entities (or investors therein); regulated investment companies; real estate investment trusts; controlled foreign corporations or passive foreign investment companies; former citizens or residents of the United States; U.S. expatriates; U.S. holders whose functional currency is not the U.S. dollar; holders who hold shares of Surrey common stock or Surrey Class A common stock as part of a hedge, straddle, constructive sale or conversion transaction or other integrated investment; holders who acquired Surrey common stock or Surrey Class A common stock through a tax qualified retirement plan or otherwise as compensation; holders who exercise appraisal rights; or holders who actually or constructively own more than 5% of Surrey's voting stock).

For purposes of this discussion, the term "U.S. holder" means a beneficial owner of Surrey common stock or Surrey Class A common stock that is, for U.S. federal income tax purposes, (1) an individual citizen or resident of the United States, (2) a corporation, or entity treated as a corporation for U.S. federal income tax purposes, organized in or under the laws of the United States, any state thereof or the District of Columbia, (3) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) such trust has made a valid election to be treated as a U.S. person for U.S. federal income tax purposes or (4) an estate, the income of which is includible in gross income for U.S. federal income tax purposes, regardless of its source.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes is a holder of Surrey common stock or Surrey Class A common stock, the tax treatment of a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. Any entity treated as a partnership for U.S. federal income tax purposes that is a holder of Surrey common stock or Surrey Class A common stock, and any partners in such partnership, should consult their tax advisors regarding the tax consequences of the merger to their specific circumstances.

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**Determining the actual tax consequences of the merger to you may be complex and will depend on your specific situation and on factors that are not within our control. All holders of Surrey common stock or Surrey Class A common stock should consult their tax advisors regarding the specific tax consequences to them of the merger in light of their particular facts and circumstances, including the applicability and effect of the alternative minimum tax and any state, local, foreign and other tax laws and of changes in those laws.**

**Tax Consequences of the Merger Generally**

The merger will qualify as a "reorganization" under Section 368(a) of the Code for U.S. federal income tax purposes. It is a condition to the obligation of First Community to complete the merger that First Community receive an opinion from Bowles Rice LLP, counsel to First Community, in form reasonably satisfactory to such recipient, dated as of the closing date, to the effect that the merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Code. It is a condition to the obligation of Surrey to complete the merger that Surrey receive an opinion from Brooks, Pierce, McLendon, Humphrey & Leonard LLP, counsel to Surrey, in form reasonably satisfactory to such recipient, dated as of the closing date, to the effect that the merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Code. Neither First Community nor Surrey currently intends to waive this opinion condition to its obligation to consummate the merger. If either First Community or Surrey waives this opinion condition after this registration statement is declared effective by the SEC, and if the tax consequences of the merger to Surrey shareholders have materially changed, First Community and Surrey will recirculate appropriate soliciting materials to resolicit the votes of Surrey shareholders. These opinions will be based on representation letters provided by First Community and Surrey, and on customary factual assumptions, including, but not limited to, the assumption that the merger will be consummated in accordance with the terms of the merger agreement. If any of the representations, assumptions, covenants or undertakings upon which those opinions are based is incorrect, incomplete, inaccurate or violated, the validity of the opinions may be affected and the tax consequences of the merger could differ from those described in this proxy statement/prospectus.

Neither of the opinions described above will be binding on the IRS or any court. First Community and Surrey have not sought and will not seek any ruling from the IRS regarding any matters relating to the merger, and as a result, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below. The following is based on the receipt and accuracy of the above described opinions.

**U.S. Federal Income Tax Consequences of the Merger to U.S. Holders of Surrey Common Stock and Surrey Class A Common Stock**

The U.S. federal income tax consequences of the merger to U.S. holders of Surrey common stock or Surrey Class A common stock generally will be as follows:

● a U.S. holder of Surrey common stock or Surrey Class A common stock generally will not recognize gain or loss upon the exchange of shares of Surrey common stock or Surrey Class A common stock for shares of First Community common stock pursuant to the merger, except with respect to cash received instead of fractional shares of First Community common stock that such holder of Surrey common stock or Surrey Class A common stock would otherwise be entitled to receive (as discussed below);

● a U.S. holder of Surrey common stock or Surrey Class A common stock will have an aggregate tax basis in the First Community common stock received in the merger (including any fractional shares deemed received and redeemed for cash as described below) equal to the aggregate adjusted tax basis in the shares of Surrey common stock or Surrey Class A common stock surrendered in the merger; and

● a U.S. holder of Surrey common stock or Surrey Class A common stock will have a holding period for the shares of First Community common stock received in the merger (including any fractional share deemed received and redeemed for cash as described below) that includes the holding period of the shares of Surrey common stock or Surrey Class A common stock surrendered in the merger.

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If a U.S. holder of Surrey common stock or Surrey Class A common stock acquired different blocks of Surrey common stock or Surrey Class A common stock at different times or at different prices, the First Community common stock such holder receives will be allocated *pro rata* to each block of Surrey common stock or Surrey Class A common stock, and the basis and holding period of each block of First Community common stock received will be determined on a block-for-block basis depending on the basis and holding period of the blocks of Surrey common stock or Surrey Class A common stock exchanged for such First Community common stock.

**Cash Instead of Fractional Shares**

A U.S. holder of Surrey common stock or Surrey Class A common stock who receives cash instead of a fractional share of First Community common stock, generally will be treated as having received such fractional share of First Community common stock pursuant to the merger and then as having received cash in redemption of such fractional share of First Community common stock. Any such holder generally will recognize gain or loss equal to the difference between the amount of cash received and the tax basis in the fractional share of First Community common stock (as set forth above). Such gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the holding period for such fractional share (including the holding period of shares of Surrey common stock or Surrey Class A common stock surrendered therefor) exceeds one year. Long-term capital gains of certain non-corporate holders of Surrey common stock or Surrey Class A common stock, including individuals, are generally taxed at preferential rates. The deductibility of capital losses is subject to limitations.

**Cash Received on Exercise of Dissenters**' **Appraisal Rights**

A U.S. holder of Surrey common stock or Surrey Class A common stock who receives cash in exchange for such holder's Surrey common stock or Surrey Class A common stock upon exercise of dissenters' appraisal rights will generally recognize gain or loss equal to the difference between the amount of cash received and the holder's adjusted tax basis in the Surrey common stock or Surrey Class A common stock exchanged therefor. Each holder of Surrey common stock or Surrey Class A common stock is urged to consult such holder's tax advisor regarding the manner in which gain or loss should be calculated among different blocks of Surrey common stock or Surrey Class A common stock exchanged in the merger. Such gain or loss will generally be long-term or short-term capital gain or loss, depending on the holder's holding period in the Surrey common stock or Surrey Class A common stock exchanged. The tax consequences of cash received may vary depending upon a holder's individual circumstances. Each holder of Surrey common stock or Surrey Class A common stock who contemplates exercising statutory dissenters' appraisal rights should consult its tax adviser as to the possibility that all or a portion of the payment received pursuant to the exercise of such rights will be treated as dividend income.

**Information Reporting and Withholding**

Surrey shareholders who receive First Community common stock as a result of the merger are required to retain permanent records and make such records available to any authorized IRS officers and employees. The records should include the number of shares of Surrey common stock or Surrey Class A common stock exchanged, the number of shares of First Community common stock received, the fair market value of the Surrey common stock or Surrey Class A common stock exchanged, and the holder's adjusted basis in the First Community common stock received.

If a U.S. holder that receives First Community common stock in the merger is considered a "significant holder" and is required to file a U. S. income tax return, such U.S. holder will be required (1) to file a statement with its U.S. federal income tax return in accordance with Treasury Regulation Section 1.368-3 providing certain facts pertinent to the merger, including such U.S. holder's tax basis in, and the fair market value of, the Surrey common stock or Surrey Class A common stock surrendered by such U.S. holder in the merger, and (2) to retain permanent records of these facts relating to the merger. A "significant holder" is any Surrey shareholder that, immediately before the merger, (a) owned at least 5% (by vote or value) of the outstanding stock of Surrey, or (b) owned Surrey securities with a tax basis of $1.0 million or more.

Payments of cash made pursuant to the merger to a non-corporate U.S. holder of Surrey common stock or Surrey Class A common stock will generally be subject to U.S. federal backup withholding (currently, at a rate of 24%).

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To prevent backup withholding, non-corporate U.S. holders of Surrey common stock or Surrey Class A common stock should provide the Exchange Agent with a properly completed IRS Form W-9 (or substantially similar form) and otherwise comply with all applicable requirements of the backup withholding rules. Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules may be refunded or credited against a U.S. holder's U. S. federal income tax liability if the required information is supplied to the IRS in a timely manner.

**This discussion of certain material U.S. federal income tax consequences is for general information purposes only and is not intended to be, and should not be construed as, tax advice. All holders of Surrey common stock and Surrey Class A common stock are urged consult their tax advisors with respect to the application of U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the U.S. federal estate or gift tax rules, or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty. Holders of Surrey common stock and Surrey Class A common stock are also urged to consult their tax advisors with respect to the effect of possible changes in any of those laws after the date of this proxy statement/prospectus.**

**THE COMPANIES**

**First Community** 

First Community, a financial holding company, was founded in 1989 and incorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company's state of incorporation from Nevada to Virginia. The reincorporation was completed on October 2, 2018. The Company's principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly-owned subsidiary First Community Bank, a Virginia-chartered banking institution founded in 1874. First Community Bank has branch offices in Virginia, West Virginia, North Carolina and Tennessee. First Community Bank offers wealth management and investment advice through its Trust Division and wholly-owned subsidiary First Community Wealth Management.

First Community focuses on building financial partnerships and creating enduring and complete relationships with businesses and individuals through a personal and local approach to banking and financial services. First Community strives to be the bank of choice in the markets we serve by offering impeccable service and a complete line of competitive products that include:

● demand deposit accounts, savings and money market accounts, certificates of deposit, and individual retirement arrangements;

● commercial, consumer, and real estate mortgage loans and lines of credit;

● various credit card, debit card, and automated teller machine card services;

● corporate and personal trust services; and

● investment management services.

As of September 30, 2022, on a consolidated basis, First Community had total assets of $3.16 billion, total deposits of $2.71 billion, total net loans of $2.33 billion, and shareholders' equity of $412 million.

First Community's executive offices are located at 29 College Drive, Bluefield, Virginia 24605-0989. First Community's telephone number is (276) 326-4000 and its website is: www.ir.fcbresource.com.

The information on First Community's website is not part of this proxy statement/prospectus, and the reference to First Community's website address does not constitute incorporation by reference of any information on that website into this proxy statement/prospectus.

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Additional information about First Community is included in documents attached as appendices to this proxy statement/prospectus. See the section entitled "*Where You Can Find More Information*" beginning on page [●].

**Surrey**

*General*

Surrey is a bank holding company organized under the laws of North Carolina in 2003 and registered as a bank holding company under the BHCA. Surrey conducts the majority of its business operations through its wholly-owned bank subsidiary, Surrey Bank & Trust. Surrey's single direct subsidiary is Surrey Bank & Trust, which is a North Carolina state-chartered bank that was incorporated in 1996. Surrey Bank & Trust provide comprehensive individual and corporate financial services through its main and branch offices in Mount Airy, North Carolina and branch offices in Stuart, Virginia, and Pilot Mountain, North Wilkesboro and Elkin, North Carolina. These services include demand and time deposits as well as commercial, installment, mortgage and other consumer lending services, insurance and investment services. Surrey Bank & Trust offers retail and commercial banking products and services to individuals, businesses and local government customers.

**Banking Services** 

At September 30, 2022, Surrey had total consolidated assets of $500 million, net loans of $244 million, deposits of $436 million and stockholders' equity of $57 million. Approximately 66.7% of Surrey Bank & Trust's total loans were real estate loans and approximately 32.2% of Surrey Bank & Trust's loans were classified as commercial and industrial loans, followed by 1.1% in other loans (which includes individuals and obligations of states and political subdivisions in the U.S. and loans to nondepository financial institutions). Surrey Bank & Trust's yield on loans was 5.32% for the nine-month period ending September 30, 2022. Approximately 60.9% of Surrey Bank & Trust's total deposits were transaction deposits, approximately 26.4% were comprised of money market and savings accounts, and approximately 12.7% consisted of time deposits. Surrey Bank & Trust's cost of interest bearing deposits was 0.14% for the nine-month period ending September 30, 2022.

**Properties**

Surrey's permanent headquarters is a two-story brick building, with approximately 8,500 square feet of space located at 145 North Renfro Street, Mount Airy, North Carolina, which is also the headquarters of Surrey Bank & Trust. The building has drive-up facilities. Surrey Bank & Trust's finance, operations and mortgage lending are housed in a one-story brick building with approximately 7,500 square feet of space located at 199 North Renfro Street in Mount Airy, North Carolina.

Surrey has a modular training facility located at 143 North Renfro Street, Mount Airy, North Carolina. The modular unit has approximately 1,600 square feet of floor space.

Surrey Bank & Trust owns a one-story brick building at 165 North Renfro Street that serves as its boardroom. The building has approximately 1,600 square feet of floor space.

Surrey Bank & Trust has two branch locations in Mount Airy, North Carolina. The 1280 West Pine Street branch is a limited service branch, located in a two-story brick building with approximately 4,500 square feet of floor space. The branch has drive-up facilities and is leased under an agreement which expires in April 2025, subject to Surrey's right to extend the lease for two additional five-year terms. The 2050 Rockford Street branch is a one-story brick building with approximately 2,400 square feet of floor space with drive-up facilities.

Surrey Bank & Trust has a branch location in Stuart, Virginia located at 940 Woodland Drive. The branch is a one-story brick building with approximately 2,800 square feet of floor space. The building has drive-up facilities.

Surrey Bank & Trust has a branch location in Pilot Mountain, North Carolina at 653 South Key Street. The branch is a one-story brick building with approximately 2,800 square feet of floor space. The building has drive-up facilities.

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Surrey Bank & Trust has a branch location in Elkin, North Carolina located at 393 CC Camp Road. The branch is a one-story brick building with approximately 2,400 square feet of floor space. The building has drive-up facilities.

Surrey Bank & Trust has a branch location in North Wilkesboro, North Carolina at 1096 Main Street. The branch is a one-story brick building with approximately 2,400 square feet of floor space. The building has drive-up facilities.

Surrey Bank & Trust owns all of its facilities except for the West Pine Street branch, which is leased, as described above.

**Employees** 

As of September 30, 2022, Surrey Bank & Trust had 52 full-time employees, none of whom is covered by a collective bargaining agreement.

**Legal Proceedings** 

There are no threatened or pending legal proceedings against Surrey or Surrey Bank & Trust that, if determined adversely, would, in the opinion of management, have a material adverse effect on Surrey's business, financial condition, results of operations or cash flows.

**Seasonality** 

Surrey does not believe its business to be seasonal in nature.

**Competition** 

Surrey Bank & Trust operates an aggregate of seven banking offices within the following banking markets: (1) Surry County, North Carolina, (2) Wilkes County, North Carolina, and (3) Patrick County, Virginia. Each of these banking markets is a highly competitive environment for commercial banking. The following table lists Surrey Bank & Trust's deposit market share, as reported by the Federal Reserve Bank of St. Louis for each banking market in which Surrey Bank & Trust has a branch, as of June 30, 2022, the most recent date for which such data is available.

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|:---|:---|:---|:---|:---|
| **Market Area** | **Market**<br> **Rank** | **No. of**<br> **Institutions in**<br> **Market** | **Total**<br> **Deposits In**<br> **Market**<br> **(in 000**'**s)** | **Surrey Bank & Trust**<br> **Market**<br> **Share** |
| Mount Airy, NC | 1 | 8 | $969386 | 28.84% |
| Pilot Mountain, NC | 2 | 4 | &nbsp;&nbsp;&nbsp;&nbsp;199142 | 26.94% |
| Stuart, VA | 4 | 4 | &nbsp;&nbsp;&nbsp;&nbsp;267223 | 13.58% |
| Elkin, NC | 4 | 6 | &nbsp;&nbsp;&nbsp;&nbsp;347407 | 9.80% |
| North Wilkesboro, NC | 4 | 4 | &nbsp;&nbsp;&nbsp;&nbsp;346213 | 8.15% |

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More information about Surrey is available by visiting www.surreybank.com and then clicking the link to "Investor Relations." Information contained on Surrey's website does not constitute part of, and is not incorporated into, this proxy statement/prospectus. For additional information regarding Surrey's business, financial condition, results of operations and other important information, please refer to Surrey's disclosures available on its website, including its Annual Report for the year ended December 31, 2021. For instructions on how to find copies of these documents, see "*Where You Can Find More Information*" beginning on page [●].

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**SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS** <br> **AND MANAGEMENT OF SURREY**

The following tables set forth the beneficial ownership of Surrey common stock and Surrey Class A common stock as of January 18, 2023 by: each person or entity (other than directors and executive officers of Surrey) who is known by Surrey to beneficially own more than 5% of the outstanding shares of Surrey common stock or Surrey Class A common stock, each director and executive officer of Surrey, and all directors and executive officers of Surrey as a group.

Beneficial ownership is determined in accordance with the rules of the SEC, based on factors including voting and investment power with respect to shares. The percentages of beneficial ownership is calculated based on the [●] shares of Surrey common stock and shares of Surrey Class A common stock, collectively, that were issued and outstanding as of January 18, 2023. Unless otherwise indicated, to Surrey's knowledge, the persons or entities identified in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them.

To our knowledge, only the following shareholders owned more than five percent of the outstanding shares of Surrey common stock or Surrey Class A common stock as of January 18, 2023.

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|:---|:---|:---|:---|
| **Name and Address of Beneficial Owner** | **Common**<br> **Stock**  | **Class A** <br> **Common Stock** | **Percent of Common Stock** <br> **beneficially owned** **<sup>(1)</sup>** |
| Betty Wright<br> 1234 Greenhill Road<br> Mount Airy, NC 27030 | 429908 | -0- | 10.49% |
| Tamra W. Thomas<br> 660 Kingsbury Circle<br> Winston-Salem, NC 27106 | 469884 | -0- | 11.46% |

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<sup>1</sup> The ownership percentage of each individual is calculated based on the total of 4,099,788 shares of Surrey common stock issued and outstanding as of January 18, 2023.

The following table shows, as of January 18, 2023 the number of securities beneficially owned by each director and executive officer and by all directors and executive officers as a group:

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|:---|:---|:---|:---|
| **Beneficial Owner** | **Common Stock** **<sup>(1)</sup>** | **Class A Common** <br> **Stock** **<sup>(2)</sup>** | **Percent of** <br> **Common Stock** **<sup>(3)</sup>** |
| Edward C. Ashby, III (Director and CEO) | 188972 | 2123 | 4.61% |
| Elizabeth Johnson Lovill (Director) | 115392 | -0- | 2.81% |
| Robert H. Moody (Chairman) | 135614 | -0- | 3.31% |
| Pedro A. Pequeno, II (President) | 31221 | -0- | \* |
| F. Eugene Rees (Vice Chairman) | 162245 | 247 | 3.96% |
| Tamra W. Thomas (Director) | 469884 | -0- | 11.46% |
| Mark H. Towe (Senior Vice President and CFO) | 21202 | 246 | \* |
| Tom G. Webb (Director) | 60692 | -0- | 1.48% |
| Buddy E. Williams (Director) | 77864 | -0- | 1.90% |
| **Directors and executive officers as a group (nine persons)** | 1263086 | 2616 | 30.81% |

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\* Owns less than one percent of the outstanding Surrey common stock.

<sup>1</sup> In addition to the total number of shares of Surrey common stock held as of January 18, 2023 this column also includes the number of shares of Surrey common stock issuable within 60 days of January 18, 2023 upon the conversion of the shares of Surrey Class A common stock listed in the second column. To Surrey's knowledge, each person has sole voting and investment power over the securities shown as beneficially owned by such person, except for the following shares for which the individual indicates that he or she shares voting and/or investment power: Ashby – 67,995 shares of Surrey common stock and 1,735 shares of Surrey Class A common stock; Pequeno – 20,212 shares of Surrey common stock; Rees – 28,054 shares of Surrey common stock and 247 shares of Surrey Class A common stock; Thomas – 114,549 shares of Surrey common stock; Towe – 4,158 shares of Surrey common stock and 246 shares of Surrey Class A common stock; Webb – 13,901 shares of Surrey common stock; and Williams – 7,974 shares of Surrey common stock.

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<sup>2</sup> Each share of Class A common stock is convertible into one share of Surrey common stock.

<sup>3</sup> The ownership percentage of each individual is calculated based on the total of 4,099,788 shares of Surrey common stock issued and outstanding as of [●] plus the number of shares of Surrey common stock issuable to that individual within 60 days of [●] upon the conversion of the shares of Surrey Class A common stock in the second column. The ownership percentage of the group is based on the total number of shares of Surrey common stock outstanding plus the total number of shares of Surrey common stock issuable to the group within 60 days of [●] upon the conversion of the shares of Surrey Class A common stock listed in the second column.

**DESCRIPTION OF FIRST COMMUNITY BANKSHARES, INC. CAPITAL STOCK**

*As a result of the merger, Surrey shareholders who receive shares of First Community common stock in the merger will become First Community shareholders. Your rights as First Community shareholders will be governed by Virginia law, the First Community articles of incorporation and the First Community bylaws. The following description of the material terms of First Community*'*s capital stock, including the common stock to be issued in the merger, reflects the anticipated state of affairs upon consummation of the merger. We urge you to read the applicable provisions of Virginia law, the First Community articles of incorporation and the First Community bylaws and federal law governing bank holding companies carefully and in their entirety.*

*Authorized Capital Stock*

As of the date of this proxy statement/prospectus, First Community has 51,000,000 shares of authorized capital stock consisting of (i) 50,000,000 shares of common stock, par value $1.00 per share and, (ii) 1,000,000 shares of preferred stock, with an undesignated par value. As of the date of this proxy statement/prospectus there were [●] shares of First Community common stock outstanding and no shares of First Community preferred stock outstanding. All outstanding shares of First Community are fully paid and non-assessable.

*Common Stock*

The following description of First Community common stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to the First Community articles of incorporation and the First Community bylaws, copies of which have been filed as exhibits to the registration statement of which this proxy statement/prospectus is a part. We encourage you to read the First Community articles of incorporation and the First Community bylaws and the applicable provisions of the VSCA, for additional information.

All shares of First Community common stock that are issued and outstanding have been validly issued and are fully paid and nonassessable. Under the VSCA, shareholders generally are not personally liable for a corporation's acts or debts.

*No Preemptive or Conversion Rights*

The holders of First Community common stock have no preemptive, subscription or redemption rights and are not entitled to the benefits of any sinking fund or conversion rights.

*Voting Rights*

The holders of First Community common stock are entitled to notice of and to attend all meetings of the shareholders of First Community and shall be entitled to one vote per share on all matters to be voted on by the First Community's shareholders. First Community shareholders are not entitled to cumulative voting rights. Under the VSCA, directors are elected by a plurality of the votes of the shares cast by the shares entitled to vote thereon at a meeting at which a quorum is present, unless the articles of incorporation or bylaws of a corporation provide otherwise. The First Community bylaws provide that all elections of directors will be determined by a plurality of the votes cast at the meeting.

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*Dividends*

The holders of First Community common stock are entitled to receive dividends if, as and when declared by the board of directors of First Community out of any funds legally available for such purpose. When and as dividends are declared thereon, whether payable in cash, property or securities of First Community, the holders of First Community common stock will be entitled to share, ratably according to the number of shares of First Community common stock held by them, in such dividends.

The VSCA provides that no distribution may be made, if, after giving effect to such distributions, (i) First Community would not be able to pay its debts as they become due in the usual course of business or, (ii) First Community's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if First Community were to be dissolved at the time of the dividend, to satisfy any shareholders who have rights superior to those receiving the dividend. In addition, other restrictions may apply under laws and regulations affecting bank holding companies, including the responsibility to maintain adequate capital in its banking subsidiary. First Community's ability to pay dividends on its common stock is also dependent on First Community's banking subsidiary's ability to pay dividends to First Community, which is subject to various regulatory restrictions and limitations.

*Liquidation Rights*

In the event of any liquidation, dissolution or winding up of First Community, whether voluntary or involuntary, or any distribution of any of its assets to any of its shareholders other than by dividends from funds legally available therefor, and other than payments made upon redemptions or purchases of shares of First Community, except as otherwise might be set forth in any articles of amendment applicable to shares of First Community preferred stock, the holders of First Community common stock shall be entitled to share, ratably according to the number of shares of First Community common stock held by them, in the remaining assets of First Community available for distribution to its shareholders.

*Preferred Stock*

Under First Community's articles of incorporation, the board of directors of First Community is authorized, without further shareholder action, to issue up to 1,000,000 shares of preferred stock in one or more series and to fix and determine the preferences, limitations and relative rights of the shares of any series so established by filing a certificate of amendment with the Virginia State Corporation Commission in the manner prescribed by the VSCA. No shares of preferred stock are currently outstanding.

*Transfer Agent*

The registrar and transfer agent for First Community common stock is Computershare Shareholder Services.

*NASDAQ Stock Exchange Listing*

The First Community common stock is listed on the NASDAQ Global Select Market under the symbol "FCBC". Following the merger, shares of First Community common stock will continue to be traded on NASDAQ.

*Certain Articles and Bylaw Provisions Affecting First Community Common Stock*

The First Community articles of incorporation and First Community bylaws contain several provisions that may make First Community a less attractive target for an acquisition of control by anyone who does not have the support of the First Community board of directors. Such provisions include, among other things, the requirement of a vote of two-thirds of the shareholders or directors to approve certain business combinations and other corporate actions, a staggered board of directors, higher voting standard to remove directors and advanced notice of shareholder proposals and director nominations. For a complete description, you should refer to the First Community articles of incorporation and the First Community bylaws.

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For more information regarding the rights of holders of First Community common stock, see the section entitled *"Comparison of Shareholder Rights"* beginning on page [●].

*Amendments to Articles of Incorporation and Bylaws*

First Community's bylaws may be amended, altered or rescinded at any regular meeting of the board of directors, by a vote of a majority of the total number of directors, or at any special or annual meeting of shareholders, by a vote of a majority of the shares of First Community's capital stock issued, outstanding and entitled to vote.

Under First Community's articles of incorporation, an amendment of articles of incorporation must be approved by the vote of a majority of all the votes entitled to be cast on such transactions by each voting group entitled to vote on the transaction at a meeting at which a quorum of the voting group is present, provided that the amendment has been approved and recommended by at least two-thirds of the directors in office at the time of that approval and recommendation. If the amendment is not so approved and recommended by two-thirds of the directors in office, then the amendment must be approved by the vote of seventy-five percent (75%) or more of all the votes entitled to be cast on such amendment by each voting group entitled to vote on the amendment.

*Restrictions on Ownership*

The BHC Act generally would prohibit any company that is not engaged in banking activities and activities that are permissible for a bank holding company or a financial holding company from acquiring control of First Community. "Control" is generally defined as ownership of 25% or more of a class of voting stock, control of the election of a majority of the directors or the power to exercise a controlling influence. In addition, any existing bank holding company would need the prior approval of the Federal Reserve Board before acquiring 5% or more of a class of voting stock of First Community. In addition, the Change in Bank Control Act of 1978, as amended, prohibits a person or group of persons from acquiring control of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as First Community, could constitute acquisition of control of the bank holding company. Virginia law generally requires the prior approval of the VBFI before a person may acquire 25% or more of a class of voting stock of a Virginia bank holding company or otherwise exercise a controlling influence. Additionally, under Virginia law, an existing bank holding company would need prior VBFI approval before it acquired 5% or more of the voting stock of a bank holding company.

**COMPARISON OF SHAREHOLDERS**' **RIGHTS** 

**General**

First Community is incorporated under the laws of the Commonwealth of Virginia, and Surrey is incorporated under the laws of the State of North Carolina. Accordingly, the rights of their shareholders are governed by Virginia law and North Carolina law, respectively, and their respective articles of incorporation and bylaws. After the merger, the rights of former shareholders of Surrey who receive shares of First Community common stock in the merger will be determined by reference to First Community's articles of incorporation and bylaws, and Virginia law. Set forth below is a description of the material differences between the rights of Surrey shareholders and First Community shareholders. First Community and Surrey believe that this summary describes the material differences between the rights of holders of First Community common stock as of the date of this proxy statement/prospectus and the rights of holders of Surrey common stock and Surrey Class A common stock as of the date of this proxy statement/prospectus; however, it does not purport to be a complete description of those differences. Shareholders are urged to read the articles of incorporation and bylaws of each of Surrey and First Community in their entirety. Copies of First Community's articles of incorporation and bylaws have been filed as exhibits to the registration statement of which this proxy statement/prospectus is a part.

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| **Size of the Board of Directors; Classes of Directors** | **Size of the Board of Directors; Classes of Directors** |
| *First Community* | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *Surrey* |
| Virginia law provides that a corporation must have at least one director and may provide in its articles of incorporation or in its bylaws for a fixed number of directors or a variable number, and for the manner in which the number of directors may be increased or decreased.<br>Virginia Law permits corporations to classify their board of directors. Approximately one-third (1/3) of the total number of directors of a Virginia corporation, at a minimum, must be elected annually.<br>First Community's articles of incorporation provide that it will have no fewer than three, and no more than twelve directors, to be determined in accordance with the bylaws. First Community's bylaws authorize the number of directors to be fixed from time to time by resolution of the board of directors. First Community's board of directors consists of eight directors. First Community's board of directors is divided into three classes, with directors serving staggered three-year terms. | North Carolina law provides that a corporation must have at least one director and must provide in its articles of incorporation or in its bylaws for a fixed number of directors, and for the manner in which the number of directors may be increased or decreased.<br>North Carolina Law permits corporations to classify their board of directors. Directors must be elected annually unless their terms are staggered. A corporation's articles of incorporation or bylaws may provide for staggered terms of directors by dividing the directors into two, three, or four groups, with each group containing one-half, one-third, or one-fourth of the total, as near as may be. Surrey does not have a staggered board of directors.<br>Surrey's bylaws provide that it will have not less than five, nor more than twelve directors, who shall be elected for a term of one year and hold office for one year. The number of directors of Surrey may be fixed from time to time by the Surrey board of directors. Surrey's board currently consists of seven directors. |
| **Removal of Directors** | **Removal of Directors** |
| *First Community* | *Surrey* |
| Under First Community's bylaws, directors may be removed for cause by an affirmative vote of more than two-thirds (2/3) of the stock of First Community then outstanding and entitled to vote thereon at a meeting duly called for that purpose. | Under Surrey's bylaws, any director may be removed from office, with or without cause by either a two-thirds vote of all directors, or by a majority vote of the holders of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. |

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| **Control Share Acquisition Provisions** | **Control Share Acquisition Provisions** |
| *First Community* | *Surrey* |
| Virginia law contains provisions that, under certain circumstances, would preclude an acquirer of the shares of a Virginia public corporation who crosses one of three voting thresholds (20%, 33 1/3% or 50%) from obtaining voting rights with respect to such shares unless the disinterested holders of a majority of the shares of the corporation held by disinterested shareholders votes to accord voting power to such shares. In order to obtain voting rights with respect to the subject shares, an acquirer must deliver to the corporation a control share acquisition statement meeting the requirements of the VSCA and may request a special meeting of the shareholders at the acquirer's expense. If a control share acquisition occurs and a control share acquisition statement that satisfies the VSCA's requirements is delivered at least 60 days prior to the intended date of notice of the corporation's annual meeting of shareholders, then the voting rights to be granted to the subject shares shall be considered at the annual meeting. If shares acquired in a control share acquisition are accorded full voting rights and the acquirer has beneficial ownership of shares entitled to cast a majority of the votes that could be cast in an election of directors, then all shareholders other than the acquirer have the right to appraisal rights and to obtain fair value for their shares (which shall be no less than the highest price paid per share in the control share acquisition) under the VSCA.<br>First Community has not opted out of coverage under the control share acquisition provisions of the VSCA | The North Carolina Control Share Acquisition Act generally provides that, except as provided below, "Control Shares" will not have any voting rights. Control Shares are shares acquired by a person under certain circumstances which, when added to other shares owned, would give such person effective control over one-fifth, one-third, or a majority of all voting power in the election of the corporation's directors. However, voting rights will be restored to Control Shares by resolution approved by the affirmative vote of the holders of a majority of the corporation's voting stock (other than shares held by the owner of the Control Shares, officers of the corporation, and directors of the corporation). If voting rights are granted to Control Shares which give the holder a majority of all voting power in the election of the corporation's directors, then the corporation's other shareholders may require the corporation to redeem their shares at their fair value. Currently, the Act would not be applicable to a transaction involving Surrey's shares because Surrey is a private corporation and is not covered by the Act. |

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| **Combinations with Interested Shareholders** | **Combinations with Interested Shareholders** |
| *First Community* | *Surrey* |
| The VSCA provides that a Virginia corporation may not engage in an affiliated transaction with any interested shareholder (as defined below) for a period of three years following the interested shareholder's determination date (which is the date the interested shareholder became an interested shareholder) unless approved by the affirmative vote of a majority (but not less than two) of the disinterested directors and by the affirmative vote of two-thirds (2/3) of the disinterested shareholders. A Virginia corporation is permitted to engage in an affiliated transaction with an interested shareholder beginning three years after such interested shareholder's determination date as long as any of the following requirements has been met:<br>(i) the transaction is approved by two-thirds (2/3) of the disinterested shareholders.<br>(ii) a majority of disinterested directors approve the transaction; or<br>(iii) price requirements set forth in the VSCA have been satisfied.<br>An interested shareholder, is someone who owns 10% or more of the outstanding shares of voting stock, or someone who is an affiliate or associate of the corporation and was an interested shareholder in the previous three years. An affiliated transaction is any of the following:<br>● Any merger of First Community or any of its subsidiaries with any interested shareholder or with any other corporation that immediately after the merger would be an affiliate of an interested shareholder that was an interested shareholder immediately before the merger;<br>● Any share exchange in which any interested shareholder acquires one or more classes or series of voting share of First Community or any of its subsidiaries;<br>| The North Carolina Shareholder Protection Act generally requires that, unless certain "fair price" and procedural requirements are satisfied, an affirmative vote of 95% of a public corporation's voting shares is required to approve certain business combination transactions with another entity that is the beneficial owner, directly or indirectly, of more than 20% of the corporation's voting shares or which is an affiliate of the corporation and previously has been a 20% beneficial holder of such shares. The Act is not applicable to Surrey because it is currently a private corporation. |
| ● Except for transactions in the ordinary course of business, (i) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or a series of transactions) to or with any interested shareholder of any assets of First Community or of any of its subsidiaries having an aggregate fair market value in excess of five percent of First Community's consolidated net worth as of the date of the most recently available financial statements, or (ii) any guaranty by First Community or any of its subsidiaries (in one transaction or a series of transactions) of indebtedness of any interested shareholder in an amount in excess of five percent of First Community's consolidated net worth as of the date of the most recently available financial statements;<br>● The sale or disposition by First Community or any of its subsidiaries to an interested shareholder (in one transaction or a series of transactions) of any voting shares of First Community or any of its subsidiaries having an aggregate market value in excess of five percent of the aggregate market value of all outstanding voting shares of First Community except pursuant to a share dividend or the exercise of rights or warrants distributed or offered on a basis affording substantially proportionate treatment to all holders of the same class or series of voting shares;<br>|  |

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● The dissolution of First Community if proposed by or on behalf of an interested shareholder; or<br>● Any reclassification of securities, including any reverse stock split, or recapitalization of First Community, or any merger of First Community with any of its subsidiaries or any distribution or other transaction, whether or not with or into or otherwise involving an interested shareholder, which has the effect, directly or indirectly (in one transaction or a series of transactions), of increasing by more than five percent the percentage of the outstanding voting shares of First Community or any of its subsidiaries beneficially owned by any interested shareholder.<br>

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| **Shareholder Action Without a Meeting** | **Shareholder Action Without a Meeting** |
| *First Community* | *Surrey* |
| Virginia law provides that, unless the articles of incorporation provide otherwise, any action required or permitted by law to be adopted or taken at a shareholders' meeting may be adopted or taken without a meeting and if the action is adopted or taken by all shareholders entitled to vote on the action, and any such written consent shall be signed by all shareholders entitle to vote on the action, bear the date of each signature and delivered for inclusion with the minutes or corporate records of the corporation. Virginia law allows written consent without a meeting or notice if the holders of outstanding shares, having at least the minimum number of votes that would be necessary to authorize or take such action at a meeting, consent to the action in writing, but only if that is provided in the articles of incorporation.<br>First Community's articles of incorporation are silent on shareholder action without a meeting. Therefore shareholder action without meeting may only be taken by all the shareholders entitled to vote on such action. | North Carolina law provides that action required or permitted to be taken at a shareholders' meeting may be taken without a meeting and without prior notice (except as provided below), if the action is taken by all the shareholders entitled to vote on the action.<br>Unless the articles of incorporation otherwise provide, if shareholder approval is required for (i) an amendment to the articles of incorporation, (ii) a plan of merger or share exchange, (iii) a plan of conversion, (iv) the sale, lease, exchange, or other disposition of all, or substantially all, of Surrey's property, or (v) a proposal for dissolution, and the approval is to be obtained through action without meeting, Surrey must give its shareholders, other than shareholders who consent to the action, written notice of the proposed action at least 10 days before the action is taken. Surrey's articles of incorporation and bylaws do not change this default provision.<br>North Carolina law also allows written consent without a meeting if the holders of outstanding shares, having at least the minimum number of votes that would be necessary to authorize or take such action at a meeting, consent to the action in writing, but only if so provided in the articles of incorporation. Surrey's articles of incorporation do not include such a provision. Therefore shareholder action without meeting may only be taken by all the shareholders entitled to vote on such action. |

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| **Notice of Meetings** | **Notice of Meetings** |
| *First Community* | *Surrey* |
| In accordance with the VSCA, First Community's bylaws require that a written notice of the time, place and purpose of the meeting must be given to each shareholder entitled to vote at the meeting not less than 10 days nor more than 60 days prior to the meeting. Notice of special meetings of shareholders also must include a description of the purpose or purposes for which the meeting is being called.<br>Pursuant to the VSCA, notice of a shareholder's meeting to act on an amendment of the articles of incorporation, a plan of merger, share exchange, domestication or entity conversion, a proposed sale of assets or the dissolution of the corporation shall be given not less than 25 nor more than 60 days before the meeting date. | In accordance with North Carolina law, Surrey bylaws require that a written notice of the time and place of the meeting must be given to each shareholder entitled to vote at the meeting not less than 10 days nor more than 60 days prior to the meeting. Notice of special meetings of shareholders also must include a description of the purpose or purposes for which the meeting is being called. |
| **Vote Required for Amendments to Articles of Incorporation and Certain Transactions** | **Vote Required for Amendments to Articles of Incorporation and Certain Transactions** |
| *First Community* <br> Under First Community's articles of incorporation, an amendment of articles of incorporation, a plan of merger or share exchange, a plan of domestication, a plan of conversion, a transaction involving the sale of all or substantially all of First Community's assets other than in the regular course of business, and a plan of dissolution must be approved by the vote of a majority of all the votes entitled to be cast on such transactions by each voting group entitled to vote on the transaction at a meeting at which a quorum of the voting group is present, provided that the transaction has been approved and recommended by at least two-thirds of the directors in the office at the time of that approval and recommendation. If the transaction is not so approved and recommended by two-thirds of the directors in office, then the transaction must be approved by the vote of seventy-five percent (75%) or more of all the votes entitled to be cast on such transactions by each voting group entitled to vote on the transaction. The voting rights and requirements in First Community's articles of incorporation are subject to certain exceptions set forth in the VSCA, one of which does not require a vote of First Community's shareholders with respect to a merger in which First Community is the surviving entity so long as the shares of First Community common stock issued in connection with the merger will not exceed by more than 20% the total number of shares of First Community outstanding immediately before the merger. | *Surrey*<br> North Carolina law provides that a corporation's articles of incorporation generally may be amended upon approval by the board of directors and the holders of a majority of the outstanding shares of such corporation's common stock entitled to vote on the amendment.<br>Surrey's articles of incorporation do not change this default provision.<br>Unless a corporation's articles of incorporation or bylaws provide otherwise (which the Surrey articles of incorporation do not), North Carolina law also requires that a plan of merger or share exchange be approved by each voting group entitled to vote separately on the plan by a majority of all the votes entitled to be cast on the plan by that voting group. |

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| **Amendment of Bylaws** | **Amendment of Bylaws** |
| *First Community* | *Surrey* |
| First Community's bylaws may be amended, altered or rescinded at a meeting of the board of directors called for that purpose, by a vote of a majority of the total number of directors at a meeting at which a quorum is present, or at any special or annual meeting of shareholders, by a vote of a majority of the shares of First Community's capital stock issued, outstanding and entitled to vote. | North Carolina law provides that a corporation's board of directors may amend or repeal the corporation's bylaws, except to the extent otherwise provided in the articles of incorporation or a bylaw adopted by the shareholders or the NCBCA, and except that a bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the board of directors if the bylaw adopted by the shareholders authorizes the board of directors to adopt, amend or repeal that particular bylaw or the bylaws generally. Further, a corporation's shareholders may amend or repeal the corporation's bylaws even though the bylaws may also be amended or repealed by its board of directors.<br>In accordance with Surrey's articles of incorporation and bylaws, the Surrey board of directors may alter, amend, and repeal the bylaws of the corporation unless otherwise limited by any bylaws of the corporation adopted by the shareholders. The bylaws made by the directors may be altered, amended or repealed by a majority vote of the directors present at a meeting at which a quorum is present or at any regular or special meeting of the shareholders, by a majority vote of the shares represented and entitled to vote at such meeting of the shareholders.<br> Surrey's bylaws provide that they may be amended or repealed and new bylaws may be adopted by the affirmative vote of a majority of the directors then holding office at any regular or special board meeting; however, the board shall not have power to adopt a bylaw: (a) requiring more than a majority of the voting shares for a quorum at a shareholders' meeting or more than a majority of the votes cast to constitute action by the shareholders, except where higher percentages are required by law; or (b) providing for the management of the corporation other than by the board or its executive committee. In addition, the shareholders may make, alter, amend or repeal Surrey's bylaws at any annual meeting or at a special meeting called for such purpose, and the bylaws adopted by the directors may be altered or repealed by the shareholders. Further, no bylaw adopted or amended by Surrey's shareholders may be altered or repealed by Surrey's board, unless specific authority to do so is provided to the board by Surrey's shareholders. |
| **Appraisal Rights** | **Appraisal Rights** |
| *First Community* | *Surrey* |
| Under Virginia law, shareholders are generally entitled to object and receive payment of the fair value of their stock in the event of any of the following corporate actions: merger, transfer of all or substantially all of the corporation's assets in an interested transaction, participation in a share exchange as the corporation whose stock will be acquired, or an amendment to the articles of incorporation that reduces the number of shares of a class or series owned by shareholders to a fraction of a share, if the corporation has the obligation or right to repurchase the fractional shares. However, appraisal rights are not available to shareholders in the event of one of the foregoing corporate actions if the stock is (i) a covered security as defined pursuant to the Securities Act of 1933, or (ii) traded in an organized market and held by 2,000 or more shareholders and has a market value of at least $20 million, excluding the value of shares held by subsidiaries, senior executives, and directors, and by any beneficial shareholder or any voting trust or beneficial owner holding more than 10% of the outstanding shares. | Under North Carolina law, shareholders are entitled to appraisal rights and to obtain payment of the fair value of that shareholder's shares in connection with certain types of corporate actions which could be adverse to the shareholder, such as a merger in which the shareholder's shares will be cancelled; a share exchange in which the shareholder's shares will not be exchanged; a disposition of all or substantially all of the assets of the corporation outside of the ordinary course of business; or an amendment of the articles of incorporation to effect a reverse stock split.<br>|

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Appraisal rights generally are not available if the shares (1) are listed on the NASDAQ or another national securities exchange, (2) are held by at least 2,000 shareholders and (3) have a market value of at least $20 million (excluding insider shares). However, appraisal rights will be available in any case if shareholders are required to accept in exchange for their shares anything other than cash or shares of another corporation or entity that would satisfy the same standards above under which appraisal rights would not be available.<br>Surrey's shareholders have such appraisal rights in connection with the merger as discussed on page [•] of this proxy statement/prospectus.<br>

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| **Dividends** | **Dividends** |
| *First Community* | *Surrey* |
| A Virginia corporation generally may pay dividends or distributions in cash or other property, excluding the corporation's own shares, except when the corporation is unable to pay its debts as they become due in the usual course of business or the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the dividend or distribution, to satisfy any shareholders who have rights superior to those receiving the dividend or distribution. In addition, as is true for First Community, other restrictions may apply under laws and regulations affecting bank holding companies, including the responsibility to maintain adequate capital in its banking subsidiary. | A North Carolina corporation generally may pay dividends or distributions in cash or other property, excluding the corporation's own shares, except when the corporation is unable to pay its debts as they become due in the usual course of business or the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the dividend, to satisfy any shareholders who have rights superior to those receiving the dividend. In addition, as is true for Surrey, other restrictions may apply under laws and regulations affecting bank holding companies, including the responsibility to maintain adequate capital in its banking subsidiary.<br>Surrey's articles of incorporation provide that (a) holders of Surrey common stock may not receive dividends unless dividends are paid to holders of Surrey Class A common stock and (b) holders of Class A common stock will be entitled to a premium on any dividends paid on Surrey common stock of $0.03 per share; |
| A Virginia corporation generally may pay dividends or distributions in cash or other property, excluding the corporation's own shares, except when the corporation is unable to pay its debts as they become due in the usual course of business or the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the dividend or distribution, to satisfy any shareholders who have rights superior to those receiving the dividend or distribution. In addition, as is true for First Community, other restrictions may apply under laws and regulations affecting bank holding companies, including the responsibility to maintain adequate capital in its banking subsidiary. | A North Carolina corporation generally may pay dividends or distributions in cash or other property, excluding the corporation's own shares, except when the corporation is unable to pay its debts as they become due in the usual course of business or the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the dividend, to satisfy any shareholders who have rights superior to those receiving the dividend. In addition, as is true for Surrey, other restrictions may apply under laws and regulations affecting bank holding companies, including the responsibility to maintain adequate capital in its banking subsidiary.<br>Surrey's articles of incorporation provide that (a) holders of Surrey common stock may not receive dividends unless dividends are paid to holders of Surrey Class A common stock and (b) holders of Class A common stock will be entitled to a premium on any dividends paid on Surrey common stock of $0.03 per share; |

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| **Indemnification** | **Indemnification** |
| *First Community* | *Surrey* |
| First Community's articles of incorporation provide for indemnification to directors and certain officers and employees in accordance with the bylaws of First Community.<br>Pursuant to its bylaws, First Community shall indemnify directors and certain officers and employees, in their personal and corporate capacity, with respect to any proceeding by third parties or for the benefit of First Community (excluding a proceeding by or for the benefit of First Community or an affiliate), against liabilities and expenses incurred by such person in connection with such proceeding if such person acted in good faith and in a manner that such person reasonably believed to be in or unopposed to the best interest of First Community; or, with respect to any criminal proceeding, such person had no reasonable cause to believe his conduct was unlawful.<br>| Surrey's articles of incorporation and bylaws generally provide that, to the fullest extent from time to time permitted by law, Surrey shall indemnify (a) all directors, officers, employees or agents of the corporation and (b) any person who, at the corporation's request, is or was serving as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan, against liability and expenses in any proceeding arising out of their status as such or their activities in such capacities; provided, however, that the corporation shall not provide indemnification if such indemnified person's activities were at the time taken known or believed by him or her to be clearly in conflict with the corporation's best interests. |
| With respect to any administrative proceeding or civil action initiated by any federal or state banking agency, First Community shall provide such indemnification only after the board of directors determines, in writing, after due investigation and consideration, without any involvement by the person prior to and as a condition to any indemnification therefor, that (a) the person acted in good faith and in a manner person reasonably believed to be in or unopposed to the best interests of First Community, (b) that any requested payment of indemnification will not materially adversely affect the safety and soundness of either First Community or its affiliates, (c) that such indemnification payment is consistent with safe and sound banking practice, and (d) that the payment of indemnification is not a "prohibited indemnification payment" as defined by applicable federal law.<br>First Community shall have the power to purchase and maintain insurance on behalf of itself or any person who is or was a director, officer, employee, or agent of First Community or an affiliate, or who is or was serving at the request of First Community as a director, officer, employee, or agent of another entity, against any claim asserted against such person, or liability incurred by such person in any such capacity, or against any liability arising out of his or her status as such, whether or not First Community would have the power to indemnify such person against such liability pursuant to its bylaws.<br>A director or officer of First Community shall not be personally liable to First Community or its shareholders in connection with any acts or omissions taken in his or her capacity as director or officer; provided, however, that the foregoing shall not eliminate or limit the liability of a director or officer: (a) for the breach of the individual's duty of loyalty to First Community or its shareholders; (b) for any acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law; or (c) for any transaction from which the individual derived an improper personal financial benefit. Further, indemnification shall not be available, where such is prohibited by applicable law.<br>|  |

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**LEGAL MATTERS**

Bowles Rice LLP, Charleston, West Virginia, and Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, Greensboro, North Carolina, will deliver at the effective time of the merger their opinions to First Community and Surrey, respectively, as to certain U.S. federal income tax consequences of the merger. See the section entitled "*Material U.S. Federal Income Tax Consequences of the Merger*." The validity of the shares of First Community common stock to be issued in connection with the merger has been passed upon for First Community by Bowles Rice LLP.

**EXPERTS**

The consolidated financial statements of First Community as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021, and the effectiveness of First Community's internal control over financial reporting as of December 31, 2021, have been audited by FORVIS, LLP, an independent registered public accounting firm as successor to Dixon Hughes Goodman LLP, as set forth in its report appearing in First Community's Annual Report on Form 10-K for the year ended December 31, 2021, and attached hereto as ***Appendix D***. Such consolidated financial statements have been attached as an appendix hereto in reliance on the report of such firm given upon its authority as experts in accounting and auditing.

**DEADLINES FOR SUBMITTING SHAREHOLDER PROPOSALS**

If the merger is completed, Surrey will not have public shareholders and there will be no public participation in any future meeting of shareholders. However, if the merger is not completed or if Surrey is otherwise required to do so under applicable laws, Surrey will hold a 2023 annual meeting of shareholders. Any shareholder nominations or proposals for open business intended to be presented at Surrey's 2023 annual meeting must be submitted to Surrey not less than seven nor more than 50 days prior to the date of the 2023 annual meeting, if any.

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**WHERE YOU CAN FIND MORE INFORMATION**

First Community files annual, quarterly, current and special reports, proxy statements and other information with the SEC. These filings are available over the Internet from the SEC's web site at www.sec.gov.

First Community maintains an Internet site that contains information about First Community and its subsidiaries at www.ir.fcbresource.com. Surrey also maintains an Internet site that contains information about Surrey and its subsidiaries at www.surreybank.com. The reports and other information filed by First Community with the SEC are available through its Internet website. The annual reports of Surrey are available on Surrey's website at www.surreybank.com under the tab "About Us" and then under the heading "Investor Relations" and "Shareholder Relations". The Internet website addresses of First Community and Surrey are provided as inactive textual references only. The information provided on the Internet websites of First Community and Surrey, other than the documents regarding First Community attached as appendices to this proxy statement/prospectus, is not part of this proxy statement/prospectus and, therefore, is not incorporated herein by reference.

This proxy statement/prospectus is part of a Registration Statement on Form S-4 that First Community has filed with the SEC with respect to the First Community common stock to be issued in the merger. This proxy statement/prospectus constitutes a prospectus of First Community and a proxy statement of Surrey for its special meeting. As permitted by the SEC, this proxy statement/prospectus does not contain all of the information contained in the Registration Statement. You may obtain copies of the Registration Statement on Form S-4 and any amendments thereto, in the manner described above.

Statements contained in this proxy statement/prospectus, including in any document attached as an appendix hereto regarding the contents of any contract or other document, are not necessarily complete, and each such statement is qualified in its entirety by reference to that contract or other document filed as an exhibit with the SEC.

Set forth below is a list of the documents previously filed with the SEC by First Community under the Exchange Act that are attached as appendices to this proxy statement/prospectus.

● Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 3, 2022 ( ***Appendix D***);

● Definitive Proxy Statement on Schedule 14A filed with the SEC on March 16, 2022 ( ***Appendix E***);

● Quarterly Reports on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 10, 2022, for the quarter ended June 30, 2022 filed with the SEC on August 5, 2022 and for the quarter ended September 30, 2022 filed with the SEC on November 8, 2022 ( ***Appendix F***); and

● Current Reports on Form 8-K, filed with the SEC on March 14, 2022, April 1, 2022, May 2, 2022, May 31, 2022, June 17, 2022, November 18, 2022 and December 1, 2022 ( ***Appendix G***).

You may request additional documents previously filed with the SEC by First Community under the Exchange Act. Except for those documents attached as appendices to this proxy statement/prospectus, such documents are not a part of this proxy statement/prospectus. If you would like to request documents from First Community, please send a request in writing or by telephone to First Community at the following address:

P.O. Box 989

Bluefield, Virginia 24605-0989

Attention: Secretary

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(276) 326-9000

Surrey does not file reports or other information with the SEC. If you would like to request documents from Surrey, please send a request in writing or by telephone to Surrey at the following address:

145 North Renfro Street

Mount Airy, North Carolina 27030

Attention: Edward C. Ashby, III

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(336) 783-3900

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**Appendix A**

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***Execution Version***

AGREEMENT AND PLAN OF MERGER

DATED AS OF NOVEMBER 17, 2022

BY AND BETWEEN

FIRST COMMUNITY BANKSHARES, INC.

AND

SURREY BANCORP

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**<u>**TABLE OF CONTENTS**</u>**

**Page**

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| | | |
|:---|:---|:---|
| ARTICLE I DEFINITIONS | ARTICLE I DEFINITIONS | A-1 |
| ARTICLE II THE MERGER | ARTICLE II THE MERGER | A-6 |
| 2.1 | The Merger | A-6 |
| 2.2 | Closing | A-6 |
| 2.3 | Effective Time | A-6 |
| 2.4 | Effects of the Merger | A-7 |
| 2.5 | Effect on Outstanding Shares of Company Stock | A-7 |
| 2.6 | Appraisal Rights | A-7 |
| 2.7 | Exchange Procedures | A-8 |
| 2.8 | Effect on Outstanding Shares of Purchaser Common Stock | A-9 |
| 2.9 | Directors of Surviving Corporation After Effective Time | A-9 |
| 2.10 | Articles of Incorporation and Bylaws | A-9 |
| 2.11 | Treatment of Restricted Stock Awards | A-10 |
| 2.12 | Bank Merger | A-10 |
| 2.13 | Alternative Structure | A-10 |
| 2.14 | Absence of Control | A-10 |
| 2.15 | Additional Actions | A-10 |
| 2.16 | Withholding | A-10 |
| ARTICLE III REPRESENTATIONS AND WARRANTIES | ARTICLE III REPRESENTATIONS AND WARRANTIES | A-11 |
| 3.1 | Disclosure Letters; Standard | A-11 |
| 3.2 | Representations and Warranties of the Company | A-11 |
| 3.3 | Representations and Warranties of Purchaser | A-27 |
| ARTICLE IV CONDUCT PENDING THE MERGER | ARTICLE IV CONDUCT PENDING THE MERGER | A-35 |
| 4.1 | Forbearances by the Company | A-35 |
| 4.2 | Forbearances by Purchaser | A-38 |
| ARTICLE V COVENANTS | ARTICLE V COVENANTS | A-39 |
| 5.1 | Acquisition Proposals | A-39 |
| 5.2 | Advice of Changes | A-40 |
| 5.3 | Access and Information | A-40 |
| 5.4 | Applications; Consents | A-41 |
| 5.5 | Anti-Takeover Provisions | A-42 |
| 5.6 | Additional Agreements | A-42 |
| 5.7 | Publicity | A-42 |
| 5.8 | Shareholder Meeting | A-42 |
| 5.9 | Registration of Purchaser Common Stock | A-43 |
| 5.10 | Notification of Certain Matters | A-44 |
| 5.11 | Employee Benefit Matters | A-44 |
| 5.12 | Indemnification | A-46 |
| 5.13 | Shareholder Litigation | A-47 |
| 5.14 | Disclosure Supplements | A-47 |
| 5.15 | Director Appointments | A-47 |
| 5.16 | Dividends | A-47 |
| 5.17 | Loan Program Credentialing | A-47 |
| ARTICLE VI CONDITIONS TO CONSUMMATION | ARTICLE VI CONDITIONS TO CONSUMMATION | A-47 |
| 6.1 | Conditions to Each Party's Obligations | A-47 |
| 6.2 | Conditions to the Obligations of Purchaser | A-48 |
| 6.3 | Conditions to the Obligations of the Company | A-49 |
| ARTICLE VII TERMINATION | ARTICLE VII TERMINATION | A-49 |
| 7.1 | Termination | A-49 |
| 7.2 | Termination Fee; Expenses | A-51 |
| 7.3 | Effect of Termination | A-51 |
| ARTICLE VIII CERTAIN OTHER MATTERS | ARTICLE VIII CERTAIN OTHER MATTERS | A-51 |

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8.1 Interpretation A-51

8.2 Survival A-51

8.3 Waiver; Amendment A-52

8.4 Counterparts A-52

8.5 Governing Law A-52

8.6 Expenses A-52

8.7 Notices A-52

8.8 Entire Agreement; etc A-53

8.9 Successors and Assigns; Assignment A-53

8.10 Severability A-53

8.11 Specific Performance A-53

8.12 Waiver of Jury Trial A-53

8.13 Delivery by Facsimile or Electronic Transmission A-53

Exhibit A Form of Company Voting Agreement

Exhibit B Bank Agreement and Plan of Merger

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**AGREEMENT AND PLAN OF MERGER**

This is an **Agreement and Plan of Merger**, dated as of November 17, 2022, by and between First Community Bankshares, Inc., a Virginia corporation ("**Purchaser**"), and Surrey Bancorp, a North Carolina corporation (the "**Company**").

**INTRODUCTORY STATEMENT**

The Boards of Directors of each of Purchaser and the Company have unanimously determined that this Agreement and the business combination and related transactions contemplated hereby are advisable and in the respective best interests of Purchaser and the Company and in the best interests of their respective shareholders.

The parties hereto intend that the Merger (as defined herein) shall qualify as a "reorganization" under the provisions of Section 368(a) of the IRC (as defined herein) for federal income tax purposes and that this Agreement be and is hereby adopted as a "plan of reorganization" within the meaning of Sections 354 and 361 of the IRC.

Purchaser and the Company each desire to make certain representations, warranties and agreements in connection with the business combination and related transactions provided for herein and to prescribe various conditions to such transactions.

As a condition and inducement to Purchaser's willingness to enter into this Agreement, each member of the Board of Directors of the Company has entered into an agreement dated as of the date hereof in the form of <u>Exhibit A</u>, pursuant to which he or she will vote his or her shares of Company Common Stock in favor of this Agreement and the transactions contemplated hereby (each, a "**Company Voting Agreement**").

In consideration of their mutual promises and obligations hereunder, the parties hereto adopt and make this Agreement and prescribe the terms and conditions hereof and the manner and basis of carrying it into effect, which shall be as follows:

**ARTICLE I.**<br> **DEFINITIONS**

The following terms are defined in this Agreement in the Section indicated:

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| | |
|:---|:---|
| **<u>Defined Term</u>** | **<u>Location of Definition</u>** |
| Additional Cash Payment Per Share | Section 7.1(g)(ii)(b) |
| ALLL | Section 3.2(h)(ii) |
| Appraisal Shares | Section 2.6 |
| Appraisal Shareholder | Section 2.6 |
| Articles of Merger | Section 2.3 |
| Audited Financial Statements | Section 3.2(h)(i) |
| Average Index Price | Section 7.1(g) |
| Average Purchaser Stock Price | Section 7.1(g) |
| Bank Call Reports | Section 3.2(h)(ii) |
| Bank Merger  | Section 2.12 |
| Bank Merger Certificates | Section 2.12 |
| BHCA<br> Burdensome Condition | Section 3.2(a)<br> Section 5.6 |
| Change of Recommendation | Section 5.8(b) |
| Closing | Section 2.2 |
| Closing Date | Section 2.2 |
| Company | Preamble |
| Company Bank | Section 2.2 |
| Company Benefit Plans | Section 3.2(r)(i) |
| Company Contract | Section 3.2(o)(ii) |

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| | |
|:---|:---|
| **<u>Defined Term</u>** | **<u>Location of Definition</u>** |
| Company ERISA Affiliate | Section 3.2(r)(i) |
| Company Intellectual Property | Section 3.2(p)(i) |
| Company IT Systems | Section 3.2(p)(ii) |
| Company Qualified Plans | Section 3.2(r)(iv) |
| Company Shareholder Meeting | Section 5.8(a) |
| Company Voting Agreement | Introductory Statement |
| Confidentiality Agreement | Section 5.1(a) |
| Continuing Employee | Section 5.11(a) |
| Designated Directors | Section 5.15 |
| Disclosure Letter | Section 3.1(a) |
| DOL | Section 3.2(r)(ii) |
| Effective Time | Section 2.3 |
| Enforceability Exceptions | Section 3.2(d) |
| Exchange Agent | Section 2.7(a) |
| Exchange Ratio | Section 2.5(a) |
| Financial Statements | Section 3.2(h)(i) |
| Indemnified Party | Section 5.12(a) |
| Index Ratio | Section 7.1(g)(ii) |
| Letter of Transmittal | Section 2.7(a) |
| Liabilities | Section 3.2(i) |
| Malicious Code | Section 3.2(p)(ii) |
| Merger | Section 2.1 |
| Merger Consideration | Section 2.5(a) |
| Multiemployer Plan | Section 3.2(r)(vi) |
| Multiple Employer Plan | Section 3.2(r)(vi) |
| NCCOB | Section 3.2(f) |
| OREO | Section 4.1(d) |
| Outside Date | Section 7.1(d) |
| Personal Information<br> PBGC | Section 3.2(p)(ii)<br> Section 3.2(r)(ii) |
| Premium Cap | Section 5.12(c) |
| Privacy Obligations | Section 3.2(p)(ii) |
| Proxy Statement-Prospectus | Section 5.9(a) |
| Purchaser | Preamble |
| Purchaser Bank | Section 2.2 |
| Purchaser Benefit Plans | Section 3.3(q)(i) |
| Purchaser Contract | Section 3.3(p)(i) |
| Purchaser ERISA Affiliate | Section 3.3(q)(i) |
| Purchaser IT Systems | Section 3.3(x) |
| Purchaser Preferred Stock | Section 3.3(c)(i) |
| Purchaser Qualified Plans | Section 3.3(q)(iii) |
| Purchaser Ratio | Section 7.1(g)(ii) |
| Purchaser Reports | Section 3.3(h) |
| Representatives | Section 5.1(a) |
| Requisite Company Vote | Section 7.1(b) |
| SBA | Section 3.2(w)(iii) |
| Starting Index Price | Section 7.1(g) |
| Starting Purchaser Price | Section 7.1(g) |
| Surviving Corporation | Section 2.1 |
| Termination Fee | Section 7.2(a) |
| Unvested Company Restricted Stock | Section 2.11 |
| USDA | Section 3.2(w)(iii) |
| VSCCBFI | Section 3.2(f) |

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For purposes of this Agreement:

"**Acquisition Proposal**" means any indication of interest, proposal or offer, whether or not in writing, with respect to any of the following (other than the transactions contemplated hereunder): (i) any merger, consolidation, share exchange, business combination, or other similar transaction or series of transactions involving the Company or any of its Subsidiaries; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more of the Company's consolidated assets in a single transaction or series of transactions or 20% or more of any class of equity or voting securities of the Company or any of its Subsidiaries; (iii) any tender offer or exchange offer for 20% or more of the outstanding voting or equity securities of the Company or any of its Subsidiaries or the filing of a registration statement under the Securities Act in connection therewith; (iv) any transaction that is similar in form, substance or purpose to any of the foregoing transactions, or any combination of the foregoing; or (v) any public announcement, notice or regulatory filing of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing.

"**Affiliate**" means, with respect to a Person, any person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with such Person.

"**Agreement**" means this Agreement and Plan of Merger, including the exhibits and schedules hereto, each as amended, modified or restated from time to time in accordance with its terms.

"**Business Day**" means any day other than a Saturday, Sunday or federal holiday.

"**Certificate**" means a certificate evidencing one or more shares of Company Common Stock or Company Class A Common Stock held by the respective holders of such shares.

"**COBRA**" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the regulations promulgated thereunder.

"**Company 401(k) Plan**" means the Pentegra Defined Contribution Plan for Financial Institutions.

"**Company Class A Common Stock**" means that portion of the common stock of the Company designated as Class A Common Stock, having no par value per share and no voting rights, except as otherwise required by applicable law.

"**Company Common Stock**" means that portion of the common stock of the Company designated as Common Stock, having no par value per share and unlimited voting rights.

"**Company Preferred Stock**" means the preferred stock, no par value per share, of the Company.

"**Company Restricted Stock Plan**" means the 2017 Long-Term Stock Incentive Plan of the Company.

"**Consumer Protection Laws**" means, collectively, the Consumer Financial Protection Act of 2010, Public Law 111-203, enacted as Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; the enumerated consumer laws set forth in 12 U.S.C. Section 5481(12) (including, for the avoidance of doubt, the USA PATRIOT Act of 2001 and the Telephone Consumer Protection Act of 1991); the identity theft red flags provisions of the Fair Credit Reporting Act set forth in 15 U.S.C. Section 1681m(e); Section 5 of the Federal Trade Commission Act set forth in 15 U.S.C. Section 45; all state and local consumer protection and unfair or deceptive trade practices laws, and all other laws that apply to the Company and its Subsidiaries that have the intent or effect to protect their respective consumer customers against the acts, errors or omissions of Company and its Subsidiaries, and all licensing requirements, regulations, guidelines, policies, and guidance implementing the aforementioned laws.

"**CRA**" means the Community Reinvestment Act of 1977, as amended.

"**Determination Date**" shall mean the latest of: (i) the date on which the last regulatory approval necessary is received (disregarding any waiting period) to meet the condition in *Section 6.1(b)*; or (ii) the date on which the Requisite Company Vote is received.

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"**Environmental Law**" means any federal, state or local law, statute, ordinance, rule, code, order or regulation relating to (i) the protection, preservation or restoration of the environment (which includes, without limitation, air, water vapor, surface water, groundwater, drinking water supply, soil, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety as it relates to Hazardous Materials, or (ii) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of, Hazardous Materials, in each case as amended and as now in effect. The term Environmental Law includes, without limitation, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Occupational Safety and Health Act of 1970 as it relates to Hazardous Materials, each as amended and as now in effect.

"**ERISA**" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.

"**Exchange Act**" means the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder.

"**Excluded Shares**" means Appraisal Shares and shares of Company Common Stock and Company Class A Common Stock owned or held, other than in a bona fide fiduciary or agency capacity or in satisfaction of a debt previously contracted, by Purchaser, by the Company or by a Subsidiary of either Purchaser or the Company.

"**FDIC**" means the Federal Deposit Insurance Corporation.

"**Federal Reserve**" means the Board of Governors of the Federal Reserve System.

"**FHLB**" means the Federal Home Loan Bank of Atlanta.

"**GAAP**" means U.S. generally accepted accounting principles.

"**Governmental Entity**" means any domestic or foreign governmental or regulatory authority, agency, court, commission, or other administrative entity or SRO.

"**Hazardous Material**" means any substance (whether solid, liquid or gas) that is detrimental to human health or safety or to the environment, currently or hereafter listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law, whether by type or by quantity, including any substance containing any such substance as a component. Hazardous Material includes, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance, oil or petroleum, or any derivative or by- product thereof, radon, radioactive material, asbestos, asbestos-containing material, urea formaldehyde foam insulation, lead and polychlorinated biphenyl.

"**IRC**" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

"**IRS**" means the Internal Revenue Service.

"**Knowledge**" means, with respect to Purchaser, the actual knowledge of those senior officers set forth in Purchaser's Disclosure Letter and, with respect to the Company, the actual knowledge of those senior officers set forth in the Company's Disclosure Letter.

"**Lien**" means any charge, mortgage, pledge, security interest, claim, lien or encumbrance.

"**Loan**" means a loan, lease, advance, credit enhancement, guarantee, participation interest in a loan, or other extension of credit.

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"**Loan Property**" means any property in which the applicable party (or a Subsidiary of it) holds a security interest and, where required by the context, includes the owner or operator of such property, but only with respect to such property.

"**Material Adverse Effect**" means an effect, circumstance, occurrence or change that, individually or in the aggregate (A) is material and adverse to the business, financial condition or results of operations of the Company or Purchaser, as the context may dictate, and its Subsidiaries, taken as a whole, or (B) materially prevents, impairs or threatens the ability of either the Company or Purchaser, as the context may dictate, to perform its obligations under this Agreement or timely consummate the transactions contemplated by this Agreement; *provided, however*, that any such effect, circumstance, occurrence or change resulting from any (i) changes, after the date hereof, in laws, rules or regulations or GAAP or regulatory accounting requirements or interpretations thereof that apply to financial and/or depository institutions and/or their holding companies generally, (ii) changes, after the date hereof, in economic conditions affecting financial institutions generally, including, but not limited to, changes in the general level of market interest rates, (iii) actions and omissions of Purchaser or the Company required under this Agreement, including expenses incurred by the parties in consummating the transactions contemplated by this Agreement, (iv) worsening of national or international political or social conditions including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack upon or within the United States, (v) natural disaster or other force majeure event, and (vi) any failure, in and of itself, to meet internal or other estimates, predictions, projections or forecasts of revenue, net income or any other measure of financial performance (except to the extent that, with respect to this clause (vi), the facts or circumstances giving rise or contributing to failure to meet estimates or projections may be deemed to constitute, or be taken into account in determining whether there has been, a Material Adverse Effect, except to the extent such facts or circumstances are themselves excepted from the definition of Material Adverse Effect pursuant to any other clause of this definition) shall not be considered in determining if a Material Adverse Effect has occurred, except, with respect to clauses (i), (ii), (iv) and (v), to the extent that the effects of such effect, circumstance, occurrence or change are materially disproportionately adverse to the business, financial condition or results of operations of such party and its Subsidiaries, taken as a whole, as compared to comparable U.S. banking organizations.

"**NASDAQ**" means NASDAQ Global Select Market.

"**NCBCA**" means the North Carolina Business Corporation Act.

"**NCSOS**" means the North Carolina Secretary of State.

"**Participation Facility**" means any facility in which the applicable party (or a Subsidiary of it) participates in the management (including all property held as trustee or in any other fiduciary capacity) of the facility and, where required by the context, includes the owner or operator of such property, but only with respect to such property.

"**Person**" means an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization or other entity.

"**Purchaser Common Stock**" means the voting common stock, $1.00 par value per share, of Purchaser.

"**Registration Statement**" means a registration statement on Form S-4 (and any amendments or supplements thereto) with respect to the issuance of Purchaser Common Stock in the Merger.

"**SEC**" means the U.S. Securities and Exchange Commission.

"**Securities Act**" means the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

"**Significant Subsidiary**" means as such term is defined in Rule 1-02 of Regulation S-X promulgated under the Exchange Act, substituting as applicable, the Company or Purchaser as the "registrant."

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"**SRO**" means (i) any "self-regulatory organization" as defined in Section 3(a)(26) of the Exchange Act and (ii) any other United States or foreign securities exchange, futures exchange, commodities exchange or contract market.

"**Subsidiary**" means a corporation, limited liability company, partnership, joint venture or other entity in which the Company or Purchaser, as applicable, has, directly or indirectly, an equity interest representing 50% or more of any class of the capital stock thereof or other equity interests therein.

"**Superior Proposal**" means an unsolicited, bona fide written offer or proposal made by a third party to consummate an Acquisition Proposal that: (i) the Company's Board of Directors determines in good faith, after consulting with its outside legal counsel and its financial advisor, would, if consummated, result in a transaction that is more favorable to the shareholders of the Company than the transactions contemplated hereby (taking into account all factors relating to such proposed transaction deemed relevant by the Company's Board of Directors, including without limitation, the amount and form of consideration, the timing of payment, the liquidity of the offeror's common stock, the risk of consummation of the transaction, the financing thereof and all other conditions thereto (including any adjustments to the terms and conditions of such transactions proposed by Purchaser in response to such Acquisition Proposal)); (ii) is for 100% of the outstanding shares of Company Common Stock and Company Class A Common Stock or all or substantially all of the assets of the Company; and (iii) is reasonably likely to be completed on the terms proposed, in each case taking into account all legal, financial, regulatory and other aspects of such Acquisition Proposal.

"**Taxes**" means all federal, state, local, and foreign income, excise, franchise, gross receipts, ad valorem, profits, real and personal property, capital, sales, transfer, use, license, and gains, payroll, wage and employment, social security, severance, unemployment, withholding, duties, excise, windfall profits, intangibles, franchise, backup withholding, value added, alternative or add-on minimum, estimated and other taxes, charges, fees, levies or like assessments together with all penalties and additions to tax and interest thereon.

"**VASCC**" means the Virginia State Corporation Commission.

"**VSCA**" means the Virginia Stock Corporation Act, as amended.

**ARTICLE II.**<br> **THE MERGER**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.1 The Merger**. Upon the terms and subject to the conditions set forth in this Agreement, the Company will merge with and into Purchaser (the "**Merger**") at the Effective Time. At the Effective Time, the separate corporate existence of the Company shall cease. Purchaser shall be the surviving corporation (hereinafter sometimes referred to in such capacity as the "**Surviving Corporation**") in the Merger and shall continue to be governed by the VSCA and its name and separate corporate existence, with all of its rights, privileges, immunities, powers and franchises, shall continue unaffected by the Merger.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.2 Closing**. The closing of the Merger (the "**Closing**") will take place by the electronic (PDF), facsimile or overnight courier exchange of executed documents or at a location and time as agreed to by the parties hereto and the parties agree to cause the date of the Closing (the "**Closing Date**") to occur on the date that is immediately prior to the conversion of the data processing systems of Surrey Bank & Trust, a wholly-owned subsidiary of the Company ("**Company Bank**"), with the data processing systems of First Community Bank, a wholly-owned subsidiary of Purchaser ("**Purchaser Bank**"); *provided*, that if such date shall not have occurred by April 21, 2023, then the parties shall cause the Closing Date to occur on the date that is fifteen (15) calendar days following the satisfaction or waiver (subject to applicable law) of the conditions set forth in Article VI (other than those conditions that by their nature are to be satisfied at the Closing), or such later date as the parties may otherwise agree.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.3 Effective Time**. In connection with the Closing, Purchaser and the Company shall duly execute and deliver articles of merger to the VASCC and NCSOS, to the extent required by the relevant provision of the VSCA and the NCBCA (the "**Articles of Merger**"). The Merger shall become effective on such date and time as the Articles of Merger are duly filed or at such later date or time as Purchaser and the Company agree and specify in the Articles of Merger (the date and time the Merger becomes effective being the "**Effective Time**").

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.4 Effects of the Merger**. The Merger will have the effects set forth in this Agreement, the VSCA and the NCBCA. Without limiting the generality of the foregoing, and subject thereto, from and after the Effective Time, Purchaser shall possess all the properties, rights, privileges, powers and franchises of the Company and be subject to all of the debts, liabilities and obligations of the Company.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.5 Effect on Outstanding Shares of Company Stock**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Subject to *Section 2.5(b)*, by virtue of the Merger, automatically and without any action on the part of the holder thereof, each share of Company Common Stock and Company Class A Common Stock issued and outstanding immediately prior to the Effective Time, other than Excluded Shares, shall become and be converted into the right to receive, without interest, 0.7159 shares (the "**Exchange Ratio**") of Purchaser Common Stock (the "**Merger Consideration**").

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Notwithstanding any other provision of this Agreement, no fraction of a share of Purchaser Common Stock and no certificates or scrip therefor will be issued in the Merger; instead, Purchaser shall pay to each holder of Company Common Stock and Company Class A Common Stock who would otherwise be entitled to a fraction of a share of Purchaser Common Stock an amount in cash, rounded to the nearest cent, determined by multiplying such fraction by the Average Purchaser Stock Price.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) If, between the date of this Agreement and the Effective Time, the outstanding shares of Purchaser Common Stock, Company Common Stock, or Company Class A Common Stock shall have been increased, decreased, changed into or exchanged for a different number of shares or into a different kind of shares or securities by reason of any stock dividend, stock repurchase, subdivision, reclassification, recapitalization, split, combination, exchange of shares or other similar change in capitalization, or there shall be any extraordinary dividend or distribution (for the avoidance of doubt, any quarterly cash dividend declared by the Company or Purchaser or any other dividend declared by the Company as contemplated by Section 4.1(c) of the Company's Disclosure Letter shall not be considered an extraordinary dividend or distribution for the purposes of this subsection) paid, the Exchange Ratio shall be adjusted appropriately and proportionately to provide the holders of Company Common Stock and Company Class A Common Stock the same economic effect as contemplated by this Agreement before such event; *provided*, that nothing in this sentence shall be construed to permit Purchaser or the Company to take any action with respect to its securities that is prohibited by the terms of this Agreement. Notwithstanding any other provisions of this *Section 2.5(c)*, no adjustment shall be made in the event of the issuance of additional shares of Purchaser Common Stock as consideration in a transaction where Purchaser is the surviving corporation or in connection with any offering of shares where Purchaser receives consideration in exchange for the shares so offered.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) As of the Effective Time, except for Appraisal Shares, each Excluded Share shall be canceled and retired and shall cease to exist, and no exchange or payment shall be made with respect thereto. All shares of Purchaser Common Stock that are held by the Company, if any, other than shares held in a fiduciary capacity or in satisfaction of a debt previously contracted, shall be canceled and shall constitute authorized but unissued shares.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.6 Appraisal Rights**. Each outstanding share of Company Common Stock and Company Class A Common Stock, the holder of which has perfected his right to appraisal under the NCBCA (an "**Appraisal Shareholder**") and has not effectively withdrawn or lost such right as of the Effective Time (the "**Appraisal Shares**") shall not be converted into or represent the right to receive the Merger Consideration hereunder and shall be entitled only to such rights as are available to such holder pursuant to the applicable provisions of the NCBCA. Each holder of an Appraisal Share shall be entitled to receive the value of such Appraisal Share held by him in accordance with the applicable provisions of the NCBCA; *provided*, that such holder complies with the procedures contemplated by and set forth in the applicable provisions of the NCBCA. If any holder of any Appraisal Share shall effectively withdraw or lose such holder's appraisal rights under the applicable provisions of the NCBCA, each such Appraisal Share shall be exchangeable for the right to receive the Merger Consideration pursuant to *Section 2.5(a)*. The Company shall promptly notify Purchaser of each shareholder who asserts rights as an Appraisal Shareholder following receipt of such shareholder's written demand delivered as provided in the NCBCA. Prior to the Effective Time, the Company shall not, except with the prior written consent of Purchaser, voluntarily make any payment or commit or agree to make any payment, or settle or commit or offer to settle, any rights of an Appraisal Shareholder asserted under the NCBCA.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.7 Exchange Procedures**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) At or before the Effective Time, Purchaser shall deposit, or shall cause to be deposited, with an exchange agent company designated by Purchaser and reasonably acceptable to the Company (the "**Exchange Agent**"), pursuant to an agreement entered into before the Closing, for the benefit of the holders of record of shares of Company Common Stock and Company Class A Common Stock, whose shares have been converted into the right to receive the Merger Consideration, for exchange in accordance with this *Section 2.7, (i)* the number of shares of Purchaser Common Stock sufficient to deliver the aggregate Merger Consideration to be delivered in whole shares and (ii) any cash payable in lieu of fractional shares pursuant to *Section 2.5(b)*, and Purchaser shall instruct the Exchange Agent to timely deliver the Merger Consideration. Appropriate transmittal materials, which shall include a form letter of transmittal for each holder to utilize to exchange the holder's shares ("**Letter of Transmittal**"), shall be mailed as soon as practicable after the Effective Time to each holder of record of Company Common Stock and Company Class A Common Stock. Where shares of Company Common Stock and/or Company Class A Common Stock are represented by one of more Certificates, a completed Letter of Transmittal from a holder to the Exchange Agent will be deemed properly completed only if the completed Letter of Transmittal is accompanied by one or more Certificates representing Company Common Stock and Company Class A Common Stock (or customary affidavits and, if required by Purchaser pursuant to *Section 2.7(h)*, indemnification regarding the loss or destruction of such Certificates or the guaranteed delivery of such Certificates) representing all shares of Company Common Stock and Company Class A Common Stock to be converted thereby. Except as otherwise provided in this *Section 2.7(a)*, Purchaser shall pay all charges and expenses, including those of the Exchange Agent, in connection with the distribution of the Merger Consideration as provided in *Section 2.7*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) At and after the Effective Time, each Certificate and book entry notation evidencing ownership of shares of Company Common Stock or Company Class A Common Stock shall represent only the right to receive the Merger Consideration, and as to Appraisal Shares, shall represent only the right to receive applicable payments as set forth in *Section 2.6*. The Company shall provide to the Exchange Agent all information reasonably necessary for it to perform its obligations as specified herein.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) The transmittal materials shall (i) specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, (ii) be in a form and contain any other provisions as Purchaser may reasonably determine, (iii) include instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration, and (iv) shall contain appropriate instructions for the distribution of the Merger Consideration to holders of Company Common Stock and Company Class A Common Stock held in book entry notation form in the Company's stock records. Upon (i) the proper surrender of any Certificates to the Exchange Agent, together with a properly completed and duly executed Letter of Transmittal or (ii) the delivery of properly completed instructions effecting surrender of shares the ownership of which is evidenced by book entry notations, the holder of such shares of Company Common Stock and Company Class A Common Stock shall be entitled to receive in exchange therefor a statement reflecting shares issued in book entry form, representing that number of whole shares of Purchaser Common Stock that such holder has the right to receive pursuant to *Section 2.5(a)* and a check in the amount equal to any cash in lieu of fractional shares such holder is entitled to pursuant to *Section 2.5(b)* and any dividends or other distributions to which such holder is entitled to pursuant to *Section 2.7(d)*. Certificates so surrendered shall forthwith be canceled. As soon as practicable following receipt of the properly completed Letter of Transmittal and any necessary accompanying documentation, the Exchange Agent shall distribute Purchaser Common Stock and cash in lieu of fractional shares as provided herein. The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of Purchaser Common Stock held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such shares for the account of the Persons entitled thereto. If there is a transfer of ownership of any shares of Company Common Stock or Company Class A Common Stock not registered in the transfer records of the Company, the Merger Consideration shall be issued to the transferee thereof if the Certificates representing such Company Common Stock or Company Class A Common Stock are presented to the Exchange Agent, accompanied by all documents required, in the reasonable judgment of Purchaser and the Exchange Agent, to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) No dividends or other distributions declared or made after the Effective Time with respect to Purchaser Common Stock issued pursuant to this Agreement shall be remitted to any Person entitled to receive shares of Purchaser Common Stock hereunder until such Person surrenders his or her Certificates or effects surrender of his or her shares the ownership of which is evidenced by book entry notations in accordance with this *Section 2.7*. Upon the surrender of such Person's Certificates or surrender of shares the ownership of which is evidenced by book entry notations, such Person shall be entitled to receive any dividends or other distributions, without interest thereon, which after the Effective Time had become payable but not paid with respect to shares of Purchaser Common Stock represented by such Person's Certificates or such book entry notations.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) The stock transfer books of the Company shall be closed immediately upon the Effective Time and from and after the Effective Time there shall be no transfers on the stock transfer records of the Company of any shares of Company Common Stock or Company Class A Common Stock. If, after the Effective Time, Certificates are presented to Purchaser, they shall be canceled and exchanged for the Merger Consideration deliverable in respect thereof pursuant to this Agreement in accordance with the procedures set forth in this *Section 2.7*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) Any portion of the aggregate amount of cash to be paid in lieu of a fraction of a share of Purchaser Common Stock pursuant to *Section 2.5*, any dividends or other distributions to be paid pursuant to this *Section 2.7* or any proceeds from any investments thereof that remain unclaimed by the holders of Company Common Stock or Company Class A Common Stock for six (6) months after the Effective Time shall be repaid by the Exchange Agent to Purchaser upon the written request of Purchaser. After such request is made, each holder of Company Common Stock or Company Class A Common Stock who has not theretofore complied with this *Section 2.7* shall look only to Purchaser for the Merger Consideration deliverable in respect of each share of Company Common Stock or Company Class A Common Stock such shareholder holds, as determined pursuant to *Section 2.5* of this Agreement, without any interest thereon. Notwithstanding the foregoing, neither the Exchange Agent nor any party to this Agreement (or any Affiliate thereof) shall be liable to any former holder of Company Common Stock or Company Class A Common Stock for any amount delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) Purchaser and the Exchange Agent shall be entitled to rely upon the Company's stock transfer books to establish the identity of those Persons entitled to receive the Merger Consideration, which books shall be conclusive with respect thereto. The Company shall provide to the Exchange Agent all information reasonably necessary for it to perform its obligations as specified herein. In the event of a dispute with respect to ownership of stock represented by any Certificate, Purchaser and the Exchange Agent shall be entitled to deposit any Merger Consideration represented thereby in escrow with an independent third party and thereafter be relieved with respect to any claims thereto.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h) If any Certificate shall have been lost, stolen, mutilated or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen, mutilated or destroyed and the posting by such Person of a bond in such amount as the Exchange Agent may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof pursuant to *Section 2.5*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.8 Effect on Outstanding Shares of Purchaser Common Stock**. At the Effective Time, and except as provided in *Section 2.5(d)*, each share of Purchaser Common Stock issued and outstanding immediately before the Effective Time shall remain an issued and outstanding share of common stock of the Surviving Corporation and shall not be affected by the Merger.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.9 Directors of Surviving Corporation After Effective Time**. Immediately after the Effective Time, until their respective successors are duly elected or appointed and qualified, the directors of the Surviving Corporation shall consist of the directors of Purchaser serving immediately before the Effective Time.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.10 Articles of Incorporation and Bylaws**. The articles of incorporation of Purchaser, as in effect immediately before the Effective Time, shall be the articles of incorporation of the Surviving Corporation until thereafter amended in accordance with applicable law and the terms thereof. The bylaws of Purchaser, as in effect immediately before the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter amended in accordance with applicable law and the terms of such bylaws.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.11 Treatment of Restricted Stock Awards**. At the Effective Time, each share of restricted stock awarded to any employee or service provider of the Company or any of its Subsidiaries under the Company Restricted Stock Plan that is unvested and subject to restrictions ("**Unvested Company Restricted Stock**") shall fully vest only in accordance with the terms of the Company Restricted Stock Plan and the applicable award agreement, and be canceled and converted automatically into the right to receive the Merger Consideration payable pursuant to *Section 2.5* on the shares of Company Common Stock underlying the Unvested Company Restricted Stock, treating the shares of Unvested Company Restricted Stock in the same manner as all other shares of Company Common Stock for such purposes.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.12 Bank Merger**. Upon the execution and delivery of this Agreement, Purchaser Bank and Company Bank shall enter into the Bank Agreement and Plan of Merger, in the form attached hereto as <u>Exhibit B</u>, pursuant to which Company Bank shall merge with and into Purchaser Bank (the "**Bank Merger**"). The parties intend that the Bank Merger will become effective immediately following the Effective Time. Prior to the Effective Time, the Company shall cause Company Bank, and Purchaser shall cause Purchaser Bank, to execute such certificates or articles of merger and such other documents and certificates as are necessary to effectuate the Bank Merger ("**Bank Merger Certificates**").

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.13 Alternative Structure**. Notwithstanding anything to the contrary contained in this Agreement, before the Effective Time, Purchaser may specify that the structure of the transactions contemplated by this Agreement be revised and the parties shall enter into such alternative transactions as Purchaser may reasonably determine to effect the purposes of this Agreement; *provided, however*, that such revised structure shall not (i) alter or change the amount or kind of the Merger Consideration, (ii) materially impede or delay consummation of the transactions contemplated by this Agreement, or (iii) adversely limit or impact the qualification of the Merger as a "reorganization" under the provisions of Section 368(a) of the IRC. If Purchaser elects to make such a revision, the parties agree to execute appropriate documents to reflect the revised structure.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.14 Absence of Control**. It is the intent of the parties hereto that Purchaser, by reason of this Agreement, shall not be deemed (until consummation of the transactions contemplated hereby) to control, directly or indirectly, the Company or its Subsidiaries or to exercise, directly or indirectly, a controlling influence over the management, policies or operation of the Company or its Subsidiaries. Nothing contained in this Agreement shall give Purchaser, directly or indirectly, the right to control or direct the operations of the Company prior to the Effective Time or shall give the Company, directly or indirectly, the right to control or direct the management, policies or operation of Purchaser. Prior to the Effective Time, (a) each of Purchaser and the Company shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its and its Subsidiaries' respective management, policies and operation, (b) the Company shall not be under any obligation to act in a manner that could reasonably be deemed to constitute anti-competitive behavior under federal or state antitrust laws and (c) the Company shall not be required to agree to any material obligation that is not contingent upon the consummation of the Merger.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.15 Additional Actions**. If, at any time after the Effective Time, Purchaser or Purchaser Bank shall consider or be advised that any further deeds, assignments or assurances in law or any other acts are necessary or desirable to (i) vest, perfect or confirm, of record or otherwise, in Purchaser or Purchaser Bank its right, title or interest in, to or under any of the rights, properties or assets of the Company or Company Bank, or (ii) otherwise carry out the purposes of this Agreement, Company Bank, the Company and their respective officers and directors shall be deemed to have granted to Purchaser and Purchaser Bank an irrevocable power of attorney to execute and deliver, in such official corporate capacities, all such deeds, assignments or assurances in law or any other acts as are necessary or desirable to (a) vest, perfect or confirm, of record or otherwise, in Purchaser or Purchaser Bank its right, title or interest in, to or under any of the rights, properties or assets of the Company or Company Bank or (b) otherwise carry out the purposes of this Agreement, and the respective officers and directors of Purchaser or Purchaser Bank are authorized in the name of the Company or Company Bank or otherwise to take any and all such action.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.16 Withholding**. Purchaser or the Exchange Agent will be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement or the transactions contemplated hereby to any holder of Company Common Stock or Company Class A Common Stock such amounts as Purchaser (or any Affiliate thereof) or the Exchange Agent are required to deduct and withhold with respect to the making of such payment under the IRC, or any applicable provision of U.S. federal, state, local or non-U.S. income tax law. To the extent that such amounts are properly withheld by Purchaser or the Exchange Agent, such withheld amounts will be treated for all purposes of this Agreement as having been paid to the holder of Company Common Stock or Company Class A Common Stock in respect of whom such deduction and withholding were made by Purchaser or the Exchange Agent.

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**ARTICLE III.**<br> **REPRESENTATIONS AND WARRANTIES**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**3.1 Disclosure Letters; Standard**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Before the execution and delivery of this Agreement, Purchaser and the Company have each delivered to the other a letter (each, its "**Disclosure Letter**") setting forth, among other things, facts, circumstances and events the disclosure of which is required or appropriate either in response to an express disclosure requirement contained in a provision hereof or as an exception to one or more of their respective representations and warranties contained in *Section 3.2* or *Section 3.3*, as applicable, or to one or more of its covenants contained in Articles IV or V (and making specific reference to the Section of this Agreement to which they relate). Disclosure in any paragraph of the Disclosure Letter shall apply only to the indicated Section of this Agreement except to the extent that it is reasonably clear on the face of such disclosure (notwithstanding the absence of a specific cross reference) that it is relevant to another paragraph of the Disclosure Letter or another Section of this Agreement. Documents, but not required Disclosure Letter items, are deemed to have been made available by Purchaser to the Company or by the Company to Purchaser if such documents (i) were included in the virtual data room of a party at least one (1) calendar day prior to the date hereof or (ii) are available on the website of the SEC through its Electronic Data Gathering, Analysis and Retrieval system (EDGAR).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) No representation or warranty of the Company or Purchaser contained in *Sections 3.2* or *3.3*, as applicable (other than (i) the representations and warranties contained in *Sections 3.2(c)* and *3.3(c),* which shall be true in all respects, and (ii) the representations and warranties contained in *Sections 3.2(a)*, *3.2(b)*, *3.2(d), 3.2(e)(i) and (ii), 3.2(j)(i) and (ii), 3.2(r), 3.2(u), 3.2(x), 3.3(a), 3.3(b)*(with respect to Significant Subsidiaries only), *3.3(d), 3.3(e)(i) and (ii), 3.3(k), and 3.3(s)*, which shall be true in all material respects) will be deemed untrue or incorrect, and no party will be deemed to have breached a representation or warranty, as a consequence of the existence of any fact, event or circumstance unless such fact, event or circumstance, individually or taken together with all other facts, events or circumstances inconsistent with any representation or warranty contained in *Sections 3.2* or *3.3*, has had or is reasonably likely to have a Material Adverse Effect with respect to the Company or Purchaser, as the case may be (it being understood that, except with respect to *Sections 3.2(j)(i) and 3.3(k)*, for purposes of determining the accuracy of such representations and warranties, all "Material Adverse Effect" qualifications and other materiality qualifications contained in such representations and warranties shall be disregarded).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**3.2 Representations and Warranties of the Company**. Except (i) as disclosed in the Company's Disclosure Letter and (ii) for information and documents commonly known as "confidential supervisory information" to the extent prohibited by applicable law from disclosure (and as to which nothing in this Agreement shall require disclosure), the Company represents and warrants to Purchaser that:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) *Organization and Qualification*. The Company is a corporation duly organized and validly existing under the laws of the State of North Carolina and properly registered with the Federal Reserve as a bank holding company and all other required state and federal regulatory agencies. The Company has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it. The Company is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on the Company. The Company engages only in activities, and holds properties only of the types, permitted to bank holding companies by the Bank Holding Company Act of 1956, as amended, and the rules, regulations and interpretations promulgated thereunder (collectively, the "**BHCA**").

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Subsidiaries*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) The Company's Disclosure Letter sets forth with respect to each of the Company's direct and indirect Subsidiaries its name, its jurisdiction of its organization, the Company's percentage ownership, the number of shares of stock or other equity interests owned or controlled by the Company and the name and number of shares held by any other person who owns any stock of the Subsidiary. The Company owns, directly or indirectly, all of the issued and outstanding shares of capital stock or other equity interests of each of its Subsidiaries, free and clear of any Liens. There are no contracts, commitments, agreements or understandings relating to the Company's right to vote or dispose of any equity securities of its Subsidiaries. The Company's ownership interest in each of its Subsidiaries complies with all applicable laws, rules and regulations relating to equity investments by bank holding companies or by North Carolina state-chartered banks.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Each of the Company's Subsidiaries is a corporation or limited liability company duly organized and validly existing under the laws of its jurisdiction of organization, has all requisite corporate or limited liability company power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it and is duly qualified or licensed as a foreign business entity to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on the Company.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) The outstanding shares of capital stock, membership interests, or other representations of equity interest of each Subsidiary of the Company have been validly authorized and are validly issued, fully paid and nonassessable and free of preemptive rights. No shares of capital stock or other equity interests of any such Subsidiary are or may be required to be issued by virtue of any options, warrants or other rights, no securities or other equity interests exist that are convertible into or exchangeable for shares of such capital stock or other equity interests or any other debt or equity security of any such Subsidiary, and there are no contracts, commitments, agreements or understandings of any kind for the issuance of additional shares of capital stock or other debt or equity security of any such Subsidiary or options, warrants or other rights with respect to such securities.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) Company Bank is a bank chartered by the State of North Carolina. No Subsidiary of the Company other than Company Bank is an "insured depository institution" as defined in the Federal Deposit Insurance Act, as amended, and the applicable regulations thereunder. Company Bank deposits are insured by the FDIC through the Deposit Insurance Fund to the fullest extent permitted by law. Company Bank is a member in good standing of the FHLB and of the FDIC and owns the requisite amount of stock in each institution.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *Capital Structure*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) The authorized capital stock of the Company consists of 11,000,000 shares divided into 10,000,000 shares of common stock and 1,000,000 shares of Company Preferred Stock. The Company's common stock is divided into two classes, of which 9,000,000 shares are designated Company Common Stock and 1,000,000 shares are designated Company Class A Common Stock.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) As of the date of this Agreement:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(A) 4,099,788 shares of Company Common Stock are issued and outstanding, all of which are validly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and were issued in full compliance with all applicable laws;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(B) 87,095 shares of Class A Common Stock are issued and outstanding, all of which are validly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and were issued in full compliance with all applicable laws;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(C) 40,000 shares of Company Common Stock are reserved for issuance pursuant to the Company Restricted Stock Plan, of which amount 12,900 shares of Unvested Company Restricted Stock were previously issued to award recipients. Set forth in Section 3.2(c)(ii)(C) of the Company's Disclosure Letter is a complete and accurate list of all unvested awards under the Company Restricted Stock Plan, including names of recipients, award dates, and vesting schedules;

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(D) No shares of the Company Preferred Stock have been issued or are outstanding.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) Except for the Unvested Company Restricted Stock, no stock options or other rights to purchase Company Common Stock, Company Class A Common Stock, or Company Preferred Stock are issued or outstanding.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) No bonds, debentures, notes or other indebtedness, in each case having the right to vote on any matters on which shareholders of the Company may vote, are issued or outstanding.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) Except as set forth in this *Section 3.2(c)*, as of the date of this Agreement, (A) no shares of capital stock or other voting securities of the Company are issued, reserved for issuance or outstanding, and (B) neither the Company nor any of its Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, puts, calls, rights, convertible securities, commitments or agreements of any character obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, any additional shares of capital stock of the Company (including any rights plan or agreement and including any cash awards where the amount of payment is determined in whole or in part on the price of any capital stock of the Company or its Subsidiaries) or obligating the Company or any of its Subsidiaries to grant, extend or enter into any such option, warrant, put, call, right, convertible security, commitment or agreement. Except as set forth in this *Section 3.2(c)*, neither the Company nor any of its Subsidiaries has or is bound by any rights of any character relating to the purchase, sale or issuance or voting of, or right to receive dividends or other distributions on shares of Company Common Stock, or any other security of the Company or a Subsidiary of the Company or any securities representing the right to vote, purchase or otherwise receive any shares of Company Common Stock or any other security of the Company or a Subsidiary of the Company. Other than as stated herein, there are no outstanding securities or instruments that contain any redemption or similar provisions, and there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vi) Other than the Company Voting Agreements and except as otherwise contemplated in *Section 5.8* of this Agreement, there are no voting trusts, shareholder agreements, proxies or similar agreements to which the Company or any of its Subsidiaries has a contractual obligation in effect with respect to the voting or transfer of Company Common Stock or other voting securities or equity interests of the Company or granting any shareholder or other person any registration rights. The Company does not have in effect a "poison pill" or similar shareholder rights plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *Authority*. The Company has all requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and, subject to the consents, approvals and filings set forth in *Section 3.2(f)*, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate actions on the part of the Company's Board of Directors or the Board of Directors of Company Bank, as applicable, and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement other than the approval and adoption of this Agreement by the affirmative vote of the holders of a majority of the outstanding shares of each of the Company Common Stock and Company Class A Common Stock entitled to be cast, each voting as a separate voting group. The Company's Board of Directors has unanimously determined that this Agreement is advisable and has directed that this Agreement be submitted to the Company's shareholders for approval and adoption and has unanimously adopted a resolution to the foregoing effect and recommends that the shareholders approve and adopt this Agreement. This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization and similar laws relating to or affecting insured depository institutions or their parent companies or creditors' rights and remedies generally and to general principles of equity, whether applied in a court of law or a court of equity (the "**Enforceability Exceptions**").

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) *No Violations*. The execution, delivery and performance of this Agreement by the Company do not, and the consummation of the transactions contemplated by this Agreement will not, (i) assuming that the consents, approvals and filings referred to in *Section 3.2(f)* have been obtained and the applicable waiting periods have expired, violate any law, rule or regulation or any judgment, decree, order, governmental permit or license to which the Company or any of its Subsidiaries (or any of their respective properties or assets) is subject, (ii) violate the articles of incorporation or bylaws of the Company or the similar organizational documents of any of its Subsidiaries or (iii) constitute a breach or violation of, or the loss of any benefit under, or a default under (or an event that, with due notice or lapse of time or both, would constitute a default under), or result in the termination of, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, indenture, deed of trust, loan agreement or other agreement, instrument or obligation to which the Company or any of its Subsidiaries is a party, or to which any of their respective properties or assets may be subject.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) *Consents and Approvals*. Except for (i) filings of applications and notices with, receipt of approvals or no objections from, and the expiration of related waiting periods required by, federal and state banking authorities, including filings and notices with the Federal Reserve, the Virginia State Corporation Commission Bureau of Financial Institutions ("**VSCCBFI**") and the North Carolina Office of the Commissioner of Banks ("**NCCOB**"), (ii) the filing with the SEC of a Proxy Statement-Prospectus in definitive form relating to the meeting of the Company's shareholders to be held in connection with this Agreement and the transactions contemplated hereby and of the Registration Statement in which such Proxy Statement-Prospectus will be included as a prospectus, and declaration of effectiveness of the Registration Statement, (iii) the filing of the Articles of Merger with the VASCC and the NCSOS pursuant to the VSCA and the NCBCA and the filing of the Bank Merger Certificates, (iv) filing with NASDAQ of a notification or application of the listing of the shares of Purchaser Common Stock to be issued in the Merger, (v) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of shares of Purchaser Common Stock pursuant to this Agreement, and (vi) the approval by the Company's shareholders required to approve the Merger under North Carolina law, no consents or approvals of, or filings or registrations with, any Governmental Entity or any third party are required to be made or obtained by the Company in connection with the execution and delivery by the Company of this Agreement or the consummation by the Company of the Merger and the other transactions contemplated by this Agreement, including the Bank Merger. As of the date hereof, the Company has no Knowledge of any reason pertaining to the Company why any of the approvals referred to in this *Section 3.2(f)* should not be obtained without the imposition of any material condition or restriction described in *Section 6.2(e)*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) *Governmental Filings*. The Company and each of its Subsidiaries has timely filed all reports, schedules, registration statements and other documents that it has been required to file since January 1, 2020 with the FDIC, the Federal Reserve, the NCCOB or any other Governmental Entity. As of their respective dates, each of such filings complied in all material respects with all laws or regulations under which it was filed (or was amended to comply promptly following discovery of such noncompliance).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h) *Financial Statements*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) The Company has previously made available to Purchaser correct and complete copies of (A) the consolidated balance sheets of the Company and its Subsidiaries as of December 31, 2021, 2020 and 2019 and related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2021, together with the notes thereto, accompanied by the audit report of the Company's independent auditor (the "**Audited Financial Statements**") and (B) the unaudited consolidated balance sheet of the Company and its Subsidiaries as of September 30, 2022, and related consolidated statement of income, and comprehensive income for the nine (9) month period ended September 30, 2022 (such unaudited financial statements, together with the Audited Financial Statements, the "**Financial Statements**"). The Financial Statements were prepared from the books and records of the Company and its Subsidiaries, fairly present the consolidated financial position of the Company and its Subsidiaries in each case at and as of the dates indicated and the consolidated results of operations and cash flows of the Company and its Subsidiaries for the periods indicated, and, except as otherwise set forth in the notes thereto, and except as set forth on Section 3.2(h) of the Company's Disclosure Letter, were prepared in accordance with GAAP consistently applied throughout the periods covered thereby; *provided, however*, that the unaudited financial statements for the nine (9) month period ended September 30, 2022 are subject to normal year-end adjustments (which will not be material individually or in the aggregate) and lack footnotes to the extent permitted under applicable regulations and GAAP. The books and records of the Company and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other legal and accounting requirements and reflect only actual transactions. As of the date of this Agreement, the Company's independent auditor, Elliott Davis PLLC, has not resigned (or informed the Company that it intends to resign) or been dismissed as independent auditor of the Company as a result of or in connection with any disagreements with the Company on a matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) The Company has made available to Purchaser true and complete copies of the Reports of Condition and Income as of December 31, 2021, December 31, 2020, December 31, 2019 and June 30, 2020 (the "**Bank Call Reports**") for Company Bank. The Bank Call Reports fairly present, in all material respects, the financial position of Company Bank and the results of its operations at the date and for the applicable period indicated in each Bank Call Report in conformity with the instructions to such Bank Call Report. The Bank Call Reports do not contain any items of special or nonrecurring income or any other income not earned in the ordinary course of business except as expressly specified therein. Company Bank has calculated its allowance for loan and lease losses ("**ALLL**") in accordance with regulatory accounting principles, including the Instructions for Preparation of Consolidated Reports of Condition and Income and the Interagency Policy Statement on the Allowance for Loan and Lease Losses as applied to banking institutions and in accordance with all applicable rules and regulations.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) *Undisclosed Liabilities*. Except as set forth in Section 3.2(i) of the Company's Disclosure Letter, neither the Company nor any of its Subsidiaries has incurred any debt, liability or obligation of any nature whatsoever (whether accrued, contingent, absolute or otherwise and whether due or to become due, "**Liabilities**") other than Liabilities reflected on or reserved against in the consolidated balance sheet of the Company as of December 31, 2021, except for (i) Liabilities incurred since December 31, 2021 in the ordinary course of business consistent with past practice that, either alone or when combined with all similar Liabilities, have not had, and would not reasonably be expected to have, a Material Adverse Effect on the Company and (ii) Liabilities incurred for legal, accounting, financial advising fees and out-of-pocket or other expenses or fees in connection with the transactions contemplated by this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j) *Absence of Certain Changes or Events*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Since December 31, 2021, the Company and its Subsidiaries have conducted their respective businesses only in the ordinary course of such businesses consistent with their past practices and there has not been any event or occurrence that has had, or is reasonably expected to have, a Material Adverse Effect on the Company.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Since December 31, 2021, none of the Company or any of its Subsidiaries have taken any action that would be prohibited by clauses (b)(i), (c), (d), (e), (h), (j), (k), (n), (o) or (p) of *Section 4.1* if taken after the date hereof.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(k) *Litigation*. There are no material suits, actions or legal, administrative or arbitration or other proceedings, or investigations of any nature pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any property or asset of the Company or any of its Subsidiaries that (i) are seeking damages or declaratory relief against the Company or any of its Subsidiaries or (ii) challenge the validity or propriety of the transactions contemplated by this Agreement. There are no judgments, decrees, injunctions, orders or rulings of any Governmental Entity or arbitrator outstanding against the Company or any of its Subsidiaries or the assets of the Company or any of its Subsidiaries (or that, upon consummation of the Merger, would apply to Purchaser or any of its Subsidiaries). Since January 1, 2020, (i) there have been no investigations, subpoenas, written demands, or document requests received by the Company or any of its Subsidiaries from any Governmental Entity (other than in the ordinary course of business) and (ii) no Governmental Entity has requested that the Company or any of its Subsidiaries enter into a settlement, negotiation or tolling agreement with respect to any matter related to any such investigation, subpoena, written demand, or document request.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(l) *Absence of Regulatory Actions*. Since January 1, 2020, neither the Company nor any of its Subsidiaries has been a party to any cease and desist order, written agreement or memorandum of understanding with, or any commitment letter or similar undertaking to, or has been ordered to pay any civil money penalty by, or has been subject to any action, proceeding, order or directive by any Governmental Entity, or has adopted any board resolutions relating to such matters as are material to the business of the Company or its Subsidiaries at the request of any Governmental Entity, or has been advised by any Governmental Entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such action, proceeding, order, directive, written agreement, memorandum of understanding, commitment letter, board resolutions or similar undertaking. To the Knowledge of the Company, there are no material unresolved violations, criticisms or exceptions by any Governmental Entity with respect to any report or statement relating to any examinations of the Company or its Subsidiaries.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(m) *Compliance with Laws*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) The Company and each of its Subsidiaries have complied in all material respects with and are not in material default or violation under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to the Company or any of its Subsidiaries, including without limitation all laws related to data protection or privacy, the Equal Credit Opportunity Act and Regulation B, the Fair Housing Act, the Fair Credit Reporting Act, the Truth in Lending Act and Regulation Z, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Electronic Fund Transfer Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Interagency Policy Statement on Retail Sales of Nondeposit Investment Products, the SAFE Mortgage Licensing Act of 2008, the Real Estate Settlement Procedures Act and Regulation X, and any other law relating to bank secrecy, consumer lending, holding consumer assets, processing consumer payments, consumer advertising and disclosures and unfair, deceptive or abusive acts or practices, discriminatory lending, financing or leasing practices, money laundering prevention, Sections 23A and 23B of the Federal Reserve Act, the Sarbanes-Oxley Act, and all agency requirements relating to the origination, sale and servicing of mortgage and consumer loans. The Company and each of its Subsidiaries has, and has had at all times since January 1, 2020, all material permits, licenses, certificates of authority, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Entities that are required to permit it to carry on its business as it is presently conducted. All such permits, licenses, certificates of authority, orders and approvals are in full force and effect, and no suspension or cancellation of any of them is, to the Knowledge of the Company, threatened. Neither the Company nor any of its Subsidiaries has been given notice or been charged with any violation of, any law, ordinance, regulation, order, writ, rule, decree or condition to approval of any Governmental Entity that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on the Company.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) The Company and each of its Subsidiaries, as applicable, maintains a written consumer compliance program that maintains procedures and controls reasonably designed to ensure compliance with applicable Consumer Protection Laws. All relevant employees of and consultants to the Company and its Subsidiaries, as applicable, have been informed of the applicable consumer compliance policies.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) To the Knowledge of the Company, (i) neither the Company nor any of its Subsidiaries is under investigation by any Governmental Entity for a violation of any applicable Consumer Protection Laws, and (ii) there are no asserted or threatened claims, notices or administrative or court complaints against the Company or any of its Subsidiaries (whether by a Governmental Entity or any other party) relating to compliance with applicable Consumer Protection Laws by the Company, its Subsidiaries or any third parties acting on their behalf.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) Except for routine examinations conducted by a Governmental Authority in the ordinary course of the business of the Company or any of its Subsidiaries, no Governmental Entity has initiated any proceeding or, to the Knowledge of the Company, investigation into the business or operations of the Company or any of its Subsidiaries since January 1, 2020. There is no unresolved violation, criticism or exception by any Governmental Entity with respect to any report or statement relating to any examinations of the Company and its Subsidiaries. Except for routine examinations conducted by a Governmental Entity in the ordinary course of business of the Company or any of its Subsidiaries, no examination of the Company or any of its Subsidiaries by any Governmental Entity has taken place or is currently under way, and, to the Knowledge of the Company, no report of examination is pending.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(n) *Taxes*. All federal, state, local and foreign tax returns required to be filed by or on behalf of the Company or any of its Subsidiaries have been timely filed or requests for extensions have been timely filed and any such extension shall have been granted and not have expired, and all such filed returns are complete and accurate in all material respects. All Taxes shown on such returns, all Taxes required to be shown on returns for which extensions have been granted and all other Taxes required to be paid by the Company or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on the Company's Financial Statements (in accordance with GAAP). There is no pending, or to the Knowledge of the Company, threatened, audit examination, deficiency assessment, tax investigation or refund litigation with respect to any Taxes of the Company or any of its Subsidiaries, and no claim has been made in writing by any authority in a jurisdiction where the Company or any of its Subsidiaries do not file tax returns that the Company or any such Subsidiary is subject to taxation in that jurisdiction. All Taxes, interest, additions and penalties due with respect to completed and settled examinations or concluded litigation relating to the Company or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on the Company's Financial Statements (in accordance with GAAP). The Company and its Subsidiaries have not executed an extension or waiver of any statute of limitations on the assessment or collection of any tax due that is currently in effect. The Company and each of its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party, and the Company and each of its Subsidiaries has timely complied with all applicable information reporting requirements under Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and local information reporting requirements. Neither the Company nor any of its Subsidiaries has made any payments and is not a party to any agreement, and does not maintain any plan, program or arrangement, which could require it to make any payments that would not be fully deductible under Section 162(m) of the IRC. The Company and each of its Subsidiaries has properly preserved all net operating losses and alternative minimum tax credits shown on the Company's Audited Financial Statements.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(o) *Agreements*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) The Company has previously made available to Purchaser, and Section 3.2(o) of the Company's Disclosure Letter sets forth, any contract, arrangement, commitment or understanding (whether written or oral) to which the Company or any of its Subsidiaries is a party or is bound:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(A) with any director, officer or employee of the Company or any of its Subsidiaries the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company or any of its Subsidiaries of the nature contemplated by this Agreement; (2) with respect to the employment or engagement of any directors, officers, employees or consultants; or (3) that relates to any benefit that will be increased, or the vesting or payment of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement, or the value of which will be calculated on the basis of any of the transactions contemplated by this Agreement (including any stock option plan, phantom stock or stock appreciation rights plan, restricted stock plan or stock purchase plan);

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(B) that (1) contains a non-compete or client, customer or employee non-solicitation requirement or any other provision that restricts the conduct of, or the manner of conducting, any line of business of the Company or any of its Subsidiaries (or, following the consummation of the transactions contemplated hereby, Purchaser or any of its Subsidiaries), (2) obligates the Company or any of its Affiliates (or, following the consummation of the transactions contemplated hereby, Purchaser or any of its Subsidiaries) to conduct business with any third party on an exclusive or preferential basis, including, but not limited to, any service providers or vendors, or (3) requires referrals of business or requires the Company or any of its Subsidiaries to make available investment opportunities to any person on a priority or exclusive basis;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(C) pursuant to which the Company or any of its Subsidiaries may become obligated to invest in or contribute capital to any entity;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(D) that relates to borrowings of money (or guarantees thereof) by the Company or any of its Subsidiaries in an amount that exceeds $100,000, other than FHLB and Federal Reserve Bank of Richmond borrowings and repurchase agreements with customers, in each case entered into in the ordinary course of business consistent with past practice;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(E) that grants any right of first refusal, right of first offer or similar right with respect to any material assets, rights or properties of the Company or any of its Subsidiaries;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(F) that limits or commits to the payment of dividends by the Company or any of its Subsidiaries;

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(G) that relates to the involvement of the Company or any Subsidiary in a joint venture, partnership, limited liability company agreement or other similar agreement or arrangement, or to the formation, creation or operation, management or control of any partnership or joint venture with any third parties;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(H) that relates to an acquisition, divestiture, merger or similar transaction and that contains representations, covenants, indemnities or other obligations (including indemnification, "earn-out" or other contingent obligations) that are still in effect;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(I) that is a lease or license with respect to any property, real or personal, whether as landlord, tenant, licensor or licensee, involving a liability or obligation as obligor in excess of $50,000 per annum;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(J) that is a consulting agreement or data processing, software programming or licensing contract involving the payment of more than $50,000 per annum; or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(K) that is not of the type described in clauses (A) through (J) above and that involved payments by, or to, the Company or any of its Subsidiaries in the fiscal year ended December 31, 2021, or that could reasonably be expected to involve such payments during the fiscal year ending December 31, 2022, of more than $100,000 (excluding Loans) or the termination of which would require payment by the Company or any of its Subsidiaries of an amount in excess of $100,000.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Each contract, arrangement, commitment or understanding of the type described in this *Section 3.2(o)*, whether set forth in Section 3.2(o) the Company's Disclosure Letter or not, is referred to herein as a "**Company Contract**." The Company has no Knowledge of any material violation of any Company Contract by any of the other parties thereto. Each Company Contract is valid and binding on the Company or one of its Subsidiaries, as applicable, and in full force and effect, except as, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company. The Company and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it under each Company Contract. To the Knowledge of the Company, each counterparty to each Company Contract has in all material respects performed all obligations required to be performed by it under such Company Contract, and no event or condition exists that constitutes or, after notice or lapse of time or both, will constitute, a material default on the part of the Company or any of its Subsidiaries under any such Company Contract.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) Neither the Company nor any of its Subsidiaries is in default under (and no event has occurred that with due notice or lapse of time or both, would constitute a default under) or is in material violation of any provision of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or other agreement to which it is a party or by which it is bound or to which any of its respective properties or assets is subject and, to the Knowledge of the Company, no other party to any such agreement (excluding any Loan or extension of credit made by the Company or any of its Subsidiaries) is in default in any respect thereunder.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(p) *Intellectual Property; Company IT Systems*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) The Company and each of its Subsidiaries owns or possesses valid and binding licenses and other rights to use (in the manner and the geographic areas in which they are currently used) without payment all intellectual property, including patents, copyrights, trade secrets, trade names, service marks and trademarks, material to its business. Section 3.2(p) of the Company's Disclosure Letter sets forth a complete and correct list of all material patents, trademarks, trade names, service marks and copyrights owned by or licensed to the Company or any of its Subsidiaries for use in its business, and all licenses and other agreements relating thereto and all agreements relating to third party intellectual property that the Company or any of its Subsidiaries is licensed or authorized to use in its business, including without limitation any software licenses but excluding any so-called "shrink-wrap" license agreements and other similar computer software licensed in the ordinary course of business and/or otherwise resident on desktop computers (collectively, the "**Company Intellectual Property**"). With respect to each item of Company Intellectual Property owned by the Company or any of its Subsidiaries, the owner possesses all right, title and interest in and to the item, free and clear of any Lien. With respect to each item of Company Intellectual Property that the Company or any of its Subsidiaries is licensed or authorized to use, the license, sublicense or agreement covering such item is legal, valid, binding, enforceable and in full force and effect as to the Company and the Subsidiaries. Neither the Company nor any of its Subsidiaries has received any charge, complaint, claim, demand or notice alleging any interference, infringement, misappropriation or violation with or of any intellectual property rights of a third party (including any claims that the Company or any of its Subsidiaries must license or refrain from using any intellectual property rights of a third party). To the Knowledge of the Company, neither the Company nor any of its Subsidiaries has interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of third parties and no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of the Company or any of its Subsidiaries.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) To the Knowledge of the Company, all information technology and computer systems (including software, information technology and telecommunication hardware and other equipment) relating to the transmission, storage, maintenance, organization, presentation, generation, processing or analysis of data and information, whether or not in electronic format, used in or necessary to the conduct of the business of the Company or its Subsidiaries (collectively, the "**Company IT Systems**") have been properly maintained by technically competent personnel, in accordance with standards set by the manufacturers or otherwise in accordance with standards in the industry, to ensure proper operation, monitoring and use. The Company IT Systems are in good working condition to effectively perform all information technology operations necessary to conduct the Company's consolidated business as currently conducted. Neither the Company nor any of its Subsidiaries has experienced within the past two (2) years any material disruption to, or material interruption in, the conduct of its business attributable to a defect, bug, breakdown, cyber incident, data breach, or other failure or deficiency of the Company IT Systems. To the Knowledge of the Company, the Company and its Subsidiaries are, and at all times through the date of this Agreement have been, in compliance with all of their applicable contractual obligations and with all applicable laws, in each case, regarding data privacy or individually identifiable personal information relating to an identifiable or identified natural person ("**Personal Information**"), including with respect to the collection, storage, processing, dissemination, combination, transfer, disclosure and use of Personal Information (collectively, "**Privacy Obligations**"). To the Knowledge of the Company, no Person has (i) gained unauthorized access to any of the Company IT Systems that has had, or is reasonably expected to have, a Material Adverse Effect on the Company or an obligation to notify any Governmental authority or (ii) alleged in writing that the Company or any of its Subsidiaries have breached any of their respective Privacy Obligations in any material respect. The Company and its Subsidiaries have taken commercially reasonable steps and implemented commercially reasonable safeguards, consistent with accepted industry practices, designed to protect their products, services and the Company IT Systems from unauthorized access and free from any disabling codes or instructions, spyware, Trojan horses, worms, viruses or other software routines that permit or cause unauthorized access to, or unauthorized disruption, impairment, disablement, or destruction of, software, data or other materials ("**Malicious Code**"). To the Knowledge of the Company, the Company IT Systems or other assets used by the Company or any of its Subsidiaries, including any Company software, (i) are as of the date of this Agreement free from any material Malicious Code, and (ii) except as has not resulted in, and would not reasonably be expected to result in, individually or in the aggregate, a Material Adverse Effect, to the Knowledge of the Company, have for the past two (2) years been free from any Malicious Code.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(q) *Labor Matters*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) The Company and its Subsidiaries are in material compliance with all applicable laws respecting employment, retention of independent contractors, employment practices, terms and conditions of employment, and wages and hours. Neither the Company nor any of its Subsidiaries is or has ever been a party to, or is or has ever been bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization with respect to its employees, nor is the Company or any of its Subsidiaries the subject of any proceeding asserting that it has committed an unfair labor practice or seeking to compel it or any such Subsidiary to bargain with any labor organization as to wages and conditions of employment nor, to the Knowledge of the Company, has any such proceeding been threatened, nor is there any strike, other labor dispute, claim or charge or organizational effort involving the Company or any of its Subsidiaries pending or, to the Knowledge of the Company, threatened. No employees of the Company or any of its Subsidiaries are represented by an labor organization.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) The Company's Disclosure Letter identifies (A) all present employees (including any leased or temporary employees) of the Company and its Subsidiaries and any consultants or independent contractors providing services to the Company or any of its Subsidiaries; (B) each employee's, consultant's or independent contractor's date of hire and current rate of compensation; and (C) each employee's accrued vacation, sick leave or personal leave if applicable. Section 3.2(q) of the Company's Disclosure Letter also names any employee who is absent from work due to a leave of absence (including, but not limited to, in accordance with the requirements of the Family and Medical Leave Act or the Uniformed Services Employment and Reemployment Rights Act) or a work-related injury, or who is receiving workers' compensation or disability compensation. There are no unpaid wages, bonuses or commissions owed to any employee (other than those not yet due).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(r) *Employee Benefit Plans*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Section 3.2(r)(i) of the Company's Disclosure Letter sets forth all Company Benefit Plans and all multiple employer plans in which the Company or any of its Subsidiaries participates as an employer. For purposes of this Agreement, "**Company Benefit Plans**" mean all employee benefit plans (as defined in Section 3(3) of ERISA), whether or not subject to ERISA, whether funded or unfunded, and all pension, benefit, retirement, bonus, stock option, stock purchase, restricted stock, stock-based, performance award, phantom equity, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance, retention, employment, consulting, termination, change in control, salary continuation, accrued leave, sick leave, vacation, paid time off, health, medical, disability, life, accidental death and dismemberment, insurance, welfare, fringe benefit and other similar plans, programs, policies, practices or arrangements or other contracts or agreements (and any amendments thereto) with respect to which the Company or any Subsidiary or any trade or business of the Company or any of its Subsidiaries, whether or not incorporated, all of which together with the Company would be deemed a "single employer" within the meaning of Section 4001 of ERISA (a "**Company ERISA Affiliate**"), is a party or has any current or future obligation or liability or that are sponsored, maintained, contributed to or required to be contributed to by the Company or any of its Subsidiaries or any Company ERISA Affiliate for the benefit of any current or former employee, officer, director, consultant or independent contractor (or any spouse or dependent of such individual) of the Company or any of its Subsidiaries or any Company ERISA Affiliate.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) The Company has heretofore made available to Purchaser true, correct and complete copies of the following documents with respect to each of the Company Benefit Plans and any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, to the extent applicable, (i) all plans and trust agreements, (ii) all summary plan descriptions, amendments, modifications or material supplements to any Company Benefit Plan and any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, (iii) where any Company Benefit Plan has not been reduced to writing, a written summary of all the material plan terms, (iv) the annual report (Form 5500), if any, filed with the IRS for the last three (3) plan years and summary annual reports, with schedules and financial statements attached, (v) the most recently received IRS determination letter, if any, relating to any Company Benefit Plan and any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, (vi) the most recently prepared actuarial report for each Company Benefit Plan (if applicable) for each of the last three (3) years and (vii) copies of material notices, letters or other correspondence with the IRS, U.S. Department of Labor (the "**DOL**") or Pension Benefit Guarantee Corporation (the "**PBGC**").

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) Each Company Benefit Plan and each Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer has been established, operated and administered in all material respects in accordance with its terms and the requirements of all applicable laws, including ERISA and the IRC. Neither the Company nor any of its Subsidiaries, or, to the Knowledge of Company, any provider of any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, has taken any action to take corrective action or made a filing under any voluntary correction program of the IRS, the DOL or any other Governmental Entity with respect to any Company Benefit Plan, and the Company has no Knowledge of any plan defect that would qualify for correction under any such program.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) Section 3.2(r)(iv) of the Company's Disclosure Letter identifies each Company Benefit Plan, including, but not limited to, any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, that is intended to be qualified under Section 401(a) of the IRC (the "**Company Qualified Plans**"). The IRS has issued a favorable determination letter with respect to each Company Qualified Plan and the related trust, which letter has not been revoked (nor has revocation been threatened), and, to the Knowledge of the Company, there are no existing circumstances and no events have occurred that could adversely affect the qualified status of any Company Qualified Plan or the exempt status of the related trust or increase the costs relating thereto. No trust funding any Company Benefit Plan is intended to meet the requirements of Section 501(c)(9) of the IRC.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) Each Company Benefit Plan that is subject to Section 409A of the IRC has been administered and documented in compliance with the requirements of Section 409A of the IRC, except where any non-compliance has not and cannot reasonably be expected to result in material liability to the Company or any of its Subsidiaries or any employee of the Company or any of its Subsidiaries.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vi) None of the Company, its Subsidiaries nor any Company ERISA Affiliate has, at any time during the last six (6) years, maintained, contributed to or been obligated to contribute to any "employee pension benefit plan" as defined in Section 3(2) of ERISA that is subject to Title IV of ERISA, any plan that is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA (a "**Multiemployer Plan**") or any plan that has two or more contributing sponsors at least two of whom are not under common control, within the meaning of Section 4063 of ERISA (a "**Multiple Employer Plan**"), and none of the Company and its Subsidiaries nor any Company ERISA Affiliate has incurred any liability to a Multiemployer Plan or Multiple Employer Plan as a result of a complete or partial withdrawal (as those terms are defined in Part 1 of Subtitle E of Title IV of ERISA) from a Multiemployer Plan or Multiple Employer Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vii) Except as disclosed in Section 3.2(r)(vii) of the Company's Disclosure Letter, neither the Company nor any of its Subsidiaries sponsors has sponsored or has any obligation with respect to any employee benefit plan that provides for any post-employment or post-retirement health or medical or life insurance benefits for retired, former or current employees or beneficiaries or dependents thereof, except as required by Section 4980B of the IRC.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(viii) All contributions required to be made to any Company Benefit Plan, and all contributions required to be made by Company or any of its Subsidiaries to any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, by applicable law or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any Company Benefit Plan, for any period through the date hereof, have been timely made or paid in full or, to the extent not required to be made or paid on or before the date hereof, have been fully reflected on the books and records of the Company, if and to the extent required by GAAP.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ix) There are no pending or, to the Knowledge of the Company, threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations that have been asserted or instituted, and, to the Knowledge of the Company, no set of circumstances exists that may reasonably be expected to give rise to a claim or lawsuit, against the Company Benefit Plans, including, but not limited to, any Multiple Employer Plan that the Company or any of its Subsidiaries participates as an employer, any fiduciaries thereof with respect to their duties to the Company Benefit Plans or such Multiple Employer Plan, or the assets of any of the trusts under any of the Company Benefit Plans or any such Multiple Employer Plan, that could reasonably be expected to result in any material liability of the Company or any of its Subsidiaries to the PBGC, the IRS, the DOL, any Multiemployer Plan, a Multiple Employer Plan, any participant in any Company Benefit Plan, or any other party.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(x) To the Knowledge of the Company, none of the Company and its Subsidiaries nor any Company ERISA Affiliate nor any other Person, including any fiduciary of any Company Benefit Plan, including, but not limited to, any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, has engaged in any "prohibited transaction" (as defined in Section 4975 of the IRC or Section 406 of ERISA) that could subject any of the Company Benefit Plans or their related trusts, the Company, any of its Subsidiaries, any Company ERISA Affiliate, any such Multiple Employer Plan or its Trust, provider or participating employers, or any Person that the Company or any of its Subsidiaries has an obligation to indemnify, to any material tax or penalty imposed under Section 4975 of the IRC or Section 502 of ERISA.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(xi) Except as set forth in Section 3.2(r)(xi) of the Company's Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) result in, cause the vesting, exercisability or delivery of, or increase in the amount or value of, any payment, compensation (including stock or stock-based), right or other benefit to any employee, officer, director, independent contractor, consultant or other service provider of the Company or any of its Subsidiaries, or result in any limitation on the right of the Company or any of its Subsidiaries to amend, merge, terminate or receive a reversion of assets from any Company Benefit Plan or related trust. Without limiting the generality of the foregoing, no amount paid or payable (whether in cash, in property, or in the form of benefits) by the Company or any of its Subsidiaries in connection with the transactions contemplated hereby (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an "excess parachute payment" within the meaning of Section 280G of the IRC. Except as disclosed in Section 3.2(r)(xi) of the Company's Disclosure Letter, neither the Company nor any of its Subsidiaries maintains or contributes to a rabbi trust or similar funding vehicle, and the transactions contemplated by this Agreement will not cause or require the Company or any of its Affiliates to establish or make any contribution to a rabbi trust or similar funding vehicle.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(xii) No Company Benefit Plan provides for the gross-up or reimbursement of Taxes under Section 409A or 4999 of the IRC, or otherwise. The Company has previously provided to the Purchaser true, correct and complete copies of Section 280G calculations (whether final or not) with respect to any disqualified individual in connection with the transactions contemplated hereby.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(s) *Properties*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) A list of all real property owned or leased by the Company or a Subsidiary of the Company is set forth in Section 3.2(s) of the Company's Disclosure Letter. The Company and each of its Subsidiaries has good and marketable title to all real property owned by it (including any property acquired in a judicial foreclosure proceeding or by way of a deed in lieu of foreclosure or similar transfer), in each case free and clear of any Liens except (A) liens for Taxes not yet due and payable and (B) such easements, restrictions and encumbrances, if any, as are not material in character, amount or extent, and do not materially detract from the value, or materially interfere with the present use of the properties subject thereto or affected thereby. Each lease pursuant to which the Company or any of its Subsidiaries, as lessee, leases real or personal property is valid and in full force and effect as to the Company and the Subsidiaries and neither the Company nor any of its Subsidiaries, nor, to the Company's Knowledge, any other party to any such lease, is in default or in violation of any material provisions of any such lease. The Company has previously made available to Purchaser a complete and correct copy of each such lease. All real property owned or leased by the Company or any of its Subsidiaries are in all material respects in a good state of maintenance and repair (normal wear and tear excepted), conform in all material respects with all applicable ordinances, regulations and zoning laws and are considered by the Company to be adequate for the current business of the Company and its Subsidiaries. To the Knowledge of the Company, none of the buildings, structures or other improvements located on any real property owned or leased by the Company or any of its Subsidiaries encroach upon or over any adjoining parcel or real estate or any easement or right- of-way.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) The Company and each of its Subsidiaries has good and marketable title to all tangible personal property owned by it, free and clear of all Liens except such Liens, if any, that are not material in character, amount or extent, and that do not materially detract from the value, or materially interfere with the present use of the properties subject thereto or affected thereby.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(t) *Fairness Opinion*. The Board of Directors of the Company has received the opinion (which, if initially rendered verbally, has been or will be confirmed by a written opinion, dated the same date) of Raymond James & Associates, Inc. to the effect that, as of the date of such opinion and subject to the assumptions, limitations and qualifications set forth therein, the Merger Consideration is fair, from a financial point of view, to the holders of Company Common Stock and Company Class A Common Stock. Such opinion has not been amended or rescinded as of the date of this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(u) *Fees*. Other than for financial advisory services performed for the Company by Raymond James & Associates, Inc. pursuant to an agreement executed on July 5, 2022, a true and complete copy of which has been previously provided to Purchaser, neither the Company nor any of its Subsidiaries, nor any of their respective officers, directors, employees or agents, has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for the Company or any of its Subsidiaries in connection with this Agreement or the transactions contemplated hereby.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) *Environmental Matters*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Except as set forth in Section 3.2(v)(i) of the Company's Disclosure Letter, each of the Company's and its Subsidiaries' properties, the Participation Facilities, and, to the Knowledge of the Company, the Loan Properties is, and has been during the period of the Company's or its Subsidiaries' ownership or operation thereof, in material compliance with all Environmental Laws.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) There is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or, to the Knowledge of the Company, threatened, before any court or Governmental Entity against the Company or any of its Subsidiaries or any Participation Facility (A) for alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (B) relating to the presence of or release into the environment of any Hazardous Material, whether or not occurring at or on a site owned, leased or operated by the Company or any of its Subsidiaries or any Participation Facility.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) There is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or, to the Knowledge of the Company, threatened before any court or, to the Knowledge of the Company, Governmental Entity relating to or against any Loan Property (or the Company or any of its Subsidiaries in respect of such Loan Property) (A) relating to alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (B) relating to the presence of or release into the environment of any Hazardous Material, whether or not occurring at a Loan Property.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) Neither the Company nor any of its Subsidiaries has received in writing any notice, demand letter, executive or administrative order, directive or request for information from any Governmental Entity or any third party indicating that it may be in violation of, or liable under, any Environmental Law.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) To the Knowledge of the Company, there are no underground storage tanks at any properties owned or operated by the Company or any of its Subsidiaries or any Participation Facility. Neither the Company nor any of its Subsidiaries nor, to the Knowledge of the Company, any other Person, has closed or removed any underground storage tanks from any properties owned or operated by the Company or any of its Subsidiaries or any Participation Facility.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vi) During the period of (A) the Company's or its Subsidiaries' ownership or operation of any of their respective current properties or (B) the Company's or its Subsidiaries' participation in the management of any Participation Facility, to the Knowledge of the Company, there has been no release of Hazardous Materials in, on, under or affecting such properties except for releases of Hazardous Materials in quantities below the level at which they were regulated under any Environmental Law in effect at the time of such release. To the Knowledge of the Company, before the period of (A) the Company's or its Subsidiaries' ownership or operation of any of their respective current properties or (B) the Company's or its Subsidiaries' participation in the management of any Participation Facility, there was no contamination by or release of Hazardous Material in, on, under or affecting such properties except for releases of Hazardous Materials in quantities below the level at which they were regulated under any Environmental Law in effect at the time of such release.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(w) *Loan Matters*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) All Loans held by the Company or any of its Subsidiaries were made in all material respects for good, valuable and adequate consideration in the ordinary course of the business, in accordance in all material respects with sound banking practices and, the Loans are not subject to any pending, or to the Knowledge of the Company, threatened defenses, setoffs or counterclaims, including without limitation any such as are afforded by usury or truth in lending laws, except as may be provided by bankruptcy, insolvency or similar laws or by general principles of equity. The notes or other evidences of indebtedness evidencing such Loans and all forms of pledges, mortgages and other collateral documents and security agreements are, in all material respects, enforceable and valid (except as may be limited by the Enforceability Exceptions), and in each case, true, genuine and what they purport to be.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Neither the terms of any Loan, any of the documentation for any Loan, the manner in which any Loans have been administered and serviced, nor the Company's practices of soliciting, originating, approving or rejecting Loan applications, violate in any material respect any federal, state, or local law, rule or regulation applicable thereto, including, without limitation, the Truth In Lending Act, Regulations O and Z of the Federal Reserve, the CRA, the Equal Credit Opportunity Act, and any state laws, rules and regulations relating to consumer protection, installment sales and usury.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) Section 3.2(w)(iii) of the Company's Disclosure Letter sets forth a list of all Loans that are guaranteed by the Small Business Administration (the "**SBA**"), the United States Department of Agriculture (the "**USDA**"), or other federal or state government agency and to the Knowledge of the Company, neither the terms of any such Loan, the documentation for any such Loan, nor the manner in which any such Loan has been administered or serviced violates in any material respect any rules or regulations of the applicable government agency or impacts the validity of the government guarantee.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) In the opinion of the management of the Company, the allowance for loan losses reflected in the Company's audited balance sheet at December 31, 2021 and unaudited balance sheet at September 30, 2022 were, and the ALLL shown on the Financial Statements for periods ending after September 30, 2022, will be, adequate, as of the dates thereof, under GAAP.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) None of the agreements pursuant to which the Company or any of its Subsidiaries has sold Loans or participations in Loans contains any obligation to repurchase such Loans or interests therein solely because of a payment default by the obligor on any such Loan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vi) (A) Section 3.2(w)(vi) of the Company's Disclosure Letter sets forth a list of all Loans as of September 30, 2022, by the Company or any of its Subsidiaries to any director, executive officer, principal shareholder or other insider (as such terms are defined in Regulation O of the Federal Reserve (12 C.F.R. Part 215)) of the Company or any of its Subsidiaries, (B) there are no Loans to any such director, executive, officer, principal shareholder or other insider or related interest thereof on which the borrower is paying a rate other than that reflected in the note or other relevant credit or security agreement or on which the borrower is paying a rate that is not in compliance with Regulation O and (C) all such Loans are and were originated in compliance in all material respects with all applicable laws.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vii) Except as such disclosure may be limited by any applicable law, rule or regulation: (A) Section 3.2(w)(vii) of the Company's Disclosure Letter sets forth a listing, as of September 30, 2022, by account, of each borrower, customer or other party that has notified the Company or its Subsidiaries during the twelve (12) months preceding the date of such listing of, or has asserted against the Company or its Subsidiaries, in each case in writing, any "lender liability" or similar claim, and, to the Knowledge of the Company, each borrower, customer or other party that has given the Company or its Subsidiaries any oral notification of, or orally asserted to or against Company or its Subsidiaries, any such claim; and (B) the Company has previously made available to Purchaser a listing, as of September 30, 2022, by account, of all Loans (1) that are contractually past due ninety (90) days or more in the payment of principal and/or interest, (2) that are on non-accrual status, (3) that are classified as "Pass 5," "Special Mention," "Substandard," "Doubtful," "Loss," "Classified," "Criticized," "Credit Risk Assets," "Concerned Loans," "Watch List" or words of similar import, (4) that are considered troubled debt restructurings or where the interest rate terms have been reduced and/or the maturity dates have been extended after the origination of the Loan due to concerns regarding the borrower's ability to pay in accordance with the Loan's original terms and (5) where a specific reserve allocation exists in connection therewith, in each case of clauses (B)(1) to (B)(5), together with the principal amount of and accrued and unpaid interest on each such Loan and the aggregate principal amount of and accrued and unpaid interest on such Loans as of such date; and (C) the Company has previously made available to Purchaser a listing, as of September 30, 2022, all other assets classified by the Company or its Subsidiaries as real estate acquired through foreclosure or in lieu of foreclosure, including in- substance foreclosures, and all other assets currently held that were acquired through foreclosure or in lieu of foreclosure.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(x) *Anti-takeover Provisions Inapplicable*. The Company and its Subsidiaries have taken all actions required to exempt Purchaser, this Agreement, the Bank Agreement and Plan of Merger, the Merger and the Bank Merger from any effects of any anti-takeover provisions contained in their organizational documents, and the provisions of any federal or state "anti-takeover," "fair price," "moratorium," "control share acquisition" or similar laws or regulations.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(y) *Material Interests of Certain Persons*. Except for deposit and loan relationships entered into in the ordinary course of business, no current or former officer or director of the Company, or any family member or Affiliate of any such Person, has any material interest, directly or indirectly, in any contract or property (real or personal), tangible or intangible, used in or pertaining to the business of the Company or any of its Subsidiaries.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(z) *Insurance*. The Company and its Subsidiaries are presently insured for amounts deemed reasonable by management of the Company against such risks as companies engaged in a similar business, including engaging in the transactions contemplated by this Agreement, would, in accordance with good business practice, customarily be insured. Section 3.2 (z) of the Company's Disclosure Letter contains a list of all policies of insurance carried and owned by the Company or any of its Subsidiaries showing the name of the insurance company and agent, the nature of the coverage, the policy limit, the annual premiums and the expiration date. All of the insurance policies and bonds maintained by the Company or any of its Subsidiaries are in full force and effect, the Company and its Subsidiaries are not in default thereunder, all premiums and other payments due under any such policy have been paid. There are presently no material claims pending under such policies of insurance and no notices have been given by the Company or any of its Subsidiaries under such policies (other than with respect to health or disability insurance).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(aa) *Investment Securities; Derivatives*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Except for restrictions that exist for securities that are classified as "held to maturity," none of the investment securities held by the Company or any of its Subsidiaries, including, but not limited to, stock of the FHLB or the Federal Reserve Bank of Richmond, is subject to any restriction (contractual or statutory) that would materially impair the ability of the entity holding such investment freely to dispose of such investment at any time.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Neither the Company nor any of its Subsidiaries is a party to or has agreed to enter into an exchange-traded or over-the-counter equity, interest rate, foreign exchange or other swap, forward, future, option, cap, floor or collar or any other contract that is a derivative contract or other similar risk management arrangements (including various combinations thereof) or owns securities that (A) are referred to generically as "structured notes," "high risk mortgage derivatives," "capped floating rate notes" or "capped floating rate mortgage derivatives" or (B) are likely to have changes in value as a result of interest or exchange rate changes that materially exceed normal changes in value attributable to interest or exchange rate changes.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(bb) *Indemnification*. Except as provided in the articles of incorporation or bylaws of the Company and the similar organizational documents of its Subsidiaries, neither the Company nor any of its Subsidiaries is a party to any agreement that provides for the indemnification of any of its present or former directors, officers, employees or shareholders, or other persons who serve or served as a director, officer or employee of another corporation, partnership or other enterprise at the request of the Company and there are no claims pending, or to the Knowledge of the Company, threatened for which any such Person would be entitled to indemnification under the articles of incorporation or bylaws of the Company or the similar organizational documents of any of its Subsidiaries, under any applicable law or regulation or under any such employment-related agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(cc) *Corporate Documents and Records*. The Company has previously provided a complete and correct copy of the articles of incorporation, bylaws and similar organizational documents of the Company and each of the Company's Subsidiaries, as in effect as of the date of this Agreement. Neither the Company nor any of the Company's Subsidiaries is in violation of its articles of incorporation, bylaws or similar organizational documents. The minute books of the Company and each of the Company's Subsidiaries constitute a complete and correct record of all actions taken by their respective boards of directors (and each committee thereof) and their shareholders.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(dd) *CRA, Anti-Money Laundering, OFAC and Customer Information Security*. Company Bank has received an overall rating of "Satisfactory" or better in its most recent examination or interim review with respect to the CRA. The Company does not have Knowledge of any facts or circumstances that would cause Company Bank or any other Subsidiary of the Company: (i) to be deemed not to be in satisfactory compliance in any material respect with the CRA, and the regulations promulgated thereunder, or to be assigned a rating for CRA purposes by federal bank regulators of lower than "Satisfactory"; (ii) to be deemed to be operating in violation in any material respect of the Bank Secrecy Act, the USA PATRIOT Act, any order issued with respect to anti-money laundering by the U.S. Department of the Treasury's Office of Foreign Assets Control, or any other applicable anti-money laundering statute, rule or regulation; or (iii) to be deemed not to be in satisfactory compliance in any material respect with the applicable privacy of customer information requirements contained in any federal and state privacy laws and regulations, including without limitation, in Title V of the Gramm-Leach- Bliley Act of 1999 and the regulations promulgated thereunder, as well as the provisions of the information security program adopted by Company Bank. To the Knowledge of the Company, no non-public customer information has been disclosed to or accessed by an unauthorized third party in a manner that would cause either the Company or any of its Subsidiaries to undertake any remedial action. The Board of Directors of Company Bank (or where appropriate of any other Subsidiary of the Company) has adopted, and Company Bank (or such other Subsidiary of the Company) has implemented, an anti-money laundering program that contains adequate and appropriate customer identification verification procedures that comply with Section 326 of the USA PATRIOT Act and such anti-money laundering program meets the requirements in all material respects of Section 352 of the USA PATRIOT Act and the regulations thereunder, and Company Bank (or such other Subsidiary of the Company) has complied in all material respects with any requirements to file reports and other necessary documents as required by the USA PATRIOT Act and the regulations thereunder.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ee) *Internal Controls*. The Company and its Subsidiaries have devised and maintain a system of internal control over financial reporting sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, and (iii) access to assets is permitted only in accordance with management's general or specific authorization. There are no significant deficiencies or material weaknesses in the design or operation of internal controls over financial reporting that are reasonably likely to adversely affect in any material respect the Company's ability to record, process, summarize and report financial information. To the Knowledge of the Company, there has occurred no fraud, whether material or not, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting. Since January 1, 2020, neither the Company nor any of its Subsidiaries, nor, to the Knowledge of the Company, any Representative of the Company or any of its Subsidiaries, has received or otherwise had or obtained knowledge of any material complaint, allegation or assertion regarding the accounting or auditing practices, procedures, methodologies or methods (including with respect to loan loss reserves, write-downs, charge-offs and accruals) of the Company or any of its Subsidiaries or their respective internal accounting controls.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ff) *Tax Treatment of the Merger*. The Company has no Knowledge of any fact or circumstance relating to it that would prevent the transactions contemplated by this Agreement from qualifying as a reorganization under Section 368(a) of the IRC.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(gg) *Related Party Transactions*. Section 3.2(gg) of the Company's Disclosure Letter lists all instances in which the Company or any of its Subsidiaries is a party to any transaction (including any Loan) with any Affiliate, current director or executive officer or Person (or any of such Person's immediate family members or Affiliates) who beneficially owns (as defined in Rules 13d-3 and 13d-5 of the Exchange Act) 5% or more of the outstanding Company Common Stock (other than Subsidiaries of the Company) of the Company or any of its Subsidiaries where the amount exceeds $120,000. All such transactions involving indebtedness (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (c) did not involve more than the normal risk of collectability or present other unfavorable features. No loan or credit accommodation to any Affiliate of the Company or any of its Subsidiaries is presently in default or, during the three-year period before the date of this Agreement, has been in default or has been restructured, modified or extended. Neither the Company nor any of its Subsidiaries has been notified that principal or interest with respect to any such loan or other credit accommodation will not be paid when due or that the loan grade classification accorded such loan or credit accommodation is inappropriate.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(hh) *No Other Representations or Warranties*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Except for the representations and warranties made by the Company in this *Section 3.2*, neither the Company nor any other Person makes any express or implied representation or warranty with respect to the Company, its Subsidiaries, or their respective businesses, operations, assets, liabilities, conditions (financial or otherwise) or prospects, and the Company hereby disclaims any such other representations or warranties. In particular, without limiting the foregoing disclaimer, neither the Company nor any other Person makes or has made any representation or warranty to Purchaser or any of its Affiliates or representatives with respect to (A) any financial projection, forecast, estimate, budget or prospective information relating to the Company, any of its Subsidiaries or their respective businesses, or (B) except for the representations and warranties made by the Company in this *Section 3.2*, any oral or written information presented to Purchaser or any of its Affiliates or representatives in the course of their due diligence investigation of the Company, the negotiation of this Agreement or in the course of the transactions contemplated hereby.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) The Company hereby acknowledges and agrees that neither Purchaser nor any other Person has made or is making any express or implied representation or warranty other than those contained in *Section 3.3*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**3.3 Representations and Warranties of Purchaser**. Except (i) as disclosed in Purchaser's Disclosure Letter, and (ii) for information and documents commonly known as "confidential supervisory information" to the extent prohibited by law from disclosure (and as to which nothing in this Agreement shall require disclosure), Purchaser represents and warrants to the Company that:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) *Organization and Qualification*. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia and is registered with the Federal Reserve as a bank holding company. Purchaser has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it. Purchaser is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on Purchaser. Purchaser engages only in activities, and holds properties only of the types, permitted to financial holding companies by the BHCA.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Subsidiaries*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Purchaser owns, directly or indirectly, all of the issued and outstanding shares of capital stock or other equity interests of each of its Subsidiaries free and clear of any Liens. There are no contracts, commitments, agreements or understandings relating to Purchaser's right to vote or dispose of any equity securities of its Subsidiaries. Purchaser's ownership interest in each of its Subsidiaries complies with all applicable laws, rules and regulations relating to equity investments by bank holding companies.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Each of Purchaser's Subsidiaries is a legal entity duly organized and validly existing under the laws of its jurisdiction of incorporation, formation or organization, as applicable, has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it and is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on Purchaser.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) The outstanding shares of capital stock, membership interests, or other representations of equity interest of each Subsidiary have been validly authorized and are validly issued, fully paid and nonassessable and free of preemptive rights. No shares of capital stock or other equity interests of any Subsidiary of Purchaser are or may be required to be issued by virtue of any options, warrants or other rights, no securities exist that are convertible into or exchangeable for shares of such capital stock or other equity interests or any other debt or equity security of any Subsidiary, and there are no contracts, commitments, agreements or understandings of any kind for the issuance of additional shares of capital stock or other equity interests or other debt or equity security of any Subsidiary or options, warrants or other rights with respect to such securities.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) Purchaser Bank is a Virginia-chartered state bank. No Subsidiary of Purchaser other than Purchaser Bank is an "insured depository institution" as defined in the Federal Deposit Insurance Act, as amended, and the applicable regulations thereunder. Purchaser Bank's deposits are insured by the FDIC through the Deposit Insurance Fund to the fullest extent permitted by law. Purchaser Bank is a member in good standing of the FHLB and the Federal Reserve Bank of Richmond and owns the requisite amount of stock therein, respectively.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *Capital Structure*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) The authorized capital stock of Purchaser consists of 50,000,000 shares of Purchaser Common Stock and 1,000,000 shares of undesignated Preferred Stock ("**Purchaser Preferred Stock**").

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) As of the date of this Agreement,

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(A) 16,225,467 shares of Purchaser Common Stock are issued and outstanding, all of which are validly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and were issued in full compliance with all applicable laws;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(B) No shares of Purchaser Preferred Stock are issued and outstanding; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(C) 273,308 shares of Purchaser Common Stock are reserved for issuance pursuant to outstanding grants or awards under Purchaser's stock-based benefit plans.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) The shares of Purchaser Common Stock to be issued in exchange for shares of Company Common Stock and Class A Common Stock upon consummation of the Merger in accordance with this Agreement have been duly authorized and when issued in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable and subject to no preemptive rights.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) No bonds, debentures, notes or other indebtedness, in each case having the right to vote on any matters on which shareholders of Purchaser may vote, are issued or outstanding.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) Except as set forth in this *Section 3.3(c)*, as of the date of this Agreement, (A) no shares of capital stock or other voting securities of Purchaser are issued, reserved for issuance or outstanding, and (B) other than options to purchase shares of Purchaser Common Stock, neither the Company nor any of its Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, puts, calls, rights, convertible securities, commitments or agreements of any character obligating Purchaser or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, any additional shares of capital stock of Purchaser (including any rights plan or agreement) or obligating Purchaser or any of its Subsidiaries to grant, extend or enter into any such option, warrant, puts, calls, rights, convertible securities, commitment or agreement. Neither Purchaser nor any of its Subsidiaries has or is bound by any rights of any character relating to the purchase, sale or issuance or voting of, or right to receive dividends or other distributions on shares of Purchaser Common Stock, or any other security of Purchaser or a Subsidiary of Purchaser or any securities representing the right to vote, purchase or otherwise receive any shares of Purchaser Common Stock or any other security of Purchaser or a Subsidiary of Purchaser. Other than as stated herein, there are no outstanding securities or instruments that contain any redemption or similar provisions, and there are no outstanding contractual obligations of Purchaser or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of Purchaser or any of its Subsidiaries.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *Authority*. Purchaser has all requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and, subject to the consents, approvals and filings set forth in *Section 3.3(f)*, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate actions on the part of Purchaser's Board of Directors, and no other corporate proceedings on the part of Purchaser are necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, subject to fraudulent transfer, moratorium, reorganization and similar laws relating to or affecting insured depository institutions or their parent companies or creditors' rights and remedies generally and to general principles of equity, whether applied in a court of law or a court of equity.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) *No Violations*. The execution, delivery and performance of this Agreement by Purchaser do not, and the consummation of the transactions contemplated by this Agreement will not, (i) assuming that the consents, approvals and filings referred to in *Section 3.3(f)* have been obtained and the applicable waiting periods have expired, violate any law, rule or regulation or any judgment, decree, order, governmental permit or license to which Purchaser or any of its Subsidiaries (or any of their respective properties) is subject, (ii) violate the articles of incorporation or bylaws of Purchaser or the similar organizational documents of any of its Subsidiaries or (iii) constitute a breach or violation of, or a default under (or an event that, with due notice or lapse of time or both, would constitute a default under), or result in the termination of, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of Purchaser or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, indenture, deed of trust, loan agreement or other agreement, instrument or obligation to which Purchaser or any of its Subsidiaries is a party, or to which any of their respective properties or assets may be subject.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) *Consents and Approvals*. Except for (i) filings of applications and notices with, receipt of approvals or no objections from, and the expiration of related waiting periods required by, federal and state banking authorities, including filings and notices with the Federal Reserve, the VSCCBFI and the NCCOB, (ii) the filing with the SEC of a Proxy Statement-Prospectus in definitive form relating to the meeting of the Company's shareholders to be held in connection with this Agreement and the transactions contemplated hereby and of the Registration Statement in which such Proxy Statement-Prospectus will be included as a prospectus, and declaration of effectiveness of the Registration Statement, (iii) the filing of the Articles of Merger with the VASCC and the NCSOS pursuant to the VSCA and the NCBCA and the filing of the Bank Merger Certificates, (iv) filing with NASDAQ of a notification or application of the listing of the shares of Purchaser Common Stock to be issued in the Merger, and (v) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of shares of Purchaser Common Stock pursuant to this Agreement, no consents or approvals of, or filings or registrations with, any Governmental Entity or any third party are required to be made or obtained by Purchaser in connection with the execution and delivery by Purchaser of this Agreement or the consummation by Purchaser of the Merger and the other transactions contemplated by this Agreement, including the Bank Merger. As of the date hereof, Purchaser has no Knowledge of any reason pertaining to Purchaser why any of the approvals referred to in this *Section 3.3(f)* should not be obtained without the imposition of any material condition or restriction described in *Section 6.2(e)*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) *Governmental Filings*. Purchaser and each of its Subsidiaries has timely filed all reports, schedules, registration statements and other documents that it has been required to file since January 1, 2020 with the Federal Reserve, or any other Governmental Entity. As of their respective dates, each of such filings complied in all material respects with all laws or regulations under which it was filed (or was amended to comply promptly following discovery of such noncompliance).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h) *Securities Filings*. Purchaser has timely filed with the SEC all reports, schedules, registration statements, definitive proxy statements and exhibits thereto that it has been required to file under the Securities Act or the Exchange Act since January 1, 2020 (collectively, "**Purchaser Reports**"). As of their respective dates of filing with the SEC, none of the Purchaser Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. As of their respective dates of filing with the SEC, all of the Purchaser Reports complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the SEC promulgated thereunder. Each of the financial statements (including, in each case, any notes thereto) of Purchaser included in the Purchaser Reports complied as to form, as of their respective dates of filing with the SEC, in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) *Financial Statements*. Purchaser has previously made available to the Company copies of (i) the consolidated balance sheets of Purchaser and its Subsidiaries as of December 31, 2021, 2020 and 2019 and related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2021, together with the notes thereto, accompanied by the audit report of Purchaser's independent registered public accounting firm, as reported in Purchaser's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and (ii) the unaudited consolidated balance sheets of Purchaser and its Subsidiaries as of September 30, 2022 and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for the nine (9) months ended September 30, 2022, as reported in the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2022 filed with the SEC. Such financial statements were prepared from the books and records of Purchaser and its Subsidiaries, fairly present the consolidated financial position of Purchaser and its Subsidiaries in each case at and as of the dates indicated and the consolidated results of operations and cash flows of Purchaser and its Subsidiaries for the periods indicated, and, except as otherwise set forth in the notes thereto, were prepared in accordance with GAAP consistently applied throughout the periods covered thereby; *provided, however*, that the unaudited financial statements for the nine (9) month period ended September 30, 2022 are subject to normal year-end adjustments (which will not be material individually or in the aggregate) and lack footnotes to the extent permitted under applicable regulations and GAAP. The books and records of Purchaser and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other legal and accounting requirements and reflect only actual transactions.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j) *Undisclosed Liabilities*. Neither Purchaser nor any of its Subsidiaries has incurred any Liabilities other than Liabilities reflected on or reserved against in the consolidated balance sheet of Purchaser as of December 31, 2021, except for (i) Liabilities incurred since December 31, 2021 in the ordinary course of business consistent with past practice that, either alone or when combined with all similar liabilities, have not had, and would not reasonably be expected to have, a Material Adverse Effect on Purchaser and (ii) Liabilities incurred for legal, accounting, financial advising fees and out-of-pocket expenses in connection with the transactions contemplated by this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(k) *Absence of Certain Changes or Events*. Since December 31, 2021, Purchaser and its Subsidiaries have conducted their respective businesses only in the ordinary course of such businesses consistent with their past practices and there has not been any event or occurrence that has had, or is reasonably expected to have, a Material Adverse Effect on Purchaser.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(l) *Litigation*. There are no material suits, actions or legal, administrative or arbitration or other proceedings, or investigations of any nature pending or, to the Knowledge of Purchaser, threatened against or affecting Purchaser or any of its Subsidiaries or any property or asset of Purchaser or any of its Subsidiaries that (i) are seeking damages or declaratory relief against the Purchaser or any of its Subsidiaries or (ii) challenge the validity or propriety of the transactions contemplated by this Agreement. There are no judgments, decrees, injunctions, orders or rulings of any Governmental Entity or arbitrator outstanding against Purchaser or any of its Subsidiaries or the assets of Purchaser or any of its Subsidiaries. Since January 1, 2020, (i) there have been no investigations, subpoenas, written demands, or document requests received by Purchaser or any of its Subsidiaries from any Governmental Entity (other than in the ordinary course of business) and (ii) no Governmental Entity has requested that Purchaser or any of its Subsidiaries enter into a settlement, negotiation or tolling agreement with respect to any matter related to any such investigation, subpoena, written demand, or document request.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(m) *Absence of Regulatory Actions*. Since January 1, 2020, neither Purchaser nor any of its Subsidiaries has been a party to any cease and desist order, written agreement or memorandum of understanding with, or any commitment letter or similar undertaking to, or has been ordered to pay any civil money penalty by, or has been subject to any action, proceeding, order or directive by any Governmental Entity, or has adopted any board resolutions relating to such matters as are material to the business of Purchaser or its Subsidiaries at the request of any Governmental Entity, or has been advised by any Governmental Entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such action, proceeding, order, directive, written agreement, memorandum of understanding, commitment letter, board resolutions or similar undertaking. To the Knowledge of Purchaser, there are no material unresolved violations, criticisms or exceptions by any Governmental Entity with respect to any report or statement relating to any examinations of Purchaser or its Subsidiaries.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(n) *Compliance with Laws*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Purchaser and each of its Subsidiaries have complied in all material respects with and are not in material default or violation under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to the Company or any of its Subsidiaries, including without limitation all laws related to data protection or privacy, the Equal Credit Opportunity Act and Regulation B, the Fair Housing Act, the Fair Credit Reporting Act, the Truth in Lending Act and Regulation Z, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Electronic Fund Transfer Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Interagency Policy Statement on Retail Sales of Nondeposit Investment Products, the SAFE Mortgage Licensing Act of 2008, the Real Estate Settlement Procedures Act and Regulation X, and any other law relating to bank secrecy, discriminatory lending, financing or leasing practices, money laundering prevention, Sections 23A and 23B of the Federal Reserve Act, the Sarbanes-Oxley Act, and all agency requirements relating to the origination, sale and servicing of mortgage and consumer loans. Purchaser and each of its Subsidiaries has, and has had at all times since January 1, 2020, all material permits, licenses, certificates of authority, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Entities that are required to permit it to carry on its business as it is presently conducted. All such permits, licenses, certificates of authority, orders and approvals are in full force and effect, and no suspension or cancellation of any of them is, to the Knowledge of Purchaser, threatened. Neither Purchaser nor any of its Subsidiaries has been given notice or been charged with any violation of, any law, ordinance, regulation, order, writ, rule, decree or condition to approval of any Governmental Entity that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on Purchaser.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Purchaser and each of its Subsidiaries, as applicable, maintains a written consumer compliance program that maintains procedures and controls reasonably designed to ensure compliance with applicable Consumer Protection Laws. All relevant employees of and consultants to Purchaser and its Subsidiaries, as applicable, have been informed of the applicable consumer compliance policies.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) To the Knowledge of Purchaser, (i) neither Purchaser nor any of its Subsidiaries is under investigation by any Governmental Entity for a violation of any applicable Consumer Protection Laws, and (ii) there are no asserted or threatened claims, notices or administrative or court complaints against Purchaser or any of its Subsidiaries (whether by a Governmental Entity or any other party) relating to compliance with applicable Consumer Protection Laws by Purchaser, its Subsidiaries or any third parties acting on their behalf, in either case that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on Purchaser.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) Except for routine examinations conducted by a Governmental Authority in the ordinary course of the business of Purchaser or any of its Subsidiaries, no Governmental Entity has initiated any proceeding or, to the Knowledge of Purchaser, investigation into the business or operations of Purchaser or any of its Subsidiaries since January 1, 2020. There is no unresolved violation, criticism or exception by any Governmental Entity with respect to any report or statement relating to any examinations of Purchaser and its Subsidiaries. Except for routine examinations conducted by a Governmental Entity in the ordinary course of business of Purchaser or any of its Subsidiaries, no examination of Purchaser or any of its Subsidiaries by any Governmental Entity has taken place or is currently under way, and, to the Knowledge of Purchaser, no report of examination is pending.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(o) *Taxes*. All federal, state, local and foreign tax returns required to be filed by or on behalf of Purchaser or any of its Subsidiaries have been timely filed or requests for extensions have been timely filed and any such extension shall have been granted and not have expired, and all such filed returns are complete and accurate in all material respects. All Taxes shown on such returns, all Taxes required to be shown on returns for which extensions have been granted and all other Taxes required to be paid by Purchaser or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on Purchaser's balance sheet (in accordance with GAAP). There is no pending, or to the Knowledge of the Company, threatened, audit examination, deficiency assessment, tax investigation or refund litigation with respect to any Taxes of Purchaser or any of its Subsidiaries, and no claim has been made in writing by any authority in a jurisdiction where Purchaser or any of its Subsidiaries do not file tax returns that Purchaser or any such Subsidiary is subject to taxation in that jurisdiction. All Taxes, interest, additions and penalties due with respect to completed and settled examinations or concluded litigation relating to Purchaser or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on Purchaser's balance sheet (in accordance with GAAP). Purchaser and its Subsidiaries have not executed an extension or waiver of any statute of limitations on the assessment or collection of any tax due that is currently in effect. Purchaser and each of its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party, and Purchaser and each of its Subsidiaries has timely complied with all applicable information reporting requirements under Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and local information reporting requirements.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(p) *Agreements*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Each contract, arrangement, commitment or understanding (whether written or oral) that is a "material contract" (as such term is defined in Item 601(b)(10) of Regulation S-K under the Securities Act) to which Purchaser or any of its Subsidiaries is a party or by which Purchaser or any of its Subsidiaries is bound as of the date hereof (each, a "**Purchaser Contract**") has been filed as an exhibit to the most recent Annual Report on Form 10-K filed by Purchaser, or a Quarterly Report on Form 10-Q or Current Report on Form 8-K subsequent thereto, and neither Purchaser nor any of its Subsidiaries knows of, or has received notice of, any material violation of the above by any of the other parties thereto.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Each Purchaser Contract is valid and binding on Purchaser or one of its Subsidiaries, as applicable, and in full force and effect, except as, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on Purchaser. Purchaser and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it under each Purchaser Contract. To the Knowledge of Purchaser, each third-party counterparty to each Purchaser Contract has in all material respects performed all obligations required to be performed by it under such Purchaser Contract, and no event or condition exists which constitutes or, after notice or lapse of time or both, will constitute, a material default on the part of Purchaser or any of its Subsidiaries under any such Purchaser Contract.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(q) *Employee Benefit Plans*.

(i) For purposes of this Agreement, "**Purchaser Benefit Plans**" mean all employee benefit plans (as defined in Section 3(3) ERISA), whether or not subject to ERISA, whether funded or unfunded, and all pension, benefit, retirement, bonus, stock option, stock purchase, restricted stock, stock-based, performance award, phantom equity, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance, accrued leave, sick leave, vacation, paid time off, health, medical, disability, life, accidental death and dismemberment, insurance, welfare, fringe benefit and other similar plans, programs, policies, practices or arrangements or other contracts or agreements (and any amendments thereto) with respect to which Purchaser or any Subsidiary or any trade or business of Purchaser or any of its Subsidiaries, whether or not incorporated, all of which together with Purchaser would be deemed a "single employer" within the meaning of Section 4001 of ERISA (a "**Purchaser ERISA Affiliate**"), is a party or that are sponsored, maintained, contributed to or required to be contributed to by Purchaser or any of its Subsidiaries or any Purchaser ERISA Affiliate for the benefit of any current employee, officer, director, consultant or independent contractor (or any spouse or dependent of such individual) of Purchaser or any of its Subsidiaries or any Purchaser ERISA Affiliate.

(ii) Each Purchaser Benefit Plan has been established, operated and administered in all material respects in accordance with its terms and the requirements of all applicable laws, including ERISA and the IRC. Neither Purchaser nor any of its Subsidiaries has taken any action to take corrective action or made a filing under any voluntary correction program of the IRS, the DOL or any other Governmental Entity with respect to any Purchaser Benefit Plan, and neither Purchaser nor any of its Subsidiaries has any Knowledge of any plan defect that would qualify for correction under any such program.

(iii) With regard to each Purchaser Benefit Plan that is intended to be qualified under Section 401(a) of the IRC (the "**Purchaser Qualified Plans**"), the IRS has issued a favorable determination letter with respect to each Purchaser Qualified Plan and the related trust, which letter has not been revoked (nor has revocation been threatened), and, to the Knowledge of Purchaser, there are no existing circumstances and no events have occurred that could adversely affect the qualified status of any Purchaser Qualified Plan or the exempt status of the related trust or increase the costs relating thereto. No trust funding any Purchaser Benefit Plan is intended to meet the requirements of Section 501(c)(9) of the IRC.

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(iv) None of Purchaser, its Subsidiaries, nor any Purchaser ERISA Affiliate has, at any time during the last six (6) years, maintained, contributed to or been obligated to contribute to any "employee pension benefit plan" as described in Section 3(2) of ERISA that is subject to Title IV of ERISA, Multiemployer Plan or Multiple Employer Plan.

(v) There are no pending or threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations that have been asserted or instituted, and, to the Knowledge of Purchaser, no set of circumstances exists that may reasonably be expected to give rise to a claim or lawsuit, against Purchaser Benefit Plans, any fiduciaries thereof with respect to their duties to Purchaser Benefit Plans or the assets of any of the trusts under any of Purchaser Benefit Plans, that could reasonably be expected to result in any material liability of Purchaser or any of its Subsidiaries to the PBGC, the IRS, the DOL, any Multiemployer Plan, a Multiple Employer Plan, any participant in any Purchaser Benefit Plan, or any other party.

(vi) To the Knowledge of Purchaser, none of Purchaser and its Subsidiaries nor any Purchaser ERISA Affiliate nor any other person, including any fiduciary, has engaged in any "prohibited transaction" (as defined in Section 4975 of the IRC or Section 406 of ERISA) that could subject any of Purchaser Benefit Plans or their related trusts, Purchaser, any of its Subsidiaries, any Purchaser ERISA Affiliate or any person that Purchaser or any of its Subsidiaries has an obligation to indemnify, to any material tax or penalty imposed under Section 4975 of the IRC or Section 502 of ERISA.

(vii) There are no pending or, to Purchaser's Knowledge, threatened material labor grievances or material unfair labor practice claims or charges against Purchaser or any of its Subsidiaries, nor any strikes or other material labor disputes against Purchaser or any of its Subsidiaries. Neither Purchaser nor any of its Subsidiaries is party to or bound by any collective bargaining or similar agreement with any labor organization, or work rules or practices agreed to with any labor organization or employee association applicable to employees of Purchaser or any of its Subsidiaries and, to the Knowledge of Purchaser, there are no organizing efforts by any union or other group seeking to represent any employees of Purchaser or any of its Subsidiaries and no employees of Purchaser or any of its Subsidiaries are represented by any labor organization.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(r) *Loan Matters.* All Loans held by Purchaser or any of its Subsidiaries were made in all material respects for good, valuable and adequate consideration in the ordinary course of the business, in accordance in all material respects with sound banking practices and the Loans are not subject to any pending, or to the Knowledge of Purchaser, threatened defenses, setoffs or counterclaims, including without limitation any such as are afforded by usury or truth in lending laws, except as may be provided by bankruptcy, insolvency or similar laws or by general principles of equity. The notes or other evidences of indebtedness evidencing such Loans and all forms of pledges, mortgages and other collateral documents and security agreements are, in all material respects, enforceable and valid (except as may be limited by the Enforceability Exceptions), and in each case, true, genuine and what they purport to be.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(s) *Anti-takeover Provisions Inapplicable*. Purchaser and its Subsidiaries have taken all actions required to exempt Purchaser, this Agreement, the Bank Agreement and Plan of Merger, the Merger and the Bank Merger from the effects of an anti-takeover provision contained in their organizational documents, and the provisions of any federal or state "anti-takeover," "fair price," "moratorium," "control share acquisition" or similar laws or regulations.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(t) *Corporate Documents and Records*. Purchaser has previously made available a complete and correct copy of the articles of incorporation, bylaws and similar organizational documents of Purchaser and each of Purchaser's Subsidiaries, as in effect as of the date of this Agreement. Neither Purchaser nor any of Purchaser's Subsidiaries is in violation of its articles of incorporation, bylaws or similar organizational documents. The minute books of Purchaser and each of Purchaser's Subsidiaries constitute a complete and correct record of all actions taken by their respective boards of directors (and each committee thereof) and their shareholders.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(u) *CRA, Anti-Money Laundering, OFAC and Customer Information Security*. Purchaser Bank has received an overall rating of "Satisfactory" or better in its most recent examination or interim review with respect to the CRA. Purchaser does not have Knowledge of any facts or circumstances that would cause Purchaser Bank or any other Subsidiary of Purchaser: (i) to be deemed not to be in satisfactory compliance in any material respect with the CRA, and the regulations promulgated thereunder, or to be assigned a rating for CRA purposes by federal bank regulators of lower than "Satisfactory"; or (ii) to be deemed to be operating in violation in any material respect of the Bank Secrecy Act, the USA PATRIOT Act, any order issued with respect to anti-money laundering by the U.S. Department of the Treasury's Office of Foreign Assets Control, or any other applicable anti-money laundering statute, rule or regulation; or (i) to be deemed not to be in satisfactory compliance in any material respect with the applicable privacy of customer information requirements contained in any federal and state privacy laws and regulations, including without limitation, in Title V of the Gramm-Leach- Bliley Act of 1999 and the regulations promulgated thereunder, as well as the provisions of the information security program adopted by Purchaser Bank. No non-public customer information has been disclosed to or, to the Knowledge of Purchaser, accessed by an unauthorized third party in a manner that would cause either Purchaser or any of its Subsidiaries to undertake any remedial action. The Board of Directors of Purchaser Bank (or where appropriate of any other Subsidiary of Purchaser) has adopted, and Purchaser Bank (or such other Subsidiary of Purchaser) has implemented, an anti-money laundering program that contains adequate and appropriate customer identification verification procedures that comply with Section 326 of the USA PATRIOT Act and such anti-money laundering program meets the requirements in all material respects of Section 352 of the USA PATRIOT Act and the regulations thereunder, and Purchaser Bank (or such other Subsidiary of Purchaser) has complied in all material respects with any requirements to file reports and other necessary documents as required by the USA PATRIOT Act and the regulations thereunder.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) *Internal Controls*. Purchaser and its Subsidiaries have devised and maintain a system of internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, and (iii) access to assets is permitted only in accordance with management's general or specific authorization. There are no significant deficiencies or material weaknesses in the design or operation of internal controls over financial reporting that are reasonably likely to adversely affect in any material respect Purchaser's ability to record, process, summarize and report financial information. To the Knowledge of Purchaser, there has occurred no fraud, whether material or not, that involves management or other employees who have a significant role in Purchaser's internal controls over financial reporting. Since January 1, 2019, neither Purchaser nor any of its Subsidiaries, nor, to the Knowledge of Purchaser, any Representative of Purchaser or any of its Subsidiaries, has received or otherwise had or obtained knowledge of any material complaint, allegation or assertion regarding the accounting or auditing practices, procedures, methodologies or methods (including with respect to loan loss reserves, write-downs, charge-offs and accruals) of Purchaser or any of its Subsidiaries or their respective internal accounting controls.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(w) *Tax Treatment of the Merger*. Purchaser has no Knowledge of any fact or circumstance relating to it that would prevent the transactions contemplated by this Agreement from qualifying as a reorganization under Section 368(a) of the IRC.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(x) *Fairness Opinion*. The Board of Directors of Purchaser has received the opinion (which, if initially rendered verbally, have been or will be confirmed by written opinions, dated the same date) of Performance Trust Capital Partners, LLC, to the effect that, as of the date of such opinion and subject to the assumptions, limitations and qualifications set forth therein, the Exchange Ratio in the Merger is fair, from a financial point of view, to Purchaser. Such opinion has not been amended or rescinded as of the date hereof.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(y) *Purchaser IT Systems*. To the Knowledge of Purchaser, all information technology and computer systems (including software, information technology and telecommunication hardware and other equipment) relating to the transmission, storage, maintenance, organization, presentation, generation, processing or analysis of data and information, whether or not in electronic format, used in or necessary to the conduct of the business of Purchaser or Purchaser Bank (collectively, "**Purchaser IT Systems**") have been properly maintained by technically competent personnel, in accordance with standards set by the manufacturers or otherwise in accordance with standards in the industry, to ensure proper operation, monitoring and use. Purchaser IT Systems are in good working condition to effectively perform all information technology operations necessary to conduct Purchaser's consolidated business as currently conducted. Neither Purchaser nor Purchaser Bank has experienced within the past two years any material disruption to, or material interruption in, the conduct of its business attributable to a defect, bug, breakdown or other failure or deficiency of Purchaser IT Systems. To Purchaser's Knowledge, no Person has gained unauthorized access to any of the Purchaser IT Systems that has had, or is reasonably expected to have, a Material Adverse Effect on Purchaser. Purchaser and Purchaser Bank have taken reasonable measures to provide for the back-up and recovery of the data and information necessary to the conduct of their businesses without material disruption to, or material interruption in, the conduct of their respective businesses. Purchaser and its Subsidiaries comply in all material respects with all data protection and privacy laws and regulations as well as their own policies relating to data protection and the privacy and security of personal data and the non-public personal information of their respective customers and employees, except for immaterial failures to comply or immaterial violations.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(z) *No Other Representations or Warranties.*

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) Except for the representations and warranties made by Purchaser in this *Section 3.3*, neither Purchaser nor any other Person makes any express or implied representation or warranty with respect to Purchaser, its Subsidiaries, or their respective businesses, operations, assets, liabilities, conditions (financial or otherwise) or prospects, and Purchaser hereby disclaims any such other representations or warranties. In particular, without limiting the foregoing disclaimer, neither Purchaser nor any other Person makes or has made any representation or warranty to the Company or any of its Affiliates or representatives with respect to (A) any financial projection, forecast, estimate, budget or prospective information relating to Purchaser, any of its Subsidiaries or their respective businesses, or (B) except for the representations and warranties made by Purchaser in this *Section 3.3*, any oral or written information presented to the Company or any of its Affiliates or representatives in the course of their due diligence investigation of Purchaser, the negotiation of this Agreement or in the course of the transactions contemplated hereby.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Purchaser hereby acknowledges and agrees that neither the Company nor any other Person has made or is making any express or implied representation or warranty other than those contained in *Section 3.2*.

**ARTICLE IV.**<br> **CONDUCT PENDING THE MERGER**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**4.1 Forbearances by the Company**. Except as expressly contemplated or permitted by this Agreement, disclosed in the Company's Disclosure Letter, or to the extent expressly required by law or regulation or any Governmental Entity, during the period from the date of this Agreement to the Effective Time, the Company shall not, nor shall the Company permit any of its Subsidiaries to, without the express prior written consent (which may include consent via electronic mail) of Purchaser (which consent shall not be unreasonably withheld, conditioned or delayed):

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) conduct its business other than in the ordinary course consistent with past practice; fail to use reasonable best efforts to maintain and preserve intact its business organization, properties, leases, Loans, deposit accounts, employees and advantageous business relationships, including any certifications, qualifications or authorizations with SBA or USDA, and retain the services of its officers and key employees; or take any action that would adversely affect or materially delay its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) (i) incur, modify, extend or renegotiate any indebtedness for borrowed money, or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other Person, other than the creation of deposit liabilities in the ordinary course of business consistent with past practice;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) prepay any indebtedness or other similar arrangements that would cause the Company to incur any prepayment penalty thereunder; or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) purchase any brokered certificates of deposit;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) adjust, split, combine or reclassify any capital stock;

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) except as set forth in Section 4.1(c) of the Company's Disclosure Letter, make, declare or pay any dividend, or make any other distribution on its capital stock;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) grant any person any right to acquire any shares of its capital stock or make any grant or award under the Company Restricted Stock Plan;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) issue any additional shares of capital stock or any securities or obligations convertible or exercisable for any shares of its capital stock; or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) redeem or otherwise acquire any shares of its capital stock other than a security interest or because of the enforcement of a security interest and other than as provided in this Agreement;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) other than in the ordinary course of business consistent with past practice (including the sale, transfer or disposal of other real estate owned ("**OREO**") if the loan associated with the OREO is $100,000 or more or the proposed sale, transfer or disposal would result in a discount of the Loan associated with the OREO of 25% or more), (i) sell, transfer, mortgage, encumber or otherwise dispose of any of its real property or other assets to any Person other than a Subsidiary, or (ii) cancel, release or assign any indebtedness to any such Person or any claims held by any such Person;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) make any equity investment, either by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets of any other Person, or form any new Subsidiary;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) except as set forth in Section 4.1(f) of the Company's Disclosure Letter, (i) renew, amend or terminate any Company Contract, or make any change in any Company Contract or (ii) enter into any contract that would constitute a Company Contract if it were in effect on the date of this Agreement;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) except for Loans or commitments for Loans that have previously been approved by the Company before the date of this Agreement, make, renegotiate, renew, increase the amount of, extend the term of, modify or purchase any Loans, or make any commitment in respect of any of the foregoing, except with respect to any secured Loan or commitment (in either case that does not involve a guaranty from a Governmental Entity, including, but not limited to USDA or SBA) wherein the total credit exposure is less than $2,000,000 or any unsecured Loan or commitment (in either case that does not involve a guaranty from a Governmental Entity, including, but not limited to USDA or SBA) wherein the total credit exposure is less than $350,000 which is made in conformity with existing lending practices to a borrower, and with collateral located within the Company's primary geographic service area; *provided*, that Purchaser shall be required to respond to any request for a consent to make such loan or extension of credit in writing within three (3) Business Days after the loan package is delivered to Purchaser or if no response is received within three (3) Business Days it will be deemed consent of Purchaser;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h) (i) make any new Loan, or commit to make any new Loan, to any director or executive officer of the Company or Company Bank, or any related entity of the foregoing or (ii) amend, renew or increase any existing Loan, or commit to amend, renew or increase any such Loan, to any director or executive officer of the Company or Company Bank, or any related entity of the foregoing, in either case, without first consulting with Purchaser, where such Loan, commitment, modification or renewal would require prior approval by the Company's Board of Directors pursuant to the policies of the Company or Company Bank or applicable law;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) except as required by any Company Benefit Plan in effect on the date hereof:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) except as set forth in Section 4.1(i)(i) of the Company's Disclosure Letter, (a) increase in any manner the compensation, bonuses or other fringe benefits of any of its employees or directors, or (b) pay, or commit to pay, any bonus, change in control, retention, pension, retirement allowance or contribution, except for payment of annual cash bonuses in respect of the fiscal year in effect as of the date of this Agreement in the ordinary course of business consistent with past practice pursuant to the Company Benefit Plans set forth in the Company's Disclosure Letter, and or (c) fund any rabbi trust or similar arrangement;

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) become a party to, amend, renew, extend or commit itself to any Company Benefit Plan or any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment, severance or change in control agreement with or for the benefit of any employee or director, except for amendments to any plan or agreement that are required by law;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) amend, modify or revise the terms of any outstanding stock option or stock-based compensation or voluntarily accelerate the vesting of, or the lapsing of restrictions with respect to, any stock options or other stock-based compensation; or make any contributions to any defined contribution plan or Company Benefit Plan that are not made in the ordinary course of business consistent with past practice;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) elect to any office with the title of Vice President or higher any person who does not hold such office as of the date of this Agreement or nominate to its Board of Directors any person who is not a member of its Board of Directors as of the date of this Agreement; or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) hire or terminate any employee with an annualized salary that exceeds $50,000, other than terminations for "cause";

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j) commence any action or proceeding, other than to enforce any obligation owed to the Company or any of its Subsidiaries and in accordance with past practice, or settle any claim, action or proceeding (i) involving payment by it of money damages that exceed $50,000 or (ii) that would impose any material restriction on its operations or the operations of any of its Subsidiaries;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(k) amend its charter or bylaws, or similar governing documents of its Subsidiaries;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(l) increase or decrease the rate of interest paid on time deposits or on certificates of deposit, except in the ordinary course of business consistent with past practice;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(m) purchase any debt security, including mortgage-backed and mortgage- related securities, other than U.S. government and U.S. government agency securities with final maturities of less than two (2) years;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(n) make, or commit to make, any capital expenditures in the aggregate amount of $50,000, other than pursuant to binding commitments existing on the date hereof, which are described in the Company's Disclosure Letter, and except for ordinary course, immaterial expenditures reasonably necessary to maintain existing assets in good repair;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(o) establish or commit to the establishment of any new branch or other office facilities or file any application to relocate or terminate the operation of any banking office;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(p) enter into any futures contract, option, swap agreement, interest rate cap, interest rate floor, interest rate exchange agreement, or take any other action for purposes of hedging the exposure of its interest-earning assets or interest-bearing liabilities to changes in market rates of interest;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(q) make any changes in policies in any material respect in existence on the date hereof with regard to: the extension of credit, or the establishment of reserves with respect to possible loss thereon or the charge off of losses incurred thereon; investments; risk and asset/liability management; deposit pricing or gathering; underwriting, pricing, originating, acquiring, selling, servicing or buying or selling rights to service, loans; its hedging practices and policies; or other material banking policies, in each case except as may be required by changes in applicable law or regulations, GAAP, or at the direction of a Governmental Entity;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(r) except as required by law or for communications in the ordinary course of business consistent with past practice that do not relate to the Merger or other transactions contemplated hereby:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) issue any communication of a general nature to employees (including general communications relating to benefits and compensation) without prior consultation with Purchaser and, to the extent relating to employment, benefit or compensation information addressed in this Agreement or related, directly or indirectly, to the transactions contemplated by this Agreement, without the prior consent of Purchaser (which shall not be unreasonably withheld, conditioned or delayed); or

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) issue any communication of a general nature to customers without the prior approval of Purchaser (which shall not be unreasonably withheld, conditioned or delayed);

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(s) except with respect to foreclosures in process as of the date hereof, foreclose upon or take a deed or title to any commercial real estate (i) without providing prior notice to Purchaser and, if requested by Purchaser, conducting a Phase I environmental assessment of the property or (ii) if the Phase I environmental assessment referred to in the prior clause reflects the presence of any Hazardous Material or underground storage tank;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(t) make, change or rescind any material election concerning Taxes or Tax returns, change an annual Tax accounting period, adopt or change any material Tax accounting method, file any amended Tax return, enter into any closing agreement with respect to Taxes, settle or compromise any material Tax claim, audit, dispute or assessment, or surrender any right to claim a refund of Taxes or obtain any Tax ruling;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(u) take any action that is intended or would reasonably be likely to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time before the Effective Time, or in any of the conditions to the Merger set forth in Article VI not being satisfied or in a violation of any provision of this Agreement;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) implement or adopt any change in its accounting principles, practices or methods, other than as may be required by GAAP or regulatory guidelines;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(w) enter any new lines of business;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(x) purchase or sell any mortgage loan servicing rights other than in the ordinary course of business consistent with past practice;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(y) merge or consolidate Company Bank or any Subsidiary with any other Person or restructure, reorganize or completely or partially liquidate or dissolve it or any of its Subsidiaries;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(z) knowingly take action that would prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the IRC; or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(aa) agree to take, make any commitment to take, or adopt any resolutions of its Board of Directors in support of, any of the actions prohibited by this *Section 4.1*.

Any request by the Company or response thereto by Purchaser shall be made in accordance with the notice provisions of *Section 8.7* and shall note that it is a request pursuant to this *Section 4.1*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**4.2 Forbearances by Purchaser**. Except as expressly contemplated or permitted by this Agreement or to the extent required by law or regulation or any Governmental Entity, during the period from the date of this Agreement to the Effective Time, Purchaser shall maintain its rights and franchises in all material respects, and shall not, nor shall Purchaser permit any of its Subsidiaries to, without the prior written consent (which may include consent via electronic mail) of the Company (which consent shall not be unreasonably withheld, conditioned or delayed):

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Conduct its business other than in the ordinary course consistent with past practice; fail to use reasonable best efforts to maintain and preserve intact its business organization, properties, leases, employees and advantageous business relationships and retain the services of its officers and key employees;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) take any action that would adversely affect or materially delay its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby on a timely basis, including causing any other application to a bank Governmental Entity for approval of a merger to be submitted for filing before the application related to the Merger is filed with such bank Governmental Entity;

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) take any action that is intended to or would reasonably be likely to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time before the Effective Time, or in any of the conditions to the Merger set forth in Article VI not being satisfied or in a violation of any provision of this Agreement;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) knowingly take action that would prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the IRC;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) agree to take, make any commitment to take, or adopt any resolutions of its Board of Directors in support of, any of the actions prohibited by this *Section 4.2*; or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) amend, repeal or modify any provision of its charter or bylaws in a manner that would adversely affect the Company or any Company shareholder relative to other holders of Purchaser Common Stock or the transactions contemplated by this Agreement.

**ARTICLE V.**<br> **COVENANTS**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.1 Acquisition Proposals**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) From the date of this Agreement until the earlier to occur of the Closing or the termination of this Agreement in accordance with its terms, the Company shall not, and shall cause its Subsidiaries, and its and its Subsidiaries' officers, directors and employees and any investment banker, financial advisor, attorney, accountant or other representative retained by the Company or any of its Subsidiaries (collectively, the "**Representatives**") not to, directly or indirectly, (i) solicit, initiate, induce or knowingly encourage, or knowingly take any other action to facilitate, any inquiries, offers, discussions or the making of any proposal that constitutes or could reasonably be expected to lead to an Acquisition Proposal, (ii) furnish any confidential or non-public information or data regarding the Company or any of its Subsidiaries or afford access to any such information or data to any Person in connection with or in response to an Acquisition Proposal or an inquiry or indication of interest that could reasonably be expected to lead to an Acquisition Proposal, (iii) continue or otherwise participate in any discussions or negotiations, or otherwise communicate in any way with any Person (other than Purchaser), regarding an Acquisition Proposal, (iv) approve, endorse or recommend any Acquisition Proposal, (v) release any Person from, waive any provisions of, or fail to use its reasonable best efforts to enforce any confidentiality agreement or standstill agreement to which the Company is a party or (vi) enter into or consummate any agreement, agreement in principle, letter of intent, arrangement or understanding contemplating any Acquisition Proposal or requiring the Company to abandon, terminate or fail to consummate the transactions contemplated hereby. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding sentence by any Representative of the Company shall be deemed to be a breach of this *Section 5.1* by the Company. Notwithstanding the foregoing, before the adoption and approval of this Agreement by the holders of Company Common Stock and Company Class A Common Stock at the Company Shareholder Meeting, this *Section 5.1(a)* shall not prohibit the Company from furnishing non- public information regarding the Company and its Subsidiaries to, or entering into discussions with, any Person in response to an Acquisition Proposal that is submitted to the Company by such Person (and not withdrawn) if (1) the Company's Board of Directors determines in good faith, after consultation with the Company's outside legal counsel and financial advisors, the Acquisition Proposal constitutes or is reasonably expected to result in a Superior Proposal, (2) the Company has not breached any of the covenants set forth in this *Section 5.1,* (3) the Company's Board of Directors determines in good faith, after consultation with outside legal counsel, that the failure to take such action would reasonably be expected to violate the directors' fiduciary obligations to the Company's shareholders under applicable law, and (4) before furnishing any non-public information to, or entering into discussions with, such Person, the Company gives Purchaser written notice of the identity of such Person and of the Company's intention to furnish non-public information to, or enter into discussions with, such Person and the Company receives from such Person an executed confidentiality agreement on terms no more favorable to such Person than the Mutual Confidentiality and Non-Disclosure Agreement, dated as of August 9, 2022, between Purchaser and the Company (the "**Confidentiality Agreement**") is to Purchaser and the Company also provides Purchaser, prior to or substantially concurrently with the time such information is provided or made available to such Person, any non-public information furnished to such other Person that was not previously furnished to Purchaser. During the term of this Agreement, the Company shall not, and shall cause its Subsidiaries and its and their Representatives not to on its behalf, enter into any binding acquisition agreement, merger agreement, or other definitive transaction agreement (other than a confidentiality agreement referred to and entered into in accordance with this *Section 5.1(a)*) relating to any Acquisition Proposal.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) The Company will notify Purchaser orally within One (1) Business Day and in writing (within two (2) Business Days) of receipt of any Acquisition Proposal, any request for non-public information that could reasonably be expected to lead to an Acquisition Proposal, or any inquiry with respect to or that could reasonably be expected to lead to an Acquisition Proposal, including, in each case, the identity of the Person making such Acquisition Proposal, the request or inquiry and the terms and conditions thereof, and shall provide to Purchaser any written materials received by the Company or any of its Subsidiaries in connection therewith. The Company will keep Purchaser informed of any developments with respect to any such Acquisition Proposal, request or inquiry promptly orally (within one (1) calendar day) and in writing (within two (2) calendar days) upon the occurrence thereof.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) The Company will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted before the date of this Agreement with respect to any of the foregoing, including terminating access to any physical or electronic data rooms relating to a possible Acquisition Proposal by such Person.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.2 Advice of Changes**. Before the Closing, each party shall promptly advise the other party orally and in writing to the extent that it has Knowledge of (i) any representation or warranty made by it contained in this Agreement becoming untrue or inaccurate in any material respect or (ii) the failure by it to comply in any material respect with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; *provided, however*, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.3 Access and Information**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Upon reasonable notice and subject to applicable laws relating to the exchange of information, each of Purchaser and the Company, for purposes of verifying the representations and warranties of the other and preparing for the Merger and other matters contemplated by this Agreement, shall (and shall cause its respective Subsidiaries to) afford to the other party and its representatives (including, without limitation, officers and employees of the other party and its Affiliates and counsel, accountants and other professionals retained by the other party) such reasonable access throughout the period before the Effective Time to the books, records, contracts, properties, personnel, information technology and to such other information relating to the other party and its Subsidiaries as may be reasonably requested, except where such materials (i) constitute attorney-client privileged communications or information, (ii) relate to pending or threatened litigation or investigations if, in the opinion of counsel, the presence of such designees would or might jeopardize any privilege relating to, the matters being discussed or (iii) constitute confidential supervisory information if, in the opinion of counsel, disclosure is prohibited by applicable laws; *provided, however*, that no investigation pursuant to this *Section 5.3* shall affect or be deemed to modify any representation or warranty made in this Agreement. Neither party nor any of its Subsidiaries shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of its customers, or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into before the date of this Agreement. The parties will endeavor to make appropriate and reasonable substitute disclosure arrangements, consistent with law, in the case of circumstances where the restrictions in clauses (ii) or (iii) above.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) From the date hereof until the Effective Time, the Company shall, and shall cause its respective Subsidiaries to, promptly provide to Purchaser (i) a copy of each report filed with a Governmental Entity (other than publicly available periodic reports filed with the SEC), (ii) a copy of each periodic report provided to its senior management and all materials relating to its business or operations furnished to its Board of Directors, (iii) a copy of each press release made available to the public and (iv) all other information concerning its business, properties and personnel as may be reasonably requested; *provided* that Purchaser shall not be entitled to receive reports or other documents relating to (w) solely in the case of clause (ii), matters involving this Agreement, (x) pending or threatened litigation or investigations if, in the opinion of counsel, the disclosure of such information would or might jeopardize any privilege relating to, the matters being discussed, or (y) confidential supervisory information if, in the opinion of counsel, disclosure is prohibited by applicable laws. The Company will endeavor to make appropriate and reasonable substitute disclosure arrangements, consistent with law, in the case of circumstances where the restrictions in clause (w) or (x) apply.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) The Company shall permit, and shall cause its Subsidiaries to permit, Purchaser and/or a cybersecurity consulting firm selected by Purchaser, at the sole expense of Purchaser, to conduct such IT security audits, studies and tests on the Company IT Systems.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) The Company and Purchaser will not, and will cause its respective representatives not to, use any information and documents obtained in the course of the consideration of the consummation of the transactions contemplated by this Agreement, including any information obtained pursuant to this *Section 5.3*, for any purpose unrelated to the consummation of the transactions contemplated by this Agreement and will hold such information and documents in confidence and treat such information and documents as secret and confidential and will use all reasonable efforts to safeguard the confidentiality of such information and documents in accordance with the provisions of the Confidentiality Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) From and after the date hereof, representatives of Purchaser and the Company shall meet on a regular basis to discuss and plan for the Closing and the conversion of the Company's and its Subsidiaries' data processing and related electronic informational systems to those used by Purchaser and its Subsidiaries with the goal of conducting such conversion as soon as practicable following the consummation of the Bank Merger.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) Within fifteen (15) Business Days of the end of each calendar month, the Company shall provide Purchaser with an updated list of Loans described in *Section 3.2(w)(vi)*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) The information regarding the Company and its Subsidiaries to be supplied by the Company for inclusion in the Registration Statement, any filings or approvals under applicable state securities laws, or any filing pursuant to Rule 165 or Rule 425 under the Securities Act or Rule 14a-12 under the Exchange Act will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The information supplied, or to be supplied, by the Company for inclusion in applications to Governmental Entities to obtain all permits, consents, approvals and authorizations necessary or advisable to consummate the transactions contemplated by this Agreement shall be accurate in all material respects.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h) The information regarding Purchaser and its Subsidiaries to be supplied by Purchaser for inclusion in the Registration Statement, any filings or approvals under applicable state securities laws, or any filing pursuant to Rule 165 or Rule 425 under the Securities Act or Rule 14a-12 under the Exchange Act will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement-Prospectus (except for such portions thereof supplied by the Company or any of its Subsidiaries) will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. The information supplied, or to be supplied, by Purchaser for inclusion in applications to Governmental Entities to obtain all permits, consents, approvals and authorizations necessary or advisable to consummate the transactions contemplated by this Agreement shall be accurate in all material respects. The Registration Statement will comply as to form in all material respects with the provisions of the Securities Act and the rules and regulations thereunder.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.4 Applications; Consents**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) The Company and Purchaser shall, upon request, furnish each other with all information concerning themselves, their Subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with the Proxy Statement-Prospectus, the Registration Statement or any other statement, filing, notice or application made by or on behalf of the Company and Purchaser or any of their respective Subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement. The parties hereto shall cooperate with each other and shall use their reasonable best efforts to prepare and file as soon as practicable after the date hereof, all necessary applications, notices and filings to obtain all permits, consents, approvals and authorizations of all Governmental Entities that are necessary or advisable to consummate the transactions contemplated by this Agreement. The Company and Purchaser shall furnish each other with all information concerning themselves, their respective Subsidiaries, and their respective Subsidiaries' directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with any application, notice or filing made by or on behalf of Purchaser, the Company or any of their respective Subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement. Purchaser and the Company shall have the right to review in advance, and to the extent practicable each will consult with the other on, in each case subject to applicable laws relating to the exchange of information, all the information relating to Purchaser and the Company, as applicable, and any of their respective Subsidiaries, that appears in any filing made with, or written materials submitted to, any Governmental Entity pursuant to this *Section 5.4(a)*. In exercising the foregoing right, each of the parties hereto shall act reasonably and as promptly as practicable.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) As soon as practicable after the date hereof, each of the parties hereto shall, and they shall cause their respective Subsidiaries to, use its reasonable best efforts to obtain any consent, authorization or approval of any third party that is required to be obtained in connection with the transactions contemplated by this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) Purchaser and the Company shall promptly advise each other upon receiving any communication from any Governmental Entity whose consent or approval is required for consummation of the transactions contemplated by this Agreement that causes such party to believe that there is a reasonable likelihood that such consent or approval will not be obtained or that the receipt of any such required consent or approval will be materially delayed.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.5 Anti-Takeover Provisions**. The Company and its Subsidiaries shall take all steps required by any relevant federal or state law or regulation or under any relevant agreement or other document to exempt or continue to exempt Purchaser, this Agreement, the Bank Agreement and Plan of Merger, the Merger and the Bank Merger from the effects of an anti-takeover provision in the Company's or its Subsidiaries' charter and bylaws, or similar organizational documents, and the provisions of any federal or state anti-takeover laws.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.6 Additional Agreements**. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use reasonable best efforts to take promptly, or cause to be taken promptly, all actions and to do promptly, or cause to be done promptly, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as possible, including using efforts to obtain all necessary actions or non-actions, extensions, waivers, consents and approvals from all applicable Governmental Entities, effecting all necessary registrations, applications and filings (including, without limitation, filings under any applicable state securities laws) and obtaining any required contractual consents and regulatory approvals. Notwithstanding anything in this Agreement to the contrary, nothing in this Agreement shall require Purchaser or its Affiliates to agree to, and without the prior consent of Purchaser the Company and its subsidiaries shall not agree to, in connection with obtaining any actions or non- actions, extensions, waivers, consents or approvals of any Governmental Entity any condition or requirement that would so materially and adversely impact the economic or business benefits to Purchaser of the transactions contemplated hereby that, had such condition or requirement been known, Purchaser would not, in its reasonable judgment, have entered into this Agreement (such condition or requirement, a "**Burdensome Condition**").

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.7 Publicity**. The initial press release announcing this Agreement shall be a joint press release. Thereafter, the Company and Purchaser shall consult with each other and obtain the advance approval of the other party (which approval shall not be unreasonably withheld, conditioned or delayed) before issuing any press releases or, to the extent practical, otherwise making public statements (including any written communications to shareholders) with respect to the Merger and any other transaction contemplated hereby; *provided, however*, that nothing in this *Section 5.7* shall be deemed to prohibit any party from making any disclosure (i) that its counsel deems necessary to satisfy such party's disclosure obligations imposed by law, (ii) at the request of a Governmental Entity or (iii) that is substantially similar to communications previously approved pursuant to this *Section 5.7*.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.8 Shareholder Meeting**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) The Company shall submit to its shareholders this Agreement and any other matters required to be approved or adopted by its shareholders to carry out the intentions of this Agreement. In furtherance of that obligation, the Company will take, in accordance with applicable law and its articles of incorporation and bylaws, all action necessary to call, give notice of, convene and hold a meeting of its shareholders (the "**Company Shareholder Meeting**") as promptly as practicable to consider and vote on approval and adoption of this Agreement and the transactions provided for in this Agreement. Subject to *Section 5.8(b)*, the Company shall, (i) through its Board of Directors, recommend to its shareholders the adoption and approval of this Agreement, (ii) include such recommendation in the Proxy Statement-Prospectus and (iii) use reasonable best efforts to obtain from its shareholders the necessary votes approving and adopting this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Notwithstanding anything in this Agreement to the contrary, at any time before the Company Shareholder Meeting, the Company's Board of Directors may, if it concludes in good faith (after consultation with its outside legal advisors) that the failure to do so would be reasonably likely to result in a violation of its fiduciary duties under applicable law, withdraw or modify or change in a manner adverse to Purchaser its recommendation that the shareholders of the Company approve this Agreement (a "**Change of Recommendation**") (although the resolutions approving this Agreement as of the date hereof may not be rescinded or amended); *provided* that before any such Change of Recommendation, the Company shall have complied in all material respects with *Section 5.1*, given Purchaser at least three (3) Business Days' prior written notice advising it of the intention of the Company's Board of Directors to take such action and a reasonable description of the event or circumstances giving rise to its determination to take such action and, if the decision relates to an Acquisition Proposal, given Purchaser the material terms and conditions of the Acquisition Proposal or inquiry, including the identity of the Person making any such Acquisition Proposal and any written materials received by the Company or any of its Subsidiaries in connection therewith; and *provided, further*, that if the decision relates to an Acquisition Proposal: (i) the Company shall have given Purchaser three (3) Business Days after delivery of such notice to Purchaser to propose revisions to the terms of this Agreement (or make another proposal) and if Purchaser proposes to revise the terms of this Agreement, throughout such period the Company shall have negotiated in good faith with Purchaser with respect to such proposed revisions or other proposal; and (ii) the Company's Board of Directors shall have determined in good faith, after consultation with the Company's outside legal counsel and financial advisors and after considering the results of such negotiations and giving effect to any proposals, amendments or modifications made or agreed to by Purchaser, if any, that such Acquisition Proposal constitutes a Superior Proposal. If the Company's Board of Directors does not make the determination that such Acquisition Proposal constitutes a Superior Proposal and thereafter determines not to withdraw, modify or change its recommendation that the shareholders of the Company approve this Agreement in connection with a new Acquisition Proposal, the procedures referred to above shall apply anew and shall also apply to any subsequent withdrawal, modification or change. In the event of any material revisions to the Acquisition Proposal, the Company shall be required to deliver a new written notice to Purchaser and to again comply with the requirements of this *Section 5.8(c)* with respect to such new written notice, except that the three (3) Business Day period referred to above shall be reduced to two (2) Business Days.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.9 Registration of Purchaser Common Stock**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Within sixty (60) days following the date hereof, Purchaser shall prepare and file the Registration Statement with the SEC. The Registration Statement shall contain proxy materials relating to the matters to be submitted to the Company shareholders at the Company Shareholder Meeting and shall also constitute the prospectus relating to the shares of Purchaser Common Stock to be issued in the Merger (such proxy statement/prospectus, and any amendments or supplements thereto, the "**Proxy Statement-Prospectus**"). The Company will furnish to Purchaser the information required to be included in the Registration Statement with respect to its business and affairs and shall have the right to review and consult with Purchaser and approve the form of, and any characterizations of such information included in, the Registration Statement before its being filed with the SEC. Each of Purchaser and the Company shall use its reasonable best efforts to have the Registration Statement declared effective by the SEC and to keep the Registration Statement effective as long as needed to consummate the Merger and the transactions contemplated hereby. Each of Purchaser and the Company will use its reasonable best efforts to cause the Proxy Statement-Prospectus to be mailed to the Company's shareholders as promptly as practicable after the Registration Statement is declared effective under the Securities Act. Purchaser will advise the Company, promptly after it receives notice thereof, of the time when the Registration Statement has become effective, the issuance of any stop order, the suspension of the qualification of Purchaser Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Proxy Statement-Prospectus or the Registration Statement. If, at any time before the Effective Time, any information relating to Purchaser or the Company, or any of their respective Affiliates, officers or directors, should be discovered by Purchaser or the Company that should be set forth in an amendment or supplement to any of the Registration Statement or the Proxy Statement-Prospectus so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party that discovers such information shall promptly notify the other party hereto and, to the extent required by law, rules or regulations, an appropriate amendment or supplement describing such information shall be promptly filed by Purchaser or the Company, as applicable, with the SEC and disseminated by Purchaser and the Company to their respective shareholders.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Purchaser shall also take any action required to be taken under any applicable state securities laws in connection with the Merger and each of the Company and Purchaser shall furnish all information concerning it and the holders of Company Common Stock and Company Class A Common Stock as may be reasonably requested in connection with any such action.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) Before the Effective Time, Purchaser shall notify or file an application with NASDAQ with respect to the additional shares of Purchaser Common Stock to be issued by Purchaser in exchange for the shares of Company Common Stock and Company Class A Common Stock.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.10 Notification of Certain Matters**. Each party shall give prompt notice to the other of: (i) any event or notice of, or other communication relating to, a default or event that, with notice or lapse of time or both, would become a default, received by it or any of its Subsidiaries after the date of this Agreement and before the Effective Time, under any contract material to the financial condition, properties, businesses or results of operations of each party and its Subsidiaries taken as a whole to which each party or any Subsidiary is a party or is subject; (ii) any event, condition, change or occurrence which it believes would or would be reasonably likely to cause or constitute a material breach of any of its representations, warranties or covenants contained herein or that reasonably could be expected to give rise, individually or in the aggregate, to the failure of a condition in Article VI and (iii) any event, condition, change or occurrence that individually or in the aggregate has, or that, so far as reasonably can be foreseen at the time of its occurrence, is reasonably likely to result in a Material Adverse Effect. Each of the Company and Purchaser shall give prompt notice to the other party of any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with any of the transactions contemplated by this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.11 Employee Benefit Matters**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) At the sole discretion of Purchaser, Purchaser may maintain the Company's health and welfare plans for Persons who are employees of the Company and its Subsidiaries immediately before the Effective Time and whose employment is not terminated before the Effective Time (a "**Continuing Employee**") through the end of the calendar year in which the Effective Time occurs. Notwithstanding the foregoing, if Purchaser determines to terminate one or more of the Company's health and/or other welfare plans, then, at the request of Purchaser, made at least thirty (30) days before the Effective Time, the Company or its Subsidiaries shall adopt resolutions, to the extent required, providing that the Company's applicable health and welfare plans will be terminated effective immediately before the Effective Time (or such later date as requested by Purchaser in writing or as may be required to comply with any applicable advance notice or other requirements contained in such plans or provided for by law) and shall arrange for termination of all corresponding insurance policies, service agreements and related arrangements effective on the same date to the extent not prohibited by the terms of the arrangements or applicable law. Notwithstanding the foregoing, no coverage of any of the Continuing Employees or their dependents shall terminate under any of the Company's health and welfare plans before the time the Continuing Employees or their dependents, as applicable, become eligible to participate in the health and welfare plans, programs and benefits common to similarly situated employees of Purchaser and its Subsidiaries and their dependents and, consequently, no Continuing Employee shall experience a gap in coverage. Subject to the provisions of this *Section 5.11*, Continuing Employees shall, if applicable, be subject to the employment terms, conditions and rules applicable to other similarly situated employees of Purchaser. Purchaser shall use commercially reasonable efforts to ensure that Continuing Employees who become covered under health and welfare plans, programs and benefits of Purchaser or any of its Subsidiaries shall (i) receive credit for any co-payments and deductibles paid under the Company's health and welfare plans for the plan year in which coverage commences under Purchaser's health and welfare plans and (ii) shall not be subject to any pre-existing conditions under any such plans or arrangements, in each case, to the same extent as applied under the Company's health and welfare plans immediately prior to the Effective Time. Company employees who are not Continuing Employees and their qualified beneficiaries will have the right to continued coverage under group health plans of Purchaser only in accordance with COBRA.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Purchaser shall cause each Purchaser Benefit Plan in which Continuing Employees are eligible to participate to take into account for purposes of eligibility and vesting (but not benefit accrual) under the Purchaser Benefit Plans the service of the Continuing Employees with the Company and its Subsidiaries to the same extent as such service was credited for such purpose by the Company and its subsidiaries; *provided, however*, that such service shall not be recognized: (i) to the extent that such recognition would result in a duplication of benefits under any Purchaser Benefit Plans, (ii) to the extent, at the sole discretion of Purchaser, the cash value of unused paid time-off is paid to Continuing Employees at the Effective Time, (iii) if similarly situated employees of Purchaser and its Subsidiaries do not receive credit for service under the applicable Purchaser Benefit Plan or (iv) with respect to any Purchaser Benefit Plan that is grandfathered or frozen, either with respect to level of benefits or participation. The value of each Company employee's (including employees of the Company's Subsidiaries) unused paid time-off is set forth in *Section 3.2(r)* of the Company's Disclosure Letter. This Agreement shall not be construed to limit the ability of Purchaser to terminate the employment of any employee of the Company or its Subsidiaries or to review any employee benefit plan or program from time to time and to make such changes (including terminating any such plan or program) as Purchaser deems appropriate.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) If requested in writing by Purchaser no later than sixty (60) days before Closing, the Company's Board of Directors will also adopt resolutions (which shall be provided to Purchaser at least five (5) Business Days prior to adoption for Purchaser's review and approval) either, as applicable, (i) terminating the Company 401(k) Plan immediately before the Effective Time, subject to the occurrence of the Effective Time, and if further requested, shall prepare and submit a request to the IRS for a favorable determination letter on termination, or (ii) authorizing and directing an officer of Company or any of its Subsidiaries, as applicable, to send the required sixty (60) day (or other applicable) written notice to terminate and end participation of Company or any of its Subsidiaries, as the case may be, in any Multiple Employer 401(k) Plan, without, unless Purchaser requests otherwise, permitting any transfer of accounts therein to any Purchaser Benefit Plan as a successor plan. If Purchaser requests that the Company apply for a favorable determination letter, then before the Effective Time, the Company shall take all such actions as are necessary (determined in consultation with Purchaser) to submit the application for favorable determination letter in advance of the Effective Time, and following the Effective Time, Purchaser shall use commercially reasonable efforts in good faith to obtain such favorable determination letter as promptly as possible (including, but not limited to, making such changes to the Company 401(k) Plan as may be required by the IRS as a condition to its issuance of a favorable determination letter).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) For those employees of the Company and Company Bank whose employment is eliminated as a result of the Bank Merger, except for employees with individual agreements that provide for payment of severance under certain circumstances (who will be paid severance only in accordance with such agreements), Purchaser will provide severance in accordance with the Purchaser's standard severance policy as disclosed on Section 5.11(d) of Purchaser's Disclosure Letter; *provided*, that the severance periods will be modified in accordance with the terms set forth on Section 5.11(d) of Purchaser's Disclosure Letter.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) Except as set forth on Section 5.11(e) of Purchaser's Disclosure Letter, Purchaser and the Company may jointly elect, in amounts mutually satisfactory to Purchaser and the Company, to enter into retention bonus agreements with key employees of the Company; *provided*, that (i) no retention bonus payment shall be made that would be considered an "excess parachute payment" within the meaning of Section 280G of the IRC or result in any other adverse tax consequence to Purchaser and (ii) the aggregate retention bonus pool amount will not exceed the amount set forth in Section 5.11(e) of Purchaser's Disclosure Letter.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) In the sole discretion of Purchaser, Purchaser may enter into mutually agreeable arrangements with executives and other employees of the Company, including agreements regarding grants or awards of Purchaser Common Stock under Purchaser's stock-based benefit plans.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) Without limiting the generality of *Section 8.8*, the provisions of this *Section 5.11* are solely for the benefit of the parties to this Agreement, and no current or former employee, director or service provider shall be regarded for any purpose as a third-party beneficiary to this Agreement. The terms of this Agreement shall not be deemed to (i) establish, amend or modify any Company Benefit Plan, Purchaser Benefit Plan or any employee benefit plan, program, agreement or arrangement maintained or sponsored by the Company, Purchaser or any of their Affiliates, (ii) alter or limit the ability of Purchaser and its Subsidiaries to amend, modify or terminate any compensation or benefit plan, program or agreement after the Effective Time or (iii) confer on any current or former employee, director or service provider any right to employment or continued employment or service with the Company, Purchaser or any of their Affiliates.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.12 Indemnification**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) From and after the Effective Time, Purchaser shall indemnify and hold harmless each of the current or former directors or officers of the Company or any of its Subsidiaries (each, an "**Indemnified Party**"), and any person who becomes an Indemnified Party between the date hereof and the Effective Time, against any costs or expenses (including reasonable attorneys' fees and expenses), judgments, fines, losses, claims, damages or liabilities and amounts paid in settlement incurred in connection with any actual or threatened claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or before the Effective Time, whether asserted or claimed before, at or after the Effective Time, based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he or she is or was a director or officer of the Company, any of its Subsidiaries or any of their respective predecessors or was before the Effective Time serving at the request of any such party as a director, officer, employee, trustee or partner of another corporation, partnership, trust, joint venture, employee benefit plan or other entity or (ii) any matters arising in connection with the transactions contemplated by this Agreement, to the fullest extent such Person would have been indemnified or have the right to advancement of expenses pursuant to the Company's articles of incorporation and bylaws as in effect on the date of this Agreement and as permitted by applicable law, and Purchaser and the Surviving Corporation shall also advance expenses as incurred by such Indemnified Party to the fullest extent permitted under applicable law; *provided, however*, that the Person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined by a court of competent jurisdiction that such Person is not entitled to indemnification.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Any Indemnified Party wishing to claim indemnification under *Section 5.12(a)*, upon learning of any action, suit, proceeding or investigation described above, shall promptly notify Purchaser thereof. Any failure to so notify shall not affect the obligations of Purchaser under *Section 5.12(a)* unless and to the extent that Purchaser is actually prejudiced as a result of such failure.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) For a period of six (6) years following the Effective Time, Purchaser shall maintain in effect the Company's current directors' and officers' liability insurance covering each Person currently covered by the Company's directors' and officers' liability insurance policy with respect to claims against such Persons arising from facts or events occurring at or before the Effective Time (*provided* that Purchaser may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are no less favorable in any material respect to the insured); *provided, however*, that in no event shall Purchaser be required to expend in the aggregate pursuant to this *Section 5.12(c*) more than 200% of the annual premium currently paid by the Company for such insurance (the "**Premium Cap**") and, if Purchaser is unable to maintain such policy as a result of this proviso, Purchaser shall obtain as much comparable insurance as is available at a premium equal to the Premium Cap; *provided further*, that after consultation with Purchaser, the Company may (i) obtain an extended reporting period endorsement under the Company's existing directors' and officers' liability insurance policy or (ii) substitute therefor "tail" policies the material terms of which, including coverage and amount, are no less favorable in any material respect to such Person than the Company's existing insurance policies as of the date hereof, in either case, if and to the extent that the same may be obtained for an amount that, in the aggregate, does not exceed the Premium Cap.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) If Purchaser or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving Person of such consolidation or merger or (ii) liquidates, dissolves, transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, proper provision shall be made so that such successor and assign of Purchaser and its successors and assigns assume the obligations set forth in this *Section 5.12*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) The provisions of this *Section 5.12* are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her representatives.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) Any indemnification payments made pursuant to this *Section 5.12* are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. 1828(k)) and the regulations promulgated thereunder by the Federal Deposit Insurance Corporation (12 C.F.R. Part 359).

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.13 Shareholder Litigation**. The Company shall give Purchaser the opportunity to participate at Purchaser's own expense in the defense or settlement of any shareholder litigation against the Company and/or its directors relating to the transactions contemplated by this Agreement, and no such settlement shall be agreed to without Purchaser's prior written consent (such consent not to be unreasonably withheld, conditioned or delayed).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.14 Disclosure Supplements**. From time to time before the Effective Time, the Company and Purchaser will promptly notify the other party in writing with respect to any matter hereafter arising that, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Disclosure Letters or that is necessary to correct any information in such Disclosure Letters that has been rendered materially inaccurate thereby. For the avoidance of doubt, such written notice shall not be deemed to be a supplement or amendment to such Disclosure Letters.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.15 Director Appointments**. Before the Closing Date, each of Purchaser and Purchaser Bank shall take all required action to appoint the Designated Directors (as hereinafter defined) to serve as directors of Purchaser Bank effective as of the Effective Time. "**Designated Directors**" shall mean two (2) members of the current Board of Directors of the Company, selected by Purchaser in consultation with the Company, and subject to the bylaws and the requirements of the nominating and governance committee of Purchaser Bank, and the requirements regarding service as a member of the Board of Directors of Purchaser Bank.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.16 Dividends**. Purchaser and the Company shall coordinate with each other regarding the declaration, setting of record dates, and payment dates of dividends with respect to shares of Company Common Stock, Company Class A Common Stock and Purchaser Common Stock, it being the intention of the parties that, with respect to the second calendar quarter of 2023 (or any subsequent calendar quarter), holders of shares of Company Common Stock and Class A Common Stock shall receive either a quarterly dividend on shares of Company Common Stock or Class A Common Stock or a quarterly dividend declared with respect to shares of Purchaser Common Stock received as Merger Consideration and shall not receive dividends declared in the second calendar quarter of 2023 (or any subsequent calendar quarter) with respect to both shares of Company Common Stock or Class A Common Stock and shares of Purchaser Common Stock received as Merger Consideration.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.17 Loan Program Credentialing.** Purchaser and the Company each agree to cooperate with one another and exercise reasonable best efforts to qualify Purchaser Bank with the SBA, USDA and any other lending program of a Governmental Entity in which Company Bank participates as of the date hereof so that Purchaser Bank may participate in any such programs after the Closing.

**ARTICLE VI.**<br> **CONDITIONS TO CONSUMMATION**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**6.1 Conditions to Each Party**'**s Obligations**. The respective obligations of each party to effect the Merger shall be subject to the satisfaction of the following conditions:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) *Shareholder Approval*. This Agreement shall have been approved by the requisite vote of the Company's shareholders in accordance with applicable laws and regulations.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Regulatory Approvals*. All approvals, consents or waivers of any Governmental Entity required to permit consummation of the transactions contemplated by this Agreement, including the Merger and the Bank Merger, shall have been obtained and shall remain in full force and effect, and all statutory waiting periods shall have expired or been terminated.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *No Injunctions or Restraints; Illegality*. No party hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the Merger or the Bank Merger and no Governmental Entity shall have instituted any proceeding to enjoin or prohibit the consummation of the Merger, the Bank Merger or any transactions contemplated by this Agreement. No statute, rule or regulation shall have been enacted, entered, promulgated or enforced by any Governmental Entity that prohibits or makes illegal consummation of the Merger or the Bank Merger.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *Registration Statement*. The Registration Statement shall have been declared effective by the SEC and no proceedings shall be pending or threatened by the SEC to suspend the effectiveness of the Registration Statement and not withdrawn.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) *Stock Listing*. Purchaser shall have filed with NASDAQ a notification form or application, as applicable, for the listing of all shares of Purchaser Common Stock to be delivered as Merger Consideration, and NASDAQ shall not have objected to the listing of such shares of Purchaser Common Stock.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) *Tax Opinions*. Purchaser and the Company shall have received written opinions of Bowles Rice LLP and Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, respectively, dated as of the Closing Date, in form and substance customary in transactions of the type contemplated hereby, and reasonably satisfactory to Purchaser and the Company, as the case may be, substantially to the effect that on the basis of the facts, representations and assumptions set forth in such opinions, which are consistent with the state of facts existing at the Effective Time, (i) the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the IRC and (ii) Purchaser and the Company will each be a party to that reorganization within the meaning of Section 368(b) of the IRC. Such opinions may be based on, in addition to the review of such matters of fact and law as counsel considers appropriate, representations contained in certificates of officers of Purchaser, the Company and others.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**6.2 Conditions to the Obligations of Purchaser**. The obligations of Purchaser to effect the Merger shall be further subject to the satisfaction of the following additional conditions, any one or more of which may be waived by Purchaser:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) *The Company*'*s Representations and Warranties*. Subject to the standard set forth in *Section 3.1(b)*, each of the representations and warranties of the Company contained in this Agreement and in any certificate or other writing delivered by the Company pursuant hereto shall be true and correct at and as of the date of this Agreement and at and as of Closing Date as though made at and as of the Closing Date, except that those representations and warranties that address matters only as of a particular date need only be true and correct as of such date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Performance of the Company*'*s Obligations*. The Company shall have performed in all material respects all obligations and covenants required to be performed by it *under* this Agreement at or before the Effective Time.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *Officers*' *Certificate*. Purchaser shall have received a certificate signed by the chief executive officer and the chief financial or principal accounting officer of the *Company* to the effect that the conditions set forth in *Sections 6.2(a)* and *(b)* have been satisfied.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *No Material Adverse Effect*. Since the date of this *Agreement*, there shall not have occurred any Material Adverse Effect with respect to the Company.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) *Burdensome Condition*. None of the approvals, consents or waivers of any Governmental Entity required to permit consummation of the transactions contemplated by this Agreement shall contain a Burdensome Condition.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) *Execution of Executive Agreement*. Edward C. Ashby, III shall have entered into a consulting agreement with Purchaser, and, except as provided in Section 6.2(f) *of* the Company's Disclosure Letter, Mr. Ashby shall not have taken any action on or before the Effective Time to cancel or terminate such agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) *Loan Program Credentialing*. Purchaser Bank shall have been qualified with SBA, USDA and any other lending program of a Governmental Entity in which *Company* Bank participates as of the date hereof so that Purchaser Bank may participate in any such programs after the Closing.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**6.3 Conditions to the Obligations of the Company**. The obligations of the Company to effect the Merger shall be further subject to the satisfaction of the following additional conditions, any one or more of which may be waived by the Company:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) *Purchaser*'*s Representations and Warranties*. Subject to the standard set forth in *Section 3.1(b)*, each of the representations and warranties of Purchaser contained in this Agreement and in any certificate or other writing delivered by Purchaser pursuant hereto shall be true and correct at and as of date of this Agreement and at and as of Closing Date as though made at and as of the Closing Date, except that those representations and warranties that address matters only as of a particular date need only be true and correct as of such date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Performance of Purchaser*'*s Obligations*. Purchaser shall have performed in all material respects all obligations and covenants required to be performed by it under this Agreement at or before the Effective Time.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *Officers*' *Certificate*. The Company shall have received a certificate signed by the chief executive officer and the chief financial or principal accounting officer of Purchaser to the effect that the conditions set forth in *Sections 6.3(a)* and *(b)* have been satisfied.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *No Material Adverse Effect*. Since the date of this Agreement, there shall not have occurred any Material Adverse Effect with respect to Purchaser.

**ARTICLE VII.**<br> **TERMINATION**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**7.1 Termination**. This Agreement may be terminated, and the Merger abandoned, at any time before the Effective Time, by action taken or authorized by the Board of Directors of the terminating party, either before or after any requisite shareholder approval:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) by the mutual written consent of Purchaser and the Company;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) by either Purchaser or the Company, in the event of the failure of the Company's shareholders to approve this Agreement at the Company Shareholder Meeting ("**Requisite Company Vote**"); *provided, however*, that the Company shall only be entitled to terminate this Agreement pursuant to this clause if it has complied in all material respects with its obligations under *Section 5.8* (subject to *Section 5.8(b)*);

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) by either Purchaser or the Company, if either (i) any approval, consent or waiver of a Governmental Entity required to permit consummation of the transactions contemplated by this Agreement shall have been denied and such denial has become final and non-appealable or (ii) any court or other Governmental Entity of competent jurisdiction shall have issued a final, unappealable order permanently enjoining or otherwise prohibiting consummation of the transactions contemplated by this Agreement, unless the failure to obtain such required approval, consent or waiver shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) by either Purchaser or the Company, if the Merger is not consummated by July 31, 2023 (the "**Outside Date**"); in each case, unless the failure to so consummate by such time is due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) by either Purchaser or the Company (*provided* that the party seeking termination is not then in material breach of any representation, warranty, covenant or other agreement contained herein), in the event of a breach of any covenant or agreement on the part of the other party set forth in this Agreement, or if any representation or warranty of the other party shall have become untrue, which breach or failure to be true, either individually or in the aggregate with all other breaches by such party (or failures of such representations or warranties to be true), would constitute, if occurring or continuing on the Closing Date, the failure of the conditions set forth in *Sections 6.2(a)* and *(b)* or *Sections 6.3(a)* and *(b)*, as the case may be and such breach or untrue representation or warranty has not been or cannot be cured within the earlier of the Outside Date and thirty (30) days following written notice to the party committing such breach or making such untrue representation or warranty, or by its nature or timing cannot be cured during such period;

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) by Purchaser, if (i) the Company shall have breached its obligations under *Section 5.1* or *Section 5.8* in any material respect or (ii) if the Board of Directors of the Company does not unanimously publicly recommend in the Proxy Statement-Prospectus that shareholders approve and adopt this Agreement or if the Board of Directors effects a Change of Recommendation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) by the Company, at any time during the five (5) day period following the Determination Date, if both of the following conditions are satisfied:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) the Average Purchaser Stock Price is less than $27.14; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) (A) the quotient of the Average Purchaser Stock Price divided by the Starting Purchaser Price (such quotient being the "**Purchaser Ratio**"), is less than eighty-five percent (85%) of (B) the quotient of the Average Index Price divided by the Starting Index Price (such quotient being the "**Index Ratio**"); subject, however, to the following provisions.

If the Company elects to exercise its termination right pursuant to this *Section 7.1(g)*, it shall give written notice to Purchaser (*provided* that such notice of election to terminate may be withdrawn at any time within the aforementioned five (5) day period). During the five (5) day period commencing with its receipt of such notice, Purchaser shall have the option to increase the consideration to be received by the holders of the Company Common Stock and Company Class A Common Stock hereunder, by either:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) increasing the Exchange Ratio (calculated to the nearest one ten-thousandth); or

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) provided that it does not and will not prevent or impede the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code, paying, as part of the Merger Consideration, to each recipient of Merger Consideration, a cash payment (in addition to, and not in lieu of, issuing shares of Purchaser Common Stock to them) (the "**Additional Cash Payment Per Share**");

in either case so that the value of the Merger Consideration (calculated based on the Average Purchaser Stock Price and including any Additional Cash Payment Per Share) to be received by each recipient thereof equals the *lesser of*:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(x) the product of the Starting Purchaser Price, 0.85 and the Exchange Ratio (as in effect immediately prior to any increase in the Exchange Ratio pursuant to this *Section 7.1(g))*; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(y) an amount equal to (1) the product of the Index Ratio, 0.85, the Exchange Ratio (as in effect immediately prior to any increase in the Exchange Ratio pursuant to this *Section 7.1(g)*), and the Average Purchaser Stock Price, divided by (2) the Purchaser Ratio.

If Purchaser so elects within such five (5) day period, it shall give prompt written notice to the Company of such election and the revised Exchange Ratio or the Additional Cash Payment Per Share, as applicable, whereupon no termination shall have occurred pursuant to this Section 7.1(g) and this Agreement shall remain in effect in accordance with its terms; *provided* that any references in this Agreement to the "Exchange Ratio" shall thereafter be deemed to refer to the Exchange Ratio as increased pursuant to this section, if applicable, and any references in this Agreement to the Merger Consideration shall thereafter include the Additional Cash Payment Per Share as set forth in this section, if applicable.

For purposes of this *Section 7.1(g)* the following terms shall have the meanings indicated:

"**Average Index Price**" means the average of the closing price for NASDAQ Bank Index for the thirty (30) consecutive full trading days ending at the closing of trading on the trading day immediately prior to the Determination Date.

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"**Average Purchaser Stock Price**" means the average of the closing sale prices of Purchaser Common Stock as reported on NASDAQ during the thirty (30) consecutive full trading days ending at the closing of trading on the trading day immediately prior to the Determination Date.

"**Starting Purchaser Price**" means $31.93 per share.

"**Starting Index Price**" means $4,269.44.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**7.2 Termination Fee; Expenses**.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) If Purchaser terminates this Agreement pursuant to *Section 7.1(f)*, the Company shall make payment to Purchaser of a termination fee of $4,000,000 (the "**Termination Fee**").

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) If (i) this Agreement is terminated (A) by either party pursuant to *Section 7.1(b)* if the Company made a Change in Recommendation or (B) by either party pursuant to *Section 7.1(d)* without the Requisite Company Vote having been obtained or (C) by Purchaser pursuant to *Section 7.1(e),* (ii) before the Company Shareholder Meeting (in the case of termination pursuant to *Section 7.1(b)*) or the date of termination (in the case of termination pursuant to *Section 7.1(d)* and *Section 7.1(e)*), an Acquisition Proposal has been publicly announced, disclosed or communicated and (iii) within twelve (12) months of such termination the Company shall consummate or enter into any agreement with respect to an Acquisition Proposal (whether or not the same Acquisition Proposal as set forth in clause (ii) of this *Section 7.2(b)*), then the Company shall make payment to Purchaser of the Termination Fee.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) The fees payable pursuant to *Section 7.2(a)* shall be made by wire transfer of immediately available funds at the time of termination. Any fee payable pursuant to *Section 7.2(b)* shall be made by wire transfer of immediately available funds within two (2) Business Days after notice of demand for payment. The Company acknowledges that the agreements contained in this *Section 7.2* are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Purchaser would not enter into this Agreement. The amount payable by the Company pursuant to *Section 7.2(a)* or *(b)*, in each case, constitutes liquidated damages and not a penalty and shall be the sole remedy of Purchaser, in the event of termination of this Agreement on the bases specified in such sections.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**7.3 Effect of Termination**. If this Agreement is terminated by either Purchaser or the Company as provided *in Section 7.1*, this Agreement shall forthwith become void and, subject to *Section 7.2*, have no effect, and there shall be no liability on the part of any party hereto or their respective officers and directors, except that (i) *Sections 5.3(c)*, *7.2* and Article VIII, shall survive any termination of this Agreement, and (ii) notwithstanding anything to the contrary contained in this Agreement, no party shall be relieved or released from any liabilities or damages arising out of its fraud or willful and material breach of any provision of this Agreement.

**ARTICLE VIII.**<br> **CERTAIN OTHER MATTERS**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.1 Interpretation**. When a reference is made in this Agreement to Sections or Exhibits such reference shall be to a Section of, or Exhibit to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for ease of reference only and shall not affect the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed followed by the words "without limitation." Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Any reference to gender in this Agreement shall be deemed to include any other gender.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.2 Survival**. Only those agreements and covenants of the parties that are by their terms applicable in whole or in part after the Effective Time, including *Section 5.12* of this Agreement, shall survive the Effective Time. All other representations, warranties, agreements and covenants shall be deemed to be conditions of this Agreement and shall not survive the Effective Time.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.3 Waiver; Amendment**. Before the Effective Time, any provision of this Agreement may be: (i) waived in writing by the party benefited by the provision or (ii) amended or modified at any time (including the structure of the transaction) by an agreement in writing between the parties hereto except that, after the vote by the shareholders of the Company, no amendment or modification may be made that would reduce the amount or alter or change the kind of consideration to be received by holders of Company Common Stock and Company Class A Common Stock or that would contravene any provision of the VSCA, the NCBCA or the applicable state and federal banking laws, rules and regulations.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.4 Counterparts**. This Agreement may be executed in counterparts each of which shall be deemed to constitute an original, but all of which together shall constitute one and the same instrument.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.5 Governing Law**. This Agreement shall be governed by, and interpreted in accordance with, the laws of the Commonwealth of Virginia, without regard to conflicts of laws principles.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.6 Expenses**. Except as otherwise provided in *Section 7.2*, each party hereto will bear all expenses incurred by it in connection with this Agreement and the transactions contemplated hereby.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.7 Notices**. All notices and other communications in connection with this Agreement shall be in writing and shall be deemed given if delivered personally, sent via facsimile (with confirmation), by electronic mail, by registered or certified mail (return receipt requested) or by commercial overnight delivery service, or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

If to Purchaser, to:

First Community Bankshares, Inc.

29 College Drive

Bluefield, Virginia 24605-0989

Attention: Sarah W. Harmon, General Counsel

E-mail: <u>swharmon@fcbinc.com</u>

With copies to:

Bowles Rice LLP

600 Quarrier Street

Charleston, WV 25301

Attention: Sandra M. Murphy

E-mail: <u>smurphy@bowlesrice.com</u>

If to the Company, to:

Surrey Bancorp

PO Box 1227

Mount Airy, NC 27030

Attention: Edward C. Ashby, III

E-mail: <u>tashby@surreybank.com</u>

With copies to:

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP

230 North Elm Street

2000 Renaissance Plaza

Greensboro, NC 27401

Attention: Robert A. Singer

E-mail: <u>rsinger@brookspierce.com</u>

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.8 Entire Agreement; etc.** This Agreement (including the documents and the instruments referred to herein), together with the Exhibits and Disclosure Letters hereto and the Confidentiality Agreement, represent the entire understanding of the parties hereto with reference to the transactions contemplated hereby and supersedes any and all other oral or written agreements heretofore made. Except for *Section 5.12*, which confers rights on the parties described therein, nothing in this Agreement is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement, including the right to rely upon the representations and warranties set forth herein. The representations and warranties in this Agreement are the product of negotiations among the parties hereto and are for the sole benefit of the parties. Any inaccuracies in such representations and warranties are subject to waiver by the parties hereto in accordance herewith without notice or liability to any other Person. In some instances, the representations and warranties in this Agreement may represent an allocation among the parties hereto of risks associated with particular matters regardless of the Knowledge of any of the parties hereto. Consequently, Persons other than the parties may not rely upon the representations and warranties in this Agreement as characterizations of actual facts or circumstances as of the date of this Agreement or as of any other date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.9 Successors and Assigns; Assignment**. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; *provided*, *however*, that this Agreement may not be assigned by either party hereto without the prior written consent of the other party.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.10 Severability**. If any one or more provisions of this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, by any court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement and the parties shall use their reasonable efforts to substitute a valid, legal and enforceable provision which, insofar as practical, implements the purposes and intents of this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.11 Specific Performance**. The parties hereto agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and, accordingly, that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement or to enforce specifically the performance of the terms and provisions hereof (including the parties' obligation to consummate the Merger), in addition to any other remedy to which they are entitled at law or in equity. Each of the parties hereby further waives (a) any defense in any action for specific performance that a remedy at law would be adequate and (b) any requirement under any law to post security or a bond as a prerequisite to obtaining equitable relief.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.12 Waiver of Jury Trial**. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW AT THE TIME OF INSTITUTION OF THE APPLICABLE LITIGATION, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT: (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS *SECTION 8.12*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.13 Delivery by Facsimile or Electronic Transmission**. This Agreement and any signed agreement or instrument entered into in connection with this Agreement, and any amendments or waivers hereto or thereto, to the extent signed and delivered by means of a facsimile machine or by e-mail delivery of a ".pdf" format data file, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in Person. No party hereto or to any such agreement or instrument shall raise the use of a facsimile machine or e-mail delivery of a ".pdf" format data file to deliver a signature to this Agreement or any amendment hereto or the fact that any signature or agreement or instrument was transmitted or communicated by means of a facsimile machine or e-mail delivery of a ".pdf" format data file as a defense to the formation of a contract and each party hereto forever waives any such defense.

*[Signature page immediately follows]*

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**In Witness Whereof**, the parties hereto have caused this Agreement and Plan of Merger to be executed by their duly authorized officers as of the date first above written.

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| | |
|:---|:---|
| **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** |
| By:  | /s/ William P. Stafford, II |
|  | Name: William P. Stafford, II |
|  | Title: Chairman of the Board of Directors |
| **SURREY BANCORP** | **SURREY BANCORP** |
| By: | /s/ Robert H. Moody |
|  | Name: Robert H. Moody |
|  | Title: Chairman of the Board of Directors |

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[Signature Page to Agreement and Plan of Merger]

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**EXHIBIT A**

**FORM OF VOTING AND SUPPORT AGREEMENT**

This Voting and Support Agreement (this "**Agreement**"), dated as of November 17, 2022, is entered into by and among First Community Bankshares, Inc., a Virginia corporation ("**Purchaser**"), Surrey Bancorp, a North Carolina corporation (the "**Company**"), and [●], a shareholder of the Company (the "**Shareholder**"). Each of Purchaser, the Company and the Shareholder may be referred to in this Agreement separately as a "**Party**" and collectively as the "**Parties**."

WHEREAS, pursuant to the terms of the Agreement and Plan of Merger (as the same may be amended or supplemented, the "**Merger Agreement**"), dated as of the date hereof, by and between Purchaser and the Company, the Company will be merged with and into Purchaser, with Purchaser as the surviving corporation (the "**Merger**");

WHEREAS, the Shareholder beneficially owns the number of shares of common stock of the Company ("**Company Common Stock**") as set forth on <u>Schedule A</u> hereto (collectively, the "**Existing Shares**"); and

WHEREAS, as an inducement and a condition to Purchaser and the Company to entering into the Merger Agreement, Purchaser and the Company have required that the Shareholder, in his or her capacity as a shareholder of the Company, enter into this Agreement.

NOW THEREFORE, in consideration of the foregoing, the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agrees as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. **Definitions.** Capitalized terms not defined in this Agreement have the meaning assigned to those terms in the Merger Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. **Voting Agreement.** From the date hereof until the earlier of (a) the Closing Date and (b) the termination of the Merger Agreement in accordance with its terms (the "**Support Period**"), the Shareholder irrevocably and unconditionally hereby agrees, that at any meeting (whether annual or special and each adjourned meeting) of the Company's shareholders, however called, or in connection with any written consent of the Company's shareholders, the Shareholder shall (i) appear at such meeting or otherwise cause all of the Existing Shares, and other shares of Company Common Stock over which he or she has acquired beneficial ownership after the date hereof (including any shares of Company Common Stock acquired by means of purchase, dividend or distribution, or issued upon the exercise of any stock options to acquire Company Common Stock, or warrants or the conversion of any convertible securities or otherwise) (collectively, the "**New Shares**" and, together with the Existing Shares, the "**Shares**"), which he or she owns or controls as of the applicable record date, to be counted as present at such meeting for purposes of calculating a quorum and (ii) vote or cause to be voted (including by proxy or written consent, if applicable) all such Shares, (A) in favor of the adoption of the Merger Agreement and the approval of the transactions contemplated thereby, including the Merger, (B) in favor of any proposal to adjourn such meeting of the Company's shareholders to a later date if there are not sufficient votes to adopt the Merger Agreement, (C) against any action or proposal in favor of an Acquisition Proposal, without regard to the terms of such Acquisition Proposal, and (D) against any action, proposal, transaction or agreement that would reasonably be likely to (1) result in a material breach of any covenant, representation or warranty or any other obligation or agreement of the Company contained in the Merger Agreement, or of the Shareholder contained in this Agreement, or (2) prevent, materially impede or materially delay the Company's or Purchaser's ability to consummate the transactions contemplated by the Merger Agreement, including the Merger; *provided*, that the foregoing applies solely to Shareholder in his or her capacity as a shareholder or as a trustee or a partner, shareholder or member in any entity holding Shares, and, to the extent the Shareholder serves as a member of the Board of Directors of the Company or as an officer of the Company, nothing in this Agreement shall limit or affect any actions or omissions taken by the Shareholder in Shareholder's capacity as such a director or officer, including in exercising rights under the Merger Agreement, and no such actions or omissions shall be deemed a breach of this Agreement or shall be construed to prohibit, limit or restrict Shareholder from exercising Shareholder's fiduciary duties as a director or officer to the Company or its shareholders. For the avoidance of doubt, the foregoing commitments apply to any Shares held by any trust, partnership or other entity holding Shares for which the Shareholder serves in any partner, shareholder, member or trustee capacity and for any Shares held jointly with a spouse or other individual. To the extent the Shareholder does not control, by himself or herself, the determinations of such shareholder trust, partnership or other entity, the Shareholder agrees to exercise all voting or other determination rights he or she has in such shareholder trust, partnership or other entity in furtherance of the intent and purposes of his or her support and voting obligations in this *Section 2* and otherwise set forth in this Agreement. The Shareholder covenants and agrees that, except for this Agreement, he or she (x) has not entered into, and shall not enter during the Support Period, any voting agreement or voting trust with respect to the Shares and (y) has not granted, and shall not grant during the Support Period, a proxy, consent or power of attorney with respect to the Shares except any proxy to carry out the intent of this Agreement.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. **GRANT OF IRREVOCABLE PROXY.** IN THE EVENT OF A FAILURE BY THE SHAREHOLDER TO ACT IN ACCORDANCE WITH THE SHAREHOLDER'S OBLIGATIONS AS TO VOTING PURSUANT TO *SECTION 2* DURING THE SUPPORT PERIOD, THE SHAREHOLDER HEREBY IRREVOCABLY (DURING THE SUPPORT PERIOD) GRANTS TO AND APPOINTS PURCHASER AS THE SHAREHOLDER'S PROXY AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION), FOR AND IN THE NAME, PLACE AND STEAD OF SHAREHOLDER, TO REPRESENT, VOTE AND OTHERWISE ACT BY VOTING AT ANY MEETING OF THE COMPANY'S SHAREHOLDERS, HOWEVER CALLED, OR IN CONNECTION WITH ANY WRITTEN CONSENT OF THE COMPANY'S SHAREHOLDERS, WITH RESPECT TO THE SHARES REGARDING THE MATTERS REFERRED TO IN *SECTION 2* DURING THE SUPPORT PERIOD, TO THE SAME EXTENT AND WITH THE SAME EFFECT AS THE SHAREHOLDER MIGHT OR COULD DO UNDER APPLICABLE LAW, RULES AND REGULATIONS. THE PROXY GRANTED PURSUANT TO THIS *SECTION 3* IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE DURING THE SUPPORT PERIOD. DURING THE SUPPORT PERIOD, THE SHAREHOLDER WILL TAKE SUCH FURTHER ACTION AND WILL EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE INTENT OF THIS PROXY. THE SHAREHOLDER HEREBY REVOKES ANY AND ALL PREVIOUS PROXIES OR POWERS OF ATTORNEY GRANTED WITH RESPECT TO ANY OF THE SHARES THAT MAY HAVE HERETOFORE BEEN APPOINTED OR GRANTED WITH RESPECT TO THE MATTERS REFERRED TO IN *SECTION 2* AND THIS *SECTION 3*.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. **Transfer Restrictions Prior to Merger.** The Shareholder hereby agrees that he or she will not, during the Support Period, sell, transfer, assign, tender in any tender or exchange offer, pledge, encumber, hypothecate or similarly dispose of (by merger, by testamentary disposition, by operation of law or otherwise), either voluntarily or involuntarily, enter into any swap or other arrangements that transfers to another, in whole or in part, any of the economic consequences of ownership of, enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, assignment, pledge, lien, hypothecation or other disposition of (by merger, by testamentary disposition, by operation of law or otherwise) or otherwise convey or dispose of, any of the Shares, or any interest therein, including the right to vote any Shares, as applicable (a "**Transfer**"), except with the prior consent of Purchaser (which consent shall not be unreasonably withheld, conditioned or delayed); *provided* that the Shareholder may Transfer Shares for estate planning, tax planning or philanthropic purposes, so long as the transferee, prior to the date of a Transfer, agrees in a signed writing reasonably acceptable to Purchaser to be bound by and comply with the provisions of this Agreement, or upon the death of the Shareholder.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5. **Non-Solicitation.** Unless this Agreement shall have been terminated, the Shareholder shall not solicit, initiate, induce, knowingly encourage, or knowingly take any other action to facilitate, any inquiries, offers, discussions, or proposals with respect to, or engage in any negotiations concerning, or provide any confidential or nonpublic information or data to, or have any discussions with, any Person relating to, any proposal that constitutes or could reasonably be expected to lead to an Acquisition Proposal. The Shareholder will immediately cease and cause to be terminated any activities, discussions or negotiations conducted before the date of this Agreement with any Persons other than Purchaser with respect to any Acquisition Proposal.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6. **No Exercise of Appraisal Rights.** The Shareholder hereby waives and agrees not to exercise any appraisal rights or right to dissent in respect of the Shares that may arise with respect to the Merger.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7. **Confidential Information.** From and after the date of this Agreement, the Shareholder shall not disclose any confidential information of Purchaser or the Company obtained by such person while serving as a director of the Company except in accordance with a judicial or other governmental order or the Merger Agreement. For purposes of this Agreement, "confidential information" does not include: (a) information that is or becomes generally available to the public other than as a result of an unauthorized disclosure by the Shareholder; (b) information that was in the Shareholder's possession prior to serving as a director or information received by the Shareholder from another person without any limitations on disclosure, but only if the Shareholder had no reason to believe that the other person was prohibited from using or disclosing such information by a contractual or fiduciary obligation; or (c) information that was independently developed by the Shareholder without using any confidential information of Purchaser or the Company.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9. **Effectiveness.** This Agreement shall be effective upon signing and is irrevocable. If the Merger Agreement is terminated for any reason in accordance with its terms, this Agreement (other than *Sections 10* through *16*) shall automatically terminate and be null and void and of no effect.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10. **Entire Agreement; Assignment.** The recitals are incorporated as a part of this Agreement. This Agreement constitutes the entire agreement among the Parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof. Nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. This Agreement shall not be assigned by operation of law or otherwise and shall be binding upon and inure solely to the benefit of each Party; *provided*, *however*, that the rights under this Agreement are assignable by Purchaser to a majority-owned affiliate or any successor-in-interest of Purchaser, but no such assignment shall relieve Purchaser of its obligations hereunder.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11. **Remedies/Specific Enforcement.** Each Party agrees that this Agreement is intended to be legally binding and specifically enforceable pursuant to its terms and that Purchaser would be irreparably harmed if any of the provisions of this Agreement are not performed in accordance with its specific terms and that monetary damages would not provide adequate remedy in such event. Accordingly, in the event of any breach or threatened breach by the Shareholder of any covenant or obligation contained in this Agreement, in addition to any other remedy to which Purchaser may be entitled (including monetary damages), Purchaser shall be entitled to injunctive relief to prevent breaches of this Agreement and to specifically enforce the terms and provisions hereof. The Shareholder further agrees that neither Purchaser nor any other person or entity shall be required to obtain, furnish or post any bond or similar instrument in connection with or as a condition to obtaining any remedy referred to in this paragraph, and the Shareholder irrevocably waives any right he or she may have to require the obtaining, furnishing or posting of any such bond or similar instrument.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12. **Governing Law; Jurisdiction and Venue**. All questions concerning the construction, validity enforcement and interpretation of this Agreement shall be governed by the internal law of the Commonwealth of Virginia, without giving effect to any choice of law of conflict of law provision or rule (whether of the Commonwealth of Virginia or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Virginia. Each Party irrevocably and unconditionally submits to the exclusive jurisdiction of the Courts of Virginia or federal court within the Commonwealth of Virginia), in any action or proceeding arising out of or relating to this Agreement and each Party irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such court. Each Party agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each Party irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, (a) any objection that he, she or it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement in any court referred to in this *Section 12*, and (b) the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;13. **Severability**. If any provision of this Agreement (or any portion thereof) or the application of any such provision (or any portion thereof) to any Person or circumstance is unenforceable, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such unenforceable provision had never comprised a part of this Agreement, the remaining provisions of this Agreement shall remain in full force and effect, and the court construing this Agreement shall add as a part of this Agreement, a provision as similar in terms and effect to such unenforceable provision as may be enforceable, in lieu of the unenforceable provision.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;14. **Amendments; Waivers**. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed (a) in the case of an amendment, by Purchaser and the Shareholder, and (b) in the case of a waiver, by the Party against whom the waiver is to be effective. No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;15. **Capacity as a Shareholder only.** Notwithstanding anything herein to the contrary, the foregoing covenants, agreements and restrictions shall not apply to any shares of the Company Common Stock or Company Class A Common Stock that the Shareholder may beneficially own as a fiduciary for others. In addition, this Agreement and the foregoing covenants, agreements and restrictions shall only apply to actions taken by the Shareholder in his or her capacity as a shareholder of the Company, and, if applicable, shall not in any way limit or affect actions the Shareholder may take in his or her capacity as a director or officer of the Company.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;16. **Counterparts.** The Parties may execute this Agreement in one or more counterparts, including by facsimile, e-mail delivery of a ".pdf" format data file, or other form of electronic signature. All the counterparts will be construed together and will constitute one Agreement.

*[Signature pages follow]*

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SIGNED as of the date first set forth above:

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| | |
|:---|:---|
| **First Community Bankshares, Inc.** | **First Community Bankshares, Inc.** |
| By:  |  |
| Name: | William P. Stafford, II |
| Title: | Chairman of the Board of Directors |

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| |
|:---|
| **Surrey Bancorp** |
| By:  |
| Name: |
| Title: |

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[Signature Page to Company Voting and Support Agreement]

*Additional Signatures on Next Page*

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SHAREHOLDER:<br>

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**Schedule A**

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| | |
|:---|:---|
| **Shareholder** | **Number of**<br> **Company Common Shares** |
|  | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; _____ shares of Common Stock<br> _____ shares of Class A Common Stock<br>|

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*Signature Page to Bank Agreement and Plan of Merger*

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**EXHIBIT B**

**BANK AGREEMENT AND PLAN OF MERGER** 

This Bank Agreement and Plan of Merger (this "**Agreement**"), dated as of November 17, 2022, is made by and between First Community Bank, a state commercial bank chartered under the laws of the Commonwealth of Virginia ("**Purchaser Bank**"), and Surrey Bank & Trust, a state commercial bank chartered under the laws of the State of North Carolina ("**Company Bank**").

**RECITALS**

WHEREAS, all of the issued and outstanding capital stock of Purchaser Bank is owned as of the date hereof directly by First Community Bankshares, Inc., a Virginia corporation ("**Purchaser**");

WHEREAS, all of the issued and outstanding capital stock of Company Bank is owned as of the date hereof directly by Surrey Bancorp, a North Carolina corporation (the "**Company**");

WHEREAS, Purchaser and the Company have entered into an Agreement and Plan of Merger, dated as of the same date hereof (as amended and/or supplemented from time to time, the "**Merger Agreement**"), pursuant to which, subject to the terms and conditions thereof, the Company will merge with and into Purchaser, with Purchaser surviving such merger (collectively, the "**HoldCo Merger**");

WHEREAS, contingent upon the HoldCo Merger, on the terms and subject to the conditions contained in this Agreement, the parties to this Agreement intend to effect the merger of Company Bank with and into Purchaser Bank, with Purchaser Bank surviving such merger (the "**Bank Merger**"); and

WHEREAS, the board of directors of Purchaser Bank and the board of directors of Company Bank deem the Bank Merger advisable and in the best interests of their respective shareholders, and have authorized and approved the execution and delivery of this Agreement and the transactions contemplated hereby.

NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto do hereby agree as follows:

**ARTICLE I** 

**BANK MERGER**

Section 1.1 <u>The Bank Merger</u>. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined below), Company Bank shall be merged with and into Purchaser Bank in accordance with the provisions of the Virginia Stock Corporation Act, the North Carolina Business Corporation Act, Title 6.2 of the Code of Virginia and Chapter 53C of the North Carolina General Statutes. At the Effective Time, the separate existence of Company Bank shall cease, and Purchaser Bank, as the surviving entity (the "**Surviving Bank**"), shall continue unaffected and unimpaired by the Bank Merger. All assets of Company Bank as they exist at the Effective Time of the Bank Merger shall pass to and vest in the Surviving Bank without any conveyance or other transfer. The Surviving Bank shall be responsible for all of the liabilities of every kind and description of each of the merging banks existing as of the Effective Time.

Section 1.2 <u>Closing</u>. The closing of the Bank Merger will take place as soon as practicable following the HoldCo Merger or at such other time and date as specified by the parties, but in no case prior to the date on which all of the conditions precedent to the consummation of the Bank Merger specified in this Agreement shall have been satisfied or duly waived by the party entitled to satisfaction thereof, at such place as is agreed by the parties hereto.

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Section 1.3 <u>Effective Time</u>. Subject to applicable law, the Bank Merger shall become effective at the later of: (i) the issuance by the Virginia State Corporation Commission (the "**VSCC**<u>"</u>) of a certificate of merger relating to the Bank Merger; (ii) the issuance by the North Carolina Office of the Commissioner of Banks of a certificate of authority relating to the Bank Merger; and (iii) the time set forth in the articles of merger relating to the Bank Merger filed with the VSCC and the North Carolina Secretary of State or such other time and date as shall be provided by law and agreed to by the parties hereto (such date and time being herein referred to as the "**Effective Time**"); *provided*, *however*<u>,</u> that in no event shall the Effective Time be earlier than, or at the same time as, the effective time of the HoldCo Merger,

Section 1.4 <u>Articles of Incorporation and Bylaws</u>. The articles of incorporation and bylaws of Purchaser Bank in effect immediately prior to the Effective Time shall be the articles of incorporation and the bylaws of the Surviving Bank, in each case until amended in accordance with applicable law and the terms thereof.

Section 1.5 <u>Board of Directors and Officers</u>. At the Effective Time, the board of directors of the Surviving Bank shall consist of the board of directors of Purchaser Bank as of immediately prior to the Bank Merger as well as the Designated Directors (as defined in the Merger Agreement) appointed to the board of directors of Purchaser Bank effective as of the effective time of the HoldCo Merger in accordance with Section 5.15 of the Merger Agreement. The officers of the Surviving Bank shall consist of the officers of Purchaser Bank as of immediately prior to the Bank Merger.

**ARTICLE II** 

**CONSIDERATION**

Section 2.1 <u>Effect on Company Bank Capital Stock</u>. By virtue of the Bank Merger and without any action on the part of the holder of any capital stock of Company Bank, at the Effective Time, all shares of Company Bank capital stock issued and outstanding shall be automatically cancelled and retired and shall cease to exist, and no cash, new shares of common stock, or other property shall be delivered in exchange therefor.

Section 2.2 <u>Effect on Purchaser Bank Capital Stock</u>. Each share of Purchaser Bank capital stock issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding and unaffected by the Bank Merger.

**ARTICLE III** 

**COVENANTS AND CONDITIONS PRECEDENT**

Section 3.1 During the period from the date of this Agreement and continuing until the Effective Time, subject to the provisions of the Merger Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement.

Section 3.2 The Bank Merger and the respective obligations of each party hereto to consummate the Bank Merger are subject to the fulfillment or written waiver of each of the following conditions prior to the Effective Time:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) All approvals, consents or waivers of any Governmental Entity (as defined in the Merger Agreement) required for the consummation the Bank Merger shall have been obtained or made and shall be in full force and effect and all waiting periods required by law shall have expired or been terminated.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) The HoldCo Merger shall have been consummated in accordance with the terms of the Merger Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) No jurisdiction or governmental authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and prohibits consummation of the Bank Merger.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) This Agreement shall have been adopted by the sole shareholder of each of Purchaser Bank and Company Bank.

**ARTICLE IV** 

**TERMINATION AND AMENDMENT**

Section 4.1 <u>Termination</u>*.* This Agreement may be terminated at any time prior to the Effective Time by an instrument executed by each of the parties hereto. This Agreement will terminate automatically upon the termination of the Merger Agreement.

Section 4.2 <u>Amendment</u>*.* This Agreement may be amended by an instrument in writing signed on behalf of each of the parties hereto except that no provision in Section 3.2 may be amended or waived at any time pursuant to its terms.

**ARTICLE V** 

**GENERAL PROVISIONS**

Section 5.1 <u>Nonsurvival of Agreements</u>. None of the agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time.

Section 5.2 <u>Notices</u>. All notices and other communications in connection with this Agreement shall be in writing and shall be deemed given if delivered personally, sent via facsimile (with confirmation), by email, by registered or certified mail (return receipt requested) or by commercial overnight delivery service, or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

If to Purchaser Bank, to:

First Community Bank

29 College Drive

Bluefield, Virginia 24605-0989

Attention: Gary R. Mills, CEO and President

Email: <u>GRMILLS@fcbinc.com</u>

With a copy (which shall not constitute notice) t:

Bowles Rice LLP

600 Quarrier Street

Charleston, WV 25301

Attention: Sandra M. Murphy

E-mail: <u>smurphy@bowlesrice.com</u>

If to the Company Bank, to:

Surrey Bank & Trust

PO Box 1227

Mount Airy, NC 27030

Attention: Edward C. Ashby, III

E-mail: <u>tashby@surreybank.com</u>

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With a copy (which shall not constitute notice):

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP

230 North Elm Street

2000 Renaissance Plaza

Greensboro, NC 27401

Attention: Robert A. Singer

E-mail: <u>rsinger@brookspierce.com</u>

All notices and other communications shall be deemed to have been given (i) when received if given in person, (ii) on the date of electronic confirmation of receipt if sent by facsimile, electronic mail or other wire transmission, (iii) three (3) business days after being deposited in the U.S. mail, certified or registered mail, postage prepaid, or (iv) one (1) business day after being deposited with a reputable overnight courier.

Section 5.3 <u>Interpretation</u>. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section references are to this Agreement unless otherwise specified. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

Section 5.4 <u>Counterparts</u>. This Agreement may be executed in two (2) or more counterparts (including by facsimile, e-mail delivery of a ".pdf" format data file, or other electronic means), all of which shall be considered one (1) and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other party, it being understood that each party need not sign the same counterpart.

Section 5.5 <u>Entire Agreement</u>. This Agreement (including any exhibits thereto, the documents and the instruments referred to in this Agreement) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement, other than the Merger Agreement.

Section 5.6 <u>Governing Law</u>. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Virginia applicable to agreements made and to be performed wholly within such state, except to the extent that the federal laws of the United States shall be applicable hereto.

Section 5.7 <u>Assignment</u>. Neither this Agreement nor any of the rights, interests or obligations may be assigned by any of the parties hereto and any attempted assignment in contravention of this Section 5.7 shall be null and void.

*[Signature page follows]*

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in counterparts by their duly authorized officers and attested by their officers thereunto duly authorized, all as of the day and year first above written.

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| | |
|:---|:---|
| FIRST COMMUNITY BANK | FIRST COMMUNITY BANK |
| By:  |  |
| Name:  | William P. Stafford, II |
| Title:  | Chairman of the Board of Directors |

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| | |
|:---|:---|
| SURREY BANK & TRUST | SURREY BANK & TRUST |
| By:  |  |
| Name: | Robert H. Moody |
| Title: | Chairman of the Board of Directors |

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**Appendix B**

![a01.jpg](a01.jpg)

November 17, 2022

Board of Directors

Surrey Bancorp

145 North Renfro Street

Mount Airy, NC 27030

Members of the Board of Directors:

We understand that First Community Bankshares, Inc. ("First Community") and Surrey Bancorp (the "Company") propose to enter into the Agreement (defined below) pursuant to which, among other things, the Company will be merged with and into First Community with First Community as the surviving corporation (the "Transaction") and that, in connection with the Transaction, each outstanding share of common stock, no par value per share, of the Company (the "Common Shares") will be converted into the right to receive 0.7159 shares of First Community common stock (the "Merger Consideration"). The Board of Directors of the Company (the "Board") has requested that Raymond James & Associates, Inc. ("Raymond James") provide an opinion (the "Opinion") to the Board as to whether, as of the date hereof, the Merger Consideration to be received by the holders of the Common Shares in the Transaction pursuant to the Agreement is fair from a financial point of view to the holders of the Common Shares. For purposes of this Opinion, and with your consent, we have assumed that the implied value of the Merger Consideration is $27.64 per share as of November 16, 2022.

In connection with our review of the proposed Transaction and the preparation of this Opinion, we have, among other things:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. reviewed the financial terms and conditions as stated in the draft of the Agreement and Plan of Merger electronically distributed to the working group by counsel to First Community on November 16, 2022 (the "Agreement");

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. reviewed certain information related to the historical condition and prospects of the Company, as made available to Raymond James by or on behalf of the Company, including, but not limited to, financial projections prepared by the management of the Company (the "Projections");

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. reviewed the Company's (a) audited consolidated financial statements for the years ended December 31, 2021, December 31, 2020 and December 31, 2019; and (b) unaudited consolidated financial statements for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. reviewed the Company's recent public filings and certain other publicly available information regarding the Company;

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Board of Directors<br> Surrey Bancorp<br> November 17, 2022

Page 2<br>

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5. reviewed the financial and operating performance of the Company and those of other selected public companies that we deemed to be relevant;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6. considered certain publicly available financial terms of certain transactions we deemed to be relevant;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7. reviewed the current and historical market prices and trading volume for the Company's Common Shares and the current market prices of the publicly traded securities of certain other companies that we deemed to be relevant;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8. conducted such other financial studies, analyses and inquiries and considered such other information and factors as we deemed appropriate;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9. received a certificate addressed to Raymond James from a member of senior management of the Company regarding, among other things, the accuracy of the information, data and other materials (financial or otherwise) provided to, or discussed with, Raymond James by or on behalf of the Company; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10. discussed with members of the senior management of the Company and First Community certain information relating to the aforementioned and any other matters which we have deemed relevant to our inquiry including, but not limited to, the past and current business operations of the Company and First Community and the financial condition, future prospects and operations of the Company and First Community, respectively.

With your consent, we have assumed and relied upon the accuracy and completeness of all information supplied by or on behalf of the Company or otherwise reviewed by or discussed with us, and we have undertaken no duty or responsibility to, nor did we, independently verify any of such information. Furthermore, we have undertaken no independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company or First Community is a party or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which the Company or First Community is a party or may be subject. With your consent, this Opinion makes no assumption concerning, and therefore does not consider, the potential effects of any such litigation, claims or investigations or possible assertions. We have not made or obtained an independent appraisal of the assets or liabilities (contingent or otherwise) of the Company. We are not experts in generally accepted accounting principles (GAAP) or the evaluation of loan and lease portfolios for purposes of assessing the adequacy of the allowances for loan and lease losses or any other reserves; accordingly, we have assumed that such allowances and reserves are in the aggregate adequate to cover such losses. With respect to the Projections and any other information and data provided to or otherwise reviewed by or discussed with us, we have, with your consent, assumed that the Projections and such other information and data have been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of management of the Company, and we have relied upon the Company to advise us promptly if any information previously provided became inaccurate or was required to be updated during the period of our review. We express no opinion with respect to the Projections or the assumptions on which they are based. We have assumed that the final form of the Agreement will be substantially similar to the draft reviewed by us, and that the Transaction will be consummated in accordance with the terms of the Agreement without waiver or amendment of any conditions thereto. Furthermore, we have assumed, in all respects material to our analysis, that the representations and warranties of each party contained in the Agreement are true and correct and that each such party will perform all of the covenants and agreements required to be performed by it under the Agreement without being waived. We have relied upon and assumed, without independent verification, that (i) the Transaction will be consummated in a manner that complies in all respects with all applicable international, federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for the consummation of the Transaction will be obtained and that no delay, limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have an effect on the Transaction or the Company that would be material to our analyses or this Opinion.

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Board of Directors<br> Surrey Bancorp<br> November 17, 2022

Our opinion is based upon market, economic, financial and other circumstances and conditions existing and disclosed to us as of November 16, 2022 and any material change in such circumstances and conditions would require a reevaluation of this Opinion, which we are under no obligation to undertake. We have relied upon and assumed, without independent verification, that there has been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Company since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to us that would be material to our analyses or this Opinion, and that there is no information or any facts that would make any of the information reviewed by us incomplete or misleading in any material respect.

We express no opinion as to the underlying business decision to effect the Transaction, the structure or tax consequences of the Transaction or the availability or advisability of any alternatives to the Transaction. We provided advice to the Company with respect to the proposed Transaction. We did not, however, recommend any specific amount of consideration or that any specific consideration constituted the only appropriate consideration for the Transaction. This letter does not express any opinion as to the likely trading range of First Community's stock following the Transaction, which may vary depending on numerous factors that generally impact the price of securities or on the financial condition of First Community at that time. We have assumed that the shares of First Community common stock to be issued in the Proposed Transaction to the shareholders of the Company will be listed on the Nasdaq Global Select Market. Our opinion is limited to the fairness, from a financial point of view, of the Merger Consideration to be received by the holders of the Common Shares.

As the Board is aware, the credit, financial and stock markets have been experiencing and do experience unusual volatility from time to time and Raymond James expresses no opinion or view as to any potential effects of such volatility on the Transaction, First Community, or the Company. This Opinion does not purport to address potential developments in any such credit, financial and stock markets on the value of the Merger Consideration after the date hereof.

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Board of Directors<br> Surrey Bancorp<br> November 17, 2022

We express no opinion with respect to any other reasons, legal, business, or otherwise, that may support the decision of the Board of Directors to approve or consummate the Transaction. Furthermore, no opinion, counsel or interpretation is intended by Raymond James on matters that require legal, accounting or tax advice. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, we have relied, with the consent of the Board, on the fact that the Company has been assisted by legal, accounting and tax advisors and we have, with the consent of the Board, relied upon and assumed the accuracy and completeness of the assessments by the Company and its advisors as to all legal, accounting and tax matters with respect to the Company and the Transaction, including, without limitation, that the Transaction will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.

In formulating our opinion, we have considered only what we understand to be the Merger Consideration to be received by the holders of Common Shares as is described above and we did not consider and we express no opinion on the fairness of the amount or nature of any compensation to be paid or payable to any of the Company's officers, directors or employees, or class of such persons, whether relative to the compensation received by the holders of the Common Shares or otherwise. We have not been requested to opine as to, and this Opinion does not express an opinion as to or otherwise address, among other things: (1) the fairness of the Transaction to the holders of any class of securities, creditors, or other constituencies of the Company, or to any other party, except and only to the extent expressly set forth in the last sentence of this Opinion or (2) the fairness of the Transaction to any one class or group of the Company's or any other party's security holders or other constituencies vis-à-vis any other class or group of the Company's or such other party's security holders or other constituents (including, without limitation, the allocation of any consideration to be received in the Transaction amongst or within such classes or groups of security holders or other constituents). We are not expressing any opinion as to the impact of the Transaction on the solvency or viability of the Company or First Community or the ability of the Company or First Community to pay their respective obligations when they come due.

The delivery of this opinion was approved by an opinion committee of Raymond James.

Raymond James has been engaged to render financial advisory services to the Company in connection with the proposed Transaction and will receive a fee for such services, a substantial portion of which is contingent upon consummation of the Transaction. Raymond James will also receive a fee upon the delivery of this Opinion, which is not contingent upon the successful completion of the Transaction or on the conclusion reached herein. In addition, the Company has agreed to reimburse certain of our expenses and to indemnify us against certain liabilities arising out of our engagement.

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Board of Directors<br> Surrey Bancorp<br> November 17, 2022

In the ordinary course of our business, Raymond James may trade in the securities of the Company and First Community for our own account or for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities. In the two years preceding the date of this Opinion, (i) Raymond James has engaged in certain fixed income trading activity with First Community Bank, a subsidiary of First Community, for which it has earned income and (ii) an affiliate of Raymond James provided services to First Community Bank relating to its wealth management business, for which Raymond James has received commissions and fees. Furthermore, Raymond James may provide investment banking, financial advisory and other financial services to the Company, First Community, or their subsidiaries or affiliates, or other participants in the Transaction in the future, for which Raymond James may receive compensation.

It is understood that this letter is solely for the information of the Board of Directors of the Company (solely in each director's capacity as such) in evaluating the proposed Transaction and does not constitute a recommendation to the Board of Directors or any shareholder of the Company or First Community regarding how said shareholder should act or vote with respect to the proposed Transaction or any other matter. Furthermore, this letter should not be construed as creating any fiduciary duty on the part of Raymond James to any such party. This Opinion may not be disclosed, reproduced, quoted, summarized, referred to at any time, in any manner, or used for any other purpose, nor shall any references to Raymond James or any of its affiliates be made, without our prior written consent, except that this Opinion may be disclosed in and filed with a proxy statement/prospectus used in connection with the Transaction that is required to be filed with the Securities and Exchange Commission, provided that this Opinion is quoted in full in such proxy statement/prospectus, along with a description, reasonably satisfactory to us.

Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Merger Consideration to be received by the holders of the Common Shares in the Transaction pursuant to the Agreement is fair, from a financial point of view, to the holders of the Common Shares.

Very truly yours,

RAYMOND JAMES & ASSOCIATES, INC.

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**Appendix C**

**Article 13 of Chapter 55**

**North Carolina Business Corporation Act**

**Appraisal Rights**

**<u>GENERAL STATUTES OF NORTH CAROLINA</u>**

**<u>Excerpt from Chapter 55, North Carolina Business Corporation Act</u>**

**<u>ARTICLE 13. Appraisal Rights</u>**

Part 1. Right to Appraisal and Payment for Shares.

**§ 55-13-01. Definitions.**

In this Article, the following definitions apply:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Affiliate. – A person that directly, or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person or is a senior executive thereof. For purposes of G.S. 55-13-01(7), a person is deemed to be an affiliate of its senior executives.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Beneficial shareholder. – A person who is the beneficial owner of shares held in a voting trust or by a nominee on the beneficial owner's behalf.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) Corporation. – The issuer of the shares held by a shareholder demanding appraisal and, for matters covered in G.S. 55-13-22 through G.S. 55-13-31, the term includes the surviving entity in a merger.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4) Expenses. – Reasonable expenses of every kind that are incurred in connection with a matter, including counsel fees.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(5) Fair value. – The value of the corporation's shares (i) immediately before the effectuation of the corporate action as to which the shareholder asserts appraisal rights, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable, (ii) using customary and current valuation concepts and techniques generally employed for similar business in the context of the transaction requiring appraisal, and (iii) without discounting for lack of marketability or minority status except, if appropriate, for amendments to the articles pursuant to G.S. 55-13-02(a)(5).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(6) Interest. – Interest from the effective date of the corporate action until the date of payment, at the rate of interest on judgments in this State on the effective date of the corporate action.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(7) Interested transaction. – A corporate action described in G.S. 55-13-02(a), other than a merger pursuant to G.S. 55-11-04 or G.S. 55-11-12, involving an interested person and in which any of the shares or assets of the corporation are being acquired or converted. As used in this definition, the following definitions apply:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. Interested person. – A person, or an affiliate of a person, who at any time during the one-year period immediately preceding approval by the board of directors of the corporate action met any of the following conditions:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. Was the beneficial owner of twenty percent (20%) or more of the voting power of the corporation, other than as owner of excluded shares.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. Had the power, contractually or otherwise, other than as owner of excluded shares, to cause the appointment or election of twenty-five percent (25%) or more of the directors to the board of directors of the corporation.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. Was a senior executive or director of the corporation or a senior executive of any affiliate thereof, and that senior executive or director will receive, as a result of the corporate action, a financial benefit not generally available to other shareholders as such, other than any of the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I. Employment, consulting, retirement, or similar benefits established separately and not as part of or in contemplation of the corporate action.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;II. Employment, consulting, retirement, or similar benefits established in contemplation of, or as part of, the corporate action that are not more favorable than those existing before the corporate action or, if more favorable, that have been approved on behalf of the corporation in the same manner as is provided in G.S. 55-8-31(a)(1) and (c).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;III. In the case of a director of the corporation who will, in the corporate action, become a director of the acquiring entity, or one of its affiliates, rights and benefits as a director that are provided on the same basis as those afforded by the acquiring entity generally to other directors of the acquiring entity or such affiliate of the acquiring entity.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. Beneficial owner. – Any person who, directly or indirectly, through any contract, arrangement, or understanding, other than a revocable proxy, has or shares the power to vote, or to direct the voting of, shares. If a member of a national securities exchange is precluded by the rules of the exchange from voting without instruction on contested matters or matters that may affect substantially the rights or privileges of the holders of the securities to be voted, then that member of a national securities exchange shall not be deemed a "beneficial owner" of any securities held directly or indirectly by the member on behalf of another person solely because the member is the record holder of the securities. When two or more persons agree to act together for the purpose of voting their shares of the corporation, each member of the group formed thereby is deemed to have acquired beneficial ownership, as of the date of the agreement, of all voting shares of the corporation beneficially owned by any member of the group.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c. Excluded shares. – Shares acquired pursuant to an offer for all shares having voting power if the offer was made within one year prior to the corporate action for consideration of the same kind and of a value equal to or less than that paid in connection with the corporate action.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(8) Preferred shares. – A class or series of shares the holders of which have preference over any other class or series with respect to distributions.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(9) Record shareholder. – The person in whose name shares are registered in the records of the corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with the corporation.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(10) Senior executive. – The chief executive officer, chief operating officer, chief financial officer, or anyone in charge of a principal business unit or function.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(11) Shareholder. – Both a record shareholder and a beneficial shareholder.

**§ 55-13-02. Right to appraisal.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) In addition to any rights granted under Article 9 of this Chapter, a shareholder is entitled to appraisal rights and to obtain payment of the fair value of that shareholder's shares, in the event of any of the following corporate actions:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Consummation of a merger to which the corporation is a party if either (i) shareholder approval is required for the merger by G.S. 55-11-03 or would be required but for the provisions of G.S. 55-11-03(j), except that appraisal rights shall not be available to any shareholder of the corporation with respect to shares of any class or series that remain outstanding after consummation of the merger or (ii) the corporation is a subsidiary and the merger is governed by G.S. 55-11-04 or G.S. 55-11-12.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Consummation of a share exchange to which the corporation is a party as the corporation whose shares will be acquired, except that appraisal rights shall not be available to any shareholder of the corporation with respect to any class or series of shares of the corporation that is not exchanged.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) Consummation of a disposition of assets pursuant to G.S. 55-12-02.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4) An amendment of the articles of incorporation (i) with respect to a class or series of shares that reduces the number of shares of a class or series owned by the shareholder to a fraction of a share if the corporation has an obligation or right to repurchase the fractional share so created or (ii) changes the corporation into a nonprofit corporation or cooperative organization.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(5) Any other amendment to the articles of incorporation, merger, share exchange, or disposition of assets to the extent provided by the articles of incorporation, bylaws, or a resolution of the board of directors.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(6) Consummation of a conversion to a foreign corporation pursuant to Part 2 of Article 11A of this Chapter if the shareholder does not receive shares in the foreign corporation resulting from the conversion that (i) have terms as favorable to the shareholder in all material respects and (ii) represent at least the same percentage interest of the total voting rights of the outstanding shares of the corporation as the shares held by the shareholder before the conversion.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(7) Consummation of a conversion of the corporation to nonprofit status pursuant to Part 2 of Article 11A of this Chapter.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(8) Consummation of a conversion of the corporation to an unincorporated entity pursuant to Part 2 of Article 11A of this Chapter.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Notwithstanding subsection (a) of this section, the availability of appraisal rights under subdivisions (1), (2), (3), (4), (6), and (8) of subsection (a) of this section shall be limited in accordance with the following provisions:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Appraisal rights shall not be available for the holders of shares of any class or series of shares that are any of the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. A covered security under section 18(b)(1)(A) or (B) of the Securities Act of 1933, as amended.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. Traded in an organized market and has at least 2,000 shareholders and a market value of at least twenty million dollars ($20,000,000) (exclusive of the value of shares held by the corporation's subsidiaries, senior executives, directors, and beneficial shareholders owning more than ten percent (10%) of such shares).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c. Issued by an open-end management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, and may be redeemed at the option of the holder at net asset value.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) The applicability of subdivision (1) of this subsection shall be determined as of (i) the record date fixed to determine the shareholders entitled to receive notice of, and to vote at, the meeting of shareholders to act upon the corporate action requiring appraisal rights or, in the case of an offer made pursuant to G.S. 55-11-03(j), the date of the offer, or (ii) the day before the effective date of the corporate action if there is no meeting of shareholders and no offer made pursuant to G.S. 55-11-03(j).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) Subdivision (1) of this subsection shall not be applicable and appraisal rights shall be available pursuant to subsection (a) of this section for the holders of any class or series of shares who are required by the terms of the corporate action requiring appraisal rights to accept for such shares anything other than cash or shares of any class or any series of shares of any corporation, or any other proprietary interest of any other entity, that satisfies the standards set forth in subdivision (1) of this subsection at the time the corporate action becomes effective.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4) Subdivision (1) of this subsection shall not be applicable and appraisal rights shall be available pursuant to subsection (a) of this section for the holders of any class or series of shares where the corporate action is an interested transaction.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) Notwithstanding any other provision of this section, the articles of incorporation as originally filed or any amendment to the articles may limit or eliminate appraisal rights for any class or series of preferred shares with respect to any corporate action, except that (i) no limitation or elimination shall be effective if the class or series does not have the right to vote separately as a voting group, alone or as part of a group, on the corporate action or if the corporate action is an amendment to the articles of incorporation that changes the corporation into a nonprofit corporation or a cooperative organization, and (ii) any limitation or elimination contained in an amendment to the articles of incorporation that limits or eliminates appraisal rights for any shares that are outstanding immediately prior to the effective date of the amendment, or that the corporation is or may be required to issue or sell thereafter pursuant to any conversion, exchange, or other right existing immediately before the effective date of the amendment, shall not apply to any corporate action that becomes effective within one year of that date if the corporate action would otherwise afford appraisal rights.

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**§ 55-13-03. Assertion of rights by nominees and beneficial owners.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) A record shareholder may assert appraisal rights as to fewer than all the shares registered in the record shareholder's name but owned by a beneficial shareholder only if the record shareholder (i) objects with respect to all shares of the class or series owned by the beneficial shareholder and (ii) notifies the corporation in writing of the name and address of each beneficial shareholder on whose behalf appraisal rights are being asserted. The rights of a record shareholder who asserts appraisal rights for only part of the shares held of record in the record shareholder's name under this subsection shall be determined as if the shares as to which the record shareholder objects and the record shareholder's other shares were registered in the names of different record shareholders.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) A beneficial shareholder may assert appraisal rights as to shares of any class or series held on behalf of the shareholder only if the shareholder does both of the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Submits to the corporation the record shareholder's written consent to the assertion of rights no later than the date referred to in G.S. 55-13-22(b)(2)b.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Submits written consent under subdivision (1) of this subsection with respect to all shares of the class or series that are beneficially owned by the beneficial shareholder.

Part 2. Procedure for Exercise of Appraisal Rights.

**§ 55-13-20. Notice of appraisal rights.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) If any corporate action specified in G.S. 55-13-02(a) is to be submitted to a vote at a shareholders' meeting, or where no approval of the action is required pursuant to G.S. 55-11-03(j), the meeting notice or, if applicable, the offer made pursuant to G.S. 55-11-03(j), shall state that the corporation has concluded that shareholders are, are not, or may be entitled to assert appraisal rights under this Article. If the corporation concludes that appraisal rights are or may be available, a copy of this Article shall accompany the meeting notice or offer sent to those record shareholders entitled to exercise appraisal rights.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) In a merger pursuant to G.S. 55-11-04 or G.S. 55-11-12, the parent corporation shall notify in writing all record shareholders of the subsidiary who are entitled to assert appraisal rights that the corporate action became effective. Notice required under this subsection shall be sent within 10 days after the corporate action became effective and include the materials described in G.S. 55-13-22.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) If any corporate action specified in G.S. 55-13-02(a) is to be approved by written consent of the shareholders pursuant to G.S. 55-7-04, then the following shall occur:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Written notice that appraisal rights are, are not, or may be available shall be given to each record shareholder from whom a consent is solicited at the time consent of each shareholder is first solicited and, if the corporation has concluded that appraisal rights are or may be available, shall be accompanied by a copy of this Article.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Written notice that appraisal rights are, are not, or may be available shall be delivered together with the notice to the applicable shareholders required by subsections (d) and (e) of G.S. 55-7-04, may include the materials described in G.S. 55-13-22, and, if the corporation has concluded that appraisal rights are or may be available, shall be accompanied by a copy of this Article.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) If any corporate action described in G.S. 55-13-02(a) is proposed, or a merger pursuant to G.S. 55-11-04 or G.S. 55-11-12 is effected, then the notice or offer referred to in subsection (a) or (c) of this section, if the corporation concludes that appraisal rights are or may be available, and the notice referred to in subsection (b) of this section, shall be accompanied by both of the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Annual financial statements as described in G.S. 55-16-20(a) of the corporation that issued the shares to be appraised. The date of the financial statements shall not be more than 16 months before the date of the notice. If annual financial statements that meet the requirements of this subdivision are not reasonably available, then the corporation shall provide reasonably equivalent financial information and in any case shall provide a balance sheet as of the end of a fiscal year ending not more than 16 months before the date of the notice, an income statement for that year, and a cash flow statement for that year.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) The latest interim financial statements of the corporation, if any.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) The right to receive the information described in subsection (d) of this section may be waived in writing by a shareholder before or after the corporate action.

**§ 55-13-21. Notice of intent to demand payment and consequences of voting or consenting.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) If a corporate action specified in G.S. 55-13-02(a) is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert appraisal rights with respect to any class or series of shares must do the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Deliver to the corporation, before the vote is taken, written notice of the shareholder's intent to demand payment if the proposed action is effectuated.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Not vote, or cause or permit to be voted, any shares of any class or series in favor of the proposed action.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) If a corporate action specified in G.S. 55-13-02(a) is to be approved by less than unanimous written consent, a shareholder who wishes to assert appraisal rights with respect to any class or series of shares must satisfy both of the following requirements:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) The shareholder must deliver to the corporation, before the proposed action becomes effective, written notice of the shareholder's intent to demand payment if the proposed action is effectuated, except that the written notice is not required if the notice required by G.S. 55-13-20(c) is given less than 25 days prior to the date the proposed action is effectuated.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) The shareholder must not execute a consent in favor of the proposed action with respect to that class or series of shares.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b1) If a corporate action specified in G.S. 55-13-02(a) does not require shareholder approval pursuant to G.S. 55-11-03(j), a shareholder who wishes to assert appraisal rights with respect to any class or series of shares must satisfy both of the following requirements:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) The shareholder must deliver to the corporation, before the shares are purchased pursuant to the offer made consistent with subdivision (2) of subsection (j) of G.S. 55-11-03, written notice of the shareholder's intent to demand payment if the proposed action is effectuated.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) The shareholder must not tender, or cause or permit to be tendered, any shares of the class or series in response to the offer.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) A shareholder who fails to satisfy the requirements of subsection (a), (b), or (b1) of this section is not entitled to payment under this Article.

**§ 55-13-22. Appraisal notice and form.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) If a corporate action requiring appraisal rights under G.S. 55-13-02(a) becomes effective, the corporation must deliver a written appraisal notice and form required by subdivision (b)(1) of this section to all shareholders who satisfied the requirements of G.S. 55-13-21. In the case of a merger under G.S. 55-11-04 or G.S. 55-11-12, the parent corporation must deliver a written appraisal notice and form to all record shareholders of the subsidiary who may be entitled to assert appraisal rights.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) The appraisal notice must be sent no earlier than the date the corporate action specified in G.S. 55-13-02(a) became effective and no later than 10 days after that date. The appraisal notice must include the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) A form that specifies the first date of any announcement to shareholders, made prior to the date the corporate action became effective, of the principal terms of the proposed corporate action. If such an announcement was made, the form shall require a shareholder asserting appraisal rights to certify whether beneficial ownership of those shares for which appraisal rights are asserted was acquired before that date. The form shall require a shareholder asserting appraisal rights to certify that the shareholder did not vote for or consent to the transaction.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Disclosure of the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. Where the form must be sent and where certificates for certificated shares must be deposited, as well as the date by which those certificates must be deposited. The certificate deposit date must not be earlier than the date for receiving the required form under sub-subdivision b. of this subdivision.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. A date by which the corporation must receive the payment demand, which date may not be fewer than 40 nor more than 60 days after the date the appraisal notice required under subsection (a) of this section and form are sent. The form shall also state that the shareholder shall have waived the right to demand appraisal with respect to the shares unless the form is received by the corporation by the specified date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c. The corporation's estimate of the fair value of the shares.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d. That, if requested in writing, the corporation will provide, to the shareholder so requesting, within 10 days after the date specified in sub-subdivision b. of this subdivision, the number of shareholders who return the forms by the specified date and the total number of shares owned by them.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;e. The date by which the notice to withdraw under G.S. 55-13-23 must be received, which date must be within 20 days after the date specified in sub-subdivision b. of this subdivision.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) Be accompanied by a copy of this Article.

**§ 55-13-23. Perfection of rights; right to withdraw.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) A shareholder who receives notice pursuant to G.S. 55-13-22 and who wishes to exercise appraisal rights must sign and return the form sent by the corporation and, in the case of certificated shares, deposit the shareholder's certificates in accordance with the terms of the notice by the date referred to in the notice pursuant to G.S. 55-13-22(b)(2). In addition, if applicable, the shareholder must certify on the form whether the beneficial owner of such shares acquired beneficial ownership of the shares before the date required to be set forth in the notice pursuant to G.S. 55-13-22(b)(1). If a shareholder fails to make this certification, the corporation may elect to treat the shareholder's shares as after-acquired shares under G.S. 55-13-27. Once a shareholder deposits that shareholder's certificates or, in the case of uncertificated shares, returns the signed forms, that shareholder loses all rights as a shareholder, unless the shareholder withdraws pursuant to subsection (b) of this section.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) A shareholder who has complied with subsection (a) of this section may nevertheless decline to exercise appraisal rights and withdraw from the appraisal process by so notifying the corporation in writing by the date set forth in the appraisal notice pursuant to G.S. 55-13-22(b)(2)e. A shareholder who fails to so withdraw from the appraisal process may not thereafter withdraw without the corporation's written consent.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) A shareholder who does not sign and return the form and, in the case of certificated shares, deposit that shareholder's share certificates where required, each by the date set forth in the notice described in G.S. 55-13-22(b) shall not be entitled to payment under this Article.

**§ 55-13-24:** *Repealed*.

**§ 55-13-25. Payment.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Except as provided in G.S. 55-13-27, within 30 days after the form required by G.S. 55-13-22(b) is due, the corporation shall pay in cash to the shareholders who complied with G.S. 55-13-23(a) the amount the corporation estimates to be the fair value of their shares, plus interest.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) The payment to each shareholder pursuant to subsection (a) of this section shall be accompanied by the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) The following financial information:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. Annual financial statements as described in G.S. 55-16-20(a) of the corporation that issued the shares to be appraised. The date of the financial statements shall not be more than 16 months before the date of payment. If annual financial statements that meet the requirements of this sub-subdivision are not reasonably available, the corporation shall provide reasonably equivalent financial information and in any case shall provide a balance sheet as of the end of a fiscal year ending not more than 16 months before the date of payment, an income statement for that year, and a cash flow statement for that year.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. The latest interim financial statements, if any.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) A statement of the corporation's estimate of the fair value of the shares. The estimate shall equal or exceed the corporation's estimate given pursuant to G.S. 55-13-22(b)(2)c.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) A statement that the shareholders described in subsection (a) of this section have the right to demand further payment under G.S. 55-13-28 and that if a shareholder does not do so within the time period specified in G.S. 55-13-28, then the shareholder shall be deemed to have accepted payment in full satisfaction of the corporation's obligations under this Article.

**§ 55-13-26:** *Repealed*.

**§ 55-13-27. After-acquired shares.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) A corporation may elect to withhold payment required by G.S. 55-13-25 from any shareholder who was required to but did not certify that beneficial ownership of all of the shareholder's shares for which appraisal rights are asserted was acquired before the date set forth in the appraisal notice sent pursuant to G.S. 55-13-22(b)(1).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) If the corporation elected to withhold payment under subsection (a) of this section, it must, within 30 days after the form required by G.S. 55-13-22(b) is due, notify all shareholders who are described in subsection (a) of this section of the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) The information required by G.S. 55-13-25(b)(1).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) The corporation's estimate of fair value pursuant to G.S. 55-13-25(b)(2).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) That they may accept the corporation's estimate of fair value, plus interest, in full satisfaction of their demands or demand appraisal under G.S. 55-13-28.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4) That those shareholders who wish to accept such offer must so notify the corporation of their acceptance of the corporation's offer within 30 days after receiving the offer.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(5) That those shareholders who do not satisfy the requirements for demanding appraisal under G.S. 55-13-28 shall be deemed to have accepted the corporation's offer.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) Within 10 days after receiving the shareholder's acceptance pursuant to subsection (b) of this section, the corporation must pay in cash the amount it offered under subdivision (b)(2) of this section to each shareholder who agreed to accept the corporation's offer in full satisfaction of the shareholder's demand.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) Within 40 days after sending the notice described in subsection (b) of this section, the corporation must pay in cash the amount it offered to pay under subdivision (b)(2) of this section to each shareholder described in subdivision (b)(5) of this section.

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**§ 55-13-28. Procedure if shareholder dissatisfied with payment or offer.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) A shareholder paid pursuant to G.S. 55-13-25 who is dissatisfied with the amount of the payment must notify the corporation in writing of that shareholder's estimate of the fair value of the shares and demand payment of that estimate plus interest (less any payment under G.S. 55-13-25). A shareholder offered payment under G.S. 55-13-27 who is dissatisfied with that offer must reject the offer and demand payment of the shareholder's stated estimate of the fair value of the shares, plus interest.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) A shareholder who fails to notify the corporation in writing of that shareholder's demand to be paid the shareholder's stated estimate of the fair value, plus interest, under subsection (a) of this section within 30 days after receiving the corporation's payment or offer of payment under G.S. 55-13-25 or G.S. 55-13-27, respectively, waives the right to demand payment under this section and shall be entitled only to the payment made or offered pursuant to those respective sections.

Part 3. Judicial Appraisal of Shares.

**§ 55-13-30. Court Action.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) If a shareholder makes a demand for payment under G.S. 55-13-28 that remains unsettled, the corporation shall commence a proceeding within 60 days after receiving the payment demand by filing a complaint with the Superior Court Division of the General Court of Justice to determine whether the shareholder complied with the requirements of this Article and is entitled to appraisal rights, and, if so, to determine the fair value of the shares and accrued interest. The shareholder has the burden of proving that the shareholder complied with the requirements of this Article regarding entitlement to appraisal rights. If the superior court determines that a shareholder has not complied with the requirements of this Article, the shareholder is not entitled to appraisal rights, and the court shall dismiss the proceeding as to the shareholder. If the corporation does not commence the proceeding within the 60-day period, the corporation shall pay in cash to each shareholder the amount the shareholder demanded pursuant to G.S. 55-13-28, plus interest.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) The corporation shall commence the proceeding in the appropriate court of the county where the corporation's principal office, or, if none, its registered office in this State is located. If the corporation is a foreign corporation without a registered office in this State, it shall commence the proceeding in the county in this State where the principal office or registered office of the domestic corporation merged with the foreign corporation was located at the time of the transaction.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) The corporation shall make all shareholders, whether or not residents of this State, whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties shall be served with a copy of the complaint. Nonresidents may be served by registered or certified mail or by publication as provided by law.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) The jurisdiction of the superior court in which the proceeding is commenced under subsection (b) of this section is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers shall have the powers described in the order appointing them, or in any amendment to it. The shareholders demanding appraisal rights are entitled to the same discovery rights as parties in other civil proceedings. There is no right to a trial by jury.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) Each shareholder made a party to the proceeding that is determined by the superior court to have complied with the requirements of this Article and is entitled to appraisal rights is entitled to judgment either (i) for the amount, if any, by which the court finds the fair value of the shareholder's shares, plus interest, exceeds the amount paid by the corporation to the shareholder for the shareholder's shares or (ii) for the fair value, plus interest, of the shareholder's shares for which the corporation elected to withhold payment under G.S. 55-13-27.

**§ 55-13-31. Court costs and expenses.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall determine all court costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation, except that the court may assess costs against all or some of the shareholders demanding appraisal, in amounts the court finds equitable, to the extent the court finds such shareholders acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Article.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) The court in an appraisal proceeding may also assess the expenses for the respective parties, in amounts the court finds equitable:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Against the corporation and in favor of any or all shareholders demanding appraisal if the court finds the corporation did not substantially comply with the requirements of G.S. 55-13-20, 55-13-22, 55-13-25, or 55-13-27.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Against either the corporation or a shareholder demanding appraisal, in favor of any other party, if the court finds that the party against whom expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Article.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) If the court in an appraisal proceeding finds that the expenses incurred by any shareholder were of substantial benefit to other shareholders similarly situated and that these expenses should not be assessed against the corporation, the court may direct that the expenses be paid out of the amounts awarded the shareholders who were benefited.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) To the extent the corporation fails to make a required payment pursuant to G.S. 55-13-25, 55-13-27, or 55-13-28, the shareholder may sue directly for the amount owed and, to the extent successful, shall be entitled to recover from the corporation all expenses of the suit.

Part 4. Other Remedies.

**§ 55-13-40. Other remedies limited.**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) The legality of a proposed or completed corporate action described in G.S. 55-13-02(a) may not be contested, nor may the corporate action be enjoined, set aside, or rescinded, in a legal or equitable proceeding by a shareholder after the shareholders have approved the corporate action.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Subsection (a) of this section does not apply to a corporate action that:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Was not authorized and approved in accordance with the applicable provisions of any of the following:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. Article 9, 9A, 10, 11, 11A, or 12 of this Chapter.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. The articles of incorporation or bylaws.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c. The resolution of the board of directors authorizing the corporate action.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Was procured as a result of fraud, a material misrepresentation, or an omission of a material fact necessary to make statements made, in light of the circumstances in which they were made, not misleading.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) Constitutes an interested transaction, unless it has been authorized, approved, or ratified by either (i) the board of directors or a committee of the board or (ii) the shareholders, in the same manner as is provided in G.S. 55-8-31(a)(1) and (c) or in G.S. 55-8-31(a)(2) and (d), as if the interested transaction were a director's conflict of interest transaction.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4) Was approved by less than unanimous consent of the voting shareholders pursuant to G.S. 55-7-04, provided that both of the following are true:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. The challenge to the corporate action is brought by a shareholder who did not consent and as to whom notice of the approval of the corporate action was not effective at least 10 days before the corporate action was effected.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. The proceeding challenging the corporate action is commenced within 10 days after notice of the approval of the corporate action is effective as to the shareholder bringing the proceeding.

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**Appendix D**

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| |
|:---|
| **UNITED STATES** <br> **SECURITIES AND EXCHANGE COMMISSION** |
| **Washington, D.C. 20549** |
| **FORM 10-K** |

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended **December 31, 2021**

or

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

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| | |
|:---|:---|
| Commission file number **000-19297** | Commission file number **000-19297** |
|  | **FIRST COMMUNITY BANKSHARES, INC.** |
|  | (Exact name of registrant as specified in its charter) |

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| | |
|:---|:---|
| **Virginia** | **55-0694814** |
| (State or other jurisdiction<br> of incorporation or organization) | (I.R.S. Employer Identification No.) |

---

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| | |
|:---|:---|
| | **P.O. Box 989**<br> **Bluefield, Virginia 24605-0989** |
| (Address of principal executive offices) (Zip Code) | (Address of principal executive offices) (Zip Code) |

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| |
|:---|
| Registrant's telephone number, including area code: **(276) 326-9000** |
| Securities registered pursuant to Section 12(b) of the Act: |

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| | |
|:---|:---|
| Title of each class | Name of each exchange on which registered |
| **Common Stock, $1.00 par value**<br> <u>**FCBC**</u> | **NASDAQ Global Select** |

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| |
|:---|
| Securities registered pursuant to Section 12(g) of the Act: **None** |
| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.<br> ☐ Yes ☑ No<br> Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.<br> ☐ Yes ☑ No<br> Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.<br> ☑ Yes ☐ No<br> Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).<br> ☑ Yes ☐ No |

---

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☑ <br> Non-accelerated filer ☐ Smaller reporting company ☐ <br> Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404 (b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

☐ Yes ☑ No

As of June 30, 2021, the aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates was $374.88 million.

As of February 23, 2022, there were 16,806,360 shares outstanding of the registrant's Common Stock, $1.00 par value.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2022, are incorporated by reference in Part III of this Form 10-K.

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**FIRST COMMUNITY BANKSHARES, INC.**

**2021 FORM 10-K**

**INDEX**

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| | | |
|:---|:---|:---|
|  |  | <u>Page</u> |
| [**PART I**](#part1) |  |  |
| Item 1. | [Business.](#item1) | [3](#item1) |
| Item 1A. | [Risk Factors.](#item1a) | [10](#item1a) |
| Item 1B. | [Unresolved Staff Comments.](#item1b) | [17](#item1b) |
| Item 2. | [Properties.](#item2) | [17](#item2) |
| Item 3. | [Legal Proceedings.](#item3) | [17](#item3) |
| Item 4. | [Mine Safety Disclosures.](#item4) | [17](#item4) |
| [**PART II**](#part2) |  |  |
| Item 5. | [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.](#item5) | [17](#item5) |
| Item 6. | [\[Reserved\]](#item6)  | [18](#item6) |
| Item 7. | [Management's Discussion and Analysis of Financial Condition and Results of Operations.](#item7) | [19](#item7) |
| Item 7A. | [Quantitative and Qualitative Disclosures About Market Risk.](#item7a) | [39](#item7a) |
| Item 8. | [Financial Statements and Supplementary Data.](#item8) | [40](#item8) |
| Item 9. | [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.](#item9) | [101](#item9) |
| Item 9A. | [Controls and Procedures.](#item9a) | [101](#item9a) |
| Item 9B. | [Other Information.](#item9b) | [101](#item9b) |
| Item 9C. | [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.](#item9c) |  |
| [**PART III**](#part3) |  |  |
| Item 10. | [Directors, Executive Officers and Corporate Governance.](#item10) | [102](#item10) |
| Item 11. | [Executive Compensation.](#item11) | [103](#item11) |
| Item 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.](#item12) | [103](#item12) |
| Item 13. | [Certain Relationships and Related Transactions, and Director Independence.](#item13) | [103](#item13) |
| Item 14. | [Principal Accounting Fees and Services.](#item14) | [103](#item14) |
| [**PART IV**](#part4) |  |  |
| Item 15. | [Exhibits and Financial Statement Schedules.](#item15) | [104](#item15) |
|  | [Signatures](#sigs) | [106](#sigs) |

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Forward-looking statements in filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K and the accompanying Exhibits, filings incorporated by reference, reports to shareholders, and other communications that represent the Company's beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," and other similar expressions identify forward-looking statements. The following factors, among others, could cause financial performance to differ materially from that expressed in such forward-looking statements:

● the effects of the COVID-19 pandemic, including the negative impacts and disruptions to the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company's business;

● the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

● the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;

● inflation, interest rate, market and monetary fluctuations;

● timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

● the willingness of customers to substitute competitors' products and services for the Company's products and services and vice versa;

● the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance;

● the impact of the U.S. Department of the Treasury and federal banking regulators' continued implementation of programs to address capital and liquidity in the banking system;

● technological changes;

● the costs and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;

● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;

● the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

● the growth and profitability of noninterest, or fee, income being less than expected;

● unanticipated regulatory or judicial proceedings;

● changes in consumer spending and saving habits; and

● the Company's success at managing the risks mentioned above.

The list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part I, Item 1A of this report.

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**PART I**

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| | |
|:---|:---|
| **Item 1.** | **Business.** |

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**General**

First Community Bankshares, Inc. (the "Company"), a financial holding company, was founded in 1989 and reincorporated under the laws of the Commonwealth of Virginia. The Company's principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the "Bank"), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management. Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" in this Annual Report on Form 10-K refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

We focus on building financial partnerships and creating enduring and mutually beneficial relationships with businesses and individuals through a personal and local approach to banking and financial services. We strive to be the bank of choice in the markets we serve by offering impeccable service and a complete line of competitive products that include:

● demand deposit accounts, savings and money market accounts, certificates of deposit, and individual retirement arrangements;

● commercial, consumer, and real estate mortgage loans and lines of credit;

● various credit card, debit card, and automated teller machine card services;

● corporate and personal trust services; and

● investment management services.

Our operations are guided by a strategic plan that focuses on organic growth supplemented by strategic acquisitions of complementary financial institutions.

**Employees and Human Capital Resources**

As of December 31, 2021, we had 599 full-time employees and 26 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.

We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and customized corporate training engagements.

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. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance and keeping increases in the employee portion of health care premiums as small as possible and sponsoring various wellness programs.

Employee retention helps us operate efficiently and achieve one of our business objectives, which is building financial partnerships. We believe our commitment to living out our core values, actively prioritizing concern for our employees' well-being, supporting our employees' career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company through participation in our current 401(k) plan and a former employee stock ownership plan, which aligns employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates.

**Market Area**

As of December 31, 2021, we operated 49 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment, Community Banking. Economic indicators in our market areas show relatively stable employment and business conditions. We serve a diverse base of individuals and businesses across a variety of industries such as education; government and health services; retail trade; construction; manufacturing; tourism; coal mining and gas extraction; and transportation.

**Competition**

The financial services industry is highly competitive and constantly evolving. We encounter strong competition in attracting and retaining deposit, loan, and other financial relationships in our market areas. We compete with other commercial banks, thrifts, savings and loan associations, credit unions, consumer finance companies, mortgage banking firms, commercial finance and leasing companies, securities firms, brokerage firms, and insurance companies. We have positioned ourselves as a regional community bank that provides an alternative to larger banks, which often place less emphasis on personal relationships, and smaller community banks, which lack the capital and resources to efficiently serve customer needs. Factors that influence our ability to remain competitive include the ability to develop, maintain, and build long-term customer relationships; the quality, variety, and pricing of products and services; the convenience of banking locations and office hours; technological developments; and industry and general economic conditions. We seek to mitigate competitive pressures with our relationship style of banking, competitive pricing, and cost efficiencies.

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**Supervision and Regulation**

***Overview***

We are subject to extensive examination, supervision, and regulation under applicable federal and state laws and various regulatory agencies. These regulations are intended to protect consumers, depositors, borrowers, deposit insurance funds, and the stability of the financial system and are not for the protection of stockholders or creditors.

Applicable laws and regulations restrict our permissible activities and investments and impose conditions and requirements on the products and services we offer and the manner in which they are offered and sold. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our banking subsidiary, and impose capital adequacy requirements on the Company and the Bank. The consequences of noncompliance with these laws and regulations can include substantial monetary and nonmonetary sanctions.

The following discussion summarizes significant laws and regulations applicable to the Company and the Bank. These summaries are not intended to be complete and are qualified in their entirety by reference to the applicable statute or regulation. Changes in laws and regulations may have a material effect on our business, financial condition, or results of operations.

*First Community Bankshares, Inc.*

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, ("BHC Act") and a financial holding company under the Gramm-Leach-Bliley Act of 1999 ("GLB Act"). The Company elected financial holding company status in December 2006. The Company and its subsidiaries are subject to supervision, regulation, and examination by the Board of Governors of the Federal Reserve System ("Federal Reserve"). The BHC Act generally provides for umbrella regulation of financial holding companies, such as the Company, by the Federal Reserve, as well as functional regulation of financial holding company subsidiaries by applicable regulatory agencies. The Federal Reserve is granted the authority, in certain circumstances, to require reports of, examine, and adopt rules applicable to any bank holding company subsidiary.

The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, ("Exchange Act"), as administered by the Securities and Exchange Commission ("SEC"). The Company's common stock is listed on the NASDAQ Global Select Market under the trading symbol FCBC and is subject to NASDAQ's rules for listed companies.

*First Community Bank*

 

The Bank is a Virginia chartered bank and a member of the Federal Reserve subject to supervision, regulation, and examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank ("FRB") of Richmond. The Bank is a member of the Federal Deposit Insurance Corporation ("FDIC"), and its deposits are insured by the FDIC to the extent provided by law. The regulations of these agencies govern most aspects of the Bank's business, including requirements concerning the allowance for loan losses, lending and mortgage operations, interest rates received on loans and paid on deposits, the payment of dividends, loans to affiliates, mergers and acquisitions, capital, and the establishment of branches. Various consumer and compliance laws and regulations also affect the Bank's operations.

As a member bank, the Bank is required to hold stock in the FRB of Richmond in an amount equal to 6% of its capital stock and surplus (half paid to acquire the stock with the remainder held as a cash reserve). Member banks do not have any control over the Federal Reserve as a result of owning the stock and the stock cannot be sold or traded.

***Permitted Activities under the BHC Act***

The BHC Act limits the activities of bank holding companies, such as the Company, to the business of banking, managing or controlling banks and other activities the Federal Reserve determines to be closely related to banking. A bank holding company that elects treatment as a financial holding company under the GLB Act, such as the Company, may engage in a broader range of activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system. These activities include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and other activities that the Federal Reserve determines to be closely related to banking.

In order to maintain financial holding company status, the Company and the Bank must be well-capitalized and well-managed under applicable Federal Reserve regulations and have received at least a satisfactory rating under the Community Reinvestment Act ("CRA"). See "Prompt Corrective Action" and "Community Reinvestment Act" below. If we fail to meet these requirements, the Federal Reserve may impose corrective capital and managerial requirements and place limitations or conditions on our ability to conduct activities permissible for financial holding companies. If the deficiencies persist, the Federal Reserve may require the Company to divest the Bank or divest investments in companies engaged in activities permissible only for financial holding companies.

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In July 2019, the federal bank regulators adopted final rules (the "Capital Simplification Rules") that, among other things, eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. The Company is required to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, subject to certain exemptions, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding 12 months, is equal to 10% or more of the Company's consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.

 ****

The BHC Act requires that bank holding companies obtain the Federal Reserve's approval before acquiring direct or indirect ownership or control of more than 5% of the voting shares or all, or substantially all, of the assets of a bank. The regulatory authorities are required to consider the financial and managerial resources and future prospects of the bank holding company and the target bank, the convenience and needs of the communities to be served, and various competitive factors when approving acquisitions. The BHC Act also prohibits a bank holding company from acquiring direct or indirect control of more than 5% of the outstanding voting stock of any company engaged in a non-banking business unless the Federal Reserve determines it to be closely related to banking.

***Capital Requirements***

We are subject to various regulatory capital requirements administered by the Federal Reserve (the "Basel III Capital Rules").

Since fully phased in on January 1, 2019, Basel III Capital Rules require the Company and the Bank to maintain the following:

● A minimum ratio of Common Equity Tier 1 ("CET1") to risk-weighted assets of at least 4.50%, plus a 2.50% "capital conservation buffer" that is composed entirely of CET1 capital (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.00%);

● A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.00%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.50%);

● A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.00%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.50%); and

● A minimum leverage ratio of 4.00%, calculated as the ratio of Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the "leverage ratio").

Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution's "eligible retained income" (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).

Basel III Capital Rules and the Capital Simplification Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 25% of CET1. Prior to the adoption of the Capital Simplification Rules in July 2019, amounts were deducted from CET1 to the extent that any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for the Company and the Bank as of January 1, 2020. These limitations did not impact our regulatory capital during any of the reported periods.

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Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.

Management believes that the Company and the Bank's current capital levels exceed the required capital amounts to the considered well-capitalized and also meet the fully phased-in minimum capital requirements, including the related capital convervation buffers, as required by the Basel III Capital Rules as of December 31, 2021. For additional information, see Note 20, "Regulatory Requirments and Restrictions," to the Consolidated Financial Statements in Part II, Item 8 of this report.

***Prompt Corrective Action***

The federal banking regulators are required to take prompt corrective action with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if the appropriate federal regulators determine that it is engaging in an unsafe or unsound practice or is in an unsafe or unsound condition. A bank's capital category is determined solely for applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank's financial condition or prospects for other purposes.

The Bank was classified as well-capitalized under prompt corrective action regulations as of December 31, 2021. In order to be considered a well-capitalized institution under Basel III Capital Rules, an organization must not be subject to any written agreement, order, capital directive, or prompt corrective action directive and must maintain the following minimum capital ratios:

● 6.5% CET1 to risk-weighted assets

● 8.0% Tier 1 capital to risk-weighted assets

● 10.0% Total capital to risk-weighted assets

● 5.0% Tier 1 leverage ratio

Undercapitalized institutions are required to submit a capital restoration plan to federal banking regulators. Under the Federal Deposit Insurance Act, as amended ("FDIA"), in order for the capital restoration plan to be accepted by the appropriate federal banking agency, a bank holding company must provide appropriate assurances of performance and guarantee that its subsidiary bank will comply with its capital restoration plan, subject to certain limitations. Agency regulations contain broad restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, establishing branches, and engaging in new lines of business. With certain exceptions, a depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to its parent holding company if the institution would be undercapitalized after such distribution or payment.

A significantly undercapitalized institution is subject to various requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and ending deposits from correspondent banks. The FDIC has limited discretion in dealing with a critically undercapitalized institution and is generally required to appoint a receiver or conservator.

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***Safety and Soundness Standards***

Guidelines adopted by federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage risks and exposures. If an institution fails to meet safety and soundness standards, the regulatory agencies may require the institution to submit a written compliance plan describing the steps they would take to correct the situation and the time that such steps would be taken. If an institution fails to submit or implement an acceptable compliance plan, after being notified, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions, such as those applicable to undercapitalized institutions under the prompt corrective action provisions of the FDIA. An institution may be subject to judicial proceedings and civil money penalties if it fails to follow such an order.

***Payment of Dividends***

 

The Company is a legal entity that is separate and distinct from its subsidiaries. The Company's principal source of cash flow is derived from dividends paid by the Bank. There are various restrictions by regulatory agencies related to dividends paid by the Bank to the Company and dividends paid by the Company to its shareholders. The payment of dividends by the Company and the Bank may be limited by certain factors, such as requirements to maintain capital above regulatory guideline minimums.

Prior FRB approval is required for the Bank to declare or pay a dividend to the Company if the total of all dividends declared in any given year exceed the total of the Bank's net profits for that year and its retained profits for the preceding two years, less any required transfers to surplus or to fund the retirement of preferred stock. Dividends paid by the Company to shareholders are subject to oversight by the Federal Reserve. Federal Reserve policy states that bank holding companies generally should pay dividends on common stock only from income available over the past year if prospective earnings retention is consistent with the organization's expected future needs, asset quality, and financial condition.

Regulatory agencies have the authority to limit or prohibit the Company and the Bank from paying dividends if the payments are deemed to constitute an unsafe or unsound practice. The appropriate regulatory authorities have stated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only from current operating earnings. In addition, the Bank may not declare or pay a dividend if, after paying the dividend, the Bank would be classified as undercapitalized. In the current financial and economic environment, the FRB has discouraged payout ratios that are at maximum allowable levels, unless both asset quality and capital are very strong, and has noted that bank holding companies should carefully review their dividend policy. Bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries.

***Source of Strength***

Federal Reserve policy and federal law requires the Company to act as a source of financial and managerial strength to the Bank. Under this requirement, the Company is expected to commit resources to support the Bank even when it may not be in a financial position to provide such resources. Because the Company is a legal entity separate and distinct from its subsidiaries, any capital loans it makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of the Company's bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

 

***Transactions with Affiliates***

The Federal Reserve Act ("FRA") and Federal Reserve Regulation W place restrictions on "covered transactions" between the Bank and its affiliates, including the Company. The term "covered transactions" includes making loans, purchasing assets, issuing guarantees, and other similar transactions. The Dodd-Frank Act expanded the definition of "covered transactions" to include derivative activities, repurchase agreements, and securities lending or borrowing activities. These restrictions limit the amount of transactions with affiliates, require certain levels of collateral for loans to affiliates, and require that all transactions with affiliates be on terms that are consistent with safe and sound banking practices. In addition, these transactions must be on terms that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for similar transactions with non-affiliates.

The FRA and Federal Reserve Regulation O place restrictions on loans between the Company and the Bank and their directors, executive officers, principal shareholders, affiliates, and interests of those directors, executive officers, and principal shareholders. These restrictions limit the amount of loans to one borrower and require that loans are on terms that are substantially the same as, and follow underwriting procedures that are not less stringent than, those prevailing at the time for similar loans with non-insiders. In addition, the aggregate limit of loans to all insiders, as a group, cannot exceed the Bank's total unimpaired capital and surplus.

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***Deposit Insurance and Assessments***

Substantially all of the Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC and are subject to quarterly deposit insurance assessments to maintain the DIF. Deposit insurance premiums are assessed using a risk-based system that places FDIC-insured institutions into one of four risk categories based on capital, supervisory ratings and other factors. The assessment rate determined by considering such information is then applied to the institution's average assets minus average tangible equity to determine the institution's insurance premium. The FDIC may change assessment rates or revise its risk-based assessment system if deemed necessary to maintain an adequate reserve ratio for the DIF. The Dodd-Frank Act required that the minimum reserve ratio for the DIF increase from 1.15% to 1.35% by September 30, 2020. Under the FDIA, the FDIC may terminate deposit insurance if it determines that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. The decrease in FDIC assessments in 2019 and 2020 were primarily the result of the receipt of Small Bank Assessment Credits from the FDIC. On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent. Because the reserve ratio exceeded 1.35 percent, two deposit insurance assessment changes occurred under the FDIC regulations. Surcharges on large banks, $10 billion or more in consolidated assets, ended; and small banks, less than $10 billion in consolidated assets, were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ration from 1.15 percent to 1.35 percent.

In addition, all FDIC-insured institutions were required to pay annual assessments to fund interest payments on bonds issued by the Financing Corporation ("FICO") through March 29, 2019. The FICO is a mixed-ownership government corporation that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation.

 

***The Volcker Rule***

The Dodd-Frank Act amended the BHC Act to prohibit depository institutions and their affiliates from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with hedge funds or private equity funds, known as the Volcker Rule. The Volcker Rule, which became effective in July 2015 and the implementing regulations of which were amended in 2019 and were subject to further amendment in 2020, does not significantly impact the operations of the Company and its subsidiaries, as we do not have any engagement in the businesses prohibited by the Volcker Rule.

***Community Reinvestment Act***

The CRA of 1977, as amended, requires depository institutions to help meet the credit needs of their market areas, including low-and moderate-income individuals and communities, consistent with safe and sound banking practices. Federal banking regulators periodically examine depository institutions and assign ratings based on CRA compliance. A rating of less than satisfactory may restrict certain operating activities, delay or deny certain transactions, or result in an institution losing its financial holding company status. The Bank received a rating of satisfactory in its most recent CRA examination.

In December 2021, the OCC issued a proposal to rescind its June 2020 CRA rulemaking and replace it with previous rules jointly adopted by the OCC, the Federal Reserve Board, the FDIC, and the former Office of Thrift Supervision in 1995. Last year, although the OCC and the FDIC published a joint notice of proposed rulemaking, the FDIC did not ultimately join with the OCC in the June 2020 CRA rulemaking. In an interagency statement, the OCC, Federal Reserve Board, and the FDIC indicated their commitment to work together on developing a joint notice of proposed CRA rulemaking to ensure a modernized framework exists for insured depository institutions to "help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods." As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.

 ***Incentive Compensation***

Federal regulatory agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance is based on the key principles that a banking organization's incentive compensation arrangements should (1) provide incentives that do not encourage risk taking beyond the organization's ability to effectively identify and manage risks, (2) be compatible with effective internal controls and risk management, and (3) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.

Federal banking regulators periodically examine the incentive compensation arrangements of banking organizations and incorporate any deficiencies in the organization's supervisory ratings, which can affect certain operating activities. The FRB may initiate enforcement actions if the organization's incentive compensation arrangements or related risk management, control, or governance processes pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. The scope and content of the U.S. banking regulators' policies on incentive compensation are continuing to develop. It cannot be determined at this time if or when a final rule will be adopted or if compliance with such a final rule will adversely affect the ability of the Company and its subsidiaries to hire, retain and motivate their key employees.

***Anti-Tying Restrictions***

The Bank and its affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by the Company.

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***Consumer Protection and Privacy***

We are subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include the Mortgage Reform and Anti-Predatory Lending Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collections Act, the Right to Financial Privacy Act, the Fair Housing Act, and various state law counterparts. These laws and regulations contain extensive customer privacy protection provisions that limit the ability of financial institutions to disclose non-public information about consumers to non-affiliated third parties and require financial institutions to disclose certain policies to consumers.

The Consumer Financial Protection Bureau ("CFPB") is a federal agency with broad authority to implement, examine, and enforce compliance with federal consumer protection laws that relate to credit card, deposit, mortgage, and other consumer financial products and services. The CFPB may enforce actions to prevent and remedy unfair, deceptive, or abusive acts and practices related to consumer financial products and services. The agency has authority to impose new disclosure requirements for any consumer financial product or service. The CFPB may impose a civil penalty or injunction against an entity in violation of federal consumer financial laws. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. As a bank with less than $10 billion in assets, the Bank is subject to these federal consumer financial laws, but continues to be examined for compliance by the Federal Reserve, its primary federal banking regulator, not the CFPB.

***Cybersecurity***

In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

In November 2021, the federal banking agencies issued a final rule that requires banking organizations to notify their primary regulator within 36 hours of becoming aware of a "computer-security incident" that rises to the level of a "notification incident." The rule also requires specific and immediate notifications by bank service providers that become aware of similar incidents.

The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties. Our employees particpate in regular company-sponsored training about cyber risks and cybersecurity. We feel this is part of a sound cyber risk management program, but can be no assurance that we will not be the victim of a cyberattack.

***Bank Secrecy Act and Anti-Money Laundering***

The Bank is subject to the requirements of the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act ("USA PATRIOT Act") of 2001. The USA PATRIOT Act broadened existing anti-money laundering legislation by imposing new compliance and due diligence obligations focused on detecting and reporting money laundering transactions. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of our customers. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

The Anti-Money Laundering Act of 2020 ("AMLA"), which amends the Bank Secrecy Act of 1970 ("BSA"), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

**O***ffice of Foreign Assets Control Regulation***

The U.S. Department of the Treasury's ("Treasury") Office of Foreign Assets Control ("OFAC") administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals, and others. OFAC publishes lists of specially designated targets and countries. We are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them, and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal, financial, and reputational consequences, including causing applicable bank regulatory authorities to not approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

***Sarbanes-Oxley Act***

The Sarbanes-Oxley Act ("SOX Act") of 2002 addresses a broad range of corporate governance, auditing and accounting, executive compensation, and disclosure requirements for public companies and their directors and officers. The SOX Act requires our Chief Executive Officer and Chief Financial Officer to certify the accuracy of certain information included in our quarterly and annual reports. The rules require these officers to certify that they are responsible for establishing, maintaining, and regularly evaluating the effectiveness of our financial reporting and disclosure controls and procedures; that they have made certain disclosures to the auditors and to the Audit Committee of the Board of Directors about our controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. Section 404 of the SOX Act requires management to undertake an assessment of the adequacy and effectiveness of our internal controls over financial reporting and requires our auditors to attest to and report on the effectiveness of these controls.

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**Available Information**

We file annual, quarterly, and current reports; proxy statements; and other information with the SEC. You may read and copy any document we file with the SEC at the SEC's website at www.sec.gov that contains reports, proxy and information statements, and other information that issuers file electronically with the SEC. We maintain a website at www.firstcommunitybank.com that makes available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information, including any amendments to those reports as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. You are encouraged to access these reports and other information about our business from the Investor Relations section of our website. The Investor Relations section contains information about our Board of Directors, executive officers, and corporate governance policies and principles, which include the charters of the standing committees of the Board of Directors, the Insider Trading Policy, and the Standards of Conduct governing our directors, officers, and employees. Information on our website is not incorporated by reference in this report.

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| **Item 1A.** | **Risk Factors.** |

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The risk factors described below 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, or incorporated by reference, in this report 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, the following risk factors are not intended to be an exhaustive list of all risks we face.

**Risks Related to the Economic Environment**

***The COVID-19 pandemic and government responses to the pandemic have adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.***

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability.

The extent to which the COVID-19 pandemic will continue to negatively affect the Company's business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on the Company's employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken, or that may yet be taken, by governmental authorities and other third parties in response to the pandemic, and public acceptance of any vaccines for COVID-19.

Although financial markets have largely rebounded from the significant declines that occurred earlier in the pandemic and global economic conditions showed signs of improvement, many of the circumstances that arose or became more pronounced after the onset of the pandemic persist, including:

● employees contracting COVID-19;

● reductions in our operating effectiveness as our employees work from home;

● increased cybersecurity risk due to the continuation of the work-from-home measures;

● a work stoppage, forced quarantine, or other interruption of our business;

● unavailability of key personnel necessary to conduct our business activities;

● effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;

● sustained closures of our branch lobbies or the offices of our customers;

● declines in demand for loans and other banking services and products;

● reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic;

● unprecedented volatility in United States financial markets;

● volatile performance of our investment securities portfolio;

● declines in value of collateral for loans, including real estate collateral;

● declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and

● declines in demand resulting from businesses being deemed to be "non-essential" by governments in the markets we serve, and from "non-essential" and "essential" businesses suffering adverse effects from reduced levels of economic activity in our markets.

These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.

The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee's ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.

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***The current economic environment poses significant challenges.***

Our financial performance is generally highly dependent on the business environment in the markets we operate in and of the U.S. as a whole, which includes the ability of borrowers to pay interest, repay principal on outstanding loans, the value of collateral securing those loans, and demand for loans and other products and services we offer. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, and investor or business confidence; limitations on the availability, or increases, in the cost of credit and capital; increases in inflation, interest rates, or employee costs; high unemployment; natural disasters; or a combination of these or other factors.

In recent years, economic growth and business activity across a wide range of industries has been slow and uneven. There are continuing concerns related to the level of U.S. government debt, fiscal actions that may be taken to address that debt, energy price volatility, global economic conditions, and significant uncertainty with respect to domestic and international fiscal and monetary policy. Economic and inflationary pressure on consumers and uncertainty about continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits. There can be no assurance that these conditions will improve or that these conditions will not worsen. Such conditions could adversely affect the credit quality of the Bank's loans and the Company's business, financial condition, and results of operations.

***As a participating lender in the SBA Paycheck Protection Program ("PPP"), the Company and the Bank are subject to additional risks of litigation from the Bank's customers or other parties regarding the Bank's processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.***

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals applied for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP. 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.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both customers and non-customers who approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company's reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Additionally, if a borrower under the PPP loan fails to qualify for loan forgiveness, the Bank is at the heightened risk of holding the loan at an unfavorable interest rate as compared to loans to customers that the Bank would have otherwise extended credit.

**Regulatory Risks**

***We operate in a highly regulated industry subject to examination, supervision, enforcement, and other legal actions by various federal and state governmental authorities, laws, and judicial and administrative decisions.***

Congress and federal regulatory agencies continually review banking laws, regulations, and policies. Changes to these statutes, regulations, and regulatory policies, including changes in the interpretation or implementation, may cause substantial and unpredictable effects, require additional costs, limit the types of financial services and products offered, or allow non-banks to offer competing financial services and products. Failure to follow laws, regulations, and policies may result in sanctions by regulatory agencies and civil money penalties, which could have material adverse effects on our reputation, business, financial condition, and results of operations. We have policies and procedures designed to prevent violations; however, there is no assurance that violations will not occur. Existing and future laws, regulations, and policies yet to be adopted may make compliance more difficult or expensive; restrict our ability to originate, broker, or sell loans; further limit or restrict commissions, interest, and other charges earned on loans we originate or sell; and adversely affect our business, financial condition, and results of operations.

***The Bank's ability to pay dividends is subject to regulatory limitations that may affect the Company's ability to pay expenses and dividends to shareholders.***

The Company is a legal entity that is separate and distinct from its subsidiaries. The Company depends on the Bank and its other subsidiaries for cash, liquidity, and the payment of dividends to the Company to pay operating expenses and dividends to stockholders. There is no assurance that the Bank will have the capacity to pay dividends to the Company in the future or that the Company will not require dividends from the Bank to satisfy obligations. The Bank's dividend payment is governed by various statutes and regulations. For additional information, see "Payment of Dividends" in Item 1 of this report. The Company may not be able to service obligations as they become due if the Bank is unable to pay dividends sufficient to satisfy the Company's obligations, including our common stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company's financial condition, results of operations, cash flows, and prospects.

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**Market and Interest Rate Risk**

***We are subject to interest rate risk.***

Interest rate risk results principally 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. Our earnings and cash flows are largely dependent upon net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly, the Federal Reserve. Changes in monetary policy and interest rates could influence the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings. Further, such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income and earnings could be adversely affected. Conversely, if interest rates received on loans and other investments fall more quickly than interest rates paid on deposits and other borrowings, our net interest income and earnings could also be adversely affected.

***Uncertainty relating to LIBOR calculation process and the phasing out of LIBOR may adversely affect us.***

The London Interbank Offered Rate ("LIBOR") and certain other "benchmarks" are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences, which cannot be predicted. On July 27, 2017, the United Kingdom's Financial Conduct Authority ("FCA"), which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. Since then, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. On November 30, 2020, ICE Benchmark Administration Limited ("IBA"), the benchmark administrator for the U.S. Dollar ("USD") LIBOR announced a proposal to extend the publication of the most commonly used USD LIBOR settings until June 30, 2023.

The administrator for LIBOR announced on March 5, 2021 that it will permanently cease to publish most LIBOR settings beginning on January 1, 2022 and cease to publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings on July 1, 2023. Accordingly, the FCA has stated that is does not intend to persuade or compel banks to submit to LIBOR after such respective dates. Until such time, however, FCA panel banks have agreed to continue to support LIBOR.

Banking regulators issued guidance strongly encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. There can be no assurances on which benchmark rate(s) may replace LIBOR or how LIBOR will be determined for purposes of financial instruments that are currently referencing LIBOR when it ceases to exist. The discontinuance of LIBOR may result in uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing documents, may adversely affect the value of our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates and may also increase operational and other risks to the Company and the industry.

In addition, the implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate the expected cost.

***Changes in the fair value of our investment securities may reduce stockholders' equity and net income.***

A decline in the estimated fair value of the investment portfolio may result in a decline in stockholders' equity, book value per common share, and tangible book value per common share. Unrealized losses are recorded even though the securities are not sold or held for sale. If a debt security is never sold and no credit impairment exists, the decrease is recovered at the security's maturity. Equity securities have no stated maturity; therefore, declines in fair value may or may not be recovered over time. We conduct quarterly reviews of our securities portfolio to determine if unrealized losses are temporary or other than temporary. No assurance can be given that we will not need to recognize other-than-temporary impairment ("OTTI") charges in the future. Additional OTTI charges may materially affect our financial condition and earnings. For additional information, see Note 1, "Basis of Presentation and Accounting Policies," and Note 3, "Debt Securities," to the Consolidated Financial Statements in Part II, Item 8 of this report.

***The repeal of the federal prohibitions on payment of interest on demand deposits could increase our interest expense.***

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. We do not know what interest rates other institutions may offer as market interest rates begin to increase. Our interest expense will increase and net interest margin will decrease if we offer interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition, and results of operations.

**Credit Risk** 

***Our accounting estimates and risk management processes rely on analytical and forecasting models.***

The processes we use to estimate probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset/liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models used for determining probable loan losses are inadequate, the allowance for credit losses may not be sufficient to cover actual loan losses and an increase in the loan loss provision could materially and adversely affect our operating results. Federal regulatory agencies regularly review our loans and allowance for credit losses as an integral part of the examination process. There is no assurance that we will not, or that regulators will not require us to, increase our allowance in future periods, which could materially and adversely affect our earnings and profitability. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon the sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition, and results of operations. For additional information, see "Fair Value Measurements" and "Allowance for Credit Losses" in the "Critical Accounting Policies" section in Part II, Item 7 and Note 1, "Basis of Presentation and Accounting Policies," to the Consolidated Financial Statements in Part II, Item 8 of this report.

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***We are subject to credit risk associated with the financial condition of other financial institutions***

Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Financial institutions are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies, and other institutional clients. Our ability to engage in routine funding transactions could be adversely affected by the failure, actions, and commercial soundness of other financial institutions. These transactions may expose us to credit risk if our counterparty or client defaults on their contractual obligation. Our credit risk may increase if the collateral we hold cannot be realized or liquidated at prices sufficient to recover the full amount of the loan or derivative exposure due to us. In the event of default, we may be required to provide collateral to secure the obligation to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, we may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty. Losses from routine funding transactions could have a material adverse effect on our financial condition and results of operations.

 ***Our commercial loan portfolio may expose us to increased credit risk.***

Commercial business and real estate loans generally have a higher risk of loss because loan balances are typically larger than residential real estate and consumer loans and repayment is usually dependent on cash flows from the borrower's business or the property securing the loan. Our commercial business loans are primarily made to small business and middle market customers. As of December 31, 2021, commercial business and real estate loans totaled $1.03 billion, or 47.64%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $5.37 million and largest outstanding commercial real estate loan was $15.94 million. Commercial construction loans generally have a higher risk of loss due to the assumptions used to estimate the value of property at completion and the cost of the project, including interest. If the assumptions and estimates are inaccurate, the value of completed property may fall below the related loan amount. As of December 31, 2021, commercial construction loans totaled $65.81 million, or 3.04% of our total loan portfolio. As of the same date, our largest outstanding commercial construction loan was $3.46 million. Losses from our commercial loan portfolio could have a material adverse effect on our financial condition and results of operations.

**Operational Risks**

***We face strong competition from other financial institutions, financial service companies, and organizations that offer services similar to our offerings.***

Our larger competitors may have substantially greater resources and lending limits, name recognition, and market presence that allow them to offer products and services that we do not offer and to price loans and deposits more aggressively than we do. The expansion of non-bank competitors, which may have fewer regulatory constraints and lower cost structures, has intensified competitive pressures on core deposit generation and retention. For additional information, see "Competition" in Item 1 of this report. Our success depends, in part, on our ability to attract and retain customers by adapting our products and services to evolving customer needs and industry and economic conditions. Failure to perform in any of these areas could weaken our competitive position, reduce deposits and loan originations, and adversely affect our financial condition, results of operations, cash flows, and prospects.

***Liquidity risk could impair our ability to fund operations.***

Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or other sources could have a materially adverse effect on our liquidity. Company specific factors such as a decline in our credit rating, an increase in the cost of capital from financial capital markets, a decrease in business activity due to adverse regulatory action or other company specific event, or a decrease in depositor or investor confidence may impair our access to funding with acceptable terms adequate to finance our activities. General factors related to the financial services industry such as a severe disruption in financial markets, a decrease in industry expectations, or a decrease in business activity due to political or environmental events may impair our access to liquidity.

***We may require additional capital in the future that may not be available when needed.***

We may need to raise additional capital to strengthen our capital position, increase our liquidity, satisfy obligations, or pursue growth objectives. Our ability to raise additional capital depends on current conditions in capital markets, which are outside our control, and our financial performance. Certain economic conditions and declining market confidence may increase our cost of funds and limit our access to customary sources of capital, such as borrowings with other financial institutions, repurchase agreements, and availability under the FRB's Discount Window. Events that limit access to capital markets and the inability to obtain capital may have a materially adverse effect on our business, financial condition, results of operations, and market value of common stock. We cannot provide any assurance that additional capital will be available, on acceptable terms or at all, in the future.

***We may experience future goodwill impairment.***

We test goodwill for impairment annually, or more frequently if events or circumstances indicate there may be impairment, using either a quantitative or qualitative assessment. If we determine that the carrying amount of a reporting unit is greater than its fair value, a goodwill impairment charge is recognized for the difference, but limited to the amount of goodwill allocated to that reporting unit. Unfavorable or uncertain economic and market conditions may trigger additional impairment charges that may cause an adverse effect on our earnings and financial position. For additional information, see "Goodwill and Other Intangible Assets" in the "Critical Accounting Policies" section in Part II, Item 7 and Note 1, "Basis of Presentation and Accounting Policies," and Note 8, "Goodwill and Other Intangible Assets," to the Consolidated Financial Statements in Part II, Item 8 of this report.

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***We may be required to pay higher FDIC insurance premiums or special assessments.***

Our deposits are insured up to applicable limits by the DIF of the FDIC and we are subject to deposit insurance assessments to maintain the DIF. For additional information, see "Deposit Insurance and Assessments" in Item 1 of this report. We are unable to predict future insurance assessment rates; however, deterioration in our risk-based capital ratios or adjustments to base assessment rates may result in higher insurance premiums or special assessments. The deterioration of banking and economic conditions and financial institution failures deplete the FDIC's DIF and reduce the ratio of reserves to insured deposits. If the DIF is unable to meet funding requirements, increases in deposit insurance premium rates or special assessments may be required. Future assessments, increases, or required prepayments related to FDIC insurance premiums may negatively affect our financial condition and results of operations.

***We continue to encounter technological change and are subject to information security risks associated with technology.***

The financial services industry continues to experience rapid technological change with the introduction of new, and increasingly complex, technology-driven products and services. The effective use of technology increases operational efficiency that enables financial service institutions to reduce costs. Our future success depends, in large part, on our ability to provide products and services that satisfactorily meet the financial needs of our customers, as well as to realize additional efficiencies in our operations. We may fail to use technology-driven products and services effectively to better serve our customers and increase operational efficiency or sufficiently invest in technology solutions and upgrades to ensure systems are operating properly. Further, many of our competitors have substantially greater resources to invest in technology, which may adversely affect our ability to compete.

We rely on electronic communications and information systems, including those provided by third-party vendors, to conduct our business operations. Our security risks increase as our reliance on technology increases; consequently, the expectation to safeguard information by monitoring systems for potential failures, disruptions, and breakdowns has also increased. Risks associated with technology include security breaches, operational failures and service interruptions, and reputational damages. These risks also apply to our third-party service providers. Our third-party vendors include large entities with significant market presence in their respective fields; therefore, their services could be difficult to replace quickly if there are operational failures or service interruptions.

We rely on our technology-driven systems to conduct daily business and accounting operations that include the collection, processing, and retention of confidential financial and client information. We may be vulnerable to security breaches, such as employee error, cyberattacks, and viruses, beyond our control. In addition to security breaches, programming errors, vandalism, natural disasters, terrorist attacks, and third-party vendor disruptions may cause operational failures and service interruptions to our communication and information systems. Further, our systems may be temporarily disrupted during implementation or upgrade. Security breaches and service interruptions related to our information systems could damage our reputation, which may cause us to lose customers, subject us to regulatory scrutiny, or expose us to civil litigation and financial liability.

Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information, or to introduce viruses or other malware through "Trojan horse" programs to our information systems and/or our customers' computers. Though we endeavor to mitigate these threats through product improvements, use of encryption and authentication technology, and customer and employee education, such cyberattacks against us or our third-party service providers remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cybercrime are complex and continue to evolve. More generally, publicized information about security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.

While we have not experienced a significant compromise, significant data loss, or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyberattacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third-party vendors, including as a result of cyberattacks, could (1) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of our customers; (2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (3) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose us to civil litigation, governmental fines and possible financial liability; (4) require significant management attention and resources to remedy the damages that result; or (5) harm our reputation or cause a decrease in the number of customers who choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

***We may be subject to claims and litigation pertaining to intellectual property.***

Banking and other financial services companies, such as the Company, rely on technology companies to provide information technology products and services necessary to support the Company's day-to-day operations. Technology companies often enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of the Company's vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions often seek injunctions and substantial damages.

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Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company may have to engage in protracted litigation. Such litigation is often expensive, time consuming, disruptive to the Company's operations, and distracting to management. If the Company is found to have infringed on one or more patents or other intellectual property rights, it may be required to pay substantial damages or royalties to a third party. In certain cases, the Company may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company's operating expenses. If legal matters related to intellectual property claims were resolved against the Company or settled, the Company could be required to make payments in amounts that could have a material adverse effect on its business, financial condition, and results of operations.

**Risks Related to Our Common Stock** 

***The market price of our common stock may be volatile.***

Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired. Our common stock price may fluctuate significantly due to a variety of factors that include the following:

● actual or expected variations in quarterly results of operations;

● recommendations by securities analysts;

● operating and stock price performance of comparable companies, as deemed by investors;

● news reports relating to trends, concerns, and other issues in the financial services industry;

● perceptions in the marketplace about our Company or competitors;

● new technology used, or services offered, by competitors;

● significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our Company or competitors;

● failure to integrate acquisitions or realize expected benefits from acquisitions;

● changes in government regulations; and

● geopolitical conditions, such as acts or threats of terrorism or military action.

General market fluctuations; industry factors; political conditions; and general economic conditions and events, such as economic slowdowns, recessions, interest rate changes, or credit loss trends, could also cause our common stock price to decrease regardless of operating results.

***The trading volume in our common stock is less than that of other larger financial services companies.***

Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock or the expectation of these sales could cause our stock price to fall.

***We may not continue to pay dividends on our common stock in the future.***

Our common stockholders are only entitled to receive dividends when declared by our Board of Directors from funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so, and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. As a financial holding company, the Company's ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve about capital adequacy and dividends. For additional information, see "Payment of Dividends" in Item 1 of this report.

**General Risks**

***We are subject to environmental liability risk associated with lending activities.***

A significant portion of our loan portfolio is secured by real property. In the ordinary course of business, we foreclose on and take title to properties that secure certain loans. Hazardous or toxic substances could be found on properties we own. If substances are present, we may be liable for remediation costs, personal injury claims, and property damage and our ability to use or sell the property would be limited. We have policies and procedures in place that require environmental reviews before initiating foreclosure actions on real property; however, these reviews may not detect all potential environmental hazards. Environmental laws that require us to incur substantial remediation costs, which could materially reduce the affected property's value, and other liabilities associated with environmental hazards could have a material adverse effect on our financial condition and results of operations.

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***Potential acquisitions may disrupt our business and dilute stockholder value.***

We may seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or the potential for improved profitability through financial management, economies of scale, or expanded services. Risks inherent in acquiring other banks, businesses, and banking branches may include the following:

● potential exposure to unknown or contingent liabilities of the target company;

● exposure to potential asset quality issues of the target company;

● difficulty, expense, and delays of integrating the operations and personnel of the target company;

● potential disruption to our business;

● potential diversion of management's time and attention;

● loss of key employees and customers of the target company;

● difficulty in estimating the value of the target company;

● potential changes in banking or tax laws or regulations that may affect the target company;

● unexpected costs and delays;

● the target company's performance does not meet our growth and profitability expectations;

● limited experience in new markets or product areas;

● increased time, expenses, and personnel as a result of strain on our infrastructure, staff, internal controls, and management; and

● potential short-term decreases in profitability.

We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve goodwill, a purchase premium over the acquired company's book and market values; therefore, dilution of our tangible book value and net income per common share may occur. If we are unable to realize revenue increases, cost savings, geographic or product presence growth, or other projected benefits from acquisitions, our financial condition and results of operations may be adversely affected.

***Attractive acquisition opportunities may not be available in the future.***

We expect banking and financial companies, which may have significantly greater resources, to compete for the acquisition of financial service businesses. This competition could increase the price of potential acquisitions that we believe are attractive. If we fail to receive proper regulatory approval, we will not be able to consummate an acquisition. Our regulators consider our capital, liquidity, profitability, regulatory compliance, level of goodwill and intangible assets, and other factors when considering acquisition and expansion proposals. Future acquisitions may be dilutive to our earnings and equity per share of our common stock.

***We may lose members of our management team and have difficulty attracting skilled personnel.***

Our success depends, in large part, on our ability to attract and retain key employees. Competition for the best people can be intense. The unexpected loss of key personnel could have a material adverse impact on our business due to the loss of certain skills, market knowledge, and industry experience and the difficulty of promptly finding qualified replacement personnel. Certain existing and proposed regulatory guidance on compensation may also negatively affect our ability to retain and attract skilled personnel.

***Our internal controls and procedures may fail or be circumvented.***

We review our internal controls over financial reporting quarterly and enhance controls in response to these assessments, internal and external audit, and regulatory recommendations. A control system, no matter how well conceived and operated, includes certain assumptions and can only provide reasonable assurance that the objectives of the control system are met. These controls may be circumvented by individual acts, collusion, or management override. Any failure or circumvention related to our controls and procedures or failure to follow regulations related to controls and procedures could have a material adverse effect on our business, reputation, results of operations, and financial condition.

***We are subject to environmental, social and governance ("ESG") risks that could adversely affect the Company's results of operations, reputation, and the market price of its securities.***

The Company is subject to a variety of risks arising from ESG matters. ESG matters include environmental and climate change activism, diversity activism, and racial and social justice issues. Such matters may involve our personnel, customers, or third parties with whom we do business. Risks arising from ESG matters may adversely affect, among other things, the Company's reputation and the market price of our securities. Further, the Company may be exposed to negative publicity based on the identity and activities of our shareholders, those to whom we lend and with which we otherwise do business, and the public's view of the approach and requirements of our state or federal regulators, customers, and business partners with respect to ESG matters. Any such negative publicity could arise through traditional media or electronic social media platforms. The Company's relationships and reputation with its existing and prospective customers and third parties with which we do business could be damaged if we were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on the Company's ability to attract and retain customers and employees and could have a negative impact on the market price for our securities.

Certain investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations with respect to ESG matters when making investment decisions. Certain investors are beginning to incorporate the business risks of ESG regulation and activism and the adequacy of companies' responses to these into their investment decisions. These shifts in investing priorities may result in adverse effects on the market price of the Company's securities.

The U.S. Congress, state legislatures and federal and state regulatory agencies, as well as certain stock exchanges, continue to propose numerous initiatives related to ESG matters. Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks' risk management practices, accounting practices, and credit portfolio concentrations management practices. The lack of empirical data surrounding the credit and other financial risks posed by ESG regulation and activism render it impossible to predict how specifically ESG matters may impact the Company's financial condition and results of operations.

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Federal and state banking regulators and supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as a tool to effect ESG activism, both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of ESG matters. Given that ESG matters could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from activism, the Company faces increasing focus on our resilience to ESG risks. Ongoing legislative or regulatory uncertainties and changes regarding ESG risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

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| **Item 1B.** | **Unresolved Staff Comments.** |

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None.

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| **Item 2.** | **Properties.** |

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We own our corporate headquarters located at One Community Place, Bluefield, Virginia. As of December 31, 2021, the Bank provided financial services through a network of 49 branch locations in West Virginia (17 branches), Virginia (23 branches), North Carolina (7 branches), and Tennessee (2 branches). We own 48 of those branches and lease the remaining branch. As of December 31, 2021, there were no mortgages or liens against any properties. We believe that our properties are suitable and adequate to serve as financial services facilities. A list of all branch and ATM locations is available on our website at www.firstcommunitybank.com. Information contained on our website is not part of this report. For additional information, see Note 7, "Premises, Equipment, and Leases," to the Consolidated Financial Statements in Part II, Item 8 of this report.

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| **Item 3.** | **Legal Proceedings.** |

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

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| **Item 4.** | **Mine Safety Disclosures.** |

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None.

**PART II**

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| **Item 5.** | **Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.** |

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**Market Information and Holders**

Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC. As of February 23, 2022, there were 2,789 record holders and 16,806,360 outstanding shares of our common stock.

**Purchases of Equity Securities**

We repurchased 949,386 shares of our common stock in 2021, 734,653 shares of our common stock in 2020, and 487,400 shares in 2019.

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

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|  | **Total Number of Shares Purchased** | **Average Price Paid per Share** | **Total Number of Shares Purchased as Part of a Publicly Announced Plan** | **Maximum Number of Shares that May Yet be Purchased Under the Plan(1)** |
| October 1-31, 2021 | 60100 | $32.32 | 1942637 | 1613214 |
| November 1-30, 2021 | 88000 | 34.25 | 3014050 | 1525214 |
| December 1-31, 2021 | 74600 | 33.47 | 2496609 | 1450614 |
| Total | 222700 | $33.47 | 7453296 |  |

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(1) In the first quarter of 2020, the Company exhausted its 6,600,000 shares repurchase authorization. As a result of the uncertainty associated with the COVID-19 pandemic; the Company elected not to repurchase shares during the remainder of 2020. In February 2021, the Board of Directors approved a new repurchase plan to repurchase 2,400,000 shares. The timing, price, and quantity of purchases under the repurchase plan are at the discretion of management and the repurchase plan may be discontinued, suspended or restarted at any time depending on the facts and circumstances.

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**Stock Performance Graph**

The following graph, compiled by S&P Global Market Intelligence ("S&P Global"), compares the cumulative total shareholder return on our common stock for the five years ended December 31, 2021, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and S&P Global's Asset Size & Regional Peer Group. The Asset Size & Regional Peer Group consists of 42 bank holding companies with total assets between $1 billion and $5 billion that are located in the Southeast Region of the United States and traded on NASDAQ, the OTC Bulletin Board, and pink sheets. The cumulative returns assume that $100 was originally invested on December 31, 2016, and that all dividends are reinvested.

![perfgraph.jpg](perfgraph.jpg)

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|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2016** | **2017** | **2018** | **2019** | **2020** | **2021** |
| First Community Bankshares, Inc. | 100.00 | 97.65 | 111.50 | 113.09 | 82.36 | 132.20 |
| S&P 500 Index | 100.00 | 121.83 | 116.49 | 153.17 | 181.35 | 233.41 |
| NASDAQ Composite Index | 100.00 | 129.64 | 125.96 | 172.18 | 249.51 | 304.85 |
| S&P Global Asset & Regional Peer Group(1) | 100.00 | 112.06 | 104.51 | 127.31 | 100.28 | 146.01 |

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(1) Includes the following institutions: American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; Auburn National Bancorporation, Inc.; BankFirst Capital Corporation; C&F Financial Corporation; Capital City Bank Group, Inc.; CapStar Financial Holdings, Inc.; Carter Bankshares, Inc.; Chesapeake Financial Shares, Inc.; Citizens Bancorp Investment, Inc.; Citizens Holding Company; CoastalSouth Bancshares, Inc.; Colony Bankcorp, Inc.; Eagle Financial Services, Inc.; F&M Bank Corp.; FineMark Holdings, Inc.; First Community Bankshares, Inc.; First Community Corporation; First National Corporation; FVCBankcorp, Inc.; GrandSouth Bancorporation; Heritage Southeast Bancorporation, Inc.; HomeTrust Bancshares, Inc.; MainStreet Bancshares, Inc.; MetroCity Bankshares, Inc.; Morris State Bancshares, Inc.; Mountain Commerce Bankcorp, Inc.; MVB Financial Corp.; National Bankshares, Inc.; Old Point Financial Corporation; Peoples Bancorp of North Carolina, Inc.; Primis Financial Corp. ; Professional Holding Corp.; SmartFinancial, Inc.; South Atlantic Bancshares, Inc.; Southern First Bancshares, Inc.; Southern States Bancshares, Inc.; Summit Financial Group, Inc.; UB Bankcorp; United Bancorporation of Alabama, Inc.; USCB Financial Holdings, Inc.; Virginia National Bankshares Corporation.<br>

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| **Item 6.** | **Reserved** |

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| **Item 7.**  | **Management's Discussion and Analysis of Financial Condition and Results of Operations.** |

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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 31<sup>st</sup>, 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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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  |
|  | **2021** |  | **2020** |  | **2019** |  |
| *(Amounts in thousands)* |  | |  | |  | |
| Net interest income, GAAP | $102474 |  | $108572 |  | $89453 |  |
| FTE adjustment(1) | 439 |  | 647 |  | 848 |  |
| Net interest income, FTE | $102913 |  | $109219 |  | $90301 |  |
| Net interest margin, GAAP | 3.65 | % | 4.27 | % | 4.54 | % |
| FTE adjustment(1) | 0.02 | % | 0.02 | % | 0.05 | % |
| Net interest margin, FTE | 3.67 | % | 4.29 | % | 4.59 | % |

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(1) FTE basis of 21%.

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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:

● Annual net income for 2021 of $51.17 million, or $2.94 per diluted common share, was an increase of $15.24 million over 2020 and represents a 45.54% increase in diluted earnings per share compared to 2020. A reversal of $8.47 million in the allowance for credit losses in 2021 accounts for a large portion of the increase in net income. The decreases in credit loss provisioning are primarily due to significantly improved economic forecasts and GDP growth 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

● Return on average assets increased to 1.63% compared to 1.24% for 2020.

● Return on average common equity increased to 11.96% compared to 8.54% for 2020.

● Non-interest income increased 14.98% to $34.30 million, over last year. The increase is largely attributable to an increase in other service charges due to the more vibrant state of local economies with increased customer activity compared with last year.

● Net charge-offs for 2021 were $2.96 million, or 0.14% of average loans, compared to net charge-offs of $4.91 million, or 0.23% of average loans, for 2020. Non-performing loans to total loans remained a very low 1.03%.

● Book value per share at December 31, 2021, was $25.34, an increase of $1.26 from year-end 2020.

● The Company repurchased 949,386 common shares, or 5.62% of outstanding, for $28.88 million.

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***Results of Operations***

*Net Income*

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

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  | **2021 Compared to 2020** | **2021 Compared to 2020** | **2020 Compared to 2019** | **2020 Compared to 2019** |
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Increase** | **%** | **Increase** | **%** |
| *(Amounts in thousands, except per share data)* | **2021** | **2020** | **2019** | **(Decrease)** | **Change** | **(Decrease)** | **Change** |
| Net income | $51168 | $35926 | $38802 | $15242 | 42.43% | $(2876) | (7.41)% |
| Basic earnings per common share | 2.95 | 2.02 | 2.47 | 0.93 | 46.04% | (0.45) | (18.22)% |
| Diluted earnings per common share | 2.94 | 2.02 | 2.46 | 0.92 | 45.54% | (0.44) | (17.88)% |
| Return on average assets | 1.63% | 1.24% | 1.75% | 0.39% | 31.45% | (0.51)% | (29.14)% |
| Return on average common equity | 11.96% | 8.54% | 11.54% | 3.42% | 40.05% | (3.00)% | (26.00)% |

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*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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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** | **2021** | **2021** | **2020** | **2020** | **2020** | **2019** | **2019** | **2019** |
| *(Amounts in thousands)* | **Average Balance** | **Interest(1)** | **Average Yield/ Rate(1)** | **Average Balance** | **Interest(1)** | **Average Yield/ Rate(1)** | **Average Balance** | **Interest(1)** | **Average Yield/ Rate(1)** |
| **Assets** |  |  |  |  |  |  |  |  |  |
| Earning assets |  |  |  |  |  |  |  |  |  |
| Loans(2)(3) | $2153099 | $102996 | 4.78% | $2142637 | $110619 | 5.16% | $1722419 | $88990 | 5.17% |
| Securities available for sale | 81049 | 2008 | 2.48% | 105005 | 3259 | 3.10% | 126732 | 4334 | 3.42% |
| Securities held to maturity |  |  |  |  |  |  | 3045 | 45 | 1.48% |
| Interest-bearing deposits | 570040 | 745 | 0.13% | 296495 | 805 | 0.27% | 116119 | 2447 | 2.10% |
| Total earning assets | 2804188 | $105749 | 3.77% | 2544137 | $114683 | 4.51% | 1968315 | $95816 | 4.87% |
| Other assets | 330640 |  |  | 348150 |  |  | 248926 |  |  |
| Total assets | $3134828 |  |  | $2892287 |  |  | $2217241 |  |  |
| **Liabilities and stockholders' equity** |  |  |  |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |  |  |  |
| Demand deposits | $646999 | $127 | 0.02% | $556279 | $311 | 0.06% | $453824 | $281 | 0.06% |
| Savings deposits | 816845 | 281 | 0.03% | 711831 | 902 | 0.13% | 504081 | 823 | 0.16% |
| Time deposits | 387249 | 2427 | 0.63% | 456755 | 4247 | 0.93% | 418450 | 4288 | 1.02% |
| Total interest-bearing deposits | 1851093 | 2835 | 0.15% | 1724865 | 5460 | 0.32% | 1376355 | 5392 | 0.39% |
| Borrowings |  |  |  |  |  |  |  |  |  |
| Retail repurchase agreements | 1194 | 1 | 0.07% | 1145 | 3 | 0.28% | 2471 | 4 | 0.14% |
| Wholesale repurchase agreements |  |  |  |  |  |  | 3767 | 119 | 3.17% |
| FHLB advances and other borrowings |  |  | —% | 36 | 1 | 2.23% |  |  |  |
| Total borrowings | 1194 | 1 | 0.07% | 1181 | 4 | 0.34% | 6238 | 123 | 1.96% |
| Total interest-bearing liabilities | 1852287 | 2836 | 0.15% | 1726046 | 5464 | 0.32% | 1382593 | 5515 | 0.40% |
| Noninterest-bearing demand deposits | 816638 |  |  | 707623 |  |  | 468774 |  |  |
| Other liabilities | 38151 |  |  | 37826 |  |  | 29736 |  |  |
| Total liabilities | 2707076 |  |  | 2471495 |  |  | 1881103 |  |  |
| Stockholders' equity | 427752 |  |  | 420792 |  |  | 336138 |  |  |
| Total liabilities and equity | $3134828 |  |  | $2892287 |  |  | $2217241 |  |  |
| Net interest income, FTE(1) |  | $102913 |  |  | $109219 |  |  | $90301 |  |
| Net interest rate spread, FTE(1) |  |  | 3.62% |  |  | 4.19% |  |  | 4.47% |
| Net interest margin, FTE(1) |  |  | 3.67% |  |  | 4.29% |  |  | 4.59% |

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

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

(3) Interest on loans include non-cash purchase accounting accretion of $4.66 million in 2021 , $7.99 million in 2020 , and $3.23 million in 2019 .

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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:

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended** | **Year Ended** | **Year Ended** | **Year Ended** | **Year Ended** | **Year Ended** | **Year Ended** | **Year Ended** |
|  | **December 31, 2021 Compared to 2020** | **December 31, 2021 Compared to 2020** | **December 31, 2021 Compared to 2020** | **December 31, 2021 Compared to 2020** | **December 31, 2020 Compared to 2019** | **December 31, 2020 Compared to 2019** | **December 31, 2020 Compared to 2019** | **December 31, 2020 Compared to 2019** |
|  | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** |
|  |  |  | **Rate/** |  |  |  | **Rate/** |  |
| *(Amounts in thousands)* | **Volume** | **Rate** | **Volume** | **Total** | **Volume** | **Rate** | **Volume** | **Total** |
| Interest earned on(1): |  |  |  |  |  |  |  |  |
| Loans | $540 | $(8123) | $(40) | $(7623) | $21736 | $(42) | $(65) | $21629 |
| Securities available for sale | (744) | (657) | 150 | (1251) | (743) | (101) | (231) | (1075) |
| Securities held to maturity |  |  |  |  | (45) |  |  | (45) |
| Interest-bearing deposits with other banks | 715 | (388) | (387) | (60) | 3791 | (534) | (4899) | (1642) |
| Total interest-earning assets | 511 | (9168) | (277) | (8934) | 24739 | (677) | (5195) | 18867 |
| Interest paid on(1): |  |  |  |  |  |  |  |  |
| Demand deposits | 51 | (202) | (33) | (184) | 63 | (7) | (26) | 30 |
| Savings deposits | 133 | (657) | (97) | (621) | 338 | (46) | (213) | 79 |
| Time deposits | (646) | (1384) | 210 | (1820) | 391 | (97) | (335) | (41) |
| Retail repurchase agreements |  | (1) | (1) | (2) | (2) | 1 |  | (1) |
| Wholesale repurchase agreements |  |  |  |  | (119) |  |  | (119) |
| FHLB advances and other borrowings | (1) |  |  | (1) |  |  | 1 | 1 |
| Total interest-bearing liabilities | (463) | (2244) | 79 | (2628) | 671 | (149) | (573) | (51) |
| Change in net interest income(1) | $974 | $(6924) | $(356) | $(6306) | $24068 | $(528) | $(4622) | $18918 |

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

*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:

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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  | **2021 Compared to 2020** | **2021 Compared to 2020** |  | **2020 Compared to 2019** | **2020 Compared to 2019** |  |
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Increase** | **%** |  | **Increase** | **%** |  |
|  | **2021** | **2020** | **2019** | **(Decrease)** | **Change** |  | **(Decrease)** | **Change** |  |
| *(Amounts in thousands)* |  |  |  |  |  | |  |  | |
| Wealth management | $3853 | $3417 | $3423 | $436 | 12.76 | % | $(6) | -0.18 | % |
| Service charges on deposits | 13446 | 13019 | 14594 | 427 | 3.28 | % | (1575) | -10.79 | % |
| Other service charges and fees | 12422 | 10333 | 8281 | 2089 | 20.22 | % | 2052 | 24.78 | % |
| Net (loss) gain on sale of securities |  | 385 | (43) | (385) | -100.00 | % | 428 | -995.35 | % |
| Net FDIC indemnification asset amortization | (1226) | (1690) | (2377) | 464 | -27.46 | % | 687 | -28.90 | % |
| Litigation income |  |  | 6995 |  |  |  | (6995) | -100.00 | % |
| Other operating income | 5806 | 4369 | 2804 | 1437 | 32.89 | % | 1565 | 55.81 | % |
| Total noninterest income | $34301 | $29833 | $33677 | $4468 | 14.98 | % | $(3844) | -11.41 | % |

---

*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:

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| | | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  |  |  | **2021 Compared to 2020** | **2021 Compared to 2020** |  | **2020 Compared to 2019** | **2020 Compared to 2019** |  |
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  | **Increase** | **%** |  | **Increase** | **%** |  |
|  | **2021** |  | **2020** |  | **2019** |  | **(Decrease)** | **Change** |  | **(Decrease)** | **Change** |  |
| *(Amounts in thousands)* |  | |  | |  | |  |  | |  |  | |
| Salaries and employee benefits | $44239 |  | $44005 |  | $37148 |  | $234 | 0.53 | % | $6857 | 18.46 | % |
| Occupancy expense | 4913 |  | 5043 |  | 4334 |  | (130) | -2.58 | % | 709 | 16.36 | % |
| Furniture and equipment expense | 5627 |  | 5558 |  | 4457 |  | 69 | 1.24 | % | 1101 | 24.70 | % |
| Service fees | 6324 |  | 5665 |  | 4448 |  | 659 | 11.63 | % | 1217 | 27.36 | % |
| Advertising and public relations | 2076 |  | 1951 |  | 2310 |  | 125 | 6.41 | % | (359) | -15.54 | % |
| Professional fees | 1524 |  | 1224 |  | 1698 |  | 300 | 24.51 | % | (474) | -27.92 | % |
| Amortization of intangibles | 1446 |  | 1450 |  | 997 |  | (4) | -0.28 | % | 453 | 45.44 | % |
| FDIC premiums and assessments | 832 |  | 426 |  | 318 |  | 406 | 95.31 | % | 108 | 33.96 | % |
| Merger, acquisition, and divestiture expense |  |  | 1893 |  | 2124 |  | (1893) | -100.00 | % | (231) | -10.88 | % |
| Other operating expense | 11737 |  | 12410 |  | 11929 |  | (673) | -5.42 | % | 481 | 4.03 | % |
| Total noninterest expense | $78718 |  | $79625 |  | $69763 |  | $(907) | -1.14 | % | $9862 | 14.14 | % |

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*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:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31,**  | **December 31,**  | **December 31,**  | **December 31,**  |
|  | **2021** | **2021** | **2020** | **2020** |
|  | **Amortized** | **Fair** | **Amortized** | **Fair** |
| *(Amounts in thousands)* | **Cost** | **Value** | **Cost** | **Value** |
| **Available for Sale** |  |  |  |  |
| U.S. Agency securities | $469 | $466 | $555 | $551 |
| U.S. Treasury securities |  |  |  |  |
| Municipal securities | 28596 | 28794 | 43950 | 44459 |
| Corporate Notes | 9935 | 9919 |  |  |
| Mortgage-backed Agency securities | 37273 | 37113 | 37453 | 38348 |
| Total securities available for sale | $76273 | $76292 | $81958 | $83358 |
| Fair value to amortized cost |  | 100.02% |  | 101.71% |

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** |  |
|  | **2021** | **2021** |  | **2020** | **2020** |  |
| *(Amounts in years)* | | | | | | |
| Average life |  | 4.74 |  |  | 5.02 |  |
| Average duration |  | 2.99 |  |  | 1.84 |  |

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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.

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **U.S. Agency Securities** | **Municipal Securities** | **Corporate Notes** | **Total** | **Tax Equivalent Purchase Yield(1)** |
| Amortized cost maturity: |  |  |  |  |  |
| One year or less | $— | $735 | $7382 | $8117 | 0.46% |
| After one year through five years |  | 19425 | 2553 | 21978 | 3.35% |
| After five years through ten years | 469 | 8436 |  | 8905 | 3.17% |
| After ten years |  |  |  |  |  |
| Amortized cost | $469 | $28596 | $9935 | 39000 |  |
| Mortgage-backed securities |  |  |  | 37273 | 1.61% |
| Total amortized cost |  |  |  | $76273 |  |
| Tax equivalent purchase yield(1) | 2.07% | 3.57% | 0.25% | 2.71% |  |
| Average contractual maturity (in years) | 5.07 | 3.75 | 0.63 | 2.97 |  |
| Fair value maturity: |  |  |  |  |  |
| One year or less | $— | $736 | $7372 | $8108 |  |
| After one year through five years |  | 19537 | 2547 | 22084 |  |
| After five years through ten years | 466 | 8521 |  | 8987 |  |
| After ten years |  |  |  |  |  |
| Fair value | $466 | $28794 | $9919 | 39179 |  |
| Mortgage-backed securities |  |  |  | 37113 |  |
| Total fair value |  |  |  | $76292 |  |

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(1) FTE basis of 21%

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:

● Commercial loans – This segment consists of loans to small and mid-size industrial, commercial, and service companies. Commercial real estate projects represent a variety of sectors of the commercial real estate market, including single family and apartment lessors, commercial real estate lessors, and hotel/motel operators. Commercial loan underwriting guidelines require that comprehensive reviews and independent evaluations be performed on credits exceeding predefined size limits. Updates to these loan reviews are done periodically or annually depending on the size of the loan relationship.

● Consumer real estate loans – This segment consists of largely of loans to individuals within our market footprint for home equity loans and lines of credit and for the purpose of financing residential properties. Residential real estate loan underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

● Consumer and other loans – This segment consists of loans to individuals within our market footprint that include, but are not limited to, automobile, credit cards, personal lines of credit, boats, mobile homes, and other consumer goods. Consumer loan underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

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:

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| | | |
|:---|:---|:---|
|  | **December 31,** | **December 31,** |
| *(Amounts in thousands)* | **2021** | **2020** |
| Loans held for investment |  |  |
| Commercial loans |  |  |
| Construction, development, and other land | $65806 | $44674 |
| Commercial and industrial | 133630 | 173024 |
| Multi-family residential | 100402 | 115161 |
| Single family non-owner occupied | 198778 | 187783 |
| Non-farm, non-residential | 707506 | 734793 |
| Agricultural | 9341 | 9749 |
| Farmland | 15013 | 19761 |
| Total commercial loans | 1230476 | 1284945 |
| Consumer real estate loans |  |  |
| Home equity lines | 79857 | 96526 |
| Single family owner occupied | 703864 | 661054 |
| Owner occupied construction | 16910 | 17720 |
| Total consumer real estate loans | 800631 | 775300 |
| Consumer and other loans |  |  |
| Consumer loans | 129794 | 120373 |
| Other | 4668 | 6014 |
| Total consumer and other loans | 134462 | 126387 |
| Total loans | 2165569 | 2186632 |
| Less: allowance for loan losses | 27858 | 26182 |
| Total loans held for investment, net of unearned income and allowance | $2137711 | $2160450 |

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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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| | | |
|:---|:---|:---|
|  | **December 31,** | **December 31,** |
|  | **2021** | **2020** |
| Commercial loans |  |  |
| Construction, development, and other land | 3.04% | 2.04% |
| Commercial and industrial | 6.17% | 7.91% |
| Multi-family residential | 4.64% | 5.27% |
| Single family non-owner occupied | 9.18% | 8.59% |
| Non-farm, non-residential | 32.67% | 33.60% |
| Agricultural | 0.43% | 0.45% |
| Farmland | 0.69% | 0.91% |
| Total commercial loans | 56.82% | 58.77% |
| Consumer real estate loans |  |  |
| Home equity lines | 3.69% | 4.41% |
| Single family owner occupied | 32.50% | 30.23% |
| Owner occupied construction | 0.78% | 0.81% |
| Total consumer real estate loans | 36.97% | 35.45% |
| Consumer and other loans |  |  |
| Consumer loans | 5.99% | 5.50% |
| Other | 0.22% | 0.28% |
| Total consumer and other loans | 6.21% | 5.78% |
| Total loans | 100.00% | 100.00% |

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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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| | | | | | |
|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Due in One Year or Less**  | **Due After One Year Through Five Years**  | **Due After Five Through Fifteen Years** | **Due After Fifteen Years** | **Total**  |
| Commercial loans |  |  |  |  |  |
| Construction, development, and other land(1) | $2982 | $10518 | $26078 | $26228 | $65806 |
| Commercial and industrial | 19205 | 78649 | 35322 | 454 | 133630 |
| Multi-family residential | 1303 | 19957 | 55405 | 23737 | 100402 |
| Single family non-owner occupied | 5560 | 18126 | 75297 | 99795 | 198778 |
| Non-farm, non-residential | 51274 | 122883 | 289248 | 244101 | 707506 |
| Agricultural | 994 | 6702 | 1645 |  | 9341 |
| Farmland | 1650 | 4262 | 6373 | 2728 | 15013 |
| Total commercial loans | 82968 | 261097 | 489368 | 397043 | 1230476 |
| Consumer real estate loans |  |  |  |  |  |
| Home equity lines | 7028 | 14162 | 47833 | 10834 | 79857 |
| Single family owner occupied | 3209 | 20605 | 182836 | 497214 | 703864 |
| Owner occupied construction |  | 669 | 1844 | 14397 | 16910 |
| Total consumer real estate loans | 10237 | 35436 | 232513 | 522445 | 800631 |
| Consumer and other loans |  |  |  |  |  |
| Consumer loans | 6830 | 89574 | 31493 | 1897 | 129794 |
| Other | 4668 |  |  |  | 4668 |
| Total consumer and other loans | 11498 | 89574 | 31493 | 1897 | 134462 |
| Total loans | $104703 | $386107 | $753374 | $921385 | $2165569 |
| **Rate sensitivities** |  |  |  |  |  |
| Predetermined interest rate | $75595 | $339582 | $501013 | $540826 | $1457016 |
| Floating or adjustable interest rate | 29108 | 46525 | 252360 | 380560 | 708553 |
| Total loans | $104703 | $386107 | $753373 | $921386 | $2165569 |

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(1) Construction loans with maturities due after five years include construction to permanent loans that have not yet converted to principal and interest payments.

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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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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** |
| *(Amounts in thousands)* | **2021** | **2020** | **2019** | **2018** | **2017** |
| **Nonperforming** |  |  |  |  |  |
| Nonaccrual loans | $20768 | $22003 | $16357 | $19905 | $19339 |
| Accruing loans past due 90 days or more | 87 | 295 | 144 | 58 | 1 |
| TDRs(1) | 1367 | 187 | 720 | 161 | 120 |
| Total non-covered nonperforming loans | 22222 | 22485 | 17221 | 20124 | 19460 |
| OREO | 1015 | 2083 | 3969 | 3838 | 2514 |
| Total nonperforming assets | $23237 | $24568 | $21190 | $23962 | $21974 |
| **Additional Information** |  |  |  |  |  |
| Total TDRs(2) | 8652 | 10248 | 6575 | 6427 | 7734 |
| Gross interest income that would have been recorded under the original terms of restructured and nonperforming loans | 1129 | 1586 | 1068 | 1175 | 1217 |
| Actual interest income recorded on restructured and nonperforming loans | 422 | 473 | 277 | 264 | 222 |
| **Total ratios** |  |  |  |  |  |
| Nonperforming loans to total loans | 1.03% | 1.03% | 0.81% | 1.13% | 1.07% |
| Nonperforming assets to total assets | 0.73% | 0.82% | 0.76% | 1.07% | 0.92% |
| Allowance for credit losses to nonperforming loans | 125.36% | 116.44% | 106.99% | 90.77% | 99.05% |
| Allowance for credit losses to total loans | 1.29% | 1.20% | 0.87% | 1.03% | 1.06% |

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(1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.80 million , $1.18 million, $95 thousand, $898 thousand, and $169 thousand for the five years ended December 31, 2021 . They are included in nonaccrual loans.

(2) Total accruing TDRs exclude nonaccrual TDRs of $2.52 million, $1.81 million, $2.34 million, $2.58 million, and $1.93 million for the five years ended December 31, 2021 . They are included in nonaccrual loans.

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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:

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| | | |
|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** | **2020** |
| *(Amounts in thousands)* | | |
| Beginning balance | $2083 | $3969 |
| Additions | 1283 | 695 |
| Disposals | (2063) | (2139) |
| Valuation adjustments | (288) | (442) |
| Ending balance | $1015 | $2083 |

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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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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** |
|  | **2021** | **2021** | **2021** | **2020** | **2020** | **2020** | **2019** | **2019** | **2019** |
| *(Amounts in thousands)* | **Net (charge-offs) recoveries** | **Average Loans** | **Ratio of Net (charge-offs) recoveries to average loans** | **Net (charge-offs) recoveries** | **Average Loans** | **Ratio of Net (charge-offs) recoveries to average loans** | **Net (charge-offs) recoveries** | **Average Loans** | **Ratio of Net (charge-offs) recoveries to average loans** |
| Commercial loans |  |  |  |  |  |  |  |  |  |
| Construction, development, and other land | $(108) | $47285 | -0.23% | $(83) | $44493 | -0.19% | $(207) | $61434 | -0.34% |
| Commercial and industrial | (639) | 173206 | -0.37% | (679) | 188475 | -0.36% | (450) | 118080 | -0.38% |
| Multi-family residential | 302 | 102175 | 0.30% | (256) | 109611 | -0.23% | (307) | 89534 | -0.34% |
| Single family non-owner occupied | 58 | 185752 | 0.03% | (405) | 173431 | -0.23% | (52) | 127745 | -0.04% |
| Non-farm, non-residential | (696) | 724444 | -0.10% | (555) | 746127 | -0.07% | (469) | 610858 | -0.08% |
| Agricultural | (157) | 9441 | -1.66% | (149) | 10683 | -1.39% | (51) | 9367 | -0.54% |
| Farmland | (56) | 16799 | -0.33% | (12) | 22422 | -0.05% | (139) | 14797 | -0.94% |
| Total commercial loans | (1296) | 1259102 | -0.10% | (2139) | 1295242 | -0.17% | (1675) | 1031815 | -0.16% |
| Consumer real estate loans |  |  |  |  |  |  |  |  |  |
| Home equity lines | 397 | 82861 | 0.48% | 117 | 103289 | 0.11% | (73) | 95511 | -0.08% |
| Single family owner occupied | 132 | 657741 | 0.02% | (271) | 610532 | -0.04% | (271) | 487489 | -0.06% |
| Owner occupied construction |  | 27529 | 0.00% |  | 20918 | 0.00% | 42 | 17019 | 0.25% |
| Total consumer real estate loans | 529 | 768131 | 0.07% | (154) | 734739 | 0.07% | (302) | 600019 | -0.05% |
| Consumer and other loans |  |  |  |  |  |  |  |  |  |
| Consumer loans | (2193) | 125866 | -1.74% | (2618) | 118504 | -2.21% | (1436) | 89413 | -1.61% |
| Total | $(2960) | $2153099 | 0.14% | $(4911) | $2148485 | -0.23% | $(3413) | $1721247 | -0.20% |

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

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** | **December 31,** |
|  | **2021** | **2021** | **2020** | **2020** |
| *(Amounts in thousands)* | **Balance** | **Percentage of Total Allowance** | **Balance** | **Percentage of Total Allowance** |
| Commercial loans |  |  |  |  |
| Construction, development, and other land | $759 | 2.72% | $528 | 2.02% |
| Commercial and industrial | 1480 | 5.31% | 1024 | 3.91% |
| Multi-family residential | 863 | 3.10% | 1417 | 5.41% |
| Single family non-owner occupied | 2586 | 9.28% | 1861 | 7.11% |
| Non-farm, non-residential | 8877 | 31.87% | 9417 | 35.97% |
| Agricultural | 5 | 0.02% | 218 | 0.83% |
| Farmland | 205 | 0.74% | 196 | 0.75% |
| Consumer real estate loans |  |  |  |  |
| Home equity lines | 677 | 2.43% | 799 | 3.05% |
| Single family owner occupied | 9172 | 32.92% | 7957 | 30.39% |
| Owner occupied construction | 123 | 0.44% | 195 | 0.74% |
| Consumer and other loans |  |  |  |  |
| Consumer loans | 3111 | 11.17% | 2570 | 9.82% |
| Total allowance, excluding PCI loans | $27858 | 100.00% | $26182 | 100.00% |

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 *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:

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| | | |
|:---|:---|:---|
| *(Amounts in thousands)* |  | |
| Three months or less | $6057.0 |  |
| Over three through six months | 2268.0 |  |
| Over six through twelve months | 8861.0 |  |
| Over twelve months | 9952.0 |  |
|  | $27138.0 |  |

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*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:

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  |
|  | **2021** | **2021** | **2021** |  | **2020** | **2020** | **2020** |  |
|  | **Amount** |  | **Rate** |  | **Amount** |  | **Rate** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Year-end balance | $1536 |  | 0.07 | % | $964 |  | 0.23 | % |
| Average annual balance | 1194 |  | 0.07 | % | 1181 |  | 0.34 | % |
| Maximum month-end balance | 1536 |  |  |  | 2348 |  |  |  |

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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:

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** |  | **2020** | **2019** |
| *(Amounts in thousands)* |  | |  |  |
| Net cash provided by operating activities | $48215 |  | $45844 | $56655 |
| Net cash provided by investing activities | 35350 |  | 17798 | 171377 |
| Net cash provided by (used) in financing activities | 137313 |  | 175910 | (87896) |
| Net increase in cash and cash equivalents | 220878 |  | 239552 | 140136 |
| Cash and cash equivalents, beginning balance | 456561 |  | 217009 | 76873 |
| Cash and cash equivalents, ending balance | $677439 |  | $456561 | $217009 |

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*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:

● 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")

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

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| | | | |
|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** |
|  | **2021** | **2020** | **2019** |
| **The Company** |  |  |  |
| Common equity Tier 1 ratio | 14.39% | 14.28% | 14.31% |
| Tier 1 risk-based capital ratio | 14.39% | 14.28% | 14.31% |
| Total risk-based capital ratio | 15.65% | 15.53% | 15.21% |
| Tier 1 leverage ratio | 9.65% | 10.24% | 14.01% |
| **The Bank** |  |  |  |
| Common equity Tier 1 ratio | 13.37% | 13.57% | 12.87% |
| Tier 1 risk-based capital ratio | 13.37% | 13.57% | 12.87% |
| Total risk-based capital ratio | 14.62% | 14.82% | 13.78% |
| Tier 1 leverage ratio | 8.94% | 9.73% | 12.61% |

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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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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  |
|  | **2021** | **2021** |  | **2020** | **2020** |  |
| **Increase (Decrease) in Basis Points** | **Change in Net Interest Income** | **Percent Change** |  | **Change in Net Interest Income** | **Percent Change** |  |
| *(Dollars in thousands)* |  |  | |  |  | |
| 300 | $14960 | 14.9 | % | $8429 | 8.5 | % |
| 200 | 10303 | 10.3 | % | 5912 | 6.0 | % |
| 100 | 5502 | 5.5 | % | 3130 | 3.2 | % |
| (100) | (6285) | -6.3 | % | (4749) | -4.8 | % |

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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.

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| | |
|:---|:---|
| **Item 7A.** | **Quantitative and Qualitative Disclosures about Market Risk.** |

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The information required in this item is incorporated by reference to "Market Risk and Interest Rate Sensitivity" in Item 7 of this report.

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| | |
|:---|:---|
| **Item 8.**  | **Financial Statements and Supplementary Data.** |

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| |
|:---|
| **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
| **INDEX** |

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| | |
|:---|:---|
|  | <u>Page</u> |
| [Consolidated Balance Sheets as of December 31, 2021 and 2020](#balsheet) | [41](#balsheet) |
| [Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019](#incstmnt) | [42](#incstmnt) |
| [Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020, and 2019](#compinc) | [43](#compinc) |
| [Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2021, 2020, and 2019](#equity) | [44](#equity) |
| [Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019](#cashflows) | [45](#cashflows) |
| [Notes to Consolidated Financial Statements](#notes) | [46](#notes) |
| [Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements](#auditrep) | [96](#auditrep) |
| [Management's Assessment of Internal Control Over Financial Reporting](#mgntassessment) | [98](#mgntassessment) |
| [Report of Independent Registered Public Accounting Firm on Management's Assessment of Internal Control Over Financial Reporting](#auditreport2) | [99](#auditreport2) |

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**FIRST COMMUNITY BANKSHARES, INC.**

**CONSOLIDATED BALANCE SHEETS**

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| | | |
|:---|:---|:---|
|  | **December 31,** | **December 31,** |
| *(Amounts in thousands, except share and per share data)* | **2021** | **2020** |
| **Assets** |  |  |
| Cash and due from banks | $47067 | $58404 |
| Federal funds sold | 627036 | 395756 |
| Interest-bearing deposits in banks | 3336 | 2401 |
| Total cash and cash equivalents | 677439 | 456561 |
| Debt securities available for sale | 76292 | 83358 |
| Loans held for investment, net of unearned income | 2165569 | 2186632 |
| Allowance for credit/loan losses (1) | (27858) | (26182) |
| Loans held for investment, net | 2137711 | 2160450 |
| Premises and equipment, net | 52284 | 57700 |
| Other real estate owned | 1015 | 2083 |
| Interest receivable | 7900 | 9052 |
| Goodwill | 129565 | 129565 |
| Other intangible assets | 5622 | 7069 |
| Other assets | 106691 | 105298 |
| Total assets | $3194519 | $3011136 |
| **Liabilities** |  |  |
| Noninterest-bearing deposits | $842783 | $772795 |
| Interest-bearing deposits | 1886608 | 1773452 |
| Total deposits | 2729391 | 2546247 |
| Securities sold under agreements to repurchase | 1536 | 964 |
| Interest, taxes, and other liabilities | 35817 | 37195 |
| Total liabilities | 2766744 | 2584406 |
| **Stockholders' equity** |  |  |
| Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding |  |  |
| Common stock, $1 par value; 50,000,000 shares authorized; 23,971,347 issued and 16,878,220 outstanding at December 31, 2021; 24,319,076 shares issued and 17,722,507 shares outstanding at December 31, 2020 | 16878 | 17723 |
| Additional paid-in capital | 147619 | 173345 |
| Retained earnings | 264824 | 237585 |
| Accumulated other comprehensive loss | (1546) | (1923) |
| Total stockholders' equity | 427775 | 426730 |
| Total liabilities and stockholders' equity | $3194519 | $3011136 |

---

(1) Effective January 1, 2021, the Company adopted the current expected credit loss methodology ("CECL"), prior to January 1, 2021, the Company utilized the incurred credit loss methodology.<br>

*See Notes to Consolidated Financial Statements.*<br>

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**FIRST COMMUNITY BANKSHARES, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

---

| | | | |
|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
| *(Amounts in thousands, except share and per share data)* | **2021** | **2020** | **2019** |
| **Interest income** |  |  |  |
| Interest and fees on loans | $102832 | $110447 | $88805 |
| Interest on securities -- taxable | 700 | 1004 | 1219 |
| Interest on securities -- tax-exempt | 1037 | 1785 | 2497 |
| Interest on deposits in banks | 741 | 800 | 2447 |
| Total interest income | 105310 | 114036 | 94968 |
| **Interest expense** |  |  |  |
| Interest on deposits | 2835 | 5460 | 5392 |
| Interest on short-term borrowings | 1 | 4 | 123 |
| Total interest expense | 2836 | 5464 | 5515 |
| **Net interest income** | 102474 | 108572 | 89453 |
| (Recovery of) provision for credit/loan losses | (8471) | 12668 | 3571 |
| **Net interest income after provision for loan losses** | 110945 | 95904 | 85882 |
| **Noninterest income** |  |  |  |
| Wealth management | 3853 | 3417 | 3423 |
| Service charges on deposits | 13446 | 13019 | 14594 |
| Other service charges and fees | 12422 | 10333 | 8281 |
| Net gain (loss) on sale of securities |  | 385 | (43) |
| Litigation settlements |  |  | 6995 |
| Other operating income | 4580 | 2679 | 427 |
| Total noninterest income | 34301 | 29833 | 33677 |
| **Noninterest expense** |  |  |  |
| Salaries and employee benefits | 44239 | 44005 | 37148 |
| Occupancy expense | 4913 | 5043 | 4334 |
| Furniture and equipment expense | 5627 | 5558 | 4457 |
| Service fees | 6324 | 5665 | 4448 |
| Advertising and public relations | 2076 | 1951 | 2310 |
| Professional fees | 1524 | 1224 | 1698 |
| Amortization of intangibles | 1446 | 1450 | 997 |
| FDIC premiums and assessments | 832 | 426 | 318 |
| Merger expense |  | 1893 | 2124 |
| Other operating expense | 11737 | 12410 | 11929 |
| Total noninterest expense | 78718 | 79625 | 69763 |
| Income before income taxes | 66528 | 46112 | 49796 |
| Income tax expense | 15360 | 10186 | 10994 |
| **Net income** | $51168 | $35926 | $38802 |
| Earnings per common share |  |  |  |
| Basic | $2.95 | $2.02 | $2.47 |
| Diluted | 2.94 | 2.02 | 2.46 |
| Cash dividends per common share | 1.04 | 1.00 | 0.96 |
| Weighted average shares outstanding |  |  |  |
| Basic | 17335615 | 17781748 | 15690812 |
| Diluted | 17402936 | 17815380 | 15756093 |

---

*See Notes to Consolidated Financial Statements.*<br>

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**FIRST COMMUNITY BANKSHARES, INC**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

---

| | | | |
|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** | **2020** | **2019** |
| *(Amounts in thousands)* |  |  |  |
| **Net income** | $51168 | $35926 | $38802 |
| **Other comprehensive income, before tax** |  |  |  |
| Available-for-sale debt securities: |  |  |  |
| Change in net unrealized (losses) gains on securities without other-than-temporary impairment | (1381) | 689 | 1414 |
| Reclassification adjustment for net (gain) loss recognized in net income |  | (385) | 43 |
| Net unrealized (losses) gains on available-for-sale debt securities | (1381) | 304 | 1457 |
| Employee benefit plans: |  |  |  |
| Net actuarial gain (loss) | 1472 | (1217) | (1570) |
| Plan change |  |  | (262) |
| Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income | 386 | 386 | 278 |
| Net unrealized gains (losses) on employee benefit plans | 1858 | (831) | (1554) |
| **Other comprehensive income (loss), before tax** | 477 | (527) | (97) |
| Income tax (expense) benefit | (100) | 110 | 20 |
| **Other comprehensive income (loss), net of tax** | 377 | (417) | (77) |
| **Total comprehensive income** | $51545 | $35509 | $38725 |

---

*See Notes to Consolidated Financial Statements.*<br>

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**FIRST COMMUNITY BANKSHARES, INC.**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  | **Accumulated** |  |
|  |  |  | **Additional** |  | **Other** |  |
|  | **Preferred**  | **Common**  | **Paid-in** | **Retained** | **Comprehensive** |  |
| *(Amounts in thousands, except share and per share data)* | **Stock**  | **Stock**  | **Capital** | **Earnings** | **Income (Loss)** | **Total**  |
| Balance January 1, 2019 | $— | $16007 | $122486 | $195793 | $(1429) | $332857 |
| Net income |  |  |  | 38802 |  | 38802 |
| Other comprehensive loss |  |  |  |  | (77) | (77) |
| Common dividends declared -- $0.96 per share |  |  |  | (15060) |  | (15060) |
| Equity-based compensation expense |  | 44 | 1437 |  |  | 1481 |
| Common stock options exercised -- 8,459 shares |  | 8 | 128 |  |  | 136 |
| Issuance of stock to 401(k) plan -- 12,407 shares |  | 12 | 399 |  |  | 411 |
| Repurchase of common shares -- 487,400 shares at $33.57 per share |  | (487) | (15875) |  |  | (16362) |
| Highlands Bankshares, Inc. acquisition |  | 2793 | 83838 |  |  | 86631 |
| Balance December 31, 2019 | $— | $18377 | $192413 | $219535 | $(1506) | $428819 |
| Balance January 1, 2020 | $— | $18377 | $192413 | $219535 | $(1506) | $428819 |
| Net income |  |  |  | 35926 |  | 35926 |
| Other comprehensive loss |  |  |  |  | (417) | (417) |
| Common dividends declared -- $1.00 per share |  |  |  | (17876) |  | (17876) |
| Equity-based compensation expense |  | 58 | 1585 |  |  | 1643 |
| Issuance of stock to 401(k) plan -- 22,693 shares |  | 23 | 484 |  |  | 507 |
| Repurchase of common shares -- 734,653 shares at $29.77 per share |  | (735) | (21137) |  |  | (21872) |
| Balance December 31, 2020 | $— | $17723 | $173345 | $237585 | $(1923) | $426730 |
| Balance January 1, 2021 | $— | $17723 | $173345 | $237585 | $(1923) | $426730 |
| Cumulative effect of adoption of ASU 2016-13 |  |  |  | (5870) |  | (5870) |
| Net income |  |  |  | 51168 |  | 51168 |
| Other comprehensive income |  |  |  |  | 377 | 377 |
| Common dividends declared -- $1.04 per share |  |  |  | (18059) |  | (18059) |
| Equity-based compensation expense |  | 48 | 1233 |  |  | 1281 |
| Common stock options exercised -- 39,995 shares |  | 40 | 498 |  |  | 538 |
| Issuance of stock to 401(k) plan --16,716 shares |  | 16 | 476 |  |  | 492 |
| Repurchase of common shares -- 949,386 shares at $30.42 per share |  | (949) | (27933) |  |  | (28882) |
| Balance December 31, 2021 | $— | $16878 | $147619 | $264824 | $(1546) | $427775 |

---

*See Notes to Consolidated Financial Statements.*<br>

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**FIRST COMMUNITY BANKSHARES, INC.**

**Consolidated Statements of Cash Flows**

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| | | | |
|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
| *(Amounts in thousands)* | **2021** | **2020** | **2019** |
| **Operating activities** |  |  |  |
| Net income | $51168 | $35926 | $38802 |
| Adjustments to reconcile net income to net cash provided by operating activities |  |  |  |
| (Recovery of) provision for credit/loan losses | (8471) | 12668 | 3571 |
| Depreciation and amortization of premises and equipment | 4471 | 4458 | 3448 |
| Amortization of premiums on investments, net | 454 | 1468 | 195 |
| Amortization of FDIC indemnification asset, net |  | 1690 | 2377 |
| Amortization of intangible assets | 1446 | 1450 | 997 |
| Goodwill impairment |  |  |  |
| Accretion on acquired loans | (4656) | (7991) | (3231) |
| Equity-based compensation expense | 1281 | 1643 | 1481 |
| Issuance of common stock to 401(k) plan | 492 | 507 | 411 |
| Loss (gain) on sale of premises and equipment, net | 499 | (59) | (75) |
| Provision expense and loss on sale of other real estate owned | 231 | 319 | 1253 |
| (Gain) loss on sale of securities |  | (385) | 43 |
| Writedowns of property, plant & equipment |  | 812 | 380 |
| Decrease (increase) in other operating activities | 1300 | (6662) | 7003 |
| Net cash provided by operating activities | 48215 | 45844 | 56655 |
| **Investing activities** |  |  |  |
| Proceeds from sale of available for sale securities | 370 | 51027 | 13898 |
| Proceeds from maturities, prepayments, and calls of securities available for sale | 27256 | 44676 | 32863 |
| Proceeds from maturities and calls of securities held to maturity |  |  | 25000 |
| Payments to acquire securities available for sale | (22394) | (10267) | (8255) |
| Proceeds from repayments (Originations of) loans, net | 27467 | (69259) | 85233 |
| Redemption of (payments for) FHLB stock, net | 1012 | (12) | 129 |
| Cash proceeds from mergers, acquisitions, and divestitures, net |  |  | 25863 |
| Payments to the FDIC |  | (30) | (152) |
| Proceeds from sale of premises and equipment | 2616 | 2861 | 1955 |
| Payments to acquire premises and equipment | (3038) | (3195) | (8411) |
| Proceeds from sale of other real estate owned | 2061 | 1997 | 3254 |
| Net cash provided by investing activities | 35350 | 17798 | 171377 |
| **Financing activities** |  |  |  |
| Increase in noninterest-bearing deposits, net | 69988 | 144927 | 12604 |
| Increase (decrease) in interest-bearing deposits, net | 113156 | 71408 | (41445) |
| Increase (decrease) securities sold under agreements to repurchase, net | 572 | (637) | (27769) |
| Repayments of FHLB and other borrowings, net |  | (40) |  |
| Proceeds from stock options exercised | 538 |  | 136 |
| Payments for repurchase of common stock | (28882) | (21872) | (16362) |
| Payments of common stock dividends | (18059) | (17876) | (15060) |
| Net cash provided by (used in) financing activities | 137313 | 175910 | (87896) |
| Net increase in cash and cash equivalents | 220878 | 239552 | 140136 |
| Cash and cash equivalents at beginning of period | 456561 | 217009 | 76873 |
| Cash and cash equivalents at end of period | $677439 | $456561 | $217009 |
| **Supplemental disclosure -- cash flow information** |  |  |  |
| Cash paid for interest | $3141 | $5500 | $5661 |
| Cash paid for income taxes | 14399 | 9074 | 8057 |
| **Supplemental transactions -- non-cash items** |  |  |  |
| Transfer of loans to other real estate | 1283 | 695 | 3160 |
| Loans originated to finance other real estate | 59 | 266 | 484 |
| Increase in accumulated other comprehensive income(loss) | 377 | (417) | (77) |
| Acquisitions: |  |  |  |
| Fair value of assets acquired |  |  | 556005 |
| Fair value of liabilities assumed |  |  | 506179 |
| Net assets acquired |  |  | 49826 |
| Common stock issued in acquisition |  |  | 86631 |

---

*See Notes to Consolidated Financial Statements.*<br>

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1. Basis of Presentation and Significant Accounting Policies**

***Basis of Presentation***

First Community Bankshares, Inc. (the "Company") is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company's principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the "Bank"), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management ("FCWM"). Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

*Principles of Consolidation*

The Company's accounting and reporting policies conform with U.S. generally accepted accounting principles ("GAAP") and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management.

The Company maintains investments in variable interest entities ("VIEs"). VIEs are legal entities in which equity investors do not have sufficient equity at risk for the entity to independently finance its activities, or as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, or do not have the obligation to absorb the expected losses of the entity or the right to receive expected residual returns of the entity. Consolidation of a VIE is required if a reporting entity is the primary beneficiary of the VIE. The Company periodically reviews its VIEs and has determined that it is not the primary beneficiary of any VIE; therefore, the assets and liabilities of these entities are not consolidated into the financial statements.

 

*Reclassification*

Certain amounts reported in prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on the Company's results of operations, financial position, or net cash flow.

*Use of Estimates*

Preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, the allowance for loan losses and goodwill and other intangible asset. For additional information, see "Critical Accounting Policies" in Part II, Item 7 of this report.

 **

***Summary of Significant Accounting Policies***

 **

*Fair Value Measurements*

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The fair value hierarchy ranks the inputs used in measuring fair value as follows:

● Level 1 – Observable, unadjusted quoted prices in active markets

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

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

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

 

*Cash and Cash Equivalents*

Cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing balances on deposit with the Federal Home Loan Bank ("FHLB"), the Federal Reserve Bank ("FRB"), and correspondent banks that are available for immediate withdrawal.

*Investment Securities*

Management classifies debt securities as held-to-maturity or available-for-sale based on the intent and ability to hold the securities to maturity. Debt securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity securities and carried at amortized cost. Debt securities not classified as held to maturity are classified as available-for-sale securities and carried at estimated fair value. Available-for-sale securities consist of securities the Company intends to hold for indefinite periods of time including securities to be used as part of the Company's asset/liability management strategy and securities that may be sold for a variety of reasons. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income ("AOCI"), net of income taxes, in stockholders' equity. Gains or losses on calls, maturities, or sales of investment securities are recorded based on the specific identification method and included in noninterest income. Premiums and discounts are amortized or accreted over the life of a security into interest income.

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

The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities. Nor does the Company record an allowance for credit losses on accrued interest receivable. As of December 31, 2021, the accrued interest receivable for investment securities available for sale was $360 thousand.

 *Other Investments*

As a condition of membership in the FHLB and the FRB, the Company is required to hold a minimum level of stock in the FHLB of Atlanta and the FRB of Richmond. These securities are carried at cost and periodically reviewed for impairment. The total investment in FHLB and FRB stock, which is included in other assets, was $9.78 million as of December 31, 2021, and $10.80 million as of December 31, 2020.

The Company owns certain long-term equity investments without readily determinable fair values, including certain tax credit limited partnerships and various limited liability companies that manage real estate investments, facilitate tax credits, and provide title insurance and other related financial services. These investments are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. The total carrying value in these investments, which is included other assets, totaled $3.85 million as of December 31, 2021, and $3.93 million as of December 31, 2020.

 

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

*Business Combinations*

The Company accounts for business combinations using the acquisition method of accounting as outlined in using Topic 805 of the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC"). Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories. Certain financial assets and liabilities are valued using discount models that apply current discount rates to streams of cash flow. Valuation methods require assumptions, which can result in alternate valuations, varying levels of goodwill or bargain purchase gains, or amortization expense or accretion income. Management must make estimates for the useful or economic lives of certain acquired assets and liabilities that are used to establish the amortization or accretion of some intangible assets and liabilities, such as core deposits. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information about the closing date fair values becomes available. Acquisition and divestiture activities are included in the Company's consolidated results of operations from the closing date of the transaction. Acquisition and divestiture related costs are recognized in noninterest expense as incurred. For additional information, see "Purchased Credit Impaired Loans" and "Intangible Assets" below.

*Loans Held for Investment*

Loans classified as held for investment are originated with the intent to hold indefinitely, until maturity, or until pay-off. Loans held for investment are carried at the principal amount outstanding, net of unearned income and any necessary write-downs to reduce individual loans to net realizable value. Interest income on performing loans is recognized as interest income at the contractual rate of interest. Loan origination fees, including loan commitment and underwriting fees, are reduced by direct costs associated with loan processing, including salaries, legal review, and appraisal fees. Net deferred loan fees are deferred and amortized over the life of the related loan or commitment period.

*Purchased Performing Loans.* Purchased loans that are deemed to be performing at the acquisition date are accounted for using the contractual cash flow method of accounting, which results in the loans being recorded at fair value with a credit discount. The fair value discount or premium is accreted or amortized, as the case may be, as an adjustment to yield over the estimated contractual lives of the loans.

*Purchased Credit Deteriorated ("PCD") Loans*. Purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company's assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition date, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the fair value and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company's acquired purchased credit impaired loans were treated as PCD loans.

*Indivually Evaluated Loans and Nonperforming Assets*. The Company maintains an active and robust problem credit identification system through its ongoing credit review function. When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company currently maintains a net book balance threshold of $500,000 for individually-evaluated loans. Generally, individually-evaluated loans other than Troubled Debt Restructurings, otherwise referred to herein as "TDRs," are on nonaccrual status. Based on the threshold above, consumer loans will generally remain in pools unless they meet the dollar threshold and foreclosure is probable. The expected credit losses on individually-evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset. The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. The accrual of interest, which is based on the daily amount of principal outstanding, on individually evaluated loans is generally continued unless the loan becomes delinquent 90 days or more.

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

Loans are considered past due when either principal or interest payments become contractually delinquent by 30 days or more. The Company's policy is to discontinue the accrual of interest, if warranted, on loans based on the payment status, evaluation of the related collateral, and the financial strength of the borrower. Loans that are 90 days or more past due are placed on nonaccrual status. Management may elect to continue the accrual of interest when the loan is well secured and in process of collection. When interest accruals are discontinued, interest accrued and not collected in the current year is reversed from income, and interest accrued and not collected from prior years is charged to the allowance for loan losses. Nonaccrual loans may be returned to accrual status when all principal and interest amounts contractually due, including past due payments, are brought current; the ability of the borrower to repay the obligation is reasonably assured; and there is generally a period of at least six months of repayment performance by the borrower in accordance with the contractual terms.

Seriously delinquent loans are evaluated for loss mitigation options. Closed-end retail loans are generally charged off against the allowance for credit losses when the loans become 120 days past due. Open-end retail loans and residential real estate secured loans are generally charged off when the loans become 180 days past due. Unsecured loans are generally charged off when the loans become 90 days past due. All other loans are charged off against the allowance for loan losses after collection attempts have been exhausted, which generally is within 120 days. Recoveries of loans previously charged off are credited to the allowance for loan losses in the period received.

Loans are considered troubled debt restructurings when the Company grants concessions, for legal or economic reasons, to borrowers experiencing financial difficulty that would not otherwise be considered. The Company generally makes concessions in interest rates, loan terms, and/or amortization terms. All TDRs $500 thousand or greater are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. TDRs under $500 thousand are subject to the reserve calculation for classified loans based primarily on the historical loss rate. At the date of modification, nonaccrual loans are classified as nonaccrual TDRs. TDRs classified as nonperforming at the date of modification 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.

Other real estate owned ("OREO") acquired through foreclosure, or other settlement, is carried at the lower of cost or fair value less estimated selling costs. The fair value is generally based on current third-party appraisals. When a property is transferred into OREO, any excess of the loan balance over the net realizable fair value is charged against the allowance for loan losses. Operating expenses, gains, and losses on the sale of OREO are included in other noninterest expense in the Company's consolidated statements of income after any fair value write-downs are recorded as valuation adjustments.

*Allowance for Credit Losses (ACL)*

We review our allowance for credit losses quarterly to determine if it is sufficient to absorb expected loan losses in the portfolio. This determination requires management to make significant estimates and assumptions. While management uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertainties may result in material changes to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated. Prior to January 1, 2021, we followed the incurred loss accounting method for reserving for loan losses which required us to estimate losses that had been incurred as of the balance sheet date. For additional information, see this note, Note 1, "Basis of Presentation," to the Consolidated Financial Statements in "*Recent Accounting Standards*".

The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments. The Company established the incremental increase in the ACL at the adoption through retained earnings and subsequent adjustments will be made through a provision for credit losses charged to earnings. Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.

A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company's estimate of its ACL involves a high degree of judgement and reflects management's best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management's current estimate of expected credit losses. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.

The Company collectively evaluates loans that share similar risk characteristics. In general, loans are segmented by loan purpose. The Company collectively evaluates loans within the following consumer and commercial segments: Loans secured by 1-4 Family Properties, Home Equity Lines of Credit ("HELOC"), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).

For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses. In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. Management reviewed the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered were further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver either using a statistical regression modeling methodology.

Management considers forward-looking information in estimated expected credit losses. The Company subscribes to a third-party service which provides summary detail of dozens of economic forecasts. Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one-year reasonable and supportable forecast period. Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management. Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending policies and procedures, 2) changes in economic conditions, 3) changes in portfolio nature and volume, 4) changes in management, 5) changes in past due loans, 6) changes in the quality of the Company's credit review system, 7) changes in the value of underlying collateral, 8) the effect of concentrations of credit, and 9) the effect of other external factors.

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

Management measures expected credit losses over the contractual term of the loans. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a TDR with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. The effects of a TDR are recorded when an individual asset is specifically identified as a reasonably-expected TDR. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower's application for a modification (i.e. the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions on substandard loans. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions on substandard loans. The Company uses a discounted cash flow methodology to calculate the effect of the concession provided to the borrower in TDR within the ACL.

The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. As of December 31, 2021, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $678 thousand. The current adjustment to the ACL for unfunded commitments would be recognized through the provision for credit losses in the Statement of Income.For additional information, see Note 6, "Allowance for Loan Losses," to the Consolidated Financial Statements in Item 8 of this report.

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

*Premises and Equipment*

Premises, equipment, and capital leases are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. Useful lives range from 5 to 10 years for furniture, fixtures, and equipment; 3 to 5 years for computer software, hardware, and data handling equipment; and 7 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 20 years and leasehold improvements are amortized over the lesser of the term of the respective leases plus the first optional renewal period, when renewal is reasonably assured, or the estimated useful lives of the improvements. The Company leases various properties within its branch network. Leases generally have initial terms of up to 10 years and most contain options to renew with increases in rent. All leases are accounted for as operating leases. Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses are reflected in current operations.

*Intangible Assets*

Intangible assets consist of goodwill, core deposit intangible assets, and other identifiable intangible assets that result from business combinations. Goodwill represents the excess of the purchase price over the fair value of net assets acquired that is allocated to the appropriate reporting unit when acquired. Core deposit intangible assets represent the future earnings potential of acquired deposit relationships that are amortized over their estimated remaining useful lives. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements that are amortized using the straight-line method.

An interim analysis of Goodwill is performed quarterly, and 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.

Management has concluded that there was no goodwill impairment for 2021.

*Securities Sold Under Agreements to Repurchase*

Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and recognized as short-term borrowings in the Company's consolidated balance sheets. Securities, generally U.S. government and federal agency securities, pledged as collateral under these arrangements can be sold or repledged only if replaced by the secured party. The fair value of the collateral provided to a third party is continually monitored and additional collateral is provided as appropriate.

*Derivative Instruments*

The Company primarily uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract such as interest rates, equity security prices, currencies, commodity prices, or credit spreads. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount, such as interest rate swaps or currency forwards, or to purchase or sell other financial instruments at specified terms on a specified date, such as options to buy or sell securities or currencies. Derivative instruments are subject to counterparty credit risk due to the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. Derivative contracts may be executed only with exchanges or counterparties approved by the Company's Asset/Liability Management Committee.

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

If certain conditions are met, a derivative may be designated as a hedge related to fair value, cash flow, or foreign exposure risk. The recognition of changes in the fair value of a derivative instrument varies depending on the intended use of the derivative and the resulting designation. The Company accounts for hedges of customer loans as fair value hedges. The change in fair value of the hedging derivative and the change in fair value of the hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current earnings. Changes in the fair value of derivatives not designated as hedging instruments are recognized as a gain or loss in earnings. The Company formally documents any relationships between hedging instruments and hedged items and the risk management objective and strategy for undertaking each hedged transaction. All derivative instruments are reported at fair value in the consolidated balance sheets.

*Equity-Based Compensation*

The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally measured at fair value on the grant date. The Black-Scholes-Merton valuation model is used to estimate the fair value of stock options at the grant date while the fair value of restricted stock awards is based on the market price of the Company's common stock on the grant date. The Black-Scholes-Merton model incorporates the following assumptions: the expected volatility is based on the weekly historical volatility of the Company's common stock price over the expected term of the option; the expected term is generally calculated using the shortcut method; the risk-free interest rate is based on the U.S. Department of the Treasury's ("Treasury") yield curve on the grant date with a term comparable to the grant; and the dividend yield is based on the Company's dividend yield using the most recent dividend rate paid per share and trading price of the Company's common stock. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

*Revenue Recognition*

*Wealth management*. Wealth management income represents monthly fees due from wealth management customers in consideration for managing and administrating the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when the performance obligation is completed each month, which is generally the time that payment is received. Income also includes fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers that are referred to the third party. These fees are paid to the Company by the third party on a quarterly basis and recognized ratably throughout the quarter as the performance obligation is satisfied.

*Service charges on deposits and other service charges and fees*. Service charges on deposits and other service charges and fees represent general service fees for account maintenance and activity and transaction-based fees that consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied. Other service charges and fees include interchange income from debit and credit card transaction fees.

 

*Advertising Expenses*

Advertising costs are generally expensed as incurred. The Company may establish accruals for incurred advertising expenses in the course of a fiscal year.

*Income Taxes*

Income tax expense is comprised of the current and deferred tax consequences of events and transactions already recognized. The Company includes interest and penalties related to income tax liabilities in income tax expense. The effective tax rate, income tax expense as a percent of pre-tax income, may vary significantly from statutory rates due to tax credits and permanent differences. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are adjusted through the provision for income taxes as changes in tax laws or rates are enacted.

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

*Per Share Results*

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that could be issued by the Company. Under the treasury stock method of accounting, potential common stock may be issued for stock options, non-vested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that have an exercise price greater than the average market value of the Company's common stock because the effect would be antidilutive.

***Risks and Uncertainties***

<u>Recent COVID-19 Virus Developments</u> –

During 2020 and continuing into 2021, government reaction to the novel coronavirus ("COVID-19") pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services. As the pandemic events unfolded during 2020 and 2021, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions.

The global pandemic has adversely impacted a broad range of industries in which the Company's customers operate and could still impair their ability to fulfill their financial obligations to the Company. The Company's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While it appears that the epidemiological and macroeconomic conditions are trending in a positive direction as of December 31, 2021, if there is a resurgence in the virus, 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 any potential resulting measures to curtail its spread, will have on the Company's future operations, the Company is disclosing potentially material items of which it is aware.

<u>Lending operations and accommodations to borrowers</u>

The general economic slowdown caused by COVID-19 in local economies in communities served by the Company has affected loan demand and consumption of financial services, generally, reducing interest income, service fees, and the demand for other profitable financial services provided by the Company.

In addition to the general impact of COVID-19, certain provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act, as well as other legislative and regulatory actions may materially impact the Company. The Company has participated in the Paycheck Protection Program ("PPP"), administered by the SBA, in an attempt to assist its customers. Per the terms of the program, PPP loans have a two-year or a five-year term, earn interest at 1%, are fully guaranteed by the SBA, and are partially or totally forgivable if administered by the borrower according to guidance provided by the SBA. The Company believes the majority of these loans have the potential to be forgiven by the SBA if administered in accordance with the terms of the program. Through December 31, 2021the Company processed a total of 1,429 loans with original principal balances totaling $92.58 million through both the first and second rounds of the PPP. As of December 31, 2021 $56.74 million or 93.03%, of the Company's first round PPP loan balances have been forgiven by the SBA. As of December 31, 2021 28.22%, or $8.91 million of the second round PPP loans have been forgiven.

To date, the Company has identified no material, unmitigated operational or internal control challenges or risks and anticipates no significant challenges to its ability to maintain systems and controls as a result of the actions taken to prevent the spread of COVID-19. In addition, the Company currently faces no material resource constraints arising due to implementation of the business continuity plan.

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

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***Recent Accounting Standards***

*Standards Adopted in 2021*

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU requires earlier recording of credit losses on loans and other financial assets held by financial institutions and other organizations. This ASU also requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It further requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. In addition, the ASU amends the accounting for credit losses in investments in debt securities and purchased financial assets with credit deterioration. The Company adopted the new standard as of January 1, 2021. The standard was applied using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. Under this method, comparative periods will not be required to be restated for financial statements related to Topic 326. Comparative prior period disclosures will be presented using the guidance for the allowance for loan losses. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and the reasons for the change, which is solely a result of the adoption of the required standard. This standard did not have a material impact on our investment securities portfolio at implementation. Related to the implementation of the standard, the Company recorded an additional ACL for loans of $13.11 million, deferred tax assets of $1.81 million, and additional reserve for unfunded commitments of $509 thousand and an adjustment to retained earnings, net of tax, of $5.87 million. See the table below for the impact of ASU 2016-13 on the Company's consolidated balance sheet.

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| | | | |
|:---|:---|:---|:---|
|  | **January 1, 2021** | **January 1, 2021** | **January 1, 2021** |
|  | **As Reported** | **Pre-** | **Impact of** |
|  | **Under** | **ASU 2016-13** | **ASU 2016-13** |
|  | **ASU 2016-13** | **Adoption** | **Adoption** |
| Assets: |  |  |  |
| Non-covered loans held for investment |  |  |  |
| Allowance for credit losses on debt securities |  |  |  |
| Investment securities - available for sale | $83358 | $83358 | $- A |
| Loans |  |  |  |
| Non-acquired loans and acquired performing loans | 2146972 | 2146972 |  |
| Acquired purchased deteriorated loans | 45535 | 39660 | 5875 B |
| Allowance for credit losses on loans | (39289) | (26182) | (13107) C |
| Deferred tax asset | 19306 | 17493 | 1813 D |
| Accrued interest receivable - loans | 9109 | 9052 | 57 B |
| Liabilities |  |  |  |
| Allowance for credit losses on off-balance sheet |  |  |  |
| credit exposures | 575 | 66 | 509 E |
| Equity: |  |  |  |
| Retained earnings | 231714 | 237585 | (5870) F |

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A. Per our analysis no ACL was necessary for investment securities available for sale.

B. Accrued interest receivable from acquired credit impaired loans of $57 thousand was reclassed to other assets and was offset by the reclass of the grossed up credit discount on acquired credit imparied loans of $57 thousand that was moved to the ACL for the purchased credit deteriorated loans.

C. Calculated adjustment to the ACL related to the adoption of ASU 2016-13. Includes additional reserve related to purchased deteriorated loans of $5.88 million.

D. Effect of deferred tax assets related to the adjustment to the ACL form the adoption of ASU 2016-13 using a 23.37% tax rate.

E. Adjustment to the reserve for unfunded commitments related to the adoption of ASU 2016-13.

F. Net adjustment to retained earnings related to the adoption of ASU 2016-13.

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes". This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The Company adopted this ASU as of January 1, 2021, and it did not have a material effect on the Company's financial statements.

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

**Note 2. Acquisitions and Divestitures**

On December 31, 2019, the Company acquired Highlands Bankshares, Inc. ("Highlands") of Abingdon, Virginia. Under the terms of the acquisition, each share of Highlands' common and preferred stock outstanding immediately converted into the right to receive 0.2703 shares of the Company's stock. The transaction combined two traditional Southwestern Virginia community banks who serve the Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $86.65 million. Goodwill of $36.82 million was added as a result of the acquisition.

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**Note 3. Debt Securities**

The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
|  | **Amortized** |  | **Unrealized** |  | **Unrealized** | **Fair** |  |
|  | **Cost** |  | **Gains** |  | **Losses** | **Value** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| U.S. Agency securities | $469 |  | $— |  | $(3) | $466 |  |
| Municipal securities | 28596 |  | 198 |  |  | 28794 |  |
| Corporate Notes | 9935 |  |  |  | (16) | 9919 |  |
| Mortgage-backed Agency securities | 37273 |  | 513 |  | (673) | 37113 |  |
| Total | $76273 |  | $711 |  | $(692) | $76292 |  |

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |  |
|  | **Amortized** |  | **Unrealized** |  | **Unrealized** | **Fair** |  |
|  | **Cost** |  | **Gains** |  | **Losses** | **Value** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| U.S. Agency securities | $555 |  | $— |  | $(4) | $551 |  |
| Municipal securities | 43950 |  | 509 |  |  | 44459 |  |
| Mortgage-backed Agency securities | 37453 |  | 992 |  | (97) | 38348 |  |
| Total | $81958 |  | $1501 |  | $(101) | $83358 |  |

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following table presents the amortized cost and fair value 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.

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| | | | | |
|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **U.S. Agency Securities**  | **Municipal Securities**  | **Corporate Notes** | **Total**  |
| Amortized cost maturity: |  |  |  |  |
| One year or less | $— | $735 | $7382 | $8117 |
| After one year through five years |  | 19425 | 2553 | 21978 |
| After five years through ten years | 469 | 8436 |  | 8905 |
| After ten years |  |  |  |  |
| Amortized cost | $469 | $28596 | $9935 | 39000 |
| Mortgage-backed securities |  |  |  | 37273 |
| Total amortized cost |  |  |  | $76273 |
| Fair value maturity: |  |  |  |  |
| One year or less | $— | $736 | $7372 | $8108 |
| After one year through five years |  | 19537 | 2547 | 22084 |
| After five years through ten years | 466 | 8521 |  | 8987 |
| After ten years |  |  |  |  |
| Fair value | $466 | $28794 | $9919 | 39179 |
| Mortgage-backed securities |  |  |  | 37113 |
| Total fair value |  |  |  | $76292 |

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Less than 12 Months** | **Less than 12 Months** | **Less than 12 Months** | **12 Months or Longer** | **12 Months or Longer** | **12 Months or Longer** | **Total** | **Total** | **Total** |
|  | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** |
|  | **Value** |  | **Losses** | **Value** |  | **Losses** | **Value** |  | **Losses** |
| *(Amounts in thousands)* |  | |  |  | |  |  | |  |
| U.S. Agency securities | $— |  | $— | $459 |  | $(3) | $459 |  | $(3) |
| Municipal securities |  |  |  |  |  |  |  |  |  |
| Corporate Notes | 9919 |  | (16) |  |  |  | 9919 |  | (16) |
| Mortgage-backed Agency securities | 14092 |  | (253) | 8384 |  | (420) | 22476 |  | (673) |
| Total | $24011 |  | $(269) | $8843 |  | $(423) | $32854 |  | $(692) |

---

---

| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |
|  | **Less than 12 Months** | **Less than 12 Months** | **Less than 12 Months** | **12 Months or Longer** | **12 Months or Longer** | **12 Months or Longer** | **Total** | **Total** | **Total** |
|  | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** |
|  | **Value** |  | **Losses** | **Value** |  | **Losses** | **Value** |  | **Losses** |
| *(Amounts in thousands)* |  | |  |  | |  |  | |  |
| U.S. Agency securities | $— |  | $— | $544 |  | $(4) | $544 |  | $(4) |
| Municipal securities |  |  |  |  |  |  |  |  |  |
| Mortgage-backed Agency securities | 11018 |  | (97) |  |  |  | 11018 |  | (97) |
| Total | $11018 |  | $(97) | $544 |  | $(4) | $11562 |  | $(101) |

---

There were 23 individual debt securities in an unrealized loss position as of December 31, 2021, and their combined depreciation in value represented 0.91% of the debt securities portfolio. There were 6 individual debt securities in an unrealized loss position as of December 31, 2020, and their combined depreciation in value represented 0.12% of the debt securities portfolio.

The following table presents gross realized gains and losses from the sale of available-for-sale debt securities for the periods indicated:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** |  | **2020** | **2019** |
| *(Amounts in thousands)* |  | |  |  |
| Gross realized gains | $— |  | $419 | $67 |
| Gross realized losses |  |  | (34) | (110) |
| Net gain (loss) on sale of securities | $— |  | $385 | $(43) |

---

The carrying amount of securities pledged for various purposes totaled $22.15 million as of December 31, 2021, and $36.56 million as of December 31, 2020.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 4. Loans**

The Company groups loans into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $1.65 million as of December 31, 2021, and $1.13 million as of December 31, 2020. Deferred loan fees were $5.06 million as of December 31, 2021, and $5.58 million as of December 31, 2020. For information about off-balance sheet financing, see Note 19, "Litigation, Commitments, and Contingencies," to the Consolidated Financial Statements of this report.

In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis for the current period December 31, 2021, to include net deferred loan fees of $5.06 million and unamortized discount total related to loans acquired of $5.41 million. Accrued interest receivable (AIR) of $7.54 million is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

The comparative periods in the table below reflect the loan portfolio prior to the adoption of ASU 2016-13, Prior periods were reported as shown in the below tables, with the acquired loans being net of unearned and of related discounts, which includes the credit discount on the acquired credit impaired loans.

Included in total loans at December 31, 2020, were covered loans generally reimbursable by the FDIC of $9.68 million. The Company terminated its remaining loss share agreement with the FDIC effective, September 28, 2021, associated with Waccamaw Bank. The termination eliminates the FDIC guarantee on particular loan losses and removes future responsibility related to the agreement.

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** | **December 31,** |
|  | **2021** | **2021** | **2020** | **2020** |
| *(Amounts in thousands)* | **Amount** | **Percent** | **Amount** | **Percent** |
| Commercial loans |  |  |  |  |
| Construction, development, and other land | $65806 | 3.04% | $44674 | 2.04% |
| Commercial and industrial | 133630 | 6.17% | 173024 | 7.91% |
| Multi-family residential | 100402 | 4.64% | 115161 | 5.27% |
| Single family non-owner occupied | 198778 | 9.18% | 187783 | 8.59% |
| Non-farm, non-residential | 707506 | 32.67% | 734793 | 33.60% |
| Agricultural | 9341 | 0.43% | 9749 | 0.45% |
| Farmland | 15013 | 0.69% | 19761 | 0.91% |
| Total commercial loans | 1230476 | 56.82% | 1284945 | 58.77% |
| Consumer real estate loans |  |  |  |  |
| Home equity lines | 79857 | 3.69% | 96526 | 4.41% |
| Single family owner occupied | 703864 | 32.50% | 661054 | 30.23% |
| Owner occupied construction | 16910 | 0.78% | 17720 | 0.81% |
| Total consumer real estate loans | 800631 | 36.97% | 775300 | 35.45% |
| Consumer and other loans |  |  |  |  |
| Consumer loans | 129794 | 5.99% | 120373 | 5.50% |
| Other | 4668 | 0.22% | 6014 | 0.28% |
| Total consumer and other loans | 134462 | 6.21% | 126387 | 5.78% |
| Total loans held for investment, net of unearned income | $2165569 | 100.00% | $2186632 | 100.00% |
|  |  | % |  |  |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENT**

The Company began participating as a Small Business Administration ("SBA") Paycheck Protection Program ("PPP") lender during the second quarter of 2020. At December 31, 2021, the PPP loans had a current balance of $20.64 million, compared to $57.06 million at December 31, 2020 and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, totaled $4.33 million at December 31, 2021, and $2.30 million at December 31, 2020. During 2021, the Company recorded amortization of net deferred loan origination fees of $2.74 million on PPP loans, compared with $868 thousand for 2020. 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 interest income. As of December 31, 2021, $56.86 million, or 93.20%, of the Company's first round Paycheck Protection Program loan balances had been forgiven by the SBA.

 ****

Prior to the adoption of ASU 2016-13, the Company identified certain purchased loans as impaired when fair values were established at acquisition and grouped those PCI loans into loan pools with common risk characteristics. The Company estimated cash flows to be collected on PCI loans and discounted those cash flows at a market rate of interest. Effective January 1, 2020, the Company consolidated the insignificant PCI loans and discounts for Peoples, Waccamaw, and other acquired loans into the core loan portfolio. The only remaining PCI pools were those loans acquired in the Highlands acquisition on December 31, 2019. As of December 31, 2020, the recorded investment and contractual unpaid principal balance of PCI loans, was $39.66 million and $47.51 million, respectively.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The Highlands acquisition added $8.15 million in accretable yield. The total fair value of the Highlands PCI loans was $53.12 million at the time of the acquisition. The gross contractual cash flows for the Highlands PCI loans was $76.45 million. The following table presents the changes in the accretable yield on PCI loans, by acquisition, during the periods indicated prior to the adoption of ASU 2016-13:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Peoples** | **Waccamaw** | **Highlands** | **Total** |
| *(Amounts in thousands)* |  |  |  |  |
| Balance January 1, 2019 | $2590 | $14639 | $— | $17229 |
| Accretion | (950) | (3317) |  | (4267) |
| Reclassifications from nonaccretable difference(1) | 17 | 1440 |  | 1457 |
| Other changes, net | 233 | (188) |  | 45 |
| Balance December 31, 2019 | $1890 | $12574 | $— | $14464 |
| Balance January 1, 2020 | $1890 | $12574 | $— | $14464 |
| Additions |  |  | 8152 | 8152 |
| Accretion |  |  | (2497) | (2497) |
| Other changes, net | (1890) | (12574) |  | (14464) |
| Balance December 31, 2020 | $— | $— | $5655 | $5655 |

---

------

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Represents changes attributable to expected loss assumptions

**Note 5. Credit Quality**

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

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

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

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

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

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

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Included in total loans December 31, 2020, were covered loans of $9.68 million generally reimbursable by the FDIC at the applicable loss share percentage of 80%.

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  |  | **Special** |  |  |  |  |
| *(Amounts in thousands)* | **Pass** | **Mention** | **Substandard** | **Doubtful** | **Loss** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $64498 | $451 | $857 | $— | $— | $65806 |
| Commercial and industrial | 128770 | 1005 | 3855 |  |  | 133630 |
| Multi-family residential | 98457 | 1090 | 855 |  |  | 100402 |
| Single family non-owner occupied | 186184 | 3607 | 8977 | 10 |  | 198778 |
| Non-farm, non-residential | 665559 | 25624 | 16323 |  |  | 707506 |
| Agricultural | 8758 | 70 | 513 |  |  | 9341 |
| Farmland | 11939 | 633 | 2441 |  |  | 15013 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 76259 | 426 | 3172 |  |  | 79857 |
| Single family owner occupied | 671459 | 2420 | 29985 |  |  | 703864 |
| Owner occupied construction | 16629 |  | 281 |  |  | 16910 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 127514 | 16 | 2264 |  |  | 129794 |
| Other | 4668 |  |  |  |  | 4668 |
| Total loans | $2060694 | $35342 | $69523 | $10 | $— | $2165569 |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |
|  |  | **Special** |  |  |  |  |
| *(Amounts in thousands)* | **Pass** | **Mention** | **Substandard** | **Doubtful** | **Loss** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $36934 | $4975 | $2765 | $— | $— | $44674 |
| Commercial and industrial | 160625 | 7065 | 5519 |  |  | 173209 |
| Multi-family residential | 103291 | 8586 | 3284 |  |  | 115161 |
| Single family non-owner occupied | 165146 | 9602 | 12838 | 12 |  | 187598 |
| Non-farm, non-residential | 568438 | 125907 | 40448 |  |  | 734793 |
| Agricultural | 7724 | 1686 | 339 |  |  | 9749 |
| Farmland | 13527 | 2597 | 3637 |  |  | 19761 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 91712 | 1488 | 3326 |  |  | 96526 |
| Single family owner occupied | 623860 | 3859 | 33335 |  |  | 661054 |
| Owner occupied construction | 17232 | 201 | 287 |  |  | 17720 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 118134 | 28 | 2211 |  |  | 120373 |
| Other | 6014 |  |  |  |  | 6014 |
| Total loans | $1912637 | $165994 | $107989 | $12 | $- | $2186632 |

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Construction, development |  |  |  |  |  |  |  |  |
| and other land |  |  |  |  |  |  |  |  |
| Pass | $40207 | $10127 | $3081 | $3704 | $1308 | $5717 | $354 | $64498 |
| Special Mention |  | 266 |  | 128 |  | 21 | 36 | 451 |
| Substandard |  |  | 128 | 11 | 291 | 427 |  | 857 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total construction, development, and other land | $40207 | $10393 | $3209 | $3843 | $1599 | $6165 | $390 | $65806 |
| Commercial and industrial |  |  |  |  |  |  |  |  |
| Pass | $34539 | $18887 | $13679 | $13772 | $4817 | $5890 | $16544 | $108128 |
| Special Mention | 32 | 60 | 597 | 192 | 28 |  | 96 | 1005 |
| Substandard | 184 | 355 | 706 | 384 | 842 | 866 | 518 | 3855 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total commercial and industrial | $34755 | $19302 | $14982 | $14348 | $5687 | $6756 | $17158 | $112988 |
| Paycheck Protection Loans |  |  |  |  |  |  |  |  |
| Pass | $16482 | $4160 | $- | $- | $- | $- | $- | $20642 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  |  |  |  |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total Paycheck Protection Loans | $16482 | $4160 | $- | $- | $- | $- | $- | $20642 |
| Multi-family residential |  |  |  |  |  |  |  |  |
| Pass | $11307 | $24299 | $4644 | $1897 | $8413 | $46962 | $935 | $98457 |
| Special Mention |  |  |  |  |  | 1090 |  | 1090 |
| Substandard |  |  |  |  |  | 855 |  | 855 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total multi-family residential | $11307 | $24299 | $4644 | $1897 | $8413 | $48907 | $935 | $100402 |
| Non-farm, non-residential |  |  |  |  |  |  |  |  |
| Pass | $147978 | $146381 | $62651 | $50943 | $43776 | $199812 | $14018 | $665559 |
| Special Mention | 397 | 3334 | 823 | 2595 | 9190 | 9135 | 150 | 25624 |
| Substandard | 1161 | 711 | 2508 | 2531 | 3232 | 5953 | 227 | 16323 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total non-farm, non-residential | $149536 | $150426 | $65982 | $56069 | $56198 | $214900 | $14395 | $707506 |
| Agricultural |  |  |  |  |  |  |  |  |
| Pass | $4564 | $1548 | $998 | $534 | $346 | $335 | $433 | $8758 |
| Special Mention | 43 | 27 |  |  |  |  |  | 70 |
| Substandard | 44 | 11 | 282 | 39 | 17 | 120 |  | 513 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total agricultural | $4651 | $1586 | $1280 | $573 | $363 | $455 | $433 | $9341 |
| Farmland |  |  |  |  |  |  |  |  |
| Pass | $428 | $1047 | $82 | $1125 | $887 | $6835 | $1535 | $11939 |
| Special Mention | 189 |  |  | 240 | 5 | 199 |  | 633 |
| Substandard |  | 14 | 519 | 249 | 264 | 1395 |  | 2441 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total farmland | $617 | $1061 | $601 | $1614 | $1156 | $8429 | $1535 | $15013 |

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[**Table of Contents**](#toc)

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Home equity lines |  |  |  |  |  |  |  |  |
| Pass | $115 | $59 | $- | $25 | $2 | $2168 | $73890 | $76259 |
| Special Mention |  |  |  |  |  |  | 426 | 426 |
| Substandard |  |  | 28 | 249 | 128 | 1316 | 1451 | 3172 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total home equity lines | $115 | $59 | $28 | $274 | $130 | $3484 | $75767 | $79857 |
| Single family Mortgage |  |  |  |  |  |  |  |  |
| Pass | $239917 | $225294 | $61925 | $46716 | $41757 | $240845 | $1189 | $857643 |
| Special Mention | 399 | 510 | 937 | 269 | 137 | 3775 |  | 6027 |
| Substandard | 1213 | 799 | 1475 | 1668 | 1878 | 31929 |  | 38962 |
| Doubtful |  |  |  |  |  | 10 |  | 10 |
| Loss |  |  |  |  |  |  |  |  |
| Total single family owner and non-owner occupied | $241529 | $226603 | $64337 | $48653 | $43772 | $276559 | $1189 | $902642 |
| Owner occupied construction |  |  |  |  |  |  |  |  |
| Pass | $9689 | $4729 | $178 | $22 | $428 | $1583 | $- | $16629 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  | 281 |  | 281 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total owner occupied construction | $9689 | $4729 | $178 | $22 | $428 | $1864 | $- | $16910 |
| Consumer loans |  |  |  |  |  |  |  |  |
| Pass | $65018 | $31065 | $16548 | $4980 | $2306 | $10040 | $2225 | $132182 |
| Special Mention |  |  | 16 |  |  |  |  | 16 |
| Substandard | 328 | 663 | 824 | 107 | 78 | 186 | 78 | 2264 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total consumer loans | $65346 | $31728 | $17388 | $5087 | $2384 | $10226 | $2303 | $134462 |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Total Loans |  |  |  |  |  |  |  |  |
| Pass | $570244 | $467596 | $163786 | $123718 | $104040 | $520187 | $111123 | $2060694 |
| Special Mention | 1060 | 4197 | 2373 | 3424 | 9360 | 14220 | 708 | 35342 |
| Substandard | 2930 | 2553 | 6470 | 5238 | 6730 | 43328 | 2274 | 69523 |
| Doubtful |  |  |  |  |  | 10 |  | 10 |
| Loss |  |  |  |  |  |  |  |  |
| Total loans | $574234 | $474346 | $172629 | $132380 | $120130 | $577745 | $114105 | $2165569 |

---

Prior to the adoption of ASU 2016-13, the Company identified loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. When the Company determined that it was probable all principal and interest amounts contractually due would not be collected, the loan was generally deemed impaired.

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[**Table of Contents**](#toc)

The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the date indicated prior to the adoption of ASU 2016-13:

---

| | | | |
|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |
|  |  | **Unpaid**  |  |
|  | **Recorded** | **Principal** | **Related**  |
| *(Amounts in thousands)* | **Investment**  | **Balance** | **Allowance** |
| Impaired loans with no related allowance |  |  |  |
| Commercial loans |  |  |  |
| Construction, development, and other land | $616 | $891 | $— |
| Commercial and industrial | 2341 | 2392 |  |
| Multi-family residential | 946 | 1593 |  |
| Single family non-owner occupied | 4816 | 5785 |  |
| Non-farm, non-residential | 8238 | 9467 |  |
| Agricultural | 218 | 226 |  |
| Farmland | 1228 | 1311 |  |
| Consumer real estate loans |  |  |  |
| Home equity lines | 1604 | 1772 |  |
| Single family owner occupied | 16778 | 19361 |  |
| Owner occupied construction | 216 | 216 |  |
| Consumer and other loans |  |  |  |
| Consumer loans | 818 | 833 |  |
| Total impaired loans with no allowance | 37819 | 43847 |  |
| Impaired loans with a related allowance |  |  |  |
| Commercial loans |  |  |  |
| Non-farm, non-residential | 1068 | 1121 | 319 |
| Consumer real estate loans |  |  |  |
| Single family owner occupied | 338 | 338 | 108 |
| Total impaired loans with an allowance | 1406 | 1459 | 427 |
| Total impaired loans(1) | $39225 | $45306 | $427 |

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(1) Total recorded investment of impaired loans include loans totaling $31.18 million as of December 31, 2020, that do not meet the Company's evaluation threshold of $500 thousand for individual impairment and are therefore collectively evaluated for impairment.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

Prior to the adoption of ASU 2016-13, the Company presented the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2020** | **2020** | **2019** | **2019** |
| *(Amounts in thousands)* | **Interest Income Recognized** | **Average Recorded Investment** | **Interest Income Recognized** | **Average Recorded Investment** |
| Impaired loans with no related allowance: |  |  |  |  |
| Commercial loans |  |  |  |  |
| Construction, development, and other land | $25 | $935 | $22 | $704 |
| Commercial and industrial | 155 | 2749 | 34 | 363 |
| Multi-family residential | 19 | 808 | 24 | 1356 |
| Single family non-owner occupied | 189 | 4890 | 123 | 2979 |
| Non-farm, non-residential | 295 | 7450 | 123 | 4683 |
| Agricultural | 9 | 241 | 9 | 121 |
| Farmland | 63 | 1569 | 55 | 1469 |
| Consumer real estate loans |  |  |  |  |
| Home equity lines | 51 | 1594 | 46 | 1439 |
| Single family owner occupied | 578 | 17044 | 599 | 16058 |
| Owner occupied construction | 10 | 407 | 29 | 308 |
| Consumer and other loans |  |  |  |  |
| Consumer loans | 42 | 543 | 13 | 213 |
| Total impaired loans with no related allowance | 1436 | 38230 | 1077 | 29693 |
| Impaired loans with a related allowance: |  |  |  |  |
| Commercial loans |  |  |  |  |
| Multi-family residential |  | 707 |  |  |
| Single family non-owner occupied |  |  |  |  |
| Non-farm, non-residential | 17 | 1524 | 48 | 766 |
| Farmland |  |  |  |  |
| Consumer real estate loans |  |  |  |  |
| Home equity lines |  |  |  |  |
| Single family owner occupied | 29 | 1196 | 46 | 1947 |
| Total impaired loans with a related allowance | 46 | 3427 | 94 | 2713 |
| Total impaired loans | $1482 | $41657 | $1171 | $32406 |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

---

| | | | |
|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **No Allowance** | **With an Allowance** | **Total** |
| Commercial loans |  |  |  |
| Construction, development, and other land | $409 | $— | $409 |
| Commercial and industrial | 1734 |  | 1734 |
| Multi-family residential | 208 |  | 208 |
| Single family non-owner occupied | 2304 |  | 2304 |
| Non-farm, non-residential | 3439 | 1100 | 4539 |
| Agricultural | 136 |  | 136 |
| Farmland | 222 |  | 222 |
| Consumer real estate loans |  |  |  |
| Home equity lines | 767 |  | 767 |
| Single family owner occupied | 8957 |  | 8957 |
| Owner occupied construction |  |  |  |
| Consumer and other loans |  |  |  |
| Consumer loans | 1492 |  | 1492 |
| Total nonaccrual loans | $19668 | $1100 | $20768 |

---

During 2021, $72 thousand in nonaccrual loan interest was recognized.

The following table presents nonaccrual loans prior to the adoption of ASU 2016-13. PCI loans were generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. Covered nonaccrual loans totaled $297 thousand at December 31, 2020; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the date indicated:

---

| | |
|:---|:---|
| *(Amounts in thousands)* | **December 31, 2020** |
| Commercial loans |  |
| Construction, development, and other land | $244 |
| Commercial and industrial | 895 |
| Multi-family residential | 946 |
| Single family non-owner occupied | 2990 |
| Non-farm, non-residential | 6343 |
| Agricultural | 217 |
| Farmland | 489 |
| Consumer real estate loans |  |
| Home equity lines | 1122 |
| Single family owner occupied | 7976 |
| Owner occupied construction |  |
| Consumer and other loans |  |
| Consumer loans | 781 |
| Total nonaccrual loans | $22003 |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  |  |  |  |  |  |  | **Amortized Cost of** |
|  | **30 - 59 Days** | **60 - 89 Days** | **90+ Days** | **Total** | **Current** | **Total** | **>90 Days Accruing** |
| *(Amounts in thousands)* | **Past Due** | **Past Due** | **Past Due** | **Past Due** | **Loans** | **Loans** | **No Allowance** |
| Commercial loans |  |  |  |  |  |  |  |
| Construction, development, and other land | $52 | $— | $120 | $172 | $65634 | $65806 | $— |
| Commercial and industrial | 325 | 35 | 1394 | 1754 | 131876 | 133630 |  |
| Multi-family residential | 97 |  |  | 97 | 100305 | 100402 |  |
| Single family non-owner occupied | 1210 | 583 | 795 | 2588 | 196190 | 198778 |  |
| Non-farm, non-residential | 1002 | 441 | 2333 | 3776 | 703730 | 707506 |  |
| Agricultural | 73 | 7 | 101 | 181 | 9160 | 9341 |  |
| Farmland | 52 |  | 222 | 274 | 14739 | 15013 |  |
| Consumer real estate loans |  |  |  |  |  |  |  |
| Home equity lines | 275 | 388 | 333 | 996 | 78861 | 79857 |  |
| Single family owner occupied | 4740 | 2584 | 3880 | 11204 | 692660 | 703864 |  |
| Owner occupied construction | 139 |  |  | 139 | 16771 | 16910 |  |
| Consumer and other loans |  |  |  |  |  |  |  |
| Consumer loans | 3469 | 1182 | 1049 | 5700 | 124094 | 129794 |  |
| Other |  |  |  |  | 4668 | 4668 |  |
| Total loans | $11434 | $5220 | $10227 | $26881 | $2138688 | $2165569 | $— |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following table presents the aging of past due loans, by loan class, as of the date indicated prior to the adoption of ASU 2016-13. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. Accruing loans contractually past due 90 days or more totaled $295 thousand as of December 31, 2020.

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |
|  | **30 - 59 Days** | **60 - 89 Days** | **90+ Days** | **Total** | **Current** | **Total** |
| *(Amounts in thousands)* | **Past Due** | **Past Due** | **Past Due** | **Past Due** | **Loans** | **Loans** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $1039 | $— | $235 | $1274 | $43400 | $44674 |
| Commercial and industrial | 669 | 230 | 700 | 1599 | 171425 | 173024 |
| Multi-family residential | 103 |  | 946 | 1049 | 114112 | 115161 |
| Single family non-owner occupied | 925 | 488 | 2144 | 3557 | 184226 | 187783 |
| Non-farm, non-residential | 601 | 296 | 3368 | 4265 | 730528 | 734793 |
| Agricultural | 70 | 189 | 88 | 347 | 9402 | 9749 |
| Farmland | 43 |  | 457 | 500 | 19261 | 19761 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 649 | 380 | 425 | 1454 | 95072 | 96526 |
| Single family owner occupied | 5317 | 2265 | 3891 | 11473 | 649581 | 661054 |
| Owner occupied construction | 82 |  |  | 82 | 17638 | 17720 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 2637 | 746 | 651 | 4034 | 116339 | 120373 |
| Other |  |  |  |  | 6014 | 6014 |
| Total loans | $12135 | $4594 | $12905 | $29634 | $2156998 | $2186632 |

---

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

---

| | | | |
|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| (Amounts in thousands) | **Balance** | **Collateral Coverage** | **Coverage Ratio** |
| Commercial Real Estate |  |  |  |
| Hotel | $- | $- |  |
| Office |  |  |  |
| Other | 2216 | 2312 | 104.33% |
| Retail |  |  |  |
| Multi-Family |  |  |  |
| Industrial |  |  |  |
| Office |  |  |  |
| Other |  |  |  |
| Commercial and industrial |  |  |  |
| Industrial |  |  |  |
| Other |  |  |  |
| Home equity loans |  |  |  |
| Consumer owner occupied |  |  |  |
| Consumer |  |  |  |
| Total collateral dependent loans | $2216 | $2312 | 104.33% |

---

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 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.

From March, 2020, through December 31, 2021, the Company modified a total of 4,066 loans with principal balances totaling $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. The Company's policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company upgrades 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, total COVID-19 loan deferrals stood at $2.92 million.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** |
|  | **2021** | **2021** | **2021** | **2020** | **2020** | **2020** |
| *(Amounts in thousands)* | **Nonaccrual(1)** | **Accruing** | **Total** | **Nonaccrual(1)** | **Accruing** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Commercial and industrial | $396 | $470 | $866 | $— | $1326 | $1326 |
| Single family non-owner occupied | 857 | 1100 | 1957 | 1585 | 1265 | 2850 |
| Non-farm, non-residential |  | 2021 | 2021 |  | 2407 | 2407 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines |  | 67 | 67 |  | 77 | 77 |
| Single family owner occupied | 1266 | 4755 | 6021 | 229 | 4927 | 5156 |
| Owner occupied construction |  | 212 | 212 |  | 216 | 216 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans |  | 27 | 27 |  | 30 | 30 |
| Total TDRs | $2519 | $8652 | $11171 | $1814 | $10248 | $12062 |
| Allowance for credit/loan losses related to TDRs |  |  | $— |  |  | $— |

---

------

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

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

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  |
|  | **2021** |  | **2020** | **2019** |  |
| *(Amounts in thousands)* |  | |  |  | |
| Interest income recognized | $422 |  | $473 | $277 |  |

---

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** | **2021** | **2021** | **2020** | **2020** | **2020** |
| *(Amounts in thousands)* | **Total Contracts** | **Pre-modification Recorded Investment** | **Post modification Recorded Investment(1)** | **Total Contracts** | **Pre-modification Recorded Investment** | **Post modification Recorded Investment(1)** |
| Below market interest rate |  |  |  |  |  |  |
| Single family owner occupied |  | $— | $— | 1 | $50 | $50 |
| Below market interest rate and extended payment term |  |  |  |  |  |  |
| Single family non-owner occupied | 1 | 165 | 165 |  |  |  |
| Single family owner occupied | 4 | 402 | 402 |  |  |  |
| Total below market interest rate and extended payment term | 5 | 567 | 567 |  |  |  |
| Principal deferral |  |  |  |  |  |  |
| Construction, development, and other land development |  |  |  | 3 | 1708 | 1708 |
| Non-farm, non-residential |  |  |  | 3 | 2115 | 2115 |
| Home equity |  |  |  |  |  |  |
| Single family non-owner occupied | 1 | 753 | 753 |  |  |  |
| Single family owner occupied | 1 | 41 | 41 | 5 | 4908 | 4877 |
| Total principal deferral | 2 | 794 | 794 | 11 | 4908 | 4877 |
| Total | 7 | $1361 | $1361 | 12 | $4958 | $4927 |

---

(1) Represents the loan balance immediately following modification

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following table presents loans modified as TDRs, by loan class, that were restructured within the previous 12 months for which there was a payment default during the periods indicated

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  |
|  | **2021** | **2021** | **2021** |  | **2020** | **2020** | **2020** |  |
|  | **Total** |  | **Recorded** |  | **Total** |  | **Recorded** |  |
|  | **Contracts** |  | **Investment** |  | **Contracts** |  | **Investment** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Single family owner occupied |  |  | $— |  | 1 |  | $53 |  |
| Total |  |  | $— |  | 1 |  | $53 |  |

---

The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:

---

| | | | |
|:---|:---|:---|:---|
|  | **December 31, 2021** |  | **December 31, 2020** |
| *(Amounts in thousands)* |  | |  |
| Total OREO | $1015 |  | $2083 |
| OREO secured by residential real estate | $337 |  | $769 |
| Residential real estate loans in the foreclosure process(1) | $2210 |  | $4141 |

---

------

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

**Note 6. Allowance for Credit Losses**

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** |
| *(Amounts in thousands)* | **Commercial** | **Consumer Real Estate** | **Consumer and Other** | **Total Allowance** |
| Beginning balance | $14661 | $8951 | $2570 | $26182 |
| Cumulative effect of adoption of ASU 2016-13 | 8360 | 4145 | 602 | 13107 |
| Provision for (recovery of) credit/loan losses charged to operations | (6949) | (3653) | 2131 | (8471) |
| Charge-offs | (3431) | (318) | (3025) | (6774) |
| Recoveries | 2134 | 847 | 833 | 3814 |
| Net (charge-offs) recoveries | (1297) | 529 | (2192) | (2960) |
| Ending balance | $14775 | $9972 | $3111 | $27858 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** |
| *(Amounts in thousands)* | **Commercial** | **Consumer Real Estate** | **Consumer and Other** | **Total Allowance** |
| Beginning balance | $10235 | $6325 | $1865 | $18425 |
| Provision for loan losses charged to operations | 6583 | 2760 | 3325 | 12668 |
| Charge-offs | (2769) | (558) | (3296) | (6623) |
| Recoveries | 612 | 424 | 676 | 1712 |
| Net charge-offs | (2157) | (134) | (2620) | (4911) |
| Ending balance | $14661 | $8951 | $2570 | $26182 |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following tables present the allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the dates indicated prior to the adoption of ASU 2016-13:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |
| *(Amounts in thousands)* | **Loans Individually Evaluated for Impairment** | **Allowance for Loans Individually Evaluated** | **Loans Collectively Evaluated for Impairment** | **Allowance for Loans Collectively Evaluated** |
| Commercial loans |  |  |  |  |
| Construction, development, and other land | $— | $— | $43716 | $528 |
| Commercial and industrial | 724 |  | 171486 | 1024 |
| Multi-family residential | 695 |  | 112852 | 1417 |
| Single family non-owner occupied | 1041 |  | 183283 | 1861 |
| Non-farm, non-residential | 3916 | 319 | 714160 | 9097 |
| Agricultural |  |  | 9728 | 218 |
| Farmland |  |  | 17540 | 196 |
| Total commercial loans | 6376 | 319 | 1252765 | 14341 |
| Consumer real estate loans |  |  |  |  |
| Home equity lines |  |  | 95765 | 799 |
| Single family owner occupied | 1673 | 108 | 647040 | 7849 |
| Owner occupied construction |  |  | 17567 | 195 |
| Total consumer real estate loans | 1673 | 108 | 760372 | 8843 |
| Consumer and other loans |  |  |  |  |
| Consumer loans |  |  | 119770 | 2570 |
| Other |  |  | 6014 |  |
| Total consumer and other loans |  |  | 125784 | 2570 |
| Total loans, excluding PCI loans | $8049 | $427 | $2138921 | $25754 |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following table presents the allowance for loan losses on PCI loans and recorded investment in PCI loans, by loan pool, as of the dates indicated prior to the adoption of ASU 2016-13:

---

| | | |
|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** |
| *(Amounts in thousands)* | **Recorded Investment** | **Allowance for Loan Pools With Impairment** |
| Commercial loans |  |  |
| Highlands: |  |  |
| 1-4 family, senior-commercial | $— | $— |
| Construction & land development | 958 |  |
| Farmland and other agricultural | 2242 |  |
| Multifamily | 1614 |  |
| Commercial real estate-owner occupied | 16717 |  |
| Commercial real estate- non-owner occupied | 3459 |  |
| Commercial and industrial | 814 |  |
| Other |  |  |
| Total commercial loans | 25804 |  |
| Consumer real estate loans |  |  |
| Highlands: |  |  |
| 1-4 family, junior and HELOCS | 761 |  |
| 1-4 family, senior-consumer | 12494 |  |
| Consumer | 603 |  |
| Total consumer real estate loans | 13858 |  |
| Total PCI loans | $39662 | $— |

---

Management believes the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2021.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 7. Premises, Equipment, and Leases**

***Premises and Equipment***

The following table presents the components of premises and equipment as of the dates indicated:

---

| | | |
|:---|:---|:---|
|  | **December 31,** | **December 31,** |
|  | **2021** | **2020** |
| *(Amounts in thousands)* |  |  |
| Land | $20402 | $21693 |
| Buildings and leasehold improvements | 48118 | 50639 |
| Equipment | 40501 | 40072 |
| Total premises and equipment | 109021 | 112404 |
| Accumulated depreciation and amortization | (56737) | (54704) |
| Total premises and equipment, net | $52284 | $57700 |

---

Impairment charges related to certain long-term investments in land and buildings totaled $781 thousand in 2021, $812 thousand in 2020, and $380 thousand in 2019. Depreciation and amortization expense for premises and equipment was $4.47 million in 2021, $4.46 million in 2020, and $3.45 million in 2019.

***Leases***

Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)"; the standard was adopted prospectively. The Company currently has two operating leases that are recorded as a right of use ("ROU") asset and operating lease liability. The right of use asset is recorded in other assets on the consolidated balance sheet, while the lease liability is recorded in other liabilities. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The current ROU asset and lease liability were recognized at the adoption date of January 1, 2019, based on the present value of the remaining lease payments using a discount rate that represented our incremental borrowing rate at the time of adoption. The lease expense which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statements of income.

The Company's current operating leases relate to one existing bank branch and the remaining two operating leases were acquired in separate bank acquisitions. Neither of the two acquired operating leases are for bank branches. One of the leases will terminate in early 2022; the remaining lease will terminate in July 2029. No ROU was recorded in the transaction due to the ROU asset related to the lease that terminates in 2022 being impaired as of the acquisition date; a lease liability was recorded for $82 thousand. The Company's total operating leases have remaining terms of 4 months to 7.5 years. As of December 31, 2021, the Company's ROU asset and lease liability were $741 thousand and $770 thousand, respectively. The weighted average discount rate was 3.22% for both 2021 and 2020.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

Future minimum lease payments as of the dates indicated are as follows:

---

| | |
|:---|:---|
| **<u>Year</u>** | **Amount** |
| *(Amounts in thousands)* |  |
| 2022 | $131 |
| 2023 | 119 |
| 2024 | 117 |
| 2025 | 101 |
| 2026 and thereafter | 362 |
| Total lease payments | 830 |
| Less: Interest | (60) |
| Present value of lease liabilities | $770 |

---

Lease expense was $182 thousand in 2021, $180 thousand in 2020, and $203 thousand in 2019. The Company maintained no subleases as of December 31, 2021.

**Note 8. Goodwill and Other Intangible Assets**

***Goodwill***

The Company has one reporting unit for goodwill impairment testing purposes, Community Banking. The Company performed its annual assessment of goodwill as of October 31, 2021, and concluded that the carrying value of goodwill was not impaired. No events have occurred after the analysis to indicate potential impairment.

As of January 1, 2019, the Company goodwill totaled $92.75 million. The December 31, 2019, acquisition of Highlands added $36.82 million in goodwill; resulting in a ending balance of $129.57 million. There was no change in the balance for 2021 or 2020.:

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 ****

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 ****

***Other Intangible Assets***

As of December 31, 2021, the remaining lives of core deposit intangibles ranged from 3 years to 8 years with a weighted average remaining life of 6 years. The following table presents the components of other intangible assets as of the dates indicated:

---

| | | | |
|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** |
|  | **2021** | **2020** | **2019** |
| *(Amounts in thousands)* |  |  |  |
| Core deposit intangibles | $12674 | $12674 | $8184 |
| Acquisitions |  |  | 4490 |
| Accumulated amortization | (7052) | (5605) | (4155) |
| Core deposit intangibles, net | 5622 | 7069 | 8519 |
| Other identifiable intangibles |  |  |  |
| Accumulated amortization |  |  |  |
| Other identifiable intangibles, net |  |  |  |
| Total other intangible assets, net | $5622 | $7069 | $8519 |

---

Amortization expense for other intangible assets was $1.45 million in 2021, and 2020, and $997 thousand in 2019.

The following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2021:

---

| | | |
|:---|:---|:---|
| *(Amounts in thousands)* |  | |
| 2022 | $1446.0 |  |
| 2023 | 878.0 |  |
| 2024 | 856.0 |  |
| 2025 | 647.0 |  |
| 2026 | 449.0 |  |
| 2027 and thereafter | 1346.0 |  |
| Total estimated amortization expense | $5622.0 |  |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 9. Deposits**

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** |  |
|  | **2021** |  | **2020** |  |
| *(Amounts in thousands)* |  | |  | |
| Noninterest-bearing demand deposits | $842783 |  | $772795 |  |
| Interest-bearing deposits |  |  |  |  |
| Interest-bearing demand deposits | 676254 |  | 598148 |  |
| Money market accounts | 293915 |  | 258864 |  |
| Savings deposits | 561576 |  | 495821 |  |
| Certificates of deposit | 237919 |  | 293848 |  |
| Individual retirement accounts | 116944 |  | 126771 |  |
| Total interest-bearing deposits | 1886608 |  | 1773452 |  |
| Total deposits | $2729391 |  | $2546247 |  |

---

The following schedule presents the contractual maturities of time deposits, by year, as of December 31, 2021:

---

| | | |
|:---|:---|:---|
| *(Amounts in thousands)* |  | |
| 2022 | $192936.0 |  |
| 2023 | 73329.0 |  |
| 2024 | 34791.0 |  |
| 2025 | 29260.0 |  |
| 2026 | 19210.0 |  |
| 2027 and thereafter | 5337.0 |  |
| Total contractual maturities | $354863.0 |  |

---

Time deposits of $250 thousand or more totaled $27.14 million as of December 31, 2021, and $35.93 million as of December 31, 2020. The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2021:

---

| | | |
|:---|:---|:---|
| *(Amounts in thousands)* |  | |
| Three months or less | $6057.0 |  |
| Over three through six months | 2268.0 |  |
| Over six through twelve months | 8861.0 |  |
| Over twelve months | 9952.0 |  |
| Total contractual maturities | $27138.0 |  |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 10. Borrowings**

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** | **December 31,** |
|  | **2021** | **2021** | **2020** | **2020** |
| *(Amounts in thousands)* | **Balance** | **Weighted Average Rate** | **Balance** | **Weighted Average Rate** |
| Retail repurchase agreements | $1536 | 0.07% | $964 | 0.34% |

---

Repurchase agreements are secured by certain securities that remain under the Company's control during the terms of the agreements. The counterparties may redeem callable repurchase agreements, which could substantially shorten the borrowings' lives. The prepayment or early termination of a repurchase agreement may result in substantial penalties based on market conditions. The following schedule presents the contractual maturities of repurchase agreements, by type of collateral pledged, as of December 31, 2021:

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Overnight and Continuous** |  | **Up to 30 Days** | **30 - 90 Days** | **Greater than 90 Days** | **Total** |
| *(Amounts in thousands)* |  | |  |  |  |  |
| U.S. Agency securities | $— |  | $— | $— | $— | $— |
| Municipal securities | 871 |  |  |  |  | 871 |
| Mortgage-backed Agency securities | 665 |  |  |  |  | 665 |
| Total | $1536 |  | $— | $— | $— | $1536 |

---

As of December 31, 2021, unused borrowing capacity with the FHLB totaled $411.23 million, net of FHLB letters of credit of $150.81 million. The Company pledged $744.08 million in qualifying loans to secure the FHLB letters of credit, which provide an attractive alternative to pledging securities for public unit deposits.

**Note 11. Derivative Instruments and Hedging Activities**

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

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan's stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. Certain of the Company's interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of December 31, 2021. The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period. The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** | **December 31,** |
|  | **2021** | **2021** | **2021** | **2020** | **2020** | **2020** |
| *(Amounts in thousands)* | **Notional or Contractual Amount** | **Derivative Assets** | **Derivative Liabilities** | **Notional or Contractual Amount** | **Derivative Assets** | **Derivative Liabilities** |
| Derivatives designated as hedges |  |  |  |  |  |  |
| Interest rate swaps | $4388 | $— | $229 | $4772 | $— | $465 |
| Derivatives not designated as hedges |  |  |  |  |  |  |
| Interest rate swaps | 7890 |  | 608 | 11928 |  | 666 |
| Total derivatives | $12278 | $— | $837 | $16700 | $— | $1131 |

---

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  |
| *(Amounts in thousands)* | **2021** | **2020** | **2019** | **Income Statement Location** |
| Derivatives designated as hedges |  |  |  |  |
| Interest rate swaps | $111 | $85 | $12 | Interest and fees on loans |
| Derivatives not designated as hedges |  |  |  |  |
| Interest rate swaps | 217 | 235 |  | Interest and fees on loans |
| Total derivative expense | $328 | $320 | $12 |  |

---

**Note 12. Employee Benefit Plans**

***Defined Benefit Plans***

 **

The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the "Benefit Plans") for key members of senior management and non-management directors. The Company's unfunded Benefit Plans include the Supplemental Executive Retention Plan ("SERP") and the Directors' Supplemental Retirement Plan ("Directors' Plan"). The SERP provides for a defined benefit, at normal retirement age, targeted at 35% of the participant's projected final average compensation, subject to a defined maximum annual benefit. Benefits under the SERP generally become payable at age 62. The Directors' Plan provides for a defined benefit, at normal retirement age, up to 100% of the participant's highest consecutive three-year average compensation. Benefits under the Directors' Plan generally become payable at age 70. The SERP was frozen near the end of 2021; the Directors' Plan was fundamentally frozen at that time as well. The following table presents the changes in the aggregate actuarial benefit obligation for the two plans combined during the periods indicated:

---

| | | |
|:---|:---|:---|
|  | **December 31,** | **December 31,** |
|  | **2021** | **2020** |
| *(Amounts in thousands)* |  |  |
| Beginning balance | $12579 | $11312 |
| Effect of curtailment | 289 |  |
| Service cost | 352 | 310 |
| Interest cost | 315 | 355 |
| Actuarial (gain) loss | (1472) | 1217 |
| Benefits paid | (605) | (615) |
| Ending balance | $11458 | $12579 |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following table presents the components of net periodic pension cost, the effect on the consolidated statements of income, and the assumed discount rate for the periods indicated:

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  |  |
|  | **2021** |  | **2020** |  | **2019** |  | **Income Statement Location** |
| *(Amounts in thousands)* |  | |  | |  | |  |
| Service cost | $352 |  | $310 |  | $320 |  | Salaries and employee benefits |
| Interest cost | 315 |  | 355 |  | 404 |  | Other expense |
| Effect of curtailment | 289 |  |  |  |  |  | Salaries and employee benefits |
| Amortization of prior service cost | 124 |  | 201 |  | 257 |  | Other expense |
| Amortization of losses | 264 |  | 186 |  | 20 |  | Other expense |
| Net periodic cost | $1344 |  | $1052 |  | $1001 |  |  |
| Assumed discount rate | 2.88 | % | 2.53 | % | 3.10 | % |  |

---

The following schedule presents the projected benefit payments to be paid under the Benefit Plans, by year, as of December 31, 2021:

---

| | | |
|:---|:---|:---|
| *(Amounts in thousands)* |  | |
| 2022 | $685.0 |  |
| 2023 | 684.0 |  |
| 2024 | 734.0 |  |
| 2025 | 729.0 |  |
| 2026 | 831.0 |  |
| 2027 through 2031 | 3669.0 |  |

---

***Deferred Compensation Plan***

The Company maintains deferred compensation agreements with certain current and former officers that provide benefit payments, over various periods, commencing at retirement or death. There were no accrued benefits, which are based on the present values of expected payments and estimated life expectancies, as of December 31, 2021 or 2020. There was no deferred compensation plan expense in 2021, 2020, or 2019.

 ****

The Company maintains a deferred compensation plan, referred to as the WRAP, and is a voluntary, non-tax qualified deferred compensation plan available to certain employees, including executive officers. Under the plan, participants may defer a portion of their base and/or annual incentive compensation. The plan is intended to mirror the Corporation's qualified KSOP, and may include discretionary match that coincides with a match made to the KSOP to the extent participants cannot otherwise receive the full match in the KSOP. The balance as of December 31, 2021 and 2020 was $5.25 million and $4.18 million, respectively.

***Employee Welfare Plan***

The Company provides various medical, dental, vision, life, accidental death and dismemberment, and long-term disability insurance benefits to all full-time employees who elect coverage under this program. A third-party administrator manages the health plan. Monthly employer and employee contributions are made to a tax-exempt employee benefits trust where the third-party administrator processes and pays claims. As of December 31, 2021, stop-loss insurance coverage generally limits the Company's risk of loss to $200 thousand for individual claims and $5.70 million for aggregate claims. Health plan expenses were $3.98 million in 2021, $4.17 million in 2020, and $3.97 million in 2019.

***Employee Stock Ownership and Savings Plan***

The Company maintains the Employee Stock Ownership and Savings Plan ("KSOP") that consists of a 401(k) savings feature that covers all employees that meet minimum eligibility requirements. The Company matches employee contributions at levels determined by the Board of Directors annually. These contributions are made in the first quarter following each plan year and employees must be employed on the last day of the plan year to be eligible. Matching contributions to qualified deferrals under the 401(k) savings component of the KSOP totaled $1.71 million in 2021, $1.51 million in 2020, and $1.10 million in 2019. The KSOP held 320,164 shares of the Company's common stock as of December 31, 2021, 351,222 shares as of December 31, 2020, and 346,833 shares as of December 31, 2019.

***Equity-Based Compensation Plans***

The Company maintains equity-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors, and other individuals performing services for the Company to focus on critical long-range objectives. The Company's equity-based compensation plans include the 2012 Omnibus Equity Compensation Plan ("2012 Plan"), 2004 Omnibus Stock Option Plan, 2001 Director's Option Plan, 1999 Stock Option Plan, and various other plans obtained through acquisitions. As of December 31, 2021, the 2012 Plan was the only plan available for the issuance of future grants. All plans issued or obtained before the 2012 Plan are frozen and no new grants may be issued; however, any options or awards unexercised and outstanding under those plans remain in effect per their respective terms. The 2012 Plan authorized 600,000 shares available for potential grants of incentive stock options, nonqualified stock options, performance awards, restricted stock, restricted stock units, stock appreciation rights, bonus stock, and stock awards. Grants issued under the 2012 Plan state the period of time the grant may be exercised, not to exceed more than ten years from the date granted. The Company's Compensation and Retirement Committee determines the vesting period for each grant; however, if no vesting period is specified the vesting occurs in 25% increments on the first four anniversaries of the grant date.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following table presents the pre-tax compensation expense and excess tax benefit recognized in earnings for all equity-based compensation plans for the periods indicated:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** | **2020** |  | **2019** |
| *(Amounts in thousands)* |  |  | |  |
| Pre-tax compensation expense | $1282 | $1643 |  | $1481 |
| Excess tax (benefit) expense | (633) | 202 |  | (340) |

---

*Stock Options*

The following table presents stock option activity and related information for the year ended December 31, 2021:

---

| | | | | |
|:---|:---|:---|:---|:---|
| *(Amounts in thousands, except share and per share data)* | **Option Shares** | **Weighted Average Exercise Price Per Share** | **Weighted Average Remaining Contractual Term (Years)** | **Aggregate Intrinsic Value** |
| Outstanding, January 1, 2021 | 114279 | $19.56 |  |  |
| Granted | 131198 | 33.00 |  |  |
| Exercised | (39995) | 13.44 |  |  |
| Canceled/Expired | (604) | 24.72 |  |  |
| Outstanding, December 31, 2021 | 204878 | $29.35 | 4.99 | $834 |
| Exercisable, December 31, 2021 | 73680 | $22.84 | 5.42 | $779 |

---

The following table presents the total options granted and the weighted average assumptions used to estimated the fair value of those options during the periods indicated. There were no options granted in 2020

The Company granted 131,198 stock options in 2021. The grant date fair value per share was $7.87. The volatility, risk-free rate, and expected dividend yield was 33.08%, 1.24%, and 3.57%, respectively. The expected term for these options in years is 5.4 years.

There were 39,995 options exercised in 2021 ; none were exercised in 2020. The intrinsic value of options exercised was $628 thousand in 2021, and none in 2020. As of December 31, 2021, unrecognized compensation cost related to nonvested stock options totaled $769 thousand with an expected weighted average recognition period of 2.25 years. The actual compensation cost recognized might differ from this estimate due to various items, including new grants and changes in estimated forfeitures.

*Restricted Stock Awards*

The following table presents restricted stock activity and related information for the year ended December 31, 2021:

---

| | | |
|:---|:---|:---|
|  | **Shares** | **Weighted Average Grant-Date Fair Value** |
| Nonvested, January 1, 2021 | 84915 | $25.31 |
| Granted |  |  |
| Vested | (37497) | 26.93 |
| Canceled | (1762) | 23.85 |
| Nonvested, December 31, 2021 | 45656 | $24.03 |

---

As of December 31, 2021, unrecognized compensation cost related to nonvested restricted stock awards totaled $535 thousand with an expected weighted average recognition period of 1.11 years. The actual compensation cost recognized might differ from this estimate due to various items, including new awards granted and changes in estimated forfeitures.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 13. Other Operating Income and Expense**

The following table presents the components of other operating income and expense for the periods indicated:

---

| | | | |
|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
| *(Amounts in thousands)* | **2021** | **2020** | **2019** |
| Other operating income |  |  |  |
| Bank owned life insurance | $1183 | $814 | $916 |
| Net FDIC indemnification asset amortization | (1226) | $(1690) | $(2377) |
| Other(1) | 4623 | 3555 | 1888 |
| Total other operating income | $4580 | $2679 | $427 |
| Other operating expense |  |  |  |
| OREO expense and net loss | 330 | 414 | 1494 |
| Telephone and data communications | 1720 | 2188 | 1404 |
| Office supplies | 553 | 660 | 647 |
| Other(1) | 9134 | 9148 | 8384 |
| Total other operating expense | $11737 | $12410 | $11929 |

---

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(1) Components of other operating income or expense that do not exceed 1% of total income

**Note 14. Income Taxes** 

Income tax expense is comprised of current and deferred, federal and state income taxes on the Company's pre-tax earnings. The following table presents the components of the income tax provision for the periods indicated:

---

| | | | |
|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
| *(Amounts in thousands)* | **2021** | **2020** | **2019** |
| Current tax expense: |  |  |  |
| Federal | $8546 | $10048 | $9603 |
| State | 1563 | 1643 | 1554 |
| Total current tax expense | 10109 | 11691 | 11157 |
| Deferred tax expense (benefit): |  |  |  |
| Federal | 4677 | (1266) | (152) |
| State | 574 | (239) | (11) |
| Total deferred tax expense (benefit) | 5251 | (1505) | (163) |
| Total income tax expense | $15360 | $10186 | $10994 |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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. The following table reconciles the Company's income tax expense to the amount computed by applying the federal statutory tax rate to pre-tax income for the periods indicated:

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** | **2021** | **2020** | **2020** | **2019** | **2019** |
|  | **Amount** | **Percent** | **Amount** | **Percent** | **Amount** | **Percent** |
| *(Amounts in thousands)* |  |  |  |  |  |  |
| Federal income tax at the statutory rate | $13971 | 21.00 | $9683 | 21.00 | $10457 | 21.00 |
| State income tax, net of federal benefit | 2076 | 3.12 | 1109 | 3.12 | 1220 | 3.12 |
|  | 16047 | 24.12 | 10792 | 24.12 | 11677 | 24.12 |
| Increase (decrease) resulting from: |  |  |  |  |  |  |
| Tax-exempt interest income | (340) | (0.51) | (500) | (1.08) | (637) | (1.28) |
| Excess tax benefits | (133) | (0.20) | 42 | 0.09 | (71) | (0.14) |
| Bank owned life insurance | (225) | (0.34) | (139) | (0.30) | (249) | (0.50) |
| Other items, net | 11 | 0.02 | (9) | (0.74) | 274 | 0.04 |
| Income tax at the effective tax rate | $15360 | 23.09 | $10186 | 22.09 | $10994 | 22.24 |

---

Deferred taxes derived from continuing operations reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for tax purposes. The following table presents the significant components of the net deferred tax asset as of the dates indicated:

---

| | | |
|:---|:---|:---|
|  | **December 31,** | **December 31,** |
| *(Amounts in thousands)* | **2021** | **2020** |
| Deferred tax assets |  |  |
| Allowance for loan losses | $6647 | $6128 |
| Unrealized asset losses | 482 | 545 |
| Purchase accounting | 455 | 2559 |
| FDIC assisted transactions | 810 | 1685 |
| Intangible assets | (318) | 217 |
| Deferred compensation assets | 4360 | 4048 |
| Federal net operating loss carryforward | 2179 | 4093 |
| Deferred loan fees | 2350 | 2401 |
| Other | 1930 | 1816 |
| Total deferred tax assets | 18895 | 23492 |
| Deferred tax liabilities |  |  |
| FDIC indemnification asset |  | 286 |
| Fixed assets | (823) | 2450 |
| Odd days interest deferral | (3324) | 1482 |
| Unrealized gains on available for sale securities | (4) | 257 |
| Other | (592) | 287 |
| Total deferred tax liabilities | (4743) | 4762 |
| Net deferred tax asset | $14152 | $18730 |

---

The Company had no unrecognized tax benefits or accrued interest or penalties as of December 31, 2021 or 2020. The Company had no deferred tax valuation allowance recorded as of December 31, 2021 or 2020, as management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and various state tax departments for the years ended December 31, 2018 through 2020.

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**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 15. Accumulated Other Comprehensive Income**

The following table presents the changes in AOCI, net of tax and by component, during the periods indicated:

---

| | | | |
|:---|:---|:---|:---|
|  | **Unrealized Gains (Losses) on Available for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Balance January 1, 2019 | $(285) | $(1144) | $(1429) |
| Other comprehensive income (loss) before reclassifications | 1117 | (1448) | (331) |
| Reclassified from AOCI | 34 | 220 | 254 |
| Other comprehensive (loss) income, net | 1151 | (1228) | (77) |
| Balance December 31, 2019 | $866 | $(2372) | $(1506) |
| Balance January 1, 2020 | $866 | $(2372) | $(1506) |
| Other comprehensive income (loss) before reclassifications | 544 | (961) | (417) |
| Reclassified from AOCI | (304) | 304 |  |
| Other comprehensive income (loss), net | 240 | (657) | (417) |
| Balance December 31, 2020 | $1106 | $(3029) | $(1923) |
| Balance January 1, 2021 | $1106 | $(3029) | $(1923) |
| Other comprehensive (loss) income before reclassifications | (1091) | 1160 | 69 |
| Reclassified from AOCI |  | 308 | 308 |
| Other comprehensive income (loss), net | (1091) | 1468 | 377 |
| Balance December 31, 2021 | $15 | $(1561) | $(1546) |

---

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Income Statement** |
| *(Amounts in thousands)* | **2021** | **2020** | **2019** | **Line Item Affected** |
| Available-for-sale securities |  |  |  |  |
| (Losses) gains recognized | $— | $(385) | $43 | Net loss on sale of securities |
| Reclassified out of AOCI, before tax |  | (385) | 43 | Income before income taxes |
| Income tax benefit |  | 81 | (9) | Income tax expense |
| Reclassified out of AOCI, net of tax |  | (304) | 34 | Net income |
| Employee benefit plans |  |  |  |  |
| Amortization of prior service cost | 124 | 201 | 257 | Other operating expense |
| Amortization of net actuarial loss | 264 | 185 | 21 | Other operating expense |
| Reclassified out of AOCI, before tax | 388 | 386 | 278 | Income before income taxes |
| Income tax expense | (80) | (82) | (58) | Income tax expense |
| Reclassified out of AOCI, net of tax | 308 | 304 | 220 | Net income |
| Total reclassified out of AOCI, net of tax | $308 | $— | $254 | Net income |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 16. Fair Value** 

***Financial Instruments Measured at Fair Value***

The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.

*Assets and Liabilities Reported at Fair Value on a Recurring Basis*

 

*Available-for-Sale Debt Securities*. Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company's Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

*Equity Securities.* Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.

*Loans Held for Investment*. Loans held for investment are reported at fair value using the exit price notion, which is derived from third-party models. Loans related to fair value hedges are recorded at fair value on a recurring basis.

*Deferred Compensation Assets and Liabilities*. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

*Derivative Assets and Liabilities*. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Total** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| Available-for-sale debt securities |  |  |  |  |
| U.S. Agency securities | $466 | $— | $466 | $— |
| Municipal securities | 28794 |  | 28794 |  |
| &nbsp;&nbsp;&nbsp; Corporate Notes | 9919 |  | 9919 |  |
| Mortgage-backed Agency securities | 37113 |  | 37113 |  |
| Total available-for-sale debt securities | 76292 |  | 76292 |  |
| Equity securities | 55 |  | 55 |  |
| Fair value loans | 13106 |  |  | 13106 |
| Deferred compensation assets | 5245 | 5245 |  |  |
| Deferred compensation liabilities | 5245 | 5245 |  |  |
| Derivative liabilities | 837 |  | 837 |  |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |
|  | **Total** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| Available-for-sale debt securities |  |  |  |  |
| U.S. Agency securities | $551 | $— | $551 | $— |
| Municipal securities | 44459 |  | 44459 |  |
| Mortgage-backed Agency securities | 38348 |  | 38348 |  |
| Total available-for-sale debt securities | 83358 |  | 83358 |  |
| Equity securities | 55 |  | 55 |  |
| Fair value loans | 17831 |  |  | 17831 |
| Deferred compensation assets | 4181 | 4181 |  |  |
| Deferred compensation liabilities | 4181 | 4181 |  |  |
| Derivative liabilities | 1131 |  | 1131 |  |

---

*Changes in Level 3 Fair Value Measurements*

The following table presents the changes in Level 3 assets recorded at fair value on a recurring basis during the period indicated:

---

| | |
|:---|:---|
|  | **Assets** |
| *(Amounts in thousands)* |  |
| Balance January 1, 2020 | $17942 |
| Changes in fair value | 621 |
| Changes due to principal reduction | (732) |
| Balance December 31, 2020 | $17831 |
| Balance January 1, 2021 | $17831 |
| Changes in fair value | (303) |
| Changes due to principal reduction | (4422) |
| Balance December 31, 2021 | $13106 |

---

No transfers into or out of Level 3 of the fair value hierarchy occurred during the year ended December 31, 2021 or 2020.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

*Assets Measured at Fair Value on a Nonrecurring Basis*

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

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

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

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

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
|  | **Total** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |  |
|  | **Fair Value** |  | **Level 1** |  | **Level 2** |  | **Level 3** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Collateral dependent assets with specific reserves | $2312 |  | $— |  | $— |  | $2312 |  |
| OREO | 1015 |  |  |  |  |  | 1015 |  |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |  |
|  | **Total** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |  |
|  | **Fair Value** |  | **Level 1** |  | **Level 2** |  | **Level 3** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Impaired loans | $979 |  | $— |  | $— |  | $979 |  |
| OREO | 2083 |  |  |  |  |  | 2083 |  |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

*Quantitative Information about Level 3 Fair Value Measurements*

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  |  |  | **Discount Range** | **Discount Range** |
|  | **Valuation** | **Unobservable** | **(Weighted Average)** | **(Weighted Average)** |
|  | **Technique** | **Input** | **December 31, 2021** | **December 31, 2021** |
| Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 11% | (6)% |
| OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 87% | (32)% |

---

------

(1) Fair value is generally based on appraisals of the underlying collateral.

(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

---

| | | | | |
|:---|:---|:---|:---|:---|
|  |  |  | **Discount Range** | **Discount Range** |
|  | **Valuation** | **Unobservable** | **(Weighted Average)** | **(Weighted Average)** |
|  | **Technique** | **Input** | **December 31, 2020** | **December 31, 2020** |
| Impaired loans | Discounted appraisals(1) | Appraisal adjustments(2) | 22% to 38% | (30)% |
| OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 8% to 77% | (25)% |

---

------

(1) Fair value is generally based on appraisals of the underlying collateral.

(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Carrying** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Amount** | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| **Assets** |  |  |  |  |  |
| Cash and cash equivalents | $677439 | $677439 | $677439 | $— | $— |
| Debt securities available for sale | 76292 | 76292 |  | 76292 |  |
| Equity securities | 55 | 55 |  | 55 |  |
| Loans held for investment, net of allowance | 2137711 | 2108513 |  |  | 2108513 |
| Interest receivable | 7900 | 7900 |  | 7900 |  |
| Deferred compensation assets | 5245 | 5245 | 5245 |  |  |
| **Liabilities** |  |  |  |  |  |
| Time deposits | 354863 | 352000 |  | 352000 |  |
| Securities sold under agreements to repurchase | 1536 | 1536 |  | 1536 |  |
| Interest payable | 314 | 314 |  | 314 |  |
| Deferred compensation liabilities | 5245 | 5245 | 5245 |  |  |
| Derivative liabilities | 837 | 837 |  | 837 |  |

---

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |
|  | **Carrying** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Amount** | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| **Assets** |  |  |  |  |  |
| Cash and cash equivalents | $456561 | $456561 | $456561 | $— | $— |
| Debt securities available for sale | 83358 | 83358 |  | 83358 |  |
| Equity securities | 55 | 55 |  | 55 |  |
| Loans held for sale |  |  |  |  |  |
| Loans held for investment, net of allowance | 2160450 | 2126221 |  |  | 2126221 |
| FDIC indemnification asset | 1223 | 509 |  |  | 509 |
| Interest receivable | 9052 | 9052 |  | 9052 |  |
| Deferred compensation assets | 4181 | 4181 | 4181 |  |  |
| **Liabilities** |  |  |  |  |  |
| Time deposits | 420619 | 423120 |  | 423120 |  |
| Securities sold under agreements to repurchase | 964 | 964 |  | 964 |  |
| Interest payable | 582 | 582 |  | 582 |  |
| Deferred compensation liabilities | 4181 | 4181 | 4181 |  |  |
| Derivative liabilities | 1131 | 1131 |  | 1131 |  |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 17. Earnings per Share**

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

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |  |
|  | **2021** |  | **2020** | **2019** |  |
| *(Amounts in thousands, except share and per share data)* |  | |  |  | |
| Net income | $51168 |  | $35926 | $38802 |  |
| Weighted average common shares outstanding, basic | 17335615 |  | 17781748 | 15690812 |  |
| Dilutive effect of potential common shares |  |  |  |  |  |
| Stock options | 30854 |  | 22495 | 53907 |  |
| Restricted stock | 36467 |  | 11137 | 11374 |  |
| Total dilutive effect of potential common shares | 67321 |  | 33632 | 65281 |  |
| Weighted average common shares outstanding, diluted | 17402936 |  | 17815380 | 15756093 |  |
| Basic earnings per common share | $2.95 |  | $2.02 | $2.47 |  |
| Diluted earnings per common share | 2.94 |  | 2.02 | 2.46 |  |
| Potential antidilutive common shares |  |  |  |  |  |
| Stock options | 103520 |  | 58166 | 25 |  |
| Restricted stock | 630 |  | 26900 | 25853 |  |
| Total potential antidilutive shares | 104150 |  | 85066 | 25878 |  |

---

**Note 18. Related Party Transactions**

The Company engages in transactions with related parties in the normal course of business. Related parties include directors, executive officers, and principal shareholders and their immediate family members, business interests, and affiliates. All related party transactions are made on terms that are substantially the same as those prevailing at the time for similar transactions with unrelated parties, including interest rates and collateral. The following table presents the changes in loans with related parties during the periods indicated:

---

| | | |
|:---|:---|:---|
|  | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** | **2020** |
| *(Amounts in thousands)* |  |  |
| Beginning balance | $20166 | $20345 |
| New loans and advances | 4476 | 4821 |
| Loan repayments | (4139) | (5023) |
| Reclassifications(1) | 13237 | 23 |
| Ending balance | $33740 | $20166 |

---

------

(1) Changes related to the composition of the Company's directors, executive officers, and related insiders

Deposits from related parties totaled $11.92 million as of December 31, 2021, and $8.04 million as of December 31, 2020. Legal fees paid to related parties totaled $80 thousand in 2021, $70 thousand in 2020, and $150 thousand in 2019. There were no lease payments paid to related parties in 2021 2020 ,2019. Other expense paid to related parties totaled $104 thousand in 2021, $68 thousand in 2020, and $7 thousand in 2019.

**Note 19. Litigation, Commitments, and Contingencies**

***Litigation***

In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 ****

***Commitments and Contingencies***

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

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

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

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31,** | **December 31,** | **December 31,** |  |
|  | **2021** |  | **2020** |  |
| *(Amounts in thousands)* |  | |  | |
| Commitments to extend credit | $272447 |  | $229408 |  |
| Standby letters of credit and financial guarantees(1) | 153717 |  | 179022 |  |
| Total off-balance sheet risk | 426164 |  | 408430 |  |
| Allowance for unfunded commitments | $678 |  | $66 |  |

---

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Includes FHLB letters of credit

**Note 20. Regulatory Requirements and Restrictions** 

The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, which applies only to the Bank, the Bank must meet specific capital guidelines that involve quantitative measures of the entity's balance sheet assets and off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In addition, the Company and the Bank are subject to various regulatory restrictions related to the payment of dividends, including requirements to maintain capital at or above regulatory minimums.

The current risk-based capital requirements, based on the international capital standards known as Basel III, requires the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital, and total capital to risk-weighted assets, and of Tier 1 capital to average consolidated assets ("Tier 1 leverage ratio"), as defined in the regulations. Basel III's capital conservation buffer ("CCB"), which is intended to absorb losses during periods of economic stress, increased those minimum ratios by 2.5% on January 1, 2019).

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The following tables present actual and required capital ratios, under Basel III capital rules, as of the dates indicated:

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Actual** | **Actual** | **Minimum Basel III Requirement** | **Minimum Basel III Requirement** | **Minimum Basel III Requirement - with CCB** | **Minimum Basel III Requirement - with CCB** | **Well Capitalized Requirement(1)** | **Well Capitalized Requirement(1)** |
| *(Amounts in thousands)* | **Amount** | **Ratio** | **Amount** | **Ratio** | **Amount** | **Ratio** | **Amount** | **Ratio** |
| **The Company** |  |  |  |  |  |  |  |  |
| Common equity Tier 1 ratio | $294207 | 14.39% | $91983 | 4.50% | $143084 | 7.00% | N/A | N/A |
| Tier 1 risk-based capital ratio | 294207 | 14.39% | 122644 | 6.00% | 173745 | 8.50% | N/A | N/A |
| Total risk-based capital ratio | 319795 | 15.65% | 163525 | 8.00% | 214626 | 10.50% | N/A | N/A |
| Tier 1 Leverage ratio | 294207 | 9.65% | 121892 | 4.00% | N/A | N/A | N/A | N/A |
| **The Bank** |  |  |  |  |  |  |  |  |
| Common equity Tier 1 ratio | $271806 | 13.37% | $91499 | 4.50% | $142332 | 7.00% | $132166 | 6.50% |
| Tier 1 risk-based capital ratio | 271806 | 13.37% | 121999 | 6.00% | 172832 | 8.50% | 162666 | 8.00% |
| Total risk-based capital ratio | 297261 | 14.62% | 162666 | 8.00% | 213499 | 10.50% | 203332 | 10.00% |
| Tier 1 Leverage ratio | 271806 | 8.94% | 121623 | 4.00% | N/A | N/A | 152028 | 5.00% |

---

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Based on prompt corrective action provisions

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** | **December 31, 2020** |
|  | **Actual** | **Actual** | **Minimum Basel III Requirement** | **Minimum Basel III Requirement** | **Minimum Basel III Requirement - with CCB** | **Minimum Basel III Requirement - with CCB** | **Well Capitalized Requirement(1)** | **Well Capitalized Requirement(1)** |
| *(Amounts in thousands)* | **Amount** | **Ratio** | **Amount** | **Ratio** | **Amount** | **Ratio** | **Amount** | **Ratio** |
| **The Company** |  |  |  |  |  |  |  |  |
| Common equity Tier 1 ratio | $292019 | 14.28% | $92043 | 4.50% | $143178 | 7.00% | N/A | N/A |
| Tier 1 risk-based capital ratio | 292019 | 14.28% | 122724 | 6.00% | 214767 | 8.50% | N/A | N/A |
| Total risk-based capital ratio | 317595 | 15.53% | 163632 | 8.00% | 173859 | 10.50% | N/A | N/A |
| Tier 1 Leverage ratio | 292019 | 10.24% | 114081 | 4.00% | N/A | N/A | N/A | N/A |
| **The Bank** |  |  |  |  |  |  |  |  |
| Common equity Tier 1 ratio | $277449 | 13.57% | $92017 | 4.50% | $143137 | 7.00% | $132913 | 6.50% |
| Tier 1 risk-based capital ratio | 277449 | 13.57% | 122689 | 6.00% | 173809 | 8.50% | 163585 | 8.00% |
| Total risk-based capital ratio | 303018 | 14.82% | 163585 | 8.00% | 214706 | 10.50% | 204482 | 10.00% |
| Tier 1 Leverage ratio | 277449 | 9.73% | 114058 | 4.00% | N/A | N/A | 142572 | 5.00% |

---

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Based on prompt corrective action provisions

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 21. Parent Company Financial Information** 

The following tables present condensed financial information for the parent company, First Community Bankshares, Inc., as of and for the dates indicated:

---

| | | |
|:---|:---|:---|
|  | **CONDENSED BALANCE SHEETS** | **CONDENSED BALANCE SHEETS** |
|  | **December 31,** | **December 31,** |
| *(Amounts in thousands)* | **2021** | **2020** |
| **Assets** |  |  |
| Cash and due from banks | $7728 | $10089 |
| Securities available for sale | 9919 |  |
| Investment in subsidiaries | 405374 | 412161 |
| Other assets | 5522 | 5089 |
| Total assets | $428543 | $427339 |
| **Liabilities** |  |  |
| Other liabilities | $768 | $609 |
| Total liabilities | 768 | 609 |
| **Stockholders' equity** |  |  |
| Common stock | 16878 | 17723 |
| Additional paid-in capital | 147619 | 173345 |
| Retained earnings | 264824 | 237585 |
| Accumulated other comprehensive loss | (1546) | (1923) |
| Total stockholders' equity | 427775 | 426730 |
| Total liabilities and stockholders' equity | $428543 | $427339 |

---

---

| | | | |
|:---|:---|:---|:---|
|  | **CONDENSED STATEMENTS OF INCOME** | **CONDENSED STATEMENTS OF INCOME** | **CONDENSED STATEMENTS OF INCOME** |
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|  | **2021** | **2020** | **2019** |
| *(Amounts in thousands)* |  |  |  |
| Cash dividends received from subsidiary bank | $53200 | $23710 | $38500 |
| Other income | 8 | 3 | 444 |
| Other operating expense | 1086 | 1446 | 1420 |
| Income before income taxes and equity in undistributed net income of subsidiaries | 52122 | 22267 | 37524 |
| Income tax benefit | (351) | (375) | (276) |
| Income before equity in undistributed net income of subsidiaries | 52473 | 22642 | 37800 |
| Equity in (dividends in excess) of undistributed net income of subsidiaries | (1305) | 13284 | 1002 |
| Net income | $51168 | $35926 | $38802 |

---

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

---

| | | | |
|:---|:---|:---|:---|
|  | **CONDENSED STATEMENTS OF CASH FLOWS** | **CONDENSED STATEMENTS OF CASH FLOWS** | **CONDENSED STATEMENTS OF CASH FLOWS** |
|  | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
| *(Amounts in thousands)* | **2021** | **2020** | **2019** |
| **Operating activities** |  |  |  |
| Net income | $51168 | $35926 | $38802 |
| Adjustments to reconcile net income to net cash provided by operating activities |  |  |  |
| Net change in other operating activities | 253 | 1047 | 1865 |
| Net cash provided by operating activities | 51421 | 36973 | 40667 |
| **Investing activities** |  |  |  |
| Purchase of investment securities | (9919) |  |  |
| Dividends in excess of undistributed net income of subsidiaries | 1305 | (13284) | (1002) |
| Net cash provided by investing activities | (8614) | (13284) | (1002) |
| **Financing activities** |  |  |  |
| Proceeds from issuance of common stock |  |  | 136 |
| Payments for repurchase of common stock | (28882) | (21872) | (16362) |
| Payments of common dividends | (18059) | (17876) | (15060) |
| Net change in other financing activities | 1773 | 2150 | 1893 |
|  | (45168) | (37598) | (29393) |
| Net increase (decrease) in cash and cash equivalents | (2361) | (13909) | 10272 |
| Cash and cash equivalents at beginning of period | 10089 | 23998 | 13726 |
| Cash and cash equivalents at end of period | $7728 | $10089 | $23998 |

---

**Note 23. Quarterly Financial Data (Unaudited)**

The following tables present selected financial data for the periods indicated:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** |
|  | **First** | **Second** | **Third** | **Fourth** |
|  | **Quarter** | **Quarter** | **Quarter** | **Quarter** |
| *(Amounts in thousands, except share and per share data)* |  |  |  |  |
| Interest income | $27151 | $26538 | $25789 | $25832 |
| Interest expense | 869 | 724 | 643 | 600 |
| Net interest income | 26282 | 25814 | 25146 | 25232 |
| Recovery of loan losses | (4001) | (2230) | (1394) | (846) |
| Net interest income after provision | 30283 | 28044 | 26540 | 26078 |
| Noninterest income, excluding net loss on sale of securities | 7569 | 8797 | 8720 | 9215 |
| Noninterest expense | 18820 | 19361 | 18836 | 21701 |
| Income before income taxes | 19032 | 17480 | 16424 | 13592 |
| Income tax expense | 4430 | 4077 | 3816 | 3037 |
| Net income | $14602 | $13403 | $12608 | $10555 |
| Basic earnings per common share | $0.83 | $0.77 | $0.73 | $0.62 |
| Diluted earnings per common share | 0.82 | 0.76 | 0.73 | 0.62 |
| Dividends per common share | 0.25 | 0.25 | 0.27 | 0.27 |
| Weighted average basic shares outstanding | 17669937 | 17486182 | 17221244 | 16974005 |
| Weighted average diluted shares outstanding | 17729185 | 17536144 | 17279576 | 17038980 |

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[**Table of Contents**](#toc)

**FIRST COMMUNITY BANKSHARES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** | **Year Ended December 31, 2020** |  |
|  | **First** |  | **Second** |  | **Third** |  | **Fourth** |  |
|  | **Quarter** |  | **Quarter** |  | **Quarter** |  | **Quarter** |  |
| *(Amounts in thousands, except share and per share data)* |  | |  | |  | |  | |
| Interest income | $29509 |  | $27786 |  | $27995 |  | $28746 |  |
| Interest expense | 1827 |  | 1447 |  | 1161 |  | 1029 |  |
| Net interest income | 27682 |  | 26339 |  | 26834 |  | 27717 |  |
| Provision for loan losses | 3500 |  | 3831 |  | 4703 |  | 634 |  |
| Net interest income after provision | 24182 |  | 22508 |  | 22131 |  | 27083 |  |
| Noninterest income, excluding net loss on sale of securities | 7164 |  | 6913 |  | 7638 |  | 7733 |  |
| Net loss on sale of securities | 385 |  |  |  |  |  |  |  |
| Noninterest expense | 21664 |  | 18913 |  | 19171 |  | 19877 |  |
| Income before income taxes | 10067 |  | 10508 |  | 10598 |  | 14939 |  |
| Income tax expense | 2195 |  | 2270 |  | 2332 |  | 3389 |  |
| Net income | $7872 |  | $8238 |  | $8266 |  | $11550 |  |
| Basic earnings per common share | $0.44 |  | $0.47 |  | $0.47 |  | $0.65 |  |
| Diluted earnings per common share | 0.44 |  | 0.46 |  | 0.47 |  | 0.65 |  |
| Dividends per common share | 0.25 |  | 0.25 |  | 0.25 |  | 0.25 |  |
| Weighted average basic shares outstanding | 17998994 |  | 17701853 |  | 17710283 |  | 17717356 |  |
| Weighted average diluted shares outstanding | 18050071 |  | 17728300 |  | 17732428 |  | 17751805 |  |

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[**Table of Contents**](#toc)

- <u>**Report of Independent Registered Public Accounting Firm**</u> **-**

Board of Directors and Stockholders

First Community Bankshares, Inc.

Bluefield, Virginia

**Opinion on the Consolidated Financial Statements**

We have audited the accompanying consolidated balance sheets of First Community Bankshares, Inc. (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020 and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles*.*

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in *Internal Control - Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2022 expressed an unqualified opinion thereon.

**Basis for Opinion**

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

**Adoption of New Accounting Standard** 

As discussed in Notes 1, 4, 5 and 6 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of Accounting Standards Codification (ASC) *Topic 326 Financial Instruments* – *Credit Losses*.

**Critical Audit Matter**

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

*Allowance for Credit Losses for Loans*

The allowance for credit losses for loans ("ACL") was $27.9 million at December 31, 2021. As described in Note 1, the Company adopted ASC *Topic 326 Financial Instruments* – *Credit Losses* as of January 1, 2021. As described in Note 1 to the consolidated financial statements, management estimates the ACL by considering 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 and reflects management's best estimate within the range of expected credit losses over the contractual term of the loans, adjusted for expected prepayments. Loans that share similar risk characteristics are collectively evaluated and generally segmented by loan purpose. For collectively evaluated loans, the Company uses a combination of discounted cash flows and remaining life methods to estimate expected credit losses. Management utilizes both Company and peer bank historical loss experience with similar risk characteristics to assess expected credit loss within the segments over an economic cycle based on call report data. Management also determines the economic variables to use for the one-year reasonable and supportable forecast period. For contractual terms that extend beyond the forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach.

We identified the ACL as a critical audit matter. The principal considerations for our determination of the ACL as a critical audit matter includes the high degree of judgment and subjectivity involved in management's determination of significant model assumptions, including the selection and application of macroeconomic data within the forecasts. In turn, auditing management's judgments regarding loan credit loss estimates and assumptions involved a high degree of subjectivity, including specialized skill and knowledge, and an increased extent of audit effort.

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[**Table of Contents**](#toc)

The primary procedures we performed to address this critical audit matter included:

● We obtained an understanding of the Company's methodology and process for establishing the ACL, and evaluated the design and operating effectiveness of controls relating to management's determination of the ACL, including controls over:

● The development of the allowance for credit losses model, including approval of key policies adopted under implementation of the new accounting standard and selection of reasonable and supportable economic forecasts used in the model,

● The completeness and accuracy of data input into the model used to determine the ACL, and

● Management's review and approval of the ACL, including management's selection and application of macroeconomic data within the forecasts.

● We evaluated management's selection and application of macroeconomic data within the forecasts, including comparing key economic forecasts to independent sources, as well as involving our valuation specialists in testing the application of forecasts in the model calculation.

● We tested the completeness and accuracy of the loan data uploaded into the model software and reconciled the loan data to the Company's core system by segment.

**/s/ DIXON HUGHES GOODMAN LLP**

We have served as the Company's auditor since 2006.

Charlotte, North Carolina

March 3, 2022

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[**Table of Contents**](#toc)

**- <u>Management's Assessment of Internal Control</u> <u>o</u><u>ver Financial Reporting</u> -**

First Community Bankshares, Inc. (the "Company") is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management's best estimates and judgments.

We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework in the *Internal Control-Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that its system of internal control over financial reporting was effective as of December 31, 2021.

Dixon Hughes Goodman LLP, independent registered public accounting firm, has issued a report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021. The Report of Independent Registered Public Accounting Firm, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021, appears hereafter in Item 8 of this Annual Report on Form 10-K.

Dated this 3rd day of March 2022.

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| | |
|:---|:---|
| /s/ William P. Stafford, II | /s/ David D. Brown |
| William P. Stafford, II | David D. Brown |
| Chief Executive Officer | Chief Financial Officer |

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[**Table of Contents**](#toc)

- **<u>Report of Independent Registered Public Accounting Firm</u>** -

Board of Directors and Stockholders

First Community Bankshares, Inc.

Bluefield, Virginia

**Opinion on Internal Control Over Financial Reporting**

We have audited First Community Bankshares, Inc.'s (the "Company") internal control over financial reporting as of December 31, 2021, based on criteria established in *Internal Control*—*Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, First Community Bankshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in *Internal Control*—*Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of First Community Bankshares, Inc. as of December 31, 2021 and 2020, and for each of the years in the three-year period ended December 31, 2021 and our report dated March 3, 2022, expressed an unqualified opinion on those consolidated financial statements.

**Basis for Opinion** 

The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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**Definition and Limitations of Internal Control Over Financial Reporting**

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

**/s/ DIXON HUGHES GOODMAN LLP** 

Charlotte, North Carolina

March 3, 2022

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[**Table of Contents**](#toc)

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| | |
|:---|:---|
| **Item 9.** | **Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.** |

---

None.

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| | |
|:---|:---|
| **Item 9A.** | **Controls and Procedures.** |

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**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 December 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 December 31, 2021, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

**Management's Report on Internal Controls over Financial Reporting**

Management's report on the Company's internal control over financial reporting and the attestation report of Dixon Hughes Goodman LLP, the Company's independent registered public accounting firm, on internal control over financial reportings are under the headings "Management's Assessment of Internal Control over Financial Reporting," and "Report of Independent Registered Public Accounting Firm," in Item 8 of this report amd are incorporated in this Item 9A by reference.

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| | |
|:---|:---|
| **Item 9B.** | **Other Information.** |

---

On December 21, 2021, the Board of Directors of the Company amended the First Community Bankshares, Inc. and Affiliated Executive Retention Plan ("Executive Retention Plan") to provide that as of January 1, 2022, (i) no new participants would be admitted to the Executive Retention Plan, (ii) future benefit accruals under the Executive Retention Plan would be ceased for the current participants in the Executive Retention Plan and (iii) no further vesting would occur under the Executive Retention Plan for the current participants in the Executive Retention Plan. The Board of Directors of the Company reviewed the Company's compensation philosophy and various plans and concluded that the continuation of the Executive Retention Plan was no longer required for the recruitment and retention of the individuals eligible to participate in the Executive Retention Plan and was not in the Company's best interests.

A copy of Amendment #6 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan is included as Exhibit 10.9.7 and is incorporated herein by reference. The above summary is qualified in its entirety by reference to Amendment #6 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan attached as Exhibit 10.9.7.

The Board of Directors of the Company also amended the First Community Bankshares, Inc. Supplemental Directors Retirement Plan (the "Directors Retirement Plan") on December 21, 2021 to (i) "freeze" the Directors Retirement Plan so that no new participants would be admitted to the Directors Retirement Plan and (ii) amend the definition of Final Average Compensation in the Directors Retirement Plan in order to cease benefit accrual. The definition of Years of Service in the Directors Retirement Plan did not change, and current participants are allowed to continue to accrue Years of Service for vesting purposes. Under the amendment, no annual compensation after December 31, 2021 will be counted toward the calculation of Final Average Compensation under the Directors Retirement Plan. In assessing the Company's compensation philosophy and various plans, the Board of Directors concluded that the design of the Directors Retirement Plan was no longer common in the industry, favored by the market or required for the recruitment and retention of qualified directors and therefore, no longer in the best interests of the Company.

A copy of Amendment #4 to the First Community Bankshares, Inc. Supplemental Directors Retirement Plan is included as Exhibit 10.12.4 and is incorporated herein by reference. The above summary is qualified in its entirety by reference to Amendment #4 to the First Community Bankshares, Inc. Supplemental Directors Retirement Plan attached as Exhibit 10.12.4.

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| | |
|:---|:---|
| **Item 9C.** | **Disclosure Regarding Foreign Jurisdictions that Prevent Inspections** |

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None.

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[**Table of Contents**](#toc)

**PART III**

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| | |
|:---|:---|
| **Item 10.** | **Directors, Executive Officers and Corporate Governance.** |

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 **Board of Directors, First Community Bankshares, Inc.**

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| | |
|:---|:---|
| **C. William Davis**<br> Attorney at Law, Richardson & Davis, PLLC<br>**Samuel L. Elmore**<br> Retired Chief Credit Officer and Senior Vice President, First Community Bank; Past Executive Vice President, Citizens Southern Bank, Inc.; Past President and Chief Executive Officer, Bank One; Past Vice President, Key Centurion Bancshares; Past President and Chief Operations Officer, Beckley National Bank; Director, Raleigh County Commission on Aging<br>**Richard S. Johnson**<br> Chairman, President, and Chief Executive Officer, The Wilton Companies; Past Chair and Director, City of Richmond Economic Development Authority; Trustee Emeritus, University of Richmond<br>**Gary R. Mills**<br> President, First Community Bankshares, Inc.; Chief Executive Officer and President, First Community Bank<br>| **Harriet B. Price**<br> Chief Financial Officer, Price-Williams Realty, Inc.<br>**M. Adam Sarver**<br> Member/Co-Manager, Main Street Builders, LLC, Eastern Door & Glass, LLC, Longview Properties LLC, and Clover Leaf Properties, LLC<br>**William P. Stafford, II**<br> Chief Executive Officer, First Community Bankshares, Inc.; Attorney at Law, Brewster Morhous PLLC<br>**Dr. Beth A. Taylor**<br> Mayor - Town of Wytheville, Virginia; Doctor of Medicine/Private Practice (retired) |
| **Executive Officers, First Community Bankshares, Inc** |  |
| **William P. Stafford, II**<br> Chief Executive Officer<br>**Gary R. Mills**<br> President<br>**Sarah W. Harmon**<br> Chief Administrative Officer and General Counsel<br>| **David D. Brown**<br> Chief Financial Officer<br>**Jason R. Belcher**<br> Chief Operating Officer<br>|
| **Board of Directors, First Community Bank** |  |
| **James H. Atkinson, Jr.**<br> Retired Chief Executive Officer, Peoples Bank of Virginia<br>**Robert L. Buzzo**<br> Retired Vice President and Secretary, First Community Bankshares, Inc.; Retired President Emeritus, First Community Bank<br>**Samuel D. Campbell**<br> Attorney at Law<br>**C. William Davis**<br> (See above)<br>**Samuel L. Elmore**<br> (See above)<br>**S. Michael Feola**<br> Retired Senior Vice President – Regional President, First Community Bank<br>**T. Vernon Foster**<br> President of J. La'Verne Print Communications; Past Director, TriStone Community Bank; Executive Director: MBA Programs, Career Management & Public Relations, University of Louisville, College of Business | **Richard H. Jarrell**<br> Chick-fil-A Franchise Owner; Director, Raleigh General Hospital Board of Trustees; Director, Beckley-Raleigh County Chamber of Commerce; Director, United Way of Southwest Virginia; Director, Raleigh County Board of Education<br>**Richard S. Johnson**<br> (See above)<br>**Gary R. Mills**<br> (See above)<br>**Harriet B. Price**<br> Chief Financial Officer, Price-Williams Realty, Inc.<br>**M. Adam Sarver**<br> (See above)<br>**William P. Stafford, II**<br> (See above)<br>**Dr. Beth A. Taylor**<br> Mayor - Town of Wytheville, Virginia; Doctor of Medicine/Private Practice (retired)<br>**Frank C. Tinder**<br> President, Tinder Enterprises, Inc. and Tinco Leasing Corporation; Realtor, Premier Realty<br>|

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[**Table of Contents**](#toc)

**Additional Information**

Additional information required in this item is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2022 ("2022 Annual Meeting") under the headings "Proposal 1: Election of Directors," "Director Nominees for the Class of 2025," "Incumbent Directors," "Non-Director Named Executive Officers,""Other Key Officers," "Board Committees," and "Delinquent Section 16(a) Reports."

Our Standards of Conduct apply to all directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Standards of Conduct is available on the Investor Relations section of our website at www.firstcommunitybank.com. There have been no waivers of the Standards of Conduct for any officer.

There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since the disclosure in our Proxy Statement filed with the SEC on March 16, 2021.

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| | |
|:---|:---|
| **Item 11.** | **Executive Compensation.** |

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The information required in this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting under the headings "Board Committees," "Compensation Discussion and Analysis," "Director Compensation," and "Pay Ratio Disclosure."

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| | |
|:---|:---|
| **Item 12.** | **Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.** |

---

The following table provides information about compensation plans under which our equity securities are authorized for issuance as of December 31, 2021:

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| | | | |
|:---|:---|:---|:---|
| **Plan category** | **Number of securities to be issued upon exercise of outstanding options, warrants and rights** | **Weighted-average exercise price of outstanding options, warrants and rights** | **Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(3)** |
|  | **(a)** | **(b)** | **(c)** |
| Equity compensation plans approved by security holders(1) | 167607 | $30.66 | 74961 |
| Equity compensation plans not approved by security holders(2) | 37271 | $23.46 |  |
| Total | 204878 |  | 74961 |

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<u> (1) Includes the 2012 Omnibus Equity Compensation Plan and 2004 Omnibus Stock Option Plan </u> <br> (2) Includes the 2001 Directors' Option Plan and 1999 Stock Option Plan <br> (3) Shares are available for future issuance under the 2012 Omnibus Equity Compensation Plan.

Additional information required in this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting under the heading "Information on Stock Ownership."

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| | |
|:---|:---|
| **Item 13.** | **Certain Relationships and Related Transactions, and Director Independence.** |

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The information required in this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting under the headings "Independence of Directors" and "Related Person/Party Transactions."

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| | |
|:---|:---|
| **Item 14.** | **Principal Accounting Fees and Services.** |

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The Independent Registered Public Accounting Firm is Dixon Hughes Goodman LLP (PCAOB Firm ID No. 57) located in Charlotte, North Carolina. 

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[**Table of Contents**](#toc)

**PART IV**

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| | |
|:---|:---|
| **Item 15.** | **Exhibits, Financial Statement Schedules.** |

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&nbsp;&nbsp;&nbsp;&nbsp;**(a)** **Documents Filed as Part of this Report** 

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**(1)** **Financial Statements** 

The financial statements required in this item are incorporated by reference to Item 8, "Financial Statements and Supplementary Data," in Part II of this report.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**(2)** **Financial Statement Schedules** 

The schedules required in this item are omitted because they are not applicable or the required information is included in the consolidated financial statements or related notes.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**(3)** **Exhibits** 

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| | |
|:---|:---|
|  **Exhibit** <br> **No.** | <br> **Exhibit** |

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2.1 [Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm#appendix_a)

2.2 [Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019](http://www.sec.gov/Archives/edgar/data/859070/000143774919018230/ex_157104.htm)

3.1 [Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm#appendix_b)

3.2 [Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124896.htm)

4.1 [Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124897.htm)

4.2 [Form of First Community Bankshares, Inc. Common Stock Certificate](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124972.htm)

---

| | |
|:---|:---|
| 10.1.1\*\* | [First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000](http://www.sec.gov/Archives/edgar/data/859070/000095012800000665/0000950128-00-000665.txt) |

---

---

| | |
|:---|:---|
| 10.1.2\*\* | [Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004](http://www.sec.gov/Archives/edgar/data/859070/000095012804000485/j0715001exv10w1w1.txt) |

---

---

| | |
|:---|:---|
| 10.2\*\* | [First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002](http://www.sec.gov/Archives/edgar/data/859070/000095012802000627/j9559101exv10w5.txt) |

---

---

| | |
|:---|:---|
| 10.3\*\* | [First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002](http://www.sec.gov/Archives/edgar/data/859070/000095012802000627/j9559101exv10w4.txt) |

---

---

| | |
|:---|:---|
| 10.6\*\* | [First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012](http://www.sec.gov/Archives/edgar/data/859070/000119312512100945/d305268ddef14a.htm) |

---

---

| | |
|:---|:---|
| 10.7\*\* | [First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013](http://www.sec.gov/Archives/edgar/data/859070/000114420413031684/v346101_ex99-1.htm) |

---

---

| | |
|:---|:---|
| 10.8\*\* | [First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000](http://www.sec.gov/Archives/edgar/data/859070/000095012800000665/0000950128-00-000665.txt) |

---

---

| | |
|:---|:---|
| 10.9.1\*\* | [First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009.](http://www.sec.gov/Archives/edgar/data/859070/000095015209000027/l35008aexv10w1.htm) |

---

---

| | |
|:---|:---|
| 10.9.2\*\* | [Amendment #1 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010](http://www.sec.gov/Archives/edgar/data/859070/000114420410067096/v205949_ex10-3.htm) |

---

---

| | |
|:---|:---|
| 10.9.3\*\* | [Amendment #2 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013](http://www.sec.gov/Archives/edgar/data/859070/000114420413010959/v336117_ex10-1.htm) |

---

---

| | |
|:---|:---|
| 10.9.4\*\* | [Amendment #3 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420416105811/v441270_ex10-1.htm) |

---

---

| | |
|:---|:---|
| 10.9.5\*\* | [Amendment #4 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm) |
| 10.9.6\* | [Amendment #5 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan](#a10kex1096) |
| 10.9.7\* | [Amendment #6 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan](#a10kex1097) |

---

------

[**Table of Contents**](#toc)

---

| | |
|:---|:---|
| 10.10\*\* | [Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006](http://www.sec.gov/Archives/edgar/data/859070/000095015206007183/l22038aexv99w2.htm) |

---

---

| | |
|:---|:---|
| 10.11.1\*\* | [First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000095015206007183/l22038aexv99w1.htm) |

---

---

| | |
|:---|:---|
| 10.11.2\*\* | [Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-2.htm) |

---

---

| | |
|:---|:---|
| 10.12.1\*\* | [First Community Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420410067096/v205949_ex10-1.htm) |

---

---

| | |
|:---|:---|
| 10.12.2\*\* | [Amendment #2 to the First Community Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420416105811/v441270_ex10-2.htm) |

---

---

| | |
|:---|:---|
| 10.12.3\* | [Amendment #3 to the First Community Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated](#a10kex10123) |
| 10.12.4\* | [Amendment #4 to the First Community Bankshares, Inc Supplemental Directors Retirement Plan, as amended and restated](#a10kex10124) |
| 10.13\*\* | [Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-3.htm) |

---

---

| | |
|:---|:---|
| 10.15\*\* | [Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-2.htm) |

---

---

| | |
|:---|:---|
| 10.16\*\* | [Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-1.htm) |

---

---

| | |
|:---|:---|
| 21\* | [Subsidiaries of the Registrant](#a10kex21) |

---

---

| | |
|:---|:---|
| 23\* | [Consent of Independent Public Accounting Firm](#a10kex23) |

---

---

| | |
|:---|:---|
| 31.1\* | [Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002](#a10kex31.1) |

---

---

| | |
|:---|:---|
| 31.2\* | [Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002](#a10kex312) |

---

---

| | |
|:---|:---|
| 32\* | [Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002](#a10kex32) |

---

---

| | |
|:---|:---|
| 101\*\*\* | Inline interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2021 and 2020; (ii) Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020, and 2019; (iv) Consolidated Statements of Stockholders' Equity for the years ended December 31, 2021, 2020, and 2019; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019; and (vi) Notes to Consolidated Financial Statements |
| 104 | The cover page of First Community Bankshares, Inc. Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL (included within the Exhibit 101 attachments). |

---

\* Filed herewith

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

\*\*\* Submitted electronically herewith

------

[**Table of Contents**](#toc)

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 3rd day of March, 2022.

First Community Bankshares, Inc.

(Registrant)

---

| | | |
|:---|:---|:---|
| By: | /s/ William P. Stafford, II | /s/ David D. Brown |
|  | William P. Stafford, II | David D. Brown |
|  | Chief Executive Officer<br> (Principal Executive Officer) | Chief Financial Officer<br> (Principal Financial Officer and Principal Accounting Officer) |

---

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

---

| | | |
|:---|:---|:---|
| <u>Signature</u> | <u>Title</u> | <u>Date</u> |
| /s/ William P. Stafford, II | Chairman and Chief Executive Officer and Director | March 3, 2022 |
| William P. Stafford, II |  |  |
| /s/ David D. Brown | Chief Financial Officer | March 3, 2022 |
| David D. Brown |  |  |
| /s/ C. William Davis | Director | March 3, 2022 |
| C. William Davis |  |  |
| /s/ Richard S. Johnson | Director | March 3, 2022 |
| Richard S. Johnson |  |  |
| /s/ Gary R. Mills | President and Director | March 3, 2022 |
| Gary R. Mills |  |  |
| /s/ M. Adam Sarver | Director | March 3, 2022 |
| M. Adam Sarver |  |  |
| /s/ Samuel L. Elmore | Director | March 3, 2022 |
| Samuel L. Elmor |  |  |
| /s/ Harriet B. Price | Director | March 3, 2022 |
| Harriet B. Price |  |  |
| /s/ Beth A. Taylor | Director | March 3, 2022 |
| Beth A. Taylor |  |  |

---

------

[**Table of Contents**](#toc)

**Exhibit 10.9.6**

**AMENDMENT FIVE**

**FIRST COMMUNITY BANCSHARES, INC. AND AFFILIATES** 

**AMENDED AND RESTATED**

**EXECUTIVE RETENTION PLAN**

First Community Bancshares, Inc., and First Community Bankshares, Inc. pursuant to Article 15 of the *First Community Bancshares, Inc. and Affiliates Executive Retention Plan* as amended and restated effective January 1, 2005 (inclusive of all amendments, hereinafter referred to as the "Plan") hereby amends said Plan effective as of the 2<sup>nd</sup> day of October, 2018.

**WITNESSETH**

**WHEREAS,** the Board of Directors of First Community Bancshares, Inc. (the "Board") previously approved and adopted the Plan; and

**WHEREAS,** the Board has approved a plan of reincorporation and merger whereby First Community Bancshares, Inc. will be merged with and into a newly formed Virginia company, First Community Bankshares, Inc., for the sole purpose of moving the corporation's domicile from Nevada to Virginia; and

**WHEREAS,** the shareholders of First Community Bancshares, Inc. approved said plan of reincorporation and merger at the 2018 Annual Meeting of shareholders; and

**WHEREAS,** as a result of the merger, all assets and liabilities of First Community Bancshares, Inc. shall become the assets and liabilities of First Community Bankshares, Inc., including without limitation those associated with the Plan.

**NOW, THEREFORE,** as a result of the merger of First Community Bancshares, Inc. into First Community Bankshares, Inc., First Community Bankshares, Inc. hereby adopts the Plan which shall be amended so that all references to First Community Bancshares, Inc., shall be amended simultaneously with said merger to reference First Community Bankshares, Inc., a Virginia corporation, including without limitation references in the titling and the following specific reference:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. Section 1.21 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.21 Employer or Company shall mean *First Community Bankshares, Inc.* (55- 0694814), a Virginia corporation, or any other organization which has adopted the Plan with the consent of such establishing employer; and any successor of such employer. The term Employer shall also apply to any subsidiary or affiliated corporations, who adopt the Plan and who, at the time such reference applies, are included in the list of Affiliated Employers set forth below. For the purpose of this Plan, First Community Bankshares, Inc. shall be deemed the representative of each Employer and any action taken by First Community Bankshares, Inc. shall be binding on all Employers.

<u>Affiliated Employers</u> <br> First Community Bank

------

[**Table of Contents**](#toc)

An Employer may be removed from the above list as of the date on which it ceases to be subsidiary to, affiliated with, or allied with First Community Bankshares, Inc. or such Employer loses its status as a legal entity by means of dissolution, merger, consolidation, bankruptcy, or otherwise. An Employer shall also be removed from the list of Employers upon the termination of the Plan for that Employer.

As used in the further provisions of the Plan, the term Employer shall be deemed to apply to each Employer independently.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. Section 1.31 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.31 Plan shall mean the *First Community Bankshares, Inc. and Affiliates Executive Retention Plan* as embodied in this instrument, any and all supporting documents, and all subsequent amendments and supplements thereto.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. Section 16.l shall be amended in its entirety to read as follows:

This Plan is created for the exclusive benefit of the Eligible Employees of the Employer and their Beneficiaries and shall be interpreted in a manner consistent with *First Community Bankshares, Inc. and Affiliates Executive Retention Plan.*

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. Except as indicated herein, all other terms of the Plan remain intact.

**IN WITNESS WHEREOF,** this Amendment is adopted on this the 24<sup>th</sup> day of July, 2018.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**First Community Bankshares, Inc.** 

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;By: /s/ Richard S. Johnson

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;____________________________

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Richard S. Johnson

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Its: Compensation & Retirement Committe Chairman

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[**Table of Contents**](#toc)

**Exhibit 10.9.7**

**Amendment # 6**

**First Community Bankshares, Inc. and Affiliates** 

**Executive Retention Plan** 

This Amendment is to be effective January 1, 2022, and hereby amends the *First Community Bankshares, Inc. and Affiliates Executive Retention Plan* as amended and restated January 1, 2005. It is intended that this Amendment comply with Internal Revenue Code § 409A as it does not affect the timing or method of payment of any benefits under this Plan.

**WITNESSETH**

**WHEREAS,** the First Community Bankshares, Inc. (the "Employer") previously adopted the Plan to provide nonqualified benefits to a select group of management and highly compensated employees; and

**WHEREAS,** the Employer desires to "freeze" the Plan so that, effective January 1, 2022, (1) no new Participants may be admitted; (2) future benefit accruals are ceased for current Participants; and (3) no further vesting shall occur under the Plan for current Participants.

**NOW, THEREFORE,** the Plan is hereby amended as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. Pursuant to the authority granted to the Committee in Section 15.4 of the Plan, the Plan is hereby amended to cease future Participant benefit accruals after December 31, 2021. All provisions of the Plan shall be interpreted consistent with this cessation of future benefit accruals and future additional vesting, whether or not specifically amended herein. This action is not intended to reduce any Participants Accrued Benefit or vested percentage therein as of December 31, 2021, or any optional form of payment on such Accrued Benefit.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. Section 1.1 is amended to add the following concluding provision:

Notwithstanding any other provisions of this Section 1.1 to the contrary, each Participant's Accrued Benefit as of December 31, 2021, shall be their final Accrued Benefit.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. The final sentence of Section 1.12 is amended to read in full as follows:

For each subsequent Plan Year ending on or before December 31 2021, a Participant's annual Base Compensation is assumed to increase three percent (3%) more than the preceding Plan Year; actual wage increases shall be disregarded and the three percent (3%) shall be used in lieu of any actual wage increase.

------

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. Section 1.13 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.13 <u>Computation Periods</u>**:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) <u>Accrual of Benefit Computation Period</u> - The 12 consecutive month period beginning with the first day of the Plan Year and ending with the last day of the Plan Year (provided that no calendar year beginning after December 31, 2021 shall be an Accrual of Benefit Computation Period) during which an Employee is credited with at least 750 or more Hours of Service. Thus, if an Employee is not credited with at least 750 Hours of Service during a Plan Year, or if such Plan Year begins after December 31, 2021, he is not given credit for a year of benefit accrual for that Plan Year.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) <u>Vesting Computation Period</u> - Means each calendar year, or Plan Year during which a Participant is expected to complete at least 750 Hours of Service, all provided that no calendar year or Plan Year beginning after December 31, 2021 shall be a Vesting Computation Period.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5. Section 1.17 shall be amended in its entirety to read in full as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.17 <u>Early Retirement Date</u>** means the first day of the month coinciding with or next following the Participant's 60<sup>th</sup> birthday provided that the Participant has completed at least 20 Years of Service and has incurred a Separation of Service from the Employer. In accordance with Section 8.2(vii), a Participant reaching his Early Retirement Date after December 31, 2021 shall be vested in his Early Retirement Benefit at the vested percentage based on his Years of Service prior to January 1, 2022. (A Participant who reached his Early Retirement Date prior to December 31, 2021 shall be 100% vested in his Accrued Benefit.)

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6. Sections 1.19 and 1.29 are amended to add the following concluding provisions:

Provided, however, that no Employees of the Employer shall be considered Eligible Employees or become Participants after December 31, 2021.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7. The first sentence of Section 3.1 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**3.1 <u>Early Retirement Benefit</u>** - A Participant who has reached Early Retirement Age will be entitled to an Early Retirement Benefit provided he has completed at least 20 Years of Service prior to January 1, 2022 and has incurred a Separation from Service from the Employer.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8. Section 3.2 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**3.2 <u>Amount And Form of Early Retirement Benefit</u>** –

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) <u>If the payment of benefits commences</u> on or after a Participant's Early Retirement Date, <u>but prior to his Normal Retirement Date</u>, the amount of the benefit shall be the Participant's Accrued Benefit as of December 31, 2021 (or, if earlier his Early Retirement Date is earlier than December 31, 2021, then the Participant's Accrued Benefit as of his Early Retirement Date), reduced by one-one hundred eightieth (1/180) for each of the months by which the starting date of the benefit precedes the Participant's Normal Retirement Date. (The Actuarial Equivalent of the Participant's Accrued Benefit shall be paid in the (Normal Annuity Form) form of a 10 Year Certain & Life Annuity with 120 guaranteed monthly payments, unless the Participant elects another Form of Payment (i) on his *Initial Payment Election Form* or (ii) by making a *Subsequent Payment Election* in accordance with Section 9.3.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) <u>If the payment of benefits is deferred until his Normal Retirement Date or later date</u>, the amount of the benefit payable as of his Normal Retirement Date or later date shall be the Participant's Accrued Benefit as of December 31, 2021 (or, if his Early Retirement Date is earlier than December 31, 2021, then the Participant's Accrued Benefit as of his Early Retirement Date). The Actuarial Equivalent of the Participant's Accrued Benefit shall be paid in the (Normal Annuity Form) form of a 10 Year Certain and Life Annuity with 120 guaranteed monthly payments, unless the Participant elects another Form of Payment (i) on his *Initial Payment Election Form* or (ii) by making a *Subsequent Payment Election* in accordance with Section 9.3.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9. Section 4.1 shall be amended in its entirety to read as follows:

At Normal Retirement Age each Participant who was 100% vested on or before December 31, 2021 shall have a 100% vested right to his Normal Retirement Benefit; provided, however, that if a Participant shall reach Normal Retirement Age after December 31, 2021, then in accordance with Section 8.2(vii), he shall only be entitled to that portion of his Normal Retirement Benefit that was accrued and vested as of December 31, 2021.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10. Section 4.2(b) shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) <u>Final Average Compensation</u> - A Participant's "Final Average Compensation" shall not be based on a Participant's actual compensation but shall be based on a calculation which is determined by an average of the last three (3) full calendar years of his Compensation while employed by the Employer, including any service with any employer acquired by the Employer. In computing the average Compensation, a Participant's *Initial Base Compensation* (see Section 1.12) is assumed to increase at a compounded annual rate of three percent (3%) per calendar year provided, however, that no calendar year beginning after December 31, 2021 shall be used in determining Final Average Compensation. Accordingly, for all Participants, "*Final Average Compensation*" shall be defined as an average of the last three (3) full calendar years of his Compensation while employed by the Employer prior to January 1, 2022, including any service prior to January 1, 2022 with any employer acquired by the Employer.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11. Section 5.2 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.2 <u>Amount of Deferred Retirement Benefit</u>**. A Participant who continues in the employ of the Employer beyond his Normal Retirement Date shall receive their Accrued Benefit based on his Final Average Compensation as of the earlier of December 31, 2021 and his Deferred Retirement Date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12. Section 6.1 shall be amended in its entirety to read in full as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**6.1 <u>Eligibility for Disability Retirement Benefits</u>**. A Participant who becomes Disabled (as defined in Section 1.15 herein) on or after December 31, 2021 but prior to his actual Early or Normal Retirement Date shall, in accordance with Section 8.2(vii), be vested in his Accrued Benefit as of December 31, 2021, with the vesting percentage therein at the vested percentage based on his Years of Service prior to January 1, 2022. [A Participant who became Disabled (as defined in Section 1.15 herein) prior to December 31, 2021 and prior to his actual Early or Normal Retirement Date shall be 100% vested in his Accrued Benefit as of the date that he is determined to be Disabled.]

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;13. Section 6.3(b) shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) The <u>amount of such Disability benefit</u> shall be determined as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Once a Participant who becomes Disabled (as defined in Section 1.15 herein) on or after December 31, 2021 but prior to his actual Early or Normal Retirement Date, is determined to be Disabled, his Accrued Benefit as of December 31, 2021 shall be at the vested percentage based on his Years of Service prior to January 1, 2022. [For a Participant who became Disabled (as defined in Section 1.15 herein) prior to December 31, 2021, his Accrued Benefit shall be vested 100% as of the date he is determined to be Disabled.]

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) For purposes of benefit accrual, a Participant shall continue to receive credit for Hours of Service during the six (6) month waiting period in Section 6.3(a), but not beyond the 6 month waiting period, equal to the Hours of Service he would have normally received credit for if the Participant would have been employed during this six (6) month waiting period, all provided that notwithstanding any of the foregoing, no credit shall be given for any Hour of Service for any period after December 31, 2021.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) If the payment of benefits commences at Normal Retirement Date, the amount of the benefit shall be the Participant's Accrued Benefit as of the earlier of December 31, 2021 and his Disability Retirement Date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4) If the payment of benefits commences prior to a Participant's Normal Retirement Date, the amount of the benefit shall be the Participant's Accrued Benefit as of the earlier of December 31, 2021 and his Disability Retirement Date, [and reduced three percent (3%) for each year that his benefit commences prior to his Normal Retirement Date ***only*** if his Disability Retirement Date is on or before December 31, 2021.]

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;14. Section 7.1(a) shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) <u>Death before Early Retirement or Normal Retirement Benefit have commenced</u>. In the event of death of a Participant before his Early Retirement or Normal Retirement Benefit has commenced he shall be vested in his Accrued Benefit at the vested percentage based on his Years of Service prior to January 1, 2022 [or vested at 100% in the event such death of a Participant occurs on or before December 31, 2021 and before his Early Retirement or Normal Retirement Benefit has commenced] and his Beneficiary shall receive the Actuarial Equivalent of his Accrued Benefit, determined at the earlier of December 31, 2021 or the Participant's date of death, payable in 120 continuous monthly payments, with the first payment commencing as of the first day of the month next following 90 days after the Participant's death.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;15. Section 8.1 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.1 <u>Non-forfeitable Rights</u>** - Notwithstanding any other provisions of this Article, a Participant's Accrued Benefit shall be vested, at the vested percentage based on his Years of Service prior to January 1, 2022, upon the events listed in Section 8.2, [all provided that for a Participant who became 100% vested in his Accrued Benefit as of a date prior to December 31, 2021, because an event listed in Section 8.2 occurred before December 31, 2021, while such Participant was employed by the Employer and a Participant prior to December 31, 2021, said Participant shall remain 100% vested.]

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;16. Section 8.2 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**8.2 <u>Vesting of Benefits</u>** – The following shall apply in determining the percentage of vesting of a Participant in his Accrued Benefit:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) In the event, on or after December 31, 2021, the Participant either dies (Section 7.1) or becomes Disabled as provided in Article 6, then upon the date of death or the date on which the Participant becomes Disabled, as the case may be, the Participant shall be vested at the vested percentage based on his Years of Service prior to January 1, 2022, [provided that if the Participant either died (Section 7.1) prior to December 31, 2021 or became Disabled as provided in Article 6 prior to December 31, 2021, then upon the date (prior to December 31, 2021) on which the Participant died or became Disabled, as the case may be, the Participant shall be 100% vested];

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) In the event the Participant first qualifies for Early Retirement (Section 3.1) on a date on or after December 31, 2021, the Participant shall be vested at the vested percentage based on his Years of Service prior to January 1, 2022 [ provided that in the event the Participant first qualified for Early Retirement (Section 3.1) on a date prior to December 31, 2021, the Participant shall be 100% vested];

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) In the event the Participant attains his Normal Retirement Age (Section 1.27) on or after December 31, 2021, the Participant shall be vested at the vested percentage based on his Years of Service prior to January 1, 2022, [provided that in the event the Participant attained his Normal Retirement Age prior to December 31, 2021, the Participant shall be 100% vested];

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) In the event of a "Change in Control" as defined in Section 1.9, occurs on or after December 31, 2021, a Participant shall be vested at the vested percentage based on his Years of Service prior to January 1, 2022, [provided that if a "Change in Control" as defined in Section 1.9 occurred before December 31, 2021, any Participant who was then employed and a Participant herein, and who thereby became 100% vested, shall continue to be 100% vested];

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) In the event of an Involuntary Termination of employment, on or after December 31, 2021, of the Participant by the Employer "*not for cause,*" [and "*Not for cause*" shall mean any termination of the employment of the Employee by the Employer that does not fall within the meaning of termination "**for cause**" as defined in Section 8.3(b) below,] the Participant shall be vested at the vested percentage based on his Years of Service prior to January 1, 2022 (provided that if a Participant had an Involuntary Termination of employment, as defined above, prior to December 31, 2021, and thereby became 100% vested, said Participant shall continue to be 100% vested);

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vi) Vesting based on Years of Service. A Participant shall become Vested in his Accrued Benefit based on his number of Years of Service prior to January 1, 2022 as follows:

---

| | |
|:---|:---|
| **Years of Service prior** <br> **to January 1, 2022** | **Vested %** |
| Less than 5<br> 5-9<br> 10-14<br> 15<br> 16<br> 17<br> 18<br> 19<br> 20 or more | 0%<br> 25%<br> 50%<br> 75%<br> 80%<br> 85%<br> 90%<br> 95%<br> 100% |

---

Notwithstanding any of the above, or any other provision of this Plan, no Years of Service subsequent to December 31, 2021 shall be counted for purposes of determining a Participant's vesting.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vii) Notwithstanding any other provision of this Section 8.2 or this Plan to the contrary, no Participant shall vest beyond the vested percentage based on their Years of Service prior to January 1, 2022.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;17. Section 15.3 is amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**15.3 <u>Vesting Upon Complete Termination</u>** - Upon complete termination of this Plan on or after December 31, 2021, the Accrued Benefit of each affected Participant as of the date of termination shall be vested at the vested percentage based on the Participant's Years of Service prior to January 1, 2022.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;18. Except as indicated herein, all other terms of the Plan remain intact.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;19. The Employer reserves the right to further amend the Plan.

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**IN WITNESS WHEREOF,** this Amendment is adopted on this the 14<sup>th</sup> day of December, 2021.

**First Community Bankshares, Inc.** 

By: /s/ William P. Stafford, II

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;____________________________

William P. Stafford, II

Its: Chairman and Chief Executive Officer

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**Exhibit 10.12.3**

**AMENDMENT THREE**

**FIRST COMMUNITY BANCSHARES, INC.** 

**AMENDED AND RESTATED**

**DIRECTORS RETIREMENT PLAN**

First Community Bancshares, Inc., and First Community Bankshares, Inc. pursuant to Article 14 of the *First Community Bancshares, Inc. Directors Retirement Plan* as amended and restated effective January 1, 2011 (inclusive of all amendments, hereinafter referred to as the "Plan") hereby amends said Plan effective as of the 2<sup>nd</sup> day of October, 2018.

**WITNESSETH**

**WHEREAS,** the Board of Directors of First Community Bancshares, Inc. (the "Board") previously approved and adopted the Plan; and

**WHEREAS,** the Board has approved a plan of reincorporation and merger whereby First Community Bancshares, Inc. will be merged with and into a newly formed Virginia company, First Community Bankshares, Inc., for the sole purpose of moving the corporation's domicile from Nevada to Virginia; and

**WHEREAS,** the shareholders of First Community Bancshares, Inc. approved said plan of reincorporation and merger at the 2018 Annual Meeting of shareholders; and

**WHEREAS,** as a result of the merger, all assets and liabilities of First Community Bancshares, Inc. shall become the assets and liabilities of First Community Bankshares, Inc., including without limitation those associated with the Plan.

**NOW, THEREFORE,** as a result of the merger of First Community Bancshares, Inc. into First Community Bankshares, Inc., First Community Bankshares, Inc. hereby adopts the Plan which shall be amended so that all references to First Community Bancshares, Inc., shall be amended simultaneously with said merger to reference First Community Bankshares, Inc., a Virginia corporation, including without limitation references in the titling and the following specific reference:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. Section 1.27 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.27 Plan shall mean the *First Community Bankshares, Inc. Supplemental Directors Retirement Plan* as embodied in this instrument, any and all supporting documents, and all subsequent amendments and supplements thereto.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. Section 1.18 shall be amended in its entirety to read as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.18 Company shall mean *First Community Bankshares, Inc.* (55-0694814) or any other organization which has adopted the Plan with the consent of such establishing Company; and any successor of such Company.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. Section 16.1 shall be amended in its entirety to read as follows:

This Plan is created for the exclusive benefit of the Eligible Directors of the Company and their Beneficiaries and shall be interpreted in a manner consistent with *First Community Bankshares, Inc. Supplemental Directors Retirement Plan.*

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. Except as indicated herein, all other terms of the Plan remain intact.

**IN WITNESS WHEREOF,** this Amendment is adopted on this the 24<sup>th</sup> day of July, 2018.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**First Community Bankshares, Inc.** 

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;By: /s/ Richard S. Johnson

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;____________________________

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Richard S. Johnson

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Its: Compensation & Retirement Committe Chairman

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**Exhibit 10.12.4**

**Amendment # 4**

**First Community Bankshares, Inc.**

**Supplemental Directors Retirement Plan**

**As Amended and Restated**

This Amendment is to be effective January 1, 2022, and hereby amends the *First Community Bankshares, Inc. Supplemental Directors Retirement Plan* as amended and restated January 1, 2005. It is intended that this Amendment comply with Internal Revenue Code 409A as it does not affect the timing or method of payment of any benefits under this Plan.

**WITNESSETH**

**WHEREAS,** the Board of Directors (the "Board") of First Community Bankshares, Inc. (the "Employer") previously approved and adopted the Plan; and

**WHEREAS,** the Compensation Committee of the Corporation is permitted to elect, pursuant to Section 14.4 of the Plan, to cease benefit accruals under the Plan at a specified date, provided that no Participant's Accrued Benefit or an optional Form of Payment on such Accrued Benefit is reduced;

**WHEREAS,** the Compensation Committee of the Corporation, has its powers as delegated by the full Board, the Board of the Corporation may exercise any powers of the Compensation Committee, including but not limited to election to cease benefit accruals at a specified date provided that no Participant's Accrued Benefit or an optional Form of Payment on such Accrued Benefit is reduced;

**WHEREAS,** effective January 1, 2022, the Board of Directors of the Corporation has resolved to (1) "freeze" the Plan to new Participants with the effect of having no new Participants, and (2) amend the definition of Final Average Compensation in the Plan, but not the definition of Years of Service in the Plan, in order to cease benefit accruals, but to allow current Participants to continue to accrue Years of Service for vesting purposes;

**NOW, THEREFORE,** the Plan is hereby amended as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. Sections 1.16 and 1.25 are amended to add the following concluding provisions:

Provided, however, that no Directors shall be considered Eligible Directors or become Participants after December 31, 2021.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. Section 3.2, Subsection (b) shall be amended in its entirety to read as follows:

<u>Final Average Compensation</u> – A "Participant's "*Final Average Compensation*" is an average of the Director's annual Compensation for the <u>highest consecutive three</u> (3) calendar years out of the last ten (10) years that he has served as a member of the Board of Directors of the Company; provided, however, that no calendar year after December 31, 2021 shall be used in determining Final Average Compensation. Accordingly, for Participants serving after December 31, 2021, "*Final Average Compensation*" shall be defined as an average of the Director's annual Compensation for the <u>highest consecutive three</u> (3) calendar years between 2011 and 2021.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. Except as indicated herein, all other terms of the Plan remain intact.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. The Employer reserves the right to further amend the Plan.

**IN WITNESS WHEREOF,** this Amendment is adopted on this the 14<sup>th</sup> day of December, 2021.

**First Community Bankshares, Inc.** 

By: /s/ William P. Stafford, II

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;____________________________

William P. Stafford, II

Its: Chairman and Chief Executive Officer

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**Exhibit 21**

**SUBSIDIARIES OF THE REGISTRANT**

---

| | |
|:---|:---|
| <u>**Title**</u> | <u>**State of Incorporation**</u> |
| First Community Bank | Virginia |

---

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**Exhibit 23**

- <u>**Consent of Independent Registered Public Accounting Firm**</u> -

Board of Directors and Stockholders

First Community Bankshares, Inc.

Bluefield, Virginia

We consent to the incorporation by reference in the Registration Statements pertaining to the 2012 Omnibus Equity Compensation Plan (Form S-8, No. 333-183057, as amended) and the Employee Stock Ownership and Savings Plan (Form S-8, No. 333-63865, as amended) of First Community Bankshares, Inc. of our reports dated March 3, 2022, with respect to the consolidated financial statements of First Community Bankshares, Inc. and the effectiveness of internal control over financial reporting, included in this Annual Report on Form 10-K for the year ended December 31, 2021.

**/s/ DIXON HUGHES GOODMAN LLP**

Charlotte, North Carolina

March 3, 2022

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**Exhibit 31.1**

**CERTIFICATION**

I, William P. Stafford, II, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Annual Report on Form 10-K of First Community Bankshares, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

&nbsp;&nbsp;&nbsp;&nbsp;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

&nbsp;&nbsp;&nbsp;&nbsp;5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 3, 2022

/s/ William P. Stafford, II<br>

William P. Stafford, II

Chief Executive Officer

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**Exhibit 31.2**

**CERTIFICATION**

I, David D. Brown, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Annual Report on Form 10-K of First Community Bankshares, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

&nbsp;&nbsp;&nbsp;&nbsp;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

&nbsp;&nbsp;&nbsp;&nbsp;5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 3, 2022

/s/ David D. Brown<br>

David D. Brown

Chief Financial Officer

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**Exhibit 32**

**CERTIFICATION PURSUANT TO**

**18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO** 

**SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

The undersigned certify, to their best knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

&nbsp;&nbsp;&nbsp;&nbsp;1. The Annual Report on Form 10-K of First Community Bankshares, Inc. (the "Company") for the period ended December 31, 2021 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

&nbsp;&nbsp;&nbsp;&nbsp;2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 3, 2022

---

| | | |
|:---|:---|:---|
| By: | /s/ William P. Stafford, II | /s/ David D. Brown |
|  | William P. Stafford, II | David D. Brown |
|  | Chief Executive Officer | Chief Financial Officer |

---

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**Appendix E**

[**Table of Contents**](#toc)

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**SCHEDULE 14A**

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended

Filed by the Registrant ☒

Filed by a party other than the Registrant ☐

Check the appropriate box:

☐ Preliminary Proxy Statement

☐ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;☒ Definitive Proxy Statement

☐ Definitive Additional Materials

☐ Soliciting Material under § 240.14a-12

**FIRST COMMUNITY BANKSHARES, INC.**

------

(Name of Registrant as Specified in Its Charter)

Not Applicable

------

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

&nbsp;&nbsp;&nbsp;&nbsp;☒ No fee required.

☐ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. Title of each class of securities to which transaction applies:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. Aggregate number of securities to which transaction applies:

---

| | |
|:---|:---|
| 3. | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
|  | The filing fee was determined based on________ |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. Proposed maximum aggregate value of transaction:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5. Total fee paid:

☐ Fee paid previously with preliminary materials.

☐ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. Amount Previously Paid:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. Form, Schedule or Registration Statement No.:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. Filing Party:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. Date Filed:

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**NOTICE OF 2022 ANNUAL MEETING OF SHAREHOLDERS**

April 26, 2022, at 2:00 p.m. Eastern Daylight Time

March 16, 2022

To First Community Bankshares, Inc. Shareholders:

First Community Bankshares, Inc.'s Annual Meeting of Shareholders will be held at 2:00 p.m. Eastern Daylight Time on Tuesday, April 26, 2022. Due to the ongoing global health pandemic resulting from the coronavirus outbreak (COVID-19), and out of concerns for the health and well-being of our employees and shareholders, the Annual Meeting will be held in a virtual meeting format only, via live webcast. You will not be able to attend the Annual Meeting in person.

At the Annual Meeting shareholders will:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Vote on the election of three (3) directors to serve as members of the Board of Directors, Class of 2025;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Vote on a non-binding, advisory basis to approve the compensation of the Corporation's named executive officers;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Vote on ratification of the selection of the independent registered public accounting firm for 2022;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Vote on the approval of the First Community Bankshares, Inc. 2022 Omnibus Equity Compensation Plan; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Transact other business that may properly come before the meeting.

Shareholders of record at the close of business on March 3, 2022, will be entitled to vote at the Annual Meeting and any adjournments.

Because the Annual Meeting is virtual and being conducted via live webcast, shareholders will not be able to attend the Annual Meeting in person. However, you will be able to attend and participate in the Annual Meeting, vote your shares electronically, and submit your questions during the meeting by visiting <u>www.virtualshareholdermeeting.com/FCBC2022</u>. To participate in the Annual Meeting, you must enter the control number found on your Notice Regarding the Availability of Proxy Materials, Proxy Card, or Voter Instruction Form. It is important to note that shareholders have the same rights and opportunities by participating in a virtual meeting as they would if attending a in-person meeting. Details regarding how to participate in the meeting online and the business to be conducted at the Annual Meeting are more fully described in this proxy statement.

You may vote during the Annual Meeting by following the instructions available on the Annual Meeting website. Whether or not you plan to attend the Annual Meeting, the Board of Directors urges you to vote and submit your proxy in advance of the Annual Meeting by one of the methods described in the proxy materials.

---

| |
|:---|
| <u>/s/Sarah W. Harmon</u> |
| Sarah W. Harmon |
| Secretary |

---

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**IMPORTANT NOTICE**

**REGARDING THE AVAILABILITY OF PROXY MATERIALS**

**FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON**

**April 26, 2022**

**The proxy materials for this Annual Meeting of Shareholders of First Community Bankshares, Inc., consisting of the proxy statement, annual report, and proxy card are available online at <u>www.firstcommunitybank.com</u> under Investor Relations.**

**You will be able to attend the First Community Bankshares, Inc. Annual Meeting online and submit your questions during the meeting by visiting <u>www.virtualshareholdermeeting.com/FCBC2022</u>. You will also be able to vote your shares online by attending the Annual Meeting by webcast. It is important to note that shareholders have the same rights and opportunities by participating in a virtual meeting as they would if attending a in-person meeting. If your shares are held in the name of a bank, broker, or other holder of record, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote online at the meeting. Information regarding how to obtain a proxy from the holder of record and how to submit it to Broadridge to vote at the Annual Meeting is set forth on page 2 of this proxy statement under the heading** "**How to Register to Attend the Annual Meeting Virtually.**"

**WHETHER OR NOT YOU ATTEND THE ANNUAL MEETING, YOUR VOTE IS IMPORTANT TO FIRST COMMUNITY BANKSHARES, INC. YOU MAY VOTE BY THE FOLLOWING METHODS:**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.** **By telephone: (800) 690-6903 until 11:59 p.m. Eastern Daylight Time on April 25, 2022 ;** 

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.** **On the Internet at <u>http://www.proxyvote.com</u> until 11:59 p.m. Eastern Daylight Time on April 25, 2022 ; or** 

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**3.** **Complete, sign and return the enclosed proxy card as promptly as possible whether or not you plan to attend the Annual Meeting. An addressed return envelope is enclosed for your convenience.** 

**FIRST COMMUNITY BANKSHARES, INC. ENCOURAGES SHAREHOLDERS TO SUBMIT THEIR PROXIES IN ADVANCE OF THE ANNUAL MEETING. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED.**

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First Community Bankshares, Inc.

29 College Drive

P. O. Box 989

Bluefield, Virginia 24605-0989

March 16, 2022

Dear Shareholder,

You are invited to attend the 2022 Annual Meeting of Shareholders of First Community Bankshares, Inc. (the "Corporation") to be held on Tuesday, April 26, 2022, at 2:00 p.m. Eastern Daylight Time, which will be held virtually at <u>www.virtualshareholdermeeting.com/FCBC2022</u>. Due to the continuing public health impact of the coronavirus pandemic (COVID-19) and to support the health and well-being of our employees, shareholders, and community, this year's Annual Meeting will be a completely virtual meeting of shareholders, which will be conducted solely via live webcast.

Because the Annual Meeting is virtual and being conducted via live webcast, shareholders will not be able to attend the Annual Meeting in person. However, you will be able to attend and participate in the First Community Bankshares, Inc. Annual Meeting online and submit your questions during the meeting by visiting <u>www.virtualshareholdermeeting.com/FCBC2022</u>. It is important to note that shareholders have the same rights and opportunities by participating in a virtual meeting as they would if attending a in-person meeting. Details regarding how to participate in the meeting online and the business to be conducted at the Annual Meeting are more fully described in this proxy statement. Information regarding how to obtain a proxy from the holder of record and how to submit it to Broadridge to vote at the Annual Meeting is set forth on page 2 of this proxy statement under the heading "How to Register to Attend the Annual Meeting Virtually."

The Annual Meeting will begin with brief comments on the Corporation's operations. This will be followed by discussion and voting on the matters set forth in the accompanying Notice of Annual Meeting and discussion of other business matters properly brought before the meeting.

Whether or not you plan to attend, please ensure that your shares are represented at the meeting by promptly voting and submitting your proxy by telephone, on the Internet, or by completing, signing, dating, and returning your proxy card in the enclosed envelope.

---

| |
|:---|
| Very truly yours, |
| <u>/s/ William P. Stafford, II</u> |
| William P. Stafford, II |
| Chairman of the Board |

---

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**TABLE OF CONTENTS**

---

| | |
|:---|:---|
|  | Page |
| [**PROXY STATEMENT**](#proxy) | [1](#proxy) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Voting**](#voting) | [1](#voting) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Information about the Virtual Annual Meeting**](#info) | [2](#info) |
| [**PROPOSAL 1: ELECTION OF DIRECTORS**](#propone) | [4](#propone) |
| [**DIRECTOR NOMINEES FOR THE CLASS OF 2025**](#dirnoms) | [6](#dirnoms) |
| [**INCUMBENT DIRECTORS**](#incdir) | [7](#incdir) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Changes to Composition of the Board of Directors in 2022**](#changes2021) | [8](#changes2021) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Director Qualifications and Experience**](#dirqual) | [8](#dirqual) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Diversity of Director Nominees**](#diversity) | [9](#diversity) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Recommendations for Director Candidates**](#recdircans) | [9](#recdircans) |
| [**NON-DIRECTOR NAMED EXECUTIVE OFFICERS**](#nondirec) | [10](#nondirec) |
| [**OTHER KEY OFFICERS**](#otherkeyoff) | [11](#otherkeyoff) |
| [**CORPORATE GOVERNANCE**](#corpgov) | [12](#corpgov) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Corporate Governance Guidelines**](#corpgovgs) | [12](#corpgovgs) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Independence of Directors**](#inddir) | [12](#inddir) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**The Board of Directors and Board Meetings**](#theboard) | [13](#theboard) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Board Committees**](#brdcomms) | [14](#brdcomms) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Anti-Hedging Policy**](#antihed) | [15](#antihed) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Environmental, Social, and Governance (**"**ESG**"**) Framework**](#esg) | [16](#esg) |
| [**PROPOSAL 2: NON-BINDING, ADVISORY VOTE ON EXECUTIVE COMPENSATION**](#proptwo) | [17](#proptwo) |
| [**COMPENSATION DISCUSSION AND ANALYSIS**](#compdisc) | [18](#compdisc) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Executive Summary**](#execsumm) | [18](#execsumm) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**What Guides our Program**](#what) | [19](#what) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**The Decision-Making Process**](#decision) | [20](#decision) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; **[2021 Executive Compensation Decisions in Detail](#a2020exec)** | [22](#a2020exec) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Other Practices, Policies, and Guidelines**](#otherprac) | [24](#otherprac) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Other Benefits and Perquisites**](#otherben) | [25](#otherben) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Employment Agreements**](#empagree) | [25](#empagree) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Risk Considerations**](#riskc) | [25](#riskc) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Tax Deductibility of Compensation**](#taxded) | [26](#taxded) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Compensation and Retirement Committee Report**](#compnret) | [26](#compnret) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; **[2021 Summary Compensation Table](#a2020summ)** | [27](#a2020summ) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; **[2021 All Other Compensation and Benefits](#a2020all)** | [28](#a2020all) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Grants of Plan-Based Awards**](#grants) | [29](#grants) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Outstanding Equity Awards at December 31, 2021**](#outstanding) | [30](#outstanding) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; **[2021 Options Exercised and Stock Vested](#a2020option)** | [31](#a2020option) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; **[2021 Pension Benefits](#a2020pen)** | [31](#a2020pen) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; **[2021 Non-Qualified Deferred Compensation](#a2020non)** | [32](#a2020non) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Potential Payments Upon Termination**](#potpay) | [32](#potpay) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Payments Made Upon Retirement**](#paymade) | [33](#paymade) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Payments Made Upon Death or Disability**](#paydeth) | [33](#paydeth) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Payments Made Upon a Change of Control**](#paychange) | [33](#paychange) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Potential Incremental Payments Table**](#potinc) | [34](#potinc) |
| [**DIRECTOR COMPENSATION**](#dircomp) | [35](#dircomp) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; **[2021 Non-Management Directors](#a2020nonmgmt)**[' **Compensation**](#a2020nonmgmt) | [35](#a2020nonmgmt) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Changes to Non-Management Directors' Compensation Beginning in 2022**](#changesnon-management) | [36](#changesnon-management) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Director Compensation Table**](#dircomtbl) | [37](#dircomtbl) |
| [**PAY RATIO DISCLOSURE**](#payratio) | [38](#payratio) |
| [**OWNERSHIP AND RELATED PERSON TRANSACTIONS**](#ownrel) | [39](#ownrel) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Information on Stock Ownership**](#infostockownership) | [39](#infostockownership) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Related Person/Party Transactions**](#related) | [40](#related) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Delinquent Section 16(a) Reports**](#delinq) | [40](#delinq) |
| [**REPORT OF THE ACER COMMITTEE**](#report) | [41](#report) |
| [**INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**](#indp) | [42](#indp) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Principal Accounting Fees and Services**](#principalaccountingfeesandserv) | [42](#principalaccountingfeesandserv) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Pre-Approval Policies and Procedures**](#preapprovalpolicies) | [42](#preapprovalpolicies) |
| [**PROPOSAL 3: RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**](#propthree) | [43](#propthree) |

---

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| | |
|:---|:---|
| [**PROPOSAL 4: APPROVAL OF THE FIRST COMMUNITY BANKSHARES, INC. 2022 OMNIBUS EQUITY COMPENSATION PLAN**](#propfour) | [44](#propfour) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Material Features of the Plan**](#materialfeatures) | [44](#materialfeatures) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Board Considerations**](#boardconsiderations) | [45](#boardconsiderations) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Administration**](#administration) | [46](#administration) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Eligibility**](#eligibility) | [46](#eligibility) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Shares Available for Awards**](#sharesavailable) | [47](#sharesavailable) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Awards**](#awards) | [47](#awards) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Employment Status of Participant**](#employstatus) | [49](#employstatus) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Change of Control**](#changeofcontrol) | [49](#changeofcontrol) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Limitations on Transfer of Awards**](#limitontransfer) | [50](#limitontransfer) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Effective Date and Term of the Plan**](#effectdateandterm) | [50](#effectdateandterm) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Amendment and Discontinuance**](#amendanddisc) | [50](#amendanddisc) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**[Repricing Prohibited](#repricing)** | [50](#repricing) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**[Clawback of Awards](#clawbackawards)** | [50](#clawbackawards) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**[New Benefit Plans](#newbenefitplans)** | [50](#newbenefitplans) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**[Federal Income Tax Consequences](#federalincometax)** | [51](#federalincometax) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Code Section 409A Compliance**](#codesection409a) | [52](#codesection409a) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;[**Vote Required**](#voterequired) | [52](#voterequired) |
| [**ADDITIONAL INFORMATION**](#addinfo) | [53](#addinfo) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Shareholder Proposals for Inclusion in Next Year**'**s Proxy Statement**](#shareprop) | [53](#shareprop) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Other Shareholder Proposals and Shareholder Nominations for Directors for Presentation at Next Year**'**s Annual Meeting**](#othershare) | [53](#othershare) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Solicitation of Proxies**](#solicit) | [53](#solicit) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Shareholder Requests for Copies of 2021**](#sharereq)**[Annual Report and Proxy Materials](#sharereq)** | [53](#sharereq) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Delivery of Documents to Shareholders Sharing Same Address (Householding)**](#delivery) | [53](#delivery) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [**Electronic Access to Proxy Statement and Annual Report**](#electronic) | [53](#electronic) |
| Exhibit 99.a |  |

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**PROXY STATEMENT**

First Community Bankshares, Inc.

29 College Drive

P. O. Box 989

Bluefield, Virginia 24605

The Board of Directors (the "Board") of First Community Bankshares, Inc. (the "Corporation") solicits the enclosed proxy for use at the Annual Meeting of Shareholders of the Corporation (the "Annual Meeting"), which will be held on Tuesday, April 26, 2022, at 2:00 p.m. Eastern Daylight Time. Due to the global health pandemic resulting from the coronavirus outbreak (COVID-19) and out of concerns for the health and well-being of our employees and shareholders, the Annual Meeting will be held in a virtual format only, via live webcast. You will not be able to attend the Annual Meeting in person.

The expenses of solicitation of proxies for the Annual Meeting, including the cost of preparing, assembling, and mailing the notice, proxy statement, proxy card, and return envelopes; the handling and tabulation of proxies received; charges of brokerage houses and other institutions, nominees, or fiduciaries for forwarding such documents to beneficial owners; and expenses associated with the virtual hosting of the Annual Meeting, will be paid by the Corporation. In addition to mailing of proxy materials, solicitation may be made in person, by telephone, or by other means by officers, directors, or employees of the Corporation.

This proxy statement and the proxies solicited hereby are being first sent or delivered to shareholders of the Corporation on or about March 16, 2022.

**Voting**

Shares of common stock (par value $1.00 per share) ("Common Stock") represented by proxies in the accompanying form, which are properly executed and returned to the Corporation, will be voted at the Annual Meeting in accordance with the shareholder's instructions contained therein. In the absence of contrary instructions, shares represented by such proxies will be voted FOR the election of the three (3) directors nominated by the Board of Directors and named in this proxy statement; FOR approval, on a non-binding, advisory basis, of the Corporation's executive compensation; FOR ratification of Elliott Davis, PLLC as the Corporation's independent registered public accounting firm; and FOR approval of the First Community Bankshares, Inc. 2022 Omnibus Equity Compensation Plan (the "2022 Plan").

Any shareholder may revoke their proxy at any time before it is voted. A proxy may be revoked at any time prior to its exercise by the filing of written notice of revocation with the Secretary of the Corporation, by delivering to the Corporation a duly executed proxy bearing a later date, or by attending the Annual Meeting virtually and voting electronically. If your shares of the Corporation's Common Stock are held for you in a brokerage, bank, or other institutional account, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote online at the Annual Meeting. Information regarding how to obtain a proxy from the holder of record and how to submit it to Broadridge to vote at the Annual Meeting is set forth below under the heading "How to Register to Attend the Annual Meeting Virtually."

The Board has fixed March 3, 2022, as the record date for shareholders entitled to notice of the Annual Meeting. Shares of Common Stock outstanding on the record date are entitled to be voted at the Annual Meeting, and the holders of record on the record date will have one vote for each share so held in the matters to be voted upon by the shareholders. Treasury shares are not voted. As of the close of business on March 3, 2022, the outstanding shares of the Corporation consisted of 16,794,260 shares of Common Stock.

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The presence in person (including by attendance at the virtual meeting) or by proxy of a majority of the shares of the Common Stock entitled to vote is necessary to constitute a quorum at the Annual Meeting. Abstentions and broker non-votes are counted as present for purposes of determining a quorum. A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power for that particular item and has not received instructions from the beneficial owner. Directors are elected by a plurality of the votes cast at a shareholders' meeting with a quorum present. The three (3) persons who receive the greatest number of votes of the holders of Common Stock represented in person or by proxy at the Annual Meeting for the class of 2025 will be elected directors of the Corporation. Because this is an uncontested election, if a nominee for director does not receive a greater number of votes "for" their election than votes "withheld" from their election, the director shall promptly tender her or his resignation to the Board of Directors. The Board's Governance and Nominating Committee (the "GNC") shall make a recommendation to the Board of Directors as to whether to accept or reject the tendered resignation or whether other action should be taken. The advisory approval of the Corporation's executive compensation program, the ratification of the independent registered public accounting firm, and the approval of the 2022 Plan each require that the number of votes cast in favor of the proposal exceed the number of votes cast against. Except as stated above regarding the presence of a quorum, abstentions and broker non-votes will have no effect on any of the proposals set forth in this proxy statement.

If the shares you own are held in "street name" (that is, through a brokerage firm, bank, or other nominee) you may vote your shares by following the instructions provided by the nominee. As the record holder of your shares, your nominee is required to vote your shares according to your instructions. In order to vote your shares, you will need to follow the directions provided to you by your nominee, many of which offer the option of voting online or by telephone. Under the current rules of the NASDAQ Stock Market LLC or NASDAQ, if you do not give instructions to your nominee, it will only be able to vote your shares for the ratification of the independent registered public accounting firm, and it will be prohibited from voting your shares on the remaining matters brought before the meeting.

**Information about the Virtual Annual Meeting**

<u>How to Attend the Virtual Meeting</u>. The 2022 Annual Meeting will be a completely virtual meeting of shareholders, which will be conducted exclusively by webcast on the internet. No physical meeting will be held. You will be able to attend the Annual Meeting online and submit your questions during the meeting by visiting <u>www.virtualshareholdermeeting.com/FCBC2022</u>. You will also be able to vote your shares online by attending the Annual Meeting by webcast.

To login to the virtual Annual Meeting please go to <u>www.virtualshareholdermeeting.com/FCBC2022</u>. You will be required to have a control number to participate in the Annual Meeting. The 16-digit control number can be found on your Notice Regarding the Availability of Proxy Materials, Proxy Card, or Voter Instruction Form included with this proxy statement.

The online meeting will begin promptly at 2:00 p.m. Eastern Daylight Time on April 26, 2022. We encourage you to access the meeting prior to the start of the meeting to leave ample time for the check-in process. Registration begins fifteen (15) minutes prior to the state of the meeting. Please follow the registration instructions as outlined below.

<u>How to Register to Attend the Annual Meeting Virtually</u>. If you are a registered shareholder, you do not need to register to attend the Annual Meeting virtually on the internet. Please follow the instructions on the enclosed proxy card.

For those investors whose shares are held by a broker, bank, or other nominee, you must obtain the 16-digit control number from your broker, bank, or nominee in order to instruct your broker, bank, or nominee.

<u>How to Submit Questions During the Virtual Meeting</u>. Shareholders as of the record date who attend the virtual Annual Meeting using their control number (as described above) will have the opportunity to submit questions during the meeting by going to the virtual meeting site at <u>www.virtualshareholdermeeting.com/FCBC2022</u> and entering your control number. Once logged in, questions may be submitted through a field in the web portal. Questions pertinent to meeting matters will be answered during the meeting, subject to time constraints. If a question is submitted about one of the matters in the agenda to be voted on by the shareholders at the Annual Meeting, the question must be submitted at or before the time such matter is before the Annual Meeting for consideration.

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The meeting is not to be used as a forum to present personal matters, or general economic, political or other views that are not directly related to the business of the Corporation and the matters properly before the meeting, and therefore questions on such matters will not be answered. If there are any matters of individual concern to a shareholder and not of general concern to all shareholders, such matters may be raised separately after the Annual Meeting by contacting Investor Relations at <u>investorrelations@fcbinc.com</u>.

To allow the Corporation to answer as many proper and relevant questions from as many shareholders as possible, we will limit each shareholder to one question. It will help us if questions are succinct and cover only one topic per question. Questions from multiple shareholders on the same topic or that are otherwise related may be grouped, summarized, and answered together. The Corporation does not intend to address any questions that are:

● irrelevant to the business of the Corporation or to the business of the Annual Meeting;

● related to or may take into account material, non-public information of the Corporation;

● related to personal grievances;

● derogatory references to individuals or that are otherwise in bad taste;

● substantially repetitious of previous questions or statements already made by another shareholder;

● in furtherance of the shareholder's personal or business interests; or

● out of order, inconsistent with these rules, or not otherwise suitable for the conduct of the Annual Meeting as determined by the Chairman or Corporate Secretary in their reasonable judgment.

All questions will be reviewed by the Chairman. If properly raised, the Chairman will read aloud the question and respond to the question or direct appropriate officers of the Corporation to respond to the question. If a question violates the rules of conduct for asking questions, as described above, it will not be summarized or answered.

<u>Technical Assistance During the Virtual Meeting</u>. In the event technical issues delay or disrupt the ability to convene the meeting for longer than thirty minutes, the Corporation will make an announcement on its website <u>www.firstcommunitybank.com</u> under Investor Relations regarding a date and time for reconvening the Annual Meeting. In the event of disorder, technical malfunction, or other significant problem that disrupts the Annual Meeting, the Chairman may adjourn, recess, or expedite the Annual Meeting, or take such other action as the Chairman determines is appropriate in light of the circumstances.

If you have difficulty accessing the virtual Annual Meeting, please call the support line displayed on the meeting page at <u>www.virtualshareholdermeeting.com/FCBC2022</u>. Technicians will be available to assist you.

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**PROPOSAL 1: ELECTION OF DIRECTORS**

The Board is currently comprised of eight (8) directors, including six (6) non-management directors, divided into three (3) classes with staggered terms: the class of 2022, consisting of three (3) directors; the class of 2023, consisting of two (2) directors; and the class of 2024, consisting of three (3) directors. Accordingly, three (3) directors will be elected to the class of 2025 and will serve until the 2025 Annual Meeting. The three (3) directors from the class of 2022 are each nominated for re-election into the class of 2025.

The Board has adopted a policy which requires that a nominee for director in an uncontested election who does not receive a greater number of votes "for" election than votes "withheld" promptly tender her or his resignation to the Board. The GNC shall make a recommendation to the Board of Directors as to whether to accept or reject the tendered resignation or whether other action should be taken. The full text of this policy can be found in the Governance and Nominating Committee Charter available on the Corporation's website <u>www.firstcommunitybank.com</u> under Investor Relations.

In the event any nominee is unable or declines to serve as a director at the time of the Annual Meeting, all proxy votes for that individual will be voted for an alternate nominee designated by the present Board to fill the vacancy. Unless contrary instructions are given by a shareholder who signs and returns a proxy, in the event more than three (3) persons are nominated for election as directors, the proxy holder shall assume the shareholder intended to vote all shares represented by that proxy for the nominees listed herein, or for any alternates nominated by the Board. All nominees named herein have consented to be named and to serve as directors if elected.

No director or executive officer of the Corporation is closely related to any other director or executive officer of the Corporation by blood, marriage, or adoption.

The table set forth below describes each director and nominee, including their age; the applicable director class, which is based upon the year in which their term of service expires; and title. A biography describing each director's and each nominee's qualifications and business background is set forth below the table. The Corporation does not know of any reason why any nominee would be unable to serve as a director.

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Members of the Corporation's Board of Directors are expected to have the appropriate skills and characteristics necessary to function in the Corporation's current operating environment and contribute to its future direction and strategies. These include legal, financial, management and other relevant skills. In addition, the Corporation looks to achieve a diversified Board, including members with varying experience, age, perspective, residence, background, race, gender, and other demographic characteristics. All members of the Corporation's Board also serve as directors for the board of the Corporation's banking subsidiary.

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| | | | |
|:---|:---|:---|:---|
| **Name and Title** | **Age** | **Director of Corporation Since** | **Class of Directors** |
| C. William Davis, Director | 74 | 2015 | 2024 |
| Samuel L. Elmore, Director Nominee | 75 | 2013 | 2022 |
| Richard S. Johnson, Director Nominee | 72 | 2008 | 2022 |
| Gary R. Mills, President and Director | 54 | 2016 | 2023 |
| Harriet B. Price, Director | 59 | 2021 | 2024 |
| M. Adam Sarver, Director | 45 | 2015 | 2023 |
| William P. Stafford, II, Chief Executive Officer and Director (Chairman) | 58 | 1994 | 2024 |
| Beth A. Taylor, Director Nominee | 66 | 2022 | 2022 |

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**DIRECTOR NOMINEES FOR THE CLASS OF 2025**

**Samuel L. Elmore, Former Executive Vice President and Chief Credit Officer, First Community Bank, Beckley, West Virginia.**

Mr. Elmore received a Bachelor of Science in Business Management and Marketing in 1970 from the University of Charleston. Prior to joining First Community Bank, Mr. Elmore served as President, Citizens Southern Bank, Beckley, West Virginia; President and Chief Executive Officer, Charleston National Bank, Charleston, West Virginia; Vice President, Key Centurion Bancshares, Huntington, West Virginia; and President and Chief Operations Officer, Beckley National Bank, Beckley, West Virginia. Mr. Elmore also served in the United States Army from 1964 to 1967. Mr. Elmore currently serves on the Board of First Community Bank and has previously served on the Boards of The United Way of Beckley, Beckley Area Foundation, Raleigh General Hospital, Raleigh County Community Action, Pinecrest Development Corporation, Raleigh County Commission on Aging, and the Virginia's Automated Clearing House Association.

Mr. Elmore's relevant experience qualifying him for service as a director includes: more than forty (40) years of experience in the community banking industry, including service as an auditor, Chief Operations Officer, Chief Financial Officer, and Chief Credit Officer; prior experience with acquisitions and mergers; and experience in a variety of offices held with increasing management responsibilities during his banking career.

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**Richard S. Johnson, Chairman, President and Chief Executive Officer, The Wilton Companies, Richmond, Virginia.** 

Mr. Johnson earned a Bachelor of Science in Business Administration from the University of Richmond, Richmond, Virginia in 1973, with concentrations in Economics and Finance, and graduated with a Master of Science from Virginia Commonwealth University, Richmond, Virginia in 1977, with a concentration in Real Estate and Urban Land Development. Mr. Johnson has been the President and Chief Executive Officer of The Wilton Companies, a real estate investment, development, brokerage and management group of companies, since 2002. He assumed the role of Chairman of The Wilton Companies in 2010. Prior to joining The Wilton Companies, Mr. Johnson served as President of Southern Financial Corp. of Virginia from 1985 to 2002 and Chairman of the Board of Southern Title Insurance Corporation from 1980 to 1985. Mr. Johnson currently serves as a Director of First Community Bankshares, Inc., First Community Bank, The Wilton Companies, Inc., and The Wilton Companies, LLC. Mr. Johnson serves as a Director of the American Civil War Museum. Mr. Johnson also serves as the Assistant Treasurer and Director Emeritus of Ducks Unlimited, Inc. and further serves as Emeritus Trustee of the Board of Trustees for the University of Richmond. He has previously served as a director/trustee of the State Fair of Virginia, the Children's Museum of Richmond, Omicron Delta Kappa, a National collegiate honor society, Ducks Unlimited Canada, Landmark Apartment Trust of America, and the City of Richmond Economic Development Authority, where he previously held the seat of Chairman.

Mr. Johnson's relevant experience qualifying him for service as a director includes his background in: long-range planning, various aspects of mortgage underwriting, marketing, and mortgage portfolio servicing; previously chairing the Economic Development Authority of the City of Richmond, Virginia; past service as a director and Finance Committee member of Ducks Unlimited, Inc. and Ducks Unlimited Canada; having served in various state and national offices with Ducks Unlimited, Inc., including Assistant Treasurer and member of the Finance and Audit Subcommittee; and previous service as a director and Audit Committee member of the Apartment Trust of America.

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**Beth A. Taylor, Mayor of the Town of Wytheville, Virginia** 

Dr. Taylor earned a Nursing Degree from Samford University in Birmingham, Alabama in 1976 and a Bachelor of Science from University of Alabama in Birmingham, Alabama in 1985. She then attended medical school at the University of South Alabama in Mobile, Alabama, earning her Doctor of Medicine in 1989. She also received certifications in Internal Medicine (1992) and Gastroenterology (1995) from the University of South Alabama. Dr. Taylor spent her medical career in private practice, focusing on gastroenterology. She retired from medical practice in 2015.

In August 2016, Dr. Taylor was elected to the Town Council of the Town of Wytheville, Virginia and on July 30, 2018, she was elected as the first female Mayor of the Town of Wytheville, Virginia. During her tenure with the Town, Dr. Taylor has, at various times, served on multiple committees, including, without limitation the Crossroads Regional Industrial Development Authority, District Three Committee, Beautification Committee, Budget and Finance Committee, and Tree Advisory Committee. She also routinely attends meetings of the Joint Industry Development Authority and the Regional Water Authority and Planning Commission.

Dr. Taylor's relevant experience qualifying her for service as a director includes a broad range of business, financial, and related experience obtained while in private medical practice; extensive civic and community service; and extensive municipal government service, including service directly related to community development activities.

**The Board of Directors unanimously recommends a vote *<u>FOR</u>* the nominees set forth above.**

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**INCUMBENT DIRECTORS**

**C. William Davis, Attorney, Richardson & Davis, PLLC, Bluefield, West Virginia.**

Mr. Davis was appointed to serve on the Board on August 25, 2015. Mr. Davis graduated from the Virginia Military Institute in 1970, with a Bachelor of Science in Civil Engineering and from Washington & Lee University School of Law in 1973, with a Juris Doctor degree. Mr. Davis is a member of Richardson & Davis, PLLC and practices law, primarily in the areas of civil litigation, commercial transactions, trusts and estates, and banking. Mr. Davis has served as a Director of the Corporation since 2015, of the Corporation's banking subsidiary since 1990, and of a predecessor bank from 1987 to 1990. Mr. Davis has served as a Director for a variety of business and professional organizations in the region, including Bluefield Supply Company, Flat Top Insurance Agency, the Defense Trial Counsel of West Virginia, Inc., and the West Virginia State Bar Board of Governors.

Mr. Davis' relevant experience qualifying him for service as a director includes: a broad range of business, legal, banking, and regulatory related issues encountered in the practice of law; extensive civic and community service; and more than thirty-five (35) years of board service in the banking industry.

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**Gary R. Mills, President, First Community Bankshares, Inc. and Chief Executive Officer and President, First Community Bank, Bluefield, Virginia.**

Mr. Mills has served as President of the Corporation since August 31, 2013 and currently serves as Chief Executive Officer and President of First Community Bank. Mr. Mills has been employed by the Corporation and/or one of its subsidiaries since 1998. Mr. Mills served as Market President of the Princeton Division of First Community Bank from 1998 until 2005, Senior Vice President of Credit Administration from 2005 to 2006, and most recently as Chief Credit Officer from 2007 until his appointment as Chief Executive Officer. Mr. Mills is a Certified Public Accountant and holds a Bachelor of Science in Business Administration with a concentration in Accounting from Concord College (now University).

Mr. Mills' relevant experience qualifying him for service as a director includes: more than thirty (30) years of experience in the financial services industry; extensive civic and community involvement; and eight (8) years of board service for the Corporation's banking subsidiary.

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**Harriet B. Price, Chief Financial Officer, Price-Williams Realty, Inc., Radford, Virginia.** 

Ms. Price was appointed to serve on the Board effective January 1, 2021. Ms. Price received a Bachelor of Science in Accounting from Virginia Polytechnic Institute and State University. She is a certified public accountant and active in the executive management of Price-Williams Realty, Inc.

Ms. Price takes pride in serving her community through her mentoring of students in accounting at Virginia Tech and Radford University over the past twenty-five years, previously serving on the City of Radford Executive Chamber Board, and volunteering in Radford City Schools.

Ms. Price's relevant experience qualifying her for service as a director includes: more than twenty-five (25) years' experience in business management and accounting and extensive civic and community service.

------

**M. Adam Sarver, Real Estate Developer and Businessman, Princeton, West Virginia.**

Mr. Sarver was appointed to serve on the Board on August 25, 2015. Mr. Sarver received his Bachelor of Science in Communication Studies in 2000 from West Virginia University. Mr. Sarver has served on the Board of Directors of the Corporation's banking subsidiary since 2014. He owns and manages several businesses in Southern West Virginia including Main Street Builders, LLC; Eastern Door & Glass, LLC; Longview Properties, LLC; and Clover Leaf Properties, LLC, which are focused on real estate development coupled with residential and commercial construction and development. Mr. Sarver currently serves as a Director for a variety of businesses, civic and charitable organizations in the region, including the Princeton Salvation Army Advisory Board (past Chairman) and the First United Methodist Church. He was previously a Director for the Princeton – Mercer County Chamber of Commerce.

Mr. Sarver's relevant experience qualifying him for service as a director includes: a broad range of business, financial, and related experience associated with operating multiple business interests and extensive civic and community service on a variety of boards.

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**William P. Stafford, II, Chief Executive Officer, First Community Bankshares, Inc., Bluefield, Virginia and Attorney, Brewster Morhous PLLC, Bluefield, West Virginia.**

Mr. Stafford is a graduate of Virginia Polytechnic Institute and State University, Blacksburg, Virginia, and holds a Bachelor of Science in Mechanical Engineering. He also holds a Juris Doctor, *cum laude*, from Washington & Lee University School of Law, Lexington, Virginia. Mr. Stafford has served as Chief Executive Officer of the Corporation since his appointment by the Board in August 2013. Mr. Stafford is a member of Brewster Morhous PLLC, and practices law on a limited basis primarily in the areas of commercial transactions, banking, creditor's rights, and trusts and estates. He currently serves as Chairman of the Board of the Corporation and Chairman of the Board of the Corporation's banking subsidiary. Mr. Stafford serves as Director and Corporate Secretary of the H. P. and Anne S. Hunnicutt Foundation, Inc., Princeton Machinery Service, Inc., and Melrose Enterprises, Ltd. He is a member of Stafford Farms, LLC, Vermillion Development, LLC, and Walnut Hill, LLC, which include real estate and agricultural holdings. Mr. Stafford is a partner in Legal Realty, A Partnership. Mr. Stafford has served, and continues to serve, on numerous civic and community service boards and commissions.

Mr. Stafford's relevant experience qualifying him for service as a director includes: a broad range of regulatory, business, legal and banking related issues encountered in the practice of law and personal business endeavors; extensive state and municipal government service; extensive civic and community service; and service as a member of the Board of Directors of the Corporation since 1994.

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**Changes to Composition of the Board of Directors in 2022**

**Director Qualifications and Experience**

The GNC is committed to presenting for shareholder consideration a slate of nominees who, taken together with current Directors, have the experience, qualifications, attributes, and skills appropriate for functioning effectively as a board and as liaisons to the customers and communities the Corporation serves. The GNC regularly reviews the composition of the Board in light of the Corporation's evolving needs, its assessment of the Board's performance, and the input of shareholders. In considering whether to recommend any candidate for inclusion in the Board's slate of recommended director nominees, including candidates recommended by shareholders, the GNC considers a number of criteria, including, but not limited to, the candidate's integrity, business acumen, age, experience, education, involvement in the communities served by the Corporation, relationships and familiarity with the Corporation's customers, commitment to the Corporation, diligence, geographic representation, conflicts of interest, strong professional reputation and record of achievement, constructive and collegial personal attributes, significant investment in or experience with the Corporation, ability and commitment to devote sufficient time and energy to Board service, and ability to act in the interests of all shareholders, rather than focusing on representation of a particular group, issue or interest. Additionally, the GNC must ensure that the composition of the Board and its committees satisfies SEC, NASDAQ, and banking regulatory standards, including those related to director independence. Further examples of individual qualifications and experience considered by the GNC include the candidate's professional standing in their chosen field and in the communities served by the Corporation, expertise in the financial services industry, civic and community involvement in the communities served by the Corporation, leadership skills, and intelligence. The GNC also strives to accomplish broad geographic representation from the communities and markets the Corporation serves and seeks candidates who can help ensure the Board remains knowledgeable and intimately involved in the banking affairs of those customers and communities. The GNC also seeks candidates with a representative mix of skills in finance, technology, marketing, community and business affairs, human resources, and governance.

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**Diversity of Director Nominees** 

The Governance and Nominating Committee Charter, which is publicly available on the Corporation's website <u>www.firstcommunitybank.com</u> under Investor Relations, addresses specifically how diversity is to be considered in the director nomination process. More broadly, however, the GNC seeks to ensure that there is diversity of thought among directors. Having diversity of thought results in more thorough analysis of each issue and better decisions, which in the long term results in greater shareholder value. The GNC believes that diversity of thought stems from many factors, including professional experience, life experience, socio-economic background, gender, race, religion, nationality, skill set, and geographic representation. The GNC does not assign specific weights to particular factors, and no particular factor is necessarily applicable to all prospective nominees. The Corporation believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge, and abilities that will allow the Board to fulfill its responsibilities. The diversity of the Board is evaluated on a continuing basis by assessing whether varying viewpoints are routinely presented, evaluating the individual performance and contributions of each Director, and ensuring that varying perspectives are presented on key issues.

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| | | | | |
|:---|:---|:---|:---|:---|
| **Board Diversity Matrix (As of March 3, 2022)** | **Board Diversity Matrix (As of March 3, 2022)** | **Board Diversity Matrix (As of March 3, 2022)** | **Board Diversity Matrix (As of March 3, 2022)** | **Board Diversity Matrix (As of March 3, 2022)** |
| Total Number of Directors | 8 | 8 | 8 | 8 |
|  | **Female** | **Male** | **Non-Binary** | **Did Not Disclose Gender** |
| **Part I: Gender Identity** |  |  |  |  |
| Directors | 2 | 6 | 0 | 0 |
| **Part II: Demographic Background** |  |  |  |  |
| African American or Black | 0 | 0 | 0 | 0 |
| Alaskan Native or Native American | 0 | 0 | 0 | 0 |
| Asian | 0 | 0 | 0 | 0 |
| Hispanic or Latinx | 0 | 0 | 0 | 0 |
| Native Hawaiian or Pacific Islander | 0 | 0 | 0 | 0 |
| White | 2 | 6 | 0 | 0 |
| Two or More Races or Ethnicities | 0 | 0 | 0 | 0 |
| LGBTQ+ | 0 | 0 | 0 | 0 |
| Did not Disclose Demographic Background | 0 | 0 | 0 | 0 |
| Directors who are Military Veterans | 2 | 2 | 2 | 2 |

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**Recommendations for Director Candidates** 

The GNC's practice is to consider all shareholder recommendations for director candidates which are received prior to February 15<sup>th</sup> each year. Any such recommendations should be sent to the GNC, c/o Secretary of First Community Bankshares, Inc., P. O. Box 989, Bluefield, Virginia 24605-0989. The Corporation believes that directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the shareholders. The GNC also considers candidates recommended by current directors, officers, employees, and others. The GNC evaluates all nominees for director in the same manner and typically bases its initial review on any written materials submitted with respect to the candidate.

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**NON-DIRECTOR NAMED EXECUTIVE OFFICERS**

Named executive officers who are not directors of the Corporation, including their title, age, and year they became an officer of the Corporation, are set forth in the chart below, which is followed by a brief biography describing each named executive officer's business experience.

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| | | |
|:---|:---|:---|
| **Name and Title** | **Age** | **Executive of the Corporation Since** |
| Jason R. Belcher, Chief Operating Officer of Corporation and of First Community Bank | 45 | 2016 |
| David D. Brown, Chief Financial Officer of Corporation and of First Community Bank | 47 | 2006 |
| Sarah W. Harmon, Chief Administrative Officer, General Counsel, and Secretary of Corporation and of First Community Bank | 40 | 2018 |

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**Jason R. Belcher, Chief Operating Officer of the Corporation and First Community Bank.** 

Mr. Belcher has served as an officer of First Community Bank since March 2, 2015, having previously served as Chief Risk Officer and Chief Administrative Officer. Mr. Belcher assumed the role of Chief Operating Officer of the Corporation on January 1, 2020 pursuant to the retirement of E. Stephen Lilly. He has been employed by the Corporation's banking subsidiary since 2005, in various roles including Market President, Finance and Tax Director, and Treasurer. Mr. Belcher, a Certified Public Accountant, earned his Bachelor of Science in Business Administration from West Virginia University in 1999 and a Master of Accounting and Information Systems Degree from Virginia Polytechnic Institute and State University in 2006. In his community, Mr. Belcher serves in various roles for his church, including as a former Deacon and as a member of the Church Officers Committee. Mr. Belcher coaches middle school football, soccer, and basketball teams and serves on the Board of Directors of the Tiger Athletic Foundation in Princeton, West Virginia.

**David D. Brown, Chief Financial Officer of the Corporation and First Community Bank.**

Mr. Brown has been Chief Financial Officer of the Corporation and First Community Bank since May 2006 and has been employed by the Corporation and/or one of its subsidiaries since 2005. Prior to joining the Corporation, Mr. Brown served in various positions including Corporate Auditor of United Bankshares, Inc. from 1999 to 2005. From 1997 to 1999, Mr. Brown practiced in the field of public accounting, concentrating his work on tax, accounting, and auditing across a variety of industries. Mr. Brown is a Certified Public Accountant and holds Master of Public Accountancy and Bachelor of Science degrees from West Virginia University. Mr. Brown is a member of the American Institute of Certified Public Accountants and the West Virginia Society of Certified Public Accountants. In his community, Mr. Brown serves on the Carlock Pruett Athletic Foundation Board and previously served on the board of the Bluefield, Virginia Little League. He has also coached middle school and Little League baseball and serves as a Virginia State Little League umpire.

**Sarah W. Harmon, Chief Administrative Officer, General Counsel, and Secretary of the Corporation and First Community Bank.**

Ms. Harmon has been employed by the Corporation's banking subsidiary since 2013. She has served as General Counsel of First Community Bank since 2018 and General Counsel of the Corporation since 2020. In 2021, Ms. Harmon was appointed Chief Administrative Officer for the Corporation and First Community Bank. In addition to her traditional General Counsel duties, Ms. Harmon provides executive oversight to the legal, compliance, and human resources departments. Ms. Harmon earned her Bachelor of Arts in the Interdisciplinary Studies of Behavioral Science and Business from Concord College (now University) in 2002, graduating *summa cum laude* as Valedictorian, her Juris Doctorate from Washington and Lee School of Law in 2006, graduating *cum laude*, and her Master of Business Administration from West Virginia University in 2017. Since March 2021, Ms. Harmon has served as the District 10 Representative for the West Virginia State Bar Board of Governors, which includes service on various sub-committees. Since 2018, she has been a member of the ABA General Counsel Group; the Virginia Bankers Association Legal Affairs Committee, which she currently chairs; and the West Virginia Bankers Association Legislative Affairs and Government Relations Committee, which she currently chairs. She has previously served as the Legislative Director for the Society for Human Resource Management, Appalachian Chapter of the Virginias Board of Directors and remains a member. Ms. Harmon is involved in her community through volunteering and other support of local schools and participation in civic and community events. She previously served on the Board of Directors for Mother Goose Child Care Center.

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**OTHER KEY OFFICERS** 

In addition to the Corporation's named executive officers, certain other key officers and executives of subsidiaries (collectively, the "Senior Management Team") are integral to the smooth operation and continued success of the Corporation and its subsidiaries. Each member of the Senior Management Team is responsible for the oversight of several functional business units of the Corporation's banking subsidiary and is primarily responsible for assessing and managing the Corporation's risk exposure, under the supervision of the Board and its committees. In addition to the named executive officers, the Senior Management Team consists of the following officers:

**Tamara L. Abel, Chief Mortgage Banking Officer of First Community Bank.**

Ms. Abel has been employed by the Corporation's banking subsidiary since 2003, having over 19 years of experience in the banking industry. Previous roles include credit analyst, business development officer, small business lending, loan review manager, and vice president of credit administration. As the Chief Mortgage Banking Officer (formerly, Senior Vice President - Mortgage Banking), Ms. Abel is responsible for the oversight and management of the Bank's mortgage banking operations, including development of policies and procedures that govern mortgage product design and underwriting criteria, compliance with applicable laws and regulations, origination of mortgage loans, and the direct supervision of the Mortgage Executive and the Mortgage Credit Executive. Ms. Abel obtained a Bachelor of Science in Business Administration with a concentration in Accounting from Concord College (now University) in 1986.

**Derek A. Bonnett, Chief Risk Officer of the Corporation and First Community Bank.**

Mr. Bonnett has been employed by the Corporation since 2016, having served as the Director of Internal Audit until being named the Chief Risk Officer in 2021. He has over 13 years of experience providing risk management advice, insight, and assurance to financial institutions. Mr. Bonnett is a Certified Public Accountant, Certified Internal Auditor, and Certified Information Systems Auditor. He holds a Bachelor of Science in Business Administration with a concentration in Accounting obtained from Concord University in 2010, from which he graduated valedictorian of his class. In his current role, Mr. Bonnett is responsible for oversight and administration of the Bank's enterprise risk management (ERM) program to ensure alignment of strategy and operations.

**Milton Campbell, Chief Retail Banking Officer of First Community Bank.**

Mr. Campbell has been employed by the Corporation's banking subsidiary since 1998, served as a Regional President of the bank from 2009 to 2021, and was named Chief Retail Banking Officer in 2021 when the bank transitioned from a regional banking management structure to a line of business structure. Mr. Campbell joined First Community following the acquisition of Blue Ridge Bank, where he had been employed from 1989 to 1996. He has over 38 years of experience in the banking industry. As Chief Retail Banking Officer, Mr. Campbell provides oversight to all functions of the branch network's deposit and retail loan operations. Mr. Campbell is also the executive responsible for oversight of the bank's credit card portfolio. Mr. Campbell obtained a Business Administration degree from Elon College (now University) in 1983 and is a graduate of the North Carolina School of Banking.

**Amy S. Hall, Chief Customer Service Officer of First Community Bank.**

Ms. Hall has been employed by the Corporation's banking subsidiary, or a predecessor bank, since 1993 and served as Director of Branch Administration from 2012 to 2021 when she was named Chief Customer Service Officer. In her current role, Ms. Hall provides executive oversight of all market staff training, all operational procedures, and market network support. In addition, Ms. Hall is responsible for executive oversight of the banking subsidiary's Client Care Center and the Digital Delivery Channels. Ms. Hall obtained her Associate Degree in Business Administration from Wilkes Community College in 1989.

**Samuel G. Hill, Chief Wealth Management Officer and Senior Trust Officer of First Community Bank.**

Mr. Hill has been employed by the Corporation's banking subsidiary since 2006 and has served in his current role since 2010 (previously Senior Vice President and Senior Trust Officer). In addition to overseeing the bank's trust department, Mr. Hill serves as the President of the bank's insurance subsidiary, First Community Insurance Services, and the bank's wealth management subsidiary, First Community Wealth Management, Inc. ("FCWM"). He has been employed by FCWM or its predecessor since 1992, and directly provides financial advising services to wealth management clients. Mr. Hill obtained his Bachelor of Science in Business Administration with a concentration in Accounting from Concord College (now University) in 1990 and holds a Master of Business Administration from West Virginia University obtained in 1999. Mr. Hill is a Certified Public Accountant, is a graduate of Cannon Trust School, and holds FINRA Series 7 and Series 63 securities licenses.

**William C. Hopkins, Chief Commercial Banking Officer of First Community Bank.** 

Mr. Hopkins has been employed by the Corporation's banking subsidiary since 1996, served as a Regional President of the bank from 2014 to 2021, and was named Chief Retail Banking Officer in 2021 when the bank transitioned from a regional banking management structure to a line of business structure. Previous roles include auditor, credit analyst, corporate strategist, commercial loan officer, commercial sales leader, and market president. As Chief Commercial Banking Officer, Mr. Hopkins provides oversight to all functions of the branch network's commercial lending and deposit functions. Mr. Hopkins is also the executive responsible for oversight of commercial credit documentation quality control and the bank's treasury services function. Mr. Hopkins holds a Bachelor of Science in Business with a concentration in Accounting and Finance obtained from Concord College (now University) in 1995. He has also completed the ABA Commercial Lending School and the Wachovia Commercial Lending School.

**Jeffrey N. Noble, Chief Credit Officer of First Community Bank.**

Mr. Noble has served the Corporation's banking subsidiary in various roles for more than thirty-five (35) years and has held his current position since 2013. In this role, Mr. Noble is responsible for the supervision of personnel, policies, procedures, and documentation for the Corporation's credit administration function, inclusive of Consumer Lending, Small Business Lending, Commercial Lending, Appraisal Services, and Special Assets. Mr. Noble holds a Bachelor of Science in Business Administration with a concentration in Accounting, obtained from Concord College (now University) in 1986. He is also a graduate of the West Virginia School of Banking, RMA Commercial Lending School, and RMA Lending to Small Business School.

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**CORPORATE GOVERNANCE**

**Corporate Governance Guidelines**

The Board regularly reviews corporate governance developments and considers modifications to clarify and augment the Board's processes, including those relating to risk oversight.

<u>The Board's Role in Risk Oversight</u>. The Board believes that each member has a responsibility to monitor and manage risks faced by the Corporation. At a minimum, this requires members of the Board to be actively engaged in Board discussions, review materials provided to them, and know when it is appropriate to request further information from management and/or engage the assistance of outside advisors. Furthermore, because the banking industry is highly regulated, certain risks to the Corporation are monitored by the Board through its review of the Corporation's compliance with regulations set forth by its regulatory authorities, including recommendations contained in regulatory examinations.

During 2021, given the ongoing nature of the COVID-19 pandemic, the Board and its committees continued to review and consider with management the impact of COVID-19 on the Corporation's employees, customers, and financial performance, and management's strategies and initiatives to respond to, and mitigate, adverse pandemic impacts, including enhanced health and safety measures for the Corporation's employees. Management reviewed and, in many cases, refined various plans, strategies, and protocols developed at the onset of the pandemic to protect employees, maintain services for clients, ensure the functional continuity of operating systems, controls and processes, and mitigate the financial risks posed by changing market conditions.

Because the Corporation believes risk oversight is the responsibility of each member of the Board, it does not concentrate the Board's responsibility for risk oversight in a single committee. Instead, each committee concentrates on specific risks for which it possesses relevant information and expertise, and each committee regularly reports to the Board on its findings. For example, the Audit, Compliance, and Enterprise Risk Committee (the "ACER Committee") regularly monitors the Corporation's exposure to certain reputational risks by establishing and evaluating the effectiveness of its programs to report and monitor fraud and by monitoring the Corporation's internal controls over financial reporting; the Asset/Liability Management Committee of the Corporation's banking subsidiary monitors liquidity and interest rate risk; the Information Systems Steering Committee of the Corporation's banking subsidiary monitors information technology and operations risk; and the Corporation's Compensation and Retirement Committee (the "CRC") monitors risks associated with the design and administration of employee compensation and benefit plans.

**Independence of Directors**

The Board annually reviews the relationships of each of its members with the Corporation to determine whether each director is independent. This determination is based on both subjective and objective criteria developed by the NASDAQ listing standards and the SEC rules. Factors considered include but are not limited to: each Director's employment history with the Corporation, if any; compensation by the Corporation to each Director and their family members, if any; and the report of the GNC Chairman, which, for 2021, indicates that no related party transactions with any Director constitutes a material relationship with the Corporation. After considering each Director's individual circumstance, the Board determined that, with regard to the following Directors and nominees, no circumstances or relationships exist which would interfere with their exercise of independent judgment as a director: C. William Davis; Samuel L. Elmore; Richard S. Johnson; Harriet B. Price; M. Adam Sarver; and Beth A. Taylor. Accordingly, these Directors and nominees are considered independent. Directors Stafford and Mills are not independent solely because they are executive officers of the Corporation.

SEC Rules and/or NASDAQ listing standards contain additional requirements for members of the ACER Committee, the CRC, and the GNC. All of the directors serving on these committees are independent under the additional requirements applicable to each such committee.

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**The Board of Directors and Board Meetings**

<u>Board Leadership Structure</u>. William P. Stafford, II currently serves as Chief Executive Officer of the Corporation and as Chairman of the Board. The role of the Chief Executive Officer is to set the strategic direction for the Corporation and manage its performance, while the Chairman of the Board is tasked with setting the agenda for Board meetings and presiding over meetings of the Board. The Board believes combining the roles of Chief Executive Officer and Chairman is in the best interests of the Corporation at this time, as doing so best positions the Corporation to carry out its strategic plan for core growth and enhanced performance; provides for greater accountability and transparency; enhances oversight of operations; and provides for greater Board involvement. However, in making this decision, the Board is not unmindful of the corporate governance objectives that are sometimes achieved through bifurcation of the Chairman and Chief Executive Officer roles. To achieve those objectives, the Board has bifurcated the positions of Chief Executive Officer of the Corporation and Chief Executive Officer of First Community Bank, the Corporation's banking subsidiary, which is its primary operating entity. Gary R. Mills serves as Chief Executive Officer and President of First Community Bank, supervises all bank operations, and manages its performance. Both Mr. Stafford and Mr. Mills work closely with the Board and its committees in their respective areas of responsibility. The Board believes, under the present circumstances particular to the Corporation, that this structure better achieves the desired corporate governance objectives set forth above, and others. Further, the Board has appointed Director Elmore as the Lead Independent Director and Vice Chairman of the Board. Director Elmore serves as Chairman of meetings of the independent directors.

<u>Standards of Conduct</u>. All directors, named executive officers, and other employees of the Corporation must act ethically at all times and in accordance with the policies comprising the Corporation's Standards of Conduct (the "Standards"), which are available at the Corporation's website <u>www.firstcommunitybank.com</u> under Investor Relations. Certification of compliance with the Standards is required on a annual basis. Only the Board of Directors may waive a provision of the Standards for directors and named executive officers and will only do so for just cause in an instance where the underlying ethical objective will not be violated. No waivers were granted to any director or named executive officer during 2021. Amendments to the Standards will be published on the Corporation's website, as required by SEC rules. If an actual or potential conflict of interest arises for a director, the director must promptly inform the Board.

<u>Communicating Concerns to Directors</u>. The ACER Committee and the non-management directors have established procedures to enable any employee who has a concern about accounting, internal accounting controls, or auditing matters related to the Corporation to communicate that concern directly to the Board through an e-mail or written notification directed to the Chairman of the ACER Committee. Such communications may be confidential or anonymous. During orientation, employees are informed how to submit such communications and the Whistleblower Policy is provided in the employee handbook, on the Corporation's Intranet, and a notice regarding the same can be found posted on bulletin boards at each location of the Corporation and its subsidiaries. The status of any unresolved concern is reported to the non-management directors of the Board periodically by the Chairman of the ACER Committee.

<u>Shareholder Communications</u>. Shareholders may communicate with all or any member of the Board by addressing correspondence to the Board or to the individual director. Shareholders may address such communication to Secretary, First Community Bankshares, Inc., P. O. Box 989, Bluefield, Virginia 24605-0989, and all communications so addressed will be forwarded to the Chairman of the Board or to the individual director to whom such correspondence is directed, without exception.

<u>Board Meetings</u>. In 2021, the Board held nine (9) regular meetings. No member attended fewer than seventy-five percent (75%) of the Board meetings or committee meetings on which the member sits. Each director is expected to devote sufficient time, energy and attention to ensure diligent performance of the director's duties and to attend all regularly scheduled Board, committee, and shareholder meetings. It is the Board's policy that the directors should attend the Annual Meeting absent exceptional circumstances. All then-current directors attended the 2021 Annual Meeting.

<u>Meetings of Independent Directors</u>. The non-management directors met without any management director or other employee present on at least two (2) occasions in 2021.

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<u>First Community Bank Board</u>. First Community Bank (the "Bank") is a Virginia chartered commercial banking corporation and the Corporation's primary operating subsidiary. The Corporation conducts its banking operations, which constitute the overwhelming majority of its activities, exclusively through First Community Bank. The Board is aided in the governance and operation of its banking subsidiary by the board of directors of First Community Bank (the "Bank Directors"). The Bank Directors currently consist of the directors of the Corporation and eight (8) additional individuals with experience, qualifications, attributes, and skills appropriate for governing a community bank. In addition, due to their involvement in the communities served by the Corporation, the Bank Directors are uniquely positioned to advise the Senior Management Team regarding community banking matters. The GNC regularly reviews the composition of the Bank board of directors in light of the Bank's evolving needs, its assessment of the Bank Directors' performance, and the markets in which the Bank operates. In considering whether to recommend any candidate for election to the Bank board of directors, the GNC considers many of the same criteria as when considering candidates for the Board of Directors, including but not limited to, the candidate's integrity, reputation, business acumen, age, education, involvement in the communities served by the Bank, relationships and familiarity with the Bank's customers, potential conflicts of interest, constructive and collegial personal attributes, knowledge of banking regulatory matters, as well as the candidate's general experience and expertise in the financial services industry and civic and community involvement. The GNC also strives to accomplish broad geographic representation from the communities and markets the Bank serves and seeks candidates who can help ensure the Bank Directors remain intimately involved in the banking affairs of the Bank's customers and communities.

In addition to the Board committees mentioned previously discussed, the Bank maintains several standing committees, including, without limitation, Loan Committee (which oversees lending matters), Asset/Liability Management Committee (ALCO) (which oversees management of the Bank's balance sheet), Trust Committee (which oversees trust and investment matters), and Information Systems Steering Committee (ISSC) (which oversees information technology matters, including digital information systems, information security, and payment channels). Both Corporation directors and Bank directors serve on each Bank-level committee, providing oversight to that committee's respective area of operation.

**Board Committees**

The Board has four (4) standing committees: the ACER Committee, the Executive Committee, the CRC, and the GNC. For each of these committees, except the Executive Committee, the Board has adopted a written charter, a current copy of which is available for review and/or printing on the Corporation's website at <u>www.firstcommunitybank.com</u> under Investor Relations. Each such charter is reviewed and approved annually by the relevant committee and by the Board.

<u>Audit Compliance and Enterprise Risk Committee</u>. ****The ACER Committee combines the functions of an audit committee with those of a compliance and enterprise risk committee to provide members a more holistic view of the financial, legal, and regulatory risks affecting the Corporation and its banking subsidiary.

The current members of the ACER Committee are Director Johnson, who chairs the Committee; Director Elmore; Director Price; and Director Sarver. All members of the ACER Committee are independent. Director Johnson is the audit committee financial expert, as the SEC defines that term and as the Board interprets such qualification in its business judgment consistent with such definition. The ACER Committee is concerned with the integrity of the Corporation's financial statements, the independence, qualifications, and performance of the Corporation's independent registered public accounting firm, and the performance of the Corporation's internal audit function. Its duties include but are not limited to: (1) selection and oversight of the independent registered public accounting firm; (2) review of the scope of the audit to be conducted by the independent registered public accounting firm, as well as the results of that audit; (3) oversight of the Corporation's financial reporting activities, including the annual report and the accounting standards and principles followed; (4) discussion with the Senior Management Team and other relevant employees of risk assessment and management policies, including risk relating to the financial statements and financial reporting process and the steps taken by management to monitor and mitigate such risks; (5) approval of audit and non-audit services provided to the Corporation by the independent registered public accounting firm; (6) review of the organization and scope of the Corporation's internal audit function and its disclosure and internal controls; and (7) oversight of regulatory compliance and enterprise risk management. The ACER Committee held eleven (11) meetings during 2021. The ACER Committee's report is on page 41.

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<u>Executive Committee</u>. The current members of the Executive Committee are Director Stafford, II, who chairs the Committee; Director Davis; Director Elmore; Director Johnson; Director Mills; Director Price; Director Sarver; and Director Taylor. The Executive Committee did not meet in 2021. The Committee, subject to the supervision and control of the Board of Directors, has been delegated substantially all of the powers of the Board to act between meetings of the Board, except for certain matters reserved to the Board by law.

<u>Compensation and Retirement Committee</u>. The current members of the CRC are Director Davis, who chairs the Committee; Director Johnson; and Director Elmore. All three (3) members of the CRC are independent. The CRC's primary duties and responsibilities are to: (1) review, evaluate, and determine annually compensation of the Chief Executive Officer and President; (2) review, evaluate, and approve annually compensation of each other named executive officer; (3) review, evaluate, and approve annually compensation of the other members of the Senior Management Team; (4) review, evaluate, and approve all incentive and equity-based compensation; and (5) review, evaluate, and approve the proxy statement Compensation Discussion and Analysis and the CRC report. While the CRC receives input from the Chief Executive Officer and President, who play a significant role in the compensation setting process, as well as other members of management, as needed, the ultimate decision regarding compensation of the named executive officers rests with the CRC. Further, the Chief Executive Officer and President do not participate in these matters as they relate to their respective compensation. For a full discussion of the CRC and management's respective roles administering the executive compensation program, please see the Compensation Discussion and Analysis. The CRC does not delegate any of its responsibilities to subcommittees, except as it relates to the day-to-day administration of benefit plans. The CRC held seven (7) meetings in 2021. The CRC's report is on page 26.

<u>Compensation and Retirement Committee Interlocks and Insider Participation</u>. None of the members of the CRC are or were formerly employed by the Corporation or any of its subsidiaries in the last completed fiscal year. None of the named executive officers of the Corporation currently serve or previously served on any compensation committee or any board of directors of another company of which any of the Corporation's Board members were also an executive officer.

<u>Governance and Nominating Committee</u>. The current members of the GNC are Director Elmore, who chairs the Committee; Director Davis; Director Sarver; and Director Price. All four (4) members of the Committee are independent. The Committee's responsibilities include the selection of director nominees for Board service and the development and review of governance guidelines. The Committee also: (1) oversees evaluations of the Board, as well as director performance and Board dynamics; (2) makes recommendations to the Board concerning the structure and membership of Board committees; and (3) reviews, approves, and ratifies significant transactions with related persons. This Committee held six (6) meetings in 2021.

**Anti-Hedging Policy** 

All of the Corporation's directors, officers and employees are subject to the First Community Bankshares, Inc. Insider Trading Policy. The Insider Trading Policy provides that insiders (defined as directors, officers, employees, and independent contractors and those in a special relationship with the Corporation such as auditors, consultants or attorneys, who possess material, non-public information) and their related persons should not engage in any transactions that suggest they are speculating in the Corporation's securities. The Insider Trading Policy prohibits insiders and their related persons from trading in options, warrants, puts and calls or similar instruments on Corporation securities or selling Corporation securities "short" or "selling against the box." The Insider Trading Policy also prohibits insiders and their related persons from holding Corporation securities in margin accounts. The Insider Trading Policy discourages insiders from engaging in hedging transactions, such as "cashless" collars, forward sales, equity swaps and other similar arrangements and requires that any such transaction be carefully reviewed by the Insider Trading Officer (the General Counsel of the Corporation or their designee) prior to the insider entering into such transaction to determine whether such transaction would violate the Insider Trading Policy. The Insider Trading Policy contains an addendum with more restrictive requirements, including a prohibition on trading during standard quarterly blackout periods that apply to certain designated insiders, including executive officers and directors.

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**Environmental, Social, and Governance (**"**ESG**"**) Framework**

We believe in developing and nurturing mutually beneficial relationships with customers, shareholders, and employees. Our ESG framework is built around this mission statement. While our efforts in this regard are shown throughout this proxy statement, below are some highlights of our program.

<u>Human Capital</u>. We believe in investing in our most valuable corporate resource -- our people! In 2021, the Corporation engaged compensation consultant Pearl Meyer & Partners, LLC to review each position in the organization, identify a market comparable, and provide benchmark data for competitive market pay. Based on the results of this exercise, the company increased employee base compensation by approximately $2.4 million. Simultaneously with this project, we updated job descriptions to ensure that expectations were clearly communicated and evaluation of those specific expectations could be easily accomplished. We also revamped our salary administration practices, including the introduction of a pay grade structure which fosters greater consistency across the organization and increased transparency for employees in career path planning.

In addition to competitive base compensation, we offer competitive benefits to attract and retain the best employees possible, including the ability to participate in our qualified defined contribution Employee Stock Ownership and 401(k) plan, discussed further on page 24. For 2021, the Board approved matching all employee contributions to their 401(k) plan account dollar-for-dollar up to 8% of each employee's compensation. A portion of the match is provided in the form of Corporation stock to promote employee ownership of the Corporation throughout the organization. We support work-life balance by offering paid time off for vacation, holidays, and personal leave, including parental involvement in schools. We also provide employees with 24 hours per year of compensated time to volunteer in their communities through our FCB Cares Volunteer Program. We strive to maintain a safe and healthy work environment and have adopted policies and practices to foster employee health including our employee wellness program and safety measures to reduce the spread of COVID-19. For 2021, employees were also granted ten (10) additional days of compensated absence for use in certain COVID related scenarios. We provide an Employee Assistance Program that includes clinical services and counseling options to employees and their families and access to financial, legal, and work-life balance resources. Generous educational assistance opportunities are also available to employees to help our team members improve on-the-job proficiency and to prepare them for advancement within the Corporation.

We believe in diversity and are committed to fostering, cultivating, and preserving a culture of diversity and inclusion. Our goal is for the Corporation to be reflective of the communities and people we serve. Consistent with these efforts, 25% of Directors on the Board are women. Women also comprise 25% of the Senior Management Team and 58% of managers who report directly to the Senior Management Team. We foster an equal opportunity environment, encouraging non-discriminatory practices, and we have strict policies in place that prohibit any form of harassment, retaliation, or intimidation. We have a strong Whistleblower Policy that provides for multiple reporting channels, including anonymous reporting directly to the ACER Committee, and we pride ourselves in adherence to our Standards of Conduct.

<u>Social Capital</u>. We believe in building strong, enduring relationships with our customers and the communities we serve. We build relationships with customers by offering a robust selection of products and services to meet their financial needs, including online and mobile banking tools and live Interactive Teller Machines to provide convenient, 24/7 access to financial resources.

We give back to our communities. In 2021, we contributed in excess of $130,000 to the communities we serve, nearly $22,000 of which was through our matching gifts program, an employee benefit designed to enhance employee charitable giving to qualified charitable organizations. Contributions supported the efforts of community organizations that are engaged in literacy programs, community revitalization, and the fight against substance abuse, homelessness, and hunger. Our employees engaged in acts of volunteerism, providing more than 300 hours of community service to organizations supporting affordable housing, economic development, financial literacy, affordable health care, youth athletics, and fighting substance abuse. We originated $29 million in loans to organizations providing rural health care services, critical municipal infrastructure, economic development, community revitalization, and job creation. We also originated more than 1,900 small business loans totaling $189.5 million, including 629 Paycheck Protection Program loans totaling $31.5 million, in support of small and medium sized businesses in the communities we serve.

We also support the future of our communities through our generous financial and other support of local schools within our footprint, our participation in various financial education programs, and the First Community Bankshares, Inc. Scholarship Program, which provides an annual award of $3,000 to an eligible dependent child of a First Community employee who is seeking higher education.

<u>Corporate Governance</u>. We believe in good corporate governance. In 2021, we were actively engaged with multiple shareholders and are committed to regular and open communications. In response to shareholder engagement, a modified majority voting standard, outlined on page 4, was adopted for election of directors in uncontested director elections. Over 75% of our directors, including all non-management directors, are independent under NASDAQ standards and our director independence standards follow the definitions established by the SEC, NASDAQ, and the FDIC. All directors serving during 2021 attended more than 75% of board and applicable committee meetings and no director serves on an excessive number of outside boards. All directors and executive officers are subject to our rigorous Stock Ownership Guidelines, which include holding requirements for all stock granted by the Corporation, and are prohibited from engaging in certain transactions in our common stock including margin accounts, short selling, trading derivative securities, and hedging. The Corporation's Stock Ownership Guidelines are more thoroughly outlined on page 24. The CRC conducts annual performance evaluations of the named executive officers and both the Board of the Corporation and its banking subsidiary perform annual self-assessments. Executive incentive and equity compensation are subject to clawback provisions.

<u>Sustainability</u>. We believe in longevity. Having served the financial needs of our communities since 1874, we understand what creates sustainable value to our shareholders, customers, and communities. We serve an essential role in the economies of our communities by facilitating the transfer of financial capital to their most productive activities, including lending for infrastructure, real estate development, community revitalization, and other projects. Our executive compensation program is designed to balance business risk with sound financial policy and shareholders' interests, and to align the interests of our executive officers with the long-term interests of our shareholders by encouraging growth in the value of the Corporation and our shareholders' investments. We have a robust business continuity management program, overseen by the Chief Risk Officer, that manages the threats and impacts associated with a potential disruption in key resources, including people, equipment, facilities, technology, and suppliers. Our business continuity plans include a pandemic response plan, which has been fully implemented in response to the COVID 19 pandemic. We have comprehensive policies and procedures to guide the management of strategic, regulatory, legal, operational, and other risks.

<u>Environmental</u>. We believe in preparing for tomorrow. We support utilizing technology and digital channels, including payments, credit, savings, remittances, mobile banking, online account opening, imaging systems, and a board portal for providing board materials and information. We provide access to our proxy materials by Internet in accordance with the "notice and access" proxy rules. We also promote the utilization of electronic deposit account statements and e-signature technology, which promotes efficiency and paper reduction. Additionally, we work primarily with shred vendors who recycle our shred waste.

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**PROPOSAL 2: NON-BINDING, ADVISORY VOTE ON EXECUTIVE COMPENSATION**

Pursuant to Section 14A of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), the Corporation is requesting shareholder approval of the compensation of its named executive officers as disclosed in this proxy statement. This proposal, commonly known as a "say-on-pay" proposal, gives shareholders the opportunity to express their views regarding named executive officers' compensation. The vote is not intended to address any specific items of compensation, but rather the overall compensation of named executive officers and the philosophy, policies, and practices described in this proxy statement. The Corporation believes that the compensation of named executive officers is straightforward, uncontroversial, and designed to discourage executives from taking excessive risk. We believe executive compensation is, in large part, Corporation performance based and not excessive but sufficient to be competitive with peers and retain the talent and skill required to run the corporation at the profitability levels historically enjoyed by shareholders. Accordingly, the following resolution is submitted for shareholder approval.

RESOLVED, that the Corporation's compensation paid to the Corporation's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the CD&A, executive officer compensation tables, and related narrative discussion, is hereby APPROVED.

The "say-on-pay" vote is an advisory vote, which is not binding on the Corporation. However, the Board and the CRC value the opinions expressed by shareholders through their vote on this proposal and will carefully consider the outcome of the vote when making future compensation decisions with respect to the Corporation's named executive officers.

At the 2020 Annual Meeting, the majority of shareholders, at the recommendation of the Board, supported a frequency of every three (3) years for future shareholder advisory votes on executive compensation. However, starting with the 2021 Annual Meeting, the Board determined that an annual "say-on-pay" vote provided shareholders more timely input and provided the Board more targeted and consistent feedback for use in effectively implementing changes, as needed, to executive compensation. Accordingly, "say-on-pay" votes will be held on an annual basis.

**The Board of Directors unanimously recommends a vote *<u>FOR</u>* this proposal.**

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**COMPENSATION DISCUSSION AND ANALYSIS**

This compensation discussion and analysis explains our executive compensation program for our named executive officers listed below. It also describes the process followed by the CRC for making pay decisions, as well as its rationale for specific decisions related to 2021.

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|:---|:---|
| &nbsp;&nbsp;&nbsp; **Named Executive Officer** | &nbsp;&nbsp;&nbsp; **Position** |
| &nbsp;&nbsp;&nbsp; William P. Stafford, II | &nbsp;&nbsp;&nbsp; Chief Executive Officer |
| &nbsp;&nbsp;&nbsp; Gary R. Mills | &nbsp;&nbsp;&nbsp; President |
| &nbsp;&nbsp;&nbsp; David D. Brown | &nbsp;&nbsp;&nbsp; Chief Financial Officer |
| &nbsp;&nbsp;&nbsp; Jason R. Belcher | &nbsp;&nbsp;&nbsp; Chief Operating Officer |
| &nbsp;&nbsp;&nbsp; Sarah W. Harmon | &nbsp;&nbsp;&nbsp; Chief Administrative Officer, General Counsel, and Corporate Secretary |

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All named executive officers are part of the Senior Management Team, which also includes certain other key officers and executives of subsidiaries who are generally subject to the same compensation programs and governance policies.

**Executive Summary**

<u>Business Overview and Financial Highlights</u>. The Corporation is the holding company of a high performing community bank with over $3 billion in total assets. We serve our customers through our network of forty-nine branch locations. Our consistent strong earnings, solid asset quality, and excellent capital management are hallmarks of our performance. Key highlights from 2021 include:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Strong return on average assets of 1.63% compared to recent Federal Reserve peer averages of 1.25%

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Earned $51.17 million in net income for the year

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Increased the regular cash dividends to shareholder for the twelfth consecutive year

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Repurchased 949,386 common shares, or 5.36% of outstanding shares of the Corporation

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Maintained a strong allowance for credit losses of 1.29% of total loans

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Maintained solid asset quality with total nonperforming assets to total assets of 0.73%

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Maintained excellent regulatory relations

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• Continued to be well-capitalized based on all regulatory guidelines, with capital ratios well in excess of the regulatory requirements

<u>Say-on-Pay and Shareholder Engagement</u>. Each year, we carefully consider the results of our previous shareholder say-on-pay vote. In 2021, approximately 76% of the votes cast supported our executive compensation decisions. We periodically engage with shareholders on executive compensation and other corporate governance issues. Based on the feedback we received, our shareholders indicated broad support of our executive compensation program. We will continue to keep an open dialogue with our shareholders to help ensure that we have a regular pulse on investor perspectives.

<u>Best Compensation Practices and Policies</u>. Our executive compensation program includes practices and policies that promote sound compensation governance and are in the best interests of our shareholders and executives:

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| | | | |
|:---|:---|:---|:---|
| **What We Do** | **What We Do** | **What We Don**'**t Do** | **What We Don**'**t Do** |
| ☑  | Place a heavy emphasis on variable compensation | ☒ | No "single trigger" change-in-control cash payments |
| ☑  | 100% of annual long-term incentives are performance based | ☒  | No tax gross-ups |
| ☑  | Conduct incentive risk reviews | ☒  | No option backdating or repricing |
| ☑  | Recoup equity awards through a clawback policy | ☒  | No hedging |
| ☑ | Use an independent compensation consultant | ☒  | No recycling of shares granted under equity plans except forfeited |
| ☑ | Require executives and directors to own shares through rigorous stock ownership and holding guidelines |  | or terminated shares |

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**What Guides our Program**

<u>Compensation Philosophy and Objectives</u>. The overall objectives of the executive compensation program are to align the long-term interests of our named executive officers and other executives as closely as possible with those of shareholders and to motivate high performing executives to continue with the Corporation for long, productive careers. The Board's belief is that shareholder value is created over time through consistent financial and operating performance coupled with strong leadership. This overriding objective affects all elements of the compensation program.

<u>Components of Executive Compensation</u>. The principal components of the executive compensation program are:

● <u>Base Compensation</u>. Base compensation is intended to provide the executive with regular living income with which to provide for their needs and the needs of their family. Each named executive officer's base compensation depends on the scope of their duties, individual performance, length of service, and leadership ability. Current base compensation decisions include an objective evaluation of adjustments relative to peers (within and outside the Corporation). Base compensation is paid in the form of cash at regular payroll intervals along with all other employees of the Corporation and is reviewed by the CRC annually.

● <u>Annual Incentive Compensation</u>. Annual incentive compensation is intended to directly incentivize the executive to maximize the financial performance of the Corporation while not taking excessive risk. For each named executive officer, the CRC has historically awarded cash and restricted stock as incentive compensation. Beginning in 2022 for 2021 performance, annual incentive compensation will be in the form of cash. Payment of any incentive compensation is completely at-risk and determined based on the Corporation's previous year's performance as evaluated by the CRC. The Chief Executive Officer and President present their recommendations for Senior Management Team annual incentive compensation for consideration and approval to the CRC, but do not deliberate on their own compensation.

● <u>Long-Term Equity Compensation</u>. The Corporation's equity compensation program is designed to align executives' interests with those of shareholders and to reward long-term performance. The CRC uses stock options and restricted stock awards which are designed to deliver reasonable, but meaningful, equity interests in the Corporation. Payment of any equity compensation is completely at-risk and has historically been determined based on the Corporation's previous year's performance as evaluated by the CRC. Beginning in 2022, vesting of equity awards granted each year will be contingent on future years' performance of the Corporation.

In addition to these principal components, the compensation program also includes retirement programs available to all employees and an option to defer compensation. Perquisites are limited and are generally business-related and granted to facilitate the efficiency and productivity of our executives.

<u>Pay Mix</u>. The Corporation's pay-for-performance philosophy is reinforced through variable compensation, which is an important underpinning of the Corporation's compensation framework. For 2021, total variable compensation was approximately 36%, as graphically illustrated in the charts below. The reduced percentage of variable compensation in 2021 as compared to 2020 results from lower incentive paid in 2021 for 2020 performance. Incentive compensation based on the Corporation's exceptional performance in 2021 will be paid in March 2022.

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| ![ceopayelements.jpg](ceopayelements.jpg) | ![otherneopayelements.jpg](otherneopayelements.jpg) |

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**The Decision-Making Process**

<u>The Role of the CRC</u>*.* The CRC is responsible for administering the Corporation's executive compensation program in a manner consistent with the compensation philosophy. Details of the CRC's authority and responsibilities are specified in its charter, which is available at <u>www.firstcommunitybank.com</u> under Investor Relations. Under the CRC's charter, it has authority to review and approve the total compensation, including base salary, cash and equity incentives, benefits, and other compensation of the named executive officers.

In making its deliberations, the CRC's goal is to achieve a balance of fixed and variable compensation that contributes to the attraction and retention of highly qualified executives and ensures that the Corporation's executive compensation remains competitive over the long term. While the CRC does not use formulas in determining the level or mix of compensation for named executive officers, it evaluates a wide range of quantitative and qualitative factors, which include consistency in reaching targeted goals, the ability to perform in both good and challenging economic times, a history of integrity, evidence that the named executive officer uses good judgment, and the executive's ability to lead and create future value for the Corporation. In evaluating sustained performance, the Corporation gives weight to the relative performance of each named executive officer in their particular industry segment or function. The CRC also places substantial weight on the Corporation's overall financial success, including achievement of short- and long-term strategic goals and annual financial results.

In connection with its analysis, the CRC also reviews and considers information provided by its independent compensation consultant and surveys to determine the appropriate level and mix of base salary, incentive pay, and other elements of compensation. The CRC reviews both compensation and performance of peer companies as just one among several factors to inform its decisions so it can set total compensation levels commensurate with the Corporation's performance and strategic initiatives.

The CRC meets at least annually to evaluate the performance, establish performance objectives, and determine compensation for the Chief Executive Officer and President. The Chief Executive Officer and President are not present for any deliberations regarding their compensation. The CRC also annually reviews, evaluates, and approves the following compensation for the other named executive officers and Senior Management Team: base compensation, any incentive compensation, and any long-term equity compensation.

<u>The Role of Senior Management</u>*.* Each of the named executive officers, except the Chief Executive Officer and President, is a leader of several business units or functions of the Corporation's banking subsidiary in their areas of expertise. As part of the Senior Management Team, each reports directly to Mr. Mills in his capacity as President of the Corporation and as the Bank's Chief Executive Officer and President. Mr. Mills then develops the objectives that each individual is expected to achieve, which is derived largely from the Corporation's financial, budget, and strategic planning processes. Performance is assessed annually, and each named executive officer's individual performance is assessed against the objectives, the Corporation's overall performance, and the performance of the named executive officer's business unit or function. The Chief Executive Officer and President then propose base compensation levels, including any adjustments, as well as any proposed annual incentive compensation or long-term equity compensation for each named executive officer to the CRC. The CRC then considers proposed annual incentive compensation and/or long-term equity compensation, if any, for the named executive officers, other members of the Senior Management Team, and other employees.

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<u>The Role of the Independent Compensation Consultant</u>. As part of the Corporation's ongoing effort to ensure its compensation program complies with industry best practices and meets or exceeds enhanced levels of regulation and scrutiny on executive compensation, the CRC exercises its authority to retain independent compensation consultants, as needed, to provide technical advice and information related to Board and executive compensation. In early 2021, Pearl Meyer & Partners, LLC ("Pearl Meyer") was engaged as the CRC's independent compensation consultant.

Pearl Meyer reports directly to the CRC and does not provide any additional services to management, although representatives of the firm may meet with members of management, including the Chief Executive Officer and Senior Management Team, for purposes of gathering information on proposals that management may make to the CRC. The CRC has conducted an independence assessment of Pearl Meyer in accordance with SEC rules and concluded that Pearl Meyer is independent.

<u>Peer Groups/Benchmarking Practices</u>. In 2021, the CRC engaged Pearl Meyer to conduct a benchmarking and peer group exercise. As a result of this exercise, Pearl Meyer presented to the CRC a recommended peer group that utilized as the primary criteria for inclusion publicly traded U.S. banks with asset sizes of $1.9 billion to $6.2 billion. The CRC considered the "compatibility" and "comparability" of each company when selecting the 2021 peer group. The CRC reviewed, among other things, each peer company's asset size, earnings, geographic location, organizational structure and governance, number of employees, number of branch offices, and service offerings.

Following selection and approval by the CRC of the peer group, the Corporation was positioned near the median of the group in terms of asset size. As a result, during 2021, the CRC compared the principal elements of total direct compensation against the peers listed below:

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| | | |
|:---|:---|:---|
| Republic Bancorp, Inc. | City Holding Company | Community Trust Bancorp, Inc. |
| Peoples Bancorp Inc. | CNB Financial Corporation | Stock Yards Bancorp, Inc. |
| Carter Bankshares, Inc. | HomeTrust Bancshares, Inc. | SmartFinancial, Inc. |
| Summit Financial Group, Inc. | American National Bankshares, Inc. | Reliant Bancorp, Inc. (1) |
| Mid Penn Bancorp, Inc. | Capstar Financial Holdings, Inc. | Orrstown Financial Services, Inc. |
| ACNB Corporation | Howard Bancorp, Inc. (2) | Southern First Bancshares, Inc. |
| MVB Financial Corp. | Codorus Valley Bancorp, Inc. | C&F Financial Corporation |
| Shore Bancshares, Inc. |  |  |

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(1) Merged with United Community Banks, Inc. in January 2022.

(2) Merged with F.N.B. Corporation in January 2022.

In addition to the selected peer group, the CRC also considered the executive compensation of peer companies used by proxy advisory firms to ensure reasonable overlap.

As part of the benchmarking exercise, the CRC reviewed relevant market and survey data on comparable banking organizations as well as other analyses provided by Pearl Meyer.

Executive positions were matched to the survey and/or proxy data based on job duties using the appropriate scope for asset size. In addition to reviewing the respective data, the CRC considered recommendations of other key executives, including the Chief Executive Officers.

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**2021 Executive Compensation Decisions in Detail** 

<u>Base Compensation</u>**.** Base compensation levels are established annually under a methodology intended to maintain parity among the Senior Management Team based on levels of responsibility and the competitive market for executives in comparable positions. Base salary is a critical element of executive compensation because it provides executives with a fixed level of income. In determining base compensation, the CRC considers qualifications and experience, scope of responsibilities, future potential, established goals and objectives, past performance, competitive salary practices at peer companies, internal pay equity, and the tax deductibility of base compensation.

Based on the above criteria, the Chief Executive Officer and President recommend base compensation for all named executive officers to the CRC for its consideration, except the Chief Executive Officer and President do not participate in their respective base compensation determinations. The CRC then considers and approves or declines base compensation adjustments for all named executive officers. Based on the above criteria, the CRC also adjusts base compensation for the Chief Executive Officer and President.

The following table outlines the base compensation adjustments which were made in 2021 based on the above-described base compensation considerations.

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| | | | |
|:---|:---|:---|:---|
| **Named Executive Officer** | **2020 Base Compensation** | **2021 Base Compensation \*** | **% Change** |
| William P. Stafford, II | $420000.00 | $450000.00 | 6.67% |
| Gary R. Mills | $567000.00 | $600000.00 | 5.50% |
| David D. Brown | $267509.00 | $305000.00 | 12.29% |
| Jason R. Belcher | $264998.00 | $305000.00 | 13.12% |
| Sarah W. Harmon | $185000.00 | $280000.00 | 33.93% |

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\*Adjustments were made to base compensation for the named executive officers, as well as other members of the Senior Management Team, in 2021 based on peer and other data as a result of the CRC's engagement with Pearl Meyer and the subsequent independent review of compensation. As these adjustments were made mid-year, the 2021 base compensation listed in the table above is not the amount of base compensation actually received in 2021, as reflected in the Summary Compensation Table on Page 27. Rather, this is the annualized amount of each executive's current base compensation as of December 31, 2021. This is compared against annualized base compensation as of December 31, 2020.

<u>Annual Incentive Compensation for 2021</u>. In 2021, based on 2020 performance, annual incentive awards earned were paid to named executive officers in the form of cash bonuses (75%) and grants of Corporation stock (25%), subject to a two-year restriction period. Awards were based on certain evaluation criteria, including Corporation performance compared to strategic objectives as measured by incentive compensation scorecards, and the overall financial and strategic performance of the Corporation. Scorecards were developed and/or reviewed by the CRC in conjunction with review of the Corporation's strategic plan, objectives, and annual financial budget, during which the Corporation's performance and growth opportunities are analyzed and goals and objectives are established for the upcoming year(s). These objectives include both objective financial metrics and quantitative and qualitative strategic and operational goals. Financial measurements within the scorecard are calculated using audited financial information obtained from the Corporation's filed Form 10-K.

The scorecard defines suggested maximum incentive award opportunities as a percentage of each executive's base salary based on the achievement of predetermined return on average equity ("ROAE") performance levels. For 2021, based on 2020 performance, no incentive awards are earned if annual ROAE is less than 8.50%.

The scorecard reviews predetermined key performance indicators ("KPI's") which also align with the Corporation's strategic plan objectives and annual financial budget, but focus specifically on selected performance goals of the Corporation. Each KPI is assigned a weighting. The KPI's for 2020 included:

● Return on Average Assets ("ROAA");

● Earnings Per Share ("EPS"); and

● Efficiency Ratio.

A performance objective, or target, is established for each KPI. Recognizing the difficulty in precisely defining the appropriate target, and to further discourage imprudent or excessive risk taking to meet a particular KPI, a range of acceptable performance is defined representing the minimum level of performance and maximum level of performance relative to target that results in incentive compensation credit for that KPI.

The CRC retains discretion to reduce or eliminate the award indicated by the above-described process based on its assessment of overall corporate and individual performance. In 2020, the Corporation's ROAE was 8.54% which resulted in annual incentive compensation paid in 2021 (as further outlined in the Summary Compensation Table) of 15.18% of each named executive officer's annualized base compensation as of December 31, 2020.

<u>Revisions to Annual Incentive Compensation</u>. In 2021, the CRC requested that Pearl Meyer review the Corporation's methodology for awarding annual incentive compensation. As a result of this review, the CRC retained Pearl Meyer to assist in designing a written plan. The CRC is preparing a new executive annual incentive plan (the "Executive Incentive Plan") that will be used for the grant of annual cash incentive compensation going forward, and which should be fnalized in March 2022.

Under the Executive Incentive Plan, target opportunities for the executives will continue to be set as a percentage of each executive's base compensation, will be based on the achievement of a pre-determined financial measure and several predetermined KPI's that align with the Corporation's strategic plan, and will be distributed in cash; however, the new financial return performance range and the performance range for the KPI's will be based on the prior three-year average results of banks comprising the peer group along with other information deemed relevant by the CRC such as the Corporation's historical and projected performance, changes in accounting regulations and tax rates, and economic factors impacting the banking industry. In addition, the CRC's discretion in the award process will be greatly reduced under the new Executive Incentive Plan. Under the prior methodology, CRC discretion accounted for one-fourth of the overall potential payout and the CRC had ultimate discretion with respect to the remaining KPIs. However, under the new Executive Incentive Plan, the CRC will only have discretion to reduce the award calculated under the plan if the CRC believes a calculated award to be inconsistent with the best interests of the Corporation or shareholders, such as based on the CRC's assessment of individual executive performance.

The CRC believes that adopting a new written plan will provide greater clarity and transparency than the current methodology. Specifically, the performance range under the Executive Incentive Plan will be based on peer group results which significantly limits the CRC's discretion in setting the performance range and determining whether the performance goals have been achieved.

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<u>Long-Term Equity Compensation</u>. The CRC believes that long-term equity compensation supports the Corporation's commitment to sound corporate governance, aligns the financial interests of executives with the interests of shareholders, specifically discourages imprudent, unreasonable, or excessive risk taking, and rewards executives and leaders of core functional business units for achievement of the Corporation's long-term strategic goals. Long-term equity compensation also supports the Corporation's leadership retention objectives and reinforces a strong ownership culture. The CRC believes a meaningful portion of the Corporation's named executive officers' compensation should be in the form of long-term, equity compensation. However, as discussed below, the Corporation must meet a required level of performance before any long-term equity compensation is awarded. The CRC will not grant any equity compensation in any year in which the Corporation's minimum three (3)-year rolling ROAE is below 8.5%, or such other minimum ROAE as determined by the CRC from time to time considering economic conditions, operating results, and adjustments to the Corporation's strategic plan goals. The financial measurements utilized in the administration of the equity compensation methodology are calculated using audited financial information.

When granting restricted stock to named executive officers or other members of the Senior Management Team, the CRC determines the applicable vesting schedule for the granted shares reflecting attainment of designated performance goals, service to the Corporation through a prescribed future date, and/or other criteria specified in the award documents. Under the plan, the CRC may provide for the payment of any applicable dividends paid with respect to any shares of Common Stock subject to a restricted stock award during the period prior to lapse.

Utilizing this methodology, on March 19, 2021, the CRC awarded long-term incentive equity compensation under the 2012 Plan to the named executive officers in the form of restricted Common Stock of the Corporation. Such shares were subject to a ratable three (3)-year vesting schedule and were further subject to a five (5)-year holding period subsequent to vesting. However, on November 3, 2021, the CRC approved the exchange of these unvested restricted stock awards for unvested stock options of equivalent value. These stock options will vest over a period of three years. The CRC elected to approve the aforesaid exchange of the unvested restricted stock awards for unvested stock options after the Corporation initiated a review of its restricted stock awards under the 2012 Plan in response to a shareholder letter received in June 2021. The shareholder letter alleged that, although the Corporation complied with the overall share issuance limit in the 2012 Plan, grants of restricted stock and performance awards prior to 2021 allegedly exceeded a sub-limit in the 2012 Plan that limited the award of certain forms of restricted stock, restricted stock units, or performance awards to 300,000 shares.

The Corporation disagrees with the assertion in the shareholder letter. Nevertheless, the CRC took the above-described actions prior to vesting of the restricted share awards in order to ensure that the Corporation remained in compliance with the referenced sub-limit during 2021.

The 2012 Plan expires by its own terms in 2022. Accordingly, any long-term incentive compensation granted in 2022, or in subsequent years, will be granted under the 2022 Plan, subject to shareholder approval of the same at the Annual Meeting. Beginning in 2022, the CRC intends to award most long-term equity compensation to named executive officers and other members of the Senior Management Team in the form of Performance Restricted Stock with a three-year cliff vesting schedule.

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**Other Practices, Policies, and Guidelines**

<u>Stock Ownership Guidelines</u>. The Corporation previously adopted the First Community Bankshares, Inc. Stock Ownership Policy, which encourages ownership of the Corporation's Common Stock by the directors, named executive officers, and other members of the Senior Management Team in order to align the interests of the Corporation's key decision makers with the Corporation's shareholders. For each named executive officer, except the Chief Executive Officers of the Corporation and First Community Bank, the guidelines require Corporation stock ownership of value equal to 2.5 times the officer's base compensation. For the Chief Executive Officers, the guidelines require ownership of value equal to 3.5 times that Chief Executive Officer's respective base compensation. In addition to all holding requirements or other restrictions placed upon granted stock or options pursuant to the respective grant agreement as discussed above, the Stock Ownership Policy requires all directors, named executive officers, and other members of the Senior Management Team to hold all shares received as the result of the vesting or payment of any equity awards or obtained by exercising stock options which were granted from and after the original effective date of this policy until such time as the holder is in compliance with this policy. Notwithstanding anything else in this section, members of the Senior Management Team and directors may immediately sell shares acquired by exercising stock options for the limited purposes of paying the exercise price of the stock option and any applicable tax liability.

Each year, the CRC receives a report regarding Senior Management Team and director compliance with this policy. As of December 31, 2021, all officers and directors are in compliance with the restrictions contained in the policy and have met or are making satisfactory progress toward meeting their respective guideline level, many of which increased in 2021. Based upon the holding requirements, no specific timeline for achieving the guideline level has been established.

<u>Clawback Policy</u>. Restricted shares granted to named executive officers or other members of the Senior Management Team as long-term equity compensation are subject to clawback. The Corporation's clawback policy requires recoupment if the Corporation is required to prepare an accounting restatement due to the Corporation's material noncompliance with any financial reporting requirement under applicable securities laws which would result in the restatement of the Corporation's financial statements. In the event of a clawback, the executive officer agrees to return the entirety of the award to the Corporation. Awards will not be subject to clawback due to immaterial corrections or changes to the Corporation's relevant financial statements or due to a restatement that is voluntary or self-imposed by the Corporation.

<u>Anti-Hedging Policy</u>. All named executive officers of the Corporation are subject to the First Community Bankshares, Inc. Insider Trading Policy, inclusive of its anti-hedging provisions. For more information, please see page 15.

<u>Retirement Plans</u>. The Corporation maintains certain retirement plans for some or all employees as follows:

*KSOP Plan.* ****

The Corporation offers to most of its employees, including the named executive officers, a qualified defined contribution Employee Stock Ownership and 401(k) plan known as the "KSOP". The KSOP Plan is administered by the CRC.

*WRAP Plan.* ****

The First Community Bankshares, Inc. Deferred Compensation Plan, referred to as the WRAP, is a voluntary, non-tax qualified deferred compensation plan available to certain employees, including all named executive officers. Under the WRAP, participants may defer a portion of their base and/or annual incentive compensation. The WRAP is intended to mirror the Corporation's qualified KSOP and may include a discretionary match that coincides with a match made to the KSOP to the extent participants cannot otherwise receive the full match in the KSOP.

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*SERP.* ****

The Corporation previously provided a defined retirement benefit to certain named executive officers and certain other key employees pursuant to a supplemental executive retention plan (the "SERP"). The SERP is unfunded and was designed to provide a benefit at or after age sixty-two (62) upon separation from service. The benefit was targeted at a maximum of thirty-five percent (35%) of final average compensation subject to an annual benefit limit of $80,000. Final average compensation was calculated as the average of the participant's last three (3) full calendar years' compensation, which compensation would have been determined by assuming a three percent (3%) compound annual rate of increase to the participant's annualized base monthly salary as of the date that the participant enters the SERP. Vesting was on a graded schedule as follows: twenty-five percent (25%) vesting after five (5) years of service; fifty percent (50%) vesting after ten (10) years of service; seventy-five percent (75%) vesting after fifteen (15) years of service; an additional five percent (5%) vesting for each year of service beyond fifteen (15) years, and full vesting after twenty (20) years of service or upon reaching age sixty-two (62). As of December 31, 2021, the SERP was frozen to new participants, further vesting, and further accruals. All current participants will receive, upon separation from service at or after age sixty-two (62), only such benefit as was accrued and vested as of December 31, 2021.

**Other Benefits and Perquisites**

Named executive officers participate in other employee benefit plans generally available to all employees on the same terms as similarly situated employees. These plans include medical, dental, group life insurance, and group disability programs, as well as flexible spending accounts for reimbursement of medical expenses. The Corporation does not provide excessive perquisites to its executive officers, and those perquisites offered are business-related and granted to facilitate the efficiency and productivity of our executives. Named executive officers, at the discretion of the CRC, may be eligible for executive life insurance, club dues, and automobile allowance. The costs associated with providing these benefits and other items of compensation for named executive officers are reflected in the Summary Compensation Table on page 27. A chart disclosing the value of these additional items is found on page 28 entitled "All Other Compensation and Benefits."

**Employment Agreements**

The Corporation provides named executive officers with written employment agreements. Each agreement is consistent with the prototype agreement previously reported on a Form 8-K filed on April 16, 2015. Accordingly, the Corporation maintains uniformity among the named executive officers concerning the terms of their employment. The agreements have an initial term of three (3) years and automatically extend for an additional year each January 1<sup>st</sup> unless the Corporation or the respective executive gives notice that the employment term will not be extended. There are no golden parachute, tax gross-up, or other similar type provisions contained in these contracts.

Each agreement provides for continuation of base compensation for thirty-six (36) months in the event of a change of control coupled with terminated employment either without "Cause" by the Corporation or by the executives for "Good Reason" (as these terms are defined in the agreements). The Corporation may terminate the employment of any executive at any time for "Cause" without further obligation. If the Corporation terminates employment for any reason other than for "Cause" or the executive terminates their employment for "Good Reason," the Corporation will generally be obligated to provide compensation and benefits specified in the agreement for the balance of the term of the agreement. Upon the termination of employment, the executive will be subject to non-competition and non-solicitation restrictions. If the executive dies while employed by the Corporation, the Corporation will pay their estate through the end of the month in which their death occurs. If their employment is terminated as a result of permanent disability as determined pursuant to the agreement, then the Corporation has the right to terminate employment before the end of the applicable term. See the section entitled "Potential Payments Upon Termination," including the related tables, beginning on page 32 for an estimate of the benefits that the named executive officers would be entitled to receive pursuant to their respective employment agreements under various employment termination scenarios.

**Risk Considerations**

The CRC views the Corporation's compensation program with a long-term focus. Under the program, an executive may achieve the greatest amount of compensation through the Corporation's sustained superior performance over long periods of time. The Corporation believes this provides a strong incentive to manage the Corporation for the long term with a clear message to avoid excessive risk in the near term. The CRC maintains full discretion to adjust compensation based on performance and adherence to the Corporation's values.

In 2021, the CRC continued its extensive review of the relationship between risk management and incentive compensation to ensure that incentive compensation does not encourage engaging in unnecessary or excessive risks that threaten the value of the Corporation. The CRC concluded that the Corporation's compensation policies and practices do not encourage excessive or inappropriate risk and instead encourage behaviors that support sustainable long-term value creation. For instance, the CRC does not use highly leveraged, short-term incentives that drive high risk investments at the expense of long-term company value. Rather, the Corporation's annual incentive compensation is based on balanced performance metrics that promote disciplined progress focused on longer-term goals.

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**Tax Deductibility of Compensation**

Under Section 162(m) of the Internal Revenue Code (the "Code"), publicly held corporations generally may not take a tax deduction for compensation in excess of $1 million paid to any named executive officer during any fiscal year. There was an exception to the $1 million limitation for performance-based compensation meeting certain requirements. However, as a result of changes made by the Tax Cuts and Jobs Act of 2017, starting with the 2018 fiscal year Section 162(m) prohibits deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who serves as the chief executive officer or chief financial officer, or who is among the three most highly compensated executive officers. The only exception to this rule is for compensation (including performance-based compensation) that is paid pursuant to a binding contract in effect on November 2, 2017, that would have otherwise been deductible under the prior Section 162(m) rules.

To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the CRC has not adopted a policy requiring all compensation to be deductible. However, the CRC considers deductibility under Section 162(m) with respect to compensation arrangements for executive officers. In 2021, none of the named executive officers received compensation that the Corporation could not deduct by reason of Section 162(m) either before or after the changes made by the Tax Cuts and Jobs Act of 2017.

**Compensation and Retirement Committee Report**

The CRC has reviewed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and discussions with management, the CRC recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Corporation's 2021 Annual Report on Form 10-K and the Corporation's 2022 proxy statement. The following independent directors, who comprise the CRC, provide this report:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. William Davis (Chairman)

Samuel L. Elmore

Richard S. Johnson

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**2021 Summary Compensation Table**

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| | |  |  |  |  | **Change in** |  |  |
| | |  |  |  |  | **Pension** |  |  |
| | |  |  |  |  | **Value and** |  |  |
| | |  |  |  |  | **Non-** |  |  |
| | |  |  |  |  | **qualified** |  |  |
| | |  |  |  |  | **Deferred** | **All** |  |
| | |  |  |  |  | **Compen-** | **Other** |  |
| | |  |  | **Stock** | **Option** | **sation** | **Compen-** |  |
| <br>**Name of Individual /**<br>**Capacities Served** | <br>**Year** | **Salary** | **Bonus (1)** | **Awards (2)** | **Awards (3)** | **Earnings (4)** | **sation (5)** | **Total (6)** |
| William P. Stafford, II | 2021 | $427769 | $47832 | $15953 | $92096 | $43270 | $64076 | $690996 |
| Chief Executive Officer | 2020 | 420000 | 196875 | 149657 |  | 40218 | 60731 | 867481 |
|  | 2019 | 420000 | 165375 | 139167 |  | 45793 | 56601 | 826936 |
| Gary R. Mills | 2021 | 575551 | 64573 | 21552 | 124339 | 52121 | 84796 | 922932 |
| President | 2020 | 567000 | 265781 | 202023 |  | 45930 | 81423 | 1162157 |
|  | 2019 | 567000 | 223256 | 187848 |  | 40460 | 76235 | 1094799 |
| David D. Brown | 2021 | 277232 | 30465 | 10174 | 58671 | 24815 | 39781 | 441138 |
| Chief Financial Officer | 2020 | 267509 | 125395 | 95318 |  | 20719 | 36956 | 545897 |
|  | 2019 | 267509 | 105332 | 88655 |  | 36456 | 36575 | 534527 |
| Jason R. Belcher | 2021 | 275360 | 30179 | 10083 | 58113 | 3902 | 35486 | 413123 |
| Chief Operating Officer | 2020 | 264998 | 110156 | 83743 |  | 14119 | 31144 | 504160 |
|  | 2019 | 223465 | 80721 | 67925 |  |  | 28319 | 400430 |
| Sarah W. Harmon | 2021 | 230370 | 21069 | 7043 | 40586 |  | 25341 | 324409 |
| Chief Administrative Officer, | 2020 | 185000 | 77344 | 58807 |  |  | 13407 | 334558 |
| General Counsel, and |  |  |  |  |  |  |  |  |
| Corporate Secretary |  |  |  |  |  |  |  |  |

---

&nbsp;&nbsp;&nbsp;&nbsp;(1) Bonus paid in 2021 for 2020 performance.

&nbsp;&nbsp;&nbsp;&nbsp;(2) All stock awards granted in 2021 were made under the 2012 Plan and represent 25% of each named executive officer's discretionary incentive compensation granted on March 19, 2021, subject to a two (2) year clawback restriction. The stock grant amounts for 2021 reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.

&nbsp;&nbsp;&nbsp;&nbsp;(3) On March 19, 2021, the named executive officers were awarded long-term equity compensation in the form of restricted stock, which was scheduled to vest ratably over a period of three (3) years. However, on November 3, 2021, the CRC approved the exchange of these unvested restricted stock awards for unvested stock options of equivalent value. The grant date fair value was calculated using the Black-Scholes-Merton model with the following assumptions: risk-free interest rate of 1.24%, dividend yield of 3.568%, expected volatility of the market price of the Corporation's common stock of 33.083%, and average expected life of 5.4 years.

&nbsp;&nbsp;&nbsp;&nbsp;(4) The amounts in this column represent the increase in the actuarial net present value of all future retirement benefits under the SERPs. The net present value of the retirement benefits used to calculate the net change in benefits was determined using the same assumptions used to determine the Corporation's retirement obligations and expense for financial statement purposes. Additional information about the SERPs is included on page 26. We have not provided above-market or preferential earnings on any nonqualified deferred compensation and, accordingly, no such amounts are reflected in the table.

&nbsp;&nbsp;&nbsp;&nbsp;(5) The amounts in this column are detailed on the following table entitled " 2021 All Other Compensation and Benefits."

&nbsp;&nbsp;&nbsp;&nbsp;(6) Salary and bonus amounts paid to the named executive officers as a percentage of total compensation are as follows for 2021 : Mr. Stafford, II – sixty-nine percent (69%); Mr. Mills – sixty-nine percent (69%); Mr. Brown – seventy percent (70%); Mr. Belcher – seventy-four percent (74%); and Ms. Harmon – seventy-eight percent (78%).

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**2021 All Other Compensation and Benefits**

The Corporation provides the named executive officers with other perquisites and personal benefits as shown in the "All Other Compensation" column of the "2021 Summary Compensation Table." The Corporation and the CRC believe these are reasonable and consistent with its overall compensation program and better enable the Corporation to attract and retain superior employees for key positions. The CRC periodically reviews the levels of perquisites and other personal benefits provided to the named executive officers. The Corporation provides additional detail of those benefits in the tables below.

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
| | | **Total** |  |  |  |  |  |
| | | **Retirement** |  |  |  |  |  |
| | | **Plan** | **Split Dollar** | **Executive** |  |  |  |
| | | **Matching** | **Life** | **Life** |  |  |  |
| <br>**Name of Individual** | <br>**Year** | **Contribution** | **Insurance (1)** | **Insurance (2)** | **Perquisites** |  | **Total** |
| William P. Stafford, II | 2021 | $37589 | $111 | $16776 | $9600 | (3) | $64076 |
|  | 2020 | 35699 | 103 | 15329 | 9600 |  | 60731 |
|  | 2019 | 32884 | 97 | 14020 | 9600 |  | 56601 |
| Gary R. Mills | 2021 | 49967 |  | 15888 | 18941 | (4) | 84796 |
|  | 2020 | 47415 |  | 14515 | 19493 |  | 81423 |
|  | 2019 | 43615 |  | 13363 | 19257 |  | 76235 |
| David D. Brown | 2021 | 24150 |  | 4825 | 10806 | (5) | 39781 |
|  | 2020 | 22946 |  | 4410 | 9600 |  | 36956 |
|  | 2019 | 21289 |  | 4050 | 11236 |  | 36575 |
| Jason R. Belcher | 2021 | 23086 |  | 2800 | 9600 | (3) | 35486 |
|  | 2020 | 18966 |  | 2578 | 9600 |  | 31144 |
|  | 2019 | 16363 |  | 2356 | 9600 |  | 28319 |
| Sarah W. Harmon | 2021 | 15741 |  |  | 9600 | (3) | 25341 |
|  | 2020 | 13407 |  |  |  |  | 13407 |

---

&nbsp;&nbsp;&nbsp;&nbsp;(1) Imputed income on Corporation funded premiums or split dollar plans.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Corporation funded premium on executive life program.

&nbsp;&nbsp;&nbsp;&nbsp;(3) Perquisites consist of automobile allowance.

&nbsp;&nbsp;&nbsp;&nbsp;(4) Perquisites consist of $14,656 associated with a Corporation provided automobile and $4,285 country club dues.

&nbsp;&nbsp;&nbsp;&nbsp;(5) Perquisites consist of $9,600 of automobile allowance and $1,206 country club dues.

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**Grants of Plan-Based Awards**

The following table sets forth information concerning individual grants of stock awarded in fiscal year 2021 to the named executive officers.

---

| | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  | **All Other** |  | **All Other** |  |  | **Grant** |
|  |  |  |  |  | **Stock** |  | **Option** |  |  | **Date** |
|  |  |  |  |  | **Awards:** |  | **Awards:** |  | **Exercise or** | **Fair** |
|  |  |  |  |  | **Number of** |  | **Number of** |  | **Base Price** | **Value** |
|  |  | **Estimated Future Payout Under** | **Estimated Future Payout Under** | **Estimated Future Payout Under** | **Shares or** |  | **Securities** |  | **of Option** | **of Stock** |
|  | **Grant** | **Equity Incentive Plan Awards** | **Equity Incentive Plan Awards** | **Equity Incentive Plan Awards** | **Stock** |  | **Underlying** |  | **Awards** | **and Option** |
| **Name** | **Date** | **Threshold (#)** | **Target (#)** | **Maximum (#)** | **Units (#)** |  | **Options (#)** |  | **($/Sh)** | **Awards ($) (3)** |
| William P. Stafford, II | 3/19/2021 |  |  |  | 530 | (1) |  |  | $- | $15953 |
|  | 11/3/2021 |  |  |  |  |  | 11702 | (2) | 33.00 | 92096 |
| Gary R. Mills | 3/19/2021 |  |  |  | 716 | (1) |  |  |  | 21552 |
|  | 11/3/2021 |  |  |  |  |  | 15799 | (2) | 33.00 | 124339 |
| David D. Brown | 3/19/2021 |  |  |  | 338 | (1) |  |  |  | 10174 |
|  | 11/3/2021 |  |  |  |  |  | 7455 | (2) | 33.00 | 58671 |
| Jason R. Belcher | 3/19/2021 |  |  |  | 335 | (1) |  |  |  | 10083 |
|  | 11/3/2021 |  |  |  |  |  | 7384 | (2) | 33.00 | 58113 |
| Sarah W. Harmon | 3/19/2021 |  |  |  | 234 | (1) |  |  |  | 7043 |
|  | 11/3/2021 |  |  |  |  |  | 5157 | (2) | 33.00 | 40586 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Awards granted on March 19, 2021 are stock awards granted under the annual incentive compensation plan for performance in 2020. The shares are fully vested and are subject to a two (2) year clawback restriction.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) On March 19, 2021, the named executive officers were awarded long-term equity compensation in the form of restricted stock, which was scheduled to vest ratably over a period of three (3) years. However, on November 3, 2021, the CRC approved the exchange of these unvested restricted stock awards for unvested stock options of equivalent value. These options will vest over a period of three (3) years.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) Amounts reflect the aggregate grant date fair value of the stock and option awards computed in accordance with FASB ASC Topic 718. For the stock awards, the fair value was calculated by multiplying the shares awarded by the grant date closing price of $30.10 on March 18, 2021. For options, the grant date fair value was calculated using the Black-Scholes-Merton model with the following assumptions: risk-free interest rate of 1.24%, dividend yield of 3.568%, expected volatility of the market price of the Corporation's common stock of 33.083%, and average expected life of 5.4 years.

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**Outstanding Equity Awards at December 31, 2021**

The following table includes information on the current holdings of unexercised stock options and stock awards that have not yet vested by the named executive officers as of December 31, 2021. Each equity grant is shown separately for each named executive officer.

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Option Awards** | **Option Awards** | **Option Awards** | **Option Awards** | **Stock Awards** | **Stock Awards** | **Stock Awards** | **Stock Awards** |
|  |  |  |  |  |  |  | **Equity Incentive** | **Equity Incentive** |
|  |  |  |  |  |  |  | **Plan Awards** | **Plan Awards** |
|  |  |  |  |  |  |  |  | **Market or** |
|  |  |  |  |  |  |  | **Number** | **Payout** |
|  |  |  |  |  |  |  | **of** | **Value of** |
|  |  |  |  |  |  | **Market** | **Unearned** | **Unearned** |
|  |  |  |  |  | **Number** | **Value of** | **Shares,** | **Shares,** |
|  |  |  |  |  | **of Shares** | **Shares or** | **Units or** | **Units or** |
|  |  |  |  |  | **or Units** | **Units of** | **Other** | **Other** |
|  | **Number of** | **Number of** |  |  | **of Stock** | **Stock** | **Rights** | **Rights** |
|  | **Securities Underlying** | **Securities Underlying** | **Option** | **Option** | **That Have** | **That Have** | **That Have** | **That Have** |
|  | **Unexercised Options** | **Unexercised Options** | **Exercise** | **Expiration** | **Not** | **Not** | **Not** | **Not** |
| **Name** | **Exercisable (1)** | **Unexercisable (2)** | **Price** | **Date** | **Vested (3)** | **Vested** | **Vested** | **Vested** |
| William P. Stafford, II |  | 11702 | $33.00 | 03/19/31 | 3506 | $117171 |  | $- |
| Gary R. Mills | 865 |  | 24.65 | 02/05/35 | 4733 | 158177 |  |  |
|  | 3025 |  | 29.15 | 02/05/35 |  |  |  |  |
|  |  | 15799 | 33.00 | 03/19/31 |  |  |  |  |
| David D. Brown |  | 7455 | 33.00 | 03/19/31 | 2233 | 74627 |  |  |
| Jason R. Belcher |  | 7384 | 33.00 | 03/19/31 | 1904 | 63632 |  |  |
| Sarah W. Harmon | 1496 |  | 20.15 | 04/22/26 | 1378 | 46053 |  |  |
|  | 1097 |  | 24.72 | 04/07/27 |  |  |  |  |
|  |  | 5157 | 33.00 | 03/19/31 |  |  |  |  |

---

&nbsp;&nbsp;&nbsp;&nbsp;(1) All options listed in the exercisable column in the above table are vested.

&nbsp;&nbsp;&nbsp;&nbsp;(2) The options granted on November 3, 2021 will vest equally over a period of three (3) years.

&nbsp;&nbsp;&nbsp;&nbsp;(3) The market value is calculated by multiplying the number of the shares of restricted stock that have not vested by the price per share of the Corporation's stock on December 31, 2021 of $33.42 per share.

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**2021 Options Exercised and Stock Vested**

The following table provides information for the named executive officers with respect to (1) stock option awards exercised during 2021, including the number of shares acquired upon exercise and the value realized at such time, and (2) the number of shares acquired upon the vesting of restricted stock awards and the value realized at such time, before the payment of any applicable withholding tax and brokerage commissions.

---

| | | | | |
|:---|:---|:---|:---|:---|
| | **Option Awards** | **Option Awards** | **Stock Awards** | **Stock Awards** |
| | **Shares** |  | **Shares** |  |
| | **Acquired on** | **Value** | **Acquired on** | **Value** |
| <br>**Name** | **Exercise** | **Realized** | **Vesting** | **Realized (1)** |
| William P. Stafford, II | 9785 | $187774 | 3347 | $99731 |
| Gary R. Mills |  |  | 4520 | 134683 |
| David D. Brown |  |  | 2142 | 63825 |
| Jason R. Belcher |  |  | 1806 | 53831 |
| Sarah W. Harmon |  |  | 1173 | 34969 |

---

(1) Total value realized on vesting is equal to the number of shares acquired on vesting multiplied by the previous day's closing price of the underlying securities on the vesting date of March 18, 2021 of $30.10 and March 30, 2021 of $29.74.

**2021 Pension Benefits**

The table below sets forth the details on pension benefits for the named executive officers under the following plan:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | | **Number of** | **Present Value of** | **Payments** |
|  | | **Years Credited** | **Accumulated** | **During Last** |
| **Name** | <br>**Plan Name** | **Service** | **Benefit** | **Fiscal Year** |
| William P. Stafford, II (1) | SERP | 28 | $683569 |  |
| Gary R. Mills | SERP | 23 | 405938 |  |
| David D. Brown | SERP | 17 | 130069 |  |
| Jason R. Belcher | SERP | 7 | 18021 |  |

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) The number of years of credited service includes years of service as a director of the Corporation.

<u>The Corporation's Executive SERP</u>. The Corporation's SERP is unfunded and not qualified for tax purposes. The values in the above table reflect the actuarial present value of the named executive officer's accumulated benefit under the SERP, computed as of December 31, 2021. As of December 31, 2021, the SERP was frozen to new participants; however, previously, employees considered highly compensated under ERISA and other senior management employees were eligible to participate in the SERP at the recommendation of the Chief Executive Officer as approved by the CRC. All participants in the SERP prior to December 31, 2021, will receive, upon separation of service at or after age 62, only such benefit as was accrued and vested as of December 31, 2021. Only those named executive officers currently approved for participation are included in the above table. Refer to page 25 of this proxy statement for a more detailed discussion of the SERP and to Note 13 of the Consolidated Financial Statements in the Annual Report for the year ended December 31, 2021, for discussion of the methodologies and assumptions underlying the projected SERP benefits.

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**2021 Non-Qualified Deferred Compensation**

<u>Deferral of Salary</u>. The named executive officers, like any employee otherwise ineligible to fully participate in the KSOP, who meets the Code definition of being "highly compensated," have historically been eligible to elect to defer up to seventy-five percent (75%) of their base salary and/or cash incentive compensation to the Corporation's WRAP plan, in the same way that not highly compensated employees may defer to the KSOP. Deferrals to the WRAP are invested as directed by each participant and are matched at the discretion of the Board of Directors in conjunction with and subject to limits established each year by the Board of Directors for elective deferrals to the KSOP. Earnings on deferrals are based on the investment elections made by the individual WRAP participants and no guaranteed return is available to any named executive officer participating in the WRAP. On an annual basis, each WRAP participant is allowed to designate or modify the percentage of salary to defer to the WRAP in compliance with Code Section 409A. The table below provides detail regarding non-qualified deferred compensation of the named executive officers. Balances previously deferred by the named executive officers to a second non-qualified plan, known as the "Deferred Compensation Plan," have been combined with the WRAP deferrals and reported in a single table below. Distributions from the WRAP are only available post-termination or retirement and cannot be taken without a minimum of six (6) months' separation from employment in compliance with Code Section 409A. Only those named executive officers who currently participate in the WRAP are included in the below table.

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Executive** | **Corporation** | **Aggregate** |  | **Aggregate** |
|  | **Contributions** | **Contributions** | **Earnings** | **Aggregate** | **Balance** |
|  | **in Last Fiscal** | **in Last Fiscal Year** | **in Last Fiscal** | **Withdrawals/** | **at Last Fiscal** |
| **Name** | **Year (1)** | **(1)** | **Year (2)** | **Distributions** | **Year End** |
| William P. Stafford, II | $88440 | $20745 | $180752 | $- | $1012021 |
| Gary R. Mills | 38012 | 33123 | 207125 |  | 807475 |
| David D. Brown | 15865 | 8050 | 62482 |  | 194519 |
| Jason R. Belcher | 4203 | 6242 | 10503 |  | 89144 |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) The amounts reported under "Executive Contributions" are included in each named executive officer's amount under the "Salary" column in the " 2021 Summary Compensation Table." The amounts reported under "Corporation Contributions" are included in each named executive officer's amount under the " 2021 All Other Compensation" column in the " 2021 Summary Compensation Table." The Corporation contributions reflected in the above table are reflective of amounts deferred by the executives in the prior plan year, but matched by the Corporation in the subsequent year.

&nbsp;&nbsp;&nbsp;&nbsp;(2) The amounts reported under "Aggregate Earnings" are not included in each named executive officer's amount under the "Salary" column in the " 2021 Summary Compensation Table."

**Potential Payments upon Termination**

The information below describes the compensation that would become payable under existing plans and agreements based on the named executive officer's actual termination of employment coupled with the assumption that the named executive officer's employment had terminated on December 31, 2021, given the named executive officer's compensation, years of service, and a presumed age of 62.

These benefits are in addition to benefits generally available to other non-executive officers, who are salaried employees, such as distributions under the KSOP and disability insurance benefits. The Corporation has estimated the amounts of compensation payable to each named executive officer under a variety of termination circumstances, including: early retirement, involuntary termination not for "Cause," termination for "Cause," termination following a change of control, and death of the named executive officer.

Since a variety of factors might affect the nature and amount of any benefits payable upon the events discussed below, actual amounts may vary from what the Corporation has projected.

Regardless of the manner in which a named executive officer's employment terminates, he or she may be entitled to receive amounts earned during their term of employment. Such amounts include:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• option or stock award grants made pursuant to the 1999 Plan, 2004 Plan, or 2012 Plan that vest through the most recently completed fiscal year;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• amounts contributed under the KSOP and the Corporation's non-qualified deferred compensation plans;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• amounts accrued and vested through the Corporation's SERP payable as benefits for the life of the named executive officer beginning at age 62; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• cash surrender value of life insurance payable.

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In the event of an involuntary termination without "Cause" or termination by a named executive officer for "Good Reason" other than a change in control, the Corporation shall pay the named executive officer severance in the form of continuing to pay their base salary for the balance of the existing term of the existing employment agreement. In addition, the Corporation shall maintain and continue to provide health, dental, accident and disability insurance and certain other executive benefit plans, programs and arrangements until the earlier of (i) the expiration of the remaining term; (ii) the named executive officer commences full-time employment with another employer or commences self-employment where earnings are expected to be, on an annualized basis, 75% or more of the base salary as of the date of termination; or (iii) the date on which the Corporation determines that the named executive officer has violated any one of several specified sections of the agreement. Additional details regarding these agreements are set forth in the discussion beginning on page 26. As required by said employment agreements, in the event of termination without "Cause," termination due to change of control, or termination by a named executive officer for "Good Reason," payment of any severance amounts due under the employment agreement is conditioned upon the execution of a separation agreement containing a valid waiver and release of any and all claims and a reaffirmation of the restrictions upon the executive contained in the employment agreement.

**Payments Made Upon Retirement**

In the event of the retirement of a named executive officer, in addition to the items identified above:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• for options granted under the 1999 Plan, the officer will retain vested options for up to five (5) years after normal retirement at age 62 or later and ninety (90) days after early retirement;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• for options granted under the 2004 Plan, the officer will retain vested options for the remainder of the outstanding ten-year term;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• for options granted under the 2012 Plan, the officer will retain vested options for the period of one year, or any statutorily required period; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;• for restricted stock awards granted under the 2012 Plan, all restrictions on vested shares will be removed and unvested shares will be forfeited.

**Payments Made Upon Death or Disability**

In the event of the death or disability of a named executive officer, in addition to the benefit payments made upon termination or retirement, the named executive officer or their beneficiaries may receive benefits under the Corporation's disability plan or executive life insurance plan, as appropriate, if enrolled. Currently, Mr. Stafford, II is the only named executive officer enrolled in a split dollar life insurance plan. If Mr. Stafford had died on December 31, 2021, his survivors would have received the projected amount of $100,000 from the proceeds of any individual split dollar life insurance policy. The premiums associated with this policy are included in the "2021 All Other Compensation and Benefits" table on page 29. The estimated amounts payable to the beneficiaries are derived by reflecting a deduction for repayment to the Corporation of the cash surrender value of the split dollar life insurance policies and distribution of eighty percent (80%) of the face value of any remaining insurance proceeds to the respective beneficiaries and twenty percent (20%) to the Corporation.

**Payments Made Upon a Change of Control**

As previously stated, the Corporation has entered into employment agreements with each of the named executive officers, which agreements include change of control provisions. Under these provisions and subject to certain requirements and restrictions, if within three (3) years after a change of control, a named executive officer is separated from service either because of (i) non-renewal of the agreement by the Corporation, (ii) termination by the Corporation without "Cause," (iii) termination by the named executive officer for "Good Reason," or (iv) termination by the named executive officer due to forced relocation, the named executive officer shall receive severance in the form of continued payment of their base salary and providing all other compensation benefits of a like kind and value as in effect at the time of the change of control, or on the date of termination, whichever is greater, for a period of thirty-six (36) months. Additional information relating to the terms of said employment agreements, including the change of control provisions, are set forth in the discussion beginning on page 26.

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**Potential Incremental Payments Table** 

The following table shows the potential incremental value transfer to each named executive officer under various termination scenarios. The table was prepared as though each named executive officer's employment was terminated on December 31, 2021, with proper prior notice if applicable.

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  | **Accel-** |  |  |  |  |  |  |
|  |  | **eration/** |  |  |  |  |  |  |
|  |  | **Vesting of** |  |  |  |  |  |  |
|  |  | **Options** | **Non-** |  |  |  |  |  |
|  |  | **and** | **Qualified** |  |  | **Executive** |  |  |
|  | **Salary &** | **Restricted** | **Deferred** |  |  | **Life** |  |  |
| **William P. Stafford, II** | **Benefits** | **Stock** | **Comp (4)** | **SERP** |  | **Ins (6)** |  | **Total** |
| Early retirement | $- | $- | $1012021 | $69333 | (57) | $43214 |  | $1124568 |
| Retirement |  | 4915 | 1012021 | 80000 | (25) | 43214 |  | 1140150 |
| Termination for "Cause" |  |  | 1012021 |  |  | 43214 |  | 1055235 |
| Termination without "Cause" | 916570 |  | 1012021 | 80000 | (15) | 43214 |  | 2051805 |
| Change in control termination | 1350000 | 117171 | 1012021 | 683569 | (4) | 43214 |  | 3205971 |
| Disability (8) |  | 122085 | 1012021 | 80000 | (15) | 43214 |  | 1257320 |
| Death (3) |  | 122085 | 1012021 | 80000 | (15) | 900000 | (4) | 2114106 |
| **Gary R. Mills** |  |  |  |  |  |  |  |  |
| Early retirement |  |  | 807475 | 53598 | (57) | 42283 |  | 903356 |
| Retirement |  | 6636 | 807475 | 61844 | (25) | 42283 |  | 918238 |
| Termination for "Cause" |  |  | 807475 |  |  | 42283 |  | 849758 |
| Termination without "Cause" | 1216570 |  | 807475 | 61844 | (15) | 42283 |  | 2128172 |
| Change in control termination | 1800000 | 158177 | 807475 | 405938 | (4) | 42283 |  | 3213869 |
| Disability (8) |  | 164812 | 807475 | 61844 | (15) | 42283 |  | 1076414 |
| Death (3) |  | 164812 | 807475 | 61844 | (15) | 1200000 | (4) | 2234131 |
| **David D. Brown** |  |  |  |  |  |  |  |  |
| Early retirement |  |  | 194519 | 30123 | (57) | 12627 |  | 237269 |
| Retirement |  | 3131 | 194519 | 34757 | (25) | 12627 |  | 245034 |
| Termination for "Cause" |  |  | 194519 |  |  | 12627 |  | 207146 |
| Termination without "Cause" | 626570 |  | 194519 | 34757 | (15) | 12627 |  | 868473 |
| Change in control termination | 915000 | 74627 | 194519 | 130069 | (4) | 12627 |  | 1326838 |
| Disability (8) |  | 77758 | 194519 | 34757 | (15) | 12627 |  | 319661 |
| Death (3) |  | 77758 | 194519 | 34757 | (15) | 625000 | (4) | 932034 |
| **Jason R. Belcher** |  |  |  |  |  |  |  |  |
| Early retirement |  |  | 89144 | 16186 | (57) | 1052 |  | 106382 |
| Retirement |  | 3101 | 89144 | 18676 | (25) | 1052 |  | 111973 |
| Termination for "Cause" |  |  | 89144 |  |  | 1052 |  | 90196 |
| Termination without "Cause" | 626570 |  | 89144 | 18676 | (15) | 1052 |  | 735442 |
| Change in control termination | 915000 | 63632 | 89144 | 18021 | (4) | 1052 |  | 1086845 |
| Disability (8) |  | 66733 | 89144 | 18676 | (15) | 1052 |  | 175605 |
| Death (3) |  | 66733 | 89144 | 18676 | (15) | 463000 | (4) | 637553 |
| **Sarah W. Harmon** |  |  |  |  |  |  |  |  |
| Early retirement |  |  |  |  |  |  |  |  |
| Retirement |  | 2166 |  |  |  |  |  | 2166 |
| Termination for "Cause" |  |  |  |  |  |  |  |  |
| Termination without "Cause" | 576570 |  |  |  |  |  |  | 576570 |
| Change in control termination | 840000 | 46053 |  |  |  |  |  | 886053 |
| Disability (8) |  | 48219 |  |  |  |  |  | 48219 |
| Death (3) |  | 48219 |  |  |  |  |  | 48219 |

---

&nbsp;&nbsp;&nbsp;&nbsp;(1) Annual payment deferred to age 60.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Annual payment; presumed to be age 62 on December 31, 2021 .

&nbsp;&nbsp;&nbsp;&nbsp;(3) Payment to beneficiary upon death of named executive officer.

&nbsp;&nbsp;&nbsp;&nbsp;(4) Presumes lump sum payout.

&nbsp;&nbsp;&nbsp;&nbsp;(5) Represents an annuity payable over the life of the named executive officer at a reduced amount beginning at age 60, a larger amount beginning at age 62 or for ten (10) years certain to a named beneficiary in the event of death.

&nbsp;&nbsp;&nbsp;&nbsp;(6) Other than the life insurance proceeds payable upon death, presumed at December 31, 2021 .

&nbsp;&nbsp;&nbsp;&nbsp;(7) Presumed to be age 60 and have at least twenty (20) years of service on December 31, 2021 .

&nbsp;&nbsp;&nbsp;&nbsp;(8) The benefits shown in the disability termination scenario reflect the accelerated vesting of options and restricted stock, lump sump payout of nonqualified deferred compensation, annuity payment of their SERP, and the cash surrender value of their life insurance upon the named executive officer's disability. There are no disability benefits listed in the above table because the Corporation's disability plan does not discriminate in scope, terms or operation in favor of executive officers and is available generally to all salaried employees.

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**DIRECTOR COMPENSATION**

**2021 Non-Management Directors**' **Compensation**

As shown on the table on page 37, for fiscal year 2021, non-management directors' compensation includes the following:

<u>Base Compensation</u>. During 2021, each non-employee member of the Board received a total annual retainer fee of $31,838, paid on a quarterly basis. A portion was paid in cash and a portion in stock. No additional fee is paid to directors of the Corporation who also serve on the board of a subsidiary, although fees may be paid for service on certain committees of subsidiaries. ACER Committee members received an annual cash retainer fee of $10,164, with the Chairman receiving an additional $12,704 and the Financial Expert receiving an additional $6,608 per year. Members of the GNC received a cash retainer fee of $635 per year. Members of the CRC receive a cash retainer fee of $1,271 per year, with the Chairman receiving an additional $1,271 per year. Non-management directors are reimbursed for travel or other expenses incurred for attendance at Board, subsidiary board, and committee meetings or other required travel for the benefit of the Corporation.

<u>Deferral of Cash Compensation</u>. Directors are permitted on an annual basis, prior to the beginning of each calendar year, to defer Board and committee cash fees to a non-qualified deferred compensation plan established solely for that purpose. Each director electing to defer fees is responsible for the investment of such deferrals, and the Corporation does not provide either a preferential investment or interest rate for such deferred compensation. Each director who has deferred any such compensation has the ability to access such deferred compensation upon retirement from active Board service.

<u>Short-Term Incentive Compensation</u>. In December 2015, the CRC adopted an executive and board incentive compensation methodology which provides suggested amounts of annual incentive compensation for directors in the form of cash bonuses (25%) and restricted common stock of the Corporation (75%). The CRC will not grant any incentive compensation in any year in which the Corporation's minimum three (3)-year rolling ROAE is below 8.5% or such other minimum ROAE as determined by the CRC from time to time considering economic conditions, operating results, and adjustments to the Corporation's strategic plan goals. Amounts paid under this methodology in 2021 based on 2020 performance are detailed in the "Director Compensation Table."

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<u>Long-Term Equity Compensation</u>. In 2021, consistent with the compensation methodology developed in 2015, the directors were awarded long-term equity compensation in the form of restricted shares, which were scheduled to vest over a period of three (3) years beginning on or about March 31, 2021 and remain under such restriction, including restrictions on sale or transfer by the director, for a period of five (5) years after vesting. However, on November 3, 2021, the CRC approved the exchange of these unvested restricted stock awards for unvested stock options of equivalent value. These stock options will vest over a period of three (3) years. The CRC elected to approve the aforesaid exchange of the unvested restricted stock awards for unvested stock options after the Corporation initiated a review of its restricted stock awards under the 2012 Plan in response to a shareholder demand letter received in June 2021. The shareholder demand letter alleges that, although the Corporation complied with the overall share issuance limit in the 2012 Plan, grants of restricted stock and performance awards prior to 2021 allegedly exceeded a sub-limit in the 2012 Plan that limited the award of certain forms of restricted stock, restricted stock units, or performance awards to 300,000 shares. The Corporation disagrees with that assertion. Nevertheless, the CRC took the above-described actions prior to vesting of the restricted share awards in order to ensure that the Corporation remained in compliance with the referenced sub-limit during 2021. All grants of restricted shares and options to directors in 2021 were made under the 2012 Plan.

<u>Directors' Supplemental Retirement Plan</u>. The Corporation established a directors' supplemental retirement plan ("Directors' SERP") for its non-management directors in 2001 which was later amended to remain compliant with Code Section 409A and to provide for certain changes in the benefit formula and various other provisions. The Directors' SERP amendment substitutes a defined benefit in lieu of the previous indexed benefit. The amended Directors' SERP provides for an annual retirement benefit of one hundred percent (100%) of the director's highest consecutive three (3) years' average compensation. Benefits are payable at the later of (i) the age of 70 or (ii) separation from service to the Corporation and continue for ten (10) years. The Directors' SERP also contains provisions addressing a change of control, as defined in the Plan, which allow the directors to retain benefits under the Directors' SERP in the event of a termination of service, other than for "Cause," during the twelve (12) months prior to a change in control or anytime thereafter, unless the director voluntarily terminates their service within ninety (90) days following the change in control. On December 31, 2021, the Directors' SERP was amended with the effect of (1) freezing it to new participants and (2) amending the definition of final average compensation so that no year after 2021 could be considered in the computation. Current participants will continue to accrue and vest as intended under the plan.

The Corporation has also entered into life insurance endorsement method split dollar agreements with certain directors covered under the Directors' SERP. Under the agreements, the Corporation shares eighty percent (80%) of death benefits (after the Corporation's recovery of cash surrender value) with the designated beneficiaries of the directors under life insurance contracts referenced in the Directors' SERP.

<u>Insurance</u>. The Corporation provides Directors' Liability Insurance coverage for its directors and indemnification is provided for in the Corporation's Bylaws.

**Changes to Non-Management Directors' Compensation Beginning in 2022**

Consistent with our long-standing goal of offering directors a compensation package that is intended to fairly compensate directors for work required for the Corporation and to align the directors' interests with the long-term interests of shareholders, Pearl Meyer was engaged in 2021 to review the competitiveness of its non-management directors' compensation program. This review included a review of annual board retainers, incentive compensation, equity awards, committee fees, and total board compensation cost. As a result of this engagement, based on a review of prevailing peer group practice and strong corporate governance practices, certain changes were made to the non-management directors' compensation program, including the following:

● The program will utilize only two components:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;● Board service fee (paid 50% in cash and 50% in equity grants of full-value shares that vest one-year from grant date)

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;● Committee service fees (including chairmanship and financial expert fees) paid in cash

● Incentive compensation will no longer be paid to non-management directors

● As discussed above, no new participants will be added to the Directors' SERP

Although the task of recruiting and retaining highly qualified directors for community bank holding companies remains extremely difficult in light of the time required, level of responsibility, and personal liability, we believe that the resulting compensation package is sufficient to not inhibit the Corporation's ability to attract and retain highly qualified directors. We further believe this compensation package is simple, direct, easy to administer, and easy to understand from a shareholder perspective.

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**Director Compensation Table**

The following table summarizes non-management director compensation, including compensation for director services at the bank subsidiary for 2021.

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  | **Change in** |  |  |
|  |  |  |  |  | **Pension Value** |  |  |
|  |  |  |  |  | **and** |  |  |
|  | **Fees** |  |  |  | **Non-qualified** |  |  |
|  | **Earned** |  |  | **Non-Equity** | **Deferred** |  |  |
|  | **or Paid in** | **Stock** | **Option** | **Incentive Plan** | **Compensation** | **All Other** |  |
| **Name** | **Cash (1)** | **Awards (2)** | **Awards (3)** | **Compensation** | **Earnings (4)** | **Compensation** | **Total** |
| C. William Davis | $48765 | $9677 | $31150 | $- | $24078 | $- | $113670 |
| Samuel L. Elmore | 64120 | 10370 | 31150 |  | 19766 |  | 125406 |
| Richard S. Johnson | 62957 | 9557 | 31150 |  | (6449) |  | 97215 |
| Harriet B. Price | 29107 | 2697 | 31150 |  |  |  | 62954 |
| M. Adam Sarver | 65188 | 9768 | 31150 |  |  |  | 106106 |

---

&nbsp;&nbsp;&nbsp;&nbsp;(1) The value represents board fees, committee fees, and cash bonuses.

&nbsp;&nbsp;&nbsp;&nbsp;(2) The value represents the grant date fair value of stock awarded as fees and stock granted as a portion of incentive compensation.

(3) On March 19, 2021, directors were awarded long-term equity compensation in the form of restricted stock, which was scheduled to vest ratably over a period of three (3) years. However, on November 3, 2021, the CRC approved the exchange of these unvested restricted stock awards for unvested stock options of equivalent value.

&nbsp;&nbsp;&nbsp;&nbsp;(4) The amounts reported represent the difference between the present value of accrued benefits of the director's SERP at the end of 2021 and 2020 .

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**PAY RATIO DISCLOSURE**

In August 2015, pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd - Frank Act"), the Securities and Exchange Commission ("SEC") adopted a rule requiring annual disclosure of the ratio of the total annual compensation of the principal executive officer ("PEO") of the Corporation to the median annual total compensation of all other employees of the Corporation (the "MATC"). The Corporation's PEO is Mr. Stafford. During calendar year 2021, Mr. Stafford received total compensation of $690,996, as reflected in the Summary Compensation Table on page 27. During calendar year 2021, the MATC was $39,536. Accordingly, the aforesaid ratio for the Corporation for fiscal year 2021 is 17.5 to 1. The ratio decreased significantly from 2020 due to the PEO's lower total compensation in 2021 as a result of a lower bonus paid to the PEO in 2021 for 2020 performance.

The MATC used in the calculation above was determined from a list of 635 persons, constituting all persons (excluding the PEO) employed by the Corporation as of December 31, 2021. Determination of the median employee was based on wages actually earned in 2021 plus the following additional 2021 compensation components, where applicable: paid time off; overtime pay; incentive compensation; and commissions. The gross amounts were adjusted for locality differentials where applicable. After identifying the median employee, the MATC was calculated using the same methodology employed for named executive officers, including the PEO, in the Summary Compensation Table.

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**OWNERSHIP AND RELATED PERSON TRANSACTIONS**

**Information on Stock Ownership**

The following table includes the stock-based holdings at March 3, 2022, of significant shareholders having beneficial ownership greater than five percent (5%), directors, executive officers, and directors and executive officers as a group.

---

| | | | |
|:---|:---|:---|:---|
| | | **Amount and** |  |
| | | **Nature** |  |
| | | **of Beneficial** | **Percent of** |
| | | **Ownership as of** | **Common** |
| <br>**Title of**<br>**Class** | <br>**Name and Address of Beneficial**<br>**Owner or Number of**<br>**Persons in Group** | **March 3, 2022** | **Stock** |
| Common | BlackRock (1) | 1546697 | 9.16% |
|  | 55 East 52nd Street, New York, NY 10055 |  |  |
| Common | Richard G. Preservati (2) | 1500775 | 8.89% |
|  | P.O. Box 1003, Princeton, WV 24740 |  |  |
| Common | Dimensional Fund Advisors, LP (3) | 1020606 | 6.05% |
|  | Building One, 6300 Bee Cave Road, Austin, TX 78746 |  |  |
|  | The Corporation's Directors and Named Executive Officers: |  |  |
| Common | Jason R. Belcher (4) | 18041 | \* |
| Common | David D. Brown (5) | 27969 | \* |
| Common | C. William Davis (6) | 21876 | \* |
| Common | Samuel L. Elmore (7) | 15815 | \* |
| Common | Sarah W. Harmon (8) | 8474 | \* |
| Common | Richard S. Johnson (9) | 48710 | \* |
| Common | Gary R. Mills (10) | 64050 | \* |
| Common | Harriet B. Price (11) | 1642 | \* |
| Common | M. Adam Sarver (12) | 155724 | \* |
| Common | William P. Stafford, II (13) | 209792 | 1.24% |
| Common | Beth A. Taylor (14) | 29279 | \* |
|  | All Directors and Executive Officers as a Group | 601372 | 3.56% |

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\* Represents less than one percent (1%) of the outstanding shares.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Number of shares are based on a Form 13G filing with the SEC as of December 31, 2021.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Number of shares are based on a Form 13G filing with the SEC as of March 6, 2015.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3) Number of shares are based on a Form 13G filing with the SEC as of December 31, 2021.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4) Includes 3,167 shares allocated to Mr. Belcher's KSOP account and 2,461 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(5) Includes 3,085 shares allocated to Mr. Brown's KSOP account and 2,485 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(6) Includes 1,319 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(7) Includes 1,319 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(8) Includes 685 shares allocated to Ms. Harmon's KSOP account and 4,312 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(9) Includes 24,550 shares held jointly by Mr. Johnson and his wife and 1,319 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan. 5,500 of the shares listed have been pledged as security by Mr. Johnson.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(10) Includes 6,601 shares allocated to Mr. Mills' KSOP account, 14,510 shares held jointly by Mr. Mills and his wife, and 3,890 shares issuable upon exercise of currently exercisable options granted under the 1999 Plan and 5,266 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan. 1,500 of the shares listed have been pledged directly as security by Mr. Mills.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(11) Includes 1,319 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(12) Includes 872 shares held by Mr. Sarver's wife, 2,000 shares held in a custodian account for his daughters, a fifty percent (50%) ownership of Longview Properties, LLC, and 1,319 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan. 22,820 of the shares listed have been pledged as security by Mr. Sarver.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(13) Includes 1,300 shares allocated to Mr. Stafford's KSOP account and 3,901 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(14) Includes 20,000 shares held by Dr. Taylor's husband and 1,319 shares issuable upon exercise of currently exercisable options granted under the 2012 Plan.

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**Related Person/Party Transactions**

<u>Review and Approval of Related Person/Party Transactions</u>. The Corporation reviews relationships and transactions in which the Corporation and its directors, executive officers, their immediate family members, or their related entities participate. The Corporation has developed and implemented processes and controls to obtain such information and determine whether a related person or party has a direct or indirect material interest in a transaction that requires approval of such transaction by the GNC and/or disclosure of such transaction in the annual proxy statement. Procedures used for reviewing and assessing this process are documented in writing.

Part of this process requires all directors of the Corporation and its banking subsidiary and all executive officers to respond annually to a related party worksheet and each director and named executive officer to respond annually to a proxy statement questionnaire. When it is determined that a transaction with a related person or party may have occurred, or when the Corporation desires to enter into a transaction with a related person or party, the transaction is scrutinized to determine whether such transaction truly rises to the level of a "Related Party Transaction" as defined by the SEC rules. Potential Related Party Transactions are examined by the GNC, which may approve or ratify the transaction, and, as necessary, consult with counsel having specific expertise in SEC matters. If a Related Party Transaction has occurred, it is disclosed in the annual proxy statement pursuant to SEC rules.

Further, all significant transactions with related persons or parties, regardless of whether they rise to the level of a Related Party Transaction, are reviewed on a quarterly basis by the GNC.

<u>Description of Related Person Transactions</u>. As expected, the Corporation's subsidiary bank has consistently and from time-to-time accepted deposits from and made loans to related persons and parties. All such loans and deposits were made: (i) in the ordinary course of business; (ii) on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related persons or parties; and (iii) did not involve more risk of collectability than comparable transactions with other non-related persons or parties. All loans made to directors and executive officers are in compliance with federal banking regulations and thereby exempt from insider loan prohibitions as set forth in the Sarbanes-Oxley Act of 2002.

During 2021, the Corporation entered into no Related Party Transactions in excess of $120,000 or which would otherwise meet the threshold for disclosure in this proxy statement under the relevant SEC rules.

**Delinquent Section 16(a) Reports**

Section 16(a) of the Exchange Act and applicable SEC regulations require the Corporation's directors, executive officers, and persons who beneficially own more than ten percent (10%) of Common Stock of the Corporation to file initial reports of ownership and reports of changes in ownership of Common Stock with the SEC. As a practical matter, the Corporation assists all directors and executive officers by monitoring, completing, and filing Section 16 reports on their behalf. Based solely upon the review of Forms 3, 4 and 5, and amendments thereto filed in accordance with the instructions and information provided to the Corporation by its officers and directors, the Corporation believes that all Section 16(a) filings required to be filed by its directors, executive officers and persons who beneficially own more than ten percent (10%) of the Common Stock were properly and timely completed during fiscal year 2021.

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**REPORT OF THE ACER COMMITTEE**

The ACER Committee is comprised of four (4) independent directors and operates under a written charter adopted by the Board of Directors and available publicly on the Corporation's website <u>www.firstcommunitybank.com</u> under Investor Relations. The ACER Committee selects the Corporation's independent registered public accounting firm, subject to advisory shareholder ratification, and reviews the Corporation's financial reporting process on behalf of the Board of Directors. Management has primary responsibility for establishing and maintaining adequate internal financial controls, for preparing financial statements and for public reporting processes. Dixon Hughes Goodman LLP ("DHG"), the Corporation's independent registered public accounting firm for 2021, is responsible for expressing opinions on the conformity of the Corporation's financial statements with generally accepted accounting principles and on the Corporation's internal control over financial reporting.

In this context, the ACER Committee has reviewed and discussed with management and DHG the audited financial statements for the year ended December 31, 2021, and DHG's evaluation of the Corporation's internal control over financial reporting as of that date. The ACER Committee regularly communicates with DHG regarding the matters that are required to be discussed by Public Company Accounting Oversight Board ("PCAOB") Auditing Standard 1301 *Communications with Audit Committees,* as well as other relevant standards. DHG has provided to the ACER Committee the written disclosures and accompanying letter required by applicable requirements of the PCAOB regarding the independent registered public accounting firm's communications with the ACER Committee concerning independence, and the ACER Committee has discussed with DHG that firm's independence. The ACER Committee has concluded that DHG's provision of audit and non-audit services to the Corporation and its affiliates is compatible with DHG's independence.

Based on the review and discussions referred to above, the ACER Committee recommended to the Board of Directors (and the Board approved) that the audited financial statements for the year ended December 31, 2021, be included in the Annual Report on Form 10-K for 2021 for filing with the SEC.

This report is provided by the following independent directors, who comprise the ACER Committee:

Samuel L. Elmore

Richard S. Johnson (Chairman)

Harriet B. Price

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;M. Adam Sarver

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**INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

For fiscal year ended December 31, 2021, the ACER Committee selected DHG as the Corporation's independent registered public accounting firm. The Board ratified the decision of the ACER Committee to engage DHG to serve as the independent registered public accounting firm for fiscal year ended December 31, 2021, and the shareholders voted to ratify that selection at the 2021 Annual Meeting. The ACER Committee annually considers the selection of the Corporation's independent registered public accounting firm. From time to time, that process is augmented by requests for proposals, including competitive bid submissions, solicited from several reputable and qualified firms. This process allows the ACER Committee to rigorously evaluate the qualifications and relevant experience of each firm and to ensure the Corporation is receiving fair pricing of services provided. Such a proposal and competitive bidding process was initiated in 2021 and, on March 9, 2022, the ACER Committee approved the dismissal of DHG and the engagement of Elliott Davis, PLLC ("Elliot Davis") to serve as the Corporation's independent registered accounting firm for the fiscal year ending December 31, 2022. On that same date, the Board ratified the ACER Committee's decision.

In making its selection, the ACER Committee considered, among a plethora of other factors, whether the audit and non-audit services provided by any potential provider are compatible with maintaining the independence of the Corporation's outside auditors. The ACER Commitee also requires the selected provider to rotate its key partners assigned to the Corporation's audit at least every five (5) years. The ACER Committee prohibits the hiring by the Corporation and its subsidiaries of any of the selected independent registered public accounting firm's partners, directors, managers, staff persons, advising members of the department of professional practice, reviewing partners, reviewing tax professionals, or any other persons having responsibility for providing audit assurance on any aspect of the certification of the Corporation's financial statements.

DHG's report on the Corporation's consolidated financial statements for the fiscal years ended December 31, 2021 and 2020, and through the subsequent interim period ending March 9, 2022, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except that the report for the years ended December 31, 2021 and 2020, contained an emphasis-of-matter paragraph indicating the Corporation had changed its method of accounting for credit losses effective January 1, 2021, due to the adoption of Accounting Standards Codification (ASC) Topic 326, Financial Instruments - Credit Losses.

Furthermore, during the fiscal years ended December 31, 2021 and 2020, and the subsequent interim period through March 9, 2022, (i) there were no disagreements between the Corporation and DHG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of DHG would have caused DHG to make reference thereto in its reports on the Corporation's consolidated financial statements, and (ii) there were no "reportable events," as such term is defined in Item 304(a)(1)(v) of Regulation S-K.

Management discussed the matters described above with representatives of DHG; provided DHG with a copy of the disclosure set forth in our Form 8-K filed on March 14, 2022; and requested that DHG furnish the Corporation with a letter addressed to the SEC stating whether or not its agrees with the statement made therein, each as required by applicable SEC rules. A copy of the letter was filed as Exhibit 16.1 to the Form 8-K.

Representatives of DHG and Elliott Davis will be present at the Annual Meeting to make a statement, if they desire to do so, and to respond to appropriate questions.

**Principal Accounting Fees and Services**

The aggregate fees paid to DHG in 2020 and 2021 for these services were:

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| | | |
|:---|:---|:---|
|  | **2020** | **2021** |
| Audit fees | $378367 | $352100 |
| Audit related fees | 27100 | 31875 |
| All other fees |  |  |
| Tax fees | 110390 | 78440 |

---

In the above table, in accordance with SEC rules, "audit fees" are fees paid by the Corporation to DHG for audit of the Corporation's financial statements included in the Annual Report on Form 10-K, for review of financial statements included in the Quarterly Reports on Form 10-Q, for audit of the Corporation's internal controls over financial reporting, and for services typically provided by the auditor in connection with statutory and regulatory filings. "Audit related fees," which amount was preapproved by the ACER Committee, include audits of two of the Corporation's employee benefit plans. "Tax fees," which were preapproved by the ACER Committee, include fees paid for the completion of the Corporation's 2020 and 2021 federal and state income tax returns, 2020 and 2021 quarterly tax estimates, and miscellaneous tax research required for the completion of these services.

**Pre-Approval Policies and Procedures** 

The ACER Committee has adopted a policy that sets forth the manner in which the ACER Committee will review and approve all services to be provided by the independent registered public accounting firm. The ACER Committee pre-approves all audit and permitted non-audit services to be performed for the Corporation by its independent public accountants. The Chair of the ACER Committee may represent the entire committee for the purposes of pre-approving permitted non-audit services. The ACER Committee does not consider the provision of the permitted non-audit services to be incompatible with maintaining the independent public accountant's independence.

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**PROPOSAL 3: RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** 

The Board has ratified the decision of the ACER Committee to engage Elliott Davis to serve as the Corporation's independent registered public accounting firm to perform the audit of the consolidated financial statements of the Corporation and its subsidiaries, as well as the Corporation's internal controls over financial reporting, for the fiscal year ending December 31, 2022. As discussed above, Elliott Davis was selected through a competitive request for proposals process.

The Corporation is asking shareholders to ratify the selection of Elliott Davis as its independent registered public accounting firm for the year ending December 31, 2022. Although ratification is not required, it has been the Corporation's practice to seek shareholder ratification of this appointment as a matter of good corporate governance. If the shareholders fail to ratify the selection, the Board may, but is not required to, reconsider whether to retain Elliott Davis as the Corporation's independent registered public accounting firm. Further, even if the selection is ratified, the Board may, in its discretion, direct the appointment of a different independent registered public accounting firm at any time during the year if the Board determines that such change would be in the best interests of the Corporation and its shareholders.

**The Board unanimously recommends a vote <u>FOR</u> the ratification of Elliott Davis, PLLC as the Corporation's independent registered public accounting firm for the year ending December 31, 2022.**

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**PROPOSAL 4: APPROVAL OF THE FIRST COMMUNITY BANKSHARES, INC. 2022 OMNIBUS EQUITY COMPENSATION PLAN**

At its February 23, 2022 regular meeting, the Board, at the recommendation of the CRC, approved adoption of the First Community Bankshares, Inc. 2022 Omnibus Equity Compensation Plan (the "Plan") and directed that the Plan be submitted to shareholders for approval.

The Corporation relies on equity awards to retain and attract key employees and non-employee Board members and believes that equity incentives are necessary for the Corporation to competitively retain and attract highly qualified individuals upon whom, in large measure, the future growth and success of the Corporation depends. The First Community Bankshares, Inc. 2012 Omnibus Equity Compensation Plan (the "2012 Plan"), which is currently the only equity compensation plan under which equity or equity-based awards may be made by the Corporation, expires on April 25, 2022. The Board of Directors is seeking shareholder approval of the Plan to replace the 2012 Plan. If approved by our shareholders at the Annual Meeting, the Plan will become effective on April 27, 2022 (the date immediately following the Annual Meeting) (the "Effective Date").

No additional awards will be made under the 2012 Plan on or after the Effective Date and any shares remaining under the 2012 Plan will be cancelled and no longer available for future grant under the 2012 Plan. Awards granted under the 2012 Plan prior to the Effective Date will remain in full force and effect and will remain subject to the terms of the 2012 Plan.

If the Corporation's shareholders approve the Plan, the Corporation will file with the SEC a registration statement on Form S-8, as soon as reasonably practicable after the approval, to register the shares available for issuance under the Plan.

**Material Features of the Plan**

The complete Plan is attached as Exhibit A to these proxy materials. Shareholders are encouraged to review the complete text of the Plan. The following description of the Plan does not purport to be complete and is qualified in its entirety by reference to the applicable provisions of the Plan document.

<u>Purpose of the Plan</u>. The purpose of the Plan is to provide the Corporation with the ability to grant equity-based incentives to eligible persons designated by the CRC to: (i) encourage such individuals to continue in the long-term service of the Corporation and its Affiliates, (ii) create in such individuals a more direct interest in the future success of the operations of the Corporation, (iii) attract outstanding individuals to service of the Corporation and its Affiliates, and (iv) retain and motivate such individuals for the long term. The Plan is further intended to provide eligible individuals with the opportunity to invest in the Corporation, thereby relating incentive compensation to increases in shareholder value and more closely aligning the compensation of such individuals with the interests of the Corporation's shareholders. The Board believes that the Corporation's equity compensation programs and emphasis on employee stock ownership will be important to the Corporation's ability to achieve superior performance in the years ahead.

The Corporation's current equity-based compensation plans include the 2012 Plan, the 1999 Stock Option Plan, the 2001 Director's Option Plan, the 2004 Omnibus Stock Option Plan, and various other plans obtained through acquisitions. All plans issued or obtained before the 2012 Plan are now frozen, and no new grants may be issued from those plans; however, any options or awards unexercised and outstanding under those plans remain in effect per their respective terms. The 2012 Plan will expire on April 25, 2022.

The Plan will not alter the terms of the awards made under the 2012 Plan, the 2004 Omnibus Stock Option Plan, the 2001 Director's Option Plan or the 1999 Stock Option Plan. The remaining shares and awards that are unissued under the 2012 Plan will cease to be available for award under the 2012 Plan following the shareholders' approval of the Plan.

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**Board Considerations**

The Board unanimously recommends that shareholders vote "**FOR**" the adoption of the Plan and believes that the Plan will promote the interests of our shareholders and is consistent with principles of good corporate governance for the following reasons:

<u>Key Component of Compensation</u>. Equity and performance-based awards are a core component of the Corporation's compensation program. The Board believes equity and performance-based awards provide employees with a proprietary interest in maximizing the growth, profitability, and overall success of First Community.

<u>Alignment with Shareholders</u>. The Board believes that First Community's equity-based incentives align the interests of employees and shareholders to create long-term shareholder value.

<u>Reasonable Potential Dilution</u>. The potential dilutive impact of the Plan is comparable to the dilutive impact of the 2012 Plan previously approved by shareholders.

As of March 1, 2012 (the record date for the 2012 Annual Meeting of Shareholders at which meeting the 2012 Plan was approved), the total number of shares of the Corporation's Common Stock outstanding stood at 17,849,376. The number of common shares subject to the 2012 Plan as a percentage of the total number of issued and outstanding common shares as of March 1, 2012 was 3.36%. The proposed number of shares of common stock available for award under the Plan is 1,000,000. Shares issued pursuant to a stock option granted under the Plan will count against this limit on a 1:1 basis. Shares issued pursuant to awards other than stock options will count against this limit as 2.0 shares for every one share issued. As of March 3, 2022, the total number of shares of the Corporation's Common Stock outstanding stood at 16,794,260. If the Plan is approved, the number of shares that will be subject to the Plan as a percentage of the total common shares outstanding as of March 3, 2022, will be 5.95% if only options are grated. Under the guidelines of the new Plan, if only restricted shares are granted, the total grants under the Plan would be 2.98% of the total common shares outstanding.

<u>Features Designed to Protect Shareholder Interests</u>. The Plan includes several features designed to protect shareholder interests and to reflect the Corporation's compensation philosophy and compensation practices:

● *No Discounted Stock Options*: The Plan prohibits the grant of stock options with an exercise price less than the fair market value of the Corporation's Common Stock on the date of grant or in the case of an option that is subsequently modified, on the date of such modification.

● *No Repricing of Awards*: The Plan prohibits the repricing of stock options granted under the Plan without approval by the Corporation's shareholders. Neither the Board nor the CRC may take any action: (1) to amend the terms of an outstanding option to reduce the option price or grant price thereof, cancel an option and replace it with a new option with a lower option price or grant price, or that has an economic effect that is the same as any such reduction or cancellation or (2) to cancel an outstanding option having an option price or grant price above the then current fair market value of the common stock in exchange for the grant of another type of award, without, in each such case, first obtaining approval of the shareholders of the Corporation of such action.

● *No Grants of* "*Reload* "*Awards*: The Plan does not provide for "reload" awards (i.e., the automatic substitution of a new award of like kind and amount upon the exercise of a previously granted award).

● *No* "*Evergreen* "*Provision*: The Plan provides for a specific maximum share limitation of 1,000,000 and does not provide for an annual or automatic increase of the number of shares available under the Plan.

● *Fungible Plan Design*: **  A total of 1,000,000 common shares of common stock may be issued under the Plan. Shares issued pursuant to a stock option granted under the Plan will count against this limit on a 1:1 basis. Shares issued pursuant to awards other than stock options will count against this limit as 2.0 shares for every one share issued.

● *No Recycling of Shares under the 2012 Plan*: If the Plan is approved, any remaining shares that are unissued or any awards that are forfeited or cancelled under the 2012 Plan will not be added to the total number of shares available for issuance under the Plan.

● *Prohibition on* "*Liberal Share Counting* "*Practices*: The Plan does not allow shares to be added back to the maximum share limitation under the Plan if they were withheld, deducted or delivered for tax payments relating to any awards under the Plan; used to pay the exercise price of a stock option; or repurchased on the open market with proceeds of a stock option. No dividends or dividend equivalents are paid on unvested restricted shares, RSUs, or PSUs.

● *Double-Trigger Change of Control Provisions*: Outstanding awards will only vest in full upon a participant's qualifying termination of employment following a change of control unless otherwise provided by the CRC in its discretion in the award agreement.

● *Minimum Vesting Requirements*: All awards made under the Plan have minimum vesting/exercise schedule of at least one year, except that a shorter vesting/exercise schedule may apply to not more than 5% of the shares of stock authorized for issuance under the Plan.

● *Ten* - *Year Plan Term*: The Plan prohibits the making of awards ten years from its effective date and limits the exercise term of stock options to ten years from the grant date.

● *Independent Committee Administration*: The Plan is administered by the CRC, which is comprised solely of outside, non-employee directors.

● *Certain Awards are Subject to Clawback Policy*: Clawback provisions will apply to named executive officers and other executive officers which provisions will permit the CRC to cancel certain awards and to recoup gains realized from previous awards should the Corporation be required to prepare an accounting restatement due to materially inaccurate performance metrics.

Shareholder approval of the Plan is being sought in order to (i) meet the shareholder approval requirements of the NASDAQ, and (ii) qualify certain stock options authorized under the Plan for treatment as incentive stock options for purposes of Section 422 of the Code.

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**Administration**

The Plan will be administered by a board committee appointed by the Board. Unless otherwise determined by the Board, the CRC will administer the Plan. The CRC will have, among other powers, the power to accelerate, waive or modify, at any time, any term or condition of an award that is not mandatory under the Plan. The CRC may correct any defect, supply any omission or reconcile any inconsistency in the Plan, and it will be the sole and final judge of such inconsistency. The CRC will have the authority to perform other acts relating to the administration of the plan, including, at the CRC's discretion, the CRC may delegate any of its administrative responsibilities, including but not limited to the authority to make awards to eligible persons who are not subject to the Exchange Act § 16. No delegate may make an award to himself or herself, and no committee of delegates may make an award to a member of such committee of delegates. In addition, any such delegation by the CRC shall include a limitation as to the number of shares underlying awards that may be granted during any period of the delegation and may contain guidelines as to the determination of the exercise price (if applicable) and the vesting criteria.

The CRC will have the sole discretion, which authority may be delegated as set forth above, to select eligible participants and grant to such participants one or more equity awards, including non-qualified stock options, incentive stock options, performance shares, performance stock units, restricted stock, restricted stock units and performance awards, or any combination thereof. The CRC will have the sole discretion, which authority may be delegated by the CRC as set forth above, to determine the type and number or amount of any award to be granted to any participant and the terms, conditions, restrictions, and performance goals relating to any award.

If the Corporation shall at any time increase or decrease the number of its outstanding shares of stock or change in any way the rights and privileges of such shares by means of the payment of a stock dividend or any other distribution upon such shares payable in stock or rights to acquire stock, or through a stock split, reverse stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the stock, or other corporate event or transaction (more fully described in Section 4.4 of the Plan), then the stock affected by such events shall be equitably and proportionally adjusted to: (i) the number and kind of shares or other property (including cash) that may thereafter be issued pursuant to the Plan, (ii) the number and kind of shares or other property (including cash) issued or issuable in respect of outstanding awards, (iii) the exercise price, grant price, or purchase price relating to any award; provided that, with respect to incentive stock options, such adjustment shall be made in accordance with Section 424(h) of the Code, (iv) the performance goals, and (v) the individual limitations applicable to awards. The CRC may not take any other action that would impair the rights of any affected participant, holder, or beneficiary under any award or reduce the exercise price of any option as established at the time of grant.

The CRC will determine whether awards will be granted with or without cash consideration. Awards may provide that upon their exercise the holder will receive cash, stock, other securities, other awards, other property, or any combination thereof, as the CRC will determine.

The CRC or the Board may at any time terminate, amend, or modify the Plan or any portion of the Plan. However, shareholder approval must be obtained if such approval is necessary to comply with listing requirements, laws, policies, or regulations.

No awards may be granted under the Plan after the tenth anniversary of the effective date of the Plan.

**Eligibility** 

At present, no specific grants are planned under the Plan. All grants are expected to be made on a discretionary basis, rather than pursuant to a formula. Accordingly, the amounts of any awards under the Plan to any specific person or group are not determinable at this time. Any employees of the Corporation or any of its affiliates, non-employee members of the board of directors, non-employee members of the board of directors of any affiliates, and individuals who qualify as a consultant or advisor under Form S-8 and who are providing consulting services, under a written agreement, to the Corporation or any affiliate, who are designated as eligible persons by the CRC will be eligible to receive grants under the Plan. However, incentive stock options may not be granted to anyone who is not an employee of the Corporation or any of its affiliates.

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**Shares Available for Awards** 

The maximum number of shares of the Corporation's Common Stock which may be issued under the Plan is 1,000,000. The total number of shares of the Corporation's Common Stock that may be issued pursuant to incentive stock options granted under the Plan shall be equal to 250,000, subject to adjustments more fully described in Section 4.4 of the Plan.

The grant of any full value award (i.e. an award other than an option) shall be deemed, for purposes of determining the number of shares of the Corporation's Common Stock available for issuance under the Plan, as an award of 2.0 shares of the Corporation's Common Stock for each such share of Common Stock actually subject to the award. The grant of an option shall be deemed, for purposes of determining the number of shares of the Corporation's Common Stock available for issuance under the Plan, as an award for one share of Common Stock for each such share of Common Stock actually subject to the award.

Shares of common stock that, as of the effective date of the Plan, have not been issued under the 2012 Plan will not be available for award under the Plan.

If, after the effective date of the Plan, (i) any shares covered by an award under the Plan, or to which such an award relates, are forfeited or (ii) any award under the Plan expires or is cancelled or otherwise terminated, then the number of shares available for issuance under the Plan will increase, to the extent of any such forfeiture, expiration, cancellation or termination. Any awards or options granted under the 2012 Plan and any previous long-term incentive plan of the Corporation will not be treated as awards under the Plan and therefore will not count toward the maximum number of shares available under the Plan and will not be added to the total number of shares available for issuance under the Plan when such awards are forfeited or cancelled. The number of shares available for issuance under the Plan are not increased by: (i) the withholding of shares as a result of the net settlement of an outstanding option; (ii) the delivery of shares to pay the exercise price or withholding taxes relating to an award; or (iii) the repurchase of shares on the open market using the proceeds of an option's exercise. If the CRC grants substitute awards, which are awards granted in assumption of, or in substitution for, outstanding awards previously granted by a corporation that is acquired by the Corporation in a merger or other business combination, then such substitute awards will not count toward the maximum number of shares available under the Plan and will result in additional dilution.

**Awards**

All awards are expected to be evidenced by an award agreement between the Corporation and the individual participant and approved by the CRC. In the discretion of the CRC, an eligible employee and a non-employee director, advisor, or consultant may receive awards from one or more categories described below, and more than one award may be granted to an eligible employee and to a non-employee director, advisor, or consultant.

Types of awards under the Plan include:

<u>Stock Options</u>. Subject to the terms of the Plan, the CRC (or its authorized delegate or delegates) may grant to participants stock options with such terms and conditions as the CRC or such delegate(s) determines. At the time of grant of a stock option, the CRC or its delegates will determine whether the option will be a non-qualified or an incentive stock option, provided that incentive stock options will only be granted to employees. The terms of any incentive stock option shall comply in all respects with the provisions of Code Section 422. Each stock option granted under the Plan will be evidenced by an option award agreement between the Corporation and the participant and such option award agreement will contain the number of shares and the terms on which the option can be exercised. The vesting period for options will be in the option award agreement, provided that no award will vest sooner than the one-year anniversary of the award, except that a shorter vesting/exercise schedule may apply to not more than five percent (5%) of the shares authorized for issuance under the Plan.

The term of each option will be fixed by the CRC or its delegates but will not exceed ten (10) years from the date of grant.

The date of grant will not be earlier than the date on which the CRC or its delegates approves such grant. The exercise price per share shall be determined by the CRC; provided, however, that except in the case of substitute awards, the exercise price will be 100% of the fair market value of the Corporation's Common Stock on the date the stock option is granted. Unless otherwise determined by the CRC or the Board, fair market value of a share of the Corporation's Common Stock on a relevant date means the per share closing price of the shares as reported on NASDAQ for the date immediately preceding the grant date, or if the shares are not so listed on such immediately preceding date, as reported on such other exchange or electronic trading system which, on the date immediately preceding the date in question, reports the largest number of traded shares, provided, however, that if on the date immediately preceding the date for which the Fair Market Value is to be determined there are no transactions, Fair Market Value shall be determined as of the next closest immediately preceding date on which there were transactions in the shares; provided further, however, that if the foregoing provisions are not applicable, the fair market value of a share as determined by the CRC by the reasonable application of such reasonable valuation method, consistently applied, as the CRC deems appropriate; provided further, however, that, with respect to incentive stock options, such Fair Market Value shall be determined subject to Section 422(c)(7) of the Code.

No incentive stock option may be granted to an individual if, at the time of the proposed grant, such individual owns more than ten percent (10%) of the total combined voting power of all classes of shares of the Corporation or any affiliate unless (i) the exercise price of such incentive stock option is at least one hundred ten percent (110%) of the fair market value of the share at the time such incentive stock option is granted and (ii) such incentive stock option is not exercisable after the expiration of five years from the date such incentive stock option is granted.

To the extent that the aggregate fair market value of stock of the Corporation with respect to which incentive stock options are exercisable for the first time by a participant during any calendar year under the Plan and any other option plan of the Corporation (or any Affiliate) shall exceed $100,000, such options shall be treated as non-qualified stock options. Such fair market value shall be determined as of the date on which each such incentive stock option is granted.

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<u>Restricted Stock and Restricted Stock Units</u>. Subject to the terms of the Plan, the CRC or its delegates may determine, with respect to each restricted stock or restricted stock unit award granted, the number of shares or restricted stock units, respectively. Unless the CRC specifies otherwise in the award agreement, the vesting period for awards of restricted stock and restricted stock units will be as determined by the CRC in the award agreement, provided that no award will vest sooner than the one-year anniversary of the award, except that a shorter vesting/exercise schedule may apply to not more than 5% of the shares authorized for issuance under the Plan.

Shares of restricted stock and restricted stock units shall be subject to such restrictions as the CRC may impose (including, without limitation, any limitation on the right to vote a share of restricted stock or the right to receive any dividend or other right or property), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the CRC may deem appropriate. Notwithstanding the foregoing, unless otherwise determined by the CRC or Board, and provided in an award agreement, a participant may become a shareholder of the Corporation with respect to all shares of restricted stock and will have all of the rights to receive dividends (or dividend equivalents) provided; however, that cash dividends and stock dividends with respect to restricted stock shall be withheld by the Corporation for the participant's account unless and until the underlying shares of restricted stock vest. The cash dividends or stock dividends so withheld by the CRC and attributable to any particular share of restricted stock shall be distributed to the participant in cash or, at the discretion of the CRC, in shares having a fair market value equal to the amount of such dividends, if applicable, upon the release of restrictions on such share and, if such share is forfeited, the participant shall have no right to such dividends.

The CRC will determine the manner in which restricted stock will be evidenced, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of restricted stock, such certificate shall be registered in the name of the participant and shall bear an appropriate legend (as determined by the CRC) referring to the terms, conditions, and restrictions applicable to such restricted stock.

<u>Performance Units</u>. Subject to the terms of the Plan, the CRC may grant to participants performance-based awards with such terms and conditions as the CRC determines. The performance-based awards may be denominated as or payable in cash, shares (including restricted stock and restricted stock units), options or other awards or other property, and will confer on the holder the rights valued as determined by the CRC and payable to the holder upon the achievement of such performance goals during such performance periods as the CRC may establish. The performance goals to be achieved during any performance period, the length of any performance period, the amount of any performance-based award granted and the amount of any payment or transfer to be made pursuant to any performance-based award will be determined by the CRC. The CRC will verify the attainment of any performance goal. The vesting period for performance-based awards will be in the performance award agreement, provided that no award will vest sooner than the one-year anniversary of the award, except that a shorter vesting/exercise schedule may apply to not more than 5% of the shares authorized for issuance under the Plan.

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**Employment Status of Participant** 

<u>Termination of Key Employee</u>. Unless otherwise provided by the CRC in the award agreement, the following will apply upon termination of an employee: If an employee retires from the Corporation or an affiliate after having attained age 65 and having provided five or more years of service (defined as "normal retirement"), then the employee's options will fully vest upon such retirement and such awards will remain exercisable ****for three (3) months but not beyond expiration of original term. If an employee dies, then the employee's options, restricted stock, and restricted stock units will fully vest upon death, except that performance-based restricted stock and performance-based restricted stock units that are unvested upon death during a restricted period shall be forfeited. The option awards will remain exercisable for one year following death, but in no event beyond the award's original expiration date. If an employee is terminated due to disability, then the employee's options, restricted stock, or restricted stock units will fully vest upon termination and the options will remain exercisable for one year following death, but in no event beyond the award's original expiration date, except that performance-based restricted stock and performance-based restricted stock units that are unvested upon termination due to disability during a restricted period shall be forfeited. An employee that is terminated for "Cause" (as such term is defined in the Plan), will forfeit any unvested options, restricted stock or restricted stock units upon such termination. If an employee is terminated for any other reason, (other than with respect to a change of control – see below,) then the employee's options, restricted stock, or restricted stock units that are not fully vested will be forfeited upon termination; provided, that any options that have vested will remain exercisable for three months following termination.

<u>Termination of Service of Non-Employee Director or Other Non-Employee</u>. Unless otherwise provided by the CRC in the award agreement, the following will apply upon termination of a non-employee director or other non-employee: Upon the death of a non-employee, (including a non-employee director, advisor, or consultant) such non-employee's options, restricted stock, or restricted stock units that are not fully vested at such time will fully vest upon such termination and any options will remain exercisable for one year following death, but in no event beyond the award's original expiration date. A non-employee (director, advisor, or consultant) whose service is terminated for cause, will forfeit any unvested options, restricted stock, or restricted stock units upon such termination.

If a non-employee director ceases to serve on the Board for any reason other than death or change of control, such non-employee director's options, restricted stock, or restricted stock units that are not fully vested at such time will be forfeited upon termination of such non-employee director's service; any options that have already vested by the termination date will remain exercisable for three months following termination. Notwithstanding the foregoing, the CRC may, in its discretion, modify the award agreement of any non-employee director, at any time, to provide that options, restricted shares, or restricted stock units, or any of them, that are not fully vested at the time a non-employee director ceases to serve on the Board for any reason other than death, change in control, and for Cause will fully vest upon such termination; such awards will remain exercisable, in the case of an option award, for three months but not beyond expiration of original term.

With respect to non-employee advisors or consultants, options that are not fully vested at the time service as a non-employee terminates for any reason other than death or change in control, will be forfeited upon termination; any options that have already vested by the termination date will remain exercisable for three months following termination. Restricted stock or restricted stock units that are not fully vested at the time service as a non-employee advisor or consultant terminates for any reason other than death or change in control, will be forfeited upon termination

**Change of Control** 

Unless otherwise provided in the award agreement, in the discretion of the CRC, any award not fully vested at the time a participant terminates employment within the vesting period for the award and on or after a change of control will become fully vested upon such termination and remain exercisable, as applicable, throughout its original term, provided, however that with respect to performance-based awards, such full vesting shall only apply with respect to any performance-based awards which are not assumed or replaced by the successor or surviving corporation. If the successor or surviving corporation (or parent thereof) so agrees, some or all outstanding awards will be assumed, or replaced with the same type of award with similar terms and conditions, by the successor or surviving corporation (or parent thereof) in a change of control transaction. If applicable, each award which is assumed by the successor or surviving corporation (or parent thereof) shall be appropriately adjusted, immediately after such change of control, to apply to the number and class of securities which would have been issuable to the participant upon the consummation of such change of control had the award been exercised, vested or earned immediately prior to such change of control, and such other appropriate adjustments in the terms and conditions of the award shall be made. In addition, if the foregoing does not apply with respect to any particular outstanding award, then the CRC may provide that all such outstanding awards shall be cancelled as of the date of the Change of control in exchange for a payment in cash and/or shares all as more fully set forth in the Plan. Change of control is defined in the Plan which is attached to this Proxy Statement.

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**Limitations on Transfer of Awards**

Each award, and all rights thereunder, shall be non-assignable and nontransferable during an individual's lifetime except that the CRC may permit further transferability of awards other than incentive stock options, on a general or a specific basis, provided, however, that no award may be transferred for value or other consideration without first obtaining approval by the shareholders of the Corporation. No award and no right under any such award may be subjected to any lien, directly or indirectly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge, bankruptcy, or court order, and any purported pledge, alienation, attachment, or encumbrance thereof shall be void and unenforceable against the Corporation. In the event of a participant's death, a participant's vested rights and interests in any award may be exercised by the personal representative of the participant's estate within three (3) months or any statutorily required period after the date of death. In the event of a participant's permanent disability, a participant's vested rights and interests in any award may be exercised by such person's guardian, conservator, or other legal personal representative within ninety (90) days or any statutorily required period after the date of permanent disability.

**Effective Date and Term of the Plan** 

If approved by the shareholders owning a majority of the total votes cast at the Annual Meeting, the Plan will become effective as of the Effective Date. The Plan shall terminate on the ten-year anniversary of the Effective Date. No grants shall be awarded after such termination; however, the terms of the Plan shall continue to apply to all awards outstanding when the Plan terminates.

Any award granted prior to the tenth (10th) anniversary of the Effective Date may extend beyond such date, and the authority of the CRC and the Board to amend, alter, adjust, suspend, discontinue or terminate any such award, or to waive any conditions or rights under any such award, and to amend the Plan, will extend beyond such date. The CRC or the Board may terminate the Plan at any time with respect to all awards that have not been granted. The CRC determines the period during which a stock option granted under the Plan may be exercised, but no such option or right will be exercisable for more than ten years from the grant date of such award.

**Amendment and Discontinuance** 

The CRC or the Board may terminate, amend or modify the Plan or any part hereof at any time it deems necessary or appropriate; provided, however, that no amendment, modification, or termination of the Plan or any award shall adversely affect the previously accrued material rights or benefits of a participant under any outstanding award under the Plan, without the consent of the participant; and provided, further, that shareholder approval of any amendment of the Plan shall also be obtained if otherwise required by an applicable statutory or regulatory requirement. Notwithstanding the foregoing, the Board and CRC are prohibited from amending the provisions of the plan that prohibit the repricing of options.

**Repricing Prohibited**

The CRC is prohibited from decreasing the exercise price for any outstanding stock option granted to a participant under the Plan after the date of grant or allowing a participant to surrender an outstanding stock option granted under the Plan to the Corporation as consideration for the grant of cash, other awards, or a new option with a lower exercise price.

**Clawback of Awards**

Clawback provisions will apply to all named executive officers and other executive officers if the Corporation is required to prepare an accounting restatement due to materially inaccurate performance metrics, and such provisions may be amended, or supplemented by an additional clawback policy or policies, at any time or from time to time. In addition, a participant may be required to repay to the Corporation previously paid compensation, whether provided pursuant to the Plan or an award agreement, in accordance with policies of the Corporation. By accepting an award, the participant will agree to be bound by such policies of the Corporation, as in effect or as may be adopted and/or modified from time to time by the Corporation (including, without limitation, to comply with applicable law or stock exchange listing requirements).

**New Benefit Plans**

As of the date of the 2022 Annual Meeting, no awards will have been granted (i.e. whether granted conditionally subject to shareholder approval or otherwise) under the Plan. Subject to shareholder approval of the Plan, all awards granted under the Plan will be made at the discretion of the CRC or its delegates. As a result, it is not currently possible to determine the benefits or amounts that will be received by any individual or groups pursuant to the Plan in the future, or the benefits or amounts that would have been received by or allocated to any individual or groups for the last completed fiscal year if the Plan had been in effect. Information regarding our recent practices with respect to equity-based compensation is presented elsewhere in this proxy statement.

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**Federal Income Tax Consequences** 

The U.S. federal income tax consequences to First Community and the recipients of awards under the Plan are complex and subject to change. The following discussion is only a summary of the general rules applicable to the Plan. Recipients of awards under the Plan should consult their own tax advisors since a taxpayer's particular situation may be such that some variation of the rules described below will apply.

As discussed above, several different types of instruments may be issued under the Plan. The tax consequences related to the issuance of each is discussed separately below.

<u>Options</u>. In general, a recipient of an option granted under the Plan will not have regular taxable income at the time of grant.

Upon exercise of a nonqualified stock option, the optionee generally must recognize taxable income in an amount equal to the fair market value on the date of exercise of the shares exercised, minus the exercise price. The tax basis for the shares purchased is their fair market value on the date of exercise. Any gain or loss recognized upon any later sale or other disposition of the acquired shares generally will be capital gain or loss. The character of such capital gain or loss (short-term or long-term) will depend upon the length of time that the optionee holds the shares prior to the sale or disposition. Generally, such shares must be held at least twelve (12) months in order for long-term capital gains tax rates to apply.

An optionee generally will not be required to recognize any regular taxable income upon the exercise of an incentive stock option, provided that the optionee does not dispose of the shares issued to him or her upon exercise of the option within the two-year period after the date of grant and within one year after the receipt of the shares by the optionee. The optionee will have alternative minimum taxable income equal to the amount by which the fair market value of the shares on the exercise date exceeds the purchase price. An optionee will recognize ordinary taxable income upon the exercise of an incentive stock option if such optionee uses the broker-assisted cashless exercise method. Provided the optionee does not recognize regular taxable income upon exercise, the tax basis for the shares purchased is equal to the exercise price. Upon a later sale or other disposition of the shares, the optionee must recognize long-term capital gain or ordinary taxable income, depending upon whether the optionee holds the shares for specified holding periods.

<u>Restricted Stock</u>. In general, a participant who receives restricted stock will not recognize taxable income upon receipt, but instead will recognize ordinary income when the shares are no longer subject to restrictions. Alternatively, unless prohibited by the CRC, a participant may elect under Section 83(b) of the Code to be taxed at the time of receipt, provided the participant meets applicable provisions of the Plan and Code with respect to such election. The amount of ordinary income recognized by the participant will be equal to the fair market value of the shares at the time income is recognized, less the amount of any price paid for the shares. In general, any gain recognized thereafter will be capital gain.

<u>Restricted Stock Units ("RSUs")</u>. In general, a participant who is awarded RSUs will not recognize taxable income upon receipt. When a participant receives payment for an award of RSUs in shares or cash, the fair market value of the shares or the amount of cash received will be taxed to the participant at ordinary income rates. However, if any shares used to pay out RSUs are nontransferable and subject to a substantial risk of forfeiture, the taxable event is deferred until either the restriction on transferability or the risk of forfeiture lapses. In such a case, a participant, unless prohibited by the CRC, may elect under Section 83(b) of the Code to be taxed at the time of receipt, provided the participant meets applicable provisions of the 2012 Plan and Code with respect to such election. In general, any gain recognized thereafter will be capital gain.

<u>Withholding Requirements</u>. The Corporation or any affiliate shall be entitled to withhold from any amount otherwise payable to a participant (or secure payment from the participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Corporation or an affiliate with respect to any amount payable and/or shares issuable to such participant under the Plan, or with respect to any income recognized upon the lapse of restrictions applicable to an award or upon a disqualifying disposition of shares received pursuant to the exercise of an incentive stock option, and the Corporation may defer payment or issuance of the cash or shares upon the grant, exercise or vesting of an award unless appropriate arrangements are made to its satisfaction against any liability for any such tax. The Corporation shall determine the amount of such withholding or tax payment, which shall be payable by the participant at such time as the Corporation determines. The CRC may prescribe in each award agreement one or more methods by which the participant will be permitted to satisfy his or her tax withholding obligation, which methods may include, without limitation, the payment of cash by the participant to the Corporation or an affiliate or the withholding from the award, at the appropriate time, of a number of shares sufficient, based upon the fair market value of such shares, to satisfy such tax withholding requirements. The CRC may establish such rules and procedures relating to withholding methods as it deems necessary or appropriate.

<u>Deduction Limits and Performance Measures</u>. The Corporation generally will be entitled to a tax deduction in connection with an award made under the Plan only to the extent that the participant recognizes ordinary income from the award. The Corporation is generally not entitled to a tax deduction for any award with respect to any amount that represents compensation of $1 million paid to "covered employees" under Code Section 162(m).

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**Code Section 409A Compliance**

Code Section 409A provides that covered amounts deferred under a nonqualified deferred compensation plan are includable in the participant's gross income to the extent not subject to a substantial risk of forfeiture and not previously included in income, unless certain requirements are met, including limitations on the timing of deferral elections and events that may trigger the distribution of deferred amounts.

Based on final regulations and other guidance issued under Code Section 409A, the awards under the Plan could be affected. In general, if an award either (1) meets the requirements imposed by Code Section 409A or (2) qualifies for an exception from coverage of Code Section 409A, the tax consequences described above will continue to apply. If an award is subject to Code Section 409A and does not comply with the requirements of Code Section 409A, then amounts deferred in the current year and in previous years will become subject to immediate taxation to the participant, and the participant will be required to pay (1) a penalty equal to interest at the underpayment rate plus 1% on the tax that should have been paid on the amount of the original deferral and any related earnings and (2) in addition to any regular tax, an excise tax equal to 20% of the original deferral and any earnings credited on the deferral.

The Corporation has designed the Plan so that awards either comply with, or are exempt from coverage of, Code Section 409A. The Corporation intends to continue to review the terms of the Plan and may, subject to the terms of the Plan, adopt additional amendments to comply with current and additional guidance issued under Section 409A of the Code.

The Corporation does not intend the preceding discussion to be a complete explanation of all of the income tax consequences of participating in the Plan. Participants in the Plan should consult their own personal tax advisors to determine the particular tax consequences of the Plan to them, including the application and effect of foreign, state and local taxes, and any changes in the federal tax laws from the date of this proxy statement.

**Vote Required**

The affirmative vote of a majority of votes cast on this proposal is required for the approval of this proposal. In determining whether the proposal has received the requisite number of affirmative votes, abstentions and broker "non-votes" will be disregarded and will have no effect on the outcome of the vote.

First Community believes that its compensation plans have made a significant contribution to the success of the Corporation in attracting and retaining key employees. It is the intention of the persons named in the accompanying proxy, unless the proxy specifies otherwise, to vote "**FOR**" the Plan.

**Accordingly, the Compensation and Retirement Committee and Board of Directors recommends that the shareholders vote** "**FOR**" **approval of the First Community Bankshares, Inc. 2022 Omnibus Equity Compensation Plan.**

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**ADDITIONAL INFORMATION**

**Shareholder Proposals for Inclusion in Next Year**'**s Proxy Statement**

To be considered for inclusion in next year's proxy statement, shareholder proposals, submitted in accordance with SEC's Rule 14a-8, must be received at the Corporation's principal executive office by November 16, 2022. Proposals must be addressed to Secretary, First Community Bankshares, Inc., P.O. Box 989, Bluefield, Virginia 24605-0989.

**Other Shareholder Proposals and Shareholder Nominations for Directors for Presentation at Next Year**'**s Annual Meeting**

The Corporation's amended and restated bylaws require that any shareholder proposal that is not submitted for inclusion in the next year's proxy statement under SEC Rule 14a-8, but, is instead sought to be presented directly at the 2023 Annual Meeting, and any shareholder nominations for directors, must be received at the Corporation's principal executive office not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the 2022 Annual Meeting. As a result, proposals, including director nominations, submitted pursuant to these provisions of the bylaws, must be received no sooner than January 26, 2023, and no later than February 25, 2023. Proposals must be addressed to Secretary, First Community Bankshares, Inc., P.O. Box 989, Bluefield, Virginia 24605-0989, and include the information set forth in the bylaws, which are posted on the Corporation's website. Shareholder nominations for directors may be made only if such nominations are made in accordance with the procedures set forth in Section 2.3 of the Corporation's amended and restated bylaws. SEC rules permit management to vote proxies in management's discretion in certain cases if the shareholder does not comply with this deadline, and in certain other cases regardless of the shareholder's compliance with this deadline. Other than proposals properly omitted from this proxy statement pursuant to SEC rules and other matters discussed in this proxy statement, the Board of Directors has not received timely notice of any other matter that may come before the Annual Meeting.

**Solicitation of Proxies**

Proxies may be solicited on behalf of the Board of Directors by mail, telephone, other electronic means, or in person. Copies of proxy materials and the 2021 Annual Report will be supplied to brokers, dealers, banks and voting trustees, or their nominees, for the purpose of soliciting proxies from the beneficial owners, and the Corporation will reimburse such record holders for their reasonable expenses.

**Shareholder Requests for Copies of 2021 Annual Report and Proxy Materials**

Upon written request, the Corporation will provide, without charge, to shareholders of record and beneficial owners as of close of business on March 3, 2022, a copy of this proxy statement and the 2021 Annual Report. Any written request for a copy of this proxy statement and/or the 2021 Annual Report must be mailed to Secretary, First Community Bankshares, Inc., P.O. Box 989, Bluefield, Virginia 24605-0989.

**Delivery of Documents to Shareholders Sharing Same Address (Householding)**

To reduce the expenses of delivering duplicate proxy materials to its shareholders, the Corporation may deliver only one proxy statement and Annual Report to multiple shareholders who share an address unless the Corporation receives contrary instructions from any shareholders at that address. If you are the beneficial owner, but not the record holder, of shares of the Corporation's stock, your broker, bank, or other nominee may only deliver one copy of this proxy statement and 2021 Annual Report to multiple shareholders at the same address, unless that nominee has received contrary instructions from one or more of the shareholders. The Corporation will deliver, upon request, a separate copy of this proxy statement and 2021 Annual Report to a shareholder at a shared address to which a single copy of the documents was delivered. A shareholder desiring to receive a separate copy of the proxy statement and Annual Report, now or in the future, should submit this request to Broadridge Financial Solutions, Inc. ("Broadridge"), either by calling toll free at (800) 542-1061 or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717. Also, shareholders sharing an address who are receiving multiple copies of proxy materials and annual reports and who wish instead to receive a single copy of such materials in the future will need to, in the case of beneficial owners, contact their broker, bank, or other nominee or, in the case of record owners, contact Broadridge (using the above contact information) to request that only a single copy of each document be mailed to all shareholders at the same address in the future.

**Electronic Access to Proxy Statement and Annual Report**

This proxy statement and the 2021 Annual Report may be viewed online at <u>www.firstcommunitybank.com</u> under Investor Relations. If you are a shareholder of record, you can elect to access future annual reports and proxy statements electronically by marking the appropriate box on your proxy form or by following the instructions provided if you vote on the Internet or by telephone. If you choose electronic access, you will receive a proxy form in mid to late March providing the website address for access. Your choice will remain in effect until you notify the Corporation by mail that you wish to resume delivery of paper copies of annual reports and proxies by mail. If your stock is held for you by a bank, broker, or another holder of record, please refer to the information provided by that entity holding the stock on your behalf for instructions on how to elect the paper option.

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**Appendix F**

[**Table of Contents**](#toc)

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| |
|:---|
| **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **WASHINGTON, D.C. 20549** |
| **FORM 10-Q** |
| ☑ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| For the quarterly period ended **March 31, 2022** |
| or |
| ☐ **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| Commission file number: **000-19297** |
| **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) |

---

---

| | |
|:---|:---|
| **Virginia** | **55-0694814** |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |

---

---

| | |
|:---|:---|
| **P.O. Box 989**<br> **Bluefield, Virginia** | **24605-0989** |
| (Address of principal executive offices) | (Zip Code) |

---

---

| |
|:---|
| **(276) 326-9000** |
| (Registrant's telephone number, including area code) |

---

**Not Applicable**

---

| | | |
|:---|:---|:---|
| (Former name, former address and former fiscal year, if changed since last report) | (Former name, former address and former fiscal year, if changed since last report) | (Former name, former address and former fiscal year, if changed since last report) |
| Securities registered pursuant to Section 12 (b) of the Act: | Securities registered pursuant to Section 12 (b) of the Act: | Securities registered pursuant to Section 12 (b) of the Act: |
| **Title of each class** | **Trading Symbol(s)** | **Name of each exchange on which registered** |
| Common Stock ($1.00 par value) | FCBC | NASDAQ Global Select |

---

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| | | |
|:---|:---|:---|
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
| ☑ Yes ☐ No | ☑ Yes ☐ No | ☑ Yes ☐ No |
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). |
| ☑ Yes ☐ No | ☑ Yes ☐ No | ☑ Yes ☐ No |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
|  | Large accelerated filer ☐ | Accelerated filer ☑ |
|  | Non-accelerated filer ☐  | Smaller reporting company ☐ |
|  | | Emerging growth company ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
| ☐ Yes ☑ No | ☐ Yes ☑ No | ☐ Yes ☑ No |
| As of April 29, 2022, there were 16,735,375 shares outstanding of the registrant's Common Stock, $1.00 par value. | As of April 29, 2022, there were 16,735,375 shares outstanding of the registrant's Common Stock, $1.00 par value. | As of April 29, 2022, there were 16,735,375 shares outstanding of the registrant's Common Stock, $1.00 par value. |

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| | | |
|:---|:---|:---|
| **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** |
| **FORM 10-Q** | **FORM 10-Q** | **FORM 10-Q** |
| **INDEX** | **INDEX** | **INDEX** |
| **PART I.** | [**FINANCIAL INFORMATION**](#part1) | <u>**P**</u><u>**age**</u> |
| Item 1. | [Financial Statements](#item1) |  |
|  | [Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021](#bs) | [4](#bs) |
|  | [Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021 (Unaudited)](#income) | [5](#income) |
|  | [Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021 (Unaudited)](#compincome) | [6](#compincome) |
|  | [Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 2022 and 2021 (Unaudited)](#eq) | [7](#eq) |
|  | [Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (Unaudited)](#cf) | [8](#cf) |
|  | [Notes to Condensed Consolidated Financial Statements (Unaudited)](#notes) | [46](#notes) |
| Item 2. | [Management's Discussion and Analysis of Financial Condition and Results of Operations](#item2) | [17](#item2) |
| Item 3. | [Quantitative and Qualitative Disclosures About Market Risk](#item3) | [17](#item3) |
| Item 4. | [Controls and Procedures](#item4) | [17](#item4) |
| **PART II.** | [**OTHER INFORMATION**](#part2) |  |
| Item 1. | [Legal Proceedings](#legal) | [47](#legal) |
| Item 1A. | [Risk Factors](#risk) | [47](#risk) |
| Item 2. | [Unregistered Sales of Equity Securities and Use of Proceeds](#unreg) | [48](#unreg) |
| Item 3. | [Defaults Upon Senior Securities](#def) | [48](#def) |
| Item 4. | [Mine Safety Disclosures](#mine) | [48](#mine) |
| Item 5. | [Other Information](#other) | [48](#other) |
| Item 6. | [Exhibits](#ex) | [49](#ex) |
| [**Signatures**](#sig) | [**Signatures**](#sig) | [51](#sig) |

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Forward-looking statements in filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q and the accompanying Exhibits, filings incorporated by reference, reports to shareholders, and other communications that represent the Company's beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," and other similar expressions identify forward-looking statements. The following factors, among others, could cause financial performance to differ materially from that expressed in such forward-looking statements:

● the effects of the COVID-19 pandemic, including the negative impacts and disruptions to the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company's business;

● the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

● the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;

● inflation, interest rate, market and monetary fluctuations;

● timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

● the willingness of customers to substitute competitors' products and services for the Company's products and services and vice versa;

● the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance;

● the impact of the U.S. Department of the Treasury and federal banking regulators' continued implementation of programs to address capital and liquidity in the banking system;

● technological changes;

● the cost and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;

● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;

● the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

● the growth and profitability of noninterest, or fee, income being less than expected;

● unanticipated regulatory or judicial proceedings;

● changes in consumer spending and saving habits; and

● the Company's success at managing the risks mentioned above.

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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| | |
|:---|:---|
| **PART I.** | **FINANCIAL INFORMATION** |

---

**Item 1. Financial Statements**

**CONDENSED CONSOLIDATED BALANCE SHEETS**<br>

---

| | | |
|:---|:---|:---|
|  | **March 31,** | **December 31,** |
|  | **2022** | **2021<sup>(1)</sup>** |
| *(Amounts in thousands, except share and per share data)* | (Unaudited) |  |
| **Assets** |  |  |
| Cash and due from banks | $50485 | $47067 |
| Federal funds sold | 403742 | 627036 |
| Interest-bearing deposits in banks | 3079 | 3336 |
| Total cash and cash equivalents | 457306 | 677439 |
| Debt securities available for sale | 268703 | 76292 |
| Loans held for investment, net of unearned income | 2244296 | 2165569 |
| Allowance for credit losses | (28981) | (27858) |
| Loans held for investment, net | 2215315 | 2137711 |
| Premises and equipment, net | 50912 | 52284 |
| Other real estate owned | 848 | 1015 |
| Interest receivable | 8100 | 7900 |
| Goodwill | 129565 | 129565 |
| Other intangible assets | 5266 | 5622 |
| Other assets | 108112 | 106691 |
| Total assets | $3244127 | $3194519 |
| **Liabilities** |  |  |
| Deposits |  |  |
| Noninterest-bearing | $860652 | $842783 |
| Interest-bearing | 1922292 | 1886608 |
| Total deposits | 2782944 | 2729391 |
| Securities sold under agreements to repurchase | 2488 | 1536 |
| Interest, taxes, and other liabilities | 34539 | 35817 |
| Total liabilities | 2819971 | 2766744 |
| **Stockholders' equity** |  |  |
| Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding |  |  |
| Common stock, $1 par value; 50,000,000 shares authorized; 23,910,857 shares issued and 16,781,975 outstanding at March 31, 2022; 23,971,347 shares issued and 16,878,220 outstanding at December 31, 2021 | 16782 | 16878 |
| Additional paid-in capital | 144088 | 147619 |
| Retained earnings | 269798 | 264824 |
| Accumulated other comprehensive loss | (6512) | (1546) |
| Total stockholders' equity | 424156 | 427775 |
| Total liabilities and stockholders' equity | $3244127 | $3194519 |

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(1) Derived from audited financial statements <br> *See Notes to Condensed Consolidated Financial Statements.*

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**CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**<br>

---

| | | |
|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** |
|  | **March 31,** | **March 31,** |
| *(Amounts in thousands, except share and per share data)* | **2022** | **2021** |
| **Interest income** |  |  |
| &nbsp;&nbsp;&nbsp; Interest and fees on loans | $24641 | $26540 |
| &nbsp;&nbsp;&nbsp; Interest on securities -- taxable | 556 | 198 |
| &nbsp;&nbsp;&nbsp; Interest on securities -- tax-exempt | 194 | 297 |
| &nbsp;&nbsp;&nbsp; Interest on deposits in banks | 248 | 116 |
| Total interest income | 25639 | 27151 |
| **Interest expense** |  |  |
| &nbsp;&nbsp;&nbsp; Interest on deposits | 486 | 869 |
| Total interest expense | 486 | 869 |
| **Net interest income** | 25153 | 26282 |
| &nbsp;&nbsp;&nbsp; Provision for (recovery of) credit losses | 1961 | (4001) |
| **Net interest income after provision for loan losses** | 23192 | 30283 |
| **Noninterest income** |  |  |
| &nbsp;&nbsp;&nbsp; Wealth management | 972 | 881 |
| &nbsp;&nbsp;&nbsp; Service charges on deposits | 3498 | 3031 |
| &nbsp;&nbsp;&nbsp; Other service charges and fees | 3017 | 3022 |
| &nbsp;&nbsp;&nbsp; Other operating income | 1707 | 635 |
| Total noninterest income | 9194 | 7569 |
| **Noninterest expense** |  |  |
| &nbsp;&nbsp;&nbsp; Salaries and employee benefits | 11671 | 10884 |
| &nbsp;&nbsp;&nbsp; Occupancy expense | 1269 | 1275 |
| &nbsp;&nbsp;&nbsp; Furniture and equipment expense | 1614 | 1367 |
| &nbsp;&nbsp;&nbsp; Service fees | 1503 | 1335 |
| &nbsp;&nbsp;&nbsp; Advertising and public relations | 540 | 335 |
| &nbsp;&nbsp;&nbsp; Professional fees | 453 | 466 |
| &nbsp;&nbsp;&nbsp; Amortization of intangibles | 357 | 357 |
| &nbsp;&nbsp;&nbsp; FDIC premiums and assessments | 218 | 199 |
| &nbsp;&nbsp;&nbsp; Other operating expense | 2361 | 2602 |
| Total noninterest expense | 19986 | 18820 |
| Income before income taxes | 12400 | 19032 |
| Income tax expense | 2885 | 4430 |
| **Net income** | $9515 | $14602 |
| Earnings per common share |  |  |
| &nbsp;&nbsp;&nbsp; Basic | $0.57 | $0.83 |
| &nbsp;&nbsp;&nbsp; Diluted | 0.56 | 0.82 |
| Weighted average shares outstanding |  |  |
| &nbsp;&nbsp;&nbsp; Basic | 16817284 | 17669937 |
| &nbsp;&nbsp;&nbsp; Diluted | 16864515 | 17729185 |

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*See Notes to Condensed Consolidated Financial Statements.*<br>

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**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)**<br>

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| | | |
|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** |
|  | **March 31,** | **March 31,** |
|  | **2022** | **2021** |
| *(Amounts in thousands)* |  |  |
| **Net income** | $9515 | $14602 |
| **Other comprehensive income, before tax** |  |  |
| &nbsp;&nbsp;&nbsp; Available-for-sale debt securities: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Change in net unrealized losses on debt securities | (5896) | (817) |
| &nbsp;&nbsp;&nbsp; Net unrealized losses on available-for-sale debt securities | (5896) | (817) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Employee benefit plans: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net actuarial loss | (423) | (206) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income | 34 | 97 |
| Net unrealized losses on employee benefit plans | (389) | (109) |
| **Other comprehensive loss, before tax** | (6285) | (926) |
| Income tax benefit | (1319) | (194) |
| **Other comprehensive loss, net of tax** | (4966) | (732) |
| **Total comprehensive income** | $4549 | $13870 |

---

*See Notes to Condensed Consolidated Financial Statements.*<br>

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---

| |
|:---|
| **CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)** |
| **THREE MONTHS ENDED** |
| **March 31, 2022 and 2021** |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  |  |  | **Accumulated** |  |
|  |  |  |  |  |  |  | **Other** |  |
| *(Amounts in thousands,* | **Preferred**  |  | **Common** |  | **Additional** |  | **Comprehensive** |  |
| *except share and per share data)* | **Stock Outstanding** | **Preferred Stock** | **Stock Outstanding** | **Common Stock** | **Paid-in Capital** | **Retained Earnings** | **Loss** | **Total**  |
| Balance January 1, 2021 |  | $- | 17722507 | $17723 | $173345 | $237585 | $(1923) | $426730 |
| Cumulative effect of adoption of ASU 2016-13 |  |  |  |  |  | (5870) |  | (5870) |
| Net income |  |  |  |  |  | 14602 |  | 14602 |
| Other comprehensive loss |  |  |  |  |  |  | (732) | (732) |
| Common dividends declared -- $0.25 per share |  |  |  |  |  | (4428) |  | (4428) |
| Equity-based compensation expense |  |  | 51550 | 51 | 483 |  |  | 534 |
| Issuance of common stock to 401(k) plan -- 5,652 shares |  |  | 5652 | 6 | 142 |  |  | 148 |
| Repurchase of common shares -- 187,700 shares at $26.56 per share |  |  | (187700) | (188) | (4797) |  |  | (4985) |
| Balance March 31, 2021 |  | $- | 17592009 | $17592 | $169173 | $241889 | $(2655) | $425999 |
| Balance January 1, 2022 |  | $- | 16878220 | $16878 | $147619 | $264824 | $(1546) | $427775 |
| Net income |  |  |  |  |  | 9515 |  | 9515 |
| Other comprehensive loss |  |  |  |  |  |  | (4966) | (4966) |
| Common dividends declared -- $0.27 per share |  |  |  |  |  | (4541) |  | (4541) |
| Equity-based compensation expense |  |  | 25137 | 25 | 147 |  |  | 172 |
| Common stock options exercised -- 4,536 shares |  |  | 4536 | 5 | 98 |  |  | 103 |
| Issuance of common stock to 401(k) plan -- 6,082 shares |  |  | 6082 | 6 | 179 |  |  | 185 |
| Repurchase of common shares -- 132,000 shares at $30.96 per share |  |  | (132000) | (132) | (3955) |  |  | (4087) |
| Balance March 31, 2022 |  | $- | 16781975 | $16782 | $144088 | $269798 | $(6512) | $424156 |

---

*See Notes to Condensed Consolidated Financial Statements.*<br>

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**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**<br>

---

| | | |
|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** |
|  | **March 31,** | **March 31,** |
| *(Amounts in thousands)* | **2022** | **2021** |
| **Operating activities** |  |  |
| Net income | $9515 | $14602 |
| Adjustments to reconcile net income to net cash provided by operating activities |  |  |
| Provision for (recovery of) credit losses | 1961 | (4001) |
| Depreciation and amortization of premises and equipment | 1108 | 1125 |
| Amortization of premiums on investments, net | 100 | 85 |
| Amortization of FDIC indemnification asset, net |  | 280 |
| Amortization of intangible assets | 357 | 357 |
| Accretion on acquired loans | (866) | (1187) |
| Equity-based compensation expense | 172 | 402 |
| Issuance of common stock to 401(k) plan | 185 | 148 |
| Gain on sale of premises and equipment, net | (392) | (64) |
| (Gain) loss on sale of other real estate owned | (5) | 316 |
| (Decrease) increase in accrued interest receivable | (200) | 328 |
| (Decrease) increase in other operating activities | (1497) | 224 |
| Net cash provided by operating activities | 10438 | 12615 |
| **Investing activities** |  |  |
| Proceeds from maturities, prepayments, and calls of securities available for sale | 4763 | 6489 |
| Payments to acquire securities available for sale | (203170) | (11675) |
| Net (Increase) decrease in loans | (78716) | 45985 |
| (Purchase of) proceeds from FHLB stock, net | (238) | 1012 |
| Payments to the FDIC |  | (3) |
| Proceeds from sale of premises and equipment | 796 | 128 |
| Payments to acquire premises and equipment | (175) | (922) |
| Proceeds from sale of other real estate owned | 189 | 428 |
| Net cash (used) provided by investing activities | (276551) | 41442 |
| **Financing activities** |  |  |
| Increase in noninterest-bearing deposits, net | 17869 | 51781 |
| Increase in interest-bearing deposits, net | 35684 | 75072 |
| Proceeds from securities sold under agreements to repurchase, net | 952 | 555 |
| Proceeds from stock options exercised | 103 | 132 |
| Payments for repurchase of common stock | (4087) | (4985) |
| Payments of common dividends | (4541) | (4428) |
| Net cash provided by financing activities | 45980 | 118127 |
| Net (decrease) increase in cash and cash equivalents | (220133) | 172184 |
| Cash and cash equivalents at beginning of period | 677439 | 456561 |
| Cash and cash equivalents at end of period | $457306 | $628745 |
| **Supplemental disclosure -- cash flow information** |  |  |
| Cash paid for interest | $889 | $1072 |
| Cash paid for income taxes |  | 4744 |
| **Supplemental transactions -- noncash items** |  |  |
| Transfer of loans to other real estate owned | 17 | 460 |
| Loans originated to finance other real estate owned |  | 59 |
| Increase in accumulated other comprehensive loss, net of taxes | (4966) | (732) |

---

*See Notes to Condensed Consolidated Financial Statements.*

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**Note 1. Basis of Presentation**

***General***

First Community Bankshares, Inc. (the "Company"), is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company's principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the "Bank"), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. ("FCWM"). Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

***Principles of Consolidation***

The Company's accounting and reporting policies conform with U.S. generally accepted accounting principles ("GAAP") and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management's opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K"), as filed with the Securities and Exchange Commission (the "SEC") on March 3, 2022. The condensed consolidated balance sheet as of December 31, 2021, has been derived from the audited consolidated financial statements.

***Reclassifications***

Certain amounts reported in prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on the Company's results of operations, financial position, or net cash flow.

***Use of Estimates***

Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the allowance for loan losses, goodwill and other intangible assets, and income taxes. A discussion of the Company's application of critical accounting estimates is included in "Critical Accounting Estimates" in Item 2 of this report.

***Significant Accounting Policies***

 ****

The Company's significant accounting policies are included in Note 1, "Basis of Presentation and Significant Accounting Policies," of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company's 2021 Form 10-K.

***Allowance for Credit Losses (***"***ACL***"***)***

On January 1, 2021, the Company adopted ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU applies to all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities, and unfunded commitments. The Company applied the ASU's provisions using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. The cumulative-effect adjustment was a decrease to retained earnings net of tax of $5.87 million. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

**ACL – Investment Securities**

The Company no longer evaluates securities for other-than-temporary impairment ("OTTI"), as ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter, the Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security's fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.

The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities. Nor does the Company record an allowance for credit losses on accrued interest receivable. As of March 31, 2022 the accrued interest receivable for investment securities available for sale was $776 thousand.

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The Company's estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. The Company does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Nonpayment of the amortized cost basis is not expected to be zero solely on the basis of the current value of collateral securing the security but, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate change since purchase, volatility of the security's fair value and historical loss information for financial assets securitized with similar collateral. The Company performed an analysis that determined that the following securities have a zero expected credit loss: U.S. Treasury Securities, Agency-Backed Securities including Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), Federal Home Loan Bank ("FHLB"), Federal Farm Credit Banks ("FFCB") and Small Business Administration ("SBA"). All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or one of its agencies. These securities are included in Government-Sponsored Entities Debt and Mortgage-Backed Securities line items in the Investment Securities footnote. Municipal securities and all other securities that do not have a zero expected credit loss will be evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value.

**ACL – Loans**

The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments. The Company established the incremental increase in the ACL at the adoption of ASU 2016-13, through retained earnings and subsequent adjustments are made through a provision for credit losses charged to earnings. Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.

A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company's estimate of its ACL involves a high degree of judgement and reflects management's best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management's current estimate of expected credit losses. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.

The Company collectively evaluates loans that share similar risk characteristics. In general, loans are segmented by loan purpose. The Company collectively evaluates loans within the following consumer and commercial segments: Loans secured by 1-4 Family Properties, Home Equity Lines of Credit ("HELOC"), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).

For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses.

In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilizes call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. Management reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered are further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information is evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporates at least one macroeconomic driver either using a statistical regression modeling methodology.

Management considers forward-looking information in estimated expected credit losses. The Company subscribes to a third-party service which provides summary detail of dozens of economic forecasts. Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one-year reasonable and supportable forecast period. Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management. Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.

Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending polices and procedures, 2) changes in economic conditions, 3) changes in portfolio nature and volume, 4) changes in management, 5) changes in past due loans, 6) changes in the quality of the Company's credit review system, 7) changes in the value of underlying collateral, 8) the effect of concentrations of credit, and 9) the effect of other external factors.

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

Management measures expected credit losses over the contractual term of the loans. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a TDR with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. The effects of a TDR are recorded when an individual asset is specifically identified as a reasonably-expected TDR. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower's application for a modification (i.e. the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions. The Company uses a discounted cash flow methodology to calculate the effect of the concession provided to the borrower in TDR within the ACL.

Purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company's assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition date, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the fair value and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company's acquired purchased credit impaired loans were treated as PCD loans.

The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of March 31, 2022 the accrued interest receivable for loans was $7.32 million

The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. As of March 31, 2022 the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $775 thousand.

***Risks and Uncertainties***

<u>COVID-19 Virus Developments</u>

During the last two years, government reaction to the novel coronavirus ("COVID-19") pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services. As COVID-19 events unfolded, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions.

It is impossible to predict the full extent to which COVID-19, the resulting measures to prevent its spread, and the effect of government spending 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 pandemic.

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***Recent Accounting Standards***

 

*Standards Adopted in 2021*

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU requires earlier recording of credit losses on loans and other financial assets held by financial institutions and other organizations. This ASU also requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It further requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. In addition, the ASU amends the accounting for credit losses in investments in debt securities and purchased financial assets with credit deterioration. The Company adopted the new standard as of January 1, 2021. The standard was applied using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. Under this method, comparative periods will not be required to be restated for financial statements related to Topic 326. Comparative prior period disclosures will be presented using the guidance for the allowance for loan losses. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and the reasons for the change, which is solely a result of the adoption of the required standard. This standard did not have a material impact on our investment securities portfolio at implementation. Related to the implementation of the standard, the Company recorded an additional ACL for loans of $13.11 million, deferred tax assets of $1.81 million, and additional reserve for unfunded commitments of $509 thousand and an adjustment to retained earnings, net of tax, of $5.87 million. See the table below for the impact of ASU 2016-13 on the Company's consolidated balance sheet.

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| | | | |
|:---|:---|:---|:---|
|  | **January 1, 2021** | **January 1, 2021** | **January 1, 2021** |
|  | **As Reported** | **Pre-** | **Impact of** |
|  | **Under** | **ASU 2016-13** | **ASU 2016-13** |
|  | **ASU 2016-13** | **Adoption** | **Adoption** |
| Assets: |  |  |  |
| Non-covered loans held for investment |  |  |  |
| Allowance for credit losses on debt securities |  |  |  |
| Investment securities - available for sale | $83358 | $83358 | $- A |
| Loans |  |  |  |
| Non-acquired loans and acquired performing loans | 2146972 | 2146972 |  |
| Acquired purchased deteriorated loans | 45535 | 39660 | 5875 B |
| Allowance for credit losses on loans | (39289) | (26182) | (13107) C |
| Deferred tax asset | 19306 | 17493 | 1813 D |
| Accrued interest receivable - loans | 9109 | 9052 | 57 B |
| Liabilities |  |  |  |
| Allowance for credit losses on off-balance sheet |  |  |  |
| credit exposures | 575 | 66 | 509 E |
| Equity: |  |  |  |
| Retained earnings | 231714 | 237585 | (5871) F |

---

&nbsp;&nbsp;&nbsp;&nbsp;A. Per our analysis no ACL was necessary for investment securities available-for-sale.

&nbsp;&nbsp;&nbsp;&nbsp;B. Accrued interest receivable from acquired credit impaired loans of $57 thousand was reclassed to other assets and was offset by the reclass of the grossed up credit discount on acquired credit impaired loans of $57 thousand that was moved to the ACL for the purchased credit deteriorated loans.

&nbsp;&nbsp;&nbsp;&nbsp;C. Calculated adjustment to the ACL related to the adoption of ASU 2016-13. Includes additional reserve related to purchased deteriorated loans of $5.88 million.

&nbsp;&nbsp;&nbsp;&nbsp;D. Effect of deferred tax assets related to the adjustment to the ACL form the adoption of ASU 2016-13 using a 23.37% tax rate.

&nbsp;&nbsp;&nbsp;&nbsp;E. Adjustment to the reserve for unfunded commitments related to the adoption of ASU 2016-13.

&nbsp;&nbsp;&nbsp;&nbsp;F. Net adjustment to retained earnings related to the adoption of ASU 2016-13.

 

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes". This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The Company adopted this ASU as of January 1, 2021, and it did not have a material effect on the Company's financial statements.

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

*Standards Not Yet Adopted*

In March 2022, the Financial Accounting Standards Board issued ASC Subtopic 470-50, Debt Modification and Extinguishments. This new accounting topic provides accounting guidance for troubled debt restructuring (TDR) and write-offs, effective January 1, 2023, with early adoption permitted. The amendments eliminate TDR accounting guidance for issuers that have adopted ASU 2016-13, create a single loan modification accounting model, and clarify disclosure requirments for loan modifications and write-offs. We are currently reviewing the impact of the updated guidance on our Consolidated Financial Statements, but do no anticipate a material impact. At this time, the Company has no plans to early adopt this guidance.

 

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**Note 2. Debt Securities**

There was no allowance for credit losses for investments as of March 31, 2022; therefore, it is not presented in the table below. The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** |  |
|  | **Amortized** |  | **Unrealized** |  | **Unrealized** | **Fair** |  |
|  | **Cost** |  | **Gains** |  | **Losses** | **Value** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| U.S. Agency securities | $447 |  | $- |  | $(3) | $444 |  |
| U.S. Treasury Notes | 116396 |  | 16 |  | (982) | 115430 |  |
| Municipal securities | 25778 |  | 84 |  | (3) | 25859 |  |
| Corporate notes | 38902 |  |  |  | (596) | 38306 |  |
| Mortgage-backed Agency securities | 93057 |  | 72 |  | (4465) | 88664 |  |
| Total | $274580 |  | $172 |  | $(6049) | $268703 |  |

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
|  | **Amortized** |  | **Unrealized** |  | **Unrealized** | **Fair** |  |
|  | **Cost** |  | **Gains** |  | **Losses** | **Value** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| U.S. Agency securities | $469 |  | $— |  | $(3) | $466 |  |
| Municipal securities | 28596 |  | 198 |  |  | 28794 |  |
| Corporate notes | 9935 |  |  |  | (16) | 9919 |  |
| Mortgage-backed Agency securities | 37273 |  | 513 |  | (673) | 37113 |  |
| Total | $76273 |  | $711 |  | $(692) | $76292 |  |

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

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| | | |
|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** |
|  | **Amortized** |  |
| *(Amounts in thousands)* | **Cost** | **Fair Value** |
| **Available-for-sale debt securities** |  |  |
| Due within one year | $17872 | $17787 |
| Due after one year but within five years | 153894 | 152562 |
| Due after five years but within ten years | 9757 | 9690 |
|  | 181523 | 180039 |
| Mortgage-backed Agency securities | 93057 | 88664 |
| Total debt securities available for sale | $274580 | $268703 |

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

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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** |
|  | **Less than 12 Months** | **Less than 12 Months** | **Less than 12 Months** | **12 Months or Longer** | **12 Months or Longer** | **12 Months or Longer** | **Total** | **Total** | **Total** |
|  | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** |
|  | **Value** |  | **Losses** | **Value** |  | **Losses** | **Value** |  | **Losses** |
| *(Amounts in thousands)* |  | |  |  | |  |  | |  |
| U.S. Agency securities | $- |  | $- | $437 |  | $(3) | $437 |  | $(3) |
| U.S. Treasury Notes | 105567 |  | (982) |  |  |  | 105567 |  | (982) |
| Municipal securities | 633 |  | (3) |  |  |  | 633 |  | (3) |
| Corporate notes | 38306 |  | (596) |  |  |  | 38306 |  | (596) |
| Mortgage-backed Agency securities | 70408 |  | (2917) | 13243 |  | (1548) | 83651 |  | (4465) |
| Total | $214914 |  | $(4498) | $13680 |  | $(1551) | $228594 |  | $(6049) |

---

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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Less than 12 Months** | **Less than 12 Months** | **Less than 12 Months** | **12 Months or Longer** | **12 Months or Longer** | **12 Months or Longer** | **Total** | **Total** | **Total** |
|  | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** |
|  | **Value** |  | **Losses** | **Value** |  | **Losses** | **Value** |  | **Losses** |
| *(Amounts in thousands)* |  | |  |  | |  |  | |  |
| U.S. Agency securities | $— |  | $— | $459 |  | $(3) | $459 |  | $(3) |
| Corporate notes | 9919 |  | (16) |  |  |  | 9919 |  | (16) |
| Mortgage-backed Agency securities | 14092 |  | (253) | 8384 |  | (420) | 22476 |  | (673) |
| Total | $24011 |  | $(269) | $8843 |  | $(423) | $32854 |  | $(692) |

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There were 74 individual debt securities in an unrealized loss position as of March 31, 2022, and the combined depreciation in value represented 2.25% of the debt securities portfolio. There were 23 individual debt securities in an unrealized loss position as of December 31, 2021, and their combined depreciation in value represented 0.91% of the debt securities portfolio.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the investments. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of March 31, 2022, continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.

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

There were no gross realized gains and losses from the sale of available-for-sale debt securities for March 31, 2022 or 2021.

The carrying amount of securities pledged for various purposes totaled $21.37 million as of March 31, 2022, and $22.15 million as of December 31, 2021.

**Note 3. Loans**

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $1.68 million as of March 31, 2022, and $1.65 million as of December 31, 2021. Deferred loan fees, net of loan costs, totaled $4.13 million as of March 31, 2022, and $5.06 million as of December 31, 2021. For information about off-balance sheet financing, see Note 14, "Litigation, Commitments, and Contingencies," to the Condensed Consolidated Financial Statements of this report.

In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis to include net deferred loan fees of $4.13 million and $5.06 million and unamortized discount related to loans acquired of $4.99 million and $5.41 million for March 31, 2022, and December 31, 2021, respectively. Accrued interest receivable (AIR) of $7.32 million as of March 31, 2022, and $7.54 million as of December 31, 2021, is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Amount** | **Percent** | **Amount** | **Percent** |
| Loans held for investment |  |  |  |  |
| Commercial loans |  |  |  |  |
| Construction, development, and other land | $77460 | 3.45% | $65806 | 3.04% |
| Commercial and industrial | 152885 | 6.81% | 133630 | 6.17% |
| Multi-family residential | 115269 | 5.14% | 100402 | 4.64% |
| Single family non-owner occupied | 198282 | 8.83% | 198778 | 9.18% |
| Non-farm, non-residential | 728142 | 32.44% | 707506 | 32.67% |
| Agricultural | 9496 | 0.42% | 9341 | 0.43% |
| Farmland | 14313 | 0.64% | 15013 | 0.69% |
| Total commercial loans | 1295847 | 57.73% | 1230476 | 56.82% |
| Consumer real estate loans |  |  |  |  |
| Home equity lines | 79461 | 3.54% | 79857 | 3.69% |
| Single family owner occupied | 705070 | 31.43% | 703864 | 32.50% |
| Owner occupied construction | 19858 | 0.88% | 16910 | 0.78% |
| Total consumer real estate loans | 804389 | 35.85% | 800631 | 36.97% |
| Consumer and other loans |  |  |  |  |
| Consumer loans | 139280 | 6.21% | 129794 | 5.99% |
| Other | 4780 | 0.21% | 4668 | 0.22% |
| Total consumer and other loans | 144060 | 6.42% | 134462 | 6.21% |
| Total loans held for investment, net of unearned income | $2244296 | 100.00% | $2165569 | 100.00% |

---

The Company began participating as a Small Business Administration Paycheck Protection Program lender during the second quarter of 2020. At March 31, 2022, the PPP loans had a current balance of $13.88 million, compared to $20.64 million at December 31, 2021, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, totaled $398 thousand at March 31, 2022, and $733 thousand at December 31, 2021. During the first quarter of 2022, the Company recorded amortization of net deferred loan origination fees of $335 thousand on PPP loans and $922 thousand in amortization for the same period of 2021. 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.

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**Note 4. Credit Quality** 

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

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

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

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

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

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

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** |
|  |  | **Special** |  |  |  |  |
| *(Amounts in thousands)* | **Pass** | **Mention** | **Substandard** | **Doubtful** | **Loss** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $76327 | $435 | $698 | $- | $- | $77460 |
| Commercial and industrial | 148454 | 820 | 3611 |  |  | 152885 |
| Multi-family residential | 113387 | 974 | 908 |  |  | 115269 |
| Single family non-owner occupied | 185540 | 3275 | 9467 |  |  | 198282 |
| Non-farm, non-residential | 693328 | 20556 | 14258 |  |  | 728142 |
| Agricultural | 9245 | 57 | 194 |  |  | 9496 |
| Farmland | 11344 | 617 | 2352 |  |  | 14313 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 75771 | 427 | 3263 |  |  | 79461 |
| Single family owner occupied | 673181 | 2137 | 29752 |  |  | 705070 |
| Owner occupied construction | 19554 |  | 304 |  |  | 19858 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 136481 | 8 | 2791 |  |  | 139280 |
| Other | 4780 |  |  |  |  | 4780 |
| Total loans | $2147392 | $29306 | $67598 | $- | $- | $2244296 |

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  |  | **Special** |  |  |  |  |
| *(Amounts in thousands)* | **Pass** | **Mention** | **Substandard** | **Doubtful** | **Loss** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $64498 | $451 | $857 | $- | $- | $65806 |
| Commercial and industrial | 128770 | 1005 | 3855 |  |  | 133630 |
| Multi-family residential | 98457 | 1090 | 855 |  |  | 100402 |
| Single family non-owner occupied | 186184 | 3607 | 8977 | 10 |  | 198778 |
| Non-farm, non-residential | 665559 | 25624 | 16323 |  |  | 707506 |
| Agricultural | 8758 | 70 | 513 |  |  | 9341 |
| Farmland | 11939 | 633 | 2441 |  |  | 15013 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 76259 | 426 | 3172 |  |  | 79857 |
| Single family owner occupied | 671459 | 2420 | 29985 |  |  | 703864 |
| Owner occupied construction | 16629 |  | 281 |  |  | 16910 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 127514 | 16 | 2264 |  |  | 129794 |
| Other | 4668 |  |  |  |  | 4668 |
| Total loans | $2060694 | $35342 | $69523 | $10 | $- | $2165569 |

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The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at March 31, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Construction, development |  |  |  |  |  |  |  |  |
| and other land |  |  |  |  |  |  |  |  |
| Pass | $4850 | $47484 | $10798 | $2889 | $3324 | $6628 | $354 | $76327 |
| Special Mention |  |  |  |  | 119 | 280 | 36 | 435 |
| Substandard |  |  | 260 | 127 | 12 | 299 |  | 698 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total construction, development, and other land | $4850 | $47484 | $11058 | $3016 | $3455 | $7207 | $390 | $77460 |
| Commercial and industrial |  |  |  |  |  |  |  |  |
| Pass | $34963 | $31648 | $16565 | $11673 | $11980 | $11201 | $16544 | $134574 |
| Special Mention |  | 28 | 41 | 563 | 93 |  | 95 | 820 |
| Substandard | 27 | 241 | 279 | 708 | 358 | 1480 | 518 | 3611 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total commercial and industrial | $34990 | $31917 | $16885 | $12944 | $12431 | $12681 | $17157 | $139005 |
| Paycheck Protection Loans |  |  |  |  |  |  |  |  |
| Pass | $- | $9785 | $4095 | $- | $- | $- | $- | $13880 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  |  |  |  |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total Paycheck Protection Loans | $- | $9785 | $4095 | $- | $- | $- | $- | $13880 |
| Multi-family residential |  |  |  |  |  |  |  |  |
| Pass | $21085 | $11018 | $24038 | $4358 | $1877 | $50076 | $935 | $113387 |
| Special Mention |  |  |  |  |  | 974 |  | 974 |
| Substandard |  |  |  |  |  | 908 |  | 908 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total multi-family residential | $21085 | $11018 | $24038 | $4358 | $1877 | $51958 | $935 | $115269 |
| Non-farm, non-residential |  |  |  |  |  |  |  |  |
| Pass | $64170 | $145170 | $137489 | $60654 | $44505 | $227323 | $14017 | $693328 |
| Special Mention |  | 469 | 3307 | 804 | 2544 | 13282 | 150 | 20556 |
| Substandard |  | 1155 | 701 | 2478 | 758 | 8940 | 226 | 14258 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total non-farm, non-residential | $64170 | $146794 | $141497 | $63936 | $47807 | $249545 | $14393 | $728142 |
| Agricultural |  |  |  |  |  |  |  |  |
| Pass | $1304 | $4314 | $1379 | $768 | $462 | $584 | $434 | $9245 |
| Special Mention |  | 40 | 17 |  |  |  |  | 57 |
| Substandard |  | 42 | 9 | 93 | 36 | 14 |  | 194 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total agricultural | $1304 | $4396 | $1405 | $861 | $498 | $598 | $434 | $9496 |
| Farmland |  |  |  |  |  |  |  |  |
| Pass | $47 | $734 | $1025 | $77 | $1044 | $6884 | $1533 | $11344 |
| Special Mention |  |  |  |  | 235 | 382 |  | 617 |
| Substandard |  |  | 13 | 563 | 246 | 1530 |  | 2352 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total farmland | $47 | $734 | $1038 | $640 | $1525 | $8796 | $1533 | $14313 |

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at March 31, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Home equity lines |  |  |  |  |  |  |  |  |
| Pass | $32 | $103 | $- | $- | $25 | $2120 | $73491 | $75771 |
| Special Mention |  |  |  |  |  |  | 427 | 427 |
| Substandard |  |  | 57 | 29 | 273 | 1453 | 1451 | 3263 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total home equity lines | $32 | $103 | $57 | $29 | $298 | $3573 | $75369 | $79461 |
| Single family Mortgage |  |  |  |  |  |  |  |  |
| Pass | $41619 | $234604 | $217260 | $58089 | $43161 | $262800 | $1188 | $858721 |
| Special Mention |  | 393 | 502 | 819 | 268 | 3430 |  | 5412 |
| Substandard | 388 | 1167 | 791 | 1542 | 2214 | 33117 |  | 39219 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total single family owner and non-owner occupied | $42007 | $236164 | $218553 | $60450 | $45643 | $299347 | $1188 | $903352 |
| Owner occupied construction |  |  |  |  |  |  |  |  |
| Pass | $1391 | $13653 | $3569 | $36 | $18 | $887 | $- | $19554 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  | 163 | 139 |  | 2 |  | 304 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total owner occupied construction | $1391 | $13653 | $3732 | $175 | $18 | $889 | $- | $19858 |
| Consumer loans |  |  |  |  |  |  |  |  |
| Pass | $26800 | $58086 | $26085 | $13872 | $4573 | $9619 | $2226 | $141261 |
| Special Mention |  |  |  | 7 |  |  | 1 | 8 |
| Substandard | 9 | 848 | 773 | 779 | 94 | 210 | 78 | 2791 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total consumer loans | $26809 | $58934 | $26858 | $14658 | $4667 | $9829 | $2305 | $144060 |

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at March 31, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Total Loans |  |  |  |  |  |  |  |  |
| Pass | $196261 | $556599 | $442303 | $152416 | $110969 | $578122 | $110722 | $2147392 |
| Special Mention |  | 930 | 3867 | 2193 | 3259 | 18348 | 709 | 29306 |
| Substandard | 424 | 3453 | 3046 | 6458 | 3991 | 47953 | 2273 | 67598 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total loans | $196685 | $560982 | $449216 | $161067 | $118219 | $644423 | $113704 | $2244296 |

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Construction, development |  |  |  |  |  |  |  |  |
| and other land |  |  |  |  |  |  |  |  |
| Pass | $40207 | $10127 | $3081 | $3704 | $1308 | $5717 | $354 | $64498 |
| Special Mention |  | 266 |  | 128 |  | 21 | 36 | 451 |
| Substandard |  |  | 128 | 11 | 291 | 427 |  | 857 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total construction, development, and other land | $40207 | $10393 | $3209 | $3843 | $1599 | $6165 | $390 | $65806 |
| Commercial and industrial |  |  |  |  |  |  |  |  |
| Pass | $34539 | $18887 | $13679 | $13772 | $4817 | $5890 | $16544 | $108128 |
| Special Mention | 32 | 60 | 597 | 192 | 28 |  | 96 | 1005 |
| Substandard | 184 | 355 | 706 | 384 | 842 | 866 | 518 | 3855 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total commercial and industrial | $34755 | $19302 | $14982 | $14348 | $5687 | $6756 | $17158 | $112988 |
| Paycheck Protection Loans |  |  |  |  |  |  |  |  |
| Pass | $16482 | $4160 | $- | $- | $- | $- | $- | $20642 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  |  |  |  |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total Paycheck Protection Loans | $16482 | $4160 | $- | $- | $- | $- | $- | $20642 |
| Multi-family residential |  |  |  |  |  |  |  |  |
| Pass | $11307 | $24299 | $4644 | $1897 | $8413 | $46962 | $935 | $98457 |
| Special Mention |  |  |  |  |  | 1090 |  | 1090 |
| Substandard |  |  |  |  |  | 855 |  | 855 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total multi-family residential | $11307 | $24299 | $4644 | $1897 | $8413 | $48907 | $935 | $100402 |
| Non-farm, non-residential |  |  |  |  |  |  |  |  |
| Pass | $147978 | $146381 | $62651 | $50943 | $43776 | $199812 | $14018 | $665559 |
| Special Mention | 397 | 3334 | 823 | 2595 | 9190 | 9135 | 150 | 25624 |
| Substandard | 1161 | 711 | 2508 | 2531 | 3232 | 5953 | 227 | 16323 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total non-farm, non-residential | $149536 | $150426 | $65982 | $56069 | $56198 | $214900 | $14395 | $707506 |
| Agricultural |  |  |  |  |  |  |  |  |
| Pass | $4564 | $1548 | $998 | $534 | $346 | $335 | $433 | $8758 |
| Special Mention | 43 | 27 |  |  |  |  |  | 70 |
| Substandard | 44 | 11 | 282 | 39 | 17 | 120 |  | 513 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total agricultural | $4651 | $1586 | $1280 | $573 | $363 | $455 | $433 | $9341 |
| Farmland |  |  |  |  |  |  |  |  |
| Pass | $428 | $1047 | $82 | $1125 | $887 | $6835 | $1535 | $11939 |
| Special Mention | 189 |  |  | 240 | 5 | 199 |  | 633 |
| Substandard |  | 14 | 519 | 249 | 264 | 1395 |  | 2441 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total farmland | $617 | $1061 | $601 | $1614 | $1156 | $8429 | $1535 | $15013 |

---

------

[**Table of Contents**](#toc)

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Home equity lines |  |  |  |  |  |  |  |  |
| Pass | $115 | $59 | $- | $25 | $2 | $2168 | $73890 | $76259 |
| Special Mention |  |  |  |  |  |  | 426 | 426 |
| Substandard |  |  | 28 | 249 | 128 | 1316 | 1451 | 3172 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total home equity lines | $115 | $59 | $28 | $274 | $130 | $3484 | $75767 | $79857 |
| Single family Mortgage |  |  |  |  |  |  |  |  |
| Pass | $239917 | $225294 | $61925 | $46716 | $41757 | $240845 | $1189 | $857643 |
| Special Mention | 399 | 510 | 937 | 269 | 137 | 3775 |  | 6027 |
| Substandard | 1213 | 799 | 1475 | 1668 | 1878 | 31929 |  | 38962 |
| Doubtful |  |  |  |  |  | 10 |  | 10 |
| Loss |  |  |  |  |  |  |  |  |
| Total single family owner and non-owner occupied | $241529 | $226603 | $64337 | $48653 | $43772 | $276559 | $1189 | $902642 |
| Owner occupied construction |  |  |  |  |  |  |  |  |
| Pass | $9689 | $4729 | $178 | $22 | $428 | $1583 | $- | $16629 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  | 281 |  | 281 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total owner occupied construction | $9689 | $4729 | $178 | $22 | $428 | $1864 | $- | $16910 |
| Consumer loans |  |  |  |  |  |  |  |  |
| Pass | $65018 | $31065 | $16548 | $4980 | $2306 | $10040 | $2225 | $132182 |
| Special Mention |  |  | 16 |  |  |  |  | 16 |
| Substandard | 328 | 663 | 824 | 107 | 78 | 186 | 78 | 2264 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total consumer loans | $65346 | $31728 | $17388 | $5087 | $2384 | $10226 | $2303 | $134462 |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Total Loans |  |  |  |  |  |  |  |  |
| Pass | $570244 | $467596 | $163786 | $123718 | $104040 | $520187 | $111123 | $2060694 |
| Special Mention | 1060 | 4197 | 2373 | 3424 | 9360 | 14220 | 708 | 35342 |
| Substandard | 2930 | 2553 | 6470 | 5238 | 6730 | 43328 | 2274 | 69523 |
| Doubtful |  |  |  |  |  | 10 |  | 10 |
| Loss |  |  |  |  |  |  |  |  |
| Total loans | $574234 | $474346 | $172629 | $132380 | $120130 | $577745 | $114105 | $2165569 |

---

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[**Table of Contents**](#toc)

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **No Allowance** | **With an Allowance** | **Total** | **No Allowance** | **With an Allowance** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Construction, development, and other land | $379 | $- | $379 | $409 | $- | $409 |
| &nbsp;&nbsp;&nbsp; Commercial and industrial | 1611 |  | 1611 | 1734 |  | 1734 |
| &nbsp;&nbsp;&nbsp; Multi-family residential | 277 |  | 277 | 208 |  | 208 |
| &nbsp;&nbsp;&nbsp; Single family non-owner occupied | 2583 |  | 2583 | 2304 |  | 2304 |
| &nbsp;&nbsp;&nbsp; Non-farm, non-residential | 3379 |  | 3379 | 3439 | 1100 | 4539 |
| &nbsp;&nbsp;&nbsp; Agricultural | 33 |  | 33 | 136 |  | 136 |
| &nbsp;&nbsp;&nbsp; Farmland | 212 |  | 212 | 222 |  | 222 |
| Consumer real estate loans |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Home equity lines | 790 |  | 790 | 767 |  | 767 |
| &nbsp;&nbsp;&nbsp; Single family owner occupied | 8969 |  | 8969 | 8957 |  | 8957 |
| &nbsp;&nbsp;&nbsp; Owner occupied construction | 139 |  | 139 |  |  |  |
| Consumer and other loans |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Consumer loans | 2115 |  | 2115 | 1492 |  | 1492 |
| Total nonaccrual loans | $20487 | $- | $20487 | $19668 | $1100 | $20768 |

---

During the first quarter of 2022, $4 thousand in nonaccrual loan interest was recognized compared to $9 thousand for the same period of 2021.

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

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** |
|  |  |  |  |  |  |  | **Amortized Cost of** |
|  | **30 - 59 Days** | **60 - 89 Days** | **90+ Days** | **Total** | **Current** | **Total** | **> 90 Days Accruing** |
| *(Amounts in thousands)* | **Past Due** | **Past Due** | **Past Due** | **Past Due** | **Loans** | **Loans** | **No Allowance** |
| Commercial loans |  |  |  |  |  |  |  |
| Construction, development, and other land | $277 | $- | $119 | $396 | $77064 | $77460 | $- |
| Commercial and industrial | 264 | 5 | 1377 | 1646 | 151239 | 152885 |  |
| Multi-family residential |  |  |  |  | 115269 | 115269 |  |
| Single family non-owner occupied | 838 | 199 | 468 | 1505 | 196777 | 198282 |  |
| Non-farm, non-residential | 665 |  | 2003 | 2668 | 725474 | 728142 |  |
| Agricultural | 28 | 12 | 15 | 55 | 9441 | 9496 |  |
| Farmland |  |  | 212 | 212 | 14101 | 14313 |  |
| Consumer real estate loans |  |  |  |  |  |  |  |
| Home equity lines | 659 | 83 | 467 | 1209 | 78252 | 79461 |  |
| Single family owner occupied | 5782 | 2809 | 3778 | 12369 | 692701 | 705070 |  |
| Owner occupied construction |  |  | 139 | 139 | 19719 | 19858 |  |
| Consumer and other loans |  |  |  |  |  |  |  |
| Consumer loans | 2444 | 1214 | 1137 | 4795 | 134485 | 139280 |  |
| Other |  | 2 |  | 2 | 4778 | 4780 |  |
| Total loans | $10957 | $4324 | $9715 | $24996 | $2219300 | $2244296 | $- |

---

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  |  |  |  |  |  |  | **Amortized Cost of** |
|  | **30 - 59 Days** | **60 - 89 Days** | **90+ Days** | **Total** | **Current** | **Total** | **> 90 Days Accruing** |
| *(Amounts in thousands)* | **Past Due** | **Past Due** | **Past Due** | **Past Due** | **Loans** | **Loans** | **No Allowance** |
| Commercial loans |  |  |  |  |  |  |  |
| Construction, development, and other land | $52 | $- | $120 | $172 | $65634 | $65806 | $- |
| Commercial and industrial | 325 | 35 | 1394 | 1754 | 131876 | 133630 |  |
| Multi-family residential | 97 |  |  | 97 | 100305 | 100402 |  |
| Single family non-owner occupied | 1210 | 583 | 795 | 2588 | 196190 | 198778 |  |
| Non-farm, non-residential | 1002 | 441 | 2333 | 3776 | 703730 | 707506 |  |
| Agricultural | 73 | 7 | 101 | 181 | 9160 | 9341 |  |
| Farmland | 52 |  | 222 | 274 | 14739 | 15013 |  |
| Consumer real estate loans |  |  |  |  |  |  |  |
| Home equity lines | 275 | 388 | 333 | 996 | 78861 | 79857 |  |
| Single family owner occupied | 4740 | 2584 | 3880 | 11204 | 692660 | 703864 |  |
| Owner occupied construction | 139 |  |  | 139 | 16771 | 16910 |  |
| Consumer and other loans |  |  |  |  |  |  |  |
| Consumer loans | 3469 | 1182 | 1049 | 5700 | 124094 | 129794 |  |
| Other |  |  |  |  | 4668 | 4668 |  |
| Total loans | $11434 | $5220 | $10227 | $26881 | $2138688 | $2165569 | $- |

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[**Table of Contents**](#toc)

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Balance** | **Collateral Coverage** | **%** | **Balance** | **Collateral Coverage** | **%** |
| Commercial Real Estate |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Hotel | $- | $- |  | $- | $- |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Office |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other | 1116 | 1322 | 118.46% | 2216 | 2312 | 104.33% |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Retail |  |  |  |  |  |  |
| Multi-Family |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Industrial |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Office |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other |  |  |  |  |  |  |
| Commercial and industrial |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Industrial |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other |  |  |  |  |  |  |
| Home equity loans |  |  |  |  |  |  |
| Consumer owner occupied |  |  |  |  |  |  |
| Consumer |  |  |  |  |  |  |
| Total collateral dependent loans | $1116 | $1322 | 118.46% | $2216 | $2312 | 104.33% |

---

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

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

From March, 2020, through March 31, 2022, the Company modified a total of 4,168 loans with principal balances totaling $478.83 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. The Company's policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company will consider upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of March 31, 2022, total COVID-19 loan deferrals stood at $3.01 million.

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[**Table of Contents**](#toc)

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Nonaccrual(1)** | **Accruing** | **Total** | **Nonaccrual(1)** | **Accruing** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Commercial and industrial | $391 | $467 | $858 | $396 | $470 | $866 |
| Single family non-owner occupied | 414 | 1317 | 1731 | 857 | 1100 | 1957 |
| Non-farm, non-residential |  | 1991 | 1991 |  | 2021 | 2021 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines |  | 65 | 65 |  | 67 | 67 |
| Single family owner occupied | 1428 | 4915 | 6343 | 1266 | 4755 | 6021 |
| Owner occupied construction |  |  |  |  | 212 | 212 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans |  | 27 | 27 |  | 27 | 27 |
| Total TDRs | $2233 | $8782 | $11015 | $2519 | $8652 | $11171 |
| Allowance for credit losses related to TDRs |  |  | $- |  |  | $- |

---

------

&nbsp;&nbsp;&nbsp;&nbsp;(1) Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** |  |
|  | **2022** |  | **2021** |  |
| *(Amounts in thousands)* |  | |  | |
| Interest income recognized | $105 |  | $104 |  |

---

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
| *(Amounts in thousands)* | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** |
| Below market interest rate |  |  |  |  |  |  |
| Single family non-owner occupied |  |  |  |  |  |  |
| Single family owner occupied | 1 | $31 | $32 |  |  |  |
| Payment deferral |  |  |  |  |  |  |
| Construction, development, and other land |  |  |  |  |  |  |
| Commercial and industrial |  |  |  |  |  |  |
| Total principal deferral |  |  |  | 1 | 1390 | 1390 |

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------

&nbsp;&nbsp;&nbsp;&nbsp;(1) Represents the loan balance immediately following modification

There was one payment default on loans modified as TDRs restructured within the previous 12 months for $41 thousand as of March 31, 2022, and none as of March 31, 2021

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

---

| | | | |
|:---|:---|:---|:---|
|  | **March 31, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| OREO | $848 |  | $1015 |
| OREO secured by residential real estate | $290 |  | $337 |
| Residential real estate loans in the foreclosure process<sup>(1)</sup> | $2475 |  | $2210 |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction

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[**Table of Contents**](#toc)

**Note 5. Allowance for Credit Losses** 

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended March 31, 2022** | **Three Months Ended March 31, 2022** | **Three Months Ended March 31, 2022** | **Three Months Ended March 31, 2022** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $14775 | $9972 | $3111 | $27858 |
| Provision for (recovery of) loan losses charged to operations | 1108 | (241) | 1094 | 1961 |
| Charge-offs | (257) | (6) | (1039) | (1302) |
| Recoveries | 270 | 39 | 155 | 464 |
| Net charge-offs | 13 | 33 | (884) | (838) |
| Ending balance | $15896 | $9764 | $3321 | $28981 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended March 31, 2021** | **Three Months Ended March 31, 2021** | **Three Months Ended March 31, 2021** | **Three Months Ended March 31, 2021** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $14661 | $8951 | $2570 | $26182 |
| Cumulative effect of adoption of ASU 2016-13 | 8360 | 4145 | 602 | 13107 |
| (Recovery of) provision for credit losses charged to operations | (3070) | (1542) | 611 | (4001) |
| Charge-offs | (757) | (10) | (963) | (1730) |
| Recoveries | 392 | 343 | 270 | 1005 |
| Net charge-offs | (365) | 333 | (693) | (725) |
| Ending balance | $19586 | $11887 | $3090 | $34563 |

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[**Table of Contents**](#toc)

**Note 6. Deposits**

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

---

| | | | |
|:---|:---|:---|:---|
|  | **March 31, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Noninterest-bearing demand deposits | $860652 |  | $842783 |
| Interest-bearing deposits: |  |  |  |
| Interest-bearing demand deposits | 680075 |  | 676254 |
| Money market accounts | 319203 |  | 293915 |
| Savings deposits | 583125 |  | 561576 |
| Certificates of deposit | 224025 |  | 237919 |
| Individual retirement accounts | 115864 |  | 116944 |
| Total interest-bearing deposits | 1922292 |  | 1886608 |
| Total deposits | $2782944 |  | $2729391 |

---

**Note 7. Leases**

Operating leases are recorded as a right of use ("ROU") asset and operating lease liability. The ROU asset is recorded in other assets, while the lease liability is recorded in other liabilities on the condensed balance sheet beginning January 1, 2019, when the Company adopted ASU 2016-02, on a prospective basis. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The ROU asset and lease liability have been recognized based on the present value of the lease payments using a discount rate that represented our incremental borrowing rate at the lease commencement date or the date of adoption of ASU 2016-02. The lease expense, which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the condensed statements of income.

The Company's current operating leases relate to one existing bank branch and the remaining two operating leases were acquired in separate bank acquisitions. Neither of the two acquired operating leases are for bank branches. One of the leases terminates in April of 2022; while the other acquired lease will terminate in July of 2029. No ROU assest was recorded in the acquisition transaction for the lease maturing in April 2022, as the ROU asset was deemed impaired at the acquisition date; a lease liability was recorded in the amount of $82 thousand. The Company's ROU asset was $718 thousand as of March 31, 2022 compared to $741 thousand as of December 31, 2021. The operating lease liability as of March 31, 2022 was $739 thousand compared to $770 thousand as of December 31, 2021. The Company's total operating leases have remaining terms of 1 month to 7.25 years;compared with 4 months to 7.5 years as of December 31, 2021. The March 31, 2022 weighted average discount rate of 3.22% did not change from December 31, 2021.

Future minimum lease payments as of the dates indicated are as follows:

---

| | |
|:---|:---|
| **<u>Year</u>** | **March 31, 2022** |
| *(Amounts in thousands)* |  |
| 2023 | $122 |
| 2024 | 119 |
| 2025 | 113 |
| 2026 | 101 |
| 2027 and thereafter | 336 |
| Total lease payments | 791 |
| Less: Interest | (52) |
| Present value of lease liabilities | $739 |

---

---

| | |
|:---|:---|
| **<u>Year</u>** | **December 31, 2021** |
| *(Amounts in thousands)* |  |
| 2022 | $131 |
| 2023 | 119 |
| 2024 | 117 |
| 2025 | 101 |
| 2026 and thereafter | 362 |
| Total lease payments | 830 |
| Less: Interest | (60) |
| Present value of lease liabilities | $770 |

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[**Table of Contents**](#toc)

**Note 8. Borrowings**

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

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **December 31, 2021** | **December 31, 2021** |
|  |  | **Weighted** |  | **Weighted** |
| *(Amounts in thousands)* | **Balance** | **Average Rate** | **Balance** | **Average Rate** |
| Retail repurchase agreements | $2488 | 0.08% | $1536 | 0.07% |

---

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

As of March 31, 2022, the Company had no long-term borrowings.

Unused borrowing capacity with the FHLB totaled $425.09 million, net of FHLB letters of credit of $149.57 million, as of March 31, 2022. As of March 31, 2022, the Company pledged $750.13 million in qualifying loans to secure the FHLB borrowing capacity.

**Note 9. Derivative Instruments and Hedging Activities**

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

 

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan's stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. In March 2020, the Company adopted ASU 2020-04, "Reference Rate Reform" which provided temporary guidance to ease the potential burden in accounting for reference rate reform. With global capital markets moving away from LIBOR, the guidance provided optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships that reference LIBOR. The migration from LIBOR is not expected to have any material effect on the Company's financial statements when and as changes are made to migrate from the reference rate.

Certain of the Company's interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of March 31, 2022. The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period.

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Notional or** | **Fair Value** | **Fair Value** | **Notional or** | **Fair Value** | **Fair Value** |
|  | **Contractual** | **Derivative** | **Derivative** | **Contractual** | **Derivative** | **Derivative** |
| *(Amounts in thousands)* | **Amount** | **Assets** | **Liabilities** | **Amount** | **Assets** | **Liabilities** |
| Derivatives designated as hedges |  |  |  |  |  |  |
| Interest rate swaps | $4287 | $- | $23 | $4388 | $- | $229 |
| Derivatives not designated as hedges |  |  |  |  |  |  |
| Interest rate swaps | $7841 | $- | $156 | $7890 | $- | $608 |
| Total derivatives | $12128 | $- | $179 | $12278 | $- | $837 |

---

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

---

| | | | |
|:---|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** |  |
| *(Amounts in thousands)* | **2022** | **2021** | **Income Statement Location** |
| Derivatives designated as hedges |  |  |  |
| Interest rate swaps | $25 | $28 | Interest and fees on loans |
| Derivatives not designated as hedges |  |  |  |
| Interest rate swaps | 51 | 68 | Interest and fees on loans |
| Total derivative expense | $76 | $96 |  |

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**Note 10. Employee Benefit Plans** 

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

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** |  |  |
|  | **2022** |  | **2021** |  | **Income Statement Location** |
| *(Amounts in thousands)* |  | |  | |  |
| Service cost | $- |  | $88 |  | Salaries and employee benefits |
| Interest cost | 83 |  | 79 |  | Other expense |
| Amortization of prior service cost |  |  | 31 |  | Other expense |
| Amortization of losses | 34 |  | 66 |  | Other expense |
| Net periodic cost | $117 |  | $264 |  |  |

---

**Note 11. Earnings per Share**

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  |
|  | **March 31,** | **March 31,** | **March 31,** |  |
|  | **2022** |  | **2021** |  |
| *(Amounts in thousands, except share and per share data)* |  | |  | |
| Net income | $9515 |  | $14602 |  |
| Weighted average common shares outstanding, basic | 16817284 |  | 17669937 |  |
| Dilutive effect of potential common shares |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Stock options | 17814 |  | 24956 |  |
| &nbsp;&nbsp;&nbsp; Unvested stock awards | 29417 |  | 34292 |  |
| Total dilutive effect of potential common shares | 47231 |  | 59248 |  |
| Weighted average common shares outstanding, diluted | 16864515 |  | 17729185 |  |
| Basic earnings per common share | $0.57 |  | $0.83 |  |
| Diluted earnings per common share | 0.56 |  | 0.82 |  |
| Antidilutive potential common shares |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Stock options | 131198 |  | 13990 |  |
| &nbsp;&nbsp;&nbsp; Unvested stock awards |  |  | 7809 |  |
| Total potential antidilutive shares | 131198 |  | 21799 |  |

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**Note 12. Accumulated Other Comprehensive Income (Loss)**

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

---

| | | | |
|:---|:---|:---|:---|
|  | **Three Months Ended March 31, 2022** | **Three Months Ended March 31, 2022** | **Three Months Ended March 31, 2022** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $15 | $(1561) | $(1546) |
| Other comprehensive loss before reclassifications | (4658) | (335) | (4993) |
| Reclassified from AOCI |  | 27 | 27 |
| Other comprehensive loss, net | (4658) | (308) | (4966) |
| Ending balance | $(4643) | $(1869) | $(6512) |

---

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| | | | |
|:---|:---|:---|:---|
|  | **Three Months Ended March 31, 2021** | **Three Months Ended March 31, 2021** | **Three Months Ended March 31, 2021** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $1106 | $(3029) | $(1923) |
| Other comprehensive loss before reclassifications | (646) | (163) | (809) |
| Reclassified from AOCI |  | 77 | 77 |
| Other comprehensive loss, net | (646) | (86) | (732) |
| Ending balance | $460 | $(3115) | $(2655) |

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

---

| | | | |
|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** |  |
|  | **March 31,** | **March 31,** | **Income Statement** |
| *(Amounts in thousands)* | **2022** | **2021** | **Line Item Affected** |
| Available-for-sale securities |  |  |  |
| &nbsp;&nbsp;&nbsp; Gain recognized | $- | $- | Net loss on sale of securities |
| &nbsp;&nbsp;&nbsp; Reclassified out of AOCI, before tax |  |  | Income before income taxes |
| &nbsp;&nbsp;&nbsp; Income tax expense |  |  | Income tax expense |
| Reclassified out of AOCI, net of tax |  |  | Net income |
| Employee benefit plans |  |  |  |
| Amortization of prior service cost | $- | $31 | Salaries and employee benefits |
| Amortization of net actuarial benefit cost | 34 | 66 | Salaries and employee benefits |
| &nbsp;&nbsp;&nbsp; Reclassified out of AOCI, before tax | 34 | 97 | Income before income taxes |
| &nbsp;&nbsp;&nbsp; Income tax expense | 7 | 20 | Income tax expense |
| Reclassified out of AOCI, net of tax | 27 | 77 | Net income |
| Total reclassified out of AOCI, net of tax | $27 | $77 | Net income |

---

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Amortization is included in net periodic pension cost. See Note 10, "Employee Benefit Plans."

**Note 13. Fair Value** 

***Financial Instruments Measured at Fair Value***

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

● Level 1 – Observable, unadjusted quoted prices in active markets

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

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

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

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*Assets and Liabilities Reported at Fair Value on a Recurring Basis*

*Available-for-Sale Debt Securities*

Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company's Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

*Equity Securities.* Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.

*Loans Held for Investment*. Loans held for investment that are subject to a fair value hedge are reported at fair value derived from third-party models. Loans designated in fair value hedges are recorded at fair value on a recurring basis.

*Deferred Compensation Assets and Liabilities*. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

*Derivative Assets and Liabilities*. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** |
|  | **Total** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| Available-for-sale debt securities |  |  |  |  |
| U.S. Agency securities | $444 | $- | $444 | $- |
| U.S. Treasury Notes | 115430 |  | 115430 |  |
| Municipal securities | 25859 |  | 25859 |  |
| Corporate Notes | 38306 |  | 38306 |  |
| Mortgage-backed Agency securities | 88664 |  | 88664 |  |
| Total available-for-sale debt securities | 268703 |  | 268703 |  |
| Equity securities | 55 |  | 55 |  |
| Fair value loans | 12751 |  |  | 12751 |
| Deferred compensation assets | 5220 | 5220 |  |  |
| Deferred compensation liabilities | 5220 | 5220 |  |  |
| Derivative liabilities | 179 |  | 179 |  |

---

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Total** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| Available-for-sale debt securities |  |  |  |  |
| U.S. Agency securities | $466 | $- | $466 | $- |
| Municipal securities | 28794 |  | 28794 |  |
| Corporate notes | 9919 |  | 9919 |  |
| Mortgage-backed Agency securities | 37113 |  | 37113 |  |
| Total available-for-sale debt securities | 76292 |  | 76292 |  |
| Equity securities | 55 |  | 55 |  |
| Fair value loans | 13106 |  |  | 13106 |
| Deferred compensation assets | 5245 | 5245 |  |  |
| Deferred compensation liabilities | 5245 | 5245 |  |  |
| Derivative liabilities | 837 |  | 837 |  |

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*Assets Measured at Fair Value on a Nonrecurring Basis*

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

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

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

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

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** |  |
|  | **Total** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |  |
|  | **Fair Value** |  | **Level 1** |  | **Level 2** |  | **Level 3** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Collateral dependent assets with specific reserves | $1322 |  | $- |  | $- |  | $1322 |  |
| OREO | $848 |  | $- |  | $- |  | $848 |  |

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
|  | **Total** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |  |
|  | **Fair Value** |  | **Level 1** |  | **Level 2** |  | **Level 3** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Collateral dependent assets with specific reserves | $2312 |  | $- |  | $- |  | $2312 |  |
| OREO | 1015 |  |  |  |  |  | 1015 |  |

---

*Quantitative Information about Level 3 Fair Value Measurements*

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

---

| | | | |
|:---|:---|:---|:---|
|  |  |  | **Discount Range** |
|  | **Valuation** | **Unobservable** | **(Weighted Average)** |
|  | **Technique** | **Input** | **March 31, 2022** |
| Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 0% (0%) |
| OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 10% to 65% (32%) |

---

&nbsp;&nbsp;&nbsp;&nbsp;(1) Fair value is generally based on appraisals of the underlying collateral.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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| | | | |
|:---|:---|:---|:---|
|  |  |  | **Discount Range** |
|  | **Valuation** | **Unobservable** | **(Weighted Average)** |
|  | **Technique** | **Input** | **December 31, 2021** |
| Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 11% (6%) |
| OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 87% (32%) |

---

&nbsp;&nbsp;&nbsp;&nbsp;(1) Fair value is generally based on appraisals of the underlying collateral.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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*Fair Value of Financial Instruments*

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

 

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

 

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

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

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

*Off-Balance Sheet Instruments*. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 14, "Litigation, Commitments, and Contingencies," to the Condensed Consolidated Financial Statements of this report.

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

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** | **March 31, 2022** |
|  | **Carrying** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Amount** | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| **Assets** |  |  |  |  |  |
| Cash and cash equivalents | $457306 | $457306 | $457306 | $- | $- |
| Debt securities available for sale | 268703 | 268703 |  | 268703 |  |
| Equity securities | 55 | 55 |  | 55 |  |
| Loans held for investment, net of allowance | 2215315 | 2154155 |  |  | 2154155 |
| Interest receivable | 8100 | 8100 |  | 8100 |  |
| Deferred compensation assets | 5220 | 5220 | 5220 |  |  |
| **Liabilities** |  |  |  |  |  |
| Time deposits | 339889 | 341029 |  | 341029 |  |
| Securities sold under agreements to repurchase | 2488 | 2488 |  | 2488 |  |
| Interest payable | 216 | 216 |  | 216 |  |
| Derivative financial liabilities | 179 | 179 |  | 179 |  |
| Deferred compensation liabilities | 5220 | 5220 | 5220 |  |  |

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Carrying** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Amount** | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| **Assets** |  |  |  |  |  |
| Cash and cash equivalents | $677439 | $677439 | $677439 | $- | $- |
| Debt securities available for sale | 76292 | 76292 |  | 76292 |  |
| Equity securities | 55 | 55 |  | 55 |  |
| Loans held for investment, net of allowance | 2137711 | 2108513 |  |  | 2108513 |
| Interest receivable | 7900 | 7900 |  | 7900 |  |
| Deferred compensation assets | 5245 | 5245 | 5245 |  |  |
| **Liabilities** |  |  |  |  |  |
| Time deposits | 354863 | 352000 |  | 352000 |  |
| Securities sold under agreements to repurchase | 1536 | 1536 |  | 1536 |  |
| Interest payable | 314 | 314 |  | 314 |  |
| Deferred compensation liabilities | 5245 | 5245 | 5245 |  |  |
| Derivative liabilities | 837 | 837 |  | 837 |  |

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**Note 14. Litigation, Commitments, and Contingencies** 

***Litigation***

In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.

***Commitments and Contingencies***

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

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

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

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

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| | | | |
|:---|:---|:---|:---|
|  | **March 31, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Commitments to extend credit | $270184 |  | $272447 |
| Standby letters of credit and financial guarantees<sup>(1)</sup> | 152286 |  | 153717 |
| Total off-balance sheet risk | $422470 |  | $426164 |
| Allowance for unfunded commitments | $775 |  | $678 |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Includes FHLB letters of credit

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 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, 2022, the Bank operated 49 branches in Virginia, West Virginia, North Carolina and Tennessee. As of March 31, 2022, full-time equivalent employees, calculated using the number of hours worked, totaled 610. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

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The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. ("FCWM"). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of March 31, 2022, the Trust Division and FCWM managed and administered $1.28 billion in combined assets under various fee-based arrangements as fiduciary or agent. The Bank also offers a full range of commercial and personal insurance products through its strategic partnership with Bankers Insurance, LLC.

On March 29, 2022, the Bank entered into a Purchase and Assumption Agreement with Benchmark Community Bank, the banking subsidiary of Benchmark Bankshares, Inc., to sell its Emporia, Virginia branch. The sale includes the branch real estate, certain personal property, and all deposits associated with the branch.

**Critical Accounting Estimates** 

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

***Allowance for Credit Losses or "ACL"***

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

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, "Financial Statements," of this Quarterly Report on Form 10-Q. Our accounting policies are described in detail in Note 1, "Basis of Presentation," of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2022, 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 2021 Form 10-K. Our critical accounting estimates are detailed in the "Critical Accounting Estimates" section in Part II, Item 7 of our 2021 Form 10-K.

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**Performance Overview**

Highlights of our results of operations for the three months ended March 31, 2022, and financial condition as of March 31, 2022, include the following:

● Net income of $9.52 million for the quarter was a decrease of $5.09 million, or $0.26 per diluted common share, compared to the same quarter of 2021. The decrease was primarily driven by a return to more normalized expense in the provision for credit losses of $1.96 million for the first quarter of 2022 compared to a $4.00 million reversal of provision in the first quarter of 2021. The current year provision is largely due to robust loan growth in the first quarter, principally led by commercial loan demand. The reversal of provision in the first quarter of 2021 was driven by a significantly improved economic outlook than in early 2020.

● Salaries and employee benefits increased $787 thousand, or 7.23%, from last year. During the quarter, the Company implemented annualized wage increases of approximately $2.5 million as part of its strategic iniative to enhance Human Capital Management, which included an increased minimum wage.

● Despite the significant increase in credit loss provision between the two periods, annualized first quarter return on average assets was 1.20% and return on average common equity was 8.98%.

● Non-performing loans to total loans remained at 0.96% of total loans and continues the declining trend experienced over the past four quarters. Net charge-offs for the first quarter of 2022 were $838 thousand, or 0.15%, of annualized average loans, compared to net charge-offs of $725 thousand, or 0.14% of annualized average loans, for the same period in 2021.

● The Company's loan portfolio increased by $78.73 million during the first quarter of 2022. Loan demand and originations increased in all categories, including construction, commercial real estate, residential mortgage, and consumer loans.

● The allowance for credit losses to total loans remained at 1.29% of total loans.

● Book value per share at March 31, 2022, was $25.27, a decrease of $0.07 from year-end 2021.

***Results of Operations***

*Net Income*

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

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |
| *(Amounts in thousands, except per* | **March 31,** | **March 31,** | **Increase** |  |
| *share data)* | **2022** | **2021** | **(Decrease)** | **% Change** |
| Net income | $9515 | $14602 | $(5087) | -34.84% |
| Basic earnings per common share | 0.57 | 0.83 | (0.26) | -31.33% |
| Diluted earnings per common share | 0.56 | 0.82 | (0.26) | -31.71% |
| Return on average assets | 1.20% | 1.94% | -0.74% | -38.14% |
| Return on average common equity | 8.98% | 13.94% | -4.96% | -35.58% |

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*Three-Month Comparison.* Net income decreased $5.09 million in the first quarter of 2022 largely due to a $5.96 million increase in the provision for credit losses. Provision for credit losses totaled $1.96 million for the first quarter of 2022 compared to a reversal of provision of $4.00 million in the first quarter of 2021. The current year provision is largely due to the growth in loans in the first quarter, in particular commercial loan demand. The reversal of provision in the first quarter of 2021 was driven by significantly improved economic forecasts.

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*Net Interest Income*

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

**AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)**<br>

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
|  | **Average** |  | **Average Yield/** | **Average** |  | **Average Yield/** |
| *(Amounts in thousands)* | **Balance** | **Interest(1)** | **Rate(1)** | **Balance** | **Interest(1)** | **Rate(1)** |
| **Assets** |  |  |  |  |  |  |
| Earning assets |  |  |  |  |  |  |
| Loans<sup>(2)(3)</sup> | $2200003 | $24698 | 4.55% | $2165054 | $26582 | 4.98% |
| Securities available for sale | 140975 | 800 | 2.30% | 83634 | 573 | 2.78% |
| Interest-bearing deposits | 544718 | 249 | 0.19% | 468067 | 118 | 0.10% |
| Total earning assets | 2885696 | 25747 | 3.62% | 2716755 | 27273 | 4.07% |
| Other assets | 328212 |  |  | 331483 |  |  |
| Total assets | $3213908 |  |  | $3048238 |  |  |
| **Liabilities and stockholders' equity** |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Demand deposits | $679211 | $28 | 0.02% | $613003 | $39 | 0.03% |
| Savings deposits | 881295 | 66 | 0.03% | 778430 | 91 | 0.05% |
| Time deposits | 346902 | 392 | 0.46% | 412986 | 739 | 0.73% |
| Total interest-bearing deposits | 1907408 | 486 | 0.10% | 1804419 | 869 | 0.19% |
| Borrowings |  |  |  |  |  |  |
| Retail repurchase agreements | 1993 |  | N/M | 1234 |  | N/M |
| Total borrowings | 1993 |  | N/M | 1234 |  | N/M |
| Total interest-bearing liabilities | 1909401 | 486 | 0.10% | 1805653 | 869 | 0.19% |
| Noninterest-bearing demand deposits | 835921 |  |  | 777876 |  |  |
| Other liabilities | 38956 |  |  | 39926 |  |  |
| Total liabilities | 2784278 |  |  | 2623455 |  |  |
| Stockholders' equity | 429630 |  |  | 424783 |  |  |
| Total liabilities and stockholders' equity | $3213908 |  |  | $3048238 |  |  |
| Net interest income, FTE<sup>(1)</sup> |  | $25261 |  |  | $26404 |  |
| Net interest rate spread |  |  | 3.52% |  |  | 3.88% |
| Net interest margin, FTE<sup>(1)</sup> |  |  | 3.55% |  |  | 3.94% |

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

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

&nbsp;&nbsp;&nbsp;&nbsp;(3) Interest on loans includes non-cash and accelerated purchase accounting accretion of $866 thousand and $1.19 million for the three months ended March 31, 2022 and 2021 , respectively.

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

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |
|  | **March 31, 2022 Compared to 2021** | **March 31, 2022 Compared to 2021** | **March 31, 2022 Compared to 2021** | **March 31, 2022 Compared to 2021** |
|  | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** |
|  |  |  | **Rate/** |  |
| *(Amounts in thousands)* | **Volume** | **Rate** | **Volume** | **Total** |
| Interest earned on(1) |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Loans | $1740 | $(9232) | $5608 | $(1884) |
| &nbsp;&nbsp;&nbsp; Securities available-for-sale | 1593 | (399) | (967) | 227 |
| Interest-bearing deposits with other banks | 78 | 389 | (336) | 131 |
| Total interest earning assets | 3411 | (9242) | 4305 | (1526) |
| Interest paid on |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Demand deposits | 17 | (56) | 28 | (11) |
| &nbsp;&nbsp;&nbsp; Savings deposits | 49 | (133) | 59 | (25) |
| &nbsp;&nbsp;&nbsp; Time deposits | (480) | (1104) | 1237 | (347) |
| &nbsp;&nbsp;&nbsp; Retail repurchase agreements |  |  |  |  |
| &nbsp;&nbsp;&nbsp; FHLB advances and other borrowings |  |  |  |  |
| Total interest-bearing liabilities | (414) | (1293) | 1324 | (383) |
| Change in net interest income(1) | $3825 | $(7949) | $2981 | $(1143) |

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

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*Three-Month Comparison*. Net interest income comprised 73.23% of total net interest and noninterest income in the first quarter of 2022 compared to 77.64% in the same quarter of 2021. Net interest income on a GAAP basis decreased $1.13 million, or 4.30%, compared to a decrease of $1.14 million, or 4.33%, on a FTE basis. The net interest margin on a FTE basis decreased 39 basis points and the net interest spread on a FTE basis decreased 36 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 $168.94 million, or 6.22%, primarily due to an increase of $76.65 million, or 16.38% in overnight funds. Securites available for sale increased $57.34 million, or 68.56% due to recent purchases of $203.17 million. In addition, average loans increased $34.95 million, or 1.61%, primarily due to strong levels of loan demand in all categories. Average interest-bearing deposits increased $102.99 million, or 5.71%. This increase is primarily due to unprecedented levels of federal government stimulus during the pandemic. The yield on earning assets decreased 45 basis points, or 11.06%, primarily due to the historically low rate environment. The average loan to deposit ratio decreased to 80.19% from 83.84% in the same quarter of 2021. Non-cash accretion income decreased $321 thousand, or 27.04%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $103.75 million, or 5.75%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 9 basis points. Average interest-bearing deposits increased $102.99 million, or 5.71%, which was driven by unprecedented levels of federal government stimulus during the pandemic. Savings deposits increased $102.87 million, or 13.21%, and interest-bearing demand deposits increased $66.21 million, or 10.80%. These increases were offset by a decrease in time deposits of $66.08 million, or 16.00%.

*Provision for Credit Losses*

*Three-Month Comparison*. The provision charged to operations increased $5.96 million, or 149.01%, in the first quarter of 2022 compared to the same quarter of 2021. Provision for credit lossess of $1.96 million was recorded in the first quarter of 2022 and was primarily attributable to loan growth in the first quarter. A reversal in provision of $4.00 million was recorded in the first quarter of 2021 and was due to significantly improved economic forecasts.

*Noninterest Income*

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

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  |  |  |  |
|  | **March 31,** | **March 31,** | **March 31,** |  | **Increase** | **%** |  |
|  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| Wealth management | $972 |  | $881 |  | $91 | 10.33 | % |
| Service charges on deposits | 3498 |  | 3031 |  | 467 | 15.41 | % |
| Other service charges and fees | 3017 |  | 3022 |  | (5) | -0.17 | % |
| Other operating income | 1707 |  | 635 |  | 1072 | 168.82 | % |
| Total noninterest income | $9194 |  | $7569 |  | $1625 | 21.47 | % |

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*Three-Month Comparison*. Noninterest income comprised 23.27% of total net interest and noninterest income in the first quarter of 2022 compared to 23.28% in the same quarter of 2021. Noninterest income increased $1.63 million or 21.47%. Other operating income increased $1.07 million, or 168.82%. The increase was primarily due to a fair value increase recognized in earnings of $578 thousand for interest rate swaps that do no qualify as a fair value hedge; as well as a gain of $394 thousand recognized on a bank-owned property sold during the first quarter of 2022. Service charges on deposits increased $467 thousand, or 15.41% compared with the same quarter of 2021. The increase is primarily attributable to increased customer activity compared to the activity levels experienced during 2021.

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*Noninterest Expense*

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

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  |  |  |  |
|  | **March 31,** | **March 31,** | **March 31,** |  | **Increase** | **%** |  |
|  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| Salaries and employee benefits | $11671 |  | $10884 |  | $787 | 7.23 | % |
| Occupancy expense | 1269 |  | 1275 |  | (6) | -0.47 | % |
| Furniture and equipment expense | 1614 |  | 1367 |  | 247 | 18.07 | % |
| Service fees | 1503 |  | 1335 |  | 168 | 12.58 | % |
| Advertising and public relations | 540 |  | 335 |  | 205 | 61.19 | % |
| Professional fees | 453 |  | 466 |  | (13) | -2.79 | % |
| Amortization of intangibles | 357 |  | 357 |  |  | 0.00 | % |
| FDIC premiums and assessments | 218 |  | 199 |  | 19 | 9.55 | % |
| Other operating expense | 2361 |  | 2602 |  | (241) | -9.26 | % |
| Total noninterest expense | $19986 |  | $18820 |  | $1166 | 6.20 | % |

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*Three-Month Comparison*. Noninterest expense increased $1.17 million, or 6.20%, in the first quarter of 2022 compared to the same quarter of 2021. The increase was largely attributable to an increase in salaries and employee benefits of $787 thousand or 7.23%. Early in the first quarter of 2022, the Company implemented annualized wage increases of approximately $2.5 million as part of its strategic initiative to enhance Human Capital Management, which included an increased minimum wage.

*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 decreased $1.55 million, or 34.88% and was primarily due to the decrease in pre-tax income. The effective tax rate remained level decreasing only one basis point to 23.27% in the first quarter of 2022 from 23.28% in the same quarter of 2021.

***Non-GAAP Financial Measures***

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

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

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** | **Three Months Ended March 31,** |  |
|  | **2022** |  | **2021** |  |
| *(Amounts in thousands)* |  | |  | |
| Net interest income, GAAP | $25153 |  | $26282 |  |
| FTE adjustment(1) | 108 |  | 122 |  |
| Net interest income, FTE | 25261 |  | 26404 |  |
| Net interest margin, GAAP | 3.53 | % | 3.92 | % |
| FTE adjustment(1) | 0.02 | % | 0.02 | % |
| Net interest margin, FTE | 3.55 | % | 3.94 | % |

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(1) FTE basis of 21%.

***Financial Condition***

Total assets as of March 31, 2022, increased $49.61 million, or 1.55% from December 31, 2021. The increase in assets was primarily driven by an increase in securities available-for-sale of $192.41 million, or 252.20%. Loans increased $78.73 million, or 3.64%. These increases were offset by a decrease in overnight funds of $223.29 million, or 35.61%. In addition, total liabilities increased $53.23 million, or 1.92% as of March 31, 2022, from December 31, 2021. The increase in liabilities was primarily driven by an increase in total deposits of $53.55 million, or 1.96%.

*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, 2022, increased $192.41 million, or 252.20%, compared to December 31, 2021. The increase is due to the purchase of $203.17 million in securities comprised of U. S. Treasury Notes, mortgage-backed securities, and corporate notes. The purchases were offset by $4.76 million in maturities, prepayments, and calls. The market value of debt securities available for sale as a percentage of amortized cost was 97.86% as of March 31, 2022, compared to 100.02% as of December 31, 2021.

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, 2022 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.

*Loans Held for Investment*

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

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **December 31, 2021** | **December 31, 2021** | **March 31, 2021** | **March 31, 2021** |
| *(Amounts in thousands)* | **Amount** | **Percent** | **Amount** | **Percent** | **Amount** | **Percent** |
| Loans held for investment |  |  |  |  |  |  |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $77460 | 3.45% | $65806 | 3.04% | $45328 | 2.11% |
| Commercial and industrial | 152885 | 6.81% | 133630 | 6.17% | 162227 | 7.56% |
| Multi-family residential | 115269 | 5.14% | 100402 | 4.64% | 105592 | 4.92% |
| Single family non-owner occupied | 198282 | 8.83% | 198778 | 9.18% | 187896 | 8.75% |
| Non-farm, non-residential | 728142 | 32.44% | 707506 | 32.67% | 718830 | 33.49% |
| Agricultural | 9496 | 0.42% | 9341 | 0.43% | 9723 | 0.45% |
| Farmland | 14313 | 0.64% | 15013 | 0.69% | 19014 | 0.89% |
| Total commercial loans | 1295847 | 57.73% | 1230476 | 56.82% | 1248610 | 58.17% |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 79461 | 3.54% | 79857 | 3.69% | 92095 | 4.29% |
| Single family owner occupied | 705070 | 31.43% | 703864 | 32.50% | 665128 | 30.97% |
| Owner occupied construction | 19858 | 0.88% | 16910 | 0.78% | 18376 | 0.86% |
| Total consumer real estate loans | 804389 | 35.85% | 800631 | 36.97% | 775599 | 36.12% |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 139280 | 6.21% | 129794 | 5.99% | 117904 | 5.49% |
| Other | 4780 | 0.21% | 4668 | 0.22% | 4527 | 0.21% |
| Total consumer and other loans | 144060 | 6.42% | 134462 | 6.21% | 122431 | 5.70% |
| Total loans held for investment, net of unearned income | 2244296 | 100.00% | 2165569 | 100.00% | 2146640 | 100.00% |
| Less: allowance for credit losses | 28981 |  | 27858 |  | 34563 |  |
| Total loans held for investment, net of unearned income and allowance | $2215315 |  | $2137711 |  | $2112077 |  |

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Total loans increased $78.73 million compared to December 31, 2021 with increases in all three loan segments. The largest increase, $65.37 million, occurred in the commercial loan segment. The increase was comprised of increases of $20.64 million in non-farm, non-residential real estate, $19.26 million in commercial and industrial, $14.87 million in multi-family, and $11.65 million in construction, development, and other land. Consumer and other loans increased $9.60 million, or 7.14%, with consumer loans being the driving factor in the increase. Additionally, the consumer real estate loan segment increased by $3.76 million. The increase occurred primarily in owner occupied construction, with an increase of $2.95 million, or 17.43%.

*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.

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** |  | **December 31, 2021** |  | **March 31, 2021** |  |
| *(Amounts in thousands)* |  | |  | |  | |
| **Nonperforming** |  |  |  |  |  |  |
| Nonaccrual loans | $20487 |  | $20768 |  | $26106 |  |
| Accruing loans past due 90 days or more |  |  | 87 |  | 171 |  |
| TDRs(1) | 1141 |  | 1367 |  | 308 |  |
| Total nonperforming loans | 21628 |  | 22222 |  | 26585 |  |
| OREO | 848 |  | 1015 |  | 1740 |  |
| Total nonperforming assets | $22476 |  | $23237 |  | $28325 |  |
| **Additional Information** |  |  |  |  |  |  |
| Total Accruing TDRs(2) | 8782 |  | 8652 |  | 9027 |  |
| **Asset Quality Ratios:** |  |  |  |  |  |  |
| Nonperforming loans to total loans | 0.96 | % | 1.03 | % | 1.24 | % |
| Nonperforming assets to total assets | 0.69 | % | 0.73 | % | 0.90 | % |
| Allowance for loan losses to nonperforming loans | 134.00 | % | 125.36 | % | 130.01 | % |
| Allowance for loan losses to total loans | 1.29 | % | 1.29 | % | 1.61 | % |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.73 million , $1.80 million , and $2.09 million for the periods ended March 31, 2022 , December 31, 2021 , and March 31, 2021 , respectively. They are included in nonaccrual loans.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Total accruing TDRs exclude nonaccrual TDRs of $2.23 million , $2.52 million , and $3.48 million for the periods ended March 31, 2022 , December 31, 2021 , and March 31, 2021 , respectively. They are included in nonaccrual loans.

Nonperforming assets as of March 31, 2022, decreased $761 thousand, or 3.27%, from December 31, 2021, with decreases occurring in all categories. Nonaccrual loans decreased $281 thousand, or 1.35%, non-performing TDR's decreased $226 thousand, or 16.53%, OREO decreased $167 thousand, or 16.45%, and 90 days past due and still accruing decreased $87 thousand or 100.00%. As of March 31, 2022, nonaccrual loans were largely attributed to single family owner occupied (43.78%), non-farm, non-residential (16.49%), and single family non-owner occupied loans (12.61%). Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management's estimate of loss at ultimate resolution.

Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $31.24 million as of March 31, 2022, a decrease of $1.87 million, or 5.65%, compared to $33.10 million as of December 31, 2021. Delinquent loans as a percent of total loans totaled 1.39% as of March 31, 2022, which includes past due loans (0.48%) and nonaccrual loans (0.91%).

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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, 2022, increased $130 thousand, or 1.50%, to $8.78 million from December 31, 2021. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of March 31, 2022, decreased $226 thousand compared to December 31, 2021. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 12.99% as of March 31, 2022, compared to 15.81% as of December 31, 2021. There were no specific reserves related to TDRs as of March 31, 2022, or December 31, 2021.

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, 2022 we had modified a total of 4,168 loans for $478.83 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 March 31, 2022, total COVID-19 loan deferrals stood at $3.01 million; compared to $2.92 million, at December 31, 2021; and down significantly from $17.48 million at March 31, 2021.

OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $167 thousand, or 16.45%, as of March 31, 2022, compared to December 31, 2021, and consisted of 9 properties with an average holding period of approximately 17 months. The net gain on the sale of OREO totaled $5 thousand for the three months ended March 31, 2022, compared to a net loss of $316 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

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| | | |
|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** |
|  | **2022** | **2021** |
| *(Amounts in thousands)* |  |  |
| Beginning balance | $1015 | $2083 |
| Additions | 17 | 460 |
| Disposals | (184) | (593) |
| Valuation adjustments |  | (210) |
| Ending balance | $848 | $1740 |

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*Allowance for Credit Losses*

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

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

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

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

With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loans from an incurred loss method to a life of loan method. See Note 1 – "Basis of Presentation - Significant Accounting Policies" for further details. As of March 31, 2022, the balance of the ACL for loans was $28.98 million, or 1.29% of total loans. The ACL at March 31, 2022, increased $1.12 million from the balance of $27.86 million recorded at December 31, 2021. This increase included a $1.96 million provision offset by net charge-offs for the three months of $838 thousand. The provision was primarily driven by loan growth in the first quarter.

At March 31, 2022, the Company also had an allowance for unfunded commitments of $775 thousand which was recorded in Other Liabilities on the Balance Sheet. During the first quarter of 2022, the provision for credit losses on unfunded commitments was $97 thousand compared to $66 thousand recorded in the same period of 2021.

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

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| | | |
|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** |
|  | **2022** | **2021** |
| *(Amounts in thousands)* |  |  |
| Beginning balance | $27858 | $26182 |
| Cumulative effect of adoption of ASU 2016-13 |  | 13107 |
| Provision for (recovery of) loan losses charged to operations | 1961 | (4001) |
| Charge-offs | (1302) | (1730) |
| Recoveries | 464 | 1005 |
| Net charge-offs | (838) | (725) |
| Ending balance | $28981 | $34563 |

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*Deposits* 

Total deposits as of March 31, 2022, increased $53.55 million, or 1.96%, compared to December 31, 2021. The increase was largely attributable to savings and interest-bearing demand deposits which increased $46.84 million, or 5.47% and $3.82 million, or 0.57%, respectively. Noninterest-bearing demand deposits also reflected growth with an increase of $17.87 million, or 2.12%. These increases were offset by a decrease in time deposits of $14.97 million, or 4.22%.

 

*Borrowings*

Total borrowings as of March 31, 2022, increased $952 thousand, or 61.98%, compared to December 31, 2021.

 ****

***Liquidity and Capital Resources***

*Liquidity*

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

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As a financial holding company, the Company's primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of March 31, 2022, the Company's cash reserves and short-term investment securities totaled $2.47 million and $17.28 million, respectively. The Company's cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank ("FRB") Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of March 31, 2022, our unencumbered cash totaled $457.31 million, unused borrowing capacity from the FHLB totaled $425.09 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 $247.33 million.

*Cash Flows*

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

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| | | | |
|:---|:---|:---|:---|
|  | **Three Months Ended March 31,** | **Three Months Ended March 31,** |  |
|  | **2022** | **2021** |  |
| *(Amounts in thousands)* |  |  | |
| Net cash provided by operating activities | $10438 | $12615 |  |
| Net cash (used) provided by investing activities | (276551) | 41442 |  |
| Net cash provided by financing activities | 45980 | 118127 |  |
| Net increase in cash and cash equivalents | (220133) | 172184 |  |
| Cash and cash equivalents, beginning balance | 677439 | 456561 |  |
| Cash and cash equivalents, ending balance | $457306 | $628745 |  |

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Cash and cash equivalents decreased $220.13 million for the three months ended March 31, 2022, compared to an increase of $172.18 million for the same period of the prior year. The decrease in cash and cash equivalents for the three month period was due largely to the purchase of securities available for sale of $203.17 million and the funding of $78.72 million in loan originations. The decreases were offset by an net increase in deposits of $53.55 million.

*Capital Resources*

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders' equity as of March 31, 2022, decreased $3.62 million, or 0.85%, to $424.16 million from $427.78 million as of December 31, 2021. The change in stockholders' equity was largely due to net income of $9.52 million offset by other comprehensive loss of $4.97 million, dividends declared on our common stock of $4.54 million, and the repurchase of 132,000 shares of our common stock totaling $4.09 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 decreased $0.07, or 0.28%, to $25.27 as of March 31, 2022, from $25.34 as of December 31, 2021.

*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 2021 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:

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** | **December 31, 2021** | **December 31, 2021** |
|  | **Company** | **Bank** | **Company** | **Bank** |
| Common equity Tier 1 ratio | 13.70% | 12.62% | 14.39% | 13.37% |
| Tier 1 risk-based capital ratio | 13.70% | 12.62% | 14.39% | 13.37% |
| Total risk-based capital ratio | 14.96% | 13.87% | 15.65% | 14.62% |
| Tier 1 leverage ratio | 9.60% | 8.84% | 9.65% | 8.94% |

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Our risk-based capital ratios as of March 31, 2022, decreased from December 31, 2021, due to a increase in our risk-weighted assets. The increase in risk-weighted assets was primarily due to the increase in total loans from year-end 2021. As of March 31, 2022, 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, 2022.

 

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***Off-Balance Sheet Arrangements***

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

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| | | | |
|:---|:---|:---|:---|
|  | **March 31, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Commitments to extend credit | $270184 |  | $272447 |
| Standby letters of credit and financial guarantees (1) | 152286 |  | 153717 |
| Total off-balance sheet risk | $422470 |  | $426164 |
| Allowance for unfunded commitments | $775 |  | $678 |

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&nbsp;&nbsp;&nbsp;&nbsp;(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, 2022, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 25 to 50 basis points. The level of benchmark interest rates at year-end 2021, rendered a complete downward shock of 100 basis points meaningless; accordingly, a downward rate scenario is only presented for the current period. In the downward rate shock presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **March 31, 2022** | **March 31, 2022** |  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
| **Increase (Decrease) in Basis Points** | **Change in Net Interest Income** | **Percent Change** |  | **Change in Net Interest Income** |  | **Percent Change** |  |
| *(Dollars in thousands)* |  |  | |  | |  | |
| 300 | $8585 | 8.49 | % | $14960 |  | 14.90 | % |
| 200 | 6065 | 6.00 | % | 10303 |  | 10.30 | % |
| 100 | 3349 | 3.31 | % | 5502 |  | 5.50 | % |
| (100) | (6966) | -6.89 | % | N/A |  | N/A |  |

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***Inflation and Changing Prices***

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

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

In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) in 2023, 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.

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| | |
|:---|:---|
| **Item 3.** | **Quantitative and Qualitative Disclosures about Market Risk** |

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

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| | |
|:---|:---|
| **Item 4.** | **Controls and Procedures** |

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**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, 2022, 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, 2022, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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| | |
|:---|:---|
| **PART II.** | **OTHER INFORMATION** |

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| | |
|:---|:---|
| **ITEM 1.** | **Legal Proceedings** |

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

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| | |
|:---|:---|
| **ITEM 1A.** | **Risk Factors** |

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The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2021, 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, 2021 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, 2021.

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| | |
|:---|:---|
| **ITEM 2.** | **Unregistered Sales of Equity Securities and Use of Proceeds**  |

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Not Applicable

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Not Applicable

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) Issuer Purchases of Equity Securities

We repurchased 132,000 shares of our common stock during the first quarter of 2022; compared to 187,700 shares purchased during the same quarter of 2021.

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

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **Total Number of Shares Purchased** | **Average Price Paid per Share** | **Total Number of Shares Purchased as Part of a Publicly Announced Plan** | **Maximum Number of Shares that May Yet be Purchased Under the Plan** |
| January 1-31, 2022 | 43600 | $34.04 | 43600 | 1407014 |
| February 1-28, 2022 | 39600 | 30.12 | 39600 | 1367414 |
| March 1-31, 2022 | 48800 | 28.90 | 48800 | 1318614 |
| Total | 132000 | $1.00 | 132000 |  |

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| | |
|:---|:---|
| **ITEM 3.** | **Defaults Upon Senior Securities** |

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None.

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|:---|:---|
| **ITEM 4.** | **Mine Safety Disclosures** |

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None.

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|:---|:---|
| **ITEM 5.** | **Other Information** |

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|:---|:---|
| **ITEM 6.** | **Exhibits** |

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| | |
|:---|:---|
| 2.1 | [Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm) |
| 2.2 | [Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019](http://www.sec.gov/Archives/edgar/data/859070/000143774919018230/ex_157104.htm) |
| 3.1 | [Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm) |
| 3.2 | [Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124896.htm) |
| 4.1 | [Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124897.htm) |
| 4.2 | [Form of First Community Bankshares, Inc. Common Stock Certificate, incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124972.htm) |
| 10.1.1\*\* | [First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000](http://www.sec.gov/Archives/edgar/data/859070/000095012800000665/0000950128-00-000665.txt) |
| 10.1.2\*\* | [Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004](http://www.sec.gov/Archives/edgar/data/859070/000143774919024675/0001437749-19-024675-index.htm) |
| 10.2\*\* | [First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 13, 2002](http://www.sec.gov/Archives/edgar/data/859070/000095012802000627/j9559101exv10w5.txt) |
| 10.3\*\* | [First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002](http://www.sec.gov/Archives/edgar/data/859070/000095012802000627/j9559101exv10w4.txt) |

---

---

| | |
|:---|:---|
| 10.6\*\* | [First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012](http://www.sec.gov/Archives/edgar/data/859070/000119312512100945/d305268ddef14a.htm) |
| 10.7\*\* | [First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013](http://www.sec.gov/Archives/edgar/data/859070/000114420413031684/v346101_ex99-1.htm) |
| 10.8\*\* | [First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000](http://www.sec.gov/Archives/edgar/data/859070/000095012800000665/0000950128-00-000665.txt) |
| 10.9.1\*\* | [First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009;](http://www.sec.gov/Archives/edgar/data/859070/000095015209000027/l35008aexv10w1.htm) |
| 10.9.2\*\* | [Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010](http://www.sec.gov/Archives/edgar/data/859070/000114420410067096/v205949_ex10-3.htm) |
| 10.9.3\*\* | [Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013](http://www.sec.gov/Archives/edgar/data/859070/000114420413010959/v336117_ex10-1.htm) |

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| | |
|:---|:---|
| 10.9.4\*\* | [Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420416105811/v441270_ex10-1.htm) |
| 10.9.5\*\* | [Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm) |
| 10.9.6\* | [Amendment #5 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm). |
| 10.9.7\* | [Amendment #6 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm). |
| 10.10\*\* | [Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2019, filed on December 19, 2019](http://www.sec.gov/Archives/edgar/data/859070/000143774919024675/0001437749-19-024675-index.htm) |
| 10.11.1\*\* | [First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000095015206007183/l22038aexv99w1.htm) |
| 10.11.2\*\* | [Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-2.htm) |
| 10.12.1\*\* | [First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420410067096/v205949_ex10-1.htm) |
| 10.12.2\*\* | [Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420416105811/v441270_ex10-2.htm) |
| 10.13\*\* | [Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-3.htm) |
| 10.15\*\* | [Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-2.htm) |
| 10.16\*\* | [Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-1.htm) |
| 31.1\* | [Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002](#a10q033122ex311) |
| 31.2\* | [Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002](#a10q033122ex312) |
| 32\* | [Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002](#a10q033122ex32) |

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| | |
|:---|:---|
| 101\*\*\* | Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of March 31, 2022, (Unaudited) and December 31, 2021; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2022 and 2021; (iv) Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three months ended March 31, 2022 and 2021; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2022 and 2021; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited). |
| 104\* | The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL (included within the Exhibit 101 attachments). |

---

\* Filed herewith

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

\*\*\* Submitted electronically herewith

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 10th day of May, 2022.

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| |
|:---|
| First Community Bankshares, Inc.<br> (Registrant) |
| /s/ William P. Stafford, II |
| William P. Stafford, II |
| Chief Executive Officer |
| (Principal Executive Officer) |
| /s/ David D. Brown |
| David D. Brown |
| Chief Financial Officer |
| (Principal Accounting Officer) |

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**Exhibit 31.1**

**CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER**

I, William P. Stafford, II, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Quarterly Report on Form 10-Q of First Community Bankshares, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

&nbsp;&nbsp;&nbsp;&nbsp;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

&nbsp;&nbsp;&nbsp;&nbsp;5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 10, 2022

/s/ William P. Stafford, II<br>

William P. Stafford, II

Chief Executive Officer

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**Exhibit 31.2**

**CERTIFICATION OF THE CHIEF FINANCIAL OFFICER**

I, David D. Brown, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Quarterly Report on Form 10-Q of First Community Bankshares, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

&nbsp;&nbsp;&nbsp;&nbsp;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

&nbsp;&nbsp;&nbsp;&nbsp;5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 10, 2022

/s/ David D. Brown<br>

David D. Brown

Chief Financial Officer

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**Exhibit 32**

**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350**

**AS ADOPTED PURSUANT TO SECTION 906**

**OF THE SARBANES-OXLEY ACT OF 2002**

The undersigned certify, to their best knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

&nbsp;&nbsp;&nbsp;&nbsp;1. the Quarterly Report on Form 10-Q of First Community Bankshares, Inc. (the "Company") for the period ended March 31, 2022 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

&nbsp;&nbsp;&nbsp;&nbsp;2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2022

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| | | | |
|:---|:---|:---|:---|
| &nbsp;&nbsp;&nbsp; By: | /s/ William P. Stafford, II | By: | /s/ David D. Brown |
|  | William P. Stafford, II |  | David D. Brown |
|  | Chief Executive Officer |  | Chief Financial Officer |

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| |
|:---|
| **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **WASHINGTON, D.C. 20549** |
| **FORM 10-Q** |
| ☑ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| For the quarterly period ended **June 30, 2022** |
| or |
| ☐ **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| Commission file number: **000-19297** |
| **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) |

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| | |
|:---|:---|
| **Virginia** | **55-0694814** |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |

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| | |
|:---|:---|
| **P.O. Box 989**<br> **Bluefield, Virginia** | **24605-0989** |
| (Address of principal executive offices) | (Zip Code) |

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| |
|:---|
| **(276) 326-9000** |
| (Registrant's telephone number, including area code) |

---

**Not Applicable**

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| | | |
|:---|:---|:---|
| (Former name, former address and former fiscal year, if changed since last report) | (Former name, former address and former fiscal year, if changed since last report) | (Former name, former address and former fiscal year, if changed since last report) |
| Securities registered pursuant to Section 12 (b) of the Act: | Securities registered pursuant to Section 12 (b) of the Act: | Securities registered pursuant to Section 12 (b) of the Act: |
| **Title of each class** | **Trading Symbol(s)** | **Name of each exchange on which registered** |
| Common Stock ($1.00 par value) | FCBC | NASDAQ Global Select |

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| | | |
|:---|:---|:---|
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
| ☑ Yes ☐ No | ☑ Yes ☐ No | ☑ Yes ☐ No |
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). |
| ☑ Yes ☐ No | ☑ Yes ☐ No | ☑ Yes ☐ No |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
|  | Large accelerated filer ☐ | Accelerated filer ☑ |
|  | Non-accelerated filer ☐  | Smaller reporting company ☐ |
|  | | Emerging growth company ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
| ☐ Yes ☑ No | ☐ Yes ☑ No | ☐ Yes ☑ No |
| As of July 29, 2022, there were 16,412,444 shares outstanding of the registrant's Common Stock, $1.00 par value. | As of July 29, 2022, there were 16,412,444 shares outstanding of the registrant's Common Stock, $1.00 par value. | As of July 29, 2022, there were 16,412,444 shares outstanding of the registrant's Common Stock, $1.00 par value. |

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| | | |
|:---|:---|:---|
| **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** |
| **FORM 10-Q** | **FORM 10-Q** | **FORM 10-Q** |
| **INDEX** | **INDEX** | **INDEX** |
| **PART I.** | [**FINANCIAL INFORMATION**](#part1) | <u>**P**</u><u>**age**</u> |
| Item 1. | [Financial Statements](#item1) |  |
|  | [Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021](#bs) | [4](#bs) |
|  | [Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)](#income) | [5](#income) |
|  | [Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)](#compincome) | [6](#compincome) |
|  | [Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)](#eq) | [7](#eq) |
|  | [Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited)](#cf) | [8](#cf) |
|  | [Notes to Condensed Consolidated Financial Statements (Unaudited)](#notes) | [46](#notes) |
| Item 2. | [Management's Discussion and Analysis of Financial Condition and Results of Operations](#item2) | [17](#item2) |
| Item 3. | [Quantitative and Qualitative Disclosures About Market Risk](#item3) | [17](#item3) |
| Item 4. | [Controls and Procedures](#item4) | [17](#item4) |
| **PART II.** | [**OTHER INFORMATION**](#part2) |  |
| Item 1. | [Legal Proceedings](#legal) | [47](#legal) |
| Item 1A. | [Risk Factors](#risk) | [47](#risk) |
| Item 2. | [Unregistered Sales of Equity Securities and Use of Proceeds](#unreg) | [48](#unreg) |
| Item 3. | [Defaults Upon Senior Securities](#def) | [48](#def) |
| Item 4. | [Mine Safety Disclosures](#mine) | [48](#mine) |
| Item 5. | [Other Information](#other) | [48](#other) |
| Item 6. | [Exhibits](#ex) | [49](#ex) |
| [**Signatures**](#sig) | [**Signatures**](#sig) | [51](#sig) |

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Forward-looking statements in filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q and the accompanying Exhibits, filings incorporated by reference, reports to shareholders, and other communications that represent the Company's beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," and other similar expressions identify forward-looking statements. The following factors, among others, could cause financial performance to differ materially from that expressed in such forward-looking statements:

● inflation, interest rate, market and monetary fluctuations;

● the effects of the COVID-19 pandemic, including the negative impacts and disruptions to the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company's business;

● the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

● the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;

● timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

● the willingness of customers to substitute competitors' products and services for the Company's products and services and vice versa;

● the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance;

● the impact of the U.S. Department of the Treasury and federal banking regulators' continued implementation of programs to address capital and liquidity in the banking system;

● technological changes;

● the cost and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;

● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;

● the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

● the growth and profitability of noninterest, or fee, income being less than expected;

● unanticipated regulatory or judicial proceedings;

● changes in consumer spending and saving habits; and

● the Company's success at managing the risks mentioned above.

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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| | |
|:---|:---|
| **PART I.** | **FINANCIAL INFORMATION** |

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**Item 1. Financial Statements**

**CONDENSED CONSOLIDATED BALANCE SHEETS**<br>

---

| | | |
|:---|:---|:---|
|  | **June 30,** | **December 31,** |
|  | **2022** | **2021<sup>(1)</sup>** |
| *(Amounts in thousands, except share and per share data)* | (Unaudited) |  |
| **Assets** |  |  |
| Cash and due from banks | $53556 | $47067 |
| Federal funds sold | 341627 | 627036 |
| Interest-bearing deposits in banks | 3059 | 3336 |
| Total cash and cash equivalents | 398242 | 677439 |
| Debt securities available for sale | 287767 | 76292 |
| Loans held for investment, net of unearned income | 2299798 | 2165569 |
| Allowance for credit losses | (29749) | (27858) |
| Loans held for investment, net | 2270049 | 2137711 |
| Premises and equipment, net | 49752 | 52284 |
| Other real estate owned | 579 | 1015 |
| Interest receivable | 8433 | 7900 |
| Goodwill | 129565 | 129565 |
| Other intangible assets | 4905 | 5622 |
| Other assets | 109085 | 106691 |
| Total assets | $3258377 | $3194519 |
| **Liabilities** |  |  |
| Deposits |  |  |
| Noninterest-bearing | $877962 | $842783 |
| Interest-bearing | 1920577 | 1886608 |
| Total deposits | 2798539 | 2729391 |
| Securities sold under agreements to repurchase | 2635 | 1536 |
| Interest, taxes, and other liabilities | 39157 | 35817 |
| Total liabilities | 2840331 | 2766744 |
| **Stockholders' equity** |  |  |
| Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding |  |  |
| Common stock, $1 par value; 50,000,000 shares authorized; 23,634,702 shares issued and 16,502,144 outstanding at June 30, 2022; 23,971,347 shares issued and 16,878,220 outstanding at December 31, 2021 | 16502 | 16878 |
| Additional paid-in capital | 136705 | 147619 |
| Retained earnings | 276499 | 264824 |
| Accumulated other comprehensive loss | (11660) | (1546) |
| Total stockholders' equity | 418046 | 427775 |
| Total liabilities and stockholders' equity | $3258377 | $3194519 |

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(1) Derived from audited financial statements <br> *See Notes to Condensed Consolidated Financial Statements.*

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**CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**<br>

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Six Months Ended** | **Six Months Ended** |
|  | **June 30,** | **June 30,** | **June 30,** | **June 30,** |
| *(Amounts in thousands, except share and per share data)* | **2022** | **2021** | **2022** | **2021** |
| **Interest income** |  |  |  |  |
| Interest and fees on loans | $25651 | $25937 | $50292 | $52477 |
| Interest on securities -- taxable | 1373 | 159 | 1929 | 357 |
| Interest on securities -- tax-exempt | 178 | 276 | 372 | 573 |
| Interest on deposits in banks | 768 | 166 | 1016 | 282 |
| Total interest income | 27970 | 26538 | 53609 | 53689 |
| **Interest expense** |  |  |  |  |
| Interest on deposits | 422 | 724 | 908 | 1593 |
| Interest on short-term borrowings | 1 |  | 1 |  |
| Total interest expense | 423 | 724 | 909 | 1593 |
| **Net interest income** | 27547 | 25814 | 52700 | 52096 |
| Provision for (recovery of) credit losses | 510 | (2230) | 2471 | (6231) |
| **Net interest income after provision for loan losses** | 27037 | 28044 | 50229 | 58327 |
| **Noninterest income** |  |  |  |  |
| Wealth management | 993 | 1058 | 1965 | 1939 |
| Service charges on deposits | 3672 | 3098 | 7170 | 6129 |
| Other service charges and fees | 3297 | 3166 | 6314 | 6188 |
| Other operating income | 892 | 1475 | 2599 | 2110 |
| Total noninterest income | 8854 | 8797 | 18048 | 16366 |
| **Noninterest expense** |  |  |  |  |
| Salaries and employee benefits | 11518 | 10216 | 23189 | 21100 |
| Occupancy expense | 1165 | 1115 | 2434 | 2390 |
| Furniture and equipment expense | 1496 | 1457 | 3110 | 2824 |
| Service fees | 2563 | 1513 | 4066 | 2848 |
| Advertising and public relations | 577 | 616 | 1117 | 951 |
| Professional fees | 544 | 290 | 997 | 756 |
| Amortization of intangibles | 360 | 360 | 717 | 717 |
| FDIC premiums and assessments | 257 | 204 | 475 | 403 |
| Other operating expense | 2775 | 3590 | 5136 | 6192 |
| Total noninterest expense | 21255 | 19361 | 41241 | 38181 |
| Income before income taxes | 14636 | 17480 | 27036 | 36512 |
| Income tax expense | 3423 | 4077 | 6308 | 8507 |
| **Net income** | $11213 | $13403 | $20728 | $28005 |
| Earnings per common share |  |  |  |  |
| Basic | $0.67 | $0.77 | $1.24 | $1.59 |
| Diluted | 0.67 | 0.76 | 1.24 | 1.59 |
| Weighted average shares outstanding |  |  |  |  |
| Basic | 16662817 | 17486182 | 16739624 | 17577552 |
| Diluted | 16682615 | 17536144 | 16772847 | 17631330 |

---

*See Notes to Condensed Consolidated Financial Statements.*<br>

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**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)**<br>

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** |  | **Six Months Ended** | **Six Months Ended** |
|  | **June 30,** | **June 30,** |  | **June 30,** | **June 30,** |
|  | **2022** | **2021** |  | **2022** | **2021** |
| *(Amounts in thousands)* |  |  | |  |  |
| **Net income** | $11213 | $13403 |  | $20728 | $28005 |
| **Other comprehensive income, before tax** |  |  |  |  |  |
| Available-for-sale debt securities: |  |  |  |  |  |
| Change in net unrealized (losses) gains on debt securities | (6550) | 17 |  | (12447) | (800) |
| Net unrealized (losses) gains on available-for-sale debt securities | (6550) | 17 |  | (12447) | (800) |
| Employee benefit plans: |  |  |  |  |  |
| Net actuarial loss | (1) |  |  | (423) | (206) |
| Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income | 33 | 96 |  | 67 | 193 |
| Net unrealized (losses) gains on employee benefit plans | 32 | 96 |  | (356) | (13) |
| **Other comprehensive (loss) income, before tax** | (6518) | 113 |  | (12803) | (813) |
| Income tax (benefit) expense | (1370) | 23 |  | (2689) | (171) |
| **Other comprehensive (loss) income, net of tax** | (5148) | 90 |  | (10114) | (642) |
| **Total comprehensive income** | $6065 | $13493 |  | $10614 | $27363 |

---

*See Notes to Condensed Consolidated Financial Statements.*<br>

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| |
|:---|
| **CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)** |
| **THREE MONTHS ENDED** |
| **June 30, 2022 and 2021** |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  |  |  | **Accumulated** |  |
|  | **Preferred** |  | **Common** |  | **Additional** |  | **Other** |  |
| *(Amounts in thousands, except share and per share data)* | **Stock Outstanding** | **Preferred Stock** | **Stock Outstanding** | **Common Stock** | **Paid-in Capital** | **Retained Earnings** | **Comprehensive Loss** | **Total** |
| Balance April, 1 2021 |  | $- | 17592009 | $17592 | $169173 | $241889 | $(2655) | $425999 |
| Net income |  |  |  |  |  | 13403 |  | 13403 |
| Other comprehensive income |  |  |  |  |  |  | 90 | 90 |
| Common dividends declared -- $0.25 per share |  |  |  |  |  | (4381) |  | (4381) |
| Equity-based compensation expense |  |  | 639 | 1 | 296 |  |  | 297 |
| Issuance of common stock to 401(k) plan |  |  | 3499 | 3 | 103 |  |  | 106 |
| Repurchase of common shares at $30.51 per share |  |  | (261600) | (261) | (7719) |  |  | (7980) |
| Balance June 30, 2021 |  | $- | 17334547 | $17335 | $161853 | $250911 | $(2565) | $427534 |
| Balance April, 1 2022 |  | $- | 16781975 | $16782 | $144088 | $269798 | $(6512) | $424156 |
| Net income |  |  |  |  |  | 11213 |  | 11213 |
| Other comprehensive loss |  |  |  |  |  |  | (5148) | (5148) |
| Common dividends declared -- $0.27 per share |  |  |  |  |  | (4512) |  | (4512) |
| Equity-based compensation expense |  |  |  |  | 181 |  |  | 181 |
| Issuance of common stock to 401(k) plan |  |  | 3676 | 4 | 100 |  |  | 104 |
| Repurchase of common shares at $28.03 per share |  |  | (283507) | (284) | (7664) |  |  | (7948) |
| Balance June 30, 2022 |  | $- | 16502144 | $16502 | $136705 | $276499 | $(11660) | $418046 |

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*See Notes to Condensed Consolidated Financial Statements.*<br>

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| |
|:---|
| **CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)** |
| **Six MONTHS ENDED** |
| **June 30, 2022 and 2021** |

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  |  |  | **Accumulated** |  |
|  | **Preferred** |  | **Common** |  | **Additional** |  | **Other** |  |
| *(Amounts in thousands, except share and per share data)* | **Stock Outstanding** | **Preferred Stock** | **Stock Outstanding** | **Common Stock** | **Paid-in Capital** | **Retained Earnings** | **Comprehensive Loss** | **Total** |
| Balance January 1, 2021 |  | $- | 17722507 | $17723 | $173345 | $237585 | $(1923) | $426730 |
| Cumulative effect of adoption of ASU 2016-13 |  |  |  |  |  | (5870) |  | (5870) |
| Net income |  |  |  |  |  | 28005 |  | 28005 |
| Other comprehensive loss |  |  |  |  |  |  | (642) | (642) |
| Common dividends declared -- $0.25 per share |  |  |  |  |  | (8809) |  | (8809) |
| Equity-based compensation expense |  |  | 52189 | 52 | 779 |  |  | 831 |
| Issuance of common stock to 401(k) plan |  |  | 9151 | 9 | 244 |  |  | 253 |
| Repurchase of common shares at $28.86 per share |  |  | (449300) | (449) | (12515) |  |  | (12964) |
| Balance June 30, 2021 |  | $- | 17334547 | $17335 | $161853 | $250911 | $(2565) | $427534 |
| Balance January 1, 2022 |  | $- | 16878220 | $16878 | $147619 | $264824 | $(1546) | $427775 |
| Net income |  |  |  |  |  | 20728 |  | 20728 |
| Other comprehensive loss |  |  |  |  |  |  | (10114) | (10114) |
| Common dividends declared -- $0.54 per share |  |  |  |  |  | (9053) |  | (9053) |
| Equity-based compensation expense |  |  | 25137 | 25 | 328 |  |  | 353 |
| Common stock options exercised |  |  | 4536 | 5 | 98 |  |  | 103 |
| Issuance of common stock to 401(k) plan |  |  | 9758 | 10 | 279 |  |  | 289 |
| Repurchase of common shares at $28.96 per share |  |  | (415507) | (416) | (11619) |  |  | (12035) |
| Balance June 30, 2022 |  | $- | 16502144 | $16502 | $136705 | $276499 | $(11660) | $418046 |

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*See Notes to Condensed Consolidated Financial Statements.*

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**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**<br>

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| | | |
|:---|:---|:---|
|  | **Six Months Ended** | **Six Months Ended** |
|  | **June 30,** | **June 30,** |
| *(Amounts in thousands)* | **2022** | **2021** |
| **Operating activities** |  |  |
| Net income | $20728 | $28005 |
| Adjustments to reconcile net income to net cash provided by operating activities |  |  |
| Provision for (recovery of) credit losses | 2471 | (6231) |
| Depreciation and amortization of premises and equipment | 2168 | 2240 |
| Amortization of premiums on investments, net | 117 | 217 |
| Amortization of FDIC indemnification asset, net |  | 1226 |
| Amortization of intangible assets | 717 | 717 |
| Accretion on acquired loans | (1736) | (2442) |
| Equity-based compensation expense | 353 | 699 |
| Issuance of common stock to 401(k) plan | 289 | 253 |
| (Gain) loss on sale of premises and equipment, net | (381) | 524 |
| Loss on sale of other real estate owned | 420 | 251 |
| (Increase) decrease in accrued interest receivable | (533) | 572 |
| Decrease (increase) in other operating activities | 3587 | (6322) |
| Net cash provided by operating activities | 28200 | 19709 |
| **Investing activities** |  |  |
| Proceeds from maturities, prepayments, and calls of securities available for sale | 12812 | 14174 |
| Payments to acquire securities available for sale | (236850) | (11675) |
| Net (increase) decrease in loans | (133395) | 39323 |
| (Purchase of) proceeds from FHLB stock, net | (240) | 1012 |
| Proceeds from sale of premises and equipment | 1145 | 2208 |
| Payments to acquire premises and equipment | (469) | (1669) |
| Proceeds from sale of other real estate owned | 338 | 1259 |
| Net cash (used) provided by investing activities | (356659) | 44632 |
| **Financing activities** |  |  |
| Increase in noninterest-bearing deposits, net | 35179 | 46343 |
| Increase in interest-bearing deposits, net | 33969 | 73104 |
| Proceeds from securities sold under agreements to repurchase, net | 1099 | 30 |
| Proceeds from stock options exercised | 103 | 132 |
| Payments for repurchase of common stock | (12035) | (12964) |
| Payments of common dividends | (9053) | (8809) |
| Net cash provided by financing activities | 49262 | 97836 |
| Net (decrease) increase in cash and cash equivalents | (279197) | 162177 |
| Cash and cash equivalents at beginning of period | 677439 | 456561 |
| Cash and cash equivalents at end of period | $398242 | $618738 |
| **Supplemental disclosure -- cash flow information** |  |  |
| Cash paid for interest | $1330 | $1846 |
| Cash paid for income taxes | 490 | 11704 |
| **Supplemental transactions -- noncash items** |  |  |
| Transfer of loans to other real estate owned | 322 | 810 |
| Loans originated to finance other real estate owned |  | 59 |
| Increase in accumulated other comprehensive loss, net of taxes | (10114) | 642 |

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*See Notes to Condensed Consolidated Financial Statements.*

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**Note 1. Basis of Presentation**

***General***

First Community Bankshares, Inc. (the "Company"), is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company's principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the "Bank"), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. ("FCWM"). Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

***Principles of Consolidation***

The Company's accounting and reporting policies conform with U.S. generally accepted accounting principles ("GAAP") and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management's opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K"), as filed with the Securities and Exchange Commission (the "SEC") on March 3, 2022. The condensed consolidated balance sheet as of December 31, 2021, has been derived from the audited consolidated financial statements.

***Reclassifications***

Certain amounts reported in prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on the Company's results of operations, financial position, or net cash flow.

***Use of Estimates***

Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the allowance for loan losses, goodwill and other intangible assets, and income taxes. A discussion of the Company's application of critical accounting estimates is included in "Critical Accounting Estimates" in Item 2 of this report.

***Significant Accounting Policies***

 ****

The Company's significant accounting policies are included in Note 1, "Basis of Presentation and Significant Accounting Policies," of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company's 2021 Form 10-K.

***Allowance for Credit Losses (***"***ACL***"***)***

On January 1, 2021, the Company adopted ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU applies to all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities, and unfunded commitments. The Company applied the ASU's provisions using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. The cumulative-effect adjustment was a decrease to retained earnings net of tax of $5.87 million. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

**ACL – Investment Securities**

The Company no longer evaluates securities for other-than-temporary impairment ("OTTI"), as ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter, the Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security's fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.

The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities. Nor does the Company record an allowance for credit losses on accrued interest receivable. As of June 30, 2022, the accrued interest receivable for investment securities available for sale was $1.32 million.

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The Company's estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. The Company does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Nonpayment of the amortized cost basis is not expected to be zero solely on the basis of the current value of collateral securing the security but, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate change since purchase, volatility of the security's fair value and historical loss information for financial assets securitized with similar collateral. The Company performed an analysis that determined that the following securities have a zero expected credit loss: U.S. Treasury Securities, Agency-Backed Securities including Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), Federal Home Loan Bank ("FHLB"), Federal Farm Credit Banks ("FFCB") and Small Business Administration ("SBA"). All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or one of its agencies. These securities are included in Government-Sponsored Entities Debt and Mortgage-Backed Securities line items in the Investment Securities footnote. Municipal securities and all other securities that do not have a zero expected credit loss will be evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value.

**ACL – Loans**

The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments. The Company established the incremental increase in the ACL at the adoption of ASU 2016-13, through retained earnings and subsequent adjustments are made through a provision for credit losses charged to earnings. Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.

A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company's estimate of its ACL involves a high degree of judgement and reflects management's best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management's current estimate of expected credit losses. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.

The Company collectively evaluates loans that share similar risk characteristics. In general, loans are segmented by loan purpose. The Company collectively evaluates loans within the following consumer and commercial segments: Loans secured by 1-4 Family Properties, Home Equity Lines of Credit ("HELOC"), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).

For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses.

In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilizes call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. Management reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered are further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information is evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporates at least one macroeconomic driver either using a statistical regression modeling methodology.

Management considers forward-looking information in estimated expected credit losses. The Company subscribes to a third-party service which provides summary detail of dozens of economic forecasts. Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one-year reasonable and supportable forecast period. Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management. Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.

Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending polices and procedures, 2) changes in economic conditions, 3) changes in portfolio nature and volume, 4) changes in management, 5) changes in past due loans, 6) changes in the quality of the Company's credit review system, 7) changes in the value of underlying collateral, 8) the effect of concentrations of credit, and 9) the effect of other external factors.

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

Management measures expected credit losses over the contractual term of the loans. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a TDR with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. The effects of a TDR are recorded when an individual asset is specifically identified as a reasonably-expected TDR. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower's application for a modification (i.e. the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions. The Company uses a discounted cash flow methodology to calculate the effect of the concession provided to the borrower in TDR within the ACL.

Purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company's assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition date, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the fair value and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company's acquired purchased credit impaired loans were treated as PCD loans.

The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of June 30, 2022, the accrued interest receivable for loans was $7.11 million.

The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. As of June 30, 2022, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $956 thousand.

***Risks and Uncertainties***

<u>COVID-19 Virus Developments</u>

During the last two-and-a-half years, government reaction to the novel coronavirus ("COVID-19") pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services. As COVID-19 events unfolded, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions.

While direct impacts of COVID-19 appear to be declining and conditions have improved as of June 30, 2022, if there is a resurgence in the virus, the Company could experience adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact of COVID-19, and any potential resulting measures to curtail its spread, will have on the Company's future operations, 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 pandemic.

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***Recent Accounting Standards***

 

*Standards Adopted in 2021*

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU requires earlier recording of credit losses on loans and other financial assets held by financial institutions and other organizations. This ASU also requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It further requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. In addition, the ASU amends the accounting for credit losses in investments in debt securities and purchased financial assets with credit deterioration. The Company adopted the new standard as of January 1, 2021. The standard was applied using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. Under this method, comparative periods will not be required to be restated for financial statements related to Topic 326. Comparative prior period disclosures will be presented using the guidance for the allowance for loan losses. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and the reasons for the change, which is solely a result of the adoption of the required standard. This standard did not have a material impact on our investment securities portfolio at implementation. Related to the implementation of the standard, the Company recorded an additional ACL for loans of $13.11 million, deferred tax assets of $1.81 million, and additional reserve for unfunded commitments of $509 thousand and an adjustment to retained earnings, net of tax, of $5.87 million. See the table below for the impact of ASU 2016-13 on the Company's consolidated balance sheet.

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| | | | |
|:---|:---|:---|:---|
|  | **January 1, 2021** | **January 1, 2021** | **January 1, 2021** |
|  | **As Reported** | **Pre-** | **Impact of** |
|  | **Under** | **ASU 2016-13** | **ASU 2016-13** |
|  | **ASU 2016-13** | **Adoption** | **Adoption** |
| Assets: |  |  |  |
| Non-covered loans held for investment |  |  |  |
| Allowance for credit losses on debt securities |  |  |  |
| Investment securities - available for sale | $83358 | $83358 | $- A |
| Loans |  |  |  |
| Non-acquired loans and acquired performing loans | 2146972 | 2146972 |  |
| Acquired purchased deteriorated loans | 45535 | 39660 | 5875 B |
| Allowance for credit losses on loans | (39289) | (26182) | (13107) C |
| Deferred tax asset | 19306 | 17493 | 1813 D |
| Accrued interest receivable - loans | 9109 | 9052 | 57 B |
| Liabilities |  |  |  |
| Allowance for credit losses on off-balance sheet |  |  |  |
| credit exposures | 575 | 66 | 509 E |
| Equity: |  |  |  |
| Retained earnings | 231714 | 237585 | (5871) F |

---

&nbsp;&nbsp;&nbsp;&nbsp;A. Per our analysis no ACL was necessary for investment securities available-for-sale.

&nbsp;&nbsp;&nbsp;&nbsp;B. Accrued interest receivable from acquired credit impaired loans of $57 thousand was reclassed to other assets and was offset by the reclass of the grossed up credit discount on acquired credit impaired loans of $57 thousand that was moved to the ACL for the purchased credit deteriorated loans.

&nbsp;&nbsp;&nbsp;&nbsp;C. Calculated adjustment to the ACL related to the adoption of ASU 2016-13. Includes additional reserve related to purchased deteriorated loans of $5.88 million.

&nbsp;&nbsp;&nbsp;&nbsp;D. Effect of deferred tax assets related to the adjustment to the ACL form the adoption of ASU 2016-13 using a 23.37% tax rate.

&nbsp;&nbsp;&nbsp;&nbsp;E. Adjustment to the reserve for unfunded commitments related to the adoption of ASU 2016-13.

&nbsp;&nbsp;&nbsp;&nbsp;F. Net adjustment to retained earnings related to the adoption of ASU 2016-13.

 

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes". This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The Company adopted this ASU as of January 1, 2021, and it did not have a material effect on the Company's financial statements.

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

*Standards Not Yet Adopted*

In March 2022, the Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This new accounting topic provides accounting guidance for troubled debt restructuring (TDR) and write-offs, effective January 1, 2023, with early adoption permitted. The amendments eliminate TDR accounting guidance for issuers that have adopted ASU 2016-13, create a single loan modification accounting model, and clarify disclosure requirments for loan modifications and write-offs. We are currently reviewing the impact of the updated guidance on our Consolidated Financial Statements, but do no anticipate a material impact. At this time, the Company has no plans to early adopt this guidance.

 

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**Note 2. Debt Securities**

There was no allowance for credit losses for investments as of June 30, 2022; therefore, it is not presented in the table below. The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** |  |
|  | **Amortized** |  | **Unrealized** |  | **Unrealized** | **Fair** |  |
|  | **Cost** |  | **Gains** |  | **Losses** | **Value** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| U.S. Agency securities | $425 |  | $- |  | $(2) | $423 |  |
| U.S. Treasury Notes | 136419 |  |  |  | (2176) | 134243 |  |
| Municipal securities | 24461 |  | 51 |  | (58) | 24454 |  |
| Corporate notes | 40625 |  |  |  | (1520) | 39105 |  |
| Agency mortgage-backed securities | 98265 |  | 13 |  | (8736) | 89542 |  |
| Total | $300195 |  | $64 |  | $(12492) | $287767 |  |

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
|  | **Amortized** |  | **Unrealized** |  | **Unrealized** | **Fair** |  |
|  | **Cost** |  | **Gains** |  | **Losses** | **Value** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| U.S. Agency securities | $469 |  | $— |  | $(3) | $466 |  |
| Municipal securities | 28596 |  | 198 |  |  | 28794 |  |
| Corporate notes | 9935 |  |  |  | (16) | 9919 |  |
| Agency mortgage-backed securities | 37273 |  | 513 |  | (673) | 37113 |  |
| Total | $76273 |  | $711 |  | $(692) | $76292 |  |

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

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| | | |
|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** |
|  | **Amortized** |  |
| *(Amounts in thousands)* | **Cost** | **Fair Value** |
| **Available-for-sale debt securities** |  |  |
| Due within one year | $19637 | $19499 |
| Due after one year but within five years | 177850 | 174311 |
| Due after five years but within ten years | 4443 | 4415 |
|  | 201930 | 198225 |
| Agency mortgage-backed securities | 98265 | 89542 |
| Total debt securities available for sale | $300195 | $287767 |

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

---

| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** |
|  | **Less than 12 Months** | **Less than 12 Months** | **Less than 12 Months** | **12 Months or Longer** | **12 Months or Longer** | **12 Months or Longer** | **Total** | **Total** | **Total** |
|  | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** |
|  | **Value** |  | **Losses** | **Value** |  | **Losses** | **Value** |  | **Losses** |
| *(Amounts in thousands)* |  | |  |  | |  |  | |  |
| U.S. Agency securities | $- |  | $- | $416 |  | $(2) | $416 |  | $(2) |
| U.S. Treasury Notes | 134243 |  | (2176) |  |  |  | 134243 |  | (2176) |
| Municipal securities | 5178 |  | (58) |  |  |  | 5178 |  | (58) |
| Corporate notes | 38119 |  | (1520) |  |  |  | 38119 |  | (1520) |
| Agency mortgage-backed securities | 76334 |  | (6381) | 12009 |  | (2355) | 88343 |  | (8736) |
| Total | $253874 |  | $(10135) | $12425 |  | $(2357) | $266299 |  | $(12492) |

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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Less than 12 Months** | **Less than 12 Months** | **Less than 12 Months** | **12 Months or Longer** | **12 Months or Longer** | **12 Months or Longer** | **Total** | **Total** | **Total** |
|  | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** |
|  | **Value** |  | **Losses** | **Value** |  | **Losses** | **Value** |  | **Losses** |
| *(Amounts in thousands)* |  | |  |  | |  |  | |  |
| U.S. Agency securities | $— |  | $— | $459 |  | $(3) | $459 |  | $(3) |
| Corporate notes | 9919 |  | (16) |  |  |  | 9919 |  | (16) |
| Agency mortgage-backed securities | 14092 |  | (253) | 8384 |  | (420) | 22476 |  | (673) |
| Total | $24011 |  | $(269) | $8843 |  | $(423) | $32854 |  | $(692) |

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There were 90 individual debt securities in an unrealized loss position as of June 30, 2022, and the combined depreciation in value represented 4.34% of the debt securities portfolio. There were 23 individual debt securities in an unrealized loss position as of December 31, 2021, and their combined depreciation in value represented 0.91% of the debt securities portfolio.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the investments. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of June 30, 2022, continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.

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

There were no gross realized gains and losses from the sale of available-for-sale debt securities for the three and six months ended June 30, 2022 and 2021.

The carrying amount of securities pledged for various purposes totaled $34.22 million as of June 30, 2022, and $22.15 million as of December 31, 2021.

**Note 3. Loans**

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $1.94 million as of June 30, 2022, and $1.65 million as of December 31, 2021. Deferred loan fees, net of loan costs, totaled $3.90 million as of June 30, 2022, and $5.06 million as of December 31, 2021. For information about off-balance sheet financing, see Note 14, "Litigation, Commitments, and Contingencies," to the Condensed Consolidated Financial Statements of this report.

In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis to include net deferred loan fees of $3.90 million and $5.06 million and unamortized discount related to loans acquired of $4.50 million and $5.41 million million for June 30, 2022, and December 31, 2021, respectively. Accrued interest receivable (AIR) of $7.11 million as of June 30, 2022, and $7.54 million as of December 31, 2021, is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Amount** | **Percent** | **Amount** | **Percent** |
| Loans held for investment |  |  |  |  |
| Commercial loans |  |  |  |  |
| Construction, development, and other land | $92840 | 4.04% | $65806 | 3.04% |
| Commercial and industrial | 139792 | 6.08% | 133630 | 6.17% |
| Multi-family residential | 124274 | 5.40% | 100402 | 4.64% |
| Single family non-owner occupied | 195113 | 8.48% | 198778 | 9.18% |
| Non-farm, non-residential | 752369 | 32.72% | 707506 | 32.67% |
| Agricultural | 9987 | 0.43% | 9341 | 0.43% |
| Farmland | 12833 | 0.56% | 15013 | 0.69% |
| Total commercial loans | 1327208 | 57.71% | 1230476 | 56.82% |
| Consumer real estate loans |  |  |  |  |
| Home equity lines | 78999 | 3.44% | 79857 | 3.69% |
| Single family owner occupied | 722370 | 31.41% | 703864 | 32.50% |
| Owner occupied construction | 17331 | 0.75% | 16910 | 0.78% |
| Total consumer real estate loans | 818700 | 35.60% | 800631 | 36.97% |
| Consumer and other loans |  |  |  |  |
| Consumer loans | 148741 | 6.47% | 129794 | 5.99% |
| Other | 5149 | 0.22% | 4668 | 0.22% |
| Total consumer and other loans | 153890 | 6.69% | 134462 | 6.21% |
| Total loans held for investment, net of unearned income | $2299798 | 100.00% | $2165569 | 100.00% |

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The Company began participating as a Small Business Administration Paycheck Protection Program lender during the second quarter of 2020. At June 30, 2022, the PPP loans had a current balance of $2.07 million, compared to $20.64 million at December 31, 2021, and were included in commercial and industrial loan balances. Deferred remaining loan origination fees related to the PPP loans, net of deferred loan origination costs, totaled $80 thousand at June 30, 2022, and $733 thousand at December 31, 2021. During the second quarter of 2022, the Company recorded amortization of net deferred loan origination fees of $319 thousand on PPP loans and recorded $654 thousand in amortization for the six month period of 2022 . The Company recorded amortization of net deferred loan origination fees on PPP loans of $608 thousand and $1.53 million in amortization for the same periods, respectively, of 2021. 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.

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**Note 4. Credit Quality** 

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

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

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

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

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

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

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** |
|  |  | **Special** |  |  |  |  |
| *(Amounts in thousands)* | **Pass** | **Mention** | **Substandard** | **Doubtful** | **Loss** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $91872 | $417 | $551 | $- | $- | $92840 |
| Commercial and industrial | 136353 | 982 | 2457 |  |  | 139792 |
| Multi-family residential | 123403 | 649 | 222 |  |  | 124274 |
| Single family non-owner occupied | 184275 | 2287 | 8551 |  |  | 195113 |
| Non-farm, non-residential | 723467 | 16794 | 12108 |  |  | 752369 |
| Agricultural | 9754 | 54 | 179 |  |  | 9987 |
| Farmland | 10584 | 603 | 1646 |  |  | 12833 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 75540 | 430 | 3029 |  |  | 78999 |
| Single family owner occupied | 692766 | 2041 | 27563 |  |  | 722370 |
| Owner occupied construction | 17167 |  | 164 |  |  | 17331 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 145934 | 11 | 2796 |  |  | 148741 |
| Other | 5149 |  |  |  |  | 5149 |
| Total loans | $2216264 | $24268 | $59266 | $- | $- | $2299798 |

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  |  | **Special** |  |  |  |  |
| *(Amounts in thousands)* | **Pass** | **Mention** | **Substandard** | **Doubtful** | **Loss** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $64498 | $451 | $857 | $- | $- | $65806 |
| Commercial and industrial | 128770 | 1005 | 3855 |  |  | 133630 |
| Multi-family residential | 98457 | 1090 | 855 |  |  | 100402 |
| Single family non-owner occupied | 186184 | 3607 | 8977 | 10 |  | 198778 |
| Non-farm, non-residential | 665559 | 25624 | 16323 |  |  | 707506 |
| Agricultural | 8758 | 70 | 513 |  |  | 9341 |
| Farmland | 11939 | 633 | 2441 |  |  | 15013 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 76259 | 426 | 3172 |  |  | 79857 |
| Single family owner occupied | 671459 | 2420 | 29985 |  |  | 703864 |
| Owner occupied construction | 16629 |  | 281 |  |  | 16910 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 127514 | 16 | 2264 |  |  | 129794 |
| Other | 4668 |  |  |  |  | 4668 |
| Total loans | $2060694 | $35342 | $69523 | $10 | $- | $2165569 |

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The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at June 30, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Construction, development |  |  |  |  |  |  |  |  |
| and other land |  |  |  |  |  |  |  |  |
| Pass | $19079 | $49774 | $10616 | $2732 | $3037 | $6280 | $354 | $91872 |
| Special Mention |  |  |  |  | 111 | 270 | 36 | 417 |
| Substandard |  |  | 255 | 36 | 12 | 248 |  | 551 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total construction, development, and other land | $19079 | $49774 | $10871 | $2768 | $3160 | $6798 | $390 | $92840 |
| Commercial and industrial |  |  |  |  |  |  |  |  |
| Pass | $44408 | $28875 | $15160 | $10273 | $11012 | $8013 | $16545 | $134286 |
| Special Mention |  | 25 | 35 | 601 | 226 |  | 95 | 982 |
| Substandard | 145 | 176 | 222 | 588 | 231 | 578 | 517 | 2457 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total commercial and industrial | $44553 | $29076 | $15417 | $11462 | $11469 | $8591 | $17157 | $137725 |
| Paycheck Protection Loans |  |  |  |  |  |  |  |  |
| Pass | $- | $2038 | $29 | $- | $- | $- | $- | $2067 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  |  |  |  |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total Paycheck Protection Loans | $- | $2038 | $29 | $- | $- | $- | $- | $2067 |
| Multi-family residential |  |  |  |  |  |  |  |  |
| Pass | $33938 | $10932 | $23800 | $4354 | $1807 | $47638 | $934 | $123403 |
| Special Mention |  |  |  |  |  | 649 |  | 649 |
| Substandard |  |  |  |  |  | 222 |  | 222 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total multi-family residential | $33938 | $10932 | $23800 | $4354 | $1807 | $48509 | $934 | $124274 |
| Non-farm, non-residential |  |  |  |  |  |  |  |  |
| Pass | $134331 | $139073 | $129979 | $57546 | $39902 | $208618 | $14018 | $723467 |
| Special Mention |  | 1969 | 868 | 1216 | 2571 | 10020 | 150 | 16794 |
| Substandard |  | 1144 | 692 | 2471 | 722 | 6851 | 228 | 12108 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total non-farm, non-residential | $134331 | $142186 | $131539 | $61233 | $43195 | $225489 | $14396 | $752369 |
| Agricultural |  |  |  |  |  |  |  |  |
| Pass | $2560 | $3779 | $1258 | $601 | $407 | $715 | $434 | $9754 |
| Special Mention |  | 37 | 17 |  |  |  |  | 54 |
| Substandard |  | 40 | 7 | 84 | 36 | 12 |  | 179 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total agricultural | $2560 | $3856 | $1282 | $685 | $443 | $727 | $434 | $9987 |
| Farmland |  |  |  |  |  |  |  |  |
| Pass | $166 | $727 | $1002 | $77 | $903 | $6176 | $1533 | $10584 |
| Special Mention |  | 110 |  |  | 232 | 261 |  | 603 |
| Substandard |  |  | 13 |  | 257 | 1376 |  | 1646 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total farmland | $166 | $837 | $1015 | $77 | $1392 | $7813 | $1533 | $12833 |

---

------

[**Table of Contents**](#toc)

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at June 30, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Home equity lines |  |  |  |  |  |  |  |  |
| Pass | $1026 | $102 | $- | $- | $62 | $861 | $73489 | $75540 |
| Special Mention |  |  |  |  |  |  | 430 | 430 |
| Substandard |  |  | 85 | 36 | 205 | 1253 | 1450 | 3029 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total home equity lines | $1026 | $102 | $85 | $36 | $267 | $2114 | $75369 | $78999 |
| Single family Mortgage |  |  |  |  |  |  |  |  |
| Pass | $92181 | $235009 | $213126 | $54675 | $39796 | $241066 | $1188 | $877041 |
| Special Mention |  | 387 | 85 | 372 | 266 | 3218 |  | 4328 |
| Substandard | 382 | 1041 | 715 | 1082 | 2172 | 30722 |  | 36114 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total single family owner and non-owner occupied | $92563 | $236437 | $213926 | $56129 | $42234 | $275006 | $1188 | $917483 |
| Owner occupied construction |  |  |  |  |  |  |  |  |
| Pass | $2591 | $11768 | $2005 | $32 | $16 | $755 | $- | $17167 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  | 163 |  |  | 1 |  | 164 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total owner occupied construction | $2591 | $11768 | $2168 | $32 | $16 | $756 | $- | $17331 |
| Consumer loans |  |  |  |  |  |  |  |  |
| Pass | $53360 | $49325 | $22059 | $11474 | $3844 | $8796 | $2225 | $151083 |
| Special Mention |  | 3 |  | 7 |  |  | 1 | 11 |
| Substandard | 55 | 1049 | 730 | 645 | 52 | 189 | 76 | 2796 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total consumer loans | $53415 | $50377 | $22789 | $12126 | $3896 | $8985 | $2302 | $153890 |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at June 30, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Total Loans |  |  |  |  |  |  |  |  |
| Pass | $383640 | $531402 | $419034 | $141764 | $100786 | $528918 | $110720 | $2216264 |
| Special Mention |  | 2531 | 1005 | 2196 | 3406 | 14418 | 712 | 24268 |
| Substandard | 582 | 3450 | 2882 | 4942 | 3687 | 41452 | 2271 | 59266 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total loans | $384222 | $537383 | $422921 | $148902 | $107879 | $584788 | $113703 | $2299798 |

---

------

[**Table of Contents**](#toc)

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Construction, development |  |  |  |  |  |  |  |  |
| and other land |  |  |  |  |  |  |  |  |
| Pass | $40207 | $10127 | $3081 | $3704 | $1308 | $5717 | $354 | $64498 |
| Special Mention |  | 266 |  | 128 |  | 21 | 36 | 451 |
| Substandard |  |  | 128 | 11 | 291 | 427 |  | 857 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total construction, development, and other land | $40207 | $10393 | $3209 | $3843 | $1599 | $6165 | $390 | $65806 |
| Commercial and industrial |  |  |  |  |  |  |  |  |
| Pass | $34539 | $18887 | $13679 | $13772 | $4817 | $5890 | $16544 | $108128 |
| Special Mention | 32 | 60 | 597 | 192 | 28 |  | 96 | 1005 |
| Substandard | 184 | 355 | 706 | 384 | 842 | 866 | 518 | 3855 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total commercial and industrial | $34755 | $19302 | $14982 | $14348 | $5687 | $6756 | $17158 | $112988 |
| Paycheck Protection Loans |  |  |  |  |  |  |  |  |
| Pass | $16482 | $4160 | $- | $- | $- | $- | $- | $20642 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  |  |  |  |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total Paycheck Protection Loans | $16482 | $4160 | $- | $- | $- | $- | $- | $20642 |
| Multi-family residential |  |  |  |  |  |  |  |  |
| Pass | $11307 | $24299 | $4644 | $1897 | $8413 | $46962 | $935 | $98457 |
| Special Mention |  |  |  |  |  | 1090 |  | 1090 |
| Substandard |  |  |  |  |  | 855 |  | 855 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total multi-family residential | $11307 | $24299 | $4644 | $1897 | $8413 | $48907 | $935 | $100402 |
| Non-farm, non-residential |  |  |  |  |  |  |  |  |
| Pass | $147978 | $146381 | $62651 | $50943 | $43776 | $199812 | $14018 | $665559 |
| Special Mention | 397 | 3334 | 823 | 2595 | 9190 | 9135 | 150 | 25624 |
| Substandard | 1161 | 711 | 2508 | 2531 | 3232 | 5953 | 227 | 16323 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total non-farm, non-residential | $149536 | $150426 | $65982 | $56069 | $56198 | $214900 | $14395 | $707506 |
| Agricultural |  |  |  |  |  |  |  |  |
| Pass | $4564 | $1548 | $998 | $534 | $346 | $335 | $433 | $8758 |
| Special Mention | 43 | 27 |  |  |  |  |  | 70 |
| Substandard | 44 | 11 | 282 | 39 | 17 | 120 |  | 513 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total agricultural | $4651 | $1586 | $1280 | $573 | $363 | $455 | $433 | $9341 |
| Farmland |  |  |  |  |  |  |  |  |
| Pass | $428 | $1047 | $82 | $1125 | $887 | $6835 | $1535 | $11939 |
| Special Mention | 189 |  |  | 240 | 5 | 199 |  | 633 |
| Substandard |  | 14 | 519 | 249 | 264 | 1395 |  | 2441 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total farmland | $617 | $1061 | $601 | $1614 | $1156 | $8429 | $1535 | $15013 |

---

------

[**Table of Contents**](#toc)

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Home equity lines |  |  |  |  |  |  |  |  |
| Pass | $115 | $59 | $- | $25 | $2 | $2168 | $73890 | $76259 |
| Special Mention |  |  |  |  |  |  | 426 | 426 |
| Substandard |  |  | 28 | 249 | 128 | 1316 | 1451 | 3172 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total home equity lines | $115 | $59 | $28 | $274 | $130 | $3484 | $75767 | $79857 |
| Single family Mortgage |  |  |  |  |  |  |  |  |
| Pass | $239917 | $225294 | $61925 | $46716 | $41757 | $240845 | $1189 | $857643 |
| Special Mention | 399 | 510 | 937 | 269 | 137 | 3775 |  | 6027 |
| Substandard | 1213 | 799 | 1475 | 1668 | 1878 | 31929 |  | 38962 |
| Doubtful |  |  |  |  |  | 10 |  | 10 |
| Loss |  |  |  |  |  |  |  |  |
| Total single family owner and non-owner occupied | $241529 | $226603 | $64337 | $48653 | $43772 | $276559 | $1189 | $902642 |
| Owner occupied construction |  |  |  |  |  |  |  |  |
| Pass | $9689 | $4729 | $178 | $22 | $428 | $1583 | $- | $16629 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  | 281 |  | 281 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total owner occupied construction | $9689 | $4729 | $178 | $22 | $428 | $1864 | $- | $16910 |
| Consumer loans |  |  |  |  |  |  |  |  |
| Pass | $65018 | $31065 | $16548 | $4980 | $2306 | $10040 | $2225 | $132182 |
| Special Mention |  |  | 16 |  |  |  |  | 16 |
| Substandard | 328 | 663 | 824 | 107 | 78 | 186 | 78 | 2264 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total consumer loans | $65346 | $31728 | $17388 | $5087 | $2384 | $10226 | $2303 | $134462 |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Total Loans |  |  |  |  |  |  |  |  |
| Pass | $570244 | $467596 | $163786 | $123718 | $104040 | $520187 | $111123 | $2060694 |
| Special Mention | 1060 | 4197 | 2373 | 3424 | 9360 | 14220 | 708 | 35342 |
| Substandard | 2930 | 2553 | 6470 | 5238 | 6730 | 43328 | 2274 | 69523 |
| Doubtful |  |  |  |  |  | 10 |  | 10 |
| Loss |  |  |  |  |  |  |  |  |
| Total loans | $574234 | $474346 | $172629 | $132380 | $120130 | $577745 | $114105 | $2165569 |

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------

[**Table of Contents**](#toc)

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **No Allowance** | **With an Allowance** | **Total** | **No Allowance** | **With an Allowance** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $277 | $- | $277 | $409 | $- | $409 |
| Commercial and industrial | 435 |  | 435 | 1734 |  | 1734 |
| Multi-family residential | 266 |  | 266 | 208 |  | 208 |
| Single family non-owner occupied | 2132 |  | 2132 | 2304 |  | 2304 |
| Non-farm, non-residential | 2815 |  | 2815 | 3439 | 1100 | 4539 |
| Agricultural | 22 |  | 22 | 136 |  | 136 |
| Farmland | 133 |  | 133 | 222 |  | 222 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 775 |  | 775 | 767 |  | 767 |
| Single family owner occupied | 8816 |  | 8816 | 8957 |  | 8957 |
| Owner occupied construction |  |  |  |  |  |  |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 2155 |  | 2155 | 1492 |  | 1492 |
| Total nonaccrual loans | $17826 | $- | $17826 | $19668 | $1100 | $20768 |

---

During the second quarter of 2022, $1 thousand in nonaccrual loan interest was recognized compared to $15 thousand for the same period of 2021. During the first six months of 2022 $3 thousand in nonaccrual loan interest was recognized compared to $24 thousand for the same period of 2021 .

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

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** |
|  |  |  |  |  |  |  | **Amortized Cost of** |
|  | **30 - 59 Days** | **60 - 89 Days** | **90+ Days** | **Total** | **Current** | **Total** | **> 90 Days Accruing** |
| *(Amounts in thousands)* | **Past Due** | **Past Due** | **Past Due** | **Past Due** | **Loans** | **Loans** | **No Allowance** |
| Commercial loans |  |  |  |  |  |  |  |
| Construction, development, and other land | $231 | $252 | $25 | $508 | $92332 | $92840 | $- |
| Commercial and industrial | 346 | 84 | 192 | 622 | 139170 | 139792 |  |
| Multi-family residential | 148 |  |  | 148 | 124126 | 124274 |  |
| Single family non-owner occupied | 180 | 327 | 502 | 1009 | 194104 | 195113 |  |
| Non-farm, non-residential | 90 | 16 | 2050 | 2156 | 750213 | 752369 |  |
| Agricultural | 16 |  | 13 | 29 | 9958 | 9987 |  |
| Farmland |  |  | 133 | 133 | 12700 | 12833 |  |
| Consumer real estate loans |  |  |  |  |  |  |  |
| Home equity lines | 405 | 123 | 469 | 997 | 78002 | 78999 |  |
| Single family owner occupied | 3977 | 2471 | 3017 | 9465 | 712905 | 722370 |  |
| Owner occupied construction |  |  |  |  | 17331 | 17331 |  |
| Consumer and other loans |  |  |  |  |  |  |  |
| Consumer loans | 3002 | 1035 | 1176 | 5213 | 143528 | 148741 |  |
| Other |  |  |  |  | 5149 | 5149 |  |
| Total loans | $8395 | $4308 | $7577 | $20280 | $2279518 | $2299798 | $- |

---

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  |  |  |  |  |  |  | **Amortized Cost of** |
|  | **30 - 59 Days** | **60 - 89 Days** | **90+ Days** | **Total** | **Current** | **Total** | **> 90 Days Accruing** |
| *(Amounts in thousands)* | **Past Due** | **Past Due** | **Past Due** | **Past Due** | **Loans** | **Loans** | **No Allowance** |
| Commercial loans |  |  |  |  |  |  |  |
| Construction, development, and other land | $52 | $- | $120 | $172 | $65634 | $65806 | $- |
| Commercial and industrial | 325 | 35 | 1394 | 1754 | 131876 | 133630 |  |
| Multi-family residential | 97 |  |  | 97 | 100305 | 100402 |  |
| Single family non-owner occupied | 1210 | 583 | 795 | 2588 | 196190 | 198778 |  |
| Non-farm, non-residential | 1002 | 441 | 2333 | 3776 | 703730 | 707506 |  |
| Agricultural | 73 | 7 | 101 | 181 | 9160 | 9341 |  |
| Farmland | 52 |  | 222 | 274 | 14739 | 15013 |  |
| Consumer real estate loans |  |  |  |  |  |  |  |
| Home equity lines | 275 | 388 | 333 | 996 | 78861 | 79857 |  |
| Single family owner occupied | 4740 | 2584 | 3880 | 11204 | 692660 | 703864 |  |
| Owner occupied construction | 139 |  |  | 139 | 16771 | 16910 |  |
| Consumer and other loans |  |  |  |  |  |  |  |
| Consumer loans | 3469 | 1182 | 1049 | 5700 | 124094 | 129794 |  |
| Other |  |  |  |  | 4668 | 4668 |  |
| Total loans | $11434 | $5220 | $10227 | $26881 | $2138688 | $2165569 | $- |

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[**Table of Contents**](#toc)

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Balance** | **Collateral Coverage** | **%** | **Balance** | **Collateral Coverage** | **%** |
| Commercial Real Estate |  |  |  |  |  |  |
| Hotel | $- | $- |  | $- | $- |  |
| Office |  |  |  |  |  |  |
| Other | 766 | 972 | 126.89% | 2216 | 2312 | 104.33% |
| Retail |  |  |  |  |  |  |
| Multi-Family |  |  |  |  |  |  |
| Industrial |  |  |  |  |  |  |
| Office |  |  |  |  |  |  |
| Other |  |  |  |  |  |  |
| Commercial and industrial |  |  |  |  |  |  |
| Industrial |  |  |  |  |  |  |
| Other |  |  |  |  |  |  |
| Home equity loans |  |  |  |  |  |  |
| Consumer owner occupied |  |  |  |  |  |  |
| Consumer |  |  |  |  |  |  |
| Total collateral dependent loans | $766 | $972 | 126.89% | $2216 | $2312 | 104.33% |

---

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

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

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[**Table of Contents**](#toc)

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Nonaccrual(1)** | **Accruing** | **Total** | **Nonaccrual(1)** | **Accruing** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Commercial and industrial | $- | $432 | $432 | $396 | $470 | $866 |
| Single family non-owner occupied | 150 | 853 | 1003 | 857 | 1100 | 1957 |
| Non-farm, non-residential |  | 1963 | 1963 |  | 2021 | 2021 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines |  | 61 | 61 |  | 67 | 67 |
| Single family owner occupied | 1284 | 4978 | 6262 | 1266 | 4755 | 6021 |
| Owner occupied construction |  |  |  |  | 212 | 212 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans |  | 26 | 26 |  | 27 | 27 |
| Total TDRs | $1434 | $8313 | $9747 | $2519 | $8652 | $11171 |
| Allowance for credit losses related to TDRs |  |  | $- |  |  | $- |

---

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

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

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** |  | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** |
|  | **2022** |  | **2021** |  | **2022** |  | **2021** |
| *(Amounts in thousands)* |  | |  | |  | |  |
| Interest income recognized | $97 |  | $94 |  | $202 |  | $198 |

---

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
| *(Amounts in thousands)* | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** |
| Extended term |  |  |  |  |  |  |
| Single family owner occupied | 2 | $238 | $245 |  | $- | $- |
| Total extended term | 2 | 238 | 245 |  |  |  |
| Total | 2 | $238 | $245 |  | $- | $- |

---

------

&nbsp;&nbsp;&nbsp;&nbsp;(1) Represents the loan balance immediately following modification

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
| *(Amounts in thousands)* | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** |
| Below market interest rate |  |  |  |  |  |  |
| Single family owner occupied | 1 | $31 | $31 |  | $- | $- |
| Total below market interest rate | 1 | $31 | $31 |  |  |  |
| Extended payment term |  |  |  |  |  |  |
| Single family owner occupied | 2 | 238 | 245 |  |  |  |
| Total extended payment term | 2 | 238 | 245 |  |  |  |
| Payment deferral |  |  |  |  |  |  |
| Non-farm, non-residential |  |  |  | 1 | 1390 | 1374 |
| Total principal deferral |  |  |  | 1 | 1390 | 1374 |
| Total | 3 | $269 | $276 | 1 | $1390 | $1374 |

---

------

&nbsp;&nbsp;&nbsp;&nbsp;(1) Represents the loan balance immediately following modification

There was one payment default in the amount of $39 thousand for loans modified as TDRs restructured within the previous 12 months as of June 30, 2022, and none as of June 30, 2021.

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[**Table of Contents**](#toc)

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

---

| | | | |
|:---|:---|:---|:---|
|  | **June 30, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| OREO | $579 |  | $1015 |
| OREO secured by residential real estate | $221 |  | $337 |
| Residential real estate loans in the foreclosure process<sup>(1)</sup> | $2741 |  | $2210 |

---

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&nbsp;&nbsp;&nbsp;&nbsp;(1) The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction

**Note 5. Allowance for Credit Losses** 

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30, 2022** | **Three Months Ended June 30, 2022** | **Three Months Ended June 30, 2022** | **Three Months Ended June 30, 2022** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $15896 | $9764 | $3321 | $28981 |
| Provision for (recovery of) loan losses charged to operations | (808) | 48 | 1270 | 510 |
| Charge-offs | (151) | (88) | (1230) | (1469) |
| Recoveries | 1182 | 325 | 220 | 1727 |
| Net recoveries (charge-offs) | 1031 | 237 | (1010) | 258 |
| Ending balance | $16119 | $10049 | $3581 | $29749 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30, 2021** | **Three Months Ended June 30, 2021** | **Three Months Ended June 30, 2021** | **Three Months Ended June 30, 2021** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $19586 | $11887 | $3090 | $34563 |
| (Recovery of) provision for credit losses charged to operations | (1712) | (986) | 468 | (2230) |
| Charge-offs | (1202) | (48) | (652) | (1902) |
| Recoveries | 1032 | 202 | 192 | 1426 |
| Net (charge-offs) recoveries | (170) | 154 | (460) | (476) |
| Ending balance | $17704 | $11055 | $3098 | $31857 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Six Months Ended June 30, 2022** | **Six Months Ended June 30, 2022** | **Six Months Ended June 30, 2022** | **Six Months Ended June 30, 2022** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $14775 | $9972 | $3111 | $27858 |
| Provision for (recovery of) loan losses charged to operations | 300 | (193) | 2364 | 2471 |
| Charge-offs | (408) | (94) | (2269) | (2771) |
| Recoveries | 1452 | 364 | 375 | 2191 |
| Net recoveries (charge-offs) | 1044 | 270 | (1894) | (580) |
| Ending balance | $16119 | $10049 | $3581 | $29749 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Six Months Ended June 30, 2021** | **Six Months Ended June 30, 2021** | **Six Months Ended June 30, 2021** | **Six Months Ended June 30, 2021** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $14661 | $8951 | $2570 | $26182 |
| Cumulative effect of adoption of ASU 2016-13 | 8360 | 4145 | 602 | 13107 |
| Provision for loan losses charged to operations | (4782) | (2528) | 1079 | (6231) |
| Charge-offs | (1959) | (58) | (1615) | (3632) |
| Recoveries | 1424 | 545 | 462 | 2431 |
| Net (charge-offs) recoveries | (535) | 487 | (1153) | (1201) |
| Ending balance | $17704 | $11055 | $3098 | $31857 |

---

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[**Table of Contents**](#toc)

**Note 6. Deposits**

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

---

| | | | |
|:---|:---|:---|:---|
|  | **June 30, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Noninterest-bearing demand deposits | $877962 |  | $842783 |
| Interest-bearing deposits: |  |  |  |
| Interest-bearing demand deposits | 702925 |  | 676254 |
| Money market accounts | 302452 |  | 293915 |
| Savings deposits | 589927 |  | 561576 |
| Certificates of deposit | 212968 |  | 237919 |
| Individual retirement accounts | 112305 |  | 116944 |
| Total interest-bearing deposits | 1920577 |  | 1886608 |
| Total deposits | $2798539 |  | $2729391 |

---

**Note 7. Leases**

Operating leases are recorded as a right of use ("ROU") asset and operating lease liability. The ROU asset is recorded in other assets, while the lease liability is recorded in other liabilities on the condensed balance sheet beginning January 1, 2019, when the Company adopted ASU 2016-02, on a prospective basis. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The ROU asset and lease liability have been recognized based on the present value of the lease payments using a discount rate that represented our incremental borrowing rate at the lease commencement date or the date of adoption of ASU 2016-02. The lease expense, which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the condensed statements of income.

The Company's current operating leases relate to one existing bank branch and one operating lease acquired in a prior bank acquisition. The acquired operating lease was for vacant land and will terminate in July of 2029. The Company's ROU asset was $695 thousand as of June 30, 2022 compared to $741 thousand as of December 31, 2021. The operating lease liability as of June 30, 2022, was $714 thousand compared to $770 thousand as of December 31, 2021. The Company's total operating leases have remaining terms of 2 - 7 years; compared with 4 months to 7.5 years as of December 31, 2021. The June 30, 2022 weighted average discount rate of 3.22% did not change from December 31, 2021.

Future minimum lease payments as of the dates indicated are as follows:

---

| | |
|:---|:---|
| **<u>Year</u>** | **June 30, 2022** |
| *(Amounts in thousands)* |  |
| 2023 | $117 |
| 2024 | 121 |
| 2025 | 108 |
| 2026 | 101 |
| 2027 and thereafter | 311 |
| Total lease payments | 758 |
| Less: Interest | (44) |
| Present value of lease liabilities | $714 |

---

---

| | |
|:---|:---|
| **<u>Year</u>** | **December 31, 2021** |
| *(Amounts in thousands)* |  |
| 2022 | $131 |
| 2023 | 119 |
| 2024 | 117 |
| 2025 | 101 |
| 2026 and thereafter | 362 |
| Total lease payments | 830 |
| Less: Interest | (60) |
| Present value of lease liabilities | $770 |

---

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[**Table of Contents**](#toc)

**Note 8. Borrowings**

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **December 31, 2021** | **December 31, 2021** |
|  |  | **Weighted** |  | **Weighted** |
| *(Amounts in thousands)* | **Balance** | **Average Rate** | **Balance** | **Average Rate** |
| Retail repurchase agreements | $2635 | 0.08% | $1536 | 0.07% |

---

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

As of June 30, 2022, the Company had no long-term borrowings.

Unused borrowing capacity with the FHLB totaled $427.55 million, net of FHLB letters of credit of $123.65 million, as of June 30, 2022. As of June 30, 2022, the Company pledged $734.26 million in qualifying loans to secure the FHLB borrowing capacity.

**Note 9. Derivative Instruments and Hedging Activities**

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

 

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan's stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. In March 2020, the Company adopted ASU 2020-04, "Reference Rate Reform" which provided temporary guidance to ease the potential burden in accounting for reference rate reform. With global capital markets moving away from LIBOR, the guidance provided optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships that reference LIBOR. The migration from LIBOR is not expected to have any material effect on the Company's financial statements when and as changes are made to migrate from the reference rate.

Certain of the Company's interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of June 30, 2022. The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period.

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Notional or** | **Fair Value** | **Fair Value** | **Notional or** | **Fair Value** | **Fair Value** |
|  | **Contractual** | **Derivative** | **Derivative** | **Contractual** | **Derivative** | **Derivative** |
| *(Amounts in thousands)* | **Amount** | **Assets** | **Liabilities** | **Amount** | **Assets** | **Liabilities** |
| Derivatives designated as hedges |  |  |  |  |  |  |
| Interest rate swaps | $4188 | $67 | $- | $4388 | $- | $229 |
| Derivatives not designated as hedges |  |  |  |  |  |  |
| Interest rate swaps | $7759 | $59 | $- | $7890 | $- | $608 |
| Total derivatives | $11947 | $126 | $- | $12278 | $- | $837 |

---

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

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** |  |
| *(Amounts in thousands)* | **2022** | **2021** | **2022** | **2021** | **Income Statement Location** |
| Derivatives designated as hedges |  |  |  |  |  |
| Interest rate swaps | $19 | $28 | $44 | $56 | Interest and fees on loans |
| Derivatives not designated as hedges |  |  |  |  |  |
| Interest rate swaps | $32 | $50 | $83 | $118 | Interest and fees on loans |
| Total derivative expense | $51 | $78 | $127 | $174 |  |

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[**Table of Contents**](#toc)

**Note 10. Employee Benefit Plans** 

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

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** |  | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** |  |
|  | **2022** |  | **2021** |  | **2022** |  | **2021** | **Income Statement Location** |
| *(Amounts in thousands)* |  | |  | |  | |  |  |
| Service cost | $- |  | $88 |  | $- |  | $176 | Salaries and employee benefits |
| Interest cost | 83 |  | 79 |  | 166 |  | 158 | Other expense |
| Amortization of prior service cost |  |  | 30 |  |  |  | 61 | Other expense |
| Amortization of losses | 33 |  | 66 |  | 67 |  | 132 | Other expense |
| Net periodic cost | $116 |  | $263 |  | $233 |  | $527 |  |

---

**Note 11. Earnings per Share**

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

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  | **Six Months Ended** | **Six Months Ended** | **Six Months Ended** |  |
|  | **June 30,** | **June 30,** | **June 30,** |  | **June 30,** | **June 30,** | **June 30,** |  |
|  | **2022** |  | **2021** |  | **2022** |  | **2021** |  |
| *(Amounts in thousands, except share and per share data)* |  | |  | |  | |  | |
| Net income | $11213 |  | $13403 |  | $20728 |  | $28005 |  |
| Weighted average common shares outstanding, basic | 16662817 |  | 17486182 |  | 16739624 |  | 17577552 |  |
| Dilutive effect of potential common shares |  |  |  |  |  |  |  |  |
| Stock options | 13068 |  | 34277 |  | 15266 |  | 29969 |  |
| Unvested stock awards | 6169 |  |  |  | 17123 |  |  |  |
| Performance restricted stock units | 561 |  | 15685 |  | 834 |  | 23809 |  |
| Total dilutive effect of potential common shares | 19798 |  | 49962 |  | 33223 |  | 53778 |  |
| Weighted average common shares outstanding, diluted | 16682615 |  | 17536144 |  | 16772847 |  | 17631330 |  |
| Basic earnings per common share | $0.67 |  | $0.77 |  | $1.24 |  | $1.59 |  |
| Diluted earnings per common share | 0.67 |  | 0.76 |  | 1.24 |  | 1.59 |  |
| Antidilutive potential common shares |  |  |  |  |  |  |  |  |
| Stock options | 143676 |  |  |  | 131198 |  | 13990 |  |
| Unvested stock awards |  |  |  |  |  |  | 22311 |  |
| Total potential antidilutive shares | 143676 |  |  |  | 131198 |  | 36301 |  |

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[**Table of Contents**](#toc)

**Note 12. Accumulated Other Comprehensive Income (Loss)**

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

---

| | | | |
|:---|:---|:---|:---|
|  | **Three Months Ended June 30, 2022** | **Three Months Ended June 30, 2022** | **Three Months Ended June 30, 2022** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $(4643) | $(1869) | $(6512) |
| Other comprehensive loss before reclassifications | (5174) |  | (5174) |
| Reclassified from AOCI |  | 26 | 26 |
| Other comprehensive loss, net | (5174) | 26 | (5148) |
| Ending balance | $(9817) | $(1843) | $(11660) |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30, 2021** | **Three Months Ended June 30, 2021** | **Three Months Ended June 30, 2021** | **Three Months Ended June 30, 2021** |
|  | **Unrealized Gains** |  |  |  |
|  | **(Losses) on Available-** |  |  |  |
|  | **for-Sale Securities** |  | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  | |  |  |
| Beginning balance | $460 |  | $(3115) | $(2655) |
| Other comprehensive income before reclassifications | 14 |  |  | 14 |
| Reclassified from AOCI |  |  | 76 | 76 |
| Other comprehensive income, net | 14 |  | 76 | 90 |
| Ending balance | $474 |  | $(3039) | $(2565) |

---

---

| | | | |
|:---|:---|:---|:---|
|  | **Six Months Ended June 30, 2022** | **Six Months Ended June 30, 2022** | **Six Months Ended June 30, 2022** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $15 | $(1561) | $(1546) |
| Other comprehensive loss before reclassifications | (9832) | (335) | (10167) |
| Reclassified from AOCI |  | 53 | 53 |
| Other comprehensive loss, net | (9832) | (282) | (10114) |
| Ending balance | $(9817) | $(1843) | $(11660) |

---

---

| | | | |
|:---|:---|:---|:---|
|  | **Six Months Ended June 30, 2021** | **Six Months Ended June 30, 2021** | **Six Months Ended June 30, 2021** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $1106 | $(3029) | $(1923) |
| Other comprehensive loss before reclassifications | (632) | (162) | (794) |
| Reclassified from AOCI |  | 152 | 152 |
| Other comprehensive loss, net | (632) | (10) | (642) |
| Ending balance | $474 | $(3039) | $(2565) |

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[**Table of Contents**](#toc)

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

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Six Months Ended** | **Six Months Ended** |  |
|  | **June 30,** | **June 30,** | **June 30,** | **June 30,** | **Income Statement** |
| *(Amounts in thousands)* | **2022** | **2021** | **2022** | **2021** | **Line Item Affected** |
| Available-for-sale securities |  |  |  |  |  |
| Gain recognized | $- | $- | $- | $- | Net loss on sale of securities |
| Reclassified out of AOCI, before tax |  |  |  |  | Income before income taxes |
| Income tax expense |  |  |  |  | Income tax expense |
| Reclassified out of AOCI, net of tax |  |  |  |  | Net income |
| Employee benefit plans |  |  |  |  |  |
| Amortization of prior service cost | $- | $31 | $- | $61 | Salaries and employee benefits |
| Amortization of net actuarial benefit cost | 33 | 66 | 67 | 132 | Salaries and employee benefits |
| Reclassified out of AOCI, before tax | 33 | 97 | 67 | 193 | Income before income taxes |
| Income tax expense | 7 | 21 | 14 | 41 | Income tax expense |
| Reclassified out of AOCI, net of tax | 26 | 76 | 53 | 152 | Net income |
| Total reclassified out of AOCI, net of tax | $26 | $76 | $53 | $152 | Net income |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Amortization is included in net periodic pension cost. See Note 10, "Employee Benefit Plans."

**Note 13. Fair Value** 

***Financial Instruments Measured at Fair Value***

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

● Level 1 – Observable, unadjusted quoted prices in active markets

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

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

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

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*Assets and Liabilities Reported at Fair Value on a Recurring Basis*

*Available-for-Sale Debt Securities*

Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company's Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

*Equity Securities.* Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.

*Loans Held for Investment*. Loans held for investment that are subject to a fair value hedge are reported at fair value derived from third-party models. Loans designated in fair value hedges are recorded at fair value on a recurring basis.

*Deferred Compensation Assets and Liabilities*. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

*Derivative Assets and Liabilities*. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** |
|  | **Total** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| Available-for-sale debt securities |  |  |  |  |
| U.S. Agency securities | $423 | $- | $423 | $- |
| &nbsp;&nbsp;&nbsp; U.S. Treasury Notes | 134243 |  | 134243 |  |
| Municipal securities | 24454 |  | 24454 |  |
| &nbsp;&nbsp;&nbsp; Corporate Notes | 39105 |  | 39105 |  |
| Agency mortgage-backed securities | 89542 |  | 89542 |  |
| Total available-for-sale debt securities | 287767 |  | 287767 |  |
| Equity securities | 55 |  | 55 |  |
| Fair value loans | 12480 |  |  | 12480 |
| Deferred compensation assets | 4803 | 4803 |  |  |
| Deferred compensation liabilities | 4803 | 4803 |  |  |

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Total** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| Available-for-sale debt securities |  |  |  |  |
| U.S. Agency securities | $466 | $- | $466 | $- |
| Municipal securities | 28794 |  | 28794 |  |
| &nbsp;&nbsp;&nbsp; Corporate notes | 9919 |  | 9919 |  |
| Agency mortgage-backed securities | 37113 |  | 37113 |  |
| Total available-for-sale debt securities | 76292 |  | 76292 |  |
| Equity securities | 55 |  | 55 |  |
| Fair value loans | 13106 |  |  | 13106 |
| Deferred compensation assets | 5245 | 5245 |  |  |
| Deferred compensation liabilities | 5245 | 5245 |  |  |
| Derivative liabilities | 837 |  | 837 |  |

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*Assets Measured at Fair Value on a Nonrecurring Basis*

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

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

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

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

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** |  |
|  | **Total** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |  |
|  | **Fair Value** |  | **Level 1** |  | **Level 2** |  | **Level 3** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Collateral dependent assets with specific reserves | $766 |  | $- |  | $- |  | $766 |  |
| OREO | $579 |  | $- |  | $- |  | $579 |  |

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
|  | **Total** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |  |
|  | **Fair Value** |  | **Level 1** |  | **Level 2** |  | **Level 3** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Collateral dependent assets with specific reserves | $2312 |  | $- |  | $- |  | $2312 |  |
| OREO | 1015 |  |  |  |  |  | 1015 |  |

---

*Quantitative Information about Level 3 Fair Value Measurements*

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

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| | | | |
|:---|:---|:---|:---|
|  |  |  | **Discount Range** |
|  | **Valuation** | **Unobservable** | **(Weighted Average)** |
|  | **Technique** | **Input** | **June 30, 2022** |
| Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 0% (0%) |
| OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 10% to 95% (71%) |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Fair value is generally based on appraisals of the underlying collateral.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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| | | | |
|:---|:---|:---|:---|
|  |  |  | **Discount Range** |
|  | **Valuation** | **Unobservable** | **(Weighted Average)** |
|  | **Technique** | **Input** | **December 31, 2021** |
| Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 11% (6%) |
| OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 87% (32%) |

---

&nbsp;&nbsp;&nbsp;&nbsp;(1) Fair value is generally based on appraisals of the underlying collateral.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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*Fair Value of Financial Instruments*

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

 

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

 

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

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

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

*Off-Balance Sheet Instruments*. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 14, "Litigation, Commitments, and Contingencies," to the Condensed Consolidated Financial Statements of this report.

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

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** | **June 30, 2022** |
|  | **Carrying** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Amount** | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| **Assets** |  |  |  |  |  |
| Cash and cash equivalents | $398242 | $398242 | $398242 | $- | $- |
| Debt securities available for sale | 287767 | 287767 |  | 287767 |  |
| Equity securities | 55 | 55 |  | 55 |  |
| Loans held for investment, net of allowance | 2299798 | 2163191 |  |  | 2163191 |
| Derivative financial assets | 126 | 126 |  | 126 |  |
| Interest receivable | 8433 | 8433 |  | 8433 |  |
| Deferred compensation assets | 4803 | 4803 | 4803 |  |  |
| **Liabilities** |  |  |  |  |  |
| Time deposits | 325273 | 325872 |  | 325872 |  |
| Securities sold under agreements to repurchase | 2635 | 2635 |  | 2635 |  |
| Interest payable | 197 | 197 |  | 197 |  |
| Deferred compensation liabilities | 4803 | 4803 | 4803 |  |  |

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Carrying** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Amount** | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| **Assets** |  |  |  |  |  |
| Cash and cash equivalents | $677439 | $677439 | $677439 | $- | $- |
| Debt securities available for sale | 76292 | 76292 |  | 76292 |  |
| Equity securities | 55 | 55 |  | 55 |  |
| Loans held for investment, net of allowance | 2137711 | 2108513 |  |  | 2108513 |
| Interest receivable | 7900 | 7900 |  | 7900 |  |
| Deferred compensation assets | 5245 | 5245 | 5245 |  |  |
| **Liabilities** |  |  |  |  |  |
| Time deposits | 354863 | 352000 |  | 352000 |  |
| Securities sold under agreements to repurchase | 1536 | 1536 |  | 1536 |  |
| Interest payable | 314 | 314 |  | 314 |  |
| Deferred compensation liabilities | 5245 | 5245 | 5245 |  |  |
| Derivative liabilities | 837 | 837 |  | 837 |  |

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**Note 14. Litigation, Commitments, and Contingencies** 

***Litigation***

In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.

***Commitments and Contingencies***

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

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

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

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

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| | | | |
|:---|:---|:---|:---|
|  | **June 30, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Commitments to extend credit | $299637 |  | $272447 |
| Standby letters of credit and financial guarantees<sup>(1)</sup> | 126275 |  | 153717 |
| Total off-balance sheet risk | $425912 |  | $426164 |
| Allowance for unfunded commitments | $956 |  | $678 |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Includes FHLB letters of credit

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K"). Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

**Executive Overview**

First Community Bankshares, Inc. (the "Company") is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the "Bank"), a Virginia chartered bank institution. As of June 30, 2022, the Bank operated 49 branches in Virginia, West Virginia, North Carolina and Tennessee. As of June 30, 2022, full-time equivalent employees, calculated using the number of hours worked, totaled 622. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

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The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. ("FCWM"). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of June 30, 2022, the Trust Division and FCWM managed and administered $1.20 billion in combined assets under various fee-based arrangements as fiduciary or agent. The Bank also offers a full range of commercial and personal insurance products through its strategic partnership with Bankers Insurance, LLC.

On March 29, 2022, the Bank entered into a Purchase and Assumption Agreement with Benchmark Community Bank, the banking subsidiary of Benchmark Bankshares, Inc., to sell its Emporia, Virginia branch. The sale, which is expected to close in the third quarter of 2022, includes the branch real estate, certain personal property, and all deposits associated with the branch.

**Critical Accounting Estimates** 

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

***Allowance for Credit Losses or "ACL"***

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

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, "Financial Statements," of this Quarterly Report on Form 10-Q. Our accounting policies are described in detail in Note 1, "Basis of Presentation," of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2022, 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 2021 Form 10-K. Our critical accounting estimates are detailed in the "Critical Accounting Estimates" section in Part II, Item 7 of our 2021 Form 10-K.

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**Performance Overview**

Highlights of our results of operations for the three and six months ended June 30, 2022, and financial condition as of June 30, 2022, include the following:

● Net income of $11.21 million for the quarter was a decrease compared to the same quarter of 2021, which included a significant reversal of provision for credit losses. The normalized provision for credit losses drove much of the difference between current year-to-date net income of $20.73 million and the same period in 2021.

● Interest income from securities of $1.55 million was an increase of $1.12 million over the second quarter of 2021, as the Company added to its portfolio with a significant weighting toward 2-year treasury securities. Interest on fed funds also increased $602 thousand to $768 thousand for the second quarter as a result of the Federal Open Market Committee's 150 basis point increase in overnight rates.

● Despite the significant increase in credit loss provision over 2021, annualized return on average assets was 1.38% for the second quarter and 1.29% for the first six months of 2022. Annualized return on average common equity was 10.61% for the second quarter and 9.80% for the first six months of 2022.

● The total cost of funds remained very low at 0.06%, a decrease of 0.05% from the second quarter of 2021.

● Net interest margin for the second quarter was 3.78%, which was a 10 basis point increase from 3.68% reported for the second quarter of 2021. The yield on earning assets increased 6 basis points primarily driven by an increase in the yields on overnight funds. The cost of interest-bearing deposits declined 6 basis points to 0.09% primarily driven by a decrease in the cost of time deposits.

● Salaries and employee benefits for the second quarter increased $1.30 million, or 12.74%, over the same quarter in 2021. Salaries and employee benefits for the first six months increased $2.09 million or 9.90%, over the first six months of 2021. During the first quarter of 2022, the Company implemented annualized wage increases of approximately $2.50 million as part of its ongoing strategic initiative to enhance Human Capital Management, which included an increased minimum wage.

● The Company's loan portfolio increased by $134.23 million, or an annualized growth rate of 12.50%, during the first six months of 2022. Loan demand and originations were strong in all categories, including construction, commercial real estate, residential mortgage, and consumer loans.

● Non-performing loans to total loans remained very low at 0.80% of total loans and continues the declining trend experienced over the past four quarters. The Company experienced net recoveries for the second quarter of 2022 of $258 thousand, or 0.05% of annualized average loans, compared to net charge-offs of $476 thousand, or 0.09% of annualized average loans, for the same period in 2021. Net charge-offs for the six-month period ended June 30, 2022, were $580 thousand, or 0.05% of annualized average loans, compared to net charge-offs of $1.20 million, or 0.11% of annualized average loans, for the same period in 2021.

● During the second quarter, the Company repurchased 283,507 of its common shares for $7.95 million. The Company repurchased 415,507 common shares for $12.03 million during the six months of 2022.

● The allowance for credit losses to total loans remained at 1.29% of total loans.

● Book value per share at June 30, 2022, was $25.33, a slight decrease of $0.01 from year-end 2021.

***Results of Operations***

*Net Income*

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

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Six Months Ended** | **Six Months Ended** | **Six Months Ended** | **Six Months Ended** |
| *(Amounts in thousands, except per* | **June 30,** | **June 30,** | **Increase** |  | **June 30,** | **June 30,** | **Increase** |  |
| *share data)* | **2022** | **2021** | **(Decrease)** | **% Change** | **2022** | **2021** | **(Decrease)** | **% Change** |
| Net income | $11213 | $13403 | $(2190) | -16.34% | $20728 | $28005 | $(7277) | -25.98% |
| Basic earnings per common share | 0.67 | 0.77 | (0.10) | -12.99% | 1.24 | 1.59 | (0.35) | -22.01% |
| Diluted earnings per common share | 0.67 | 0.76 | (0.09) | -11.84% | 1.24 | 1.59 | (0.35) | -22.01% |
| Return on average assets | 1.38% | 1.70% | -0.32% | -18.82% | 1.29% | 1.82% | -0.53% | -29.12% |
| Return on average common equity | 10.61% | 12.55% | -1.94% | -15.46% | 9.80% | 13.24% | -3.44% | -25.98% |

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*Three-Month Comparison.* Net income decreased $2.19 million in the second quarter of 2022 largely due to a $2.74 million increase in the provision for credit losses. Provision for credit losses totaled $510 thousand for the second quarter of 2022 compared to a reversal of provision of $2.23 million in the second quarter of 2021. The current year provision is largely due to the loan growth, in particular commercial loan demand. The reversal of provision in the second quarter of 2021 was driven by significantly improved economic forecasts.

*Six-Month Comparison.* Net income decreased $7.28 million in the first six months of 2022 largely due to a $8.70 million increase in the provision for credit losses. Provision for credit losses totaled $2.47 million for the first six months of 2022 compared to a reversal of provision of $6.23 million in the same period of 2021. As noted for the quarter, the current year provision is largely due to loan growth in the first six months, in particular commercial loan demand. The reversal of provision in 2021 was driven by significantly improved economic forecasts.

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*Net Interest Income*

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

**AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)**<br>

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
|  | **Average** |  | **Average Yield/** | **Average** |  | **Average Yield/** |
| *(Amounts in thousands)* | **Balance** | **Interest(1)** | **Rate(1)** | **Balance** | **Interest(1)** | **Rate(1)** |
| **Assets** |  |  |  |  |  |  |
| Earning assets |  |  |  |  |  |  |
| Loans<sup>(2)(3)</sup> | $2273844 | $25714 | 4.54% | $2134136 | $25979 | 4.88% |
| Securities available for sale | 280823 | 1597 | 2.28% | 84099 | 508 | 2.42% |
| Interest-bearing deposits | 377931 | 769 | 0.82% | 610148 | 166 | 0.11% |
| Total earning assets | 2932598 | 28080 | 3.84% | 2828383 | 26653 | 3.78% |
| Other assets | 331774 |  |  | 331563 |  |  |
| Total assets | $3264372 |  |  | $3159946 |  |  |
| **Liabilities and stockholders' equity** |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Demand deposits | $698978 | $29 | 0.02% | $654767 | $33 | 0.02% |
| Savings deposits | 895370 | 67 | 0.03% | 818490 | 63 | 0.03% |
| Time deposits | 331555 | 326 | 0.39% | 394889 | 628 | 0.64% |
| Total interest-bearing deposits | 1925903 | 422 | 0.09% | 1868146 | 724 | 0.19% |
| Borrowings |  |  |  |  |  |  |
| Retail repurchase agreements | 2105 | 1 | 0.08% | 1266 |  | N/M |
| Total borrowings | 2105 | 1 | 0.08% | 1266 |  | N/M |
| Total interest-bearing liabilities | 1928008 | 423 | 0.09% | 1869412 | 724 | 0.16% |
| Noninterest-bearing demand deposits | 874507 |  |  | 824888 |  |  |
| Other liabilities | 38106 |  |  | 37306 |  |  |
| Total liabilities | 2840621 |  |  | 2731606 |  |  |
| Stockholders' equity | 423751 |  |  | 428340 |  |  |
| Total liabilities and stockholders' equity | $3264372 |  |  | $3159946 |  |  |
| Net interest income, FTE<sup>(1)</sup> |  | $27657 |  |  | $25929 |  |
| Net interest rate spread |  |  | 3.75% |  |  | 3.62% |
| Net interest margin, FTE<sup>(1)</sup> |  |  | 3.78% |  |  | 3.68% |

---

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

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

&nbsp;&nbsp;&nbsp;&nbsp;(3) Interest on loans includes non-cash and accelerated purchase accounting accretion of $870 thousand and $1.25 million for the three months ended June 30, 2022 and 2021 , respectively.

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[**Table of Contents**](#toc)

**AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)**

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** |
|  | **2022** | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
|  | **Average** |  | **Average Yield/** | **Average Yield/** | **Average** |  | **Average Yield/** |
| *(Amounts in thousands)* | **Balance** | **Interest(1)** | **Rate(1)** | **Rate(1)** | **Balance** | **Interest(1)** | **Rate(1)** |
| **Assets** |  |  |  |  |  |  |  |
| Earning assets |  |  |  |  |  |  |  |
| Loans<sup>(2)(3)</sup> | $2237128 | $50412 |  | 4.54% | $2149509 | $52561 | 4.93% |
| Securities available for sale | 211285 | 2397 |  | 2.29% | 83868 | 1081 | 2.60% |
| Interest-bearing deposits | 460864 | 1018 |  | 0.45% | 539500 | 284 | 0.11% |
| Total earning assets | 2909277 | 53827 |  | 3.73% | 2772877 | 53926 | 3.92% |
| Other assets | 330003 |  |  |  | 331524 |  |  |
| Total assets | $3239280 |  |  |  | $3104401 |  |  |
| **Liabilities and stockholders' equity** |  |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |  |
| Demand deposits | $689149 | $57 |  | 0.02% | $634000 | $72 | 0.02% |
| Savings deposits | 888371 | 133 |  | 0.03% | 798571 | 154 | 0.04% |
| Time deposits | 339186 | 718 |  | 0.43% | 403888 | 1367 | 0.68% |
| Total interest-bearing deposits | 1916706 | 908 |  | 0.10% | 1836459 | 1593 | 0.16% |
| Borrowings |  |  |  |  |  |  |  |
| Retail repurchase agreements | 2050 | 1 | 0.08 | 0.08% | 1250 |  | N/M |
| Total borrowings | 2050 | 1 | 0.08 | 0.08% | 1250 |  | N/M |
| Total interest-bearing liabilities | 1918756 | 909 |  | 0.10% | 1837709 | 1593 | 0.17% |
| Noninterest-bearing demand deposits | 855321 |  |  |  | 801512 |  |  |
| Other liabilities | 38529 |  |  |  | 38609 |  |  |
| Total liabilities | 2812606 |  |  |  | 2677830 |  |  |
| Stockholders' equity | 426674 |  |  |  | 426571 |  |  |
| Total liabilities and stockholders' equity | $3239280 |  |  |  | $3104401 |  |  |
| Net interest income, FTE<sup>(1)</sup> |  | $52918 |  |  |  | $52333 |  |
| Net interest rate spread |  |  |  | 3.64% |  |  | 3.75% |
| Net interest margin, FTE<sup>(1)</sup> |  |  |  | 3.67% |  |  | 3.81% |

---

------

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

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

&nbsp;&nbsp;&nbsp;&nbsp;(3) Interest on loans includes non-cash and accelerated purchase accounting accretion of $1.74 million and $2.44 million for the six months ended June 30, 2022 and 2021 , respectively.

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[**Table of Contents**](#toc)

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:

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Six Months Ended** | **Six Months Ended** | **Six Months Ended** | **Six Months Ended** |
|  | **June 30, 2022 Compared to 2021** | **June 30, 2022 Compared to 2021** | **June 30, 2022 Compared to 2021** | **June 30, 2022 Compared to 2021** | **June 30, 2022 Compared to 2021** | **June 30, 2022 Compared to 2021** | **June 30, 2022 Compared to 2021** | **June 30, 2022 Compared to 2021** |
|  | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** |
|  |  |  | **Rate/** |  |  |  | **Rate/** |  |
| *(Amounts in thousands)* | **Volume** | **Rate** | **Volume** | **Total** | **Volume** | **Rate** | **Volume** | **Total** |
| Interest earned on(1) |  |  |  |  |  |  |  |  |
| Loans | $3383 | $(3670) | $22 | $(265) | $2143 | $(4123) | $(169) | $(2149) |
| Securities available-for-sale | 2364 | (59) | (1216) | 1089 | 1642 | (130) | (196) | 1316 |
| Interest-bearing deposits with other banks | (126) | 2139 | (1410) | 603 | (37) | 934 | (163) | 734 |
| Total interest earning assets | 5621 | (1590) | (2604) | 1427 | 3748 | (3319) | (528) | (99) |
| Interest paid on |  |  |  |  |  |  |  |  |
| Demand deposits | 4 | (12) | 4 | (4) | 6 | (20) | (1) | (15) |
| Savings deposits | 12 | (3) | (5) | 4 | 17 | (34) | (4) | (21) |
| Time deposits | (200) | (477) | 375 | (302) | (219) | (512) | 82 | (649) |
| Retail repurchase agreements |  | 1 |  | 1 |  | 1 |  | 1 |
| FHLB advances and other borrowings |  |  |  |  |  |  |  |  |
| Total interest-bearing liabilities | (184) | (491) | 374 | (301) | (196) | (565) | 77 | (684) |
| Change in net interest income(1) | $5805 | $(1099) | $(2978) | $1728 | $3944 | $(2754) | $(605) | $585 |

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

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[**Table of Contents**](#toc)

*Three-Month Comparison*. Net interest income comprised 75.68% of total net interest and noninterest income in the second quarter of 2022 compared to 74.58% in the same quarter of 2021. Net interest income on a GAAP basis increased $1.73 million, or 6.71%, compared to an increase of $1.73 million, or 6.66%, on a FTE basis. The net interest margin on a FTE basis increased 10 basis points and the net interest spread on a FTE basis increased 13 basis points. The increase was primarily driven by an increase in the yield on overnight funds and a decrease in the cost of time deposits.

Average earning assets increased $104.22 million, or 3.68%, primarily due to an increase in both the securities available for sale and loan portfolios. Securities available for sale increased $196.72 million, or 233.92% due to recent purchases of $236.85 million in the first six months of 2022. In addition, average loans increased $139.71 million, or 6.55%, primarily due to strong levels of loan demand in all categories. Average interest-bearing deposits increased $57.76 million, or 3.09%. The yield on earning assets increased 6 basis points, or 1.59%, primarily due to the increase in yield on overnight funds due to the Federal Open Market Committee's increase in the fed funds rate of 150 basis points during 2022. The average loan to deposit ratio increased to 81.20% from 79.25% in the same quarter of 2021. Non-cash accretion income decreased $384 thousand, or 30.62%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $58.60 million, or 3.13%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 7 basis points. Average interest-bearing deposits increased $57.76 million, or 3.09%. Savings deposits increased $76.88 million, or 9.39%, and interest-bearing demand deposits increased $44.21 million, or 6.75%. These increases were offset by a decrease in time deposits of $63.33 million, or 16.04%.

*Six-Month Comparison*. Net interest income comprised 74.49% of total net interest and noninterest income in the six months ended June 30, 2022 compared to 76.09% in the same period of 2021. Net interest income on a GAAP basis increased $604 thousand, or 1.16%, compared to an increase of $585 thousand, or 1.12%, on a FTE basis. The net interest margin on a FTE basis decreased 14 basis points and the net interest spread on a FTE basis decreased 11 basis points. The decrease was primarily driven by a decrease in the yields in both the securities available for sale and loan portfolios offset by an increase in the yield on overnight funds and a decrease in the cost of time deposits.

Average earning assets increased $136.40 million, or 4.92%, primarily due to an increase in both the securities available for sale and loan portfolios. Securities available for sale increased $127.42 million, or 151.93% due to recent purchases of $236.85 million in the first six months of 2022. In addition, average loans increased $87.62 million, or 4.08%, primarily due to strong levels of loan demand in all categories. Average interest-bearing deposits increased $80.25 million, or 4.37%. The yield on earning assets decreased 19 basis points, or 4.85%, primarily due to the decrease in yields in the securities available for sale and loan portfolios. The decrease in yields in these portfolios was offset by an increase in yield on overnight funds due to year-to-date increases in the fed funds rate of 150 basis points. The average loan to deposit ratio decreased to 80.70% from 81.48% in the same period of 2021. Non-cash accretion income decreased $705 thousand, or 28.88%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $81.05 million, or 4.41%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 7 basis points. Average interest-bearing deposits increased $80.25 million, or 4.37%. Savings deposits increased $89.80 million, or 11.25%, and interest-bearing demand deposits increased $55.15 million, or 8.70%. These increases were offset by a decrease in time deposits of $64.70 million, or 16.02%.

*Provision for Credit Losses*

*Three-Month Comparison*. The provision charged to operations increased $2.74 million, in the second quarter of 2022 compared to the same quarter of 2021. Provision for credit losses of $510 thousand was recorded in the second quarter of 2022 and was primarily attributable to loan growth. A reversal in provision of $2.23 million was recorded in the second quarter of 2021 and was due to significantly improved economic forecasts.

*Six-Month Comparison*. The provision charged to operations increased $8.70 million, for the six months ended June 30, 2022 compared to the same period of 2021. Provision for credit losses of $2.47 million was recorded for the first six months of 2022 and was primarily attributable to loan growth. A reversal in provision of $6.23 million was recorded in the same period of 2021 and was due to significantly improved economic forecasts.

*Noninterest Income*

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

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| | | | | | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  |  |  |  | **Six Months Ended** | **Six Months Ended** | **Six Months Ended** |  |  |  |  |  |
|  | **June 30,** | **June 30,** | **June 30,** |  | **Increase** | **%** |  | **June 30,** | **June 30,** | **June 30,** |  | **Increase** |  | **%** |  |
|  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  | **2022** |  | **2021** |  | **(Decrease)** |  | **Change** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |  | |  | |  | |  | |
| Wealth management | $993 |  | $1058 |  | $(65) | -6.14 | % | $1965 |  | $1939 |  | $26 |  | 1.34 | % |
| Service charges on deposits | 3672 |  | 3098 |  | 574 | 18.53 | % | 7170 |  | 6129 |  | 1041 |  | 16.98 | % |
| Other service charges and fees | 3297 |  | 3166 |  | 131 | 4.14 | % | 6314 |  | 6188 |  | 126 |  | 2.04 | % |
| Other operating income | 892 |  | 1475 |  | (583) | -39.53 | % | 2599 |  | 2110 |  | 489 |  | 23.18 | % |
| Total noninterest income | $8854 |  | $8797 |  | $57 | 0.65 | % | $18048 |  | $16366 |  | $1682 |  | 10.28 | % |

---

*Three-Month Comparison*. Noninterest income comprised 24.32% of total net interest and noninterest income in the second quarter of 2022 compared to 25.42% in the same quarter of 2021. Noninterest income increased $57 thousand or 0.65%. Service charges on deposits increased $574 thousand, or 18.53%, and other service charges and fees increased $131 thousand, or 4.14%, compared with the same quarter of 2021. The increases are primarily attributable to increased customer activity compared to the activity levels experienced during 2021.Other operating income decreased $583 thousand, or 39.53%. The decrease was primarily due to a recovery of $1.00 million during the second quarter of 2021 of an acquired loan from a failed bank acquisition that had been written down prior to acquisition. In addition, 2021 included gains of approximately $626 thousand recorded during the quarter for the sale of various bank-owned properties. These decreases were offset by the 2021 amortization of the FDIC indemnification asset of $945 thousand that was fully amortized in the second quarter of 2021, as well as a fair value increase recognized in earnings in the second quarter of 2022 for $275 thousand related to interest rate swaps that do no qualify as a fair value hedge.

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[**Table of Contents**](#toc)

*Six-Month Comparison*. Noninterest income comprised 25.51% of total net interest and noninterest income for the first six months of 2022 compared to 23.91% in the same period of 2021. Noninterest income increased $1.68 million or 10.28%. Service charges on deposits increased $1.04 million, or 16.98%, and other service charges and fees increased $126 thousand, or 2.04%, compared with the same period of 2021. As noted for the quarter, the increases are primarily attributable to increased customer activity compared to the activity levels experienced during 2021.Other operating income increased $489 thousand, or 23.18%. The increase was primarily due to the 2021 amortization of the FDIC indemnification asset of $1.23 million that was fully amortized in the second quarter of 2021, as well as a fair value increase recognized in earnings in 2022 for $853 thousand related to interest rate swaps that do no qualify as a fair value hedge. The increases were offset by a recovery of $1.00 million during the second quarter of 2021 of an acquired loan from a failed bank acquisition that had been written down prior to acquisition. In addition, the income recognized for the adjustment to cash surrender value of bank-owned life insurance decreased $547 thousand for the year.

*Noninterest Expense*

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

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| | | | | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  |  |  |  | **Six Months Ended** | **Six Months Ended** | **Six Months Ended** |  |  |  |  |
|  | **June 30,** | **June 30,** | **June 30,** |  | **Increase** | **%** |  | **June 30,** | **June 30,** | **June 30,** |  | **Increase** | **%** |  |
|  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |  | |  | |  |  | |
| Salaries and employee benefits | $11518 |  | $10216 |  | $1302 | 12.74 | % | $23189 |  | $21100 |  | $2089 | 9.90 | % |
| Occupancy expense | 1165 |  | 1115 |  | 50 | 4.48 | % | 2434 |  | 2390 |  | 44 | 1.84 | % |
| Furniture and equipment expense | 1496 |  | 1457 |  | 39 | 2.68 | % | 3110 |  | 2824 |  | 286 | 10.13 | % |
| Service fees | 2563 |  | 1513 |  | 1050 | 69.40 | % | 4066 |  | 2848 |  | 1218 | 42.77 | % |
| Advertising and public relations | 577 |  | 616 |  | (39) | -6.33 | % | 1117 |  | 951 |  | 166 | 17.46 | % |
| Professional fees | 544 |  | 290 |  | 254 | 87.59 | % | 997 |  | 756 |  | 241 | 31.88 | % |
| Amortization of intangibles | 360 |  | 360 |  |  | 0.00 | % | 717 |  | 717 |  |  | 0.00 | % |
| FDIC premiums and assessments | 257 |  | 204 |  | 53 | 25.98 | % | 475 |  | 403 |  | 72 | 17.87 | % |
| Other operating expense | 2775 |  | 3590 |  | (815) | -22.70 | % | 5136 |  | 6192 |  | (1056) | -17.05 | % |
| Total noninterest expense | $21255 |  | $19361 |  | $1894 | 9.78 | % | $41241 |  | $38181 |  | $3060 | 8.01 | % |

---

*Three-Month Comparison*. Noninterest expense increased $1.89 million, or 9.78%, in the second quarter of 2022 compared to the same quarter of 2021. The increase was largely attributable to an increase in salaries and employee benefits of $1.30 million or 12.74%. Early in the first quarter of 2022, the Company implemented annualized wage increases of approximately $2.5 million as part of its strategic initiative to enhance Human Capital Management, which included an increased minimum wage. In addition, service fees increased $1.05 million, or 69.40% primarily due to an increase in core processing expense. These increases were offset by a decrease in other operating expense of $815 thousand or 22.70%. The decrease is primarily attributable to the 2021 write-down of bank property of $781 thousand.

*Six-Month Comparison*. Noninterest expense increased $3.06 million, or 8.01%, in the first six months of 2022 compared to the same period of 2021. As in the quarter, the increase was largely attributable to an increase in salaries and employee benefits of $2.09 million or 9.90%. The increase is due to wage increases implemented in the first quarter as part of the Company's strategic initiative to enhance Human Capital Management, which included an increased minimum wage. In addition, service fees increased $1.22 million, or 42.77% primarily due to an increase in core processing expense. These increases were offset by a decrease in other operating expense of $1.06 million, or 17.05%. The decrease is primarily attributable to the 2021 write-down of bank property of $781 thousand.

*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 decreased $654 thousand, or 16.04% and was primarily due to the decrease in pre-tax income. The effective tax rate increased to 23.39% in the second quarter of 2022 from 23.32% in the same quarter of 2021. The increase in the effective rate was primarily due to a decrease in permanent differences for officers life insurance quarter over quarter.

*Six-Month Comparison*. Income tax expense decreased $2.20 million, or 25.85% and was primarily due to the decrease in pre-tax income. The effective tax rate remained level for the first six months of 2022 and increased only three basis points to 23.33% from 23.30% in the same period of 2021.

***Non-GAAP Financial Measures***

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

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[**Table of Contents**](#toc)

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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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended June 30,** | **Three Months Ended June 30,** | **Three Months Ended June 30,** |  | **Six Months Ended June 30,** | **Six Months Ended June 30,** | **Six Months Ended June 30,** |  |
|  | **2022** |  | **2021** |  | **2022** |  | **2021** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Net interest income, GAAP | $27547 |  | $25814 |  | $52700 |  | $52096 |  |
| FTE adjustment(1) | 110 |  | 115 |  | 218 |  | 237 |  |
| Net interest income, FTE | 27657 |  | 25929 |  | 52918 |  | 52333 |  |
| Net interest margin, GAAP | 3.76 | % | 3.66 | % | 3.66 | % | 3.79 | % |
| FTE adjustment(1) | 0.02 | % | 0.02 | % | 0.01 | % | 0.02 | % |
| Net interest margin, FTE | 3.78 | % | 3.68 | % | 3.67 | % | 3.81 | % |

---

(1) FTE basis of 21%.

***Financial Condition***

Total assets as of June 30, 2022, increased $63.86 million, or 2.00%, from December 31, 2021. The increase in assets was primarily driven by an increase in securities available-for-sale of $211.48 million, or 277.19%. Loans increased $134.23 million, or 6.20%. These increases were offset by a decrease in overnight funds of $285.41 million, or 45.52%. In addition, total liabilities increased $73.59 million, or 2.66%, as of June 30, 2022, from December 31, 2021. The increase in liabilities was primarily driven by an increase in total deposits of $69.15 million, or 2.53%.

*Investment Securities*

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

Available-for-sale debt securities as of June 30, 2022, increased $211.48 million, or 277.19%, compared to December 31, 2021. The increase is due to the purchase of $236.85 million in securities comprised of U. S. Treasury Notes, mortgage-backed securities, and corporate notes. The purchases were offset by $12.81 million in maturities, prepayments, and calls. The market value of debt securities available for sale as a percentage of amortized cost was 95.86% as of June 30, 2022, compared to 100.02% as of December 31, 2021.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the investments. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of June 30, 2022 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.

*Loans Held for Investment*

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

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **December 31, 2021** | **December 31, 2021** | **June 30, 2021** | **June 30, 2021** |
| *(Amounts in thousands)* | **Amount** | **Percent** | **Amount** | **Percent** | **Amount** | **Percent** |
| Loans held for investment |  |  |  |  |  |  |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $92840 | 4.04% | $65806 | 3.04% | $60560 | 2.81% |
| Commercial and industrial | 139792 | 6.08% | 133630 | 6.17% | 147768 | 6.86% |
| Multi-family residential | 124274 | 5.40% | 100402 | 4.64% | 100347 | 4.66% |
| Single family non-owner occupied | 195113 | 8.48% | 198778 | 9.18% | 190008 | 8.82% |
| Non-farm, non-residential | 752369 | 32.72% | 707506 | 32.67% | 713089 | 33.11% |
| Agricultural | 9987 | 0.43% | 9341 | 0.43% | 8665 | 0.40% |
| Farmland | 12833 | 0.56% | 15013 | 0.69% | 18285 | 0.85% |
| Total commercial loans | 1327208 | 57.71% | 1230476 | 56.82% | 1238722 | 57.51% |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 78999 | 3.44% | 79857 | 3.69% | 87251 | 4.05% |
| Single family owner occupied | 722370 | 31.41% | 703864 | 32.50% | 679863 | 31.57% |
| Owner occupied construction | 17331 | 0.75% | 16910 | 0.78% | 21158 | 0.98% |
| Total consumer real estate loans | 818700 | 35.60% | 800631 | 36.97% | 788272 | 36.60% |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 148741 | 6.47% | 129794 | 5.99% | 122067 | 5.67% |
| Other | 5149 | 0.22% | 4668 | 0.22% | 4670 | 0.22% |
| Total consumer and other loans | 153890 | 6.69% | 134462 | 6.21% | 126737 | 5.89% |
| Total loans held for investment, net of unearned income | 2299798 | 100.00% | 2165569 | 100.00% | 2153731 | 100.00% |
| Less: allowance for credit losses | 29749 |  | 27858 |  | 31857 |  |
| Total loans held for investment, net of unearned income and allowance | $2270049 |  | $2137711 |  | $2121874 |  |

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Total loans as of June 30, 2022, increased $134.23 million, or 6.20%, compared to December 31, 2021, with increases in all three loan segments. The largest increase, $96.73 million, occurred in the commercial loan segment. The increase was comprised of increases of $44.86 million in non-farm, non-residential real estate, $27.03 million in construction, development, and other land, and $23.87 million in multi-family categories. Consumer real estate loans increased $18.06 million with the increase concentrated in the single family owner occupied category. Consumer and other loans also increased with a total increase of $19.43 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.

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** |  | **December 31, 2021** |  | **June 30, 2021** |  |
| *(Amounts in thousands)* |  | |  | |  | |
| **Nonperforming** |  |  |  |  |  |  |
| Nonaccrual loans | $17826 |  | $20768 |  | $24085 |  |
| Accruing loans past due 90 days or more | 131 |  | 87 |  | 327 |  |
| TDRs(1) | 515 |  | 1367 |  | 133 |  |
| Total nonperforming loans | 18472 |  | 22222 |  | 24545 |  |
| OREO | 579 |  | 1015 |  | 1324 |  |
| Total nonperforming assets | $19051 |  | $23237 |  | $25869 |  |
| **Additional Information** |  |  |  |  |  |  |
| Total Accruing TDRs(2) | $8313 |  | $8652 |  | $8309 |  |
| **Asset Quality Ratios:** |  |  |  |  |  |  |
| Nonperforming loans to total loans | 0.80 | % | 1.03 | % | 1.14 | % |
| Nonperforming assets to total assets | 0.58 | % | 0.73 | % | 0.83 | % |
| Allowance for credit losses to nonperforming loans | 161.05 | % | 125.36 | % | 129.79 | % |
| Allowance for credit losses to total loans | 1.29 | % | 1.29 | % | 1.48 | % |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.17 million , $1.80 million , and $2.26 million for the periods ended June 30, 2022 , December 31, 2021 , and June 30, 2021 , respectively. They are included in nonaccrual loans.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Total accruing TDRs exclude nonaccrual TDRs of $1.43 million , $2.52 million , and $3.63 million for the periods ended June 30, 2022 , December 31, 2021 , and June 30, 2021 , respectively. They are included in nonaccrual loans.

Nonperforming assets as of June 30, 2022, decreased $4.19 million, or 18.01%, from December 31, 2021, with the largest decrease occurring on nonaccrual loans. Nonaccrual loans decreased $2.94 million, or 14.17%, non-performing TDR's decreased $852 thousand, or 62.33%, and OREO decreased $436 thousand, or 42.96%. As of June 30, 2022, nonaccrual loans were largely attributed to single family owner occupied (49.46%), non-farm, non-residential (15.79%), and single family non-owner occupied loans (11.96%). 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 $26.56 million as of June 30, 2022, a decrease of $6.54 million, or 19.76%, compared to $33.10 million as of December 31, 2021. Delinquent loans as a percent of total loans totaled 1.16% as of June 30, 2022, which includes past due loans (0.38%) and nonaccrual loans (0.78%).

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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 June 30, 2022, decreased $339 thousand, or 3.92%, to $8.31 million from December 31, 2021. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of June 30, 2022, decreased $852 thousand compared to December 31, 2021. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 6.20% as of June 30, 2022, compared to 15.81% as of December 31, 2021. There were no specific reserves related to TDRs as of June 30, 2022, or December 31, 2021.

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.

OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $436 thousand, or 42.96%, as of June 30, 2022, compared to December 31, 2021, and consisted of 10 properties with an average holding period of approximately 14 months. The net loss on the sale of OREO totaled $421 thousand for the six months ended June 30, 2022, compared to $252 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

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| | | |
|:---|:---|:---|
|  | **Six Months Ended June 30,** | **Six Months Ended June 30,** |
|  | **2022** | **2021** |
| *(Amounts in thousands)* |  |  |
| Beginning balance | $1015 | $2083 |
| Additions | 322 | 810 |
| Disposals | (325) | (1317) |
| Valuation adjustments | (433) | (252) |
| Ending balance | $579 | $1324 |

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*Allowance for Credit Losses*

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

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

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

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

With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loans from an incurred loss method to a life of loan method. See Note 1 – "Basis of Presentation - Significant Accounting Policies" for further details. As of June 30, 2022, the balance of the ACL for loans was $29.75 million, or 1.29% of total loans. The ACL at June 30, 2022, increased $1.89 million from the balance of $27.86 million recorded at December 31, 2021. This increase included a $2.47 million provision offset by net charge-offs for the six months of $580 thousand. The provision was primarily driven by loan growth in the first half.

At June 30, 2022, the Company also had an allowance for unfunded commitments of $956 thousand which was recorded in Other Liabilities on the Balance Sheet. During the first six months of 2022, the provision for credit losses on unfunded commitments was $278 thousand compared to a reversal of provision of $48 thousand recorded in the same period of 2021.

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

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| | | |
|:---|:---|:---|
|  | **Three Months Ended June 30,** | **Three Months Ended June 30,** |
|  | **2022** | **2021** |
| *(Amounts in thousands)* |  |  |
| Beginning balance | $28981 | $34563 |
| Provision for (recovery of) loan losses charged to operations | 510 | (2230) |
| Charge-offs | (1469) | (1902) |
| Recoveries | 1727 | 1426 |
| Net charge-offs | 258 | (476) |
| Ending balance | $29749 | $31857 |

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| | | |
|:---|:---|:---|
|  | **Six Months Ended June 30,** | **Six Months Ended June 30,** |
|  | **2021** | **2021** |
| *(Amounts in thousands)* |  |  |
| Beginning balance | $27858 | $26182 |
| Cumulative effect of adoption of ASU 2016-13 |  | 13107 |
| Provision for (recovery of) loan losses charged to operations | 2471 | (6231) |
| Charge-offs | (2771) | (3632) |
| Recoveries | 2191 | 2431 |
| Net charge-offs | (580) | (1201) |
| Ending balance | $29749 | $31857 |

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*Deposits* 

Total deposits as of June 30, 2022, increased $69.15 million, or 2.53%, compared to December 31, 2021. The increase was largely attributable to savings and noninterest-bearing demand deposits which increased $36.89 million, or 4.31% and $35.18 million, or 4.17%, respectively. Interest-bearing demand deposits also reflected growth with an increase of $26.67 million, or 3.94%. These increases were offset by a decrease in time deposits of $29.59 million, or 8.34%.

 

*Borrowings*

Total borrowings in the form of retail repurchase agreements as of June 30, 2022, increased $1.10 million, or 71.55%, compared to December 31, 2021.

 ****

***Liquidity and Capital Resources***

*Liquidity*

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

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As a financial holding company, the Company's primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of June 30, 2022, the Company's cash reserves and short-term investment securities totaled $9.28 million and $20.26 million, respectively. The Company's cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank ("FRB") Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of June 30, 2022, our unencumbered cash totaled $398.24 million, unused borrowing capacity from the FHLB totaled $427.55 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 $253.55 million.

*Cash Flows*

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

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| | | | |
|:---|:---|:---|:---|
|  | **Six Months Ended June 30,** | **Six Months Ended June 30,** |  |
|  | **2022** | **2021** |  |
| *(Amounts in thousands)* |  |  | |
| Net cash provided by operating activities | $28200 | $19709 |  |
| Net cash (used) provided by investing activities | (356659) | 44632 |  |
| Net cash provided by financing activities | 49262 | 97836 |  |
| Net increase in cash and cash equivalents | (279197) | 162177 |  |
| Cash and cash equivalents, beginning balance | 677439 | 456561 |  |
| Cash and cash equivalents, ending balance | $398242 | $618738 |  |

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Cash and cash equivalents decreased $279.20 million for the six months ended June 30, 2022, compared to an increase of $162.18 million for the same period of the prior year. The decrease in cash and cash equivalents for the six month period was due largely to the purchase of securities available for sale of $236.85 million and the funding of $133.40 million in loan originations. The decreases were offset by an net increase in deposits of $69.15 million.

*Capital Resources*

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders' equity as of June 30, 2022, decreased $9.73 million, or 2.27%, to $418.05 million from $427.78 million as of December 31, 2021. The change in stockholders' equity was largely due to net income of $20.73 million offset by other comprehensive loss of $10.11 million, the repurchase of 415,507 shares of our common stock totaling $12.04 million, and dividends declared on our common stock of $9.05 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 decreased $0.01, or 0.04%, to $25.33 as of June 30, 2022, from $25.34 as of December 31, 2021.

*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 2021 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:

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** | **December 31, 2021** | **December 31, 2021** |
|  | **Company** | **Bank** | **Company** | **Bank** |
| Common equity Tier 1 ratio | 13.37% | 11.93% | 14.39% | 13.37% |
| Tier 1 risk-based capital ratio | 13.37% | 11.93% | 14.39% | 13.37% |
| Total risk-based capital ratio | 14.62% | 13.18% | 15.65% | 14.62% |
| Tier 1 leverage ratio | 9.53% | 8.40% | 9.65% | 8.94% |

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Our risk-based capital ratios as of June 30, 2022, decreased from December 31, 2021, due to an increase in our risk-weighted assets. The increase in risk-weighted assets was primarily due to the increase in total loans as well as an increase in available for sale debt securities from year-end 2021. As of June 30, 2022, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank's classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of June 30, 2022.

 

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***Off-Balance Sheet Arrangements***

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

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| | | | |
|:---|:---|:---|:---|
|  | **June 30, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Commitments to extend credit | $299637 |  | $272447 |
| Standby letters of credit and financial guarantees (1) | 126275 |  | 153717 |
| Total off-balance sheet risk | $425912 |  | $426164 |
| Allowance for unfunded commitments | $956 |  | $678 |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Includes FHLB letters of credit

***Market Risk and Interest Rate Sensitivity***

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

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

As of June 30, 2022, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 150 to 175 basis points. The level of benchmark interest rates at year-end 2021, rendered a complete downward shock of 100 basis points meaningless; accordingly, a downward rate scenario is only presented for the current period. In the downward rate shock presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **June 30, 2022** | **June 30, 2022** |  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
| **Increase (Decrease) in Basis Points** | **Change in Net Interest Income** | **Percent Change** |  | **Change in Net Interest Income** |  | **Percent Change** |  |
| *(Dollars in thousands)* |  |  | |  | |  | |
| 300 | $6500 | 5.84 | % | $14960 |  | 14.90 | % |
| 200 | 4662 | 4.19 | % | 10303 |  | 10.30 | % |
| 100 | 2620 | 2.36 | % | 5502 |  | 5.50 | % |
| (100) | (8545) | 7.68 | % | N/A |  | N/A |  |

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***Inflation and Changing Prices***

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

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

In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) in 2023, 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.

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| | |
|:---|:---|
| **Item 3.** | **Quantitative and Qualitative Disclosures about Market Risk** |

---

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

---

| | |
|:---|:---|
| **Item 4.** | **Controls and Procedures** |

---

**Evaluation of Disclosure Controls and Procedures**

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of June 30, 2022, our disclosure controls and procedures were effective.

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

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

**Changes in Internal Control over Financial Reporting**

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

---

| | |
|:---|:---|
| **PART II.** | **OTHER INFORMATION** |

---

---

| | |
|:---|:---|
| **ITEM 1.** | **Legal Proceedings** |

---

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

---

| | |
|:---|:---|
| **ITEM 1A.** | **Risk Factors** |

---

The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2021, 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, 2021 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, 2021.

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---

| | |
|:---|:---|
| **ITEM 2.** | **Unregistered Sales of Equity Securities and Use of Proceeds**  |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Not Applicable

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Not Applicable

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) Issuer Purchases of Equity Securities

We repurchased 283,507 shares of our common stock during the second quarter of 2022 compared to 261,600 shares purchased during the same quarter of 2021.

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Total Number of Shares Purchased** | **Average Price Paid per Share** | **Total Number of Shares Purchased as Part of a Publicly Announced Plan** | **Maximum Number of Shares that May Yet be Purchased Under the Plan** |
| April 1-30, 2022 | 46600 | $27.66 | 46600 | 1272014 |
| May 1-31, 2022 | 118600 | 27.53 | 118600 | 1153414 |
| June 1-30, 2022 | 118307 | 28.68 | 118307 | 1035107 |
| Total | 283507 | $28.03 | 283507 |  |

---

---

| | |
|:---|:---|
| **ITEM 3.** | **Defaults Upon Senior Securities** |

---

None.

---

| | |
|:---|:---|
| **ITEM 4.** | **Mine Safety Disclosures** |

---

None.

---

| | |
|:---|:---|
| **ITEM 5.** | **Other Information** |

---

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[**Table of Contents**](#toc)

---

| | |
|:---|:---|
| **ITEM 6.** | **Exhibits** |

---

---

| | |
|:---|:---|
| 2.1 | [Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm) |
| 2.2 | [Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019](http://www.sec.gov/Archives/edgar/data/859070/000143774919018230/ex_157104.htm) |
| 3.1 | [Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm) |
| 3.2 | [Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124896.htm) |
| 4.1 | [Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124897.htm) |
| 4.2 | [Form of First Community Bankshares, Inc. Common Stock Certificate, incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124972.htm) |
| 10.1.1\*\* | [First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000](http://www.sec.gov/Archives/edgar/data/859070/000095012800000665/0000950128-00-000665.txt) |
| 10.1.2\*\* | [Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004](http://www.sec.gov/Archives/edgar/data/859070/000143774919024675/0001437749-19-024675-index.htm) |
| 10.2\*\* | [First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 13, 2002](http://www.sec.gov/Archives/edgar/data/859070/000095012802000627/j9559101exv10w5.txt) |
| 10.3\*\* | [First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002](http://www.sec.gov/Archives/edgar/data/859070/000095012802000627/j9559101exv10w4.txt) |

---

---

| | |
|:---|:---|
| 10.6\*\* | [First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012](http://www.sec.gov/Archives/edgar/data/859070/000119312512100945/d305268ddef14a.htm) |
| 10.7\*\* | [First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013](http://www.sec.gov/Archives/edgar/data/859070/000114420413031684/v346101_ex99-1.htm) |
| 10.8\*\* | [First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000](http://www.sec.gov/Archives/edgar/data/859070/000095012800000665/0000950128-00-000665.txt) |
| 10.9.1\*\* | [First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009;](http://www.sec.gov/Archives/edgar/data/859070/000095015209000027/l35008aexv10w1.htm) |
| 10.9.2\*\* | [Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010](http://www.sec.gov/Archives/edgar/data/859070/000114420410067096/v205949_ex10-3.htm) |
| 10.9.3\*\* | [Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013](http://www.sec.gov/Archives/edgar/data/859070/000114420413010959/v336117_ex10-1.htm) |

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| | |
|:---|:---|
| 10.9.4\*\* | [Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420416105811/v441270_ex10-1.htm) |
| 10.9.5\*\* | [Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm) |
| 10.9.6\* | [Amendment #5 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm). |
| 10.9.7\* | [Amendment #6 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm). |
| 10.10\*\* | [Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2019, filed on December 19, 2019](http://www.sec.gov/Archives/edgar/data/859070/000143774919024675/0001437749-19-024675-index.htm) |
| 10.11.1\*\* | [First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000095015206007183/l22038aexv99w1.htm) |
| 10.11.2\*\* | [Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-2.htm) |
| 10.12.1\*\* | [First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420410067096/v205949_ex10-1.htm) |
| 10.12.2\*\* | [Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420416105811/v441270_ex10-2.htm) |
| 10.13\*\* | [Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-3.htm) |
| 10.15\*\* | [Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-2.htm) |
| 10.16\*\* | [Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-1.htm) |
| 31.1\* | [Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002](#a10q063022ex311) |
| 31.2\* | [Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002](#a10q063022ex312) |
| 32\* | [Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002](#a10q063022ex32) |

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| | |
|:---|:---|
| 101\*\*\* | Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of June 30, 2022, (Unaudited) and December 31, 2021; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three and six months ended June 30, 2022 and 2021; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2022 and 2021; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited). |
| 104\* | The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included within the Exhibit 101 attachments). |

---

\* Filed herewith

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

\*\*\* Submitted electronically herewith

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 5th day of August, 2022.

---

| |
|:---|
| First Community Bankshares, Inc.<br> (Registrant) |
| /s/ William P. Stafford, II |
| William P. Stafford, II |
| Chief Executive Officer |
| (Principal Executive Officer) |
| /s/ David D. Brown |
| David D. Brown |
| Chief Financial Officer |
| (Principal Accounting Officer) |

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**Exhibit 31.1**

**CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER**

I, William P. Stafford, II, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Quarterly Report on Form 10-Q of First Community Bankshares, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

&nbsp;&nbsp;&nbsp;&nbsp;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

&nbsp;&nbsp;&nbsp;&nbsp;5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 5, 2022

/s/ William P. Stafford, II<br>

William P. Stafford, II

Chief Executive Officer

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**Exhibit 31.2**

**CERTIFICATION OF THE CHIEF FINANCIAL OFFICER**

I, David D. Brown, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Quarterly Report on Form 10-Q of First Community Bankshares, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

&nbsp;&nbsp;&nbsp;&nbsp;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

&nbsp;&nbsp;&nbsp;&nbsp;5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 5, 2022

/s/ David D. Brown<br>

David D. Brown

Chief Financial Officer

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**Exhibit 32**

**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350**

**AS ADOPTED PURSUANT TO SECTION 906**

**OF THE SARBANES-OXLEY ACT OF 2002**

The undersigned certify, to their best knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

&nbsp;&nbsp;&nbsp;&nbsp;1. the Quarterly Report on Form 10-Q of First Community Bankshares, Inc. (the "Company") for the period ended June 30, 2022 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

&nbsp;&nbsp;&nbsp;&nbsp;2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 5, 2022

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| | | | |
|:---|:---|:---|:---|
| &nbsp;&nbsp;&nbsp; By: | /s/ William P. Stafford, II | By: | /s/ David D. Brown |
|  | William P. Stafford, II |  | David D. Brown |
|  | Chief Executive Officer |  | Chief Financial Officer |

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| |
|:---|
| **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **WASHINGTON, D.C. 20549** |
| **FORM 10-Q** |
| ☑ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| For the quarterly period ended **September 30, 2022** |
| or |
| ☐ **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| Commission file number: **000-19297** |
| **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) |

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| | |
|:---|:---|
| **Virginia** | **55-0694814** |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |

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| | |
|:---|:---|
| **P.O. Box 989**<br> **Bluefield, Virginia** | **24605-0989** |
| (Address of principal executive offices) | (Zip Code) |

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| |
|:---|
| **(276) 326-9000** |
| (Registrant's telephone number, including area code) |

---

**Not Applicable**

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| | | |
|:---|:---|:---|
| (Former name, former address and former fiscal year, if changed since last report) | (Former name, former address and former fiscal year, if changed since last report) | (Former name, former address and former fiscal year, if changed since last report) |
| Securities registered pursuant to Section 12 (b) of the Act: | Securities registered pursuant to Section 12 (b) of the Act: | Securities registered pursuant to Section 12 (b) of the Act: |
| **Title of each class** | **Trading Symbol(s)** | **Name of each exchange on which registered** |
| Common Stock ($1.00 par value) | FCBC | NASDAQ Global Select |

---

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| | | |
|:---|:---|:---|
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
| ☑ Yes ☐ No | ☑ Yes ☐ No | ☑ Yes ☐ No |
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). |
| ☑ Yes ☐ No | ☑ Yes ☐ No | ☑ Yes ☐ No |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
|  | Large accelerated filer ☐ | Accelerated filer ☑ |
|  | Non-accelerated filer ☐  | Smaller reporting company ☐ |
|  | | Emerging growth company ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
| ☐ Yes ☑ No | ☐ Yes ☑ No | ☐ Yes ☑ No |
| As of October 28, 2022, there were 16,231,717 shares outstanding of the registrant's Common Stock, $1.00 par value. | As of October 28, 2022, there were 16,231,717 shares outstanding of the registrant's Common Stock, $1.00 par value. | As of October 28, 2022, there were 16,231,717 shares outstanding of the registrant's Common Stock, $1.00 par value. |

---

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| | | |
|:---|:---|:---|
| **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** |
| **FORM 10-Q** | **FORM 10-Q** | **FORM 10-Q** |
| **INDEX** | **INDEX** | **INDEX** |
| **PART I.** | [**FINANCIAL INFORMATION**](#part1) | <u>**P**</u><u>**age**</u> |
| Item 1. | [Financial Statements](#item1) |  |
|  | [Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021](#bs) | [4](#bs) |
|  | [Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)](#income) | [5](#income) |
|  | [Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)](#compincome) | [6](#compincome) |
|  | [Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)](#eq) | [7](#eq) |
|  | [Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)](#cf) | [8](#cf) |
|  | [Notes to Condensed Consolidated Financial Statements (Unaudited)](#notes) | [46](#notes) |
| Item 2. | [Management's Discussion and Analysis of Financial Condition and Results of Operations](#item2) | [17](#item2) |
| Item 3. | [Quantitative and Qualitative Disclosures About Market Risk](#item3) | [17](#item3) |
| Item 4. | [Controls and Procedures](#item4) | [17](#item4) |
| **PART II.** | [**OTHER INFORMATION**](#part2) |  |
| Item 1. | [Legal Proceedings](#legal) | [47](#legal) |
| Item 1A. | [Risk Factors](#risk) | [47](#risk) |
| Item 2. | [Unregistered Sales of Equity Securities and Use of Proceeds](#unreg) | [48](#unreg) |
| Item 3. | [Defaults Upon Senior Securities](#def) | [48](#def) |
| Item 4. | [Mine Safety Disclosures](#mine) | [48](#mine) |
| Item 5. | [Other Information](#other) | [48](#other) |
| Item 6. | [Exhibits](#ex) | [49](#ex) |
| [**Signatures**](#sig) | [**Signatures**](#sig) | [51](#sig) |

---

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Forward-looking statements in filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q and the accompanying Exhibits, filings incorporated by reference, reports to shareholders, and other communications that represent the Company's beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," and other similar expressions identify forward-looking statements. The following factors, among others, could cause financial performance to differ materially from that expressed in such forward-looking statements:

● inflation, interest rate, market and monetary fluctuations;

● the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

● the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;

● the effects of the COVID-19 pandemic, including negative impacts and disruptions to the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company's business;

● timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

● the willingness of customers to substitute competitors' products and services for the Company's products and services and vice versa;

● the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance;

● the impact of the U.S. Department of the Treasury and federal banking regulators' continued implementation of programs to address capital and liquidity in the banking system;

● technological changes;

● the cost and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;

● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;

● the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

● the sustainability of noninterest, or fee, income;

● unanticipated regulatory or judicial proceedings;

● changes in consumer spending and saving habits; and

● the Company's success at managing the risks mentioned above.

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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| | |
|:---|:---|
| **PART I.** | **FINANCIAL INFORMATION** |

---

**Item 1. Financial Statements**

**CONDENSED CONSOLIDATED BALANCE SHEETS**<br>

---

| | | |
|:---|:---|:---|
|  | **September 30,** | **December 31,** |
|  | **2022** | **2021<sup>(1)</sup>** |
| *(Amounts in thousands, except share and per share data)* | (Unaudited) |  |
| **Assets** |  |  |
| Cash and due from banks | $54795 | $47067 |
| Federal funds sold | 172141 | 627036 |
| Interest-bearing deposits in banks | 2159 | 3336 |
| Total cash and cash equivalents | 229095 | 677439 |
| Debt securities available for sale | 299620 | 76292 |
| Loans held for investment, net of unearned income | 2362733 | 2165569 |
| Allowance for credit losses | (29388) | (27858) |
| Loans held for investment, net | 2333345 | 2137711 |
| Premises and equipment, net | 47891 | 52284 |
| Other real estate owned | 559 | 1015 |
| Interest receivable | 8345 | 7900 |
| Goodwill | 129565 | 129565 |
| Other intangible assets | 4541 | 5622 |
| Other assets | 107838 | 106691 |
| Total assets | $3160799 | $3194519 |
| **Liabilities** |  |  |
| Deposits |  |  |
| Noninterest-bearing | $878423 | $842783 |
| Interest-bearing | 1831798 | 1886608 |
| Total deposits | 2710221 | 2729391 |
| Securities sold under agreements to repurchase | 1958 | 1536 |
| Interest, taxes, and other liabilities | 36362 | 35817 |
| Total liabilities | 2748541 | 2766744 |
| **Stockholders' equity** |  |  |
| Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding |  |  |
| Common stock, $1 par value; 50,000,000 shares authorized; 23,412,168 shares issued and 16,273,177 outstanding at September 30, 2022; 23,971,347 shares issued and 16,878,220 outstanding at December 31, 2021 | 16273 | 16878 |
| Additional paid-in capital | 129914 | 147619 |
| Retained earnings | 285096 | 264824 |
| Accumulated other comprehensive loss | (19025) | (1546) |
| Total stockholders' equity | 412258 | 427775 |
| Total liabilities and stockholders' equity | $3160799 | $3194519 |

---

------

(1) Derived from audited financial statements <br> *See Notes to Condensed Consolidated Financial Statements.*

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[**Table of Contents**](#toc)

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**<br>

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Nine Months Ended** | **Nine Months Ended** |
|  | **September 30,** | **September 30,** | **September 30,** | **September 30,** |
| *(Amounts in thousands, except share and per share data)* | **2022** | **2021** | **2022** | **2021** |
| **Interest income** |  |  |  |  |
| Interest and fees on loans | $26405 | $25119 | $76697 | $77596 |
| Interest on securities -- taxable | 1610 | 200 | 3539 | 557 |
| Interest on securities -- tax-exempt | 175 | 245 | 547 | 818 |
| Interest on deposits in banks | 1532 | 225 | 2548 | 507 |
| Total interest income | 29722 | 25789 | 83331 | 79478 |
| **Interest expense** |  |  |  |  |
| Interest on deposits | 380 | 642 | 1288 | 2235 |
| &nbsp;&nbsp;&nbsp; Interest on short-term borrowings |  | 1 | 1 | 1 |
| Total interest expense | 380 | 643 | 1289 | 2236 |
| **Net interest income** | 29342 | 25146 | 82042 | 77242 |
| Provision for (recovery of) credit losses | 685 | (1394) | 3156 | (7625) |
| **Net interest income after provision for loan losses** | 28657 | 26540 | 78886 | 84867 |
| **Noninterest income** |  |  |  |  |
| Wealth management | 932 | 974 | 2897 | 2913 |
| Service charges on deposits | 3689 | 3599 | 10859 | 9728 |
| Other service charges and fees | 2988 | 3143 | 9302 | 9331 |
| &nbsp;&nbsp;&nbsp; Divestiture gain | 1658 |  | 1658 |  |
| Other operating income | 683 | 1004 | 3282 | 3114 |
| Total noninterest income | 9950 | 8720 | 27998 | 25086 |
| **Noninterest expense** |  |  |  |  |
| Salaries and employee benefits | 12081 | 10646 | 35270 | 31746 |
| Occupancy expense | 1188 | 1155 | 3622 | 3545 |
| Furniture and equipment expense | 1478 | 1385 | 4588 | 4209 |
| Service fees | 1635 | 1530 | 5701 | 4378 |
| Advertising and public relations | 718 | 536 | 1835 | 1487 |
| Professional fees | 208 | 313 | 1205 | 1069 |
| Amortization of intangibles | 365 | 365 | 1082 | 1082 |
| FDIC premiums and assessments | 321 | 216 | 796 | 619 |
| &nbsp;&nbsp;&nbsp; Divestiture expenses | 153 |  | 153 |  |
| Other operating expense | 2998 | 2690 | 8134 | 8882 |
| Total noninterest expense | 21145 | 18836 | 62386 | 57017 |
| Income before income taxes | 17462 | 16424 | 44498 | 52936 |
| Income tax expense | 4111 | 3816 | 10419 | 12323 |
| **Net income** | $13351 | $12608 | $34079 | $40613 |
| Earnings per common share |  |  |  |  |
| Basic | $0.82 | $0.73 | $2.05 | $2.32 |
| Diluted | 0.81 | 0.73 | 2.05 | 2.32 |
| Weighted average shares outstanding |  |  |  |  |
| Basic | 16378022 | 17221244 | 16617766 | 17457477 |
| Diluted | 16413202 | 17279576 | 16654697 | 17511900 |

---

*See Notes to Condensed Consolidated Financial Statements.*<br>

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[**Table of Contents**](#toc)

**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)**<br>

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Nine Months Ended** | **Nine Months Ended** |
|  | **September 30,** | **September 30,** | **September 30,** | **September 30,** |
|  | **2022** | **2021** | **2022** | **2021** |
| *(Amounts in thousands)* |  |  |  |  |
| **Net income** | $13351 | $12608 | $34079 | $40613 |
| **Other comprehensive income, before tax** |  |  |  |  |
| Available-for-sale debt securities: |  |  |  |  |
| Net unrealized losses on available-for-sale debt securities | (9355) | (207) | (21802) | (1007) |
| Employee benefit plans: |  |  |  |  |
| Net actuarial loss | (1) |  | (424) | (206) |
| Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income | 34 | 96 | 101 | 289 |
| Net unrealized gains (losses) on employee benefit plans | 33 | 96 | (323) | 83 |
| **Other comprehensive loss, before tax** | (9322) | (111) | (22125) | (924) |
| Income tax benefit | (1957) | (23) | (4646) | (194) |
| **Other comprehensive loss, net of tax** | (7365) | (88) | (17479) | (730) |
| **Total comprehensive income** | $5986 | $12520 | $16600 | $39883 |

---

*See Notes to Condensed Consolidated Financial Statements.*<br>

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[**Table of Contents**](#toc)

---

| |
|:---|
| **CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)** |
| **THREE MONTHS ENDED** |
| **September 30, 2022 and 2021** |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  |  |  | **Accumulated** |  |
|  | **Preferred** |  | **Common** |  | **Additional** |  | **Other** |  |
| *(Amounts in thousands, except share and per share data)* | **Stock Outstanding** | **Preferred Stock** | **Stock Outstanding** | **Common Stock** | **Paid-in Capital** | **Retained Earnings** | **Comprehensive Loss** | **Total** |
| Balance July, 1 2021 |  | $- | 17334547 | $17335 | $161853 | $250911 | $(2565) | $427534 |
| Net income |  |  |  |  |  | 12608 |  | 12608 |
| Other comprehensive loss |  |  |  |  |  |  | (88) | (88) |
| Common dividends declared -- $0.27 per share |  |  |  |  |  | (4659) |  | (4659) |
| Equity-based compensation expense |  |  | 553 |  | 37 |  |  | 37 |
| Common stock options exercised |  |  | 9371 | 10 | 268 |  |  | 278 |
| Issuance of common stock to 401(k) plan |  |  | 3967 | 4 | 116 |  |  | 120 |
| Repurchase of common shares at $30.52 per share |  |  | (277386) | (278) | (8188) |  |  | (8466) |
| Balance September 30, 2021 |  | $- | 17071052 | $17071 | $154086 | $258860 | $(2653) | $427364 |
| Balance July, 1 2022 |  | $- | 16502144 | $16502 | $136705 | $276499 | $(11660) | $418046 |
| Net income |  |  |  |  |  | 13351 |  | 13351 |
| Other comprehensive loss |  |  |  |  |  |  | (7365) | (7365) |
| Common dividends declared -- $0.29 per share |  |  |  |  |  | (4754) |  | (4754) |
| Equity-based compensation expense |  |  |  |  | 52 |  |  | 52 |
| Common stock options exercised -- shares |  |  | 2443 | 2 | 182 |  |  | 184 |
| Issuance of common stock to 401(k) plan |  |  | 3990 | 4 | 123 |  |  | 127 |
| Repurchase of common shares at $31.36 per share |  |  | (235400) | (235) | (7148) |  |  | (7383) |
| Balance September 30, 2022 |  | $- | 16273177 | $16273 | $129914 | $285096 | $(19025) | $412258 |

---

*See Notes to Condensed Consolidated Financial Statements.*<br>

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[**Table of Contents**](#toc)

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| |
|:---|
| **CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)** |
| **Nine MONTHS ENDED** |
| **September 30, 2022 and 2021** |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  |  |  | **Accumulated** |  |
|  | **Preferred** |  | **Common** |  | **Additional** |  | **Other** |  |
| *(Amounts in thousands, except share and per share data)* | **Stock Outstanding** | **Preferred Stock** | **Stock Outstanding** | **Common Stock** | **Paid-in Capital** | **Retained Earnings** | **Comprehensive Loss** | **Total** |
| Balance January 1, 2021 |  | $- | 17722507 | $17723 | $173345 | $237585 | $(1923) | $426730 |
| Cumulative effect of adoption of ASU 2016-13 |  |  |  |  |  | (5870) |  | (5870) |
| Net income |  |  |  |  |  | 40613 |  | 40613 |
| Other comprehensive loss |  |  |  |  |  |  | (730) | (730) |
| Common dividends declared -- $0.77 per share |  |  |  |  |  | (13468) |  | (13468) |
| Equity-based compensation expense |  |  | 42340 | 42 | 816 |  |  | 858 |
| Common stock options exercised |  |  | 19773 | 20 | 268 |  |  | 288 |
| Issuance of common stock to 401(k) plan |  |  | 13118 | 13 | 360 |  |  | 373 |
| Repurchase of common shares at $29.49 per share |  |  | (726686) | (727) | (20703) |  |  | (21430) |
| Balance September 30, 2021 |  | $- | 17071052 | $17071 | $154086 | $258860 | $(2653) | $427364 |
| Balance January 1, 2022 |  | $- | 16878220 | $16878 | $147619 | $264824 | $(1546) | $427775 |
| Net income |  |  |  |  |  | 34079 |  | 34079 |
| Other comprehensive loss |  |  |  |  |  |  | (17479) | (17479) |
| Common dividends declared -- $0.83 per share |  |  |  |  |  | (13807) |  | (13807) |
| Equity-based compensation expense |  |  | 25137 | 25 | 511 |  |  | 536 |
| Common stock options exercised |  |  | 6979 | 7 | 150 |  |  | 157 |
| Issuance of common stock to 401(k) plan |  |  | 13748 | 14 | 401 |  |  | 415 |
| Repurchase of common shares at $29.83 per share |  |  | (650907) | (651) | (18767) |  |  | (19418) |
| Balance September 30, 2022 |  | $- | 16273177 | $16273 | $129914 | $285096 | $(19025) | $412258 |

---

*See Notes to Condensed Consolidated Financial Statements.*

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**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**<br>

---

| | | |
|:---|:---|:---|
|  | **Nine Months Ended** | **Nine Months Ended** |
|  | **September 30,** | **September 30,** |
| *(Amounts in thousands)* | **2022** | **2021** |
| **Operating activities** |  |  |
| Net income | $34079 | $40613 |
| Adjustments to reconcile net income to net cash provided by operating activities |  |  |
| Provision for (recovery of) credit losses | 3156 | (7625) |
| Depreciation and amortization of premises and equipment | 3205 | 3346 |
| (Accretion) amortization of premiums on investments, net | (26) | 307 |
| Amortization of FDIC indemnification asset, net |  | 1226 |
| Amortization of intangible assets | 1082 | 1082 |
| Accretion on acquired loans | (2224) | (3599) |
| &nbsp;&nbsp;&nbsp; Gain on divestiture | (1658) |  |
| Equity-based compensation expense | 536 | 858 |
| Issuance of common stock to 401(k) plan | 415 | 373 |
| (Gain) loss on sale of premises and equipment, net | (772) | 518 |
| Loss on sale of other real estate owned | 423 | 135 |
| (Increase) decrease in accrued interest receivable | (445) | 906 |
| Decrease (increase) in other operating activities | 3757 | (1547) |
| Net cash provided by operating activities | 41528 | 36593 |
| **Investing activities** |  |  |
| Proceeds from maturities, prepayments, and calls of securities available for sale | 19855 | 21183 |
| Payments to acquire securities available for sale | (264960) | (16578) |
| Net (increase) decrease in loans | (197035) | 41185 |
| (Purchase of) proceeds from FHLB stock, net | (240) | 1012 |
| &nbsp;&nbsp;&nbsp; Proceeds from bank owned life insurance | 1046 |  |
| &nbsp;&nbsp;&nbsp; Cash proceeds paid in divestiture | (59039) |  |
| Proceeds from sale of premises and equipment | 1542 | 2578 |
| Payments to acquire premises and equipment | (750) | (2454) |
| Proceeds from sale of other real estate owned | 471 | 1796 |
| Net cash (used) provided by investing activities | (499110) | 48722 |
| **Financing activities** |  |  |
| Increase in noninterest-bearing deposits, net | 54024 | 47352 |
| (Decrease) increase in interest-bearing deposits, net | (12140) | 80247 |
| Proceeds from securities sold under agreements to repurchase, net | 422 | 142 |
| Proceeds from stock options exercised | 157 | 288 |
| Payments for repurchase of common stock | (19418) | (21430) |
| Payments of common dividends | (13807) | (13468) |
| Net cash provided by financing activities | 9238 | 93131 |
| Net (decrease) increase in cash and cash equivalents | (448344) | 178446 |
| Cash and cash equivalents at beginning of period | 677439 | 456561 |
| Cash and cash equivalents at end of period | $229095 | $635007 |
| **Supplemental disclosure -- cash flow information** |  |  |
| Cash paid for interest | $1728 | $2508 |
| Cash paid for income taxes | 4090 | 11989 |
| **Supplemental transactions -- noncash items** |  |  |
| Transfer of loans to other real estate owned | 438 | 1147 |
| Loans originated to finance other real estate owned |  | 59 |
| Increase in accumulated other comprehensive loss, net of taxes | (17479) | (730) |

---

*See Notes to Condensed Consolidated Financial Statements.*

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[**Table of Contents**](#toc)

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**Note 1. Basis of Presentation**

***General***

First Community Bankshares, Inc. (the "Company"), is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company's principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the "Bank"), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. ("FCWM"). Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

***Principles of Consolidation***

The Company's accounting and reporting policies conform with U.S. generally accepted accounting principles ("GAAP") and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management's opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K"), as filed with the Securities and Exchange Commission (the "SEC") on March 3, 2022. The condensed consolidated balance sheet as of December 31, 2021, has been derived from the audited consolidated financial statements.

***Reclassifications***

Certain amounts reported in prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on the Company's results of operations, financial position, or net cash flow.

***Use of Estimates***

Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the allowance for loan losses, goodwill and other intangible assets, and income taxes. A discussion of the Company's application of critical accounting estimates is included in "Critical Accounting Estimates" in Item 2 of this report.

***Significant Accounting Policies***

 ****

The Company's significant accounting policies are included in Note 1, "Basis of Presentation and Significant Accounting Policies," of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company's 2021 Form 10-K.

***Allowance for Credit Losses (***"***ACL***"***)***

On January 1, 2021, the Company adopted ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU applies to all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities, and unfunded commitments. The Company applied the ASU's provisions using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. The cumulative-effect adjustment was a decrease to retained earnings net of tax of $5.87 million. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

**ACL – Investment Securities**

The Company no longer evaluates securities for other-than-temporary impairment ("OTTI"), as ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter, the Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security's fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.

The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities and does not record an allowance for credit losses on accrued interest receivable. As of September 30, 2022, the accrued interest receivable for investment securities available for sale was $1.06 million.

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The Company's estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. The Company does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Nonpayment of the amortized cost basis is not expected to be zero solely on the basis of the current value of collateral securing the security but, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate change since purchase, volatility of the security's fair value and historical loss information for financial assets securitized with similar collateral. The Company performed an analysis that determined that the following securities have a zero expected credit loss: U.S. Treasury Securities, Agency-Backed Securities including Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), Federal Home Loan Bank ("FHLB"), Federal Farm Credit Banks ("FFCB") and Small Business Administration ("SBA"). All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or one of its agencies. These securities are included in Government-Sponsored Entities Debt and Mortgage-Backed Securities line items in the Investment Securities footnote. Municipal securities and all other securities that do not have a zero expected credit loss will be evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value.

**ACL – Loans**

The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments. The Company established the incremental increase in the ACL at the adoption of ASU 2016-13, through retained earnings and subsequent adjustments are made through a provision for credit losses charged to earnings. Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.

A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company's estimate of its ACL involves a high degree of judgement and reflects management's best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management's current estimate of expected credit losses. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.

The Company collectively evaluates loans that share similar risk characteristics. In general, loans are segmented by loan purpose. The Company collectively evaluates loans within the following consumer and commercial segments: Loans secured by 1-4 Family Properties, Home Equity Lines of Credit ("HELOC"), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).

For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses.

In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilizes call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. Management reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered are further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information is evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporates at least one macroeconomic driver either using a statistical regression modeling methodology.

Management considers forward-looking information in estimated expected credit losses. The Company subscribes to a third-party service which provides summary detail of dozens of economic forecasts. Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one-year reasonable and supportable forecast period. Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management. Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.

Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending polices and procedures, 2) changes in economic conditions, 3) changes in portfolio nature and volume, 4) changes in management, 5) changes in past due loans, 6) changes in the quality of the Company's credit review system, 7) changes in the value of underlying collateral, 8) the effect of concentrations of credit, and 9) the effect of other external factors.

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

Management measures expected credit losses over the contractual term of the loans. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a TDR with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. The effects of a TDR are recorded when an individual asset is specifically identified as a reasonably-expected TDR. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower's application for a modification (i.e. the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions. The Company uses a discounted cash flow methodology to calculate the effect of the concession provided to the borrower in TDR within the ACL.

Purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company's assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition date, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the fair value and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company's acquired purchased credit impaired loans were treated as PCD loans.

The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of September 30, 2022, the accrued interest receivable for loans was $7.28 million.

The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. As of September 30, 2022, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $1.42 million.

***Risks and Uncertainties***

<u>COVID-19 Virus Developments</u>

During the last two-and-a-half years, government reaction to the novel coronavirus ("COVID-19") pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services. As COVID-19 events unfolded, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions.

While direct impacts of COVID-19 appear to be declining and conditions have improved as of September 30, 2022, if there is a resurgence in the virus, the Company could experience adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact of COVID-19, and any potential resulting measures to curtail its spread, will have on the Company's future operations, 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 pandemic.

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***Recent Accounting Standards***

 

*Standards Adopted in 2021*

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU requires earlier recording of credit losses on loans and other financial assets held by financial institutions and other organizations. This ASU also requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It further requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. In addition, the ASU amends the accounting for credit losses in investments in debt securities and purchased financial assets with credit deterioration. The Company adopted the new standard as of January 1, 2021. The standard was applied using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. Under this method, comparative periods will not be required to be restated for financial statements related to Topic 326. Comparative prior period disclosures will be presented using the guidance for the allowance for loan losses. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and the reasons for the change, which is solely a result of the adoption of the required standard. This standard did not have a material impact on our investment securities portfolio at implementation. Related to the implementation of the standard, the Company recorded an additional ACL for loans of $13.11 million, deferred tax assets of $1.81 million, and additional reserve for unfunded commitments of $509 thousand and an adjustment to retained earnings, net of tax, of $5.87 million. See the table below for the impact of ASU 2016-13 on the Company's consolidated balance sheet.

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| | | | |
|:---|:---|:---|:---|
|  | **January 1, 2021** | **January 1, 2021** | **January 1, 2021** |
|  | **As Reported** | **Pre-** | **Impact of** |
|  | **Under** | **ASU 2016-13** | **ASU 2016-13** |
|  | **ASU 2016-13** | **Adoption** | **Adoption** |
| Assets: |  |  |  |
| Non-covered loans held for investment |  |  |  |
| Allowance for credit losses on debt securities |  |  |  |
| Investment securities - available for sale | $83358 | $83358 | $- A |
| Loans |  |  |  |
| Non-acquired loans and acquired performing loans | 2146972 | 2146972 |  |
| Acquired purchased deteriorated loans | 45535 | 39660 | 5875 B |
| Allowance for credit losses on loans | (39289) | (26182) | (13107) C |
| Deferred tax asset | 19306 | 17493 | 1813 D |
| Accrued interest receivable - loans | 9109 | 9052 | 57 B |
| Liabilities |  |  |  |
| Allowance for credit losses on off-balance sheet credit exposures | 575 | 66 | 509 E |
| Equity: |  |  |  |
| Retained earnings | 231714 | 237585 | (5871) F |

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&nbsp;&nbsp;&nbsp;&nbsp;A. Per our analysis no ACL was necessary for investment securities available-for-sale.

&nbsp;&nbsp;&nbsp;&nbsp;B. Accrued interest receivable from acquired credit impaired loans of $57 thousand was reclassed to other assets and was offset by the reclass of the grossed up credit discount on acquired credit impaired loans of $57 thousand that was moved to the ACL for the purchased credit deteriorated loans.

&nbsp;&nbsp;&nbsp;&nbsp;C. Calculated adjustment to the ACL related to the adoption of ASU 2016-13. Includes additional reserve related to purchased deteriorated loans of $5.88 million.

&nbsp;&nbsp;&nbsp;&nbsp;D. Effect of deferred tax assets related to the adjustment to the ACL form the adoption of ASU 2016-13 using a 23.37% tax rate.

&nbsp;&nbsp;&nbsp;&nbsp;E. Adjustment to the reserve for unfunded commitments related to the adoption of ASU 2016-13.

&nbsp;&nbsp;&nbsp;&nbsp;F. Net adjustment to retained earnings related to the adoption of ASU 2016-13.

 

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes". This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The Company adopted this ASU as of January 1, 2021, and it did not have a material effect on the Company's financial statements.

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

*Standards Not Yet Adopted*

In March 2022, the Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This new accounting topic provides accounting guidance for troubled debt restructuring (TDR) and write-offs, effective January 1, 2023, with early adoption permitted. The amendments eliminate TDR accounting guidance for issuers that have adopted ASU 2016-13, create a single loan modification accounting model, and clarify disclosure requirements for loan modifications and write-offs. We are currently reviewing the impact of the updated guidance on our Consolidated Financial Statements, but do no anticipate a material impact. At this time, the Company has no plans to early adopt this guidance.

 

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**Note 2. Divestitures**

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

**Note 3. Debt Securities**

There was no allowance for credit losses for debt securities as of September 30, 2022; therefore, it is not presented in the table below. The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** |  |
|  | **Amortized** |  | **Unrealized** |  | **Unrealized** | **Fair** |  |
|  | **Cost** |  | **Gains** |  | **Losses** | **Value** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| U.S. Agency securities | $1500 |  | $- |  | $(12) | $1488 |  |
| U.S. Treasury Notes | 160935 |  |  |  | (4475) | 156460 |  |
| Municipal securities | 23523 |  | 9 |  | (471) | 23061 |  |
| Corporate notes | 37056 |  |  |  | (2537) | 34519 |  |
| Agency mortgage-backed securities | 98389 |  | 1 |  | (14298) | 84092 |  |
| Total | $321403 |  | $10 |  | $(21793) | $299620 |  |

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
|  | **Amortized** |  | **Unrealized** |  | **Unrealized** | **Fair** |  |
|  | **Cost** |  | **Gains** |  | **Losses** | **Value** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |
| U.S. Agency securities | $469 |  | $— |  | $(3) | $466 |  |
| Municipal securities | 28596 |  | 198 |  |  | 28794 |  |
| Corporate notes | 9935 |  |  |  | (16) | 9919 |  |
| Agency mortgage-backed securities | 37273 |  | 513 |  | (673) | 37113 |  |
| Total | $76273 |  | $711 |  | $(692) | $76292 |  |

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

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| | | |
|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** |
|  | **Amortized** |  |
| *(Amounts in thousands)* | **Cost** | **Fair Value** |
| **Available-for-sale debt securities** |  |  |
| Due within one year | $43628 | $43323 |
| Due after one year but within five years | 174943 | 167932 |
| Due after five years but within ten years | 4443 | 4273 |
|  | 223014 | 215528 |
| Agency mortgage-backed securities | 98389 | 84092 |
| Total debt securities available for sale | $321403 | $299620 |

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

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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** |
|  | **Less than 12 Months** | **Less than 12 Months** | **Less than 12 Months** | **12 Months or Longer** | **12 Months or Longer** | **12 Months or Longer** | **Total** | **Total** | **Total** |
|  | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** |
|  | **Value** |  | **Losses** | **Value** |  | **Losses** | **Value** |  | **Losses** |
| *(Amounts in thousands)* |  | |  |  | |  |  | |  |
| U.S. Agency securities | $1488 |  | $(12) | $- |  | $- | $1488 |  | $(12) |
| U.S. Treasury Notes | 156460 |  | (4475) |  |  |  | 156460 |  | (4475) |
| Municipal securities | 18872 |  | (471) |  |  |  | 18872 |  | (471) |
| Corporate notes | 34519 |  | (2537) |  |  |  | 34519 |  | (2537) |
| Agency mortgage-backed securities | 69521 |  | (10452) | 14515 |  | (3846) | 84036 |  | (14298) |
| Total | $280860 |  | $(17947) | $14515 |  | $(3846) | $295375 |  | $(21793) |

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| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Less than 12 Months** | **Less than 12 Months** | **Less than 12 Months** | **12 Months or Longer** | **12 Months or Longer** | **12 Months or Longer** | **Total** | **Total** | **Total** |
|  | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** | **Fair** |  | **Unrealized** |
|  | **Value** |  | **Losses** | **Value** |  | **Losses** | **Value** |  | **Losses** |
| *(Amounts in thousands)* |  | |  |  | |  |  | |  |
| U.S. Agency securities | $— |  | $— | $459 |  | $(3) | $459 |  | $(3) |
| Corporate notes | 9919 |  | (16) |  |  |  | 9919 |  | (16) |
| Agency mortgage-backed securities | 14092 |  | (253) | 8384 |  | (420) | 22476 |  | (673) |
| Total | $24011 |  | $(269) | $8843 |  | $(423) | $32854 |  | $(692) |

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There were 136 individual debt securities in an unrealized loss position as of September 30, 2022, and the combined depreciation in value represented 7.27% of the debt securities portfolio. There were 23 individual debt securities in an unrealized loss position as of December 31, 2021, and their combined depreciation in value represented 0.91% of the debt securities portfolio. The decline in the market value of debt securities available for sale from December 31, 2021, is primarily attributable to the increasing rate environment throughout 2022.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the investments. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of September 30, 2022, continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.

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

There were no gross realized gains and losses from the sale of available-for-sale debt securities for the three and nine months ended September 30, 2022 and 2021.

The carrying amount of securities pledged for various purposes totaled $27.82 million as of September 30, 2022, and $22.15 million as of December 31, 2021.

**Note 4. Loans**

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $1.29 million as of September 30, 2022, and $1.65 million as of December 31, 2021. Deferred loan fees, net of loan costs, totaled $4.11 million as of September 30, 2022, and $5.06 million as of December 31, 2021. For information about off-balance sheet financing, see Note 15, "Litigation, Commitments, and Contingencies," to the Condensed Consolidated Financial Statements of this report.

In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis to include net deferred loan fees of $4.11 million and $5.06 million and unamortized discount related to loans acquired of $4.11 million and $5.41 million million for September 30, 2022, and December 31, 2021, respectively. Accrued interest receivable (AIR) of $7.28 million as of September 30, 2022, and $7.54 million as of December 31, 2021, is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Amount** | **Percent** | **Amount** | **Percent** |
| Loans held for investment |  |  |  |  |
| Commercial loans |  |  |  |  |
| Construction, development, and other land | $109104 | 4.62% | $65806 | 3.04% |
| Commercial and industrial | 148024 | 6.26% | 133630 | 6.17% |
| Multi-family residential | 135489 | 5.73% | 100402 | 4.64% |
| Single family non-owner occupied | 196133 | 8.30% | 198778 | 9.18% |
| Non-farm, non-residential | 777350 | 32.90% | 707506 | 32.67% |
| Agricultural | 10537 | 0.45% | 9341 | 0.43% |
| Farmland | 12127 | 0.51% | 15013 | 0.69% |
| Total commercial loans | 1388764 | 58.77% | 1230476 | 56.82% |
| Consumer real estate loans |  |  |  |  |
| Home equity lines | 77424 | 3.28% | 79857 | 3.69% |
| Single family owner occupied | 726780 | 30.76% | 703864 | 32.50% |
| Owner occupied construction | 14602 | 0.62% | 16910 | 0.78% |
| Total consumer real estate loans | 818806 | 34.66% | 800631 | 36.97% |
| Consumer and other loans |  |  |  |  |
| Consumer loans | 151022 | 6.39% | 129794 | 5.99% |
| Other | 4141 | 0.18% | 4668 | 0.22% |
| Total consumer and other loans | 155163 | 6.57% | 134462 | 6.21% |
| Total loans held for investment, net of unearned income | $2362733 | 100.00% | $2165569 | 100.00% |

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The Company began participating as a Small Business Administration Paycheck Protection Program lender during the second quarter of 2020. At September 30, 2022, there was no remaining balance of PPP loans, compared to $20.64 million at December 31, 2021, which were included in commercial and industrial loan balances. There were no remaining net deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, at September 30, 2022. At December 31, 2021, the amount of net deferred loan origination fees related to PPP loans was $733 thousand. During the third quarter of 2022, the Company recorded amortization of net deferred loan origination fees of $80 thousand on PPP loans and recorded $734 thousand in amortization for the nine month period of 2022 . The Company recorded amortization of net deferred loan origination fees on PPP loans of $708 thousand and $2.24 million in amortization for the same periods, respectively, for 2021.

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[**Table of Contents**](#toc)

**Note 5. Credit Quality** 

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

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

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

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

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

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

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** |
|  |  | **Special** |  |  |  |  |
| *(Amounts in thousands)* | **Pass** | **Mention** | **Substandard** | **Doubtful** | **Loss** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $107937 | $757 | $410 | $- | $- | $109104 |
| Commercial and industrial | 145064 | 1084 | 1876 |  |  | 148024 |
| Multi-family residential | 130970 | 4081 | 438 |  |  | 135489 |
| Single family non-owner occupied | 185415 | 2358 | 8360 |  |  | 196133 |
| Non-farm, non-residential | 749705 | 16206 | 11439 |  |  | 777350 |
| Agricultural | 10324 | 51 | 162 |  |  | 10537 |
| Farmland | 9909 | 589 | 1629 |  |  | 12127 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 74067 | 430 | 2927 |  |  | 77424 |
| Single family owner occupied | 697976 | 2022 | 26782 |  |  | 726780 |
| Owner occupied construction | 14438 |  | 164 |  |  | 14602 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 148436 | 10 | 2576 |  |  | 151022 |
| Other | 4141 |  |  |  |  | 4141 |
| Total loans | $2278382 | $27588 | $56763 | $- | $- | $2362733 |

---

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  |  | **Special** |  |  |  |  |
| *(Amounts in thousands)* | **Pass** | **Mention** | **Substandard** | **Doubtful** | **Loss** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $64498 | $451 | $857 | $- | $- | $65806 |
| Commercial and industrial | 128770 | 1005 | 3855 |  |  | 133630 |
| Multi-family residential | 98457 | 1090 | 855 |  |  | 100402 |
| Single family non-owner occupied | 186184 | 3607 | 8977 | 10 |  | 198778 |
| Non-farm, non-residential | 665559 | 25624 | 16323 |  |  | 707506 |
| Agricultural | 8758 | 70 | 513 |  |  | 9341 |
| Farmland | 11939 | 633 | 2441 |  |  | 15013 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 76259 | 426 | 3172 |  |  | 79857 |
| Single family owner occupied | 671459 | 2420 | 29985 |  |  | 703864 |
| Owner occupied construction | 16629 |  | 281 |  |  | 16910 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 127514 | 16 | 2264 |  |  | 129794 |
| Other | 4668 |  |  |  |  | 4668 |
| Total loans | $2060694 | $35342 | $69523 | $10 | $- | $2165569 |

---

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The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at September 30, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Construction, development and other land |  |  |  |  |  |  |  |  |
| Pass | $39902 | $45588 | $8631 | $3144 | $2724 | $7594 | $354 | $107937 |
| Special Mention |  | 156 |  |  | 102 | 463 | 36 | 757 |
| Substandard |  |  | 362 | 36 | 12 |  |  | 410 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Total construction, development, and other land | $39902 | $45744 | $8993 | $3180 | $2838 | $8057 | $390 | $109104 |
| Commercial and industrial |  |  |  |  |  |  |  |  |
| Pass | $60771 | $26011 | $13335 | $8824 | $9815 | $9764 | $16544 | $145064 |
| Special Mention | 234 | 22 | 28 | 524 | 179 |  | 97 | 1084 |
| Substandard | 147 | 122 | 122 | 425 | 212 | 330 | 518 | 1876 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Total commercial and industrial | $61152 | $26155 | $13485 | $9773 | $10206 | $10094 | $17159 | $148024 |
| Multi-family residential |  |  |  |  |  |  |  |  |
| Pass | $40595 | $15211 | $26878 | $3757 | $1788 | $41807 | $934 | $130970 |
| Special Mention |  |  |  |  |  | 4081 |  | 4081 |
| Substandard |  |  |  |  |  | 438 |  | 438 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Total multi-family residential | $40595 | $15211 | $26878 | $3757 | $1788 | $46326 | $934 | $135489 |
| Non-farm, non-residential |  |  |  |  |  |  |  |  |
| Pass | $183767 | $145439 | $122934 | $53060 | $37644 | $192843 | $14018 | $749705 |
| Special Mention |  | 1946 | 860 | 1205 | 2756 | 9289 | 150 | 16206 |
| Substandard |  | 1130 | 682 | 2762 | 714 | 5924 | 227 | 11439 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Total non-farm, non-residential | $183767 | $148515 | $124476 | $57027 | $41114 | $208056 | $14395 | $777350 |
| Agricultural |  |  |  |  |  |  |  |  |
| Pass | $4071 | $3447 | $1158 | $469 | $364 | $382 | $433 | $10324 |
| Special Mention |  | 35 | 16 |  |  |  |  | 51 |
| Substandard |  | 38 | 3 | 75 | 30 | 16 |  | 162 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Total agricultural | $4071 | $3520 | $1177 | $544 | $394 | $398 | $433 | $10537 |
| Farmland |  |  |  |  |  |  |  |  |
| Pass | $217 | $720 | $814 | $77 | $885 | $5662 | $1534 | $9909 |
| Special Mention |  | 110 |  |  | 227 | 252 |  | 589 |
| Substandard |  |  | 13 |  | 256 | 1360 |  | 1629 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp; Total farmland | $217 | $830 | $827 | $77 | $1368 | $7274 | $1534 | $12127 |

---

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[**Table of Contents**](#toc)

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at September 30, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Home equity lines |  |  |  |  |  |  |  |  |
| Pass | $967 | $100 | $76 | $- | $77 | $- | $72847 | $74067 |
| Special Mention |  |  |  |  |  |  | 430 | 430 |
| Substandard |  |  | 28 | 36 | 205 | 1207 | 1451 | 2927 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total home equity lines | $967 | $100 | $104 | $36 | $282 | $1207 | $74728 | $77424 |
| Single family Mortgage |  |  |  |  |  |  |  |  |
| Pass | $124170 | $233991 | $208988 | $51754 | $38014 | $225285 | $1189 | $883391 |
| Special Mention |  | 380 | 91 | 367 | 264 | 3278 |  | 4380 |
| Substandard | 378 | 1090 | 708 | 1164 | 2143 | 29659 |  | 35142 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total single family owner and non-owner occupied | $124548 | $235461 | $209787 | $53285 | $40421 | $258222 | $1189 | $922913 |
| Owner occupied construction |  |  |  |  |  |  |  |  |
| Pass | $5224 | $8686 | $- | $23 | $13 | $492 | $- | $14438 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  | 162 |  | 2 |  | 164 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total owner occupied construction | $5224 | $8686 | $- | $185 | $13 | $494 | $- | $14602 |
| Consumer loans |  |  |  |  |  |  |  |  |
| Pass | $67539 | $43169 | $18776 | $9514 | $3176 | $8178 | $2225 | $152577 |
| Special Mention |  | 3 |  | 6 |  |  | 1 | 10 |
| Substandard | 423 | 892 | 556 | 443 | 46 | 137 | 79 | 2576 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total consumer loans | $67962 | $44064 | $19332 | $9963 | $3222 | $8315 | $2305 | $155163 |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at September 30, 2022** | **2022** | **2021** | **2020** | **2019** | **2018** | **Prior** | **Revolving** | **Total** |
| Total Loans |  |  |  |  |  |  |  |  |
| Pass | $527223 | $522362 | $401590 | $130622 | $94500 | $492007 | $110078 | $2278382 |
| Special Mention | 234 | 2652 | 995 | 2102 | 3528 | 17363 | 714 | 27588 |
| Substandard | 948 | 3272 | 2474 | 5103 | 3618 | 39073 | 2275 | 56763 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total loans | $528405 | $528286 | $405059 | $137827 | $101646 | $548443 | $113067 | $2362733 |

---

------

[**Table of Contents**](#toc)

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Construction, development |  |  |  |  |  |  |  |  |
| and other land |  |  |  |  |  |  |  |  |
| Pass | $40207 | $10127 | $3081 | $3704 | $1308 | $5717 | $354 | $64498 |
| Special Mention |  | 266 |  | 128 |  | 21 | 36 | 451 |
| Substandard |  |  | 128 | 11 | 291 | 427 |  | 857 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total construction, development, and other land | $40207 | $10393 | $3209 | $3843 | $1599 | $6165 | $390 | $65806 |
| Commercial and industrial |  |  |  |  |  |  |  |  |
| Pass | $34539 | $18887 | $13679 | $13772 | $4817 | $5890 | $16544 | $108128 |
| Special Mention | 32 | 60 | 597 | 192 | 28 |  | 96 | 1005 |
| Substandard | 184 | 355 | 706 | 384 | 842 | 866 | 518 | 3855 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total commercial and industrial | $34755 | $19302 | $14982 | $14348 | $5687 | $6756 | $17158 | $112988 |
| Paycheck Protection Loans |  |  |  |  |  |  |  |  |
| Pass | $16482 | $4160 | $- | $- | $- | $- | $- | $20642 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  |  |  |  |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total Paycheck Protection Loans | $16482 | $4160 | $- | $- | $- | $- | $- | $20642 |
| Multi-family residential |  |  |  |  |  |  |  |  |
| Pass | $11307 | $24299 | $4644 | $1897 | $8413 | $46962 | $935 | $98457 |
| Special Mention |  |  |  |  |  | 1090 |  | 1090 |
| Substandard |  |  |  |  |  | 855 |  | 855 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total multi-family residential | $11307 | $24299 | $4644 | $1897 | $8413 | $48907 | $935 | $100402 |
| Non-farm, non-residential |  |  |  |  |  |  |  |  |
| Pass | $147978 | $146381 | $62651 | $50943 | $43776 | $199812 | $14018 | $665559 |
| Special Mention | 397 | 3334 | 823 | 2595 | 9190 | 9135 | 150 | 25624 |
| Substandard | 1161 | 711 | 2508 | 2531 | 3232 | 5953 | 227 | 16323 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total non-farm, non-residential | $149536 | $150426 | $65982 | $56069 | $56198 | $214900 | $14395 | $707506 |
| Agricultural |  |  |  |  |  |  |  |  |
| Pass | $4564 | $1548 | $998 | $534 | $346 | $335 | $433 | $8758 |
| Special Mention | 43 | 27 |  |  |  |  |  | 70 |
| Substandard | 44 | 11 | 282 | 39 | 17 | 120 |  | 513 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total agricultural | $4651 | $1586 | $1280 | $573 | $363 | $455 | $433 | $9341 |
| Farmland |  |  |  |  |  |  |  |  |
| Pass | $428 | $1047 | $82 | $1125 | $887 | $6835 | $1535 | $11939 |
| Special Mention | 189 |  |  | 240 | 5 | 199 |  | 633 |
| Substandard |  | 14 | 519 | 249 | 264 | 1395 |  | 2441 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total farmland | $617 | $1061 | $601 | $1614 | $1156 | $8429 | $1535 | $15013 |

---

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[**Table of Contents**](#toc)

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Home equity lines |  |  |  |  |  |  |  |  |
| Pass | $115 | $59 | $- | $25 | $2 | $2168 | $73890 | $76259 |
| Special Mention |  |  |  |  |  |  | 426 | 426 |
| Substandard |  |  | 28 | 249 | 128 | 1316 | 1451 | 3172 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total home equity lines | $115 | $59 | $28 | $274 | $130 | $3484 | $75767 | $79857 |
| Single family Mortgage |  |  |  |  |  |  |  |  |
| Pass | $239917 | $225294 | $61925 | $46716 | $41757 | $240845 | $1189 | $857643 |
| Special Mention | 399 | 510 | 937 | 269 | 137 | 3775 |  | 6027 |
| Substandard | 1213 | 799 | 1475 | 1668 | 1878 | 31929 |  | 38962 |
| Doubtful |  |  |  |  |  | 10 |  | 10 |
| Loss |  |  |  |  |  |  |  |  |
| Total single family owner and non-owner occupied | $241529 | $226603 | $64337 | $48653 | $43772 | $276559 | $1189 | $902642 |
| Owner occupied construction |  |  |  |  |  |  |  |  |
| Pass | $9689 | $4729 | $178 | $22 | $428 | $1583 | $- | $16629 |
| Special Mention |  |  |  |  |  |  |  |  |
| Substandard |  |  |  |  |  | 281 |  | 281 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total owner occupied construction | $9689 | $4729 | $178 | $22 | $428 | $1864 | $- | $16910 |
| Consumer loans |  |  |  |  |  |  |  |  |
| Pass | $65018 | $31065 | $16548 | $4980 | $2306 | $10040 | $2225 | $132182 |
| Special Mention |  |  | 16 |  |  |  |  | 16 |
| Substandard | 328 | 663 | 824 | 107 | 78 | 186 | 78 | 2264 |
| Doubtful |  |  |  |  |  |  |  |  |
| Loss |  |  |  |  |  |  |  |  |
| Total consumer loans | $65346 | $31728 | $17388 | $5087 | $2384 | $10226 | $2303 | $134462 |

---

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| *(Amounts in thousands)* | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** | **Term Loans Amortized Cost Basis by Origination Year** |  |  |
| **Balance at December 31, 2021** | **2021** | **2020** | **2019** | **2018** | **2017** | **Prior** | **Revolving** | **Total** |
| Total Loans |  |  |  |  |  |  |  |  |
| Pass | $570244 | $467596 | $163786 | $123718 | $104040 | $520187 | $111123 | $2060694 |
| Special Mention | 1060 | 4197 | 2373 | 3424 | 9360 | 14220 | 708 | 35342 |
| Substandard | 2930 | 2553 | 6470 | 5238 | 6730 | 43328 | 2274 | 69523 |
| Doubtful |  |  |  |  |  | 10 |  | 10 |
| Loss |  |  |  |  |  |  |  |  |
| Total loans | $574234 | $474346 | $172629 | $132380 | $120130 | $577745 | $114105 | $2165569 |

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[**Table of Contents**](#toc)

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **No Allowance** | **With an Allowance** | **Total** | **No Allowance** | **With an Allowance** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $33 | $- | $33 | $409 | $- | $409 |
| Commercial and industrial | 265 |  | 265 | 1734 |  | 1734 |
| Multi-family residential | 396 |  | 396 | 208 |  | 208 |
| Single family non-owner occupied | 1320 |  | 1320 | 2304 |  | 2304 |
| Non-farm, non-residential | 2273 |  | 2273 | 3439 | 1100 | 4539 |
| Agricultural | 18 |  | 18 | 136 |  | 136 |
| Farmland | 133 |  | 133 | 222 |  | 222 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 503 |  | 503 | 767 |  | 767 |
| Single family owner occupied | 8416 |  | 8416 | 8957 |  | 8957 |
| Owner occupied construction |  |  |  |  |  |  |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 1946 |  | 1946 | 1492 |  | 1492 |
| Total nonaccrual loans | $15303 | $- | $15303 | $19668 | $1100 | $20768 |

---

During the third quarter of 2022, $1 thousand in nonaccrual loan interest was recognized compared to $14 thousand for the same period of 2021. During the first nine months of 2022 $4 thousand in nonaccrual loan interest was recognized compared to $38 thousand for the same period of 2021 .

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

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** |
|  |  |  |  |  |  |  | **Amortized Cost of** |
|  | **30 - 59 Days** | **60 - 89 Days** | **90+ Days** | **Total** | **Current** | **Total** | **> 90 Days Accruing** |
| *(Amounts in thousands)* | **Past Due** | **Past Due** | **Past Due** | **Past Due** | **Loans** | **Loans** | **No Allowance** |
| Commercial loans |  |  |  |  |  |  |  |
| Construction, development, and other land | $40 | $8 | $25 | $73 | $109031 | $109104 | $- |
| Commercial and industrial | 319 | 186 | 45 | 550 | 147474 | 148024 |  |
| Multi-family residential |  |  |  |  | 135489 | 135489 |  |
| Single family non-owner occupied | 398 | 239 | 335 | 972 | 195161 | 196133 |  |
| Non-farm, non-residential | 780 |  | 1377 | 2157 | 775193 | 777350 |  |
| Agricultural | 30 | 18 | 11 | 59 | 10478 | 10537 |  |
| Farmland |  |  | 133 | 133 | 11994 | 12127 |  |
| Consumer real estate loans |  |  |  |  |  |  |  |
| Home equity lines | 425 | 183 | 309 | 917 | 76507 | 77424 |  |
| Single family owner occupied | 4686 | 2057 | 3454 | 10197 | 716583 | 726780 |  |
| Owner occupied construction |  |  |  |  | 14602 | 14602 |  |
| Consumer and other loans |  |  |  |  |  |  |  |
| Consumer loans | 3767 | 1616 | 944 | 6327 | 144695 | 151022 |  |
| Other |  |  |  |  | 4141 | 4141 |  |
| Total loans | $10445 | $4307 | $6633 | $21385 | $2341348 | $2362733 | $- |

---

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  |  |  |  |  |  |  | **Amortized Cost of** |
|  | **30 - 59 Days** | **60 - 89 Days** | **90+ Days** | **Total** | **Current** | **Total** | **> 90 Days Accruing** |
| *(Amounts in thousands)* | **Past Due** | **Past Due** | **Past Due** | **Past Due** | **Loans** | **Loans** | **No Allowance** |
| Commercial loans |  |  |  |  |  |  |  |
| Construction, development, and other land | $52 | $- | $120 | $172 | $65634 | $65806 | $- |
| Commercial and industrial | 325 | 35 | 1394 | 1754 | 131876 | 133630 |  |
| Multi-family residential | 97 |  |  | 97 | 100305 | 100402 |  |
| Single family non-owner occupied | 1210 | 583 | 795 | 2588 | 196190 | 198778 |  |
| Non-farm, non-residential | 1002 | 441 | 2333 | 3776 | 703730 | 707506 |  |
| Agricultural | 73 | 7 | 101 | 181 | 9160 | 9341 |  |
| Farmland | 52 |  | 222 | 274 | 14739 | 15013 |  |
| Consumer real estate loans |  |  |  |  |  |  |  |
| Home equity lines | 275 | 388 | 333 | 996 | 78861 | 79857 |  |
| Single family owner occupied | 4740 | 2584 | 3880 | 11204 | 692660 | 703864 |  |
| Owner occupied construction | 139 |  |  | 139 | 16771 | 16910 |  |
| Consumer and other loans |  |  |  |  |  |  |  |
| Consumer loans | 3469 | 1182 | 1049 | 5700 | 124094 | 129794 |  |
| Other |  |  |  |  | 4668 | 4668 |  |
| Total loans | $11434 | $5220 | $10227 | $26881 | $2138688 | $2165569 | $- |

---

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[**Table of Contents**](#toc)

ASC 326 prescribes that when an entity determines foreclosure is probable, the expected credit loss is required to be measured based on the fair value of the collateral. As a practical expedient, an entity may use the fair value as of the reporting date when recording the net carrying amount of the asset. For the collateral dependent asset ("CDA") a credit loss expense is recorded for loan amounts in excess of fair value of the collateral. The table below summarizes collateral dependent loans, where foreclosure is probable, by type of collateral, and the extent to which they are collateralized during the period. As of September 30, 2022, there were no collateral dependent loans.

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Balance** | **Collateral Coverage** | **%** | **Balance** | **Collateral Coverage** | **%** |
| Commercial Real Estate |  |  |  |  |  |  |
| Hotel | $- | $- |  | $- | $- |  |
| Office |  |  |  |  |  |  |
| Other |  |  |  | 2216 | 2312 | 104.33% |
| Retail |  |  |  |  |  |  |
| Multi-Family |  |  |  |  |  |  |
| Industrial |  |  |  |  |  |  |
| Office |  |  |  |  |  |  |
| Other |  |  |  |  |  |  |
| Commercial and industrial |  |  |  |  |  |  |
| Industrial |  |  |  |  |  |  |
| Other |  |  |  |  |  |  |
| Home equity loans |  |  |  |  |  |  |
| Consumer owner occupied |  |  |  |  |  |  |
| Consumer |  |  |  |  |  |  |
| Total collateral dependent loans | $- | $- |  | $2216 | $2312 | 104.33% |

---

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

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

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[**Table of Contents**](#toc)

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
| *(Amounts in thousands)* | **Nonaccrual(1)** | **Accruing** | **Total** | **Nonaccrual(1)** | **Accruing** | **Total** |
| Commercial loans |  |  |  |  |  |  |
| Commercial and industrial | $- | $409 | $409 | $396 | $470 | $866 |
| Single family non-owner occupied | 147 | 844 | 991 | 857 | 1100 | 1957 |
| Non-farm, non-residential |  | 766 | 766 |  | 2021 | 2021 |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines |  | 59 | 59 |  | 67 | 67 |
| Single family owner occupied | 1328 | 4925 | 6253 | 1266 | 4755 | 6021 |
| Owner occupied construction |  |  |  |  | 212 | 212 |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans |  | 25 | 25 |  | 27 | 27 |
| Total TDRs | $1475 | $7028 | $8503 | $2519 | $8652 | $11171 |
| Allowance for credit losses related to TDRs |  |  | $- |  |  | $- |

---

------

&nbsp;&nbsp;&nbsp;&nbsp;(1) Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

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

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** |  | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** |
|  | **2022** |  | **2021** |  | **2022** |  | **2021** |
| *(Amounts in thousands)* |  | |  | |  | |  |
| Interest income recognized | $97 |  | $92 |  | $299 |  | $290 |

---

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
| *(Amounts in thousands)* | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** |
| Payment deferral |  |  |  |  |  |  |
| Single family owner occupied | 1 | $94 | $72 |  |  |  |
| Total payment deferral | 1 | $94 | $72 |  | $- | $- |
| Below market interest rate and extended payment term |  |  |  |  |  |  |
| Single family owner occupied |  | $- | $- | 2 | $302 | $283 |
| Total below market interest rate and extended term |  | $- | $- | 2 | $302 | $283 |
| Total | 1 | $94 | $72 | 2 | $302 | $283 |

---

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Represents the loan balance immediately following modification

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
| *(Amounts in thousands)* | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** | **Total Contracts** | **Pre-modification Recorded Investment** | **Post-modification Recorded Investment(1)** |
| Below market interest rate |  |  |  |  |  |  |
| Single family owner occupied | 1 | $31 | $32 |  | $- | $- |
| Total below market interest rate | 1 | $31 | $32 |  |  |  |
| Below market interest rate and extended payment term |  |  |  |  |  |  |
| Single family owner occupied |  | $- | $- | 2 | $302 | $283 |
| Total below market interest rate and extended payment term |  | $- | $- | 2 | $302 | $283 |
| Payment deferral |  |  |  |  |  |  |
| Single family owner occupied | 3 | $331 | $317 |  |  |  |
| Non-farm, non-residential |  |  |  | 1 | 1390 | 1368 |
| Total payment deferral | 3 | $331 | $317 | 1 | $1390 | $1368 |
| Total | 4 | $362 | $349 | 3 | $1692 | $1651 |

---

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Represents the loan balance immediately following modification

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[**Table of Contents**](#toc)

There were no payment defaults for loans modified as TDRs restructured within the previous 12 months as of September 30, 2022, and there was one payment default in the amount of $1.37 million as of September 30, 2021 .

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

---

| | | | |
|:---|:---|:---|:---|
|  | **September 30, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| OREO | $559 |  | $1015 |
| OREO secured by residential real estate | $231 |  | $337 |
| Residential real estate loans in the foreclosure process<sup>(1)</sup> | $2678 |  | $2210 |

---

------

&nbsp;&nbsp;&nbsp;&nbsp;(1) The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction

**Note 6. Allowance for Credit Losses** 

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended September 30, 2022** | **Three Months Ended September 30, 2022** | **Three Months Ended September 30, 2022** | **Three Months Ended September 30, 2022** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $16119 | $10049 | $3581 | $29749 |
| (Recovery of) provision for credit losses charged to operations | (444) | (1391) | 2520 | 685 |
| Charge-offs | (89) | (182) | (1887) | (2158) |
| Recoveries | 872 | 77 | 163 | 1112 |
| Net recoveries (charge-offs) | 783 | (105) | (1724) | (1046) |
| Ending balance | $16458 | $8553 | $4377 | $29388 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three Months Ended September 30, 2021** | **Three Months Ended September 30, 2021** | **Three Months Ended September 30, 2021** | **Three Months Ended September 30, 2021** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $17704 | $11055 | $3098 | $31857 |
| (Recovery of) provision for credit losses charged to operations | (1504) | (317) | 427 | (1394) |
| Charge-offs | (407) | (195) | (653) | (1255) |
| Recoveries | 285 | 179 | 205 | 669 |
| Net (charge-offs) recoveries | (122) | (16) | (448) | (586) |
| Ending balance | $16078 | $10722 | $3077 | $29877 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Nine Months Ended September 30, 2022** | **Nine Months Ended September 30, 2022** | **Nine Months Ended September 30, 2022** | **Nine Months Ended September 30, 2022** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $14775 | $9972 | $3111 | $27858 |
| (Recovery of) provision for credit losses charged to operations | (144) | (1584) | 4884 | 3156 |
| Charge-offs | (497) | (276) | (4156) | (4929) |
| Recoveries | 2324 | 441 | 538 | 3303 |
| Net recoveries (charge-offs) | 1827 | 165 | (3618) | (1626) |
| Ending balance | $16458 | $8553 | $4377 | $29388 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Nine Months Ended September 30, 2021** | **Nine Months Ended September 30, 2021** | **Nine Months Ended September 30, 2021** | **Nine Months Ended September 30, 2021** |
|  |  | **Consumer Real** | **Consumer and** | **Total** |
| *(Amounts in thousands)* | **Commercial** | **Estate** | **Other** | **Allowance** |
| **Total allowance** |  |  |  |  |
| Beginning balance | $14661 | $8951 | $2570 | $26182 |
| Cumulative effect of adoption of ASU 2016-13 | 8360 | 4145 | 602 | 13107 |
| (Recovery of) provision for credit losses charged to operations | (6286) | (2845) | 1506 | (7625) |
| Charge-offs | (2366) | (253) | (2268) | (4887) |
| Recoveries | 1709 | 724 | 667 | 3100 |
| Net (charge-offs) recoveries | (657) | 471 | (1601) | (1787) |
| Ending balance | $16078 | $10722 | $3077 | $29877 |

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[**Table of Contents**](#toc)

**Note 7. Deposits**

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

---

| | | | |
|:---|:---|:---|:---|
|  | **September 30, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Noninterest-bearing demand deposits | $878423 |  | $842783 |
| Interest-bearing deposits: |  |  |  |
| Interest-bearing demand deposits | 658211 |  | 676254 |
| Money market accounts | 281435 |  | 293915 |
| Savings deposits | 587413 |  | 561576 |
| Certificates of deposit | 196365 |  | 237919 |
| Individual retirement accounts | 108374 |  | 116944 |
| Total interest-bearing deposits | 1831798 |  | 1886608 |
| Total deposits | $2710221 |  | $2729391 |

---

**Note 8. Leases**

Operating leases are recorded as a right of use ("ROU") asset and operating lease liability. The ROU asset is recorded in other assets, while the lease liability is recorded in other liabilities on the condensed balance sheet beginning January 1, 2019, when the Company adopted ASU 2016-02, on a prospective basis. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The ROU asset and lease liability have been recognized based on the present value of the lease payments using a discount rate that represented our incremental borrowing rate at the lease commencement date or the date of adoption of ASU 2016-02. The lease expense, which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the condensed statements of income.

The Company's current operating leases relate to one existing bank branch and one operating lease acquired in a prior bank acquisition. The acquired operating lease was for vacant land and will terminate in July of 2029. The Company's ROU asset was $672 thousand as of September 30, 2022 compared to $741 thousand as of December 31, 2021. The operating lease liability as of September 30, 2022, was $692 thousand compared to $770 thousand as of December 31, 2021. The Company's total operating leases have remaining terms of 2 - 7 years; compared with 4 months to 7.5 years as of December 31, 2021. The September 30, 2022 weighted average discount rate of 3.22% did not change from December 31, 2021.

Future minimum lease payments as of the dates indicated are as follows:

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| | |
|:---|:---|
| **<u>Year</u>** | **September 30, 2022** |
| *(Amounts in thousands)* |  |
| 2023 | $119 |
| 2024 | 119 |
| 2025 | 104 |
| 2026 | 101 |
| 2027 and thereafter | 285 |
| Total lease payments | 728 |
| Less: Interest | (36) |
| Present value of lease liabilities | $692 |

---

---

| | |
|:---|:---|
| **<u>Year</u>** | **December 31, 2021** |
| *(Amounts in thousands)* |  |
| 2022 | $131 |
| 2023 | 119 |
| 2024 | 117 |
| 2025 | 101 |
| 2026 and thereafter | 362 |
| Total lease payments | 830 |
| Less: Interest | (60) |
| Present value of lease liabilities | $770 |

---

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[**Table of Contents**](#toc)

**Note 9. Borrowings**

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **December 31, 2021** | **December 31, 2021** |
|  |  | **Weighted** |  | **Weighted** |
| *(Amounts in thousands)* | **Balance** | **Average Rate** | **Balance** | **Average Rate** |
| Retail repurchase agreements | $1958 | 0.07% | $1536 | 0.07% |

---

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

As of September 30, 2022, the Company had no long-term borrowings.

Unused borrowing capacity with the FHLB totaled $422.61 million, net of FHLB letters of credit of $126.54 million, as of September 30, 2022. As of September 30, 2022, the Company pledged $736.92 million in qualifying loans to secure the FHLB borrowing capacity.

**Note 10. Derivative Instruments and Hedging Activities**

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

 

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan's stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. In March 2020, the Company adopted ASU 2020-04, "Reference Rate Reform" which provided temporary guidance to ease the potential burden in accounting for reference rate reform. With global capital markets moving away from LIBOR, the guidance provided optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships that reference LIBOR. The migration from LIBOR is not expected to have any material effect on the Company's financial statements when and as changes are made to migrate from the reference rate.

Certain of the Company's interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of September 30, 2022.

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

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Notional or** | **Fair Value** | **Fair Value** | **Notional or** | **Fair Value** | **Fair Value** |
|  | **Contractual** | **Derivative** | **Derivative** | **Contractual** | **Derivative** | **Derivative** |
| *(Amounts in thousands)* | **Amount** | **Assets** | **Liabilities** | **Amount** | **Assets** | **Liabilities** |
| Derivatives designated as hedges |  |  |  |  |  |  |
| Interest rate swaps | $4161 | $211 | $- | $4388 | $- | $229 |
| Derivatives not designated as hedges |  |  |  |  |  |  |
| Interest rate swaps | $- | $- | $- | $7890 | $- | $608 |
| Total derivatives | $4161 | $211 | $- | $12278 | $- | $837 |

---

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

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** |  |
| *(Amounts in thousands)* | **2022** | **2021** | **2022** | **2021** | **Income Statement Location** |
| Derivatives designated as hedges |  |  |  |  |  |
| Interest rate swaps | $3 | $27 | $47 | $83 | Interest and fees on loans |
| Derivatives not designated as hedges |  |  |  |  |  |
| Interest rate swaps | $6 | $45 | $90 | $163 | Interest and fees on loans |
| Total derivative expense | $9 | $72 | $137 | $246 |  |

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[**Table of Contents**](#toc)

**Note 11. Employee Benefit Plans** 

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

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** |  | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** |  |
|  | **2022** |  | **2021** |  | **2022** |  | **2021** | **Income Statement Location** |
| *(Amounts in thousands)* |  | |  | |  | |  |  |
| Service cost | $- |  | $88 |  | $- |  | $264 | Salaries and employee benefits |
| Interest cost | 83 |  | 78 |  | 249 |  | 236 | Other expense |
| Amortization of prior service cost |  |  | 31 |  |  |  | 92 | Other expense |
| Amortization of losses | 34 |  | 65 |  | 101 |  | 197 | Other expense |
| Net periodic cost | $117 |  | $262 |  | $350 |  | $789 |  |

---

**Note 12. Earnings per Share**

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

---

| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  | **Nine Months Ended** | **Nine Months Ended** | **Nine Months Ended** |  |
|  | **September 30,** | **September 30,** | **September 30,** |  | **September 30,** | **September 30,** | **September 30,** |  |
|  | **2022** |  | **2021** |  | **2022** |  | **2021** |  |
| *(Amounts in thousands, except share and per share data)* |  | |  | |  | |  | |
| Net income | $13351 |  | $12608 |  | $34079 |  | $40613 |  |
| Weighted average common shares outstanding, basic | 16378022 |  | 17221244 |  | 16617766 |  | 17457477 |  |
| Dilutive effect of potential common shares |  |  |  |  |  |  |  |  |
| Stock options | 18975 |  | 33370 |  | 16615 |  | 31094 |  |
| Unvested stock awards | 10570 |  | 24962 |  | 14681 |  | 23329 |  |
| Performance restricted stock units | 5635 |  |  |  | 5635 |  |  |  |
| Total dilutive effect of potential common shares | 35180 |  | 58332 |  | 36931 |  | 54423 |  |
| Weighted average common shares outstanding, diluted | 16413202 |  | 17279576 |  | 16654697 |  | 17511900 |  |
| Basic earnings per common share | $0.82 |  | $0.73 |  | $2.05 |  | $2.32 |  |
| Diluted earnings per common share | 0.81 |  | 0.73 |  | 2.05 |  | 2.32 |  |
| Antidilutive potential common shares |  |  |  |  |  |  |  |  |
| Stock options | 131198 |  |  |  | 131198 |  | 13990 |  |
| Unvested stock awards |  |  |  |  |  |  | 214 |  |
| Total potential antidilutive shares | 131198 |  |  |  | 131198 |  | 14204 |  |

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**Note 13. Accumulated Other Comprehensive Income (Loss)**

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

---

| | | | |
|:---|:---|:---|:---|
|  | **Three Months Ended September 30, 2022** | **Three Months Ended September 30, 2022** | **Three Months Ended September 30, 2022** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $(9817) | $(1843) | $(11660) |
| Other comprehensive loss before reclassifications | (7392) |  | (7392) |
| Reclassified from AOCI |  | 27 | 27 |
| Other comprehensive loss, net | (7392) | 27 | (7365) |
| Ending balance | $(17209) | $(1816) | $(19025) |

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| | | | |
|:---|:---|:---|:---|
|  | **Three Months Ended September 30, 2021** | **Three Months Ended September 30, 2021** | **Three Months Ended September 30, 2021** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $474 | $(3039) | $(2565) |
| Other comprehensive loss before reclassifications | (164) | (1) | (165) |
| Reclassified from AOCI |  | 77 | 77 |
| Other comprehensive loss, net | (164) | 76 | (88) |
| Ending balance | $310 | $(2963) | $(2653) |

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| | | | |
|:---|:---|:---|:---|
|  | **Nine Months Ended September 30, 2022** | **Nine Months Ended September 30, 2022** | **Nine Months Ended September 30, 2022** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $15 | $(1561) | $(1546) |
| Other comprehensive loss before reclassifications | (17224) | (335) | (17559) |
| Reclassified from AOCI |  | 80 | 80 |
| Other comprehensive loss, net | (17224) | (255) | (17479) |
| Ending balance | $(17209) | $(1816) | $(19025) |

---

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| | | | |
|:---|:---|:---|:---|
|  | **Nine Months Ended September 30, 2021** | **Nine Months Ended September 30, 2021** | **Nine Months Ended September 30, 2021** |
|  | **Unrealized Gains** |  |  |
|  | **(Losses) on Available-** |  |  |
|  | **for-Sale Securities** | **Employee Benefit Plans** | **Total** |
| *(Amounts in thousands)* |  |  |  |
| Beginning balance | $1106 | $(3029) | $(1923) |
| Other comprehensive loss before reclassifications | (796) | (163) | (959) |
| Reclassified from AOCI |  | 229 | 229 |
| Other comprehensive loss, net | (796) | 66 | (730) |
| Ending balance | $310 | $(2963) | $(2653) |

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

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Nine Months Ended** | **Nine Months Ended** |  |
|  | **September 30,** | **September 30,** | **September 30,** | **September 30,** | **Income Statement** |
| *(Amounts in thousands)* | **2022** | **2021** | **2022** | **2021** | **Line Item Affected** |
| Available-for-sale securities |  |  |  |  |  |
| Gain recognized | $- | $- | $- | $- | Net loss on sale of securities |
| Reclassified out of AOCI, before tax |  |  |  |  | Income before income taxes |
| Income tax expense |  |  |  |  | Income tax expense |
| Reclassified out of AOCI, net of tax |  |  |  |  | Net income |
| Employee benefit plans |  |  |  |  |  |
| Amortization of prior service cost | $- | $31 | $- | $92 | Salaries and employee benefits |
| Amortization of net actuarial benefit cost | 34 | 65 | 101 | 197 | Salaries and employee benefits |
| Reclassified out of AOCI, before tax | 34 | 96 | 101 | 289 | Income before income taxes |
| Income tax expense | 7 | 20 | 21 | 61 | Income tax expense |
| Reclassified out of AOCI, net of tax | 27 | 76 | 80 | 228 | Net income |
| Total reclassified out of AOCI, net of tax | $27 | $76 | $80 | $228 | Net income |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Amortization is included in net periodic pension cost. See Note 10, "Employee Benefit Plans."

**Note 14. Fair Value** 

***Financial Instruments Measured at Fair Value***

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

● Level 1 – Observable, unadjusted quoted prices in active markets

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

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

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

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*Assets and Liabilities Reported at Fair Value on a Recurring Basis*

*Available-for-Sale Debt Securities*

Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company's Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

*Equity Securities.* Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.

*Loans Held for Investment*. Loans held for investment that are subject to a fair value hedge are reported at fair value derived from third-party models. Loans designated in fair value hedges are recorded at fair value on a recurring basis.

*Deferred Compensation Assets and Liabilities*. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

*Derivative Assets and Liabilities*. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** |
|  | **Total** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| Available-for-sale debt securities |  |  |  |  |
| U.S. Agency securities | $1488 | $- | $1488 | $- |
| &nbsp;&nbsp;&nbsp; U.S. Treasury Notes | 156460 |  | 156460 |  |
| Municipal securities | 23061 |  | 23061 |  |
| &nbsp;&nbsp;&nbsp; Corporate Notes | 34519 |  | 34519 |  |
| Agency mortgage-backed securities | 84092 |  | 84092 |  |
| Total available-for-sale debt securities | 299620 |  | 299620 |  |
| Equity securities | 55 |  | 55 |  |
| Fair value loans | 3950 |  |  | 3950 |
| Deferred compensation assets | 4822 | 4822 |  |  |
| Deferred compensation liabilities | 4822 | 4822 |  |  |

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Total** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| Available-for-sale debt securities |  |  |  |  |
| U.S. Agency securities | $466 | $- | $466 | $- |
| Municipal securities | 28794 |  | 28794 |  |
| &nbsp;&nbsp;&nbsp; Corporate notes | 9919 |  | 9919 |  |
| Agency mortgage-backed securities | 37113 |  | 37113 |  |
| Total available-for-sale debt securities | 76292 |  | 76292 |  |
| Equity securities | 55 |  | 55 |  |
| Fair value loans | 13106 |  |  | 13106 |
| Deferred compensation assets | 5245 | 5245 |  |  |
| Deferred compensation liabilities | 5245 | 5245 |  |  |
| Derivative liabilities | 837 |  | 837 |  |

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*Assets Measured at Fair Value on a Nonrecurring Basis*

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

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

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

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

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** |  |
|  | **Total** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |  |
|  | **Fair Value** |  | **Level 1** |  | **Level 2** |  | **Level 3** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Collateral dependent assets with specific reserves | $- |  | $- |  | $- |  | $- |  |
| OREO | $559 |  | $- |  | $- |  | $559 |  |

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
|  | **Total** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |  |
|  | **Fair Value** |  | **Level 1** |  | **Level 2** |  | **Level 3** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Collateral dependent assets with specific reserves | $2312 |  | $- |  | $- |  | $2312 |  |
| OREO | 1015 |  |  |  |  |  | 1015 |  |

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*Quantitative Information about Level 3 Fair Value Measurements*

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

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| | | | |
|:---|:---|:---|:---|
|  |  |  | **Discount Range** |
|  | **Valuation** | **Unobservable** | **(Weighted Average)** |
|  | **Technique** | **Input** | **September 30, 2022** |
| Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 0% (0%) |
| OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 10% to 95% (73%) |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Fair value is generally based on appraisals of the underlying collateral.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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| | | | |
|:---|:---|:---|:---|
|  |  |  | **Discount Range** |
|  | **Valuation** | **Unobservable** | **(Weighted Average)** |
|  | **Technique** | **Input** | **December 31, 2021** |
| Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 11% (6%) |
| OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 87% (32%) |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Fair value is generally based on appraisals of the underlying collateral.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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*Fair Value of Financial Instruments*

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

 

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

 

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

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

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

*Off-Balance Sheet Instruments*. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 14, "Litigation, Commitments, and Contingencies," to the Condensed Consolidated Financial Statements of this report.

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

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** | **September 30, 2022** |
|  | **Carrying** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Amount** | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| **Assets** |  |  |  |  |  |
| Cash and cash equivalents | $229095 | $229095 | $229095 | $- | $- |
| Debt securities available for sale | 299620 | 299620 |  | 299620 |  |
| Equity securities | 55 | 55 |  | 55 |  |
| Loans held for investment, net of allowance | 2333345 | 2198020 |  |  | 2198020 |
| Derivative financial assets | 211 | 211 |  | 211 |  |
| Interest receivable | 8345 | 8345 |  | 8345 |  |
| Deferred compensation assets | 4822 | 4822 | 4822 |  |  |
| **Liabilities** |  |  |  |  |  |
| Time deposits | 304739 | 304232 |  | 304232 |  |
| Securities sold under agreements to repurchase | 1958 | 1958 |  | 1958 |  |
| Interest payable | 180 | 180 |  | 180 |  |
| Deferred compensation liabilities | 4822 | 4822 | 4822 |  |  |

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |
|  | **Carrying** |  | **Fair Value Measurements Using** | **Fair Value Measurements Using** | **Fair Value Measurements Using** |
| *(Amounts in thousands)* | **Amount** | **Fair Value** | **Level 1** | **Level 2** | **Level 3** |
| **Assets** |  |  |  |  |  |
| Cash and cash equivalents | $677439 | $677439 | $677439 | $- | $- |
| Debt securities available for sale | 76292 | 76292 |  | 76292 |  |
| Equity securities | 55 | 55 |  | 55 |  |
| Loans held for investment, net of allowance | 2137711 | 2108513 |  |  | 2108513 |
| Interest receivable | 7900 | 7900 |  | 7900 |  |
| Deferred compensation assets | 5245 | 5245 | 5245 |  |  |
| **Liabilities** |  |  |  |  |  |
| Time deposits | 354863 | 352000 |  | 352000 |  |
| Securities sold under agreements to repurchase | 1536 | 1536 |  | 1536 |  |
| Interest payable | 314 | 314 |  | 314 |  |
| Deferred compensation liabilities | 5245 | 5245 | 5245 |  |  |
| Derivative liabilities | 837 | 837 |  | 837 |  |

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**Note 15. Litigation, Commitments, and Contingencies** 

***Litigation***

In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.

***Commitments and Contingencies***

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

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

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

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

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| | | | |
|:---|:---|:---|:---|
|  | **September 30, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Commitments to extend credit | $302765 |  | $272447 |
| Standby letters of credit and financial guarantees<sup>(1)</sup> | 129527 |  | 153717 |
| Total off-balance sheet risk | $432292 |  | $426164 |
| Allowance for unfunded commitments <sup>(2)</sup> | $1416 |  | $678 |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Includes FHLB letters of credit

&nbsp;&nbsp;&nbsp;&nbsp;(2) Included in Interest, taxes, and other liabilities on the Condensed Consolidated Balance Sheet

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K"). Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

**Executive Overview**

First Community Bankshares, Inc. (the "Company") is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the "Bank"), a Virginia chartered bank institution. As of September 30, 2022, the Bank operated 48 branches in Virginia, West Virginia, North Carolina and Tennessee. As of September 30, 2022, full-time equivalent employees, calculated using the number of hours worked, totaled 613. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

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The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. ("FCWM"). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of September 30, 2022, the Trust Division and FCWM managed and administered $1.19 billion in combined assets under various fee-based arrangements as fiduciary or agent. The Bank also offers a full range of commercial and personal insurance products through its strategic partnership with Bankers Insurance, LLC.

**Critical Accounting Estimates** 

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

***Allowance for Credit Losses or "ACL"***

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

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, "Financial Statements," of this Quarterly Report on Form 10-Q. Our accounting policies are described in detail in Note 1, "Basis of Presentation," of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2022, 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 2021 Form 10-K. Our critical accounting estimates are detailed in the "Critical Accounting Estimates" section in Part II, Item 7 of our 2021 Form 10-K.

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**Performance Overview**

Highlights of our results of operations for the three and nine months ended September 30, 2022, and financial condition as of September 30, 2022, include the following:

● Net income of $13.35 million for the quarter was an increase of $743 thousand compared to $12.61 million recorded in the same quarter of 2021. The increase is primarily attributable to an increase in net interest income of $4.2 million and the branch sale gains of $1.66 million offset by an increase in the provision for credit losses of $2.08 million and an increase in salaries and employee benefits of $1.44 million compared to 2021.

● On September 16, 2022, the Company completed the sale of First Community Bank's Emporia, Virginia branch to Benchmark Community Bank. A gain of $1.66 million was realized from the sale.

● Net interest margin for the third quarter was 4.01%, which was a 45 basis point increase from 3.56% reported for third quarter of 2021. The yield on earning assets increased 42 basis points, primarily driven by increased earnings on securities and overnight funds.

● The cost of interest-bearing deposits declined 6 basis points to 0.08%, primarily driven by a decrease in the cost of time deposits and focus on non-maturing deposits. Additionally, non-maturing deposit balances remained strong even after the Emporia Branch Sale.

● Net interest income increased $4.2 million compared to the same quarter of 2021. Interest income from securities of $1.79 million was an increase of $1.34 million over the third quarter of 2021. Interest on fed funds also increased $1.31 million to $1.53 million for the third quarter as a result of the Federal Open Market Committee's incremental 300 basis point rate increase in overnight rates throughout 2022 as compared to the overnight rates of 2021. Interest and fees on loans increased $1.29 million from the same quarter of 2021 and is primarily attributable to loan demand and originations.

● The provision for credit losses of $685 thousand for the quarter was an increase of $2.08 million compared to the same quarter of 2021. The increase was attributable to a return to normalized provisions as compared with prior year recoveries of pandemic-related provisioning.

● Despite the significant increase in credit loss provision over 2021, annualized return on average assets was 1.63% for the third quarter and 1.41% for the first nine months of 2022. Annualized return on average common equity was 12.60% for the third quarter and 10.73% for the first nine months of 2022.

● Salaries and employee benefits for the third quarter increased $1.44 million, or 13.48%, over the same quarter in 2021. Salaries and employee benefits for the first nine months increased $3.52 million, or 11.10%, over the first nine months of 2021. During the first quarter of 2022, the Company implemented annualized wage increases of approximately $2.5 million as part of its ongoing strategic initiative to enhance Human Capital Management, which included an increased minimum wage.

● The Company's loan portfolio increased by $197.16 million, an annualized growth rate of 12.17%, during the first nine months of 2022. Loan demand and originations were strong in all categories, including construction, commercial real estate, residential mortgage, and consumer loans.

● Total deposits sold to Benchmark as part of the Emporia Branch Sale totaled $61.05 million.

● During the third quarter, the Company repurchased 235,400 of its common shares for $7.38 million. The Company repurchased 650,907 common shares for $19.42 million during the first nine months of 2022.

● The allowance for credit losses to total loans decreased slightly to 1.24% of total loans.

● Book value per share at September 30, 2022, was $25.33, a slight decrease of $0.01 from year-end 2021.

***Results of Operations***

*Net Income*

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

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Nine Months Ended** | **Nine Months Ended** | **Nine Months Ended** | **Nine Months Ended** |
| *(Amounts in thousands, except per* | **September 30,** | **September 30,** | **Increase** |  | **September 30,** | **September 30,** | **Increase** |  |
| *share data)* | **2022** | **2021** | **(Decrease)** | **% Change** | **2022** | **2021** | **(Decrease)** | **% Change** |
| Net income | $13351 | $12608 | $743 | 5.89% | $34079 | $40613 | $(6534) | -16.09% |
| Basic earnings per common share | 0.82 | 0.73 | 0.09 | 12.33% | 2.05 | 2.32 | (0.27) | -11.64% |
| Diluted earnings per common share | 0.81 | 0.73 | 0.08 | 10.96% | 2.05 | 2.32 | (0.27) | -11.64% |
| Return on average assets | 1.63% | 1.59% | 0.04% | 2.52% | 1.41% | 1.74% | -0.33% | -18.97% |
| Return on average common equity | 12.60% | 11.65% | 0.95% | 8.15% | 10.73% | 12.70% | -1.97% | -15.51% |

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*Three-Month Comparison.*

Net income increased $743 thousand in the third quarter of 2022 largely due to a $4.2 million increase in net interest income and the branch sale gains totaling $1.66 million. The increases were offset by an increase in the provision for credit losses of $2.08 million to $685 thousand for the third quarter of 2022 compared to a recovery of provision of $1.39 million in the third quarter of 2021. The current year provision is largely due to the loan growth, in particular commercial loan demand. The recovery of provision in the third quarter of 2021 was due to the recovery of pandemic-related provisioning. In addition, salaries and employee benefits increased $1.44 million when compared to the same period of 2021.

*Nine-Month Comparison.* Net income decreased $6.53 million in the first nine months of 2022 largely due to a $10.78 million increase in the provision for credit losses. Provision for credit losses totaled $3.16 million for the first nine months of 2022 compared to a recovery of provision of $7.63 million in the same period of 2021. As noted for the quarter, the current year provision is largely due to loan growth in the first nine months, in particular commercial loan demand. The recovery of provision in 2021 was driven by the recovery of pandemic-related provisioning. In addition, salaries and employee benefits increased $3.52 million for the first nine months when compared to the same period of 2021. These decreases were offset by an increase in net interest income of $4.8 million, as well as the Emporia Branch Sale gains totaling $1.66 million for first nine months of 2022 when compared to the same period of 2021.

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*Net Interest Income*

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

**AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)**<br>

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
|  | **Average** |  | **Average Yield/** | **Average** |  | **Average Yield/** |
| *(Amounts in thousands)* | **Balance** | **Interest(1)** | **Rate(1)** | **Balance** | **Interest(1)** | **Rate(1)** |
| **Assets** |  |  |  |  |  |  |
| Earning assets |  |  |  |  |  |  |
| Loans<sup>(2)(3)</sup> | $2334596 | $26474 | 4.50% | $2149647 | $25161 | 4.64% |
| Securities available for sale | 301360 | 1833 | 2.41% | 79995 | 509 | 2.52% |
| Interest-bearing deposits | 275290 | 1531 | 2.21% | 586787 | 225 | 0.15% |
| Total earning assets | 2911246 | 29838 | 4.07% | 2816429 | 25895 | 3.65% |
| Other assets | 328534 |  |  | 330679 |  |  |
| Total assets | $3239780 |  |  | $3147108 |  |  |
| **Liabilities and stockholders' equity** |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Demand deposits | $689376 | $28 | 0.02% | $651237 | $27 | 0.02% |
| Savings deposits | 887454 | 67 | 0.03% | 826144 | 63 | 0.03% |
| Time deposits | 317294 | 285 | 0.36% | 378895 | 552 | 0.58% |
| Total interest-bearing deposits | 1894124 | 380 | 0.08% | 1856276 | 642 | 0.13% |
| Borrowings |  |  |  |  |  |  |
| Retail repurchase agreements | 2378 |  | N/M | 1040 | 1 | 0.07% |
| Total borrowings | 2378 |  | N/M | 1040 | 1 | 0.07% |
| Total interest-bearing liabilities | 1896502 | 380 | 0.08% | 1857316 | 643 | 0.14% |
| Noninterest-bearing demand deposits | 881429 |  |  | 824112 |  |  |
| Other liabilities | 41373 |  |  | 36419 |  |  |
| Total liabilities | 2819304 |  |  | 2717847 |  |  |
| Stockholders' equity | 420476 |  |  | 429261 |  |  |
| Total liabilities and stockholders' equity | $3239780 |  |  | $3147108 |  |  |
| Net interest income, FTE<sup>(1)</sup> |  | $29458 |  |  | $25252 |  |
| Net interest rate spread |  |  | 3.99% |  |  | 3.51% |
| Net interest margin, FTE<sup>(1)</sup> |  |  | 4.01% |  |  | 3.56% |

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

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

&nbsp;&nbsp;&nbsp;&nbsp;(3) Interest on loans includes non-cash and accelerated purchase accounting accretion of $487 thousand and $1.01 million for the three months ended September 30, 2022 and 2021 , respectively.

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**AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)**

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** |
|  | **2022** | **2022** | **2022** | **2021** | **2021** | **2021** |
|  | **Average** |  | **Average Yield/** | **Average** |  | **Average Yield/** |
| *(Amounts in thousands)* | **Balance** | **Interest(1)** | **Rate(1)** | **Balance** | **Interest(1)** | **Rate(1)** |
| **Assets** |  |  |  |  |  |  |
| Earning assets |  |  |  |  |  |  |
| Loans<sup>(2)(3)</sup> | $2269974 | $76886 | 4.53% | $2149556 | $77722 | 4.83% |
| Securities available for sale | 241640 | 4230 | 2.34% | 82563 | 1590 | 2.57% |
| Interest-bearing deposits | 398326 | 2549 | 0.86% | 555435 | 509 | 0.12% |
| Total earning assets | 2909940 | 83665 | 3.84% | 2787554 | 79821 | 3.83% |
| Other assets | 329508 |  |  | 331239 |  |  |
| Total assets | $3239448 |  |  | $3118793 |  |  |
| **Liabilities and stockholders' equity** |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Demand deposits | $689226 | $85 | 0.02% | $639809 | $99 | 0.02% |
| Savings deposits | 888062 | 200 | 0.03% | 807863 | 217 | 0.04% |
| Time deposits | 331808 | 1003 | 0.40% | 395465 | 1919 | 0.65% |
| Total interest-bearing deposits | 1909096 | 1288 | 0.09% | 1843137 | 2235 | 0.15% |
| Borrowings |  |  |  |  |  |  |
| Retail repurchase agreements | 2161 | 1 | 0.07% | 1179 | 1 | 0.07% |
| Total borrowings | 2161 | 1 | 0.07% | 1179 | 1 | 0.07% |
| Total interest-bearing liabilities | 1911257 | 1289 | 0.09% | 1844316 | 2236 | 0.16% |
| Noninterest-bearing demand deposits | 864119 |  |  | 809128 |  |  |
| Other liabilities | 39487 |  |  | 37871 |  |  |
| Total liabilities | 2814863 |  |  | 2691315 |  |  |
| Stockholders' equity | 424585 |  |  | 427478 |  |  |
| Total liabilities and stockholders' equity | $3239448 |  |  | $3118793 |  |  |
| Net interest income, FTE<sup>(1)</sup> |  | $82376 |  |  | $77585 |  |
| Net interest rate spread |  |  | 3.75% |  |  | 3.67% |
| Net interest margin, FTE<sup>(1)</sup> |  |  | 3.78% |  |  | 3.72% |

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

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

&nbsp;&nbsp;&nbsp;&nbsp;(3) Interest on loans includes non-cash and accelerated purchase accounting accretion of $2.22 million and $3.45 million for the nine months ended September 30, 2022 and 2021 , respectively.

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

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** | **Nine Months Ended** | **Nine Months Ended** | **Nine Months Ended** | **Nine Months Ended** |
|  | **September 30, 2022 Compared to 2021** | **September 30, 2022 Compared to 2021** | **September 30, 2022 Compared to 2021** | **September 30, 2022 Compared to 2021** | **September 30, 2022 Compared to 2021** | **September 30, 2022 Compared to 2021** | **September 30, 2022 Compared to 2021** | **September 30, 2022 Compared to 2021** |
|  | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** | **Dollar Increase (Decrease) due to** |
|  |  |  | **Rate/** |  |  |  | **Rate/** |  |
| *(Amounts in thousands)* | **Volume** | **Rate** | **Volume** | **Total** | **Volume** | **Rate** | **Volume** | **Total** |
| Interest earned on(1) |  |  |  |  |  |  |  |  |
| Loans | $6424 | $(2327) | $(2784) | $1313 | $4354 | $(4915) | $(275) | $(836) |
| Securities available-for-sale | 4180 | (67) | (2789) | 1324 | 3064 | (145) | (279) | 2640 |
| Interest-bearing deposits with other banks | (353) | 9018 | (7359) | 1306 | (144) | 3046 | (862) | 2040 |
| Total interest earning assets | 10251 | 6624 | (12932) | 3943 | 7274 | (2014) | (1416) | 3844 |
| Interest paid on |  |  |  |  |  |  |  |  |
| Demand deposits | 5 | (2) | (2) | 1 | 8 | (20) | (2) | (14) |
| Savings deposits | 14 | (2) | (8) | 4 | 22 | (35) | (4) | (17) |
| Time deposits | (267) | (625) | 625 | (267) | (309) | (723) | 116 | (916) |
| Retail repurchase agreements | (1) |  |  | (1) |  |  |  |  |
| FHLB advances and other borrowings |  |  |  |  |  |  |  |  |
| Total interest-bearing liabilities | (249) | (629) | 615 | (263) | (279) | (778) | 110 | (947) |
| Change in net interest income(1) | $10500 | $7253 | $(13547) | $4206 | $7553 | $(1236) | $(1526) | $4791 |

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

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*Three-Month Comparison*. Net interest income comprised 74.68% of total net interest and noninterest income in the third quarter of 2022 compared to 74.25% in the same quarter of 2021. Net interest income on a GAAP basis increased $4.2 million, or 16.69%, compared to an increase of $4.21 million, or 16.66%, on a FTE basis. The net interest margin on a FTE basis increased 45 basis points and the net interest spread on a FTE basis increased 48 basis points. The increase was primarily driven by increased earnings on securities and overnight funds and a decrease in the cost of time deposits.

Average earning assets increased $94.82 million, or 3.37%, primarily due to an increase in both the securities available for sale and loan portfolios. Securities available for sale increased $221.37 million, or 276.72%, due to recent purchases of $264.96 million in the first nine months of 2022. In addition, average loans increased $184.95 million, or 8.60%, primarily due to strong levels of loan demand in all categories. Average interest-bearing deposits decreased $311.50 million, or 53.09%. The yield on earning assets increased 42 basis points, or 11.51%, primarily due to the increase in yield on overnight funds due to the Federal Open Market Committee's incremental increase in the fed funds rate of 300 basis points throughout 2022. The average loan to deposit ratio increased to 84.11% from 80.20% in the same quarter of 2021. Non-cash accretion income decreased $522 thousand, or 51.73%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $39.19 million, or 2.11%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 6 basis points. Average interest-bearing deposits increased $37.85 million, or 2.04%. Savings deposits increased $61.31 million, or 7.42%, and interest-bearing demand deposits increased $38.14 million, or 5.86%. These increases were offset by a decrease in time deposits of $61.60 million, or 16.26%.

*Nine-Month Comparison*. Net interest income comprised 74.56% of total net interest and noninterest income in the nine months ended September 30, 2022 compared to 75.48% in the same period of 2021. Net interest income on a GAAP basis increased $4.80 million, or 6.21%, compared to an increase of $4.79 million, or 6.18%, on a FTE basis. The net interest margin on a FTE basis increased 6 basis points and the net interest spread on a FTE basis increased 8 basis points. As noted for the quarter increase, the nine-month period increase was primarily driven by increased earnings on securities and overnight funds and a decrease in the cost of time deposits.

Average earning assets increased $122.39 million, or 4.39%, primarily due to an increase in both the securities available for sale and loan portfolios. Securities available for sale increased $159.08 million, or 192.67%, due to recent purchases of $264.96 million in the first nine months of 2022. In addition, average loans increased $120.42 million, or 5.60%, primarily due to strong levels of loan demand in all categories. Average interest-bearing deposits decreased $157.11 million, or 28.29%. The yield on earning assets increased 1 basis point for the nine month period as compared to 2021. The average loan to deposit ratio increased to 81.85% from 81.05% in the same period of 2021. Non-cash accretion income decreased $1.23 million, or 35.57%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $66.94 million, or 3.63%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 7 basis points. Average interest-bearing deposits increased $65.96 million, or 3.58%. Savings deposits increased $80.2 million, or 9.93%, and interest-bearing demand deposits increased $49.42 million, or 7.72%. These increases were offset by a decrease in time deposits of $63.66 million, or 16.10%.

*Provision for Credit Losses*

*Three-Month Comparison*. The provision charged to operations increased $2.08 million, in the third quarter of 2022 compared to the same quarter of 2021. Provision for credit losses of $685 thousand was recorded in the third quarter of 2022 and was primarily attributable to loan growth. A recovery of provision of $1.39 million was recorded in the third quarter of 2021 and was due to significantly improved economic forecasts from pandemic provisioning.

*Nine-Month Comparison*. The provision charged to operations increased $10.78 million, for the nine months ended September 30, 2022 compared to the same period of 2021. Provision for credit losses of $3.16 million was recorded for the first nine months of 2022 and was primarily attributable to loan growth. A recovery of provision of $7.63 million was recorded in the same period of 2021 and was due to significantly improved economic forecasts from pandemic provisioning.

*Noninterest Income*

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

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| | | | | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  |  |  |  | **Nine Months Ended** | **Nine Months Ended** | **Nine Months Ended** |  |  |  |  |
|  | **September 30,** | **September 30,** | **September 30,** |  | **Increase** | **%** |  | **September 30,** | **September 30,** | **September 30,** |  | **Increase** | **%** |  |
|  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |  | |  | |  |  | |
| Wealth management | $932 |  | $974 |  | $(42) | -4.31 | % | $2897 |  | $2913 |  | $(16) | -0.55 | % |
| Service charges on deposits | 3689 |  | 3599 |  | 90 | 2.50 | % | 10859 |  | 9728 |  | 1131 | 11.63 | % |
| Other service charges and fees | 2988 |  | 3143 |  | (155) | -4.93 | % | 9302 |  | 9331 |  | (29) | -0.31 | % |
| Divestiture Gain | 1658 |  |  |  | 1658 |  |  | 1658 |  |  |  | 1658 |  |  |
| Other operating income | 683 |  | 1004 |  | (321) | -31.97 | % | 3282 |  | 3114 |  | 168 | 5.39 | % |
| Total noninterest income | $9950 |  | $8720 |  | $1230 | 14.11 | % | $27998 |  | $25086 |  | $2912 | 11.61 | % |

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*Three-Month Comparison*. Noninterest income comprised 25.32% of total net interest and noninterest income in the third quarter of 2022 compared to 25.75% in the same quarter of 2021. Noninterest income increased $1.23 million or 14.11%. The increase is primarily driven by the $1.66 million gain realized during the quarter for the Emporia Branch Sale.

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*Nine-Month Comparison*. Noninterest income comprised 25.44% of total net interest and noninterest income for the first nine months of 2022 compared to 24.52% in the same period of 2021. Noninterest income increased $2.91 million or 11.61%. A gain $1.66 million was realized during the quarter for the sale of the Emporia, Virginia branch. Service charges on deposits increased $1.13 million, or 11.63%, compared with the same period of 2021. The increases are primarily attributable to increased customer activity compared to the activity levels experienced during 2021.

*Noninterest Expense*

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

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| | | | | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended** | **Three Months Ended** | **Three Months Ended** |  |  |  |  | **Nine Months Ended** | **Nine Months Ended** | **Nine Months Ended** |  |  |  |  |
|  | **September 30,** | **September 30,** | **September 30,** |  | **Increase** | **%** |  | **September 30,** | **September 30,** | **September 30,** |  | **Increase** | **%** |  |
|  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  | **2022** |  | **2021** |  | **(Decrease)** | **Change** |  |
| *(Amounts in thousands)* |  | |  | |  |  | |  | |  | |  |  | |
| Salaries and employee benefits | $12081 |  | $10646 |  | $1435 | 13.48 | % | $35270 |  | $31746 |  | $3524 | 11.10 | % |
| Occupancy expense | 1188 |  | 1155 |  | 33 | 2.86 | % | 3622 |  | 3545 |  | 77 | 2.17 | % |
| Furniture and equipment expense | 1478 |  | 1385 |  | 93 | 6.71 | % | 4588 |  | 4209 |  | 379 | 9.00 | % |
| Service fees | 1635 |  | 1530 |  | 105 | 6.86 | % | 5701 |  | 4378 |  | 1323 | 30.22 | % |
| Advertising and public relations | 718 |  | 536 |  | 182 | 33.96 | % | 1835 |  | 1487 |  | 348 | 23.40 | % |
| Professional fees | 208 |  | 313 |  | (105) | -33.55 | % | 1205 |  | 1069 |  | 136 | 12.72 | % |
| Amortization of intangibles | 365 |  | 365 |  |  | 0.00 | % | 1082 |  | 1082 |  |  | 0.00 | % |
| FDIC premiums and assessments | 321 |  | 216 |  | 105 | 48.61 | % | 796 |  | 619 |  | 177 | 28.59 | % |
| Divestiture expense | 153 |  |  |  | 153 |  |  | 153 |  |  |  | 153 |  |  |
| Other operating expense | 2998 |  | 2690 |  | 308 | 11.45 | % | 8134 |  | 8882 |  | (748) | -8.42 | % |
| Total noninterest expense | $21145 |  | $18836 |  | $2309 | 12.26 | % | $62386 |  | $57017 |  | $5369 | 9.42 | % |

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*Three-Month Comparison*. Noninterest expense increased $2.31 million, or 12.26%, in the third quarter of 2022 compared to the same quarter of 2021. The increase was largely attributable to an increase in salaries and employee benefits of $1.44 million or 13.48%. Early in the first quarter of 2022, the Company implemented annualized wage increases of approximately $2.5 million as part of its strategic initiative to enhance Human Capital Management, which included an increased minimum wage. Other operating expense increased $308 thousand, or 11.45%. The increase is primarily attributable to a $310 thousand increase in the provision for off-balance sheet credit losses. Other increases occurred in advertising and public relations of $182 thousand and divestiture expense of $153 thousand.

*Nine-Month Comparison*. Noninterest expense increased $5.37 million, or 9.42%, in the first nine months of 2022 compared to the same period of 2021. As in the quarter, the increase was largely attributable to an increase in salaries and employee benefits of $3.52 million or 11.10%. The increase is due to wage increases implemented in the first quarter as part of the Company's strategic initiative to enhance Human Capital Management, which included an increased minimum wage. In addition, service fees increased $1.32 million, or 30.22% primarily due to an increase in core processing expense. These increases were offset by a decrease in other operating expense of $748 thousand, or 8.42%. The decrease is primarily attributable to the 2021 write-down of bank property of $781 thousand.

*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 $295 thousand, or 7.73% and was primarily due to the decrease in pre-tax income. The effective tax rate increased to 23.54% in the third quarter of 2022 from 23.23% in the same quarter of 2021.

*Nine-Month Comparison*. Income tax expense decreased $1.90 million, or 15.45% and was primarily due to the decrease in pre-tax income. The effective tax rate increased 13 basis points to 23.41% for the first nine months of 2022 compared to 23.28% in the same period of 2021.

***Non-GAAP Financial Measures***

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

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

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| | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Three Months Ended September 30,** | **Three Months Ended September 30,** | **Three Months Ended September 30,** |  | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** |  |
|  | **2022** |  | **2021** |  | **2022** |  | **2021** |  |
| *(Amounts in thousands)* |  | |  | |  | |  | |
| Net interest income, GAAP | $29342 |  | $25146 |  | $82042 |  | $77242 |  |
| FTE adjustment(1) | 116 |  | 106 |  | 334 |  | 343 |  |
| Net interest income, FTE | 29458 |  | 25252 |  | 82376 |  | 77585 |  |
| Net interest margin, GAAP | 3.99 | % | 3.54 | % | 3.77 | % | 3.70 | % |
| FTE adjustment(1) | 0.02 | % | 0.02 | % | 0.01 | % | 0.02 | % |
| Net interest margin, FTE | 4.01 | % | 3.56 | % | 3.78 | % | 3.72 | % |

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(1) FTE basis of 21%.

***Financial Condition***

Total assets as of September 30, 2022, decreased $33.72 million, or 1.06%, from December 31, 2021. The decrease in assets was primarily driven by a decrease in overnight funds of $454.9 million, or 72.55%. The decrease in overnight funds was offset by an increase in available-for-sale debt securities of $223.33 million, or 292.73%, and an increase in loans of $197.16 million, or 9.10%. Total liabilities decreased $18.20 million, or 0.66%, as of September 30, 2022, from December 31, 2021. The decrease in liabilities was primarily driven by a decrease in total deposits of $19.17 million, or 0.70%. The decrease in deposits was primarily due to the $61.05 million divestiture of deposits in the Emporia branch sale offset by an increase in deposits of $41.88 million excluding the effect of the Emporia Branch Sale.

*Investment Securities*

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

Available-for-sale debt securities as of September 30, 2022, increased $223.33 million, or 292.73%, compared to December 31, 2021. The increase is due to the purchase of $264.96 million in securities comprised of U. S. Treasury Notes, mortgage-backed securities, and corporate notes. The purchases were offset by $19.86 million in maturities, prepayments, and calls. The market value of debt securities available for sale as a percentage of amortized cost was 93.22% as of September 30, 2022, compared to 100.02% as of December 31, 2021. The decrease in the market value of debt securities available for sale as a percentage of amortized cost is primarily attributable to the increasing rate environment since year-end 2021.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the investments. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of September 30, 2022 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.

*Loans Held for Investment*

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

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **December 31, 2021** | **December 31, 2021** | **September 30, 2021** | **September 30, 2021** |
| *(Amounts in thousands)* | **Amount** | **Percent** | **Amount** | **Percent** | **Amount** | **Percent** |
| Loans held for investment |  |  |  |  |  |  |
| Commercial loans |  |  |  |  |  |  |
| Construction, development, and other land | $109104 | 4.62% | $65806 | 3.04% | $56466 | 2.62% |
| Commercial and industrial | 148024 | 6.26% | 133630 | 6.17% | 133923 | 6.22% |
| Multi-family residential | 135489 | 5.73% | 100402 | 4.64% | 100444 | 4.67% |
| Single family non-owner occupied | 196133 | 8.30% | 198778 | 9.18% | 196946 | 9.15% |
| Non-farm, non-residential | 777350 | 32.90% | 707506 | 32.67% | 711861 | 33.08% |
| Agricultural | 10537 | 0.45% | 9341 | 0.43% | 9784 | 0.45% |
| Farmland | 12127 | 0.51% | 15013 | 0.69% | 17614 | 0.82% |
| Total commercial loans | 1388764 | 58.77% | 1230476 | 56.82% | 1227038 | 57.01% |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 77424 | 3.28% | 79857 | 3.69% | 83079 | 3.86% |
| Single family owner occupied | 726780 | 30.76% | 703864 | 32.50% | 684930 | 31.83% |
| Owner occupied construction | 14602 | 0.62% | 16910 | 0.78% | 25551 | 1.19% |
| Total consumer real estate loans | 818806 | 34.66% | 800631 | 36.97% | 793560 | 36.88% |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 151022 | 6.39% | 129794 | 5.99% | 126578 | 5.88% |
| Other | 4141 | 0.18% | 4668 | 0.22% | 4927 | 0.23% |
| Total consumer and other loans | 155163 | 6.57% | 134462 | 6.21% | 131505 | 6.11% |
| Total loans held for investment, net of unearned income | 2362733 | 100.00% | 2165569 | 100.00% | 2152103 | 100.00% |
| Less: allowance for credit losses | 29388 |  | 27858 |  | 29877 |  |
| Total loans held for investment, net of unearned income and allowance | $2333345 |  | $2137711 |  | $2122226 |  |

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Total loans as of September 30, 2022, increased $197.16 million, or 9.10%, compared to December 31, 2021, with increases in all three loan segments. The largest increase, $158.29 million, occurred in the commercial loan segment. The increase was comprised of increases of $69.84 million in non-farm, non-residential real estate, $43.30 million in construction, development, and other land, and $35.09 million in multi-family categories. Consumer and other loans increased $20.70 million and consumer real estate loans increased $18.18 million with the increase concentrated in the single family owner occupied category.

*Risk Elements*

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

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, 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.

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** |  | **December 31, 2021** |  | **September 30, 2021** |  |
| *(Amounts in thousands)* |  | |  | |  | |
| **Nonperforming** |  |  |  |  |  |  |
| Nonaccrual loans | $15303 |  | $20768 |  | $22067 |  |
| Accruing loans past due 90 days or more | 131 |  | 87 |  | 5 |  |
| TDRs(1) | 1331 |  | 1367 |  | 584 |  |
| Total nonperforming loans | 16765 |  | 22222 |  | 22656 |  |
| OREO | 559 |  | 1015 |  | 1240 |  |
| Total nonperforming assets | $17324 |  | $23237 |  | $23896 |  |
| **Additional Information** |  |  |  |  |  |  |
| Total Accruing TDRs(2) | $7028 |  | $8652 |  | $8185 |  |
| **Asset Quality Ratios:** |  |  |  |  |  |  |
| Nonperforming loans to total loans | 0.71 | % | 1.03 | % | 1.05 | % |
| Nonperforming assets to total assets | 0.55 | % | 0.73 | % | 0.76 | % |
| Allowance for credit losses to nonperforming loans | 175.29 | % | 125.36 | % | 131.87 | % |
| Allowance for credit losses to total loans | 1.24 | % | 1.29 | % | 1.39 | % |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $2.09 million , $1.80 million , and $3.03 million for the periods ended September 30, 2022 , December 31, 2021 , and September 30, 2021 , respectively. They are included in nonaccrual loans.

&nbsp;&nbsp;&nbsp;&nbsp;(2) Total accruing TDRs exclude nonaccrual TDRs of $1.48 million , $2.52 million , and $3.60 million for the periods ended September 30, 2022 , December 31, 2021 , and September 30, 2021 , respectively. They are included in nonaccrual loans.

Nonperforming assets as of September 30, 2022, decreased $5.91 million, or 25.45%, from December 31, 2021, with the largest decrease occurring on nonaccrual loans. Nonaccrual loans decreased $5.47 million, or 26.31%, non-performing TDR's decreased $36 thousand, or 2.63%, and OREO decreased $456 thousand, or 44.93%. As of September 30, 2022, nonaccrual loans were largely attributed to single family owner occupied (55%), non-farm, non-residential (14.85%), and consumer loans (12.72%). 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 $27.41 million as of September 30, 2022, a decrease of $5.70 million, or 17.21%, compared to $33.10 million as of December 31, 2021. Delinquent loans as a percent of total loans totaled 1.16% as of September 30, 2022, which includes past due loans (0.51%) and nonaccrual loans (0.65%).

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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 September 30, 2022, decreased $1.62 million, or 18.77%, to $7.03 million from December 31, 2021. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of September 30, 2022, decreased $36 thousand compared to December 31, 2021. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 18.94% as of September 30, 2022, compared to 15.81% as of December 31, 2021. There were no specific reserves related to TDRs as of September 30, 2022, or December 31, 2021.

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.

OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $456 thousand, or 44.93%, as of September 30, 2022, compared to December 31, 2021, and consisted of 10 properties with an average holding period of approximately 12 months. The net loss on the sale of OREO totaled $422 thousand for the nine months ended September 30, 2022, compared to $135 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

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| | | |
|:---|:---|:---|
|  | **Nine Months Ended September 30,** | **Nine Months Ended September 30,** |
|  | **2022** | **2021** |
| *(Amounts in thousands)* |  |  |
| Beginning balance | $1015 | $2083 |
| Additions | 438 | 1147 |
| Disposals | (442) | (1738) |
| Valuation adjustments | (452) | (252) |
| Ending balance | $559 | $1240 |

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*Allowance for Credit Losses*

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

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

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

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

With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loans from an incurred loss method to a life of loan method. See Note 1 – "Basis of Presentation - Significant Accounting Policies" for further details. As of September 30, 2022, the balance of the ACL for loans was $29.39 million, or 1.24% of total loans. The ACL at September 30, 2022, increased $1.53 million from the balance of $27.86 million recorded at December 31, 2021. This increase included a $3.16 million provision offset by net charge-offs for the nine months of $1.63 million. The provision was primarily driven by loan growth in the first nine months of 2022.

At September 30, 2022, the Company also had an allowance for unfunded commitments of $1.42 million which was recorded in Other Liabilities on the Balance Sheet. During the first nine months of 2022, the provision for credit losses on unfunded commitments was $737 thousand compared to a provision of $102 thousand recorded in the same period of 2021.

*Deposits* 

Total deposits as of September 30, 2022, decreased $19.17 million, or 0.70%, compared to December 31, 2021. Total deposits divested in the Emporia Branch Sale to Benchmark totaled $61.05 million. The divested deposits were composed of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52 million in savings, and $2.69 million in time deposits. Excluding the effect of the branch sale, deposits increased $41.88 million. The increase was largely attributable to an increase in non-interest bearing demand of $54.02 million, or 6.41%, and an increase in savings of $24.87 million, or 2.91%. Interest-bearing demand deposits also reflected growth with an increase of $10.42 million, or 1.54%. These increases were offset by a decrease in time deposits of $47.43 million, or 13.37%.

 

*Borrowings*

Total borrowings in the form of retail repurchase agreements as of September 30, 2022, increased $422 thousand, or 27.47%, compared to December 31, 2021.

 ****

***Liquidity and Capital Resources***

*Liquidity*

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

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As a financial holding company, the Company's primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of September 30, 2022, the Company's cash reserves and short-term investment securities totaled $10.54 million and $43.32 million, respectively. The Company's cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank ("FRB") Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of September 30, 2022, our unencumbered cash totaled $229.10 million, unused borrowing capacity from the FHLB totaled $422.61 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 $271.80 million.

*Capital Resources*

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders' equity as of September 30, 2022, decreased $15.52 million, or 3.63%, to $412.26 million from $427.78 million as of December 31, 2021. The change in stockholders' equity was largely due to net income of $34.08 million offset by other comprehensive loss of $17.48 million, the repurchase of 650,907 shares of our common stock totaling $19.42 million, and dividends declared on our common stock of $13.81 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 decreased $0.01, or 0.04%, to $25.33 as of September 30, 2022, from $25.34 as of December 31, 2021.

*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 2021 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:

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** | **December 31, 2021** | **December 31, 2021** |
|  | **Company** | **Bank** | **Company** | **Bank** |
| Common equity Tier 1 ratio | 13.09% | 11.70% | 14.39% | 13.37% |
| Tier 1 risk-based capital ratio | 13.09% | 11.70% | 14.39% | 13.37% |
| Total risk-based capital ratio | 14.34% | 12.95% | 15.65% | 14.62% |
| Tier 1 leverage ratio | 9.53% | 8.53% | 9.65% | 8.94% |

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Our risk-based capital ratios as of September 30, 2022, decreased from December 31, 2021, due to an increase in our risk-weighted assets. The increase in risk-weighted assets was primarily due to the increase in total loans as well as an increase in available for sale debt securities from year-end 2021. As of September 30, 2022, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank's classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of September 30, 2022.

 

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***Off-Balance Sheet Arrangements***

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

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| | | | |
|:---|:---|:---|:---|
|  | **September 30, 2022** |  | **December 31, 2021** |
| *(Amounts in thousands)* |  | |  |
| Commitments to extend credit | $302765 |  | $272447 |
| Standby letters of credit and financial guarantees (1) | 129527 |  | 153717 |
| Total off-balance sheet risk | $432292 |  | $426164 |
| Allowance for unfunded commitments | $1416 |  | $678 |

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&nbsp;&nbsp;&nbsp;&nbsp;(1) Includes FHLB letters of credit

***Market Risk and Interest Rate Sensitivity***

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

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

As of September 30, 2022, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 300 to 325 basis points. The level of benchmark interest rates at year-end 2021, rendered a complete downward shock of 100 and 200 basis points meaningless; accordingly, a downward rate scenario is only presented for the current period. In the downward rate shock presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **September 30, 2022** | **September 30, 2022** |  | **December 31, 2021** | **December 31, 2021** | **December 31, 2021** |  |
| **Increase (Decrease) in Basis Points** | **Change in Net Interest Income** | **Percent Change** |  | **Change in Net Interest Income** |  | **Percent Change** |  |
| *(Dollars in thousands)* |  |  | |  | |  | |
| 300 | $2858 | 2.44 | % | $14960 |  | 14.90 | % |
| 200 | 1859 | 1.59 | % | 10303 |  | 10.30 | % |
| 100 | 1062 | 0.91 | % | 5502 |  | 5.50 | % |
| (100) | (6709) | -5.72 | % | N/A |  | N/A |  |
| (200) | (14486) | -12.36 | % | N/A |  | N/A |  |

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***Inflation and Changing Prices***

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

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

In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) in 2023, 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.

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| | |
|:---|:---|
| **Item 3.** | **Quantitative and Qualitative Disclosures about Market Risk** |

---

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

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| | |
|:---|:---|
| **Item 4.** | **Controls and Procedures** |

---

**Evaluation of Disclosure Controls and Procedures**

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of September 30, 2022, our disclosure controls and procedures were effective.

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

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

**Changes in Internal Control over Financial Reporting**

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2022, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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| | |
|:---|:---|
| **PART II.** | **OTHER INFORMATION** |

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| | |
|:---|:---|
| **ITEM 1.** | **Legal Proceedings** |

---

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

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| | |
|:---|:---|
| **ITEM 1A.** | **Risk Factors** |

---

The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2021, 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, 2021 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, 2021.

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| | |
|:---|:---|
| **ITEM 2.** | **Unregistered Sales of Equity Securities and Use of Proceeds**  |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) Not Applicable

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) Not Applicable

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) Issuer Purchases of Equity Securities

We repurchased 235,400 shares of our common stock during the third quarter of 2022 compared to 277,386 shares purchased during the same quarter of 2021.

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

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **Total Number of Shares Purchased** | **Average Price Paid per Share** | **Total Number of Shares Purchased as Part of a Publicly Announced Plan** | **Maximum Number of Shares that May Yet be Purchased Under the Plan** |
| July 1-31, 2022 | 89700 | $29.85 | 89700 | 945407 |
| August 1-31, 2022 | 76400 | 32.46 | 76400 | 869007 |
| September 1-30, 2022 | 69300 | 32.12 | 69300 | 799707 |
| Total | 235400 | $31.36 | 235400 |  |

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| | |
|:---|:---|
| **ITEM 3.** | **Defaults Upon Senior Securities** |

---

None.

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| | |
|:---|:---|
| **ITEM 4.** | **Mine Safety Disclosures** |

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None.

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| | |
|:---|:---|
| **ITEM 5.** | **Other Information** |

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| | |
|:---|:---|
| **ITEM 6.** | **Exhibits** |

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| | |
|:---|:---|
| 2.1 | [Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm) |
| 2.2 | [Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019](http://www.sec.gov/Archives/edgar/data/859070/000143774919018230/ex_157104.htm) |
| 3.1 | [Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm) |
| 3.2 | [Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124896.htm) |
| 4.1 | [Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124897.htm) |
| 4.2 | [Form of First Community Bankshares, Inc. Common Stock Certificate, incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated and filed October 2, 2018](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124972.htm) |
| 10.1.1\*\* | [First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000](http://www.sec.gov/Archives/edgar/data/859070/000095012800000665/0000950128-00-000665.txt) |
| 10.1.2\*\* | [Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004](http://www.sec.gov/Archives/edgar/data/859070/000143774919024675/0001437749-19-024675-index.htm) |
| 10.2\*\* | [First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 13, 2002](http://www.sec.gov/Archives/edgar/data/859070/000095012802000627/j9559101exv10w5.txt) |
| 10.3\*\* | [First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002](http://www.sec.gov/Archives/edgar/data/859070/000095012802000627/j9559101exv10w4.txt) |

---

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| | |
|:---|:---|
| 10.6\*\* | [First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012](http://www.sec.gov/Archives/edgar/data/859070/000119312512100945/d305268ddef14a.htm) |
| 10.7\*\* | [First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013](http://www.sec.gov/Archives/edgar/data/859070/000114420413031684/v346101_ex99-1.htm) |
| 10.8\*\* | [First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000](http://www.sec.gov/Archives/edgar/data/859070/000095012800000665/0000950128-00-000665.txt) |
| 10.9.1\*\* | [First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009;](http://www.sec.gov/Archives/edgar/data/859070/000095015209000027/l35008aexv10w1.htm) |
| 10.9.2\*\* | [Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010](http://www.sec.gov/Archives/edgar/data/859070/000114420410067096/v205949_ex10-3.htm) |
| 10.9.3\*\* | [Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013](http://www.sec.gov/Archives/edgar/data/859070/000114420413010959/v336117_ex10-1.htm) |

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| | |
|:---|:---|
| 10.9.4\*\* | [Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420416105811/v441270_ex10-1.htm) |
| 10.9.5\*\* | [Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm) |
| 10.9.6\* | [Amendment #5 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm). |
| 10.9.7\* | [Amendment #6 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-1.htm). |
| 10.10\*\* | [Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2019, filed on December 19, 2019](http://www.sec.gov/Archives/edgar/data/859070/000143774919024675/0001437749-19-024675-index.htm) |
| 10.11.1\*\* | [First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000095015206007183/l22038aexv99w1.htm) |
| 10.11.2\*\* | [Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017](http://www.sec.gov/Archives/edgar/data/859070/000114420417011822/v460760_ex10-2.htm) |
| 10.12.1\*\* | [First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420410067096/v205949_ex10-1.htm) |
| 10.12.2\*\* | [Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016](http://www.sec.gov/Archives/edgar/data/859070/000114420416105811/v441270_ex10-2.htm) |
| 10.13\*\* | [Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-3.htm) |
| 10.15\*\* | [Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-2.htm) |
| 10.16\*\* | [Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015](http://www.sec.gov/Archives/edgar/data/859070/000114420415023213/v407220_ex10-1.htm) |
| 31.1\* | [Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002](#a10q093022ex311) |
| 31.2\* | [Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002](#a10q093022ex312) |
| 32\* | [Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002](#a10q093022ex32) |

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| | |
|:---|:---|
| 101\*\*\* | Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2022, (Unaudited) and December 31, 2021; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the three and nine months ended September 30, 2022 and 2021; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2022 and 2021; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited). |
| 104\* | The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (included within the Exhibit 101 attachments). |

---

\* Filed herewith

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

\*\*\* Submitted electronically herewith

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 8th day of November, 2022.

---

| |
|:---|
| First Community Bankshares, Inc.<br> (Registrant) |
| /s/ William P. Stafford, II |
| William P. Stafford, II |
| Chief Executive Officer |
| (Principal Executive Officer) |
| /s/ David D. Brown |
| David D. Brown |
| Chief Financial Officer |
| (Principal Accounting Officer) |

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**Exhibit 31.1**

**CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER**

I, William P. Stafford, II, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Quarterly Report on Form 10-Q of First Community Bankshares, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

&nbsp;&nbsp;&nbsp;&nbsp;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

&nbsp;&nbsp;&nbsp;&nbsp;5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 8, 2022

/s/ William P. Stafford, II<br>

William P. Stafford, II

Chief Executive Officer

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**Exhibit 31.2**

**CERTIFICATION OF THE CHIEF FINANCIAL OFFICER**

I, David D. Brown, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Quarterly Report on Form 10-Q of First Community Bankshares, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

&nbsp;&nbsp;&nbsp;&nbsp;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

&nbsp;&nbsp;&nbsp;&nbsp;5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 8, 2022

/s/ David D. Brown<br>

David D. Brown

Chief Financial Officer

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**Exhibit 32**

**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350**

**AS ADOPTED PURSUANT TO SECTION 906**

**OF THE SARBANES-OXLEY ACT OF 2002**

The undersigned certify, to their best knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

&nbsp;&nbsp;&nbsp;&nbsp;1. the Quarterly Report on Form 10-Q of First Community Bankshares, Inc. (the "Company") for the period ended September 30, 2022 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

&nbsp;&nbsp;&nbsp;&nbsp;2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 8, 2022

---

| | | | |
|:---|:---|:---|:---|
| &nbsp;&nbsp;&nbsp; By: | /s/ William P. Stafford, II | By: | /s/ David D. Brown |
|  | William P. Stafford, II |  | David D. Brown |
|  | Chief Executive Officer |  | Chief Financial Officer |

---

------

[**Table of Contents**](#toc)

**Appendix G**

---

| | | |
|:---|:---|:---|
| **UNITED STATES** | **UNITED STATES** | **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** | **SECURITIES AND EXCHANGE COMMISSION** | **SECURITIES AND EXCHANGE COMMISSION** |
| **Washington, D.C. 20549** | **Washington, D.C. 20549** | **Washington, D.C. 20549** |
| **FORM **8-K** | **FORM **8-K** | **FORM **8-K** |
| **CURRENT REPORT**  | **CURRENT REPORT**  | **CURRENT REPORT**  |
| **Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934** | **Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934** | **Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934** |
| Date of Report (Date of earliest event reported): March 9, 2022 | Date of Report (Date of earliest event reported): March 9, 2022 | Date of Report (Date of earliest event reported): March 9, 2022 |
| **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** | **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) |
| **Virginia** | **000-19297** | **55-0694814** |
| (State or other jurisdiction | (Commission | (IRS Employer |
| of incorporation) | File Number) | Identification No.) |
| **P.O. Box 989**<br> **Bluefield, **Virginia** |  | **24605-0989** |
| (Address of principal executive offices) |  | (Zip Code) |
| Registrant's telephone number, including area code: **(**276**) **326-9000** | Registrant's telephone number, including area code: **(**276**) **326-9000** | Registrant's telephone number, including area code: **(**276**) **326-9000** |
| Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |
| ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |

---

**Securities registered pursuant to Section 12(b) of the Act:**

---

| | |
|:---|:---|
| **Title of each class** | **Name of each exchange on which**<br> **registered** |
| Common Stock ($1.00 par value) FCBC | NASDAQ Global Select |

---

---

| |
|:---|
| Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). |
| Emerging growth company ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |

---

------

**Item 4.01 Changes in Registrant**'**s Certifying Accountant.**

(a) On March 9, 2022, the Audit Committee of the Board of First Community Bankshares, Inc. (the "Registrant") approved the dismissal of Dixon Hughes Goodman LLP ("DHG") as the independent registered public accounting firm for the Registrant.

The report of DHG on the consolidated financial statements of the Registrant for the years ended December 31, 2021 and 2020, contained no adverse opinion or disclaimer of opinion, and such report was not qualified or modified as to uncertainty, audit scope, or accounting principles, except that the report for the years ended December 31, 2021 and 2020, contained an emphasis-of-matter paragraph indicating the Registrant had changed its method of accounting for credit losses effective January 1, 2021, due to the adoption of Accounting Standards Codification (ASC) Topic 326, *Financial Instruments* – *Credit Losses*.

During the years ended December 31, 2021 and 2020, and through March 9, 2022, there were no disagreements with DHG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of DHG would have caused it to make a reference to the subject matter of the disagreements in connection with its report on the Registrant's financial statements for such years.

No reportable event as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K has occurred during the years ended December 31, 2021 and 2020, and through March 9, 2022.

The Registrant provided a copy of the foregoing disclosures to DHG prior to the date of the filing of this report and requested that DHG furnish it with a letter addressed to the United States Securities and Exchange Commission ("SEC") stating whether or not it agrees with the above disclosures. A copy of DHG's letter to the SEC dated March 14, 2022, is furnished in response to that request, is filed as Exhibit 16.1 to this Current Report on Form 8-K.

(b) Effective on March 9, 2022, the Registrant engaged Elliott Davis, PLLC as its new independent registered public accounting firm for the year ended December 31, 2022. This engagement was approved by the Audit Committee of the Registrant's Board of Directors. During the two most recent fiscal years and subsequent interim period prior to its selection as the Registrant's independent accountant, Elliott Davis, PLLC was not consulted by the Registrant on any of the matters referenced in Regulation S-K Item 304(a)(2)(i) or (ii).

**Item 9.01 Financial Statements and Exhibits**

---

| | | |
|:---|:---|:---|
| (d) | The following exhibit is included with this report: | The following exhibit is included with this report: |
|  | <u>Exhibit No.</u> | <u>Exhibit Description</u> |
|  | 16.1 | [Letter of Dixon Hughes Goodman LLP regarding change in certifying accountant](#newex03) |
|  | 104 | Cover Page Interactive Data File (formatted as Inline XBRL). |

---

------

SIGNATURE

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

---

| | | | |
|:---|:---|:---|:---|
| | | FIRST COMMUNITY BANCSHARES, INC. | FIRST COMMUNITY BANCSHARES, INC. |
| Date: | March 14, 2022 | By: | /s/ David D. Brown |
|  |  |  | David D. Brown |
|  |  |  | Chief Financial Officer |

---

------

[**Table of Contents**](#toc)

**Exhibit 16.1**

March 14, 2022

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

Ladies and Gentlemen:

We have read Item 4.01 of Form 8-K dated March 14, 2022 of First Community Bankshares, Inc. and are in agreement with the statements contained therein with respect to our firm. We have no basis to agree or disagree with the other statements of the registrant contained therein.

/s/ Dixon Hughes Goodman LLP

Charlotte, North Carolina

------

[**Table of Contents**](#toc)

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| |
|:---|
| **UNITED STATES**<br>**SECURITIES AND EXCHANGE COMMISSION**<br>**Washington, D.C. 20549**<br>**FORM **8-K**<br>**CURRENT REPORT** <br>**Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934**<br>Date of Report (Date of earliest event reported): March **29, 2022**<br>**FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) |

---

---

| | | |
|:---|:---|:---|
| **Virginia** | **000-19297** | **55-0694814** |
| (State or other jurisdiction | (Commission | (IRS Employer |
| of incorporation) | File Number) | Identification No.) |
| **P.O. Box 989**<br> **Bluefield**, **Virginia** |  | **24605-0989** |
| (Address of principal executive offices) |  | (Zip Code) |
| Registrant's telephone number, including area code: **(**276**) **326-9000** | Registrant's telephone number, including area code: **(**276**) **326-9000** | Registrant's telephone number, including area code: **(**276**) **326-9000** |
| Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |
| ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |

---

**Securities registered pursuant to Section 12(b) of the Act:**

---

| | |
|:---|:---|
| &nbsp;&nbsp;&nbsp;**Title of each class** | &nbsp;&nbsp;&nbsp;**Name of each exchange on which registered** |
| &nbsp;&nbsp;&nbsp;Common Stock ($1.00 par value) &nbsp;&nbsp;&nbsp;FCBC | &nbsp;&nbsp;&nbsp;NASDAQ Global Select |

---

---

| |
|:---|
| Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). |
| Emerging growth company ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |

---

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[**Table of Contents**](#toc)

**Item 8.01 Other Events.**

On March 29, 2022, First Community Bank, the wholly-owned banking subsidiary of First Community Bankshares, Inc. entered into a Purchase and Assumption Agreement with Benchmark Community Bank, the banking subsidiary of Benchmark Bankshares, Inc., in which First Community Bank has agreed to sell and Benchmark Community Bank has agreed to purchase First Community Bank's Emporia, Virginia branch. A copy of the press release announcing the transaction is attached to this filing as Exhibit 99.1 and is being furnished to the Securities and Exchange Commission and shall not be deemed "filed" for any purpose. Subject to regulatory approval as well as customary closing conditions, the transaction is expected to close by the end of this year.

**Item 9.01 Financial Statements and Exhibits.**

(d) The following exhibits are included with this report:

---

| | |
|:---|:---|
| Exhibit No. | Exhibit Description |
| 99.1 | [Press release dated April 1, 2022](#newex02) |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL). |

---

**Forward-Looking Statements**

This Current Report on Form 8-K contains forward-looking statements. These forward-looking statements are based on current expectations that involve risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may differ materially. These risks include: changes in business or other market conditions; the timely development, production and acceptance of new products and services; the challenge of managing asset/liability levels; the management of credit risk and interest rate risk; the difficulty of keeping expense growth at modest levels while increasing revenues; and other risks detailed from time to time in the Company's Securities and Exchange Commission reports, including but not limited to the Annual Report on Form 10-K for the most recent year ended. Pursuant to the Private Securities Litigation Reform Act of 1995, the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

------

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

---

| | | | |
|:---|:---|:---|:---|
| | | FIRST COMMUNITY BANKSHARES, INC. | FIRST COMMUNITY BANKSHARES, INC. |
| Date: | &nbsp;&nbsp;&nbsp; April 1, 2022 | By: | /s/ David D. Brown |
|  |  |  | David D. Brown |
|  |  |  | Chief Financial Officer |

---

------

[**Table of Contents**](#toc)

**Exhibit 99.1**

---

| | | |
|:---|:---|:---|
| ![ss01.jpg](ss01.jpg) | ![ss02.jpg](ss02.jpg) | ![ss03.jpg](ss03.jpg) |

---

**FOR IMMEDIATE RELEASE 04/01/2022**

---

| | |
|:---|:---|
| Contact: | Helen Person |
|  | VP/Director of Marketing & Public Relations |
|  | 434-676-5112 |
|  | helen.person@bcbonline.com |

---

**Benchmark Community Bank enters agreement with First Community Bank**

Benchmark Community Bank and First Community Bank jointly announced today their entry into an agreement pursuant to which Benchmark will purchase First Community's Emporia, Virginia Branch. The purchase includes the branch real estate, certain personal property, and all deposits (but not loans) associated with the branch.

The sole subsidiary of Benchmark Bankshares, Inc. (OTC Pink: BMBN), Benchmark Community Bank ("Benchmark") is headquartered in Kenbridge, Virginia. First Community Bank ("First Community"), the banking subsidiary of First Community Bankshares, Inc. (NASDAQ: FCBC), is headquartered in Bluefield, Virginia.

Benchmark opened its Emporia branch in September, 2018, as the fifteenth of its seventeen locations. The bank operates fourteen ATMs located throughout southside Virginia and northern North Carolina. Its menu of products and services include 24-Hour account access via Internet Banking and Bank-by-Phone, as well as mobile banking for both personal deposit and business accounts. Benchmark offers a full array of personal, business, and mortgage loan products.

"Since moving to Emporia in 2018, we have looked for an opportunity to move into a larger, full-service facility in the community," said Jay A Stafford, President and Chief Executive Officer of Benchmark Community Bank. "Our current location has served as a wonderful introduction to the Emporia community. We are excited to serve First Community's customers and expand our product and service offerings to the citizens of Emporia and the surrounding area."

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[**Table of Contents**](#toc)

Gary Mills, President of First Community Bankshares, Inc. and Chief Executive Officer and President of First Community Bank, commented, "Our staff members in Emporia are all outstanding. In fact, our Emporia customers and the Emporia community are top notch. While we appreciate the Emporia community, we recognize that our Emporia branch is geographically removed from our Richmond operations and Southwest Virginia headquarters. We have known Jay and his team for a long time and are confident Benchmark will do well by our employees and customers."

The transaction, which is subject to customary closing conditions, including the receipt of all required regulatory approvals, enables both banks to achieve further concentration of banking operations in their respective core operating markets. It is anticipated to close later this year.

# # # # #

**About Benchmark Community Bank**

Benchmark Community Bank, Member FDIC, Equal Housing Lender, opened in 1971 as The Lunenburg County Bank and added its Victoria branch in 1974. In 1989, the bank expanded operations to neighboring Prince Edward and Mecklenburg Counties as Benchmark Community Bank. The bank operates 16 full-service branches, one loan production office and 14 ATMs. To learn more about Benchmark, please visit one of our branch locations or our website at www.bcbonline.com.

**About First Community Bankshares, Inc.**

First Community Bankshares, Inc., a financial holding company headquartered in Bluefield, Virginia, provides banking products and services through its wholly owned subsidiary First Community Bank. First Community Bank operated 49 branch banking locations in Virginia, West Virginia, North Carolina, and Tennessee as of December 31, 2021. First Community Bank offers wealth management and investment advice through its Trust Division and First Community Wealth Management, which collectively managed and administered $1.32 billion in combined assets as of December 31, 2021. The Company reported consolidated assets of $3.19 billion as of December 31, 2021. The Company's common stock is listed on the NASDAQ Global Select Market under the trading symbol, "FCBC". Additional investor information is available on the Company's website at www.firstcommunitybank.com. <br>*This news release may include forward-looking statements. These forward-looking statements are based on current expectations that involve risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may differ materially. These risks include: changes in business or other market conditions; the timely development, production and acceptance of new products and services; the challenge of managing asset/liability levels; the management of credit risk and interest rate risk; the difficulty of keeping expense growth at modest levels while increasing revenues; and other risks detailed from time to time in the Company*'*s Securities and Exchange Commission reports including, but not limited to, the Annual Report on Form 10-K for the most recent fiscal year end. Pursuant to the Private Securities Litigation Reform Act of 1995, the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made*.

------

[**Table of Contents**](#toc)

---

| |
|:---|
| **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **Washington, D.C. 20549** |
| **FORM **8-K** |
| **CURRENT REPORT**  |
| **Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934** |
| Date of Report (Date of earliest event reported): **April 26, 2022** |
| **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) |

---

---

| | | |
|:---|:---|:---|
| **Virginia** | **000-19297** | **55-0694814** |
| (State or other jurisdiction | (Commission | (IRS Employer |
| of incorporation) | File Number) | Identification No.) |

---

---

| | |
|:---|:---|
| **P.O. Box 989**<br> **Bluefield**, **Virginia** | **24605-0989** |
| (Address of principal executive offices) | (Zip Code) |

---

---

| | | |
|:---|:---|:---|
| Registrant's telephone number, including area code: **(**276**) **326-9000** | Registrant's telephone number, including area code: **(**276**) **326-9000** | Registrant's telephone number, including area code: **(**276**) **326-9000** |
| Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |
| ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| **Securities registered pursuant to Section 12(b) of the Act:** | **Securities registered pursuant to Section 12(b) of the Act:** | **Securities registered pursuant to Section 12(b) of the Act:** |
| &nbsp;&nbsp;&nbsp; **Title of each class** | &nbsp;&nbsp;&nbsp; **Trading Symbol(s)** | &nbsp;&nbsp;&nbsp; **Name of each exchange on which registered** |
| &nbsp;&nbsp;&nbsp; Common Stock ($1.00 par value) | &nbsp;&nbsp;&nbsp; FCBC | &nbsp;&nbsp;&nbsp; NASDAQ Global Select |
| Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). | Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). | Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). |
| Emerging growth company ☐ | Emerging growth company ☐ | Emerging growth company ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |

---

------

**Item 5.07 Submission of Matters to a Vote of Security Holders.**

On April 26, 2022, First Community Bankshares, Inc. (the "Company") held its annual shareholders' meeting. As of March 3, 2022, there were 16,794,260 issued and outstanding shares of Common Stock. A total of 12,015,083 shares of common stock were voted in person or by proxy, representing 71.54% of the shares entitled to be voted. At the meeting, the Company's shareholders: (i) elected the persons listed below under Proposal 1 to serve as directors of the Company for a term that will continue until the 2025 annual meeting of shareholders; (ii) approved under Proposal 2, the non-binding, advisory vote on executive compensation; (iii) ratified under Proposal 3, the appointment of Elliott Davis PLLC as the Company's independent registered public accounting firm for 2022; and (iv) approved under Proposal 4, the First Community Bankshares, Inc. 2022 Omnibus Equity Compensation Plan..

The following tables summarize voting results by the Company's shareholders.

*Proposal 1: To elect three directors to serve as members of the Board of Directors Class of 2025.*

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
| **Nominee** | **Votes** <br> **For** | **Votes** <br> **For** | **Votes** <br> **Withheld** | **Votes** <br> **Withheld** | **Abstentions** | **Broker** <br> **Non-Votes** | **Broker** <br> **Non-Votes** |
| Samuel L. Elmore |  | 7438417 |  | 2102870 |  |  | 2473796 |
| Richard S. Johnson |  | 9231360 |  | 309927 |  |  | 2473796 |
| Beth A. Taylor |  | 9417265 |  | 124022 |  |  | 2473796 |

---

*Proposal 2: Non-binding, advisory vote on executive compensation.*

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
| **Votes** <br> **For** | **Votes** <br> **Against** | **Votes** <br> **Against** | **Abstentions** | **Abstentions** | **Broker** <br> **Non-Votes** | **Broker** <br> **Non-Votes** |
| 9144888 |  | 353767 |  | 42632 |  | 2473796 |

---

*Proposal 3: To ratify the appointment of Elliott Davis PLLC as the Company*'*s independent registered public accounting firm.*

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
| **Votes** <br> **For** | **Votes** <br> **Against** | **Votes** <br> **Against** | **Abstentions** | **Abstentions** | **Broker** <br> **Non-Votes** |
| 11872293 |  | 102405 |  | 40385 |  |

---

*Proposal 4: Approval of the First Community Bankshares, Inc. 2022 Omnibus Equity Compensation Plan.*

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
| **Votes** <br> **For** | **Votes** <br> **Against** | **Votes** <br> **Against** | **Abstentions** | **Abstentions** | **Broker** <br> **Non-Votes** | **Broker** <br> **Non-Votes** |
| 8942418 |  | 560913 |  | 37956 |  | 2473796 |

---

------

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

---

| | | | |
|:---|:---|:---|:---|
| | | FIRST COMMUNITY BANKSHARES, INC. | FIRST COMMUNITY BANKSHARES, INC. |
| &nbsp;&nbsp;&nbsp; Date: | May 2, 2022 | By: | /s/ David D. Brown |
|  |  |  | David D. Brown |
|  |  |  | Chief Financial Officer |

---

------

[**Table of Contents**](#toc)

---

| |
|:---|
| **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **Washington, D.C. 20549** |
| **FORM **8-K** |
| **CURRENT REPORT**  |
| **Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934** |
| Date of Report (Date of earliest event reported): May 24, 2022 |

---

---

| |
|:---|
| **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) |

---

---

| | | |
|:---|:---|:---|
| **Virginia** | **000-19297** | **55-0694814** |
| (State or other jurisdiction | (Commission | (IRS Employer |
| of incorporation) | File Number) | Identification No.) |

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| | |
|:---|:---|
| **P.O. Box 989**<br> **Bluefield**, Virginia** | **24605-0989** |
| (Address of principal executive offices) | (Zip Code) |

---

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| | | |
|:---|:---|:---|
| Registrant's telephone number, including area code: **(**276**) 326-9000** | Registrant's telephone number, including area code: **(**276**) 326-9000** | Registrant's telephone number, including area code: **(**276**) 326-9000** |
| Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |
| ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| **Securities registered pursuant to Section 12(b) of the Act:** | **Securities registered pursuant to Section 12(b) of the Act:** | **Securities registered pursuant to Section 12(b) of the Act:** |
| **Title of each class** | **Trading Symbol(s)** | **Name of each exchange on which registered** |
| Common Stock ($1.00 par value) | FCBC | NASDAQ Global Select |
| Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). | Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). | Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). |
| Emerging growth company ☐ | Emerging growth company ☐ | Emerging growth company ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |

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**Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) On May 24, 2022, the Compensation and Retirement Committee of the Board of Directors (the "Committee") of First Community Bankshares, Inc. (the "Corporation") approved, and the Board of Directors of the Corporation reviewed and adopted, the First Community Bankshares Executive Incentive Compensation Plan (the "Plan"). The purpose of the Plan is to reward the performance of Plan participants in a manner that is consistent with the Corporation's strategic plan and the attainment of a competitive return to the shareholders of the Corporation. The Plan is effective for the 2022 calendar year and will continue to renew for successive one-year periods unless otherwise terminated or modified in accordance with the Plan and specifically approved by the Committee.

The named executive officers that have been approved to participate in the 2022 plan year are: William P. Stafford, II, Gary R. Mills, David D. Brown, Jason R. Belcher and Sarah W. Harmon.

A Participant's actual incentive compensation award is based on two factors: (1) the Corporation's performance against a chosen financial return metric and (2) performance against certain key performance indicators. Incentives earned under the Plan are paid in cash.

<u>Financial Return Metric</u> 

The Plan uses a multi-step process for determining actual incentives. The first step is for the Committee, as early as possible in each Plan Year, to determine the specific financial return metric to be used. As part of this step, the Committee also sets a threshold for that financial return metric, below which no incentives may be paid under the Plan, and a maximum for that financial return metric, above which no greater incentives may be paid under the Plan. For the 2022 plan year, the key financial return metric is Return on Average Equity and the range of incentives based on a percentage of the Participant's salary for 2022 plan year for the named executive officers are as follows:

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| | | | | |
|:---|:---|:---|:---|:---|
| **Participant Name** | **Participant Title** | **Incentive Range Based on Results** <br> **Above Threshold** | **Incentive Range Based on Results** <br> **Above Threshold** | **Incentive Range Based on Results** <br> **Above Threshold** |
|  |  | **Threshold** | **Target** | **Maximum** |
| William P. Stafford, II | Chairman of the Board (Bankshares & Bank) & Chief Executive Officer (Bankshares) | 12.5% | 25% | 50% |
| Gary Mills | President (Bankshares), Chief Executive Officer & President (Bank) | 12.5% | 25% | 50% |
| David D. Brown | Chief Financial Officer | 12.5% | 25% | 50% |
| Jason R. Belcher | Chief Operating Officer | 12.5% | 25% | 50% |
| Sarah W. Harmon | Chief Administrative Officer, General Counsel & Secretary | 12.5% | 25% | 50% |

---

The financial return performance range for the financial return metric is based on the prior three-year average results of banks comprising the peer group along with other information deemed relevant by the Committee such as the Corporation's historical and projected performance, changes in accounting regulations and tax rates, and economic factors impacting the banking industry.

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The guidance used by the Committee in setting the financial return performance range and the range of incentives based on a percentage of the Participant's salary is shown in the following table:

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| | | |
|:---|:---|:---|
| **Financial Return Metric** | **Guideline on Setting Financial Return Measure Relative to Peer Group Historical Performance** | **Target Annual Incentive** |
| Below Threshold | Generally below 25th percentile | 0% |
| Threshold | Approximately equal to 25th percentile | .5 X Target |
| Target | Approximately equal to 50th percentile | 1 X Target |
| Halfway between Target and Max | Approximately equal to 75th percentile | 1.5 X Target |
| Maximum | At or above the 90th percentile | 2 X Target |

---

Actual results for a plan year that fall between the levels shown above determine an incentive level using straight line interpolation. If the Corporation fails to achieve the threshold level for the financial return metric, then no incentives are funded.

The Committee believes that the performance goals for Return on Average Equity for the 2022 plan year are moderately challenging at the threshold performance level, challenging at the target performance level, and extremely challenging at the maximum performance level.

Although Return on Average Equity was identified as the key financial return metric for the 2022 plan year, the following metrics may be used by the Committee in future plan years: earnings per share, return on average tangible common equity, return on average equity, return on average assets, non-performing assets ratio, total shareholder return, efficiency ratio, net income, budgeted net income, or similar metrics.

<u>Key Performance Indicators</u>

The next step is for the Committee, also as early as possible in each play year, to select the key performance indicators ("KPIs") and the targeted performance range for each KPI. The Committee also determines the weight for each KPI (that sum to 100%), and Threshold, Target, and Maximum performance levels for each. The KPIs may include objective financial performance targets and subjective performance objectives based on a participant's duties to the Corporation or the Corporation's subsidiary bank, First Community Bank. The Committee will set levels of achievements for each KPI at "threshold," "target," and "maximum" performance level and will weight each KPI by priority as a percentage. The Committee may use the following objective financial performance targets and subjective performance objectives: budgeted net income, efficiency ratio, return on equity, return on core equity, return on tangible common equity, return on core tangible common equity, return on assets, return on core assets, return on average assets, earnings per share, earnings per share growth, return on average tangible common equity, non-performing assets ratio, total shareholder return, net income expense to average assets ratio, net revenue goals, net income, net income growth, risk management goals, asset quality goals, loan growth goals, net charge off to average loan ratio, net interest margin, demand deposit growth, outstanding common shares repurchased, merger or acquisition opportunities executed, regulatory capital ratios, book value growth, tangible book value growth, pre-provision operating income and growth, dividend growth, or similar KPI.

For the 2022 plan year, the following KPIs have been selected by the Committee: the Corporation's budgeted net income, efficiency ratio, and return on assets. The Committee believes that the performance goals for these KPIs for the 2022 plan year are moderately challenging at the threshold performance level, challenging at the target performance level, and extremely challenging at maximum performance level.

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Following the conclusion of a plan year, the Corporation's chief executive officers will report performance versus the financial return metric, performance on the Committee's previously selected KPI's, and the calculation of each Participant's incentive for the Committee's review and consideration. Based on this information, the Committee will make final decisions regarding payment of incentives (such date on which the decisions are made is referred to as the "Payment Authorization Date"). Unless otherwise determined by the Committee, awards will not be earned or paid, regardless of performance, if 1) any regulatory agency issues a formal, written enforcement action, memorandum of understanding or other negative directive action where the Committee considers it imprudent to provide awards under the Plan; or 2) after a review of the Corporation's credit quality measures the Committee considers it imprudent to provide awards under the Plan.

Awards under the Plan to the named executive officers are subject to a clawback policy if the Corporation is required to restate its financial statements for any reporting period due to any misstatement or omission of material fact, any failure to report its financial condition or financial results in accordance with GAAP in any material respect, or any requirement of federal law or regulation. All incentive compensation awards under the Plan are also subject to any condition, limitation or prohibition under any financial institution regulatory policy or rule to which the Corporation is subject.

The foregoing description of the material terms of the Plan does not purport to be complete and is qualified in its entirety by references to the Plan, a copy of which is filed herewith as Exhibit 10.1, which is incorporated herein by reference.

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| | |
|:---|:---|
| **Item 9.01** | **Financial Statements and Exhibits.** |

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| | |
|:---|:---|
| (d) The following exhibits are included with this report: | (d) The following exhibits are included with this report: |
| Exhibit No. | Exhibit Description |
| 10.1 | [First Community Bankshares Executive Incentive Compensation Plan](#a8k053122ex101) |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL). |

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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| | | | |
|:---|:---|:---|:---|
| | | FIRST COMMUNITY BANKSHARES, INC. | FIRST COMMUNITY BANKSHARES, INC. |
| Date: | May 31, 2022 | By: | /s/ David D. Brown |
|  |  |  | David D. Brown |
|  |  |  | Chief Financial Officer |

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**Exhibit 10.1**

**FIRST COMMUNITY BANKSHARES, INC.**

**Executive Incentive Compensation Plan**

**Effective Date: May 24, 2022**

This document outlines the First Community Bankshares, Inc. Executive Incentive Plan (the "<u>Plan</u>"), which may provide, as set forth herein, and solely in the discretion of First Community Bankshares, Inc. ("<u>First Community</u>" or the "<u>Corporation</u>"), certain awards to certain executives approved for participation in the Plan (the "<u>Participant</u>" or "<u>Participants</u>").

**1. Purpose**

The purpose of the Plan is to reward the performance of the Participant in a manner that is consistent with the Corporation's strategic plan and the attainment of a competitive return to the shareholders of the Corporation. The Plan is further intended to assist the Corporation in its ability to motivate, attract and retain qualified employees.

**2. Effective Date**

The Effective Date of the Plan (the "Effective Date") is January 1, 2022. The Plan will remain in effect through December 31, 2022; provided, however, the Plan will renew and continue to renew for successive one-year periods (each calendar year being a "<u>Plan Year</u>") beginning January 1, 2023 unless otherwise terminated or modified in accordance with the Plan or specifically approved by the Compensation and Retirement Committee (the "<u>Committee</u>") of the First Community Board of Directors (the "<u>Board</u>"). The terms of this Plan will first apply to incentives paid to executives for performance during the 2021 fiscal year.

**3. Eligibility**

Participation is limited to the Chief Executive Officers of the Corporation and First Community Bank (the "<u>Bank</u>"); the Presidents of the Corporation and the Bank; and those executives of the Corporation, the Bank, and/or any subsidiaries of the Corporation or the Bank recommended by the Chief Executive Officers, who will typically only consist of members of the Executive Management Team. Participants must be approved by the Committee for participation in the Plan before any incentive of other compensation may be paid to any person under the Plan. Executives that would otherwise be eligible for participation in the Plan who are hired or promoted after the commencement of a Plan Year may be included in the Plan on a case-by-case basis only with the approval of the Committee.

**4. Basis of Incentive Compensation Award**

No payment of any incentive is guaranteed under the Plan. Incentives earned under the Plan, if any, are paid in cash, absent express direction of some other form of payment by the Committee. A Participant's actual incentive compensation award is based on two factors: (1) the Corporation's performance against a chosen financial return metric (the "<u>FRM</u>"); and (2) performance against certain key performance indicators (the "<u>KPIs</u>"). As early as possible each Plan Year, the FRM, KPIs, and target level of each are selected, reviewed, amended as appropriate, and approved by the Committee. The amount of incentive paid for that Plan Year, if any, is determined based on the Company's performance against the established FRM and KPIs.

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**5. Plan Details**

*A. <u>Early in the Plan Year</u>*

The Plan uses a multi-step process for determining actual incentives. The first step is for the Committee, as early as possible in each Plan Year, to determine the specific FRM to be used. For example, return on average equity might be the FRM selected by the Committee. Return on average assets, earnings per share, return on average tangible common equity, non-interest expense to assets, non-performing assets to total assets, total shareholder return, efficiency ratio, net income, budgeted net income, or other important and relevant metric might also be selected by the Committee as the FRM. As part of this step, the Committee also sets a threshold for that FRM, below which no incentives may be paid under the Plan, and a maximum for that FRM, above which no greater incentives may be paid under the Plan.

The threshold, maximum, and interval target values for the FRM are set by the Committee based on the prior three-year average results of banks comprising the Corporation's peer group, as determined from time to time with the assistance of the Committee's compensation consultant, along with other information deemed relevant by the Committee such as the Corporation's historical and projected performance, changes in accounting regulations and tax rates, and economic factors impacting the banking industry.

The next step is for the Committee, also as early as possible in each Plan Year, to set the corresponding target annual incentive (expressed as a percentage of base compensation for each Participant or group of Participants) (the "<u>TAI</u>") that results from achievement by the Corporation of each specified level of achieved FRM between the threshold and the maximum. The TAI corresponding to each level of achieved FRM is determined by the Committee by comparison to the aforesaid established peer group's performance on that FRM, as discussed above. The Committee further utilizes the following table to determine the TAI as a function of FRM:

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| | |
|:---|:---|
| **Financial Return Metric (FRM)** | **Target Annual Incentive (TIA)** |
| Below Threshold<br> Generally below 25<sup>th</sup> percentile | **0%** |
| **Threshold** <br> Approximately equal to 25<sup>th</sup> percentile | **0.5 X Target** |
| **Target**<br> Approximately equal to 50<sup>th</sup> percentile | **1 X Target**  |
| Halfway between Target and Max<br> Approximately equal to 75<sup>th</sup> percentile | **1.5 X Target** |
| **Maximum**<br> At or above the 90<sup>th</sup> percentile | **2 X Target**  |

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The TIA for actual FRM results for the Plan Year that fall between the FRM levels shown above are determined by linear interpolation. For example, if the Corporation's financial return falls halfway between the 25<sup>th</sup> and 50<sup>th</sup> percentiles, the TAI will be a ratio halfway between the threshold and target incentive levels (e.g., .75 X Target incentive).

If the Corporation fails to achieve the threshold level for the FRM, no cash incentives are paid. If the Corporation exceeds the maximum level, incentives are capped at the 2X Target amount.

The next step is for the Committee, also as early as possible in each Plan Year, to select the KPIs and the targeted performance range for each KPI. The Committee also determines the weight for each KPI (that sum to 100%), and Threshold, Target, and Maximum performance levels for each. The following table provides a formatting example. Actual KPI's, weights, and performance ranges for the Plan Year are set by the Committee.

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| | | | | |
|:---|:---|:---|:---|:---|
| **Key Performance**  | **Weight**  | **KPI Performance Range** | **KPI Performance Range** | **KPI Performance Range** |
| **Indicator** | **Assigned** | **Threshold** | **Target** | **Maximum** |
| A | TBD | TBD | TBD | TBD |
| B | TBD | TBD | TBD | TBD |
| C | TBD | TBD | TBD | TBD |
| **Total** | **100%** |  |  |  |

---

The KPI ranges determined by the Committee are based on the prior three-year average results of banks comprising the peer group along with other information deemed relevant by the Committee (e.g., First Community's historical and projected performance, changes in accounting regulations and tax rates, economic factors impacting the banking industry, etc.).

*B. <u>Following Conclusion and Reported Results for the Plan Year</u>*

Following conclusion of the Plan Year and reporting of financial results for the year in the Corporation's SEC Form 10-K, the Chief Executive Officers, with assistance from the Chief Financial Officer and such other executives as they may request, using the above-described calculation methods, calculate and report to the Committee performance versus the selected FRM, and the resulting TAI ratio. The calculated TAI ratio is then either reduced or increased within a performance range based on the Corporation's performance against each KPI. This calculation determines the actual percentage of base compensation, if any, to which each Participant or group of Participants is potentially entitled under the Plan as annual incentive compensation. The results of this calculation are then submitted to the Committee for review and action. The Committee retains complete negative discretion to award no or less annual incentive compensation than otherwise due to a Participant under the Plan due to any item of negative performance during the Plan Year by the Corporation or any Participant. The Committee may not award more annual incentive compensation under the Plan than is calculated under the Plan.

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The following example of how the Plan works assumes that based on the Corporation's annual performance for the selected FRM and FRM range, the calculated TAI is 25% of a Participant's base compensation. The example further assumes that three KPI's are used with weights of 33.3%, 33.3% and 33.3%, respectively, and that actual results versus each KPI are those shown in the table and marked with ovals.

![a1.jpg](a1.jpg)

In this example, the table below shows the allocation of potential incentive among KPIs based on their respective weights, and the calculation of the Participant's earned incentive based on results versus KPIs.

![a2.jpg](a2.jpg)

In this example, the Company's performance versus the selected FRM results in a TAI equal to 25% of base compensation (as stated in this example above). Performance versus the selected KPIs and KPI ranges (85% to 115% in this example) adjusts the earned incentive to 17.29% of the Participant's base compensation.

**6. Administrative Matters**

*A. <u>Administration of the Plan</u>*

The Committee is responsible for the oversight, supervision and existence of the Plan. The Chief Executive Officers will monitor performance, ensure adequate expense accrual, and provide periodic progress reports to the Committee on performance and estimated incentive awards.

Based on information reported by, or at the direction of, the Chief Executive Officers, the Committee will make final decisions regarding the authorization of payment of incentives. The date of the Committee's final decision will be the Payment Authorization Date (as defined below). In addition, the Committee, in its discretion, makes all final determinations including those not herein specifically authorized which may be necessary or desirable for the effective administration of the Plan.

Unless the Committee deems otherwise, awards will not be earned or paid, regardless of performance, if 1) any regulatory agency issues a formal, written enforcement action, memorandum of understanding or other negative directive action where the Committee considers it imprudent to provide awards under the Plan; or 2) after a review of First Community's credit quality measures, the Committee considers it imprudent to provide awards under the Plan.

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The Committee may withhold or adjust any incentive compensation award in its sole discretion as it deems appropriate and will have the Chief Executive Officers notify the Participant of its decision to withhold or adjust an incentive compensation award.

Any decision or interpretation of any provision of the Plan adopted by the Committee shall be final and conclusive.

*B. <u>Active Participation Required</u>*

In the event, during the Plan Year, of the Participant's death, permanent disability (as determined by the Committee in its discretion) or retirement (each, an "<u>Early Termination Event</u>"), any incentive compensation award shall be based on performance for the Plan Year, but prorated through the end of the most recent month prior to the Early Termination Event and shall be paid at the same time as would be otherwise due.

Any incentive compensation award to a Participant who transfers out of an eligible position prior to the end of the Plan Year, for any reason, will be prorated through the end of the most recent month prior to the event and will be paid at the same time as would otherwise be due<sup>.</sup>

In the event the Participant's employment ceases prior to the Payment Authorization Date (as defined below) for any reason other than an Early Termination Event or a change of control of First Community, including, without limitation, a voluntary termination of employment by the Participant, as defined by the personnel policies of First Community, or an involuntary termination with or without cause, the Participant shall not be entitled to, and shall not have earned, any incentive compensation award under the Plan.

**7. Payment Method**

The Payment Authorization Date is the date after the filing of the Corporation's SEC From 10-K for the preceeding year, upon which any awards under this Plan have been calculated, and after such awards as calculated have received final approval from the Committee. Awards are paid in cash on an annual basis through the Corporation's existing payroll process. Payment of awards, less applicable federal, state and local taxes, will be made as soon as practicable following the Payment Authorization Date (the "<u>Payment Date</u>").

**8. Modification and Termination of Plan**

The Plan may be modified or changed at any time by the Committee in its discretion. The Plan may also be terminated at any time by the Committee in its complete discretion. In the event of a Plan termination, the Committee determines in its discretion whether any incentive compensation should be paid for that year. In that circumstance, incentive compensation awards, if any, shall be calculated through the date of the Plan termination on such basis as the Committee deems appropriate in its discretion.

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**9. Participant Rights Not Assignable; Plan not a Contract**

Any awards made pursuant to the Plan shall not be subject to assignment, pledge or other disposition. Nothing contained in the Plan shall confer upon any employee any right to continued employment or to receive or continue to receive any rate of pay or other compensation, nor does the Plan affect the right of First Community to terminate a Participant's employment. Participation in the Plan does not confer rights to participation in other First Community or Bank programs or plans, including annual or long-term incentive plans, non-qualified retirement or deferred compensation plans or other executive perquisite programs.

**10. Ethical Statement**

First Community is committed to doing business in an honest and ethical manner and to complying with all applicable laws and regulations. Participant actions are expected to comply with the policies established by First Community and the Bank, including the Standards of Conduct, which are published on First Community's website. The Committee may determine on a case-by-case basis any reductions or eliminations of incentive payments under this Plan due to violations of policies or noncompliance by any Participant.

**11. Governing Law and Venue**

The parties agree that the interpretation and enforcement of the Plan shall be governed by the laws of the Commonwealth of Virginia, and that any action to enforce or determine any rights under the Plan shall be brought exclusively in the Circuit Court of Tazewell County, Virginia. The Participant consents and waives any objection to personal jurisdiction and venue in such court. The Plan, and any payments thereunder, shall not be subject to the Employee Retirement Income Security Act.

**12. Attorney**'**s Fees and Costs**

The parties agree that in the event of any legal action arising out of or relating to the interpretation or enforcement of the Plan, the parties shall pay their respective attorney fees and expenses, with no fee shifting of any sort.

**13. No Oral or Written Representations**

The parties agree that they have relied on no oral or written representation or promises not set forth herein, and that the terms of the Plan are set forth solely in the written Plan document and it constitutes the complete and entire agreement of the parties relating to the subject matter hereof.

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**14. Clawback**

Certain Participants may be subject to the clawback of any amounts paid under the Plan and will receive written notification should the clawback described in this paragraph apply. If First Community is required to restate its financial statements for any reporting period due to any misstatement or omission of material fact, any failure to report its financial condition or financial results in accordance with GAAP in any material respect, or any requirement of federal law or regulation, the notified Participant shall, unless otherwise determined in the sole discretion of the Committee, reimburse First Community upon receipt of written notification for any portion of an award payment resulting from the circumstance requiring such restatement. In calculating such amount, the Committee shall compare the calculation of the amount of award payment based on the restated financial statements to the amount of award payment based on the financial statements that were required to be restated. First Community has the right to modify a Participant's future incentive payments should repayment by the Participant not occur.

**15. Banking Regulatory Provision**

All incentive compensation awards under the Plan are subject to any condition, limitation or prohibition under any financial institution regulatory policy or rule to which First Community is subject.

Approved by the Compensation and Retirement Committee of the Board of Directors of First Community Bankshares, Inc. on May 24, 2022.

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**PARTICIPANT**'**S ACKNOWLEDGEMENT FORM**

I acknowledge that I have read and understand the Plan described above. I understand that the Plan is not a contract and may be revised, amended, or terminated at any time as more fully set forth above.

In lieu of Plan Attachments, I have been provided with an Incentive Plan Participant Worksheet showing the performance range used to determine funded incentives, percent of my salary as the range of potential payments of the cash incentive, KPI table with weights and performance ranges, and example calculation of the cash incentive.

PARTICIPANT:

<u> </u>

Signature

<u> </u>

Print Name

<u> </u>

Date

Please read the Plan carefully. Then sign this acknowledgement and return a copy of the same to: Ruth A. White. 

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| |
|:---|
| **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **Washington, D.C. 20549** |
| **FORM **8-K** |
| **CURRENT REPORT**  |
| **Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934** |
| Date of Report (Date of earliest event reported): June 13, 2022 |

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| |
|:---|
| **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) |

---

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| | | |
|:---|:---|:---|
| **Virginia** | **000-19297** | **55-0694814** |
| (State or other jurisdiction | (Commission | (IRS Employer |
| of incorporation) | File Number) | Identification No.) |

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| | |
|:---|:---|
| **P.O. Box 989**<br> **Bluefield**, Virginia** | **24605-0989** |
| (Address of principal executive offices) | (Zip Code) |

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Registrant's telephone number, including area code: **(**276**) **326-9000**<br>

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| | | |
|:---|:---|:---|
| Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |
| ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| **Securities registered pursuant to Section 12(b) of the Act:** | **Securities registered pursuant to Section 12(b) of the Act:** | **Securities registered pursuant to Section 12(b) of the Act:** |
| **Title of each class** | **Trading Symbol(s)** | **Name of each exchange on which registered** |
| Common Stock ($1.00 par value) | FCBC | NASDAQ Global Select |
| Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). | Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). | Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). |
| Emerging growth company ☐ | Emerging growth company ☐ | Emerging growth company ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |

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[**Table of Contents**](#toc)

**Item 5.04 Temporary Suspension of Trading Under Registrant**'**s Employee Benefit Plans.**

First Community Bankshares, Inc. (the "Company") and plan participants in the First Community Bankshares, Inc. Employee Stock Ownership and Savings Plan (the "Plan") received a notice dated June 13, 2022 that Stanley Benefits, the current trading platform for the Plan, will be transitioning the Plan to the American Trust platform starting on Thursday, July 14, 2022 (the "Transition"). As a result of the Transition, participants in the Plan were notified that they will be temporarily unable to direct or diversify the investment of assets in their Plan accounts beginning on July 14, 2022 and ending on July 18, 2022 (the "Blackout Period").

On June 17, 2022, the Company transmitted a notice (the "Notice") to its directors and executive officers informing them of the Blackout Period regarding the Plan. The Notice also informed the directors and executive officers that during the Blackout Period, directors and executive officers will be prohibited from directly or indirectly purchasing, selling or otherwise acquiring or transferring any Company equity securities or certain derivative securities previously acquired in connection with their service as a director or executive officer, unless exempt under Regulation BTR of the Securities Exchange Act of 1934.

The Notice is attached hereto as Exhibit 99.1 and is incorporated by reference herein.

**Item 9.01 Financial Statements and Exhibits.**

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| | | |
|:---|:---|:---|
| (d) | The following exhibit is included with this report: | The following exhibit is included with this report: |
|  | <u>Exhibit No.</u> | <u>Exhibit Description</u> |
|  | 99.1 | [Important Notice of Blackout Period to Directors and Executive Officers of First Community Bankshares, Inc.](#newex1) |
|  | 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |

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SIGNATURE

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

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| | | | |
|:---|:---|:---|:---|
| | | FIRST COMMUNITY BANKSHARES, INC. | FIRST COMMUNITY BANKSHARES, INC. |
| Date: | June 17, 2022 | By: | /s/ William P. Stafford II |
|  |  |  | William P. Stafford II |
|  |  |  | Chairman & Chief Executive Officer |

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[**Table of Contents**](#toc)

**Exhibit 99.1**

**Important Notice of Blackout Period to Directors and Executive Officers of**

**First Community Bankshares, Inc.**

**June 17, 2022**

**Pursuant to the Sarbanes-Oxley Act of 2002, and Rule 104 under Securities and Exchange Commission Regulation BTR, First Community Bankshares, Inc. (the** "**Company**"**) is hereby notifying you of upcoming temporary restrictions on your ability to engage in certain activities regarding Company equity securities.**

As a result of updating the trading platform of First Community Bankshares, Inc. Employee Stock Ownership and Savings Plan (the "Plan"), there will be a blackout period for Plan participants scheduled to begin on July 14, 2022 and expected to conclude July 18, 2022 (the "Blackout Period"). During the Blackout Period, Plan participants will not be permitted to direct or diversify investments in their accounts.

In accordance with Section 306(a) of the Sarbanes-Oxley Act of 2002 and the SEC's rules promulgated thereunder, during the Blackout Period, all directors and executive officers of the Company are prohibited, with limited exceptions from purchasing, selling or otherwise acquiring, disposing or transferring any Company common stock (including exercising Company stock options) or any derivatives of Company common stock, regardless of whether the individual participates in the Plan. As a director or executive officer of the Company, these prohibitions are not limited to those transactions involving your direct ownership but include any transaction in which you have a pecuniary interest (for example, transactions by your immediate family members living in your household).

If you engage in a transaction that violates these rules, you may be required to disgorge your profits from the transaction, and you may be subject to civil and criminal penalties. **Because of the complexity of these rules and the severity of the penalties and other remedies, please contact Sarah W. Harmon, Chief Administrative Officer, General Counsel, and Secretary at (276) 326-9000, or in writing at First Community Bank, P. O. Box 989, Bluefield, VA, 24605 before engaging in <u>any</u> transaction involving the Company**'**s equity securities during the Blackout Period.**

For additional information or if you have any questions regarding the Blackout Period please contact **Sarah W. Harmon, Chief Administrative Officer, General Counsel, and Secretary at (276) 326-9000, or in writing at P. O. Box 989, Bluefield, VA, 24605**.

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[**Table of Contents**](#toc)

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| |
|:---|
| **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **Washington, D.C. 20549** |
| **FORM **8-K** |
| **CURRENT REPORT**  |
| **Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934** |
| Date of Report (Date of earliest event reported): November 17, 2022 |

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| | |
|:---|:---|
|  | **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) |

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| | | |
|:---|:---|:---|
| **Virginia** | **000-19297** | **55-0694814** |
| (State or other jurisdiction | (Commission | (IRS Employer |
| of incorporation) | File Number) | Identification No.) |

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| | |
|:---|:---|
| **P.O. Box 989**<br> **Bluefield, **Virginia** | **24605-0989** |
| (Address of principal executive offices) | (Zip Code) |

---

Registrant's telephone number, including area code: **(**276**) **326-9000**

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| |
|:---|
| Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |
| ☒ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |

---

**Securities registered pursuant to Section 12(b) of the Act:**

---

| | |
|:---|:---|
| **Title of each class** | **Name of each exchange on which registered** |
| Common Stock ($1.00 par value)<br> FCBC | NASDAQ Global Select |

---

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). <br> Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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**Item 1.01 Entry into a Material Definitive Agreement** 

On November 17, 2022, First Community Bankshares, Inc. ("First Community") entered into an Agreement and Plan of Merger (the "Agreement") with Surrey Bancorp ("Surrey"), a North Carolina corporation headquartered in Mt. Airy, North Carolina under which First Community will acquire Surrey for a total valuation of approximately $113.20 million based on First Community's recent 10-day volume-weighted average price.

In accordance with the Agreement, Surrey will merge with and into First Community (the "Merger"). Surrey will cease to exist and First Community will survive and continue to exist as a Virginia corporation. At the effective time of the Merger, Surrey Bank & Trust, a wholly-owned subsidiary of Surrey, will merge with and into First Community Bank, a wholly-owned subsidiary of First Community (the "Bank Merger"). First Community Bank will survive the Bank Merger and continue to exist as a Virginia banking corporation.

The Agreement provides that upon consummation of the Merger, each outstanding share of common stock of Surrey will be converted into the right to receive 0.7159 shares of First Community common stock, par value $1.00 per share, which equates to $26.95 per share of Surrey common stock.

At the effective time of the Merger, two current members of the Surrey board of directors will be appointed to the First Community Bank board of directors.

The Agreement contains usual and customary representations and warranties that First Community and Surrey make to each other as of specific dates. Each party has also agreed to customary covenants, including, among others, covenants relating to the conduct of its business during the interim period between the execution of the Agreement and the consummation of the Merger.

The Merger, which received unanimous approval by both First Community's and Surrey' board of directors, is subject to approval of the shareholders of Surrey, the receipt of all required regulatory approvals, as well as other customary conditions.

The Agreement provides certain termination rights for both First Community and Surrey, including, among others, by mutual consent of the parties, by either party upon the failure to obtain the requisite regulatory approvals, by either party if the Merger is not consummated by July 31, 2023, by either party if the other materially breaches a representation, warranty, covenant or agreement, by either party for Surrey not obtaining the required shareholder vote, and by First Community if the Surrey board of directors changes its recommendation to its shareholders or fails to include the agreed board recommendation in the proxy statement/prospectus to be filed by First Community, Surrey breaches the non-solicitation covenants in the Agreement, or Surrey breaches its covenant to hold the Surrey shareholder meeting to vote on the Agreement.

The Merger Agreement provides that Surrey will pay a termination fee of $4.0 million to First Community if First Community terminates the Merger Agreement because (a) the Surrey board of directors changes its recommendation to its shareholders or fails to include the agreed board recommendation in the proxy statement/prospectus to be filed by First Community, (b) Surrey breaches the non-solicitation covenants in the Agreement in any material respect or (c) Surrey breaches its covenant to hold the Surrey shareholder meeting to vote on the Agreement in any material respect. Surrey is also required to pay the termination fee if (i) the Agreement is terminated by either party as a result of the Surrey board of directors changing its recommendation to its shareholders or the Merger is not consummated by July 31, 2023 as a result of Surrey not obtaining the required shareholder vote or by First Community as a result of Surrey's material breach of a representation, warranty, covenant or agreement, (ii) before the Surrey shareholder meeting or the date of termination, an acquisition proposal has been publicly announced, disclosed and communicated and (iii) within 12 months of such termination, Surrey enters into an agreement with respect to an acquisition proposal.

In connection with the Agreement, First Community entered into voting and support agreements with the directors of Surrey, in their capacities and shareholders. Pursuant to the terms of the voting and support agreements, each director of Surrey has agreed to vote the shares of Surrey common stock they own in favor of the Agreement.

The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreement, a copy of which is attached as Exhibit 2.1 to this Current Report on Form 8-K and is incorporated herein by reference. The Agreement has been attached as an exhibit to provide investors and security holders with information regarding its terms. It is not intended to provide any other financial information about First Community or its subsidiaries or affiliates. The representations, warranties and covenants contained in the Agreement were made only for purposes of that agreement and as of specific dates, are solely for the benefit of the parties to the Agreement, may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the parties that differ from those applicable to investors. Investors should not rely on the representations, warranties or covenants or any description thereof as characterizations of the actual state of facts or condition of First Community or any of its subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Agreement, which subsequent information may or may not be fully reflected in public disclosures by First Community.

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**Item 8.01 Other Events** 

On November 18, 2022, First Community and Surrey issued a joint press release and provided an investor presentation to interested parties concerning the acquisition of Surrey. Copies of the press release and investor presentation are attached hereto as Exhibits 99.1 and 99.2, and are being furnished to the Securities and Exchange Commission and shall not be deemed "filed" for any purpose.

**Item 9.01 Financial Statements and Exhibits** 

(d) Exhibits

2.1 [Agreement and Plan of Merger, dated as of November 17, 2022, by and between First Community Bankshares, Inc. and Surrey Bancorp (listed disclosure schedules have been omitted pursuant to Regulation S-K Item 601(b)(2). First Community agrees to furnish a supplemental copy of such schedule upon request of the SEC).](#a8k111722ex21)

99.1 [Press Release, dated November 18, 2022, issued by First Community Bankshares, Inc. and Surrey Bancorp.](#a8k111722ex991)

99.2 [Investor Presentation, dated November 18, 2022, issued by First Community Bankshares, Inc.](#a8k111722ex992)

104 Cover-Page Interactive Data File (embedded within the Inline XBRL document)

**Forward-Looking Statements** 

Certain of the statements made in this press release may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements, including statements regarding the intent, belief, or current expectations of First Community's management regarding the company's strategic direction, prospects, or future results or the benefits of the proposed transaction, are subject to numerous risks and uncertainties. These forward-looking statements are based upon the current beliefs and expectations of the respective managements of First Community and Surrey and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of First Community and Surrey. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the anticipated results discussed in these forward-looking statements because of possible uncertainties. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) the risk that the cost savings and revenue synergies anticipated in connection with the proposed transaction may not be realized or may take longer than anticipated to be realized, (2) disruption from the proposed transaction with customers, suppliers, or employee or other business relationships, (3) the occurrence of any event, change, or other circumstances that could give rise to the termination of the agreement and plan of merger, (4) the risk of successful integration of the two organizations' businesses, (5) the failure of Surrey shareholders to approve the proposed transaction, (6) the amount of costs, fees, expenses, and charges related to the proposed transaction, (7) the ability to obtain required governmental and regulatory approvals for the proposed transaction, (8) reputational risk and the reaction of the parties' customers to the proposed transaction, (9) the failure of the conditions to closing of the proposed transaction to be satisfied, (10) the risk that the integration of Surrey's operations with those of First Community will be materially delayed or will be more costly or difficult than expected, (11) the possibility that the proposed transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events, (12) the dilution caused by First Community's issuance of additional shares of its common stock in the proposed transaction, (13) changes in management's plans for the future, (14) prevailing economic and political conditions, particularly in our market areas, (15) credit risk associated with our lending activities, (16) changes in interest rates, loan demand, real estate values, and competition, (17) changes in accounting principles, policies, or guidelines, (18) changes in applicable laws, rules, or regulations, and (19) other competitive, economic, political, and market factors affecting our business, operations, pricing, products, and services. Certain additional factors which could affect the forward-looking statements can be found in First Community's annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, in each case filed with or furnished to the SEC and available on the SEC's website at <u>http://www.sec.gov</u> and in Surrey's annual reports by accessing Surrey's website at www.surreybank.com under the tab "About Us" and then under the heading "Investor Relations" and "Shareholder Relations". First Community and Surrey caution that the foregoing list of factors is not exclusive. All subsequent written and oral forward-looking statements concerning the proposed transaction or other matters attributable to First Community or Surrey or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements above. First Community and Surrey disclaim any obligation to update or revise any forward-looking statements contained in this press release, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise.

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**Additional Information About the Merger and Where to Find It** 

The information in this Current Report on Form 8-K shall not constitute an offer to sell, the solicitation of an offer to sell, or the solicitation of an offer to buy any securities or the solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. In connection with the proposed transaction, First Community will file a registration statement on Form S-4 with the Securities and Exchange Commission (the "SEC"), which will contain the proxy statement of Surrey and a prospectus of First Community. Shareholders of Surrey and other investors are urged to read the proxy statement/prospectus that will be included in the registration statement on Form S-4 that First Community will file with the SEC in connection with the proposed merger because it will contain important information about First Community, Surrey, the merger, the persons soliciting proxies in the merger and their interests in the merger and related matters. Investors will be able to obtain all documents filed with the SEC by First Community free of charge at the SEC's Internet site (http://www.sec.gov). In addition, documents filed with the SEC by First Community will be available free of charge from the Corporate Secretary of First Community Bankshares, Inc., P.O. Box 989, Bluefield, Virginia 24605-0989; telephone (276) 326-9000. The proxy statement/prospectus (when it is available) and the other documents may also be obtained for free by accessing First Community's website at www.ir.fcbresource.com under the tab "SEC Filings" or by accessing Surrey's website at www.surreybank.com under the tab "About Us" and then under the heading "Investor Relations" and "Shareholder Relations". You are urged to read the proxy statement/prospectus carefully before making a decision concerning the merger. You are urged to read the proxy statement/prospectus carefully before making a decision concerning the merger.

**Participants in the Transactions** 

First Community, Surrey and their respective directors, executive officers and certain other members of management and employees may be deemed "participants" in the solicitation of proxies from Surrey's shareholders in favor of the merger with First Community. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of the Surrey shareholders in connection with the proposed merger will be set forth in the proxy statement/prospectus when it is filed with the SEC.

You can find information about the executive officers and directors of First Community in its Annual Report on Form 10-K for the year ended December 31, 2021 and in its definitive proxy statement filed with the SEC on March 16, 2022. You can find information about Surrey's executive officers and directors in its Annual Report for the year ended December 31, 2020 by accessing Surrey's website at www.surreybank.com under the tab "About Us" and then under the heading "Investor Relations" and "Shareholder Relations". You can obtain free copies of these documents from First Community or Surrey using the contact information above.

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**Exhibit 2.1**

***Execution Version***

AGREEMENT AND PLAN OF MERGER

DATED AS OF NOVEMBER 17, 2022

BY AND BETWEEN

FIRST COMMUNITY BANKSHARES, INC.

AND

SURREY BANCORP

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[**Table of Contents**](#toc)

**<u>**TABLE OF CONTENTS**</u>**

**Page**

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| | | |
|:---|:---|:---|
| ARTICLE I DEFINITIONS | ARTICLE I DEFINITIONS | 1 |
| ARTICLE II THE MERGER | ARTICLE II THE MERGER | 8 |
| 2.1 | The Merger | 8 |
| 2.2 | Closing | 8 |
| 2.3 | Effective Time | 8 |
| 2.4 | Effects of the Merger | 8 |
| 2.5 | Effect on Outstanding Shares of Company Stock | 8 |
| 2.6 | Appraisal Rights | 9 |
| 2.7 | Exchange Procedures | 10 |
| 2.8 | Effect on Outstanding Shares of Purchaser Common Stock | 12 |
| 2.9 | Directors of Surviving Corporation After Effective Time | 12 |
| 2.1 | Articles of Incorporation and Bylaws | 12 |
| 2.11 | Treatment of Restricted Stock Awards | 12 |
| 2.12 | Bank Merger | 13 |
| 2.13 | Alternative Structure | 13 |
| 2.14 | Absence of Control | 13 |
| 2.15 | Additional Actions | 13 |
| 2.16 | Withholding | 14 |
| ARTICLE III REPRESENTATIONS AND WARRANTIES | ARTICLE III REPRESENTATIONS AND WARRANTIES | 14 |
| 3.1 | Disclosure Letters; Standard | 14 |
| 3.2 | Representations and Warranties of the Company | 15 |
| 3.3 | Representations and Warranties of Purchaser | 36 |
| ARTICLE IV CONDUCT PENDING THE MERGER | ARTICLE IV CONDUCT PENDING THE MERGER | 48 |
| 4.1 | Forbearances by the Company | 48 |
| 4.2 | Forbearances by Purchaser | 52 |
| ARTICLE V COVENANTS | ARTICLE V COVENANTS | 53 |
| 5.1 | Acquisition Proposals | 53 |
| 5.2 | Advice of Changes | 54 |
| 5.3 | Access and Information | 54 |
| 5.4 | Applications; Consents | 56 |
| 5.5 | Anti-Takeover Provisions | 57 |
| 5.6 | Additional Agreements | 57 |
| 5.7 | Publicity | 57 |
| 5.8 | Shareholder Meeting | 58 |
| 5.9 | Registration of Purchaser Common Stock | 59 |
| 5.1 | Notification of Certain Matters | 59 |
| 5.11 | Employee Benefit Matters | 60 |
| 5.12 | Indemnification | 62 |
| 5.13 | Shareholder Litigation | 63 |
| 5.14 | Disclosure Supplements | 63 |
| 5.15 | Director Appointments | 64 |
| 5.16 | Dividends | 64 |
| 5.17 | Loan Program Credentialing | 64 |

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| | | |
|:---|:---|:---|
| ARTICLE VI CONDITIONS TO CONSUMMATION | ARTICLE VI CONDITIONS TO CONSUMMATION | 64 |
| 6.1 | Conditions to Each Party's Obligations | 64 |
| 6.2 | Conditions to the Obligations of Purchaser | 65 |
| 6.3 | Conditions to the Obligations of the Company | 66 |
| ARTICLE VII TERMINATION | ARTICLE VII TERMINATION | 66 |
| 7.1 | Termination | 66 |
| 7.2 | Termination Fee; Expenses | 69 |
| 7.3 | Effect of Termination | 69 |
| ARTICLE VIII CERTAIN OTHER MATTERS | ARTICLE VIII CERTAIN OTHER MATTERS | 69 |
| 8.1 | Interpretation | 69 |
| 8.2 | Survival | 70 |
| 8.3 | Waiver; Amendment | 70 |
| 8.4 | Counterparts | 70 |
| 8.5 | Governing Law | 70 |
| 8.6 | Expenses | 70 |
| 8.7 | Notices | 70 |
| 8.8 | Entire Agreement; etc | 71 |
| 8.9 | Successors and Assigns; Assignment | 71 |
| 8.10 | Severability | 72 |
| 8.11 | Specific Performance | 72 |
| 8.12 | Waiver of Jury Trial | 72 |
| 8.13 | Delivery by Facsimile or Electronic Transmission | 72 |

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Exhibit A Form of Company Voting Agreement

Exhibit B Bank Agreement and Plan of Merger

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[**Table of Contents**](#toc)

**AGREEMENT AND PLAN OF MERGER**

This is an **Agreement and Plan of Merger**, dated as of November 17, 2022, by and between First Community Bankshares, Inc., a Virginia corporation ("**Purchaser**"), and Surrey Bancorp, a North Carolina corporation (the "**Company**").

**INTRODUCTORY STATEMENT**

The Boards of Directors of each of Purchaser and the Company have unanimously determined that this Agreement and the business combination and related transactions contemplated hereby are advisable and in the respective best interests of Purchaser and the Company and in the best interests of their respective shareholders.

The parties hereto intend that the Merger (as defined herein) shall qualify as a "reorganization" under the provisions of Section 368(a) of the IRC (as defined herein) for federal income tax purposes and that this Agreement be and is hereby adopted as a "plan of reorganization" within the meaning of Sections 354 and 361 of the IRC.

Purchaser and the Company each desire to make certain representations, warranties and agreements in connection with the business combination and related transactions provided for herein and to prescribe various conditions to such transactions.

As a condition and inducement to Purchaser's willingness to enter into this Agreement, each member of the Board of Directors of the Company has entered into an agreement dated as of the date hereof in the form of <u>Exhibit A</u>, pursuant to which he or she will vote his or her shares of Company Common Stock in favor of this Agreement and the transactions contemplated hereby (each, a "**Company Voting Agreement**").

In consideration of their mutual promises and obligations hereunder, the parties hereto adopt and make this Agreement and prescribe the terms and conditions hereof and the manner and basis of carrying it into effect, which shall be as follows:

**ARTICLE I**<br> **DEFINITIONS**

The following terms are defined in this Agreement in the Section indicated:

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| | |
|:---|:---|
| **<u>Defined Term</u>** | **<u>Location of Definition</u>** |
| Additional Cash Payment Per Share | Section 7.1(g)(ii)(b) |
| ALLL | Section 3.2(h)(ii) |
| Appraisal Shares | Section 2.6 |
| Appraisal Shareholder | Section 2.6 |
| Articles of Merger | Section 2.3 |
| Audited Financial Statements | Section 3.2(h)(i) |
| Average Index Price | Section 7.1(g) |
| Average Purchaser Stock Price | Section 7.1(g) |
| Bank Call Reports | Section 3.2(h)(ii) |
| Bank Merger  | Section 2.12 |

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[**Table of Contents**](#toc)

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| | |
|:---|:---|
| **<u>Defined Term</u>** | **<u>Location of Definition</u>** |
| Bank Merger Certificates | Section 2.12 |
| BHCA<br> Burdensome Condition | Section 3.2(a)<br> Section 5.6 |
| Change of Recommendation | Section 5.8(b) |
| Closing | Section 2.2 |
| Closing Date | Section 2.2 |
| Company | Preamble |
| Company Bank | Section 2.2 |
| Company Benefit Plans | Section 3.2(r)(i) |
| Company Contract | Section 3.2(o)(ii) |
| Company ERISA Affiliate | Section 3.2(r)(i) |
| Company Intellectual Property | Section 3.2(p)(i) |
| Company IT Systems | Section 3.2(p)(ii) |
| Company Qualified Plans | Section 3.2(r)(iv) |
| Company Shareholder Meeting | Section 5.8(a) |
| Company Voting Agreement | Introductory Statement |
| Confidentiality Agreement | Section 5.1(a) |
| Continuing Employee | Section 5.11(a) |
| Designated Directors | Section 5.15 |
| Disclosure Letter | Section 3.1(a) |
| DOL | Section 3.2(r)(ii) |
| Effective Time | Section 2.3 |
| Enforceability Exceptions | Section 3.2(d) |
| Exchange Agent | Section 2.7(a) |
| Exchange Ratio | Section 2.5(a) |
| Financial Statements | Section 3.2(h)(i) |
| Indemnified Party | Section 5.12(a) |
| Index Ratio | Section 7.1(g)(ii) |
| Letter of Transmittal | Section 2.7(a) |
| Liabilities | Section 3.2(i) |
| Malicious Code | Section 3.2(p)(ii) |
| Merger | Section 2.1 |
| Merger Consideration | Section 2.5(a) |
| Multiemployer Plan | Section 3.2(r)(vi) |
| Multiple Employer Plan | Section 3.2(r)(vi) |
| NCCOB | Section 3.2(f) |
| OREO | Section 4.1(d) |
| Outside Date | Section 7.1(d) |
| Personal Information<br> PBGC | Section 3.2(p)(ii)<br> Section 3.2(r)(ii) |
| Premium Cap | Section 5.12(c) |
| Privacy Obligations | Section 3.2(p)(ii) |
| Proxy Statement-Prospectus | Section 5.9(a) |
| Purchaser | Preamble |
| Purchaser Bank | Section 2.2 |

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| | |
|:---|:---|
| **<u>Defined Term</u>** | **<u>Location of Definition</u>** |
| Purchaser Benefit Plans | Section 3.3(q)(i) |
| Purchaser Contract | Section 3.3(p)(i) |
| Purchaser ERISA Affiliate | Section 3.3(q)(i) |
| Purchaser IT Systems | Section 3.3(x) |
| Purchaser Preferred Stock | Section 3.3(c)(i) |
| Purchaser Qualified Plans | Section 3.3(q)(iii) |
| Purchaser Ratio | Section 7.1(g)(ii) |
| Purchaser Reports | Section 3.3(h) |
| Representatives | Section 5.1(a) |
| Requisite Company Vote | Section 7.1(b) |
| SBA | Section 3.2(w)(iii) |
| Starting Index Price | Section 7.1(g) |
| Starting Purchaser Price | Section 7.1(g) |
| Surviving Corporation | Section 2.1 |
| Termination Fee | Section 7.2(a) |
| Unvested Company Restricted Stock | Section 2.11 |
| USDA | Section 3.2(w)(iii) |
| VSCCBFI | Section 3.2(f) |

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For purposes of this Agreement:

"**Acquisition Proposal**" means any indication of interest, proposal or offer, whether or not in writing, with respect to any of the following (other than the transactions contemplated hereunder): (i) any merger, consolidation, share exchange, business combination, or other similar transaction or series of transactions involving the Company or any of its Subsidiaries; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more of the Company's consolidated assets in a single transaction or series of transactions or 20% or more of any class of equity or voting securities of the Company or any of its Subsidiaries; (iii) any tender offer or exchange offer for 20% or more of the outstanding voting or equity securities of the Company or any of its Subsidiaries or the filing of a registration statement under the Securities Act in connection therewith; (iv) any transaction that is similar in form, substance or purpose to any of the foregoing transactions, or any combination of the foregoing; or (v) any public announcement, notice or regulatory filing of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing.

"**Affiliate**" means, with respect to a Person, any person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with such Person.

"**Agreement**" means this Agreement and Plan of Merger, including the exhibits and schedules hereto, each as amended, modified or restated from time to time in accordance with its terms.

"**Business Day**" means any day other than a Saturday, Sunday or federal holiday.

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"**Certificate**" means a certificate evidencing one or more shares of Company Common Stock or Company Class A Common Stock held by the respective holders of such shares.

"**COBRA**" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the regulations promulgated thereunder.

"**Company 401(k) Plan**" means the Pentegra Defined Contribution Plan for Financial Institutions.

"**Company Class A Common Stock**" means that portion of the common stock of the Company designated as Class A Common Stock, having no par value per share and no voting rights, except as otherwise required by applicable law.

"**Company Common Stock**" means that portion of the common stock of the Company designated as Common Stock, having no par value per share and unlimited voting rights.

"**Company Preferred Stock**" means the preferred stock, no par value per share, of the Company.

"**Company Restricted Stock Plan**" means the 2017 Long-Term Stock Incentive Plan of the Company.

"**Consumer Protection Laws**" means, collectively, the Consumer Financial Protection Act of 2010, Public Law 111-203, enacted as Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; the enumerated consumer laws set forth in 12 U.S.C. Section 5481(12) (including, for the avoidance of doubt, the USA PATRIOT Act of 2001 and the Telephone Consumer Protection Act of 1991); the identity theft red flags provisions of the Fair Credit Reporting Act set forth in 15 U.S.C. Section 1681m(e); Section 5 of the Federal Trade Commission Act set forth in 15 U.S.C. Section 45; all state and local consumer protection and unfair or deceptive trade practices laws, and all other laws that apply to the Company and its Subsidiaries that have the intent or effect to protect their respective consumer customers against the acts, errors or omissions of Company and its Subsidiaries, and all licensing requirements, regulations, guidelines, policies, and guidance implementing the aforementioned laws.

"**CRA**" means the Community Reinvestment Act of 1977, as amended.

"**Determination Date**" shall mean the latest of: (i) the date on which the last regulatory approval necessary is received (disregarding any waiting period) to meet the condition in *Section 6.1(b)*; or (ii) the date on which the Requisite Company Vote is received.

"**Environmental Law**" means any federal, state or local law, statute, ordinance, rule, code, order or regulation relating to (i) the protection, preservation or restoration of the environment (which includes, without limitation, air, water vapor, surface water, groundwater, drinking water supply, soil, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety as it relates to Hazardous Materials, or (ii) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of, Hazardous Materials, in each case as amended and as now in effect. The term Environmental Law includes, without limitation, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Occupational Safety and Health Act of 1970 as it relates to Hazardous Materials, each as amended and as now in effect.

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"**ERISA**" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.

"**Exchange Act**" means the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder.

"**Excluded Shares**" means Appraisal Shares and shares of Company Common Stock and Company Class A Common Stock owned or held, other than in a bona fide fiduciary or agency capacity or in satisfaction of a debt previously contracted, by Purchaser, by the Company or by a Subsidiary of either Purchaser or the Company.

"**FDIC**" means the Federal Deposit Insurance Corporation.

"**Federal Reserve**" means the Board of Governors of the Federal Reserve System.

"**FHLB**" means the Federal Home Loan Bank of Atlanta.

"**GAAP**" means U.S. generally accepted accounting principles.

"**Governmental Entity**" means any domestic or foreign governmental or regulatory authority, agency, court, commission, or other administrative entity or SRO.

"**Hazardous Material**" means any substance (whether solid, liquid or gas) that is detrimental to human health or safety or to the environment, currently or hereafter listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law, whether by type or by quantity, including any substance containing any such substance as a component. Hazardous Material includes, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance, oil or petroleum, or any derivative or by- product thereof, radon, radioactive material, asbestos, asbestos-containing material, urea formaldehyde foam insulation, lead and polychlorinated biphenyl.

"**IRC**" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

"**IRS**" means the Internal Revenue Service.

"**Knowledge**" means, with respect to Purchaser, the actual knowledge of those senior officers set forth in Purchaser's Disclosure Letter and, with respect to the Company, the actual knowledge of those senior officers set forth in the Company's Disclosure Letter.

"**Lien**" means any charge, mortgage, pledge, security interest, claim, lien or encumbrance.

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"**Loan**" means a loan, lease, advance, credit enhancement, guarantee, participation interest in a loan, or other extension of credit.

"**Loan Property**" means any property in which the applicable party (or a Subsidiary of it) holds a security interest and, where required by the context, includes the owner or operator of such property, but only with respect to such property.

"**Material Adverse Effect**" means an effect, circumstance, occurrence or change that, individually or in the aggregate (A) is material and adverse to the business, financial condition or results of operations of the Company or Purchaser, as the context may dictate, and its Subsidiaries, taken as a whole, or (B) materially prevents, impairs or threatens the ability of either the Company or Purchaser, as the context may dictate, to perform its obligations under this Agreement or timely consummate the transactions contemplated by this Agreement; *provided, however*, that any such effect, circumstance, occurrence or change resulting from any (i) changes, after the date hereof, in laws, rules or regulations or GAAP or regulatory accounting requirements or interpretations thereof that apply to financial and/or depository institutions and/or their holding companies generally, (ii) changes, after the date hereof, in economic conditions affecting financial institutions generally, including, but not limited to, changes in the general level of market interest rates, (iii) actions and omissions of Purchaser or the Company required under this Agreement, including expenses incurred by the parties in consummating the transactions contemplated by this Agreement, (iv) worsening of national or international political or social conditions including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack upon or within the United States, (v) natural disaster or other force majeure event, and (vi) any failure, in and of itself, to meet internal or other estimates, predictions, projections or forecasts of revenue, net income or any other measure of financial performance (except to the extent that, with respect to this clause (vi), the facts or circumstances giving rise or contributing to failure to meet estimates or projections may be deemed to constitute, or be taken into account in determining whether there has been, a Material Adverse Effect, except to the extent such facts or circumstances are themselves excepted from the definition of Material Adverse Effect pursuant to any other clause of this definition) shall not be considered in determining if a Material Adverse Effect has occurred, except, with respect to clauses (i), (ii), (iv) and (v), to the extent that the effects of such effect, circumstance, occurrence or change are materially disproportionately adverse to the business, financial condition or results of operations of such party and its Subsidiaries, taken as a whole, as compared to comparable U.S. banking organizations.

"**NASDAQ**" means the NASDAQ Global Select Market.

"**NCBCA**" means the North Carolina Business Corporation Act.

"**NCSOS**" means the North Carolina Secretary of State.

"**Participation Facility**" means any facility in which the applicable party (or a Subsidiary of it) participates in the management (including all property held as trustee or in any other fiduciary capacity) of the facility and, where required by the context, includes the owner or operator of such property, but only with respect to such property.

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"**Person**" means an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization or other entity.

"**Purchaser Common Stock**" means the voting common stock, $1.00 par value per share, of Purchaser.

"**Registration Statement**" means a registration statement on Form S-4 (and any amendments or supplements thereto) with respect to the issuance of Purchaser Common Stock in the Merger.

"**SEC**" means the U.S. Securities and Exchange Commission.

"**Securities Act**" means the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

"**Significant Subsidiary**" means as such term is defined in Rule 1-02 of Regulation S-X promulgated under the Exchange Act, substituting as applicable, the Company or Purchaser as the "registrant."

"**SRO**" means (i) any "self-regulatory organization" as defined in Section 3(a)(26) of the Exchange Act and (ii) any other United States or foreign securities exchange, futures exchange, commodities exchange or contract market.

"**Subsidiary**" means a corporation, limited liability company, partnership, joint venture or other entity in which the Company or Purchaser, as applicable, has, directly or indirectly, an equity interest representing 50% or more of any class of the capital stock thereof or other equity interests therein.

"**Superior Proposal**" means an unsolicited, bona fide written offer or proposal made by a third party to consummate an Acquisition Proposal that: (i) the Company's Board of Directors determines in good faith, after consulting with its outside legal counsel and its financial advisor, would, if consummated, result in a transaction that is more favorable to the shareholders of the Company than the transactions contemplated hereby (taking into account all factors relating to such proposed transaction deemed relevant by the Company's Board of Directors, including without limitation, the amount and form of consideration, the timing of payment, the liquidity of the offeror's common stock, the risk of consummation of the transaction, the financing thereof and all other conditions thereto (including any adjustments to the terms and conditions of such transactions proposed by Purchaser in response to such Acquisition Proposal)); (ii) is for 100% of the outstanding shares of Company Common Stock and Company Class A Common Stock or all or substantially all of the assets of the Company; and (iii) is reasonably likely to be completed on the terms proposed, in each case taking into account all legal, financial, regulatory and other aspects of such Acquisition Proposal.

"**Taxes**" means all federal, state, local, and foreign income, excise, franchise, gross receipts, ad valorem, profits, real and personal property, capital, sales, transfer, use, license, and gains, payroll, wage and employment, social security, severance, unemployment, withholding, duties, excise, windfall profits, intangibles, franchise, backup withholding, value added, alternative or add-on minimum, estimated and other taxes, charges, fees, levies or like assessments together with all penalties and additions to tax and interest thereon.

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"**VASCC**" means the Virginia State Corporation Commission.

"**VSCA**" means the Virginia Stock Corporation Act, as amended.

**ARTICLE II**<br> **THE MERGER**

**2.1 The Merger**. Upon the terms and subject to the conditions set forth in this Agreement, the Company will merge with and into Purchaser (the "**Merger**") at the Effective Time. At the Effective Time, the separate corporate existence of the Company shall cease. Purchaser shall be the surviving corporation (hereinafter sometimes referred to in such capacity as the "**Surviving Corporation**") in the Merger and shall continue to be governed by the VSCA and its name and separate corporate existence, with all of its rights, privileges, immunities, powers and franchises, shall continue unaffected by the Merger.

**2.2 Closing**. The closing of the Merger (the "**Closing**") will take place by the electronic (PDF), facsimile or overnight courier exchange of executed documents or at a location and time as agreed to by the parties hereto and the parties agree to cause the date of the Closing (the "**Closing Date**") to occur on the date that is immediately prior to the conversion of the data processing systems of Surrey Bank & Trust, a wholly-owned subsidiary of the Company ("**Company Bank**"), with the data processing systems of First Community Bank, a wholly-owned subsidiary of Purchaser ("**Purchaser Bank**"); *provided*, that if such date shall not have occurred by April 21, 2023, then the parties shall cause the Closing Date to occur on the date that is fifteen (15) calendar days following the satisfaction or waiver (subject to applicable law) of the conditions set forth in Article VI (other than those conditions that by their nature are to be satisfied at the Closing), or such later date as the parties may otherwise agree.

**2.3 Effective Time**. In connection with the Closing, Purchaser and the Company shall duly execute and deliver articles of merger to the VASCC and NCSOS, to the extent required by the relevant provision of the VSCA and the NCBCA (the "**Articles of Merger**"). The Merger shall become effective on such date and time as the Articles of Merger are duly filed or at such later date or time as Purchaser and the Company agree and specify in the Articles of Merger (the date and time the Merger becomes effective being the "**Effective Time**").

**2.4 Effects of the Merger**. The Merger will have the effects set forth in this Agreement, the VSCA and the NCBCA. Without limiting the generality of the foregoing, and subject thereto, from and after the Effective Time, Purchaser shall possess all the properties, rights, privileges, powers and franchises of the Company and be subject to all of the debts, liabilities and obligations of the Company.

**2.5 Effect on Outstanding Shares of Company Stock.**

(a) Subject to *Section 2.5(b)*, by virtue of the Merger, automatically and without any action on the part of the holder thereof, each share of Company Common Stock and Company Class A Common Stock issued and outstanding immediately prior to the Effective Time, other than Excluded Shares, shall become and be converted into the right to receive, without interest, 0.7159 shares (the "**Exchange Ratio**") of Purchaser Common Stock (the "**Merger Consideration**").

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(b) Notwithstanding any other provision of this Agreement, no fraction of a share of Purchaser Common Stock and no certificates or scrip therefor will be issued in the Merger; instead, Purchaser shall pay to each holder of Company Common Stock and Company Class A Common Stock who would otherwise be entitled to a fraction of a share of Purchaser Common Stock an amount in cash, rounded to the nearest cent, determined by multiplying such fraction by the Average Purchaser Stock Price.

(c) If, between the date of this Agreement and the Effective Time, the outstanding shares of Purchaser Common Stock, Company Common Stock, or Company Class A Common Stock shall have been increased, decreased, changed into or exchanged for a different number of shares or into a different kind of shares or securities by reason of any stock dividend, stock repurchase, subdivision, reclassification, recapitalization, split, combination, exchange of shares or other similar change in capitalization, or there shall be any extraordinary dividend or distribution (for the avoidance of doubt, any quarterly cash dividend declared by the Company or Purchaser or any other dividend declared by the Company as contemplated by Section 4.1(c) of the Company's Disclosure Letter shall not be considered an extraordinary dividend or distribution for the purposes of this subsection) paid, the Exchange Ratio shall be adjusted appropriately and proportionately to provide the holders of Company Common Stock and Company Class A Common Stock the same economic effect as contemplated by this Agreement before such event; *provided*, that nothing in this sentence shall be construed to permit Purchaser or the Company to take any action with respect to its securities that is prohibited by the terms of this Agreement. Notwithstanding any other provisions of this *Section 2.5(c)*, no adjustment shall be made in the event of the issuance of additional shares of Purchaser Common Stock as consideration in a transaction where Purchaser is the surviving corporation or in connection with any offering of shares where Purchaser receives consideration in exchange for the shares so offered.

(d) As of the Effective Time, except for Appraisal Shares, each Excluded Share shall be canceled and retired and shall cease to exist, and no exchange or payment shall be made with respect thereto. All shares of Purchaser Common Stock that are held by the Company, if any, other than shares held in a fiduciary capacity or in satisfaction of a debt previously contracted, shall be canceled and shall constitute authorized but unissued shares.

**2.6 Appraisal Rights**. Each outstanding share of Company Common Stock and Company Class A Common Stock, the holder of which has perfected his right to appraisal under the NCBCA (an "**Appraisal Shareholder**") and has not effectively withdrawn or lost such right as of the Effective Time (the "**Appraisal Shares**") shall not be converted into or represent the right to receive the Merger Consideration hereunder and shall be entitled only to such rights as are available to such holder pursuant to the applicable provisions of the NCBCA. Each holder of an Appraisal Share shall be entitled to receive the value of such Appraisal Share held by him in accordance with the applicable provisions of the NCBCA; *provided*, that such holder complies with the procedures contemplated by and set forth in the applicable provisions of the NCBCA. If any holder of any Appraisal Share shall effectively withdraw or lose such holder's appraisal rights under the applicable provisions of the NCBCA, each such Appraisal Share shall be exchangeable for the right to receive the Merger Consideration pursuant to *Section 2.5(a)*. The Company shall promptly notify Purchaser of each shareholder who asserts rights as an Appraisal Shareholder following receipt of such shareholder's written demand delivered as provided in the NCBCA. Prior to the Effective Time, the Company shall not, except with the prior written consent of Purchaser, voluntarily make any payment or commit or agree to make any payment, or settle or commit or offer to settle, any rights of an Appraisal Shareholder asserted under the NCBCA.

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**2.7 Exchange Procedures.**

(a) At or before the Effective Time, Purchaser shall deposit, or shall cause to be deposited, with an exchange agent company designated by Purchaser and reasonably acceptable to the Company (the "**Exchange Agent**"), pursuant to an agreement entered into before the Closing, for the benefit of the holders of record of shares of Company Common Stock and Company Class A Common Stock, whose shares have been converted into the right to receive the Merger Consideration, for exchange in accordance with this *Section 2.7, (i)* the number of shares of Purchaser Common Stock sufficient to deliver the aggregate Merger Consideration to be delivered in whole shares and (ii) any cash payable in lieu of fractional shares pursuant to *Section 2.5(b)*, and Purchaser shall instruct the Exchange Agent to timely deliver the Merger Consideration. Appropriate transmittal materials, which shall include a form letter of transmittal for each holder to utilize to exchange the holder's shares ("**Letter of Transmittal**"), shall be mailed as soon as practicable after the Effective Time to each holder of record of Company Common Stock and Company Class A Common Stock. Where shares of Company Common Stock and/or Company Class A Common Stock are represented by one of more Certificates, a completed Letter of Transmittal from a holder to the Exchange Agent will be deemed properly completed only if the completed Letter of Transmittal is accompanied by one or more Certificates representing Company Common Stock and Company Class A Common Stock (or customary affidavits and, if required by Purchaser pursuant to *Section 2.7(h)*, indemnification regarding the loss or destruction of such Certificates or the guaranteed delivery of such Certificates) representing all shares of Company Common Stock and Company Class A Common Stock to be converted thereby. Except as otherwise provided in this *Section 2.7(a)*, Purchaser shall pay all charges and expenses, including those of the Exchange Agent, in connection with the distribution of the Merger Consideration as provided in *Section 2.7*.

(b) At and after the Effective Time, each Certificate and book entry notation evidencing ownership of shares of Company Common Stock or Company Class A Common Stock shall represent only the right to receive the Merger Consideration, and as to Appraisal Shares, shall represent only the right to receive applicable payments as set forth in *Section 2.6*. The Company shall provide to the Exchange Agent all information reasonably necessary for it to perform its obligations as specified herein.

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(c) The transmittal materials shall (i) specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, (ii) be in a form and contain any other provisions as Purchaser may reasonably determine, (iii) include instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration, and (iv) shall contain appropriate instructions for the distribution of the Merger Consideration to holders of Company Common Stock and Company Class A Common Stock held in book entry notation form in the Company's stock records. Upon (i) the proper surrender of any Certificates to the Exchange Agent, together with a properly completed and duly executed Letter of Transmittal or (ii) the delivery of properly completed instructions effecting surrender of shares the ownership of which is evidenced by book entry notations, the holder of such shares of Company Common Stock and Company Class A Common Stock shall be entitled to receive in exchange therefor a statement reflecting shares issued in book entry form, representing that number of whole shares of Purchaser Common Stock that such holder has the right to receive pursuant to *Section 2.5(a)* and a check in the amount equal to any cash in lieu of fractional shares such holder is entitled to pursuant to *Section 2.5(b)* and any dividends or other distributions to which such holder is entitled to pursuant to *Section 2.7(d)*. Certificates so surrendered shall forthwith be canceled. As soon as practicable following receipt of the properly completed Letter of Transmittal and any necessary accompanying documentation, the Exchange Agent shall distribute Purchaser Common Stock and cash in lieu of fractional shares as provided herein. The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of Purchaser Common Stock held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such shares for the account of the Persons entitled thereto. If there is a transfer of ownership of any shares of Company Common Stock or Company Class A Common Stock not registered in the transfer records of the Company, the Merger Consideration shall be issued to the transferee thereof if the Certificates representing such Company Common Stock or Company Class A Common Stock are presented to the Exchange Agent, accompanied by all documents required, in the reasonable judgment of Purchaser and the Exchange Agent, to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid.

(d) No dividends or other distributions declared or made after the Effective Time with respect to Purchaser Common Stock issued pursuant to this Agreement shall be remitted to any Person entitled to receive shares of Purchaser Common Stock hereunder until such Person surrenders his or her Certificates or effects surrender of his or her shares the ownership of which is evidenced by book entry notations in accordance with this *Section 2.7*. Upon the surrender of such Person's Certificates or surrender of shares the ownership of which is evidenced by book entry notations, such Person shall be entitled to receive any dividends or other distributions, without interest thereon, which after the Effective Time had become payable but not paid with respect to shares of Purchaser Common Stock represented by such Person's Certificates or such book entry notations.

(e) The stock transfer books of the Company shall be closed immediately upon the Effective Time and from and after the Effective Time there shall be no transfers on the stock transfer records of the Company of any shares of Company Common Stock or Company Class A Common Stock. If, after the Effective Time, Certificates are presented to Purchaser, they shall be canceled and exchanged for the Merger Consideration deliverable in respect thereof pursuant to this Agreement in accordance with the procedures set forth in this *Section 2.7*.

(f) Any portion of the aggregate amount of cash to be paid in lieu of a fraction of a share of Purchaser Common Stock pursuant to *Section 2.5*, any dividends or other distributions to be paid pursuant to this *Section 2.7* or any proceeds from any investments thereof that remain unclaimed by the holders of Company Common Stock or Company Class A Common Stock for six (6) months after the Effective Time shall be repaid by the Exchange Agent to Purchaser upon the written request of Purchaser. After such request is made, each holder of Company Common Stock or Company Class A Common Stock who has not theretofore complied with this *Section 2.7* shall look only to Purchaser for the Merger Consideration deliverable in respect of each share of Company Common Stock or Company Class A Common Stock such shareholder holds, as determined pursuant to *Section 2.5* of this Agreement, without any interest thereon. Notwithstanding the foregoing, neither the Exchange Agent nor any party to this Agreement (or any Affiliate thereof) shall be liable to any former holder of Company Common Stock or Company Class A Common Stock for any amount delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.

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(g) Purchaser and the Exchange Agent shall be entitled to rely upon the Company's stock transfer books to establish the identity of those Persons entitled to receive the Merger Consideration, which books shall be conclusive with respect thereto. The Company shall provide to the Exchange Agent all information reasonably necessary for it to perform its obligations as specified herein. In the event of a dispute with respect to ownership of stock represented by any Certificate, Purchaser and the Exchange Agent shall be entitled to deposit any Merger Consideration represented thereby in escrow with an independent third party and thereafter be relieved with respect to any claims thereto.

(h) If any Certificate shall have been lost, stolen, mutilated or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen, mutilated or destroyed and the posting by such Person of a bond in such amount as the Exchange Agent may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof pursuant to *Section 2.5*.

**2.8 Effect on Outstanding Shares of Purchaser Common Stock**. At the Effective Time, and except as provided in *Section 2.5(d)*, each share of Purchaser Common Stock issued and outstanding immediately before the Effective Time shall remain an issued and outstanding share of common stock of the Surviving Corporation and shall not be affected by the Merger.

**2.9 Directors of Surviving Corporation After Effective Time**. Immediately after the Effective Time, until their respective successors are duly elected or appointed and qualified, the directors of the Surviving Corporation shall consist of the directors of Purchaser serving immediately before the Effective Time.

**2.10 Articles of Incorporation and Bylaws**. The articles of incorporation of Purchaser, as in effect immediately before the Effective Time, shall be the articles of incorporation of the Surviving Corporation until thereafter amended in accordance with applicable law and the terms thereof. The bylaws of Purchaser, as in effect immediately before the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter amended in accordance with applicable law and the terms of such bylaws.

**2.11 Treatment of Restricted Stock Awards**. At the Effective Time, each share of restricted stock awarded to any employee or service provider of the Company or any of its Subsidiaries under the Company Restricted Stock Plan that is unvested and subject to restrictions ("**Unvested Company Restricted Stock**") shall fully vest only in accordance with the terms of the Company Restricted Stock Plan and the applicable award agreement, and be canceled and converted automatically into the right to receive the Merger Consideration payable pursuant to *Section 2.5* on the shares of Company Common Stock underlying the Unvested Company Restricted Stock, treating the shares of Unvested Company Restricted Stock in the same manner as all other shares of Company Common Stock for such purposes.

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**2.12 Bank Merger**. Upon the execution and delivery of this Agreement, Purchaser Bank and Company Bank shall enter into the Bank Agreement and Plan of Merger, in the form attached hereto as <u>Exhibit B</u>, pursuant to which Company Bank shall merge with and into Purchaser Bank (the "**Bank Merger**"). The parties intend that the Bank Merger will become effective immediately following the Effective Time. Prior to the Effective Time, the Company shall cause Company Bank, and Purchaser shall cause Purchaser Bank, to execute such certificates or articles of merger and such other documents and certificates as are necessary to effectuate the Bank Merger ("**Bank Merger Certificates**").

**2.13 Alternative Structure**. Notwithstanding anything to the contrary contained in this Agreement, before the Effective Time, Purchaser may specify that the structure of the transactions contemplated by this Agreement be revised and the parties shall enter into such alternative transactions as Purchaser may reasonably determine to effect the purposes of this Agreement; *provided, however*, that such revised structure shall not (i) alter or change the amount or kind of the Merger Consideration, (ii) materially impede or delay consummation of the transactions contemplated by this Agreement, or (iii) adversely limit or impact the qualification of the Merger as a "reorganization" under the provisions of Section 368(a) of the IRC. If Purchaser elects to make such a revision, the parties agree to execute appropriate documents to reflect the revised structure.

**2.14 Absence of Control**. It is the intent of the parties hereto that Purchaser, by reason of this Agreement, shall not be deemed (until consummation of the transactions contemplated hereby) to control, directly or indirectly, the Company or its Subsidiaries or to exercise, directly or indirectly, a controlling influence over the management, policies or operation of the Company or its Subsidiaries. Nothing contained in this Agreement shall give Purchaser, directly or indirectly, the right to control or direct the operations of the Company prior to the Effective Time or shall give the Company, directly or indirectly, the right to control or direct the management, policies or operation of Purchaser. Prior to the Effective Time, (a) each of Purchaser and the Company shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its and its Subsidiaries' respective management, policies and operation, (b) the Company shall not be under any obligation to act in a manner that could reasonably be deemed to constitute anti-competitive behavior under federal or state antitrust laws and (c) the Company shall not be required to agree to any material obligation that is not contingent upon the consummation of the Merger.

**2.15 Additional Actions**. If, at any time after the Effective Time, Purchaser or Purchaser Bank shall consider or be advised that any further deeds, assignments or assurances in law or any other acts are necessary or desirable to (i) vest, perfect or confirm, of record or otherwise, in Purchaser or Purchaser Bank its right, title or interest in, to or under any of the rights, properties or assets of the Company or Company Bank, or (ii) otherwise carry out the purposes of this Agreement, Company Bank, the Company and their respective officers and directors shall be deemed to have granted to Purchaser and Purchaser Bank an irrevocable power of attorney to execute and deliver, in such official corporate capacities, all such deeds, assignments or assurances in law or any other acts as are necessary or desirable to (a) vest, perfect or confirm, of record or otherwise, in Purchaser or Purchaser Bank its right, title or interest in, to or under any of the rights, properties or assets of the Company or Company Bank or (b) otherwise carry out the purposes of this Agreement, and the respective officers and directors of Purchaser or Purchaser Bank are authorized in the name of the Company or Company Bank or otherwise to take any and all such action.

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**2.16 Withholding**. Purchaser or the Exchange Agent will be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement or the transactions contemplated hereby to any holder of Company Common Stock or Company Class A Common Stock such amounts as Purchaser (or any Affiliate thereof) or the Exchange Agent are required to deduct and withhold with respect to the making of such payment under the IRC, or any applicable provision of U.S. federal, state, local or non-U.S. income tax law. To the extent that such amounts are properly withheld by Purchaser or the Exchange Agent, such withheld amounts will be treated for all purposes of this Agreement as having been paid to the holder of Company Common Stock or Company Class A Common Stock in respect of whom such deduction and withholding were made by Purchaser or the Exchange Agent.

**ARTICLE III**<br> **REPRESENTATIONS AND WARRANTIES**

**3.1 Disclosure Letters; Standard**

(a) Before the execution and delivery of this Agreement, Purchaser and the Company have each delivered to the other a letter (each, its "**Disclosure Letter**") setting forth, among other things, facts, circumstances and events the disclosure of which is required or appropriate either in response to an express disclosure requirement contained in a provision hereof or as an exception to one or more of their respective representations and warranties contained in *Section 3.2* or *Section 3.3*, as applicable, or to one or more of its covenants contained in Articles IV or V (and making specific reference to the Section of this Agreement to which they relate). Disclosure in any paragraph of the Disclosure Letter shall apply only to the indicated Section of this Agreement except to the extent that it is reasonably clear on the face of such disclosure (notwithstanding the absence of a specific cross reference) that it is relevant to another paragraph of the Disclosure Letter or another Section of this Agreement. Documents, but not required Disclosure Letter items, are deemed to have been made available by Purchaser to the Company or by the Company to Purchaser if such documents (i) were included in the virtual data room of a party at least one (1) calendar day prior to the date hereof or (ii) are available on the website of the SEC through its Electronic Data Gathering, Analysis and Retrieval system (EDGAR).

(b) No representation or warranty of the Company or Purchaser contained in *Sections 3.2* or *3.3*, as applicable (other than (i) the representations and warranties contained in *Sections 3.2(c)* and *3.3(c),* which shall be true in all respects, and (ii) the representations and warranties contained in *Sections 3.2(a)*, *3.2(b)*, *3.2(d), 3.2(e)(i) and (ii), 3.2(j)(i) and (ii), 3.2(r), 3.2(u), 3.2(x), 3.3(a), 3.3(b)*(with respect to Significant Subsidiaries only), *3.3(d), 3.3(e)(i) and (ii), 3.3(k), and 3.3(s)*, which shall be true in all material respects) will be deemed untrue or incorrect, and no party will be deemed to have breached a representation or warranty, as a consequence of the existence of any fact, event or circumstance unless such fact, event or circumstance, individually or taken together with all other facts, events or circumstances inconsistent with any representation or warranty contained in *Sections 3.2* or *3.3*, has had or is reasonably likely to have a Material Adverse Effect with respect to the Company or Purchaser, as the case may be (it being understood that, except with respect to *Sections 3.2(j)(i) and 3.3(k)*, for purposes of determining the accuracy of such representations and warranties, all "Material Adverse Effect" qualifications and other materiality qualifications contained in such representations and warranties shall be disregarded).

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**3.2 Representations and Warranties of the Company**. Except (i) as disclosed in the Company's Disclosure Letter and (ii) for information and documents commonly known as "confidential supervisory information" to the extent prohibited by applicable law from disclosure (and as to which nothing in this Agreement shall require disclosure), the Company represents and warrants to Purchaser that:

(a) *Organization and Qualification*. The Company is a corporation duly organized and validly existing under the laws of the State of North Carolina and properly registered with the Federal Reserve as a bank holding company and all other required state and federal regulatory agencies. The Company has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it. The Company is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on the Company. The Company engages only in activities, and holds properties only of the types, permitted to bank holding companies by the Bank Holding Company Act of 1956, as amended, and the rules, regulations and interpretations promulgated thereunder (collectively, the "**BHCA**").

(b) *Subsidiaries*.

(i) The Company's Disclosure Letter sets forth with respect to each of the Company's direct and indirect Subsidiaries its name, its jurisdiction of its organization, the Company's percentage ownership, the number of shares of stock or other equity interests owned or controlled by the Company and the name and number of shares held by any other person who owns any stock of the Subsidiary. The Company owns, directly or indirectly, all of the issued and outstanding shares of capital stock or other equity interests of each of its Subsidiaries, free and clear of any Liens. There are no contracts, commitments, agreements or understandings relating to the Company's right to vote or dispose of any equity securities of its Subsidiaries. The Company's ownership interest in each of its Subsidiaries complies with all applicable laws, rules and regulations relating to equity investments by bank holding companies or by North Carolina state-chartered banks.

(ii) Each of the Company's Subsidiaries is a corporation or limited liability company duly organized and validly existing under the laws of its jurisdiction of organization, has all requisite corporate or limited liability company power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it and is duly qualified or licensed as a foreign business entity to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on the Company.

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(iii) The outstanding shares of capital stock, membership interests, or other representations of equity interest of each Subsidiary of the Company have been validly authorized and are validly issued, fully paid and nonassessable and free of preemptive rights. No shares of capital stock or other equity interests of any such Subsidiary are or may be required to be issued by virtue of any options, warrants or other rights, no securities or other equity interests exist that are convertible into or exchangeable for shares of such capital stock or other equity interests or any other debt or equity security of any such Subsidiary, and there are no contracts, commitments, agreements or understandings of any kind for the issuance of additional shares of capital stock or other debt or equity security of any such Subsidiary or options, warrants or other rights with respect to such securities.

(iv) Company Bank is a bank chartered by the State of North Carolina. No Subsidiary of the Company other than Company Bank is an "insured depository institution" as defined in the Federal Deposit Insurance Act, as amended, and the applicable regulations thereunder. Company Bank deposits are insured by the FDIC through the Deposit Insurance Fund to the fullest extent permitted by law. Company Bank is a member in good standing of the FHLB and of the FDIC and owns the requisite amount of stock in each institution.

(c) *Capital Structure*.

(i) The authorized capital stock of the Company consists of 11,000,000 shares divided into 10,000,000 shares of common stock and 1,000,000 shares of Company Preferred Stock. The Company's common stock is divided into two classes, of which 9,000,000 shares are designated Company Common Stock and 1,000,000 shares are designated Company Class A Common Stock.

(ii) As of the date of this Agreement:

(A) 4,099,788 shares of Company Common Stock are issued and outstanding, all of which are validly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and were issued in full compliance with all applicable laws;

(B) 87,095 shares of Class A Common Stock are issued and outstanding, all of which are validly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and were issued in full compliance with all applicable laws;

(C) 40,000 shares of Company Common Stock are reserved for issuance pursuant to the Company Restricted Stock Plan, of which amount 12,900 shares of Unvested Company Restricted Stock were previously issued to award recipients. Set forth in Section 3.2(c)(ii)(C) of the Company's Disclosure Letter is a complete and accurate list of all unvested awards under the Company Restricted Stock Plan, including names of recipients, award dates, and vesting schedules;

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(D) No shares of the Company Preferred Stock have been issued or are outstanding.

(iii) Except for the Unvested Company Restricted Stock, no stock options or other rights to purchase Company Common Stock, Company Class A Common Stock, or Company Preferred Stock are issued or outstanding.

(iii) No bonds, debentures, notes or other indebtedness, in each case having the right to vote on any matters on which shareholders of the Company may vote, are issued or outstanding.

(iv) Except as set forth in this *Section 3.2(c)*, as of the date of this Agreement, (A) no shares of capital stock or other voting securities of the Company are issued, reserved for issuance or outstanding, and (B) neither the Company nor any of its Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, puts, calls, rights, convertible securities, commitments or agreements of any character obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, any additional shares of capital stock of the Company (including any rights plan or agreement and including any cash awards where the amount of payment is determined in whole or in part on the price of any capital stock of the Company or its Subsidiaries) or obligating the Company or any of its Subsidiaries to grant, extend or enter into any such option, warrant, put, call, right, convertible security, commitment or agreement. Except as set forth in this *Section 3.2(c)*, neither the Company nor any of its Subsidiaries has or is bound by any rights of any character relating to the purchase, sale or issuance or voting of, or right to receive dividends or other distributions on shares of Company Common Stock, or any other security of the Company or a Subsidiary of the Company or any securities representing the right to vote, purchase or otherwise receive any shares of Company Common Stock or any other security of the Company or a Subsidiary of the Company. Other than as stated herein, there are no outstanding securities or instruments that contain any redemption or similar provisions, and there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries.

(v) Other than the Company Voting Agreements and except as otherwise contemplated in *Section 5.8* of this Agreement, there are no voting trusts, shareholder agreements, proxies or similar agreements to which the Company or any of its Subsidiaries has a contractual obligation in effect with respect to the voting or transfer of Company Common Stock or other voting securities or equity interests of the Company or granting any shareholder or other person any registration rights. The Company does not have in effect a "poison pill" or similar shareholder rights plan.

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(d) *Authority*. The Company has all requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and, subject to the consents, approvals and filings set forth in *Section 3.2(f)*, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate actions on the part of the Company's Board of Directors or the Board of Directors of Company Bank, as applicable, and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement other than the approval and adoption of this Agreement by the affirmative vote of the holders of a majority of the outstanding shares of each of the Company Common Stock and Company Class A Common Stock entitled to be cast, each voting as a separate voting group. The Company's Board of Directors has unanimously determined that this Agreement is advisable and has directed that this Agreement be submitted to the Company's shareholders for approval and adoption and has unanimously adopted a resolution to the foregoing effect and recommends that the shareholders approve and adopt this Agreement. This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization and similar laws relating to or affecting insured depository institutions or their parent companies or creditors' rights and remedies generally and to general principles of equity, whether applied in a court of law or a court of equity (the "**Enforceability Exceptions**").

(e) *No Violations*. The execution, delivery and performance of this Agreement by the Company do not, and the consummation of the transactions contemplated by this Agreement will not, (i) assuming that the consents, approvals and filings referred to in *Section 3.2(f)* have been obtained and the applicable waiting periods have expired, violate any law, rule or regulation or any judgment, decree, order, governmental permit or license to which the Company or any of its Subsidiaries (or any of their respective properties or assets) is subject, (ii) violate the articles of incorporation or bylaws of the Company or the similar organizational documents of any of its Subsidiaries or (iii) constitute a breach or violation of, or the loss of any benefit under, or a default under (or an event that, with due notice or lapse of time or both, would constitute a default under), or result in the termination of, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, indenture, deed of trust, loan agreement or other agreement, instrument or obligation to which the Company or any of its Subsidiaries is a party, or to which any of their respective properties or assets may be subject.

(f) *Consents and Approvals*. Except for (i) filings of applications and notices with, receipt of approvals or no objections from, and the expiration of related waiting periods required by, federal and state banking authorities, including filings and notices with the Federal Reserve, the Virginia State Corporation Commission Bureau of Financial Institutions ("**VSCCBFI**") and the North Carolina Office of the Commissioner of Banks ("**NCCOB**"), (ii) the filing with the SEC of a Proxy Statement-Prospectus in definitive form relating to the meeting of the Company's shareholders to be held in connection with this Agreement and the transactions contemplated hereby and of the Registration Statement in which such Proxy Statement-Prospectus will be included as a prospectus, and declaration of effectiveness of the Registration Statement, (iii) the filing of the Articles of Merger with the VASCC and the NCSOS pursuant to the VSCA and the NCBCA and the filing of the Bank Merger Certificates, (iv) filing with the NASDAQ of a notification or application of the listing of the shares of Purchaser Common Stock to be issued in the Merger, (v) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of shares of Purchaser Common Stock pursuant to this Agreement, and (vi) the approval by the Company's shareholders required to approve the Merger under North Carolina law, no consents or approvals of, or filings or registrations with, any Governmental Entity or any third party are required to be made or obtained by the Company in connection with the execution and delivery by the Company of this Agreement or the consummation by the Company of the Merger and the other transactions contemplated by this Agreement, including the Bank Merger. As of the date hereof, the Company has no Knowledge of any reason pertaining to the Company why any of the approvals referred to in this *Section 3.2(f)* should not be obtained without the imposition of any material condition or restriction described in *Section 6.2(e)*.

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(g) *Governmental Filings*. The Company and each of its Subsidiaries has timely filed all reports, schedules, registration statements and other documents that it has been required to file since January 1, 2020 with the FDIC, the Federal Reserve, the NCCOB or any other Governmental Entity. As of their respective dates, each of such filings complied in all material respects with all laws or regulations under which it was filed (or was amended to comply promptly following discovery of such noncompliance).

(h) *Financial Statements*.

(i) The Company has previously made available to Purchaser correct and complete copies of (A) the consolidated balance sheets of the Company and its Subsidiaries as of December 31, 2021, 2020 and 2019 and related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2021, together with the notes thereto, accompanied by the audit report of the Company's independent auditor (the "**Audited Financial Statements**") and (B) the unaudited consolidated balance sheet of the Company and its Subsidiaries as of September 30, 2022, and related consolidated statement of income, and comprehensive income for the nine (9) month period ended September 30, 2022 (such unaudited financial statements, together with the Audited Financial Statements, the "**Financial Statements**"). The Financial Statements were prepared from the books and records of the Company and its Subsidiaries, fairly present the consolidated financial position of the Company and its Subsidiaries in each case at and as of the dates indicated and the consolidated results of operations and cash flows of the Company and its Subsidiaries for the periods indicated, and, except as otherwise set forth in the notes thereto, and except as set forth on Section 3.2(h) of the Company's Disclosure Letter, were prepared in accordance with GAAP consistently applied throughout the periods covered thereby; *provided, however*, that the unaudited financial statements for the nine (9) month period ended September 30, 2022 are subject to normal year-end adjustments (which will not be material individually or in the aggregate) and lack footnotes to the extent permitted under applicable regulations and GAAP. The books and records of the Company and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other legal and accounting requirements and reflect only actual transactions. As of the date of this Agreement, the Company's independent auditor, Elliott Davis PLLC, has not resigned (or informed the Company that it intends to resign) or been dismissed as independent auditor of the Company as a result of or in connection with any disagreements with the Company on a matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

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(ii) The Company has made available to Purchaser true and complete copies of the Reports of Condition and Income as of December 31, 2021, December 31, 2020, December 31, 2019 and June 30, 2020 (the "**Bank Call Reports**") for Company Bank. The Bank Call Reports fairly present, in all material respects, the financial position of Company Bank and the results of its operations at the date and for the applicable period indicated in each Bank Call Report in conformity with the instructions to such Bank Call Report. The Bank Call Reports do not contain any items of special or nonrecurring income or any other income not earned in the ordinary course of business except as expressly specified therein. Company Bank has calculated its allowance for loan and lease losses ("**ALLL**") in accordance with regulatory accounting principles, including the Instructions for Preparation of Consolidated Reports of Condition and Income and the Interagency Policy Statement on the Allowance for Loan and Lease Losses as applied to banking institutions and in accordance with all applicable rules and regulations.

(i) *Undisclosed Liabilities*. Except as set forth in Section 3.2(i) of the Company's Disclosure Letter, neither the Company nor any of its Subsidiaries has incurred any debt, liability or obligation of any nature whatsoever (whether accrued, contingent, absolute or otherwise and whether due or to become due, "**Liabilities**") other than Liabilities reflected on or reserved against in the consolidated balance sheet of the Company as of December 31, 2021, except for (i) Liabilities incurred since December 31, 2021 in the ordinary course of business consistent with past practice that, either alone or when combined with all similar Liabilities, have not had, and would not reasonably be expected to have, a Material Adverse Effect on the Company and (ii) Liabilities incurred for legal, accounting, financial advising fees and out-of-pocket or other expenses or fees in connection with the transactions contemplated by this Agreement.

(j) *Absence of Certain Changes or Events*.

(i) Since December 31, 2021, the Company and its Subsidiaries have conducted their respective businesses only in the ordinary course of such businesses consistent with their past practices and there has not been any event or occurrence that has had, or is reasonably expected to have, a Material Adverse Effect on the Company.

(ii) Since December 31, 2021, none of the Company or any of its Subsidiaries have taken any action that would be prohibited by clauses (b)(i), (c), (d), (e), (h), (j), (k), (n), (o) or (p) of *Section 4.1* if taken after the date hereof.

(k) *Litigation*. There are no material suits, actions or legal, administrative or arbitration or other proceedings, or investigations of any nature pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any property or asset of the Company or any of its Subsidiaries that (i) are seeking damages or declaratory relief against the Company or any of its Subsidiaries or (ii) challenge the validity or propriety of the transactions contemplated by this Agreement. There are no judgments, decrees, injunctions, orders or rulings of any Governmental Entity or arbitrator outstanding against the Company or any of its Subsidiaries or the assets of the Company or any of its Subsidiaries (or that, upon consummation of the Merger, would apply to Purchaser or any of its Subsidiaries). Since January 1, 2020, (i) there have been no investigations, subpoenas, written demands, or document requests received by the Company or any of its Subsidiaries from any Governmental Entity (other than in the ordinary course of business) and (ii) no Governmental Entity has requested that the Company or any of its Subsidiaries enter into a settlement, negotiation or tolling agreement with respect to any matter related to any such investigation, subpoena, written demand, or document request.

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(l) *Absence of Regulatory Actions*. Since January 1, 2020, neither the Company nor any of its Subsidiaries has been a party to any cease and desist order, written agreement or memorandum of understanding with, or any commitment letter or similar undertaking to, or has been ordered to pay any civil money penalty by, or has been subject to any action, proceeding, order or directive by any Governmental Entity, or has adopted any board resolutions relating to such matters as are material to the business of the Company or its Subsidiaries at the request of any Governmental Entity, or has been advised by any Governmental Entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such action, proceeding, order, directive, written agreement, memorandum of understanding, commitment letter, board resolutions or similar undertaking. To the Knowledge of the Company, there are no material unresolved violations, criticisms or exceptions by any Governmental Entity with respect to any report or statement relating to any examinations of the Company or its Subsidiaries.

(m) *Compliance with Laws*.

(i) The Company and each of its Subsidiaries have complied in all material respects with and are not in material default or violation under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to the Company or any of its Subsidiaries, including without limitation all laws related to data protection or privacy, the Equal Credit Opportunity Act and Regulation B, the Fair Housing Act, the Fair Credit Reporting Act, the Truth in Lending Act and Regulation Z, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Electronic Fund Transfer Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Interagency Policy Statement on Retail Sales of Nondeposit Investment Products, the SAFE Mortgage Licensing Act of 2008, the Real Estate Settlement Procedures Act and Regulation X, and any other law relating to bank secrecy, consumer lending, holding consumer assets, processing consumer payments, consumer advertising and disclosures and unfair, deceptive or abusive acts or practices, discriminatory lending, financing or leasing practices, money laundering prevention, Sections 23A and 23B of the Federal Reserve Act, the Sarbanes-Oxley Act, and all agency requirements relating to the origination, sale and servicing of mortgage and consumer loans. The Company and each of its Subsidiaries has, and has had at all times since January 1, 2020, all material permits, licenses, certificates of authority, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Entities that are required to permit it to carry on its business as it is presently conducted. All such permits, licenses, certificates of authority, orders and approvals are in full force and effect, and no suspension or cancellation of any of them is, to the Knowledge of the Company, threatened. Neither the Company nor any of its Subsidiaries has been given notice or been charged with any violation of, any law, ordinance, regulation, order, writ, rule, decree or condition to approval of any Governmental Entity that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on the Company.

(ii) The Company and each of its Subsidiaries, as applicable, maintains a written consumer compliance program that maintains procedures and controls reasonably designed to ensure compliance with applicable Consumer Protection Laws. All relevant employees of and consultants to the Company and its Subsidiaries, as applicable, have been informed of the applicable consumer compliance policies.

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(iii) To the Knowledge of the Company, (i) neither the Company nor any of its Subsidiaries is under investigation by any Governmental Entity for a violation of any applicable Consumer Protection Laws, and (ii) there are no asserted or threatened claims, notices or administrative or court complaints against the Company or any of its Subsidiaries (whether by a Governmental Entity or any other party) relating to compliance with applicable Consumer Protection Laws by the Company, its Subsidiaries or any third parties acting on their behalf.

(iv) Except for routine examinations conducted by a Governmental Authority in the ordinary course of the business of the Company or any of its Subsidiaries, no Governmental Entity has initiated any proceeding or, to the Knowledge of the Company, investigation into the business or operations of the Company or any of its Subsidiaries since January 1, 2020. There is no unresolved violation, criticism or exception by any Governmental Entity with respect to any report or statement relating to any examinations of the Company and its Subsidiaries. Except for routine examinations conducted by a Governmental Entity in the ordinary course of business of the Company or any of its Subsidiaries, no examination of the Company or any of its Subsidiaries by any Governmental Entity has taken place or is currently under way, and, to the Knowledge of the Company, no report of examination is pending.

(n) *Taxes*. All federal, state, local and foreign tax returns required to be filed by or on behalf of the Company or any of its Subsidiaries have been timely filed or requests for extensions have been timely filed and any such extension shall have been granted and not have expired, and all such filed returns are complete and accurate in all material respects. All Taxes shown on such returns, all Taxes required to be shown on returns for which extensions have been granted and all other Taxes required to be paid by the Company or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on the Company's Financial Statements (in accordance with GAAP). There is no pending, or to the Knowledge of the Company, threatened, audit examination, deficiency assessment, tax investigation or refund litigation with respect to any Taxes of the Company or any of its Subsidiaries, and no claim has been made in writing by any authority in a jurisdiction where the Company or any of its Subsidiaries do not file tax returns that the Company or any such Subsidiary is subject to taxation in that jurisdiction. All Taxes, interest, additions and penalties due with respect to completed and settled examinations or concluded litigation relating to the Company or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on the Company's Financial Statements (in accordance with GAAP). The Company and its Subsidiaries have not executed an extension or waiver of any statute of limitations on the assessment or collection of any tax due that is currently in effect. The Company and each of its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party, and the Company and each of its Subsidiaries has timely complied with all applicable information reporting requirements under Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and local information reporting requirements. Neither the Company nor any of its Subsidiaries has made any payments and is not a party to any agreement, and does not maintain any plan, program or arrangement, which could require it to make any payments that would not be fully deductible under Section 162(m) of the IRC. The Company and each of its Subsidiaries has properly preserved all net operating losses and alternative minimum tax credits shown on the Company's Audited Financial Statements.

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(o) *Agreements*.

(i) The Company has previously made available to Purchaser, and Section 3.2(o) of the Company's Disclosure Letter sets forth, any contract, arrangement, commitment or understanding (whether written or oral) to which the Company or any of its Subsidiaries is a party or is bound:

(A) (1) with any director, officer or employee of the Company or any of its Subsidiaries the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company or any of its Subsidiaries of the nature contemplated by this Agreement; (2) with respect to the employment or engagement of any directors, officers, employees or consultants; or (3) that relates to any benefit that will be increased, or the vesting or payment of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement, or the value of which will be calculated on the basis of any of the transactions contemplated by this Agreement (including any stock option plan, phantom stock or stock appreciation rights plan, restricted stock plan or stock purchase plan);

(B) that (1) contains a non-compete or client, customer or employee non-solicitation requirement or any other provision that restricts the conduct of, or the manner of conducting, any line of business of the Company or any of its Subsidiaries (or, following the consummation of the transactions contemplated hereby, Purchaser or any of its Subsidiaries), (2) obligates the Company or any of its Affiliates (or, following the consummation of the transactions contemplated hereby, Purchaser or any of its Subsidiaries) to conduct business with any third party on an exclusive or preferential basis, including, but not limited to, any service providers or vendors, or (3) requires referrals of business or requires the Company or any of its Subsidiaries to make available investment opportunities to any person on a priority or exclusive basis;

(C) pursuant to which the Company or any of its Subsidiaries may become obligated to invest in or contribute capital to any entity;

(D) that relates to borrowings of money (or guarantees thereof) by the Company or any of its Subsidiaries in an amount that exceeds $100,000, other than FHLB and Federal Reserve Bank of Richmond borrowings and repurchase agreements with customers, in each case entered into in the ordinary course of business consistent with past practice;

(E) that grants any right of first refusal, right of first offer or similar right with respect to any material assets, rights or properties of the Company or any of its Subsidiaries;

(F) that limits or commits to the payment of dividends by the Company or any of its Subsidiaries;

(G) that relates to the involvement of the Company or any Subsidiary in a joint venture, partnership, limited liability company agreement or other similar agreement or arrangement, or to the formation, creation or operation, management or control of any partnership or joint venture with any third parties;

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(H) that relates to an acquisition, divestiture, merger or similar transaction and that contains representations, covenants, indemnities or other obligations (including indemnification, "earn-out" or other contingent obligations) that are still in effect;

(I) that is a lease or license with respect to any property, real or personal, whether as landlord, tenant, licensor or licensee, involving a liability or obligation as obligor in excess of $50,000 per annum;

(J) that is a consulting agreement or data processing, software programming or licensing contract involving the payment of more than $50,000 per annum; or

(K) that is not of the type described in clauses (A) through (J) above and that involved payments by, or to, the Company or any of its Subsidiaries in the fiscal year ended December 31, 2021, or that could reasonably be expected to involve such payments during the fiscal year ending December 31, 2022, of more than $100,000 (excluding Loans) or the termination of which would require payment by the Company or any of its Subsidiaries of an amount in excess of $100,000.

(ii) Each contract, arrangement, commitment or understanding of the type described in this *Section 3.2(o)*, whether set forth in Section 3.2(o) the Company's Disclosure Letter or not, is referred to herein as a "**Company Contract**." The Company has no Knowledge of any material violation of any Company Contract by any of the other parties thereto. Each Company Contract is valid and binding on the Company or one of its Subsidiaries, as applicable, and in full force and effect, except as, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company. The Company and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it under each Company Contract. To the Knowledge of the Company, each counterparty to each Company Contract has in all material respects performed all obligations required to be performed by it under such Company Contract, and no event or condition exists that constitutes or, after notice or lapse of time or both, will constitute, a material default on the part of the Company or any of its Subsidiaries under any such Company Contract.

(iii) Neither the Company nor any of its Subsidiaries is in default under (and no event has occurred that with due notice or lapse of time or both, would constitute a default under) or is in material violation of any provision of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or other agreement to which it is a party or by which it is bound or to which any of its respective properties or assets is subject and, to the Knowledge of the Company, no other party to any such agreement (excluding any Loan or extension of credit made by the Company or any of its Subsidiaries) is in default in any respect thereunder.

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(p) *Intellectual Property; Company IT Systems*.

(i) The Company and each of its Subsidiaries owns or possesses valid and binding licenses and other rights to use (in the manner and the geographic areas in which they are currently used) without payment all intellectual property, including patents, copyrights, trade secrets, trade names, service marks and trademarks, material to its business. Section 3.2(p) of the Company's Disclosure Letter sets forth a complete and correct list of all material patents, trademarks, trade names, service marks and copyrights owned by or licensed to the Company or any of its Subsidiaries for use in its business, and all licenses and other agreements relating thereto and all agreements relating to third party intellectual property that the Company or any of its Subsidiaries is licensed or authorized to use in its business, including without limitation any software licenses but excluding any so-called "shrink-wrap" license agreements and other similar computer software licensed in the ordinary course of business and/or otherwise resident on desktop computers (collectively, the "**Company Intellectual Property**"). With respect to each item of Company Intellectual Property owned by the Company or any of its Subsidiaries, the owner possesses all right, title and interest in and to the item, free and clear of any Lien. With respect to each item of Company Intellectual Property that the Company or any of its Subsidiaries is licensed or authorized to use, the license, sublicense or agreement covering such item is legal, valid, binding, enforceable and in full force and effect as to the Company and the Subsidiaries. Neither the Company nor any of its Subsidiaries has received any charge, complaint, claim, demand or notice alleging any interference, infringement, misappropriation or violation with or of any intellectual property rights of a third party (including any claims that the Company or any of its Subsidiaries must license or refrain from using any intellectual property rights of a third party). To the Knowledge of the Company, neither the Company nor any of its Subsidiaries has interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of third parties and no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of the Company or any of its Subsidiaries.

(ii) To the Knowledge of the Company, all information technology and computer systems (including software, information technology and telecommunication hardware and other equipment) relating to the transmission, storage, maintenance, organization, presentation, generation, processing or analysis of data and information, whether or not in electronic format, used in or necessary to the conduct of the business of the Company or its Subsidiaries (collectively, the "**Company IT Systems**") have been properly maintained by technically competent personnel, in accordance with standards set by the manufacturers or otherwise in accordance with standards in the industry, to ensure proper operation, monitoring and use. The Company IT Systems are in good working condition to effectively perform all information technology operations necessary to conduct the Company's consolidated business as currently conducted. Neither the Company nor any of its Subsidiaries has experienced within the past two (2) years any material disruption to, or material interruption in, the conduct of its business attributable to a defect, bug, breakdown, cyber incident, data breach, or other failure or deficiency of the Company IT Systems. To the Knowledge of the Company, the Company and its Subsidiaries are, and at all times through the date of this Agreement have been, in compliance with all of their applicable contractual obligations and with all applicable laws, in each case, regarding data privacy or individually identifiable personal information relating to an identifiable or identified natural person ("**Personal Information**"), including with respect to the collection, storage, processing, dissemination, combination, transfer, disclosure and use of Personal Information (collectively, "**Privacy Obligations**"). To the Knowledge of the Company, no Person has (i) gained unauthorized access to any of the Company IT Systems that has had, or is reasonably expected to have, a Material Adverse Effect on the Company or an obligation to notify any Governmental authority or (ii) alleged in writing that the Company or any of its Subsidiaries have breached any of their respective Privacy Obligations in any material respect. The Company and its Subsidiaries have taken commercially reasonable steps and implemented commercially reasonable safeguards, consistent with accepted industry practices, designed to protect their products, services and the Company IT Systems from unauthorized access and free from any disabling codes or instructions, spyware, Trojan horses, worms, viruses or other software routines that permit or cause unauthorized access to, or unauthorized disruption, impairment, disablement, or destruction of, software, data or other materials ("**Malicious Code**"). To the Knowledge of the Company, the Company IT Systems or other assets used by the Company or any of its Subsidiaries, including any Company software, (i) are as of the date of this Agreement free from any material Malicious Code, and (ii) except as has not resulted in, and would not reasonably be expected to result in, individually or in the aggregate, a Material Adverse Effect, to the Knowledge of the Company, have for the past two (2) years been free from any Malicious Code.

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(q) *Labor Matters*.

(i) The Company and its Subsidiaries are in material compliance with all applicable laws respecting employment, retention of independent contractors, employment practices, terms and conditions of employment, and wages and hours. Neither the Company nor any of its Subsidiaries is or has ever been a party to, or is or has ever been bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization with respect to its employees, nor is the Company or any of its Subsidiaries the subject of any proceeding asserting that it has committed an unfair labor practice or seeking to compel it or any such Subsidiary to bargain with any labor organization as to wages and conditions of employment nor, to the Knowledge of the Company, has any such proceeding been threatened, nor is there any strike, other labor dispute, claim or charge or organizational effort involving the Company or any of its Subsidiaries pending or, to the Knowledge of the Company, threatened. No employees of the Company or any of its Subsidiaries are represented by an labor organization.

(ii) The Company's Disclosure Letter identifies (A) all present employees (including any leased or temporary employees) of the Company and its Subsidiaries and any consultants or independent contractors providing services to the Company or any of its Subsidiaries; (B) each employee's, consultant's or independent contractor's date of hire and current rate of compensation; and (C) each employee's accrued vacation, sick leave or personal leave if applicable. Section 3.2(q) of the Company's Disclosure Letter also names any employee who is absent from work due to a leave of absence (including, but not limited to, in accordance with the requirements of the Family and Medical Leave Act or the Uniformed Services Employment and Reemployment Rights Act) or a work-related injury, or who is receiving workers' compensation or disability compensation. There are no unpaid wages, bonuses or commissions owed to any employee (other than those not yet due).

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(r) *Employee Benefit Plans*.

(i) Section 3.2(r)(i) of the Company's Disclosure Letter sets forth all Company Benefit Plans and all multiple employer plans in which the Company or any of its Subsidiaries participates as an employer. For purposes of this Agreement, "**Company Benefit Plans**" mean all employee benefit plans (as defined in Section 3(3) of ERISA), whether or not subject to ERISA, whether funded or unfunded, and all pension, benefit, retirement, bonus, stock option, stock purchase, restricted stock, stock-based, performance award, phantom equity, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance, retention, employment, consulting, termination, change in control, salary continuation, accrued leave, sick leave, vacation, paid time off, health, medical, disability, life, accidental death and dismemberment, insurance, welfare, fringe benefit and other similar plans, programs, policies, practices or arrangements or other contracts or agreements (and any amendments thereto) with respect to which the Company or any Subsidiary or any trade or business of the Company or any of its Subsidiaries, whether or not incorporated, all of which together with the Company would be deemed a "single employer" within the meaning of Section 4001 of ERISA (a "**Company ERISA Affiliate**"), is a party or has any current or future obligation or liability or that are sponsored, maintained, contributed to or required to be contributed to by the Company or any of its Subsidiaries or any Company ERISA Affiliate for the benefit of any current or former employee, officer, director, consultant or independent contractor (or any spouse or dependent of such individual) of the Company or any of its Subsidiaries or any Company ERISA Affiliate.

(ii) The Company has heretofore made available to Purchaser true, correct and complete copies of the following documents with respect to each of the Company Benefit Plans and any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, to the extent applicable, (i) all plans and trust agreements, (ii) all summary plan descriptions, amendments, modifications or material supplements to any Company Benefit Plan and any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, (iii) where any Company Benefit Plan has not been reduced to writing, a written summary of all the material plan terms, (iv) the annual report (Form 5500), if any, filed with the IRS for the last three (3) plan years and summary annual reports, with schedules and financial statements attached, (v) the most recently received IRS determination letter, if any, relating to any Company Benefit Plan and any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, (vi) the most recently prepared actuarial report for each Company Benefit Plan (if applicable) for each of the last three (3) years and (vii) copies of material notices, letters or other correspondence with the IRS, U.S. Department of Labor (the "**DOL**") or Pension Benefit Guarantee Corporation (the "**PBGC**").

(iii) Each Company Benefit Plan and each Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer has been established, operated and administered in all material respects in accordance with its terms and the requirements of all applicable laws, including ERISA and the IRC. Neither the Company nor any of its Subsidiaries, or, to the Knowledge of Company, any provider of any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, has taken any action to take corrective action or made a filing under any voluntary correction program of the IRS, the DOL or any other Governmental Entity with respect to any Company Benefit Plan, and the Company has no Knowledge of any plan defect that would qualify for correction under any such program.

(iv) Section 3.2(r)(iv) of the Company's Disclosure Letter identifies each Company Benefit Plan, including, but not limited to, any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, that is intended to be qualified under Section 401(a) of the IRC (the "**Company Qualified Plans**"). The IRS has issued a favorable determination letter with respect to each Company Qualified Plan and the related trust, which letter has not been revoked (nor has revocation been threatened), and, to the Knowledge of the Company, there are no existing circumstances and no events have occurred that could adversely affect the qualified status of any Company Qualified Plan or the exempt status of the related trust or increase the costs relating thereto. No trust funding any Company Benefit Plan is intended to meet the requirements of Section 501(c)(9) of the IRC.

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(v) Each Company Benefit Plan that is subject to Section 409A of the IRC has been administered and documented in compliance with the requirements of Section 409A of the IRC, except where any non-compliance has not and cannot reasonably be expected to result in material liability to the Company or any of its Subsidiaries or any employee of the Company or any of its Subsidiaries.

(vi) None of the Company, its Subsidiaries nor any Company ERISA Affiliate has, at any time during the last six (6) years, maintained, contributed to or been obligated to contribute to any "employee pension benefit plan" as defined in Section 3(2) of ERISA that is subject to Title IV of ERISA, any plan that is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA (a "**Multiemployer Plan**") or any plan that has two or more contributing sponsors at least two of whom are not under common control, within the meaning of Section 4063 of ERISA (a "**Multiple Employer Plan**"), and none of the Company and its Subsidiaries nor any Company ERISA Affiliate has incurred any liability to a Multiemployer Plan or Multiple Employer Plan as a result of a complete or partial withdrawal (as those terms are defined in Part 1 of Subtitle E of Title IV of ERISA) from a Multiemployer Plan or Multiple Employer Plan.

(vii) Except as disclosed in Section 3.2(r)(vii) of the Company's Disclosure Letter, neither the Company nor any of its Subsidiaries sponsors has sponsored or has any obligation with respect to any employee benefit plan that provides for any post-employment or post-retirement health or medical or life insurance benefits for retired, former or current employees or beneficiaries or dependents thereof, except as required by Section 4980B of the IRC.

(viii) All contributions required to be made to any Company Benefit Plan, and all contributions required to be made by Company or any of its Subsidiaries to any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, by applicable law or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any Company Benefit Plan, for any period through the date hereof, have been timely made or paid in full or, to the extent not required to be made or paid on or before the date hereof, have been fully reflected on the books and records of the Company, if and to the extent required by GAAP.

(ix) There are no pending or, to the Knowledge of the Company, threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations that have been asserted or instituted, and, to the Knowledge of the Company, no set of circumstances exists that may reasonably be expected to give rise to a claim or lawsuit, against the Company Benefit Plans, including, but not limited to, any Multiple Employer Plan that the Company or any of its Subsidiaries participates as an employer, any fiduciaries thereof with respect to their duties to the Company Benefit Plans or such Multiple Employer Plan, or the assets of any of the trusts under any of the Company Benefit Plans or any such Multiple Employer Plan, that could reasonably be expected to result in any material liability of the Company or any of its Subsidiaries to the PBGC, the IRS, the DOL, any Multiemployer Plan, a Multiple Employer Plan, any participant in any Company Benefit Plan, or any other party.

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(x) To the Knowledge of the Company, none of the Company and its Subsidiaries nor any Company ERISA Affiliate nor any other Person, including any fiduciary of any Company Benefit Plan, including, but not limited to, any Multiple Employer Plan in which the Company or any of its Subsidiaries participates as an employer, has engaged in any "prohibited transaction" (as defined in Section 4975 of the IRC or Section 406 of ERISA) that could subject any of the Company Benefit Plans or their related trusts, the Company, any of its Subsidiaries, any Company ERISA Affiliate, any such Multiple Employer Plan or its Trust, provider or participating employers, or any Person that the Company or any of its Subsidiaries has an obligation to indemnify, to any material tax or penalty imposed under Section 4975 of the IRC or Section 502 of ERISA.

(xi) Except as set forth in Section 3.2(r)(xi) of the Company's Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) result in, cause the vesting, exercisability or delivery of, or increase in the amount or value of, any payment, compensation (including stock or stock-based), right or other benefit to any employee, officer, director, independent contractor, consultant or other service provider of the Company or any of its Subsidiaries, or result in any limitation on the right of the Company or any of its Subsidiaries to amend, merge, terminate or receive a reversion of assets from any Company Benefit Plan or related trust. Without limiting the generality of the foregoing, no amount paid or payable (whether in cash, in property, or in the form of benefits) by the Company or any of its Subsidiaries in connection with the transactions contemplated hereby (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an "excess parachute payment" within the meaning of Section 280G of the IRC. Except as disclosed in Section 3.2(r)(xi) of the Company's Disclosure Letter, neither the Company nor any of its Subsidiaries maintains or contributes to a rabbi trust or similar funding vehicle, and the transactions contemplated by this Agreement will not cause or require the Company or any of its Affiliates to establish or make any contribution to a rabbi trust or similar funding vehicle.

(xii) No Company Benefit Plan provides for the gross-up or reimbursement of Taxes under Section 409A or 4999 of the IRC, or otherwise. The Company has previously provided to the Purchaser true, correct and complete copies of Section 280G calculations (whether final or not) with respect to any disqualified individual in connection with the transactions contemplated hereby.

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(s) *Properties*.

(i) A list of all real property owned or leased by the Company or a Subsidiary of the Company is set forth in Section 3.2(s) of the Company's Disclosure Letter. The Company and each of its Subsidiaries has good and marketable title to all real property owned by it (including any property acquired in a judicial foreclosure proceeding or by way of a deed in lieu of foreclosure or similar transfer), in each case free and clear of any Liens except (A) liens for Taxes not yet due and payable and (B) such easements, restrictions and encumbrances, if any, as are not material in character, amount or extent, and do not materially detract from the value, or materially interfere with the present use of the properties subject thereto or affected thereby. Each lease pursuant to which the Company or any of its Subsidiaries, as lessee, leases real or personal property is valid and in full force and effect as to the Company and the Subsidiaries and neither the Company nor any of its Subsidiaries, nor, to the Company's Knowledge, any other party to any such lease, is in default or in violation of any material provisions of any such lease. The Company has previously made available to Purchaser a complete and correct copy of each such lease. All real property owned or leased by the Company or any of its Subsidiaries are in all material respects in a good state of maintenance and repair (normal wear and tear excepted), conform in all material respects with all applicable ordinances, regulations and zoning laws and are considered by the Company to be adequate for the current business of the Company and its Subsidiaries. To the Knowledge of the Company, none of the buildings, structures or other improvements located on any real property owned or leased by the Company or any of its Subsidiaries encroach upon or over any adjoining parcel or real estate or any easement or right- of-way.

(ii) The Company and each of its Subsidiaries has good and marketable title to all tangible personal property owned by it, free and clear of all Liens except such Liens, if any, that are not material in character, amount or extent, and that do not materially detract from the value, or materially interfere with the present use of the properties subject thereto or affected thereby.

(t) *Fairness Opinion*. The Board of Directors of the Company has received the opinion (which, if initially rendered verbally, has been or will be confirmed by a written opinion, dated the same date) of Raymond James & Associates, Inc. to the effect that, as of the date of such opinion and subject to the assumptions, limitations and qualifications set forth therein, the Merger Consideration is fair, from a financial point of view, to the holders of Company Common Stock and Company Class A Common Stock. Such opinion has not been amended or rescinded as of the date of this Agreement.

(u) *Fees*. Other than for financial advisory services performed for the Company by Raymond James & Associates, Inc. pursuant to an agreement executed on July 5, 2022, a true and complete copy of which has been previously provided to Purchaser, neither the Company nor any of its Subsidiaries, nor any of their respective officers, directors, employees or agents, has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for the Company or any of its Subsidiaries in connection with this Agreement or the transactions contemplated hereby.

(v) *Environmental Matters*.

(i) Except as set forth in Section 3.2(v)(i) of the Company's Disclosure Letter, each of the Company's and its Subsidiaries' properties, the Participation Facilities, and, to the Knowledge of the Company, the Loan Properties is, and has been during the period of the Company's or its Subsidiaries' ownership or operation thereof, in material compliance with all Environmental Laws.

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(ii) There is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or, to the Knowledge of the Company, threatened, before any court or Governmental Entity against the Company or any of its Subsidiaries or any Participation Facility (A) for alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (B) relating to the presence of or release into the environment of any Hazardous Material, whether or not occurring at or on a site owned, leased or operated by the Company or any of its Subsidiaries or any Participation Facility.

(iii) There is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or, to the Knowledge of the Company, threatened before any court or, to the Knowledge of the Company, Governmental Entity relating to or against any Loan Property (or the Company or any of its Subsidiaries in respect of such Loan Property) (A) relating to alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (B) relating to the presence of or release into the environment of any Hazardous Material, whether or not occurring at a Loan Property.

(iv) Neither the Company nor any of its Subsidiaries has received in writing any notice, demand letter, executive or administrative order, directive or request for information from any Governmental Entity or any third party indicating that it may be in violation of, or liable under, any Environmental Law.

(v) To the Knowledge of the Company, there are no underground storage tanks at any properties owned or operated by the Company or any of its Subsidiaries or any Participation Facility. Neither the Company nor any of its Subsidiaries nor, to the Knowledge of the Company, any other Person, has closed or removed any underground storage tanks from any properties owned or operated by the Company or any of its Subsidiaries or any Participation Facility.

(vi) During the period of (A) the Company's or its Subsidiaries' ownership or operation of any of their respective current properties or (B) the Company's or its Subsidiaries' participation in the management of any Participation Facility, to the Knowledge of the Company, there has been no release of Hazardous Materials in, on, under or affecting such properties except for releases of Hazardous Materials in quantities below the level at which they were regulated under any Environmental Law in effect at the time of such release. To the Knowledge of the Company, before the period of (A) the Company's or its Subsidiaries' ownership or operation of any of their respective current properties or (B) the Company's or its Subsidiaries' participation in the management of any Participation Facility, there was no contamination by or release of Hazardous Material in, on, under or affecting such properties except for releases of Hazardous Materials in quantities below the level at which they were regulated under any Environmental Law in effect at the time of such release.

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(w) *Loan Matters*.

(i) All Loans held by the Company or any of its Subsidiaries were made in all material respects for good, valuable and adequate consideration in the ordinary course of the business, in accordance in all material respects with sound banking practices and, the Loans are not subject to any pending, or to the Knowledge of the Company, threatened defenses, setoffs or counterclaims, including without limitation any such as are afforded by usury or truth in lending laws, except as may be provided by bankruptcy, insolvency or similar laws or by general principles of equity. The notes or other evidences of indebtedness evidencing such Loans and all forms of pledges, mortgages and other collateral documents and security agreements are, in all material respects, enforceable and valid (except as may be limited by the Enforceability Exceptions), and in each case, true, genuine and what they purport to be.

(ii) Neither the terms of any Loan, any of the documentation for any Loan, the manner in which any Loans have been administered and serviced, nor the Company's practices of soliciting, originating, approving or rejecting Loan applications, violate in any material respect any federal, state, or local law, rule or regulation applicable thereto, including, without limitation, the Truth In Lending Act, Regulations O and Z of the Federal Reserve, the CRA, the Equal Credit Opportunity Act, and any state laws, rules and regulations relating to consumer protection, installment sales and usury.

(iii) Section 3.2(w)(iii) of the Company's Disclosure Letter sets forth a list of all Loans that are guaranteed by the Small Business Administration (the "**SBA**"), the United States Department of Agriculture (the "**USDA**"), or other federal or state government agency and to the Knowledge of the Company, neither the terms of any such Loan, the documentation for any such Loan, nor the manner in which any such Loan has been administered or serviced violates in any material respect any rules or regulations of the applicable government agency or impacts the validity of the government guarantee.

(iv) In the opinion of the management of the Company, the allowance for loan losses reflected in the Company's audited balance sheet at December 31, 2021 and unaudited balance sheet at September 30, 2022 were, and the ALLL shown on the Financial Statements for periods ending after September 30, 2022, will be, adequate, as of the dates thereof, under GAAP.

(v) None of the agreements pursuant to which the Company or any of its Subsidiaries has sold Loans or participations in Loans contains any obligation to repurchase such Loans or interests therein solely because of a payment default by the obligor on any such Loan.

(vi) (A) Section 3.2(w)(vi) of the Company's Disclosure Letter sets forth a list of all Loans as of September 30, 2022, by the Company or any of its Subsidiaries to any director, executive officer, principal shareholder or other insider (as such terms are defined in Regulation O of the Federal Reserve (12 C.F.R. Part 215)) of the Company or any of its Subsidiaries, (B) there are no Loans to any such director, executive, officer, principal shareholder or other insider or related interest thereof on which the borrower is paying a rate other than that reflected in the note or other relevant credit or security agreement or on which the borrower is paying a rate that is not in compliance with Regulation O and (C) all such Loans are and were originated in compliance in all material respects with all applicable laws.

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(vii) Except as such disclosure may be limited by any applicable law, rule or regulation: (A) Section 3.2(w)(vii) of the Company's Disclosure Letter sets forth a listing, as of September 30, 2022, by account, of each borrower, customer or other party that has notified the Company or its Subsidiaries during the twelve (12) months preceding the date of such listing of, or has asserted against the Company or its Subsidiaries, in each case in writing, any "lender liability" or similar claim, and, to the Knowledge of the Company, each borrower, customer or other party that has given the Company or its Subsidiaries any oral notification of, or orally asserted to or against Company or its Subsidiaries, any such claim; and (B) the Company has previously made available to Purchaser a listing, as of September 30, 2022, by account, of all Loans (1) that are contractually past due ninety (90) days or more in the payment of principal and/or interest, (2) that are on non-accrual status, (3) that are classified as "Pass 5," "Special Mention," "Substandard," "Doubtful," "Loss," "Classified," "Criticized," "Credit Risk Assets," "Concerned Loans," "Watch List" or words of similar import, (4) that are considered troubled debt restructurings or where the interest rate terms have been reduced and/or the maturity dates have been extended after the origination of the Loan due to concerns regarding the borrower's ability to pay in accordance with the Loan's original terms and (5) where a specific reserve allocation exists in connection therewith, in each case of clauses (B)(1) to (B)(5), together with the principal amount of and accrued and unpaid interest on each such Loan and the aggregate principal amount of and accrued and unpaid interest on such Loans as of such date; and (C) the Company has previously made available to Purchaser a listing, as of September 30, 2022, all other assets classified by the Company or its Subsidiaries as real estate acquired through foreclosure or in lieu of foreclosure, including in- substance foreclosures, and all other assets currently held that were acquired through foreclosure or in lieu of foreclosure.

(x) *Anti-takeover Provisions Inapplicable*. The Company and its Subsidiaries have taken all actions required to exempt Purchaser, this Agreement, the Bank Agreement and Plan of Merger, the Merger and the Bank Merger from any effects of any anti-takeover provisions contained in their organizational documents, and the provisions of any federal or state "anti-takeover," "fair price," "moratorium," "control share acquisition" or similar laws or regulations.

(y) *Material Interests of Certain Persons*. Except for deposit and loan relationships entered into in the ordinary course of business, no current or former officer or director of the Company, or any family member or Affiliate of any such Person, has any material interest, directly or indirectly, in any contract or property (real or personal), tangible or intangible, used in or pertaining to the business of the Company or any of its Subsidiaries.

(z) *Insurance*. The Company and its Subsidiaries are presently insured for amounts deemed reasonable by management of the Company against such risks as companies engaged in a similar business, including engaging in the transactions contemplated by this Agreement, would, in accordance with good business practice, customarily be insured. Section 3.2 (z) of the Company's Disclosure Letter contains a list of all policies of insurance carried and owned by the Company or any of its Subsidiaries showing the name of the insurance company and agent, the nature of the coverage, the policy limit, the annual premiums and the expiration date. All of the insurance policies and bonds maintained by the Company or any of its Subsidiaries are in full force and effect, the Company and its Subsidiaries are not in default thereunder, all premiums and other payments due under any such policy have been paid. There are presently no material claims pending under such policies of insurance and no notices have been given by the Company or any of its Subsidiaries under such policies (other than with respect to health or disability insurance).

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(aa) *Investment Securities; Derivatives*.

(i) Except for restrictions that exist for securities that are classified as "held to maturity," none of the investment securities held by the Company or any of its Subsidiaries, including, but not limited to, stock of the FHLB or the Federal Reserve Bank of Richmond, is subject to any restriction (contractual or statutory) that would materially impair the ability of the entity holding such investment freely to dispose of such investment at any time.

(ii) Neither the Company nor any of its Subsidiaries is a party to or has agreed to enter into an exchange-traded or over-the-counter equity, interest rate, foreign exchange or other swap, forward, future, option, cap, floor or collar or any other contract that is a derivative contract or other similar risk management arrangements (including various combinations thereof) or owns securities that (A) are referred to generically as "structured notes," "high risk mortgage derivatives," "capped floating rate notes" or "capped floating rate mortgage derivatives" or (B) are likely to have changes in value as a result of interest or exchange rate changes that materially exceed normal changes in value attributable to interest or exchange rate changes.

(bb) *Indemnification*. Except as provided in the articles of incorporation or bylaws of the Company and the similar organizational documents of its Subsidiaries, neither the Company nor any of its Subsidiaries is a party to any agreement that provides for the indemnification of any of its present or former directors, officers, employees or shareholders, or other persons who serve or served as a director, officer or employee of another corporation, partnership or other enterprise at the request of the Company and there are no claims pending, or to the Knowledge of the Company, threatened for which any such Person would be entitled to indemnification under the articles of incorporation or bylaws of the Company or the similar organizational documents of any of its Subsidiaries, under any applicable law or regulation or under any such employment-related agreement.

(cc) *Corporate Documents and Records*. The Company has previously provided a complete and correct copy of the articles of incorporation, bylaws and similar organizational documents of the Company and each of the Company's Subsidiaries, as in effect as of the date of this Agreement. Neither the Company nor any of the Company's Subsidiaries is in violation of its articles of incorporation, bylaws or similar organizational documents. The minute books of the Company and each of the Company's Subsidiaries constitute a complete and correct record of all actions taken by their respective boards of directors (and each committee thereof) and their shareholders.

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(dd) *CRA, Anti-Money Laundering, OFAC and Customer Information Security*. Company Bank has received an overall rating of "Satisfactory" or better in its most recent examination or interim review with respect to the CRA. The Company does not have Knowledge of any facts or circumstances that would cause Company Bank or any other Subsidiary of the Company: (i) to be deemed not to be in satisfactory compliance in any material respect with the CRA, and the regulations promulgated thereunder, or to be assigned a rating for CRA purposes by federal bank regulators of lower than "Satisfactory"; (ii) to be deemed to be operating in violation in any material respect of the Bank Secrecy Act, the USA PATRIOT Act, any order issued with respect to anti-money laundering by the U.S. Department of the Treasury's Office of Foreign Assets Control, or any other applicable anti-money laundering statute, rule or regulation; or (iii) to be deemed not to be in satisfactory compliance in any material respect with the applicable privacy of customer information requirements contained in any federal and state privacy laws and regulations, including without limitation, in Title V of the Gramm-Leach- Bliley Act of 1999 and the regulations promulgated thereunder, as well as the provisions of the information security program adopted by Company Bank. To the Knowledge of the Company, no non-public customer information has been disclosed to or accessed by an unauthorized third party in a manner that would cause either the Company or any of its Subsidiaries to undertake any remedial action. The Board of Directors of Company Bank (or where appropriate of any other Subsidiary of the Company) has adopted, and Company Bank (or such other Subsidiary of the Company) has implemented, an anti-money laundering program that contains adequate and appropriate customer identification verification procedures that comply with Section 326 of the USA PATRIOT Act and such anti-money laundering program meets the requirements in all material respects of Section 352 of the USA PATRIOT Act and the regulations thereunder, and Company Bank (or such other Subsidiary of the Company) has complied in all material respects with any requirements to file reports and other necessary documents as required by the USA PATRIOT Act and the regulations thereunder.

(ee) *Internal Controls*. The Company and its Subsidiaries have devised and maintain a system of internal control over financial reporting sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, and (iii) access to assets is permitted only in accordance with management's general or specific authorization. There are no significant deficiencies or material weaknesses in the design or operation of internal controls over financial reporting that are reasonably likely to adversely affect in any material respect the Company's ability to record, process, summarize and report financial information. To the Knowledge of the Company, there has occurred no fraud, whether material or not, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting. Since January 1, 2020, neither the Company nor any of its Subsidiaries, nor, to the Knowledge of the Company, any Representative of the Company or any of its Subsidiaries, has received or otherwise had or obtained knowledge of any material complaint, allegation or assertion regarding the accounting or auditing practices, procedures, methodologies or methods (including with respect to loan loss reserves, write-downs, charge-offs and accruals) of the Company or any of its Subsidiaries or their respective internal accounting controls.

(ff) *Tax Treatment of the Merger*. The Company has no Knowledge of any fact or circumstance relating to it that would prevent the transactions contemplated by this Agreement from qualifying as a reorganization under Section 368(a) of the IRC.

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(gg) *Related Party Transactions*. Section 3.2(gg) of the Company's Disclosure Letter lists all instances in which the Company or any of its Subsidiaries is a party to any transaction (including any Loan) with any Affiliate, current director or executive officer or Person (or any of such Person's immediate family members or Affiliates) who beneficially owns (as defined in Rules 13d-3 and 13d-5 of the Exchange Act) 5% or more of the outstanding Company Common Stock (other than Subsidiaries of the Company) of the Company or any of its Subsidiaries where the amount exceeds $120,000. All such transactions involving indebtedness (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (c) did not involve more than the normal risk of collectability or present other unfavorable features. No loan or credit accommodation to any Affiliate of the Company or any of its Subsidiaries is presently in default or, during the three-year period before the date of this Agreement, has been in default or has been restructured, modified or extended. Neither the Company nor any of its Subsidiaries has been notified that principal or interest with respect to any such loan or other credit accommodation will not be paid when due or that the loan grade classification accorded such loan or credit accommodation is inappropriate.

(hh) *No Other Representations or Warranties*.

(i) Except for the representations and warranties made by the Company in this *Section 3.2*, neither the Company nor any other Person makes any express or implied representation or warranty with respect to the Company, its Subsidiaries, or their respective businesses, operations, assets, liabilities, conditions (financial or otherwise) or prospects, and the Company hereby disclaims any such other representations or warranties. In particular, without limiting the foregoing disclaimer, neither the Company nor any other Person makes or has made any representation or warranty to Purchaser or any of its Affiliates or representatives with respect to (A) any financial projection, forecast, estimate, budget or prospective information relating to the Company, any of its Subsidiaries or their respective businesses, or (B) except for the representations and warranties made by the Company in this *Section 3.2*, any oral or written information presented to Purchaser or any of its Affiliates or representatives in the course of their due diligence investigation of the Company, the negotiation of this Agreement or in the course of the transactions contemplated hereby.

(ii) The Company hereby acknowledges and agrees that neither Purchaser nor any other Person has made or is making any express or implied representation or warranty other than those contained in *Section 3.3*.

**3.3 Representations and Warranties of Purchaser**. Except (i) as disclosed in Purchaser's Disclosure Letter, and (ii) for information and documents commonly known as "confidential supervisory information" to the extent prohibited by law from disclosure (and as to which nothing in this Agreement shall require disclosure), Purchaser represents and warrants to the Company that:

(a) *Organization and Qualification*. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia and is registered with the Federal Reserve as a bank holding company. Purchaser has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it. Purchaser is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on Purchaser. Purchaser engages only in activities, and holds properties only of the types, permitted to financial holding companies by the BHCA.

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(b) *Subsidiaries*.

(i) Purchaser owns, directly or indirectly, all of the issued and outstanding shares of capital stock or other equity interests of each of its Subsidiaries free and clear of any Liens. There are no contracts, commitments, agreements or understandings relating to Purchaser's right to vote or dispose of any equity securities of its Subsidiaries. Purchaser's ownership interest in each of its Subsidiaries complies with all applicable laws, rules and regulations relating to equity investments by bank holding companies.

(ii) Each of Purchaser's Subsidiaries is a legal entity duly organized and validly existing under the laws of its jurisdiction of incorporation, formation or organization, as applicable, has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it and is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on Purchaser.

(iii) The outstanding shares of capital stock, membership interests, or other representations of equity interest of each Subsidiary have been validly authorized and are validly issued, fully paid and nonassessable and free of preemptive rights. No shares of capital stock or other equity interests of any Subsidiary of Purchaser are or may be required to be issued by virtue of any options, warrants or other rights, no securities exist that are convertible into or exchangeable for shares of such capital stock or other equity interests or any other debt or equity security of any Subsidiary, and there are no contracts, commitments, agreements or understandings of any kind for the issuance of additional shares of capital stock or other equity interests or other debt or equity security of any Subsidiary or options, warrants or other rights with respect to such securities.

(iv) Purchaser Bank is a Virginia-chartered state bank. No Subsidiary of Purchaser other than Purchaser Bank is an "insured depository institution" as defined in the Federal Deposit Insurance Act, as amended, and the applicable regulations thereunder. Purchaser Bank's deposits are insured by the FDIC through the Deposit Insurance Fund to the fullest extent permitted by law. Purchaser Bank is a member in good standing of the FHLB and the Federal Reserve Bank of Richmond and owns the requisite amount of stock therein, respectively.

(c) *Capital Structure*.

(i) The authorized capital stock of Purchaser consists of 50,000,000 shares of Purchaser Common Stock and 1,000,000 shares of undesignated Preferred Stock ("**Purchaser Preferred Stock**").

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(ii) As of the date of this Agreement,

(A) 16,225,467 shares of Purchaser Common Stock are issued and outstanding, all of which are validly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and were issued in full compliance with all applicable laws;

(B) No shares of Purchaser Preferred Stock are issued and outstanding; and

(C) 273,308 shares of Purchaser Common Stock are reserved for issuance pursuant to outstanding grants or awards under Purchaser's stock-based benefit plans.

(iii) The shares of Purchaser Common Stock to be issued in exchange for shares of Company Common Stock and Class A Common Stock upon consummation of the Merger in accordance with this Agreement have been duly authorized and when issued in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable and subject to no preemptive rights.

(iv) No bonds, debentures, notes or other indebtedness, in each case having the right to vote on any matters on which shareholders of Purchaser may vote, are issued or outstanding.

(v) Except as set forth in this *Section 3.3(c)*, as of the date of this Agreement, (A) no shares of capital stock or other voting securities of Purchaser are issued, reserved for issuance or outstanding, and (B) other than options to purchase shares of Purchaser Common Stock, neither the Company nor any of its Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, puts, calls, rights, convertible securities, commitments or agreements of any character obligating Purchaser or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, any additional shares of capital stock of Purchaser (including any rights plan or agreement) or obligating Purchaser or any of its Subsidiaries to grant, extend or enter into any such option, warrant, puts, calls, rights, convertible securities, commitment or agreement. Neither Purchaser nor any of its Subsidiaries has or is bound by any rights of any character relating to the purchase, sale or issuance or voting of, or right to receive dividends or other distributions on shares of Purchaser Common Stock, or any other security of Purchaser or a Subsidiary of Purchaser or any securities representing the right to vote, purchase or otherwise receive any shares of Purchaser Common Stock or any other security of Purchaser or a Subsidiary of Purchaser. Other than as stated herein, there are no outstanding securities or instruments that contain any redemption or similar provisions, and there are no outstanding contractual obligations of Purchaser or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of Purchaser or any of its Subsidiaries.

(d) *Authority*. Purchaser has all requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and, subject to the consents, approvals and filings set forth in *Section 3.3(f)*, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate actions on the part of Purchaser's Board of Directors, and no other corporate proceedings on the part of Purchaser are necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, subject to fraudulent transfer, moratorium, reorganization and similar laws relating to or affecting insured depository institutions or their parent companies or creditors' rights and remedies generally and to general principles of equity, whether applied in a court of law or a court of equity.

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(e) *No Violations*. The execution, delivery and performance of this Agreement by Purchaser do not, and the consummation of the transactions contemplated by this Agreement will not, (i) assuming that the consents, approvals and filings referred to in *Section 3.3(f)* have been obtained and the applicable waiting periods have expired, violate any law, rule or regulation or any judgment, decree, order, governmental permit or license to which Purchaser or any of its Subsidiaries (or any of their respective properties) is subject, (ii) violate the articles of incorporation or bylaws of Purchaser or the similar organizational documents of any of its Subsidiaries or (iii) constitute a breach or violation of, or a default under (or an event that, with due notice or lapse of time or both, would constitute a default under), or result in the termination of, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of Purchaser or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, indenture, deed of trust, loan agreement or other agreement, instrument or obligation to which Purchaser or any of its Subsidiaries is a party, or to which any of their respective properties or assets may be subject.

(f) *Consents and Approvals*. Except for (i) filings of applications and notices with, receipt of approvals or no objections from, and the expiration of related waiting periods required by, federal and state banking authorities, including filings and notices with the Federal Reserve, the VSCCBFI and the NCCOB, (ii) the filing with the SEC of a Proxy Statement-Prospectus in definitive form relating to the meeting of the Company's shareholders to be held in connection with this Agreement and the transactions contemplated hereby and of the Registration Statement in which such Proxy Statement-Prospectus will be included as a prospectus, and declaration of effectiveness of the Registration Statement, (iii) the filing of the Articles of Merger with the VASCC and the NCSOS pursuant to the VSCA and the NCBCA and the filing of the Bank Merger Certificates, (iv) filing with the NASDAQ of a notification or application of the listing of the shares of Purchaser Common Stock to be issued in the Merger, and (v) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of shares of Purchaser Common Stock pursuant to this Agreement, no consents or approvals of, or filings or registrations with, any Governmental Entity or any third party are required to be made or obtained by Purchaser in connection with the execution and delivery by Purchaser of this Agreement or the consummation by Purchaser of the Merger and the other transactions contemplated by this Agreement, including the Bank Merger. As of the date hereof, Purchaser has no Knowledge of any reason pertaining to Purchaser why any of the approvals referred to in this *Section 3.3(f)* should not be obtained without the imposition of any material condition or restriction described in *Section 6.2(e)*.

(g) *Governmental Filings*. Purchaser and each of its Subsidiaries has timely filed all reports, schedules, registration statements and other documents that it has been required to file since January 1, 2020 with the Federal Reserve, or any other Governmental Entity. As of their respective dates, each of such filings complied in all material respects with all laws or regulations under which it was filed (or was amended to comply promptly following discovery of such noncompliance).

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(h) *Securities Filings*. Purchaser has timely filed with the SEC all reports, schedules, registration statements, definitive proxy statements and exhibits thereto that it has been required to file under the Securities Act or the Exchange Act since January 1, 2020 (collectively, "**Purchaser Reports**"). As of their respective dates of filing with the SEC, none of the Purchaser Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. As of their respective dates of filing with the SEC, all of the Purchaser Reports complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the SEC promulgated thereunder. Each of the financial statements (including, in each case, any notes thereto) of Purchaser included in the Purchaser Reports complied as to form, as of their respective dates of filing with the SEC, in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto.

(i) *Financial Statements*. Purchaser has previously made available to the Company copies of (i) the consolidated balance sheets of Purchaser and its Subsidiaries as of December 31, 2021, 2020 and 2019 and related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2021, together with the notes thereto, accompanied by the audit report of Purchaser's independent registered public accounting firm, as reported in Purchaser's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and (ii) the unaudited consolidated balance sheets of Purchaser and its Subsidiaries as of September 30, 2022 and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for the nine (9) months ended September 30, 2022, as reported in the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2022 filed with the SEC. Such financial statements were prepared from the books and records of Purchaser and its Subsidiaries, fairly present the consolidated financial position of Purchaser and its Subsidiaries in each case at and as of the dates indicated and the consolidated results of operations and cash flows of Purchaser and its Subsidiaries for the periods indicated, and, except as otherwise set forth in the notes thereto, were prepared in accordance with GAAP consistently applied throughout the periods covered thereby; *provided, however*, that the unaudited financial statements for the nine (9) month period ended September 30, 2022 are subject to normal year-end adjustments (which will not be material individually or in the aggregate) and lack footnotes to the extent permitted under applicable regulations and GAAP. The books and records of Purchaser and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other legal and accounting requirements and reflect only actual transactions.

(j) *Undisclosed Liabilities*. Neither Purchaser nor any of its Subsidiaries has incurred any Liabilities other than Liabilities reflected on or reserved against in the consolidated balance sheet of Purchaser as of December 31, 2021, except for (i) Liabilities incurred since December 31, 2021 in the ordinary course of business consistent with past practice that, either alone or when combined with all similar liabilities, have not had, and would not reasonably be expected to have, a Material Adverse Effect on Purchaser and (ii) Liabilities incurred for legal, accounting, financial advising fees and out-of-pocket expenses in connection with the transactions contemplated by this Agreement.

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(k) *Absence of Certain Changes or Events*. Since December 31, 2021, Purchaser and its Subsidiaries have conducted their respective businesses only in the ordinary course of such businesses consistent with their past practices and there has not been any event or occurrence that has had, or is reasonably expected to have, a Material Adverse Effect on Purchaser.

(l) *Litigation*. There are no material suits, actions or legal, administrative or arbitration or other proceedings, or investigations of any nature pending or, to the Knowledge of Purchaser, threatened against or affecting Purchaser or any of its Subsidiaries or any property or asset of Purchaser or any of its Subsidiaries that (i) are seeking damages or declaratory relief against the Purchaser or any of its Subsidiaries or (ii) challenge the validity or propriety of the transactions contemplated by this Agreement. There are no judgments, decrees, injunctions, orders or rulings of any Governmental Entity or arbitrator outstanding against Purchaser or any of its Subsidiaries or the assets of Purchaser or any of its Subsidiaries. Since January 1, 2020, (i) there have been no investigations, subpoenas, written demands, or document requests received by Purchaser or any of its Subsidiaries from any Governmental Entity (other than in the ordinary course of business) and (ii) no Governmental Entity has requested that Purchaser or any of its Subsidiaries enter into a settlement, negotiation or tolling agreement with respect to any matter related to any such investigation, subpoena, written demand, or document request.

(m) *Absence of Regulatory Actions*. Since January 1, 2020, neither Purchaser nor any of its Subsidiaries has been a party to any cease and desist order, written agreement or memorandum of understanding with, or any commitment letter or similar undertaking to, or has been ordered to pay any civil money penalty by, or has been subject to any action, proceeding, order or directive by any Governmental Entity, or has adopted any board resolutions relating to such matters as are material to the business of Purchaser or its Subsidiaries at the request of any Governmental Entity, or has been advised by any Governmental Entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such action, proceeding, order, directive, written agreement, memorandum of understanding, commitment letter, board resolutions or similar undertaking. To the Knowledge of Purchaser, there are no material unresolved violations, criticisms or exceptions by any Governmental Entity with respect to any report or statement relating to any examinations of Purchaser or its Subsidiaries.

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(n) *Compliance with Laws*.

(i) Purchaser and each of its Subsidiaries have complied in all material respects with and are not in material default or violation under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to the Company or any of its Subsidiaries, including without limitation all laws related to data protection or privacy, the Equal Credit Opportunity Act and Regulation B, the Fair Housing Act, the Fair Credit Reporting Act, the Truth in Lending Act and Regulation Z, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Electronic Fund Transfer Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Interagency Policy Statement on Retail Sales of Nondeposit Investment Products, the SAFE Mortgage Licensing Act of 2008, the Real Estate Settlement Procedures Act and Regulation X, and any other law relating to bank secrecy, discriminatory lending, financing or leasing practices, money laundering prevention, Sections 23A and 23B of the Federal Reserve Act, the Sarbanes-Oxley Act, and all agency requirements relating to the origination, sale and servicing of mortgage and consumer loans. Purchaser and each of its Subsidiaries has, and has had at all times since January 1, 2020, all material permits, licenses, certificates of authority, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Entities that are required to permit it to carry on its business as it is presently conducted. All such permits, licenses, certificates of authority, orders and approvals are in full force and effect, and no suspension or cancellation of any of them is, to the Knowledge of Purchaser, threatened. Neither Purchaser nor any of its Subsidiaries has been given notice or been charged with any violation of, any law, ordinance, regulation, order, writ, rule, decree or condition to approval of any Governmental Entity that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on Purchaser.

(ii) Purchaser and each of its Subsidiaries, as applicable, maintains a written consumer compliance program that maintains procedures and controls reasonably designed to ensure compliance with applicable Consumer Protection Laws. All relevant employees of and consultants to Purchaser and its Subsidiaries, as applicable, have been informed of the applicable consumer compliance policies.

(iii) To the Knowledge of Purchaser, (i) neither Purchaser nor any of its Subsidiaries is under investigation by any Governmental Entity for a violation of any applicable Consumer Protection Laws, and (ii) there are no asserted or threatened claims, notices or administrative or court complaints against Purchaser or any of its Subsidiaries (whether by a Governmental Entity or any other party) relating to compliance with applicable Consumer Protection Laws by Purchaser, its Subsidiaries or any third parties acting on their behalf, in either case that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on Purchaser.

(iv) Except for routine examinations conducted by a Governmental Authority in the ordinary course of the business of Purchaser or any of its Subsidiaries, no Governmental Entity has initiated any proceeding or, to the Knowledge of Purchaser, investigation into the business or operations of Purchaser or any of its Subsidiaries since January 1, 2020. There is no unresolved violation, criticism or exception by any Governmental Entity with respect to any report or statement relating to any examinations of Purchaser and its Subsidiaries. Except for routine examinations conducted by a Governmental Entity in the ordinary course of business of Purchaser or any of its Subsidiaries, no examination of Purchaser or any of its Subsidiaries by any Governmental Entity has taken place or is currently under way, and, to the Knowledge of Purchaser, no report of examination is pending.

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(o) *Taxes*. All federal, state, local and foreign tax returns required to be filed by or on behalf of Purchaser or any of its Subsidiaries have been timely filed or requests for extensions have been timely filed and any such extension shall have been granted and not have expired, and all such filed returns are complete and accurate in all material respects. All Taxes shown on such returns, all Taxes required to be shown on returns for which extensions have been granted and all other Taxes required to be paid by Purchaser or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on Purchaser's balance sheet (in accordance with GAAP). There is no pending, or to the Knowledge of the Company, threatened, audit examination, deficiency assessment, tax investigation or refund litigation with respect to any Taxes of Purchaser or any of its Subsidiaries, and no claim has been made in writing by any authority in a jurisdiction where Purchaser or any of its Subsidiaries do not file tax returns that Purchaser or any such Subsidiary is subject to taxation in that jurisdiction. All Taxes, interest, additions and penalties due with respect to completed and settled examinations or concluded litigation relating to Purchaser or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on Purchaser's balance sheet (in accordance with GAAP). Purchaser and its Subsidiaries have not executed an extension or waiver of any statute of limitations on the assessment or collection of any tax due that is currently in effect. Purchaser and each of its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party, and Purchaser and each of its Subsidiaries has timely complied with all applicable information reporting requirements under Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and local information reporting requirements.

(p) *Agreements*.

(i) Each contract, arrangement, commitment or understanding (whether written or oral) that is a "material contract" (as such term is defined in Item 601(b)(10) of Regulation S-K under the Securities Act) to which Purchaser or any of its Subsidiaries is a party or by which Purchaser or any of its Subsidiaries is bound as of the date hereof (each, a "**Purchaser Contract**") has been filed as an exhibit to the most recent Annual Report on Form 10-K filed by Purchaser, or a Quarterly Report on Form 10-Q or Current Report on Form 8-K subsequent thereto, and neither Purchaser nor any of its Subsidiaries knows of, or has received notice of, any material violation of the above by any of the other parties thereto.

(ii) Each Purchaser Contract is valid and binding on Purchaser or one of its Subsidiaries, as applicable, and in full force and effect, except as, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on Purchaser. Purchaser and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it under each Purchaser Contract. To the Knowledge of Purchaser, each third-party counterparty to each Purchaser Contract has in all material respects performed all obligations required to be performed by it under such Purchaser Contract, and no event or condition exists which constitutes or, after notice or lapse of time or both, will constitute, a material default on the part of Purchaser or any of its Subsidiaries under any such Purchaser Contract.

(q) *Employee Benefit Plans*.

(i) For purposes of this Agreement, "**Purchaser Benefit Plans**" mean all employee benefit plans (as defined in Section 3(3) ERISA), whether or not subject to ERISA, whether funded or unfunded, and all pension, benefit, retirement, bonus, stock option, stock purchase, restricted stock, stock-based, performance award, phantom equity, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance, accrued leave, sick leave, vacation, paid time off, health, medical, disability, life, accidental death and dismemberment, insurance, welfare, fringe benefit and other similar plans, programs, policies, practices or arrangements or other contracts or agreements (and any amendments thereto) with respect to which Purchaser or any Subsidiary or any trade or business of Purchaser or any of its Subsidiaries, whether or not incorporated, all of which together with Purchaser would be deemed a "single employer" within the meaning of Section 4001 of ERISA (a "**Purchaser ERISA Affiliate**"), is a party or that are sponsored, maintained, contributed to or required to be contributed to by Purchaser or any of its Subsidiaries or any Purchaser ERISA Affiliate for the benefit of any current employee, officer, director, consultant or independent contractor (or any spouse or dependent of such individual) of Purchaser or any of its Subsidiaries or any Purchaser ERISA Affiliate.

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(ii) Each Purchaser Benefit Plan has been established, operated and administered in all material respects in accordance with its terms and the requirements of all applicable laws, including ERISA and the IRC. Neither Purchaser nor any of its Subsidiaries has taken any action to take corrective action or made a filing under any voluntary correction program of the IRS, the DOL or any other Governmental Entity with respect to any Purchaser Benefit Plan, and neither Purchaser nor any of its Subsidiaries has any Knowledge of any plan defect that would qualify for correction under any such program.

(iii) With regard to each Purchaser Benefit Plan that is intended to be qualified under Section 401(a) of the IRC (the "**Purchaser Qualified Plans**"), the IRS has issued a favorable determination letter with respect to each Purchaser Qualified Plan and the related trust, which letter has not been revoked (nor has revocation been threatened), and, to the Knowledge of Purchaser, there are no existing circumstances and no events have occurred that could adversely affect the qualified status of any Purchaser Qualified Plan or the exempt status of the related trust or increase the costs relating thereto. No trust funding any Purchaser Benefit Plan is intended to meet the requirements of Section 501(c)(9) of the IRC.

(iv) None of Purchaser, its Subsidiaries, nor any Purchaser ERISA Affiliate has, at any time during the last six (6) years, maintained, contributed to or been obligated to contribute to any "employee pension benefit plan" as described in Section 3(2) of ERISA that is subject to Title IV of ERISA, Multiemployer Plan or Multiple Employer Plan.

(v) There are no pending or threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations that have been asserted or instituted, and, to the Knowledge of Purchaser, no set of circumstances exists that may reasonably be expected to give rise to a claim or lawsuit, against Purchaser Benefit Plans, any fiduciaries thereof with respect to their duties to Purchaser Benefit Plans or the assets of any of the trusts under any of Purchaser Benefit Plans, that could reasonably be expected to result in any material liability of Purchaser or any of its Subsidiaries to the PBGC, the IRS, the DOL, any Multiemployer Plan, a Multiple Employer Plan, any participant in any Purchaser Benefit Plan, or any other party.

(vi) To the Knowledge of Purchaser, none of Purchaser and its Subsidiaries nor any Purchaser ERISA Affiliate nor any other person, including any fiduciary, has engaged in any "prohibited transaction" (as defined in Section 4975 of the IRC or Section 406 of ERISA) that could subject any of Purchaser Benefit Plans or their related trusts, Purchaser, any of its Subsidiaries, any Purchaser ERISA Affiliate or any person that Purchaser or any of its Subsidiaries has an obligation to indemnify, to any material tax or penalty imposed under Section 4975 of the IRC or Section 502 of ERISA.

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(vii) There are no pending or, to Purchaser's Knowledge, threatened material labor grievances or material unfair labor practice claims or charges against Purchaser or any of its Subsidiaries, nor any strikes or other material labor disputes against Purchaser or any of its Subsidiaries. Neither Purchaser nor any of its Subsidiaries is party to or bound by any collective bargaining or similar agreement with any labor organization, or work rules or practices agreed to with any labor organization or employee association applicable to employees of Purchaser or any of its Subsidiaries and, to the Knowledge of Purchaser, there are no organizing efforts by any union or other group seeking to represent any employees of Purchaser or any of its Subsidiaries and no employees of Purchaser or any of its Subsidiaries are represented by any labor organization.

(r) *Loan Matters.* All Loans held by Purchaser or any of its Subsidiaries were made in all material respects for good, valuable and adequate consideration in the ordinary course of the business, in accordance in all material respects with sound banking practices and the Loans are not subject to any pending, or to the Knowledge of Purchaser, threatened defenses, setoffs or counterclaims, including without limitation any such as are afforded by usury or truth in lending laws, except as may be provided by bankruptcy, insolvency or similar laws or by general principles of equity. The notes or other evidences of indebtedness evidencing such Loans and all forms of pledges, mortgages and other collateral documents and security agreements are, in all material respects, enforceable and valid (except as may be limited by the Enforceability Exceptions), and in each case, true, genuine and what they purport to be.

(s) *Anti-takeover Provisions Inapplicable*. Purchaser and its Subsidiaries have taken all actions required to exempt Purchaser, this Agreement, the Bank Agreement and Plan of Merger, the Merger and the Bank Merger from the effects of an anti-takeover provision contained in their organizational documents, and the provisions of any federal or state "anti-takeover," "fair price," "moratorium," "control share acquisition" or similar laws or regulations.

(t) *Corporate Documents and Records*. Purchaser has previously made available a complete and correct copy of the articles of incorporation, bylaws and similar organizational documents of Purchaser and each of Purchaser's Subsidiaries, as in effect as of the date of this Agreement. Neither Purchaser nor any of Purchaser's Subsidiaries is in violation of its articles of incorporation, bylaws or similar organizational documents. The minute books of Purchaser and each of Purchaser's Subsidiaries constitute a complete and correct record of all actions taken by their respective boards of directors (and each committee thereof) and their shareholders.

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(u) *CRA, Anti-Money Laundering, OFAC and Customer Information Security*. Purchaser Bank has received an overall rating of "Satisfactory" or better in its most recent examination or interim review with respect to the CRA. Purchaser does not have Knowledge of any facts or circumstances that would cause Purchaser Bank or any other Subsidiary of Purchaser: (i) to be deemed not to be in satisfactory compliance in any material respect with the CRA, and the regulations promulgated thereunder, or to be assigned a rating for CRA purposes by federal bank regulators of lower than "Satisfactory"; or (ii) to be deemed to be operating in violation in any material respect of the Bank Secrecy Act, the USA PATRIOT Act, any order issued with respect to anti-money laundering by the U.S. Department of the Treasury's Office of Foreign Assets Control, or any other applicable anti-money laundering statute, rule or regulation; or (i) to be deemed not to be in satisfactory compliance in any material respect with the applicable privacy of customer information requirements contained in any federal and state privacy laws and regulations, including without limitation, in Title V of the Gramm-Leach- Bliley Act of 1999 and the regulations promulgated thereunder, as well as the provisions of the information security program adopted by Purchaser Bank. No non-public customer information has been disclosed to or, to the Knowledge of Purchaser, accessed by an unauthorized third party in a manner that would cause either Purchaser or any of its Subsidiaries to undertake any remedial action. The Board of Directors of Purchaser Bank (or where appropriate of any other Subsidiary of Purchaser) has adopted, and Purchaser Bank (or such other Subsidiary of Purchaser) has implemented, an anti-money laundering program that contains adequate and appropriate customer identification verification procedures that comply with Section 326 of the USA PATRIOT Act and such anti-money laundering program meets the requirements in all material respects of Section 352 of the USA PATRIOT Act and the regulations thereunder, and Purchaser Bank (or such other Subsidiary of Purchaser) has complied in all material respects with any requirements to file reports and other necessary documents as required by the USA PATRIOT Act and the regulations thereunder.

(v) *Internal Controls*. Purchaser and its Subsidiaries have devised and maintain a system of internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, and (iii) access to assets is permitted only in accordance with management's general or specific authorization. There are no significant deficiencies or material weaknesses in the design or operation of internal controls over financial reporting that are reasonably likely to adversely affect in any material respect Purchaser's ability to record, process, summarize and report financial information. To the Knowledge of Purchaser, there has occurred no fraud, whether material or not, that involves management or other employees who have a significant role in Purchaser's internal controls over financial reporting. Since January 1, 2019, neither Purchaser nor any of its Subsidiaries, nor, to the Knowledge of Purchaser, any Representative of Purchaser or any of its Subsidiaries, has received or otherwise had or obtained knowledge of any material complaint, allegation or assertion regarding the accounting or auditing practices, procedures, methodologies or methods (including with respect to loan loss reserves, write-downs, charge-offs and accruals) of Purchaser or any of its Subsidiaries or their respective internal accounting controls.

(w) *Tax Treatment of the Merger*. Purchaser has no Knowledge of any fact or circumstance relating to it that would prevent the transactions contemplated by this Agreement from qualifying as a reorganization under Section 368(a) of the IRC.

(x) *Fairness Opinion*. The Board of Directors of Purchaser has received the opinion (which, if initially rendered verbally, have been or will be confirmed by written opinions, dated the same date) of Performance Trust Capital Partners, LLC, to the effect that, as of the date of such opinion and subject to the assumptions, limitations and qualifications set forth therein, the Exchange Ratio in the Merger is fair, from a financial point of view, to Purchaser. Such opinion has not been amended or rescinded as of the date hereof.

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(y) *Purchaser IT Systems*. To the Knowledge of Purchaser, all information technology and computer systems (including software, information technology and telecommunication hardware and other equipment) relating to the transmission, storage, maintenance, organization, presentation, generation, processing or analysis of data and information, whether or not in electronic format, used in or necessary to the conduct of the business of Purchaser or Purchaser Bank (collectively, "**Purchaser IT Systems**") have been properly maintained by technically competent personnel, in accordance with standards set by the manufacturers or otherwise in accordance with standards in the industry, to ensure proper operation, monitoring and use. Purchaser IT Systems are in good working condition to effectively perform all information technology operations necessary to conduct Purchaser's consolidated business as currently conducted. Neither Purchaser nor Purchaser Bank has experienced within the past two years any material disruption to, or material interruption in, the conduct of its business attributable to a defect, bug, breakdown or other failure or deficiency of Purchaser IT Systems. To Purchaser's Knowledge, no Person has gained unauthorized access to any of the Purchaser IT Systems that has had, or is reasonably expected to have, a Material Adverse Effect on Purchaser. Purchaser and Purchaser Bank have taken reasonable measures to provide for the back-up and recovery of the data and information necessary to the conduct of their businesses without material disruption to, or material interruption in, the conduct of their respective businesses. Purchaser and its Subsidiaries comply in all material respects with all data protection and privacy laws and regulations as well as their own policies relating to data protection and the privacy and security of personal data and the non-public personal information of their respective customers and employees, except for immaterial failures to comply or immaterial violations.

*(z) No Other Representations or Warranties.*

(i) Except for the representations and warranties made by Purchaser in this *Section 3.3*, neither Purchaser nor any other Person makes any express or implied representation or warranty with respect to Purchaser, its Subsidiaries, or their respective businesses, operations, assets, liabilities, conditions (financial or otherwise) or prospects, and Purchaser hereby disclaims any such other representations or warranties. In particular, without limiting the foregoing disclaimer, neither Purchaser nor any other Person makes or has made any representation or warranty to the Company or any of its Affiliates or representatives with respect to (A) any financial projection, forecast, estimate, budget or prospective information relating to Purchaser, any of its Subsidiaries or their respective businesses, or (B) except for the representations and warranties made by Purchaser in this *Section 3.3*, any oral or written information presented to the Company or any of its Affiliates or representatives in the course of their due diligence investigation of Purchaser, the negotiation of this Agreement or in the course of the transactions contemplated hereby.

(ii) Purchaser hereby acknowledges and agrees that neither the Company nor any other Person has made or is making any express or implied representation or warranty other than those contained in *Section 3.2*.

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**ARTICLE IV**<br> **CONDUCT PENDING THE MERGER**

**4.1 Forbearances by the Company**. Except as expressly contemplated or permitted by this Agreement, disclosed in the Company's Disclosure Letter, or to the extent expressly required by law or regulation or any Governmental Entity, during the period from the date of this Agreement to the Effective Time, the Company shall not, nor shall the Company permit any of its Subsidiaries to, without the express prior written consent (which may include consent via electronic mail) of Purchaser (which consent shall not be unreasonably withheld, conditioned or delayed):

(a) conduct its business other than in the ordinary course consistent with past practice; fail to use reasonable best efforts to maintain and preserve intact its business organization, properties, leases, Loans, deposit accounts, employees and advantageous business relationships, including any certifications, qualifications or authorizations with SBA or USDA, and retain the services of its officers and key employees; or take any action that would adversely affect or materially delay its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby;

(b) incur, modify, extend or renegotiate any indebtedness for borrowed money, or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other Person, other than the creation of deposit liabilities in the ordinary course of business consistent with past practice;

(ii) prepay any indebtedness or other similar arrangements that would cause the Company to incur any prepayment penalty thereunder; or

(iii) purchase any brokered certificates of deposit;

(c) (i) adjust, split, combine or reclassify any capital stock;

(ii) except as set forth in Section 4.1(c) of the Company's Disclosure Letter, make, declare or pay any dividend, or make any other distribution on its capital stock;

(iii) grant any person any right to acquire any shares of its capital stock or make any grant or award under the Company Restricted Stock Plan;

(iv) issue any additional shares of capital stock or any securities or obligations convertible or exercisable for any shares of its capital stock; or

(v) redeem or otherwise acquire any shares of its capital stock other than a security interest or because of the enforcement of a security interest and other than as provided in this Agreement;

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(d) other than in the ordinary course of business consistent with past practice (including the sale, transfer or disposal of other real estate owned ("**OREO**") if the loan associated with the OREO is $100,000 or more or the proposed sale, transfer or disposal would result in a discount of the Loan associated with the OREO of 25% or more), (i) sell, transfer, mortgage, encumber or otherwise dispose of any of its real property or other assets to any Person other than a Subsidiary, or (ii) cancel, release or assign any indebtedness to any such Person or any claims held by any such Person;

(e) make any equity investment, either by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets of any other Person, or form any new Subsidiary;

(f) except as set forth in Section 4.1(f) of the Company's Disclosure Letter, (i) renew, amend or terminate any Company Contract, or make any change in any Company Contract or (ii) enter into any contract that would constitute a Company Contract if it were in effect on the date of this Agreement;

(g) except for Loans or commitments for Loans that have previously been approved by the Company before the date of this Agreement, make, renegotiate, renew, increase the amount of, extend the term of, modify or purchase any Loans, or make any commitment in respect of any of the foregoing, except with respect to any secured Loan or commitment (in either case that does not involve a guaranty from a Governmental Entity, including, but not limited to USDA or SBA) wherein the total credit exposure is less than $2,000,000 or any unsecured Loan or commitment (in either case that does not involve a guaranty from a Governmental Entity, including, but not limited to USDA or SBA) wherein the total credit exposure is less than $350,000 which is made in conformity with existing lending practices to a borrower, and with collateral located within the Company's primary geographic service area; *provided*, that Purchaser shall be required to respond to any request for a consent to make such loan or extension of credit in writing within three (3) Business Days after the loan package is delivered to Purchaser or if no response is received within three (3) Business Days it will be deemed consent of Purchaser;

(h) make any new Loan, or commit to make any new Loan, to any director or executive officer of the Company or Company Bank, or any related entity of the foregoing or (ii) amend, renew or increase any existing Loan, or commit to amend, renew or increase any such Loan, to any director or executive officer of the Company or Company Bank, or any related entity of the foregoing, in either case, without first consulting with Purchaser, where such Loan, commitment, modification or renewal would require prior approval by the Company's Board of Directors pursuant to the policies of the Company or Company Bank or applicable law;

(i) except as required by any Company Benefit Plan in effect on the date hereof:

(i) except as set forth in Section 4.1(i)(i) of the Company's Disclosure Letter, (a) increase in any manner the compensation, bonuses or other fringe benefits of any of its employees or directors, or (b) pay, or commit to pay, any bonus, change in control, retention, pension, retirement allowance or contribution, except for payment of annual cash bonuses in respect of the fiscal year in effect as of the date of this Agreement in the ordinary course of business consistent with past practice pursuant to the Company Benefit Plans set forth in the Company's Disclosure Letter, and or (c) fund any rabbi trust or similar arrangement;

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(ii) become a party to, amend, renew, extend or commit itself to any Company Benefit Plan or any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment, severance or change in control agreement with or for the benefit of any employee or director, except for amendments to any plan or agreement that are required by law;

(iii) amend, modify or revise the terms of any outstanding stock option or stock-based compensation or voluntarily accelerate the vesting of, or the lapsing of restrictions with respect to, any stock options or other stock-based compensation; or make any contributions to any defined contribution plan or Company Benefit Plan that are not made in the ordinary course of business consistent with past practice;

(iv) elect to any office with the title of Vice President or higher any person who does not hold such office as of the date of this Agreement or nominate to its Board of Directors any person who is not a member of its Board of Directors as of the date of this Agreement; or

(v) hire or terminate any employee with an annualized salary that exceeds $50,000, other than terminations for "cause";

(j) commence any action or proceeding, other than to enforce any obligation owed to the Company or any of its Subsidiaries and in accordance with past practice, or settle any claim, action or proceeding (i) involving payment by it of money damages that exceed $50,000 or (ii) that would impose any material restriction on its operations or the operations of any of its Subsidiaries;

(k) amend its charter or bylaws, or similar governing documents of its Subsidiaries;

(l) increase or decrease the rate of interest paid on time deposits or on certificates of deposit, except in the ordinary course of business consistent with past practice;

(m) purchase any debt security, including mortgage-backed and mortgage- related securities, other than U.S. government and U.S. government agency securities with final maturities of less than two (2) years;

(n) make, or commit to make, any capital expenditures in the aggregate amount of $50,000, other than pursuant to binding commitments existing on the date hereof, which are described in the Company's Disclosure Letter, and except for ordinary course, immaterial expenditures reasonably necessary to maintain existing assets in good repair;

(o) establish or commit to the establishment of any new branch or other office facilities or file any application to relocate or terminate the operation of any banking office;

(p) enter into any futures contract, option, swap agreement, interest rate cap, interest rate floor, interest rate exchange agreement, or take any other action for purposes of hedging the exposure of its interest-earning assets or interest-bearing liabilities to changes in market rates of interest;

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(q) make any changes in policies in any material respect in existence on the date hereof with regard to: the extension of credit, or the establishment of reserves with respect to possible loss thereon or the charge off of losses incurred thereon; investments; risk and asset/liability management; deposit pricing or gathering; underwriting, pricing, originating, acquiring, selling, servicing or buying or selling rights to service, loans; its hedging practices and policies; or other material banking policies, in each case except as may be required by changes in applicable law or regulations, GAAP, or at the direction of a Governmental Entity;

(r) except as required by law or for communications in the ordinary course of business consistent with past practice that do not relate to the Merger or other transactions contemplated hereby:

(i) issue any communication of a general nature to employees (including general communications relating to benefits and compensation) without prior consultation with Purchaser and, to the extent relating to employment, benefit or compensation information addressed in this Agreement or related, directly or indirectly, to the transactions contemplated by this Agreement, without the prior consent of Purchaser (which shall not be unreasonably withheld, conditioned or delayed); or

(ii) issue any communication of a general nature to customers without the prior approval of Purchaser (which shall not be unreasonably withheld, conditioned or delayed);

(s) except with respect to foreclosures in process as of the date hereof, foreclose upon or take a deed or title to any commercial real estate (i) without providing prior notice to Purchaser and, if requested by Purchaser, conducting a Phase I environmental assessment of the property or (ii) if the Phase I environmental assessment referred to in the prior clause reflects the presence of any Hazardous Material or underground storage tank;

(t) make, change or rescind any material election concerning Taxes or Tax returns, change an annual Tax accounting period, adopt or change any material Tax accounting method, file any amended Tax return, enter into any closing agreement with respect to Taxes, settle or compromise any material Tax claim, audit, dispute or assessment, or surrender any right to claim a refund of Taxes or obtain any Tax ruling;

(u) take any action that is intended or would reasonably be likely to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time before the Effective Time, or in any of the conditions to the Merger set forth in Article VI not being satisfied or in a violation of any provision of this Agreement;

(v) implement or adopt any change in its accounting principles, practices or methods, other than as may be required by GAAP or regulatory guidelines;

(w) enter any new lines of business;

(x) purchase or sell any mortgage loan servicing rights other than in the ordinary course of business consistent with past practice;

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(y) merge or consolidate Company Bank or any Subsidiary with any other Person or restructure, reorganize or completely or partially liquidate or dissolve it or any of its Subsidiaries;

(z) knowingly take action that would prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the IRC; or

(aa) agree to take, make any commitment to take, or adopt any resolutions of its Board of Directors in support of, any of the actions prohibited by this *Section 4.1*.

Any request by the Company or response thereto by Purchaser shall be made in accordance with the notice provisions of *Section 8.7* and shall note that it is a request pursuant to this *Section 4.1*.

**4.2 Forbearances by Purchaser**. Except as expressly contemplated or permitted by this Agreement or to the extent required by law or regulation or any Governmental Entity, during the period from the date of this Agreement to the Effective Time, Purchaser shall maintain its rights and franchises in all material respects, and shall not, nor shall Purchaser permit any of its Subsidiaries to, without the prior written consent (which may include consent via electronic mail) of the Company (which consent shall not be unreasonably withheld, conditioned or delayed):

(a) Conduct its business other than in the ordinary course consistent with past practice; fail to use reasonable best efforts to maintain and preserve intact its business organization, properties, leases, employees and advantageous business relationships and retain the services of its officers and key employees;

(b) take any action that would adversely affect or materially delay its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby on a timely basis, including causing any other application to a bank Governmental Entity for approval of a merger to be submitted for filing before the application related to the Merger is filed with such bank Governmental Entity;

(c) take any action that is intended to or would reasonably be likely to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time before the Effective Time, or in any of the conditions to the Merger set forth in Article VI not being satisfied or in a violation of any provision of this Agreement;

(d) knowingly take action that would prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the IRC;

(e) agree to take, make any commitment to take, or adopt any resolutions of its Board of Directors in support of, any of the actions prohibited by this *Section 4.2*; or

(f) amend, repeal or modify any provision of its charter or bylaws in a manner that would adversely affect the Company or any Company shareholder relative to other holders of Purchaser Common Stock or the transactions contemplated by this Agreement.

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**ARTICLE V**<br> **COVENANTS**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**5.1 Acquisition Proposals**.

(a) From the date of this Agreement until the earlier to occur of the Closing or the termination of this Agreement in accordance with its terms, the Company shall not, and shall cause its Subsidiaries, and its and its Subsidiaries' officers, directors and employees and any investment banker, financial advisor, attorney, accountant or other representative retained by the Company or any of its Subsidiaries (collectively, the "**Representatives**") not to, directly or indirectly, (i) solicit, initiate, induce or knowingly encourage, or knowingly take any other action to facilitate, any inquiries, offers, discussions or the making of any proposal that constitutes or could reasonably be expected to lead to an Acquisition Proposal, (ii) furnish any confidential or non-public information or data regarding the Company or any of its Subsidiaries or afford access to any such information or data to any Person in connection with or in response to an Acquisition Proposal or an inquiry or indication of interest that could reasonably be expected to lead to an Acquisition Proposal, (iii) continue or otherwise participate in any discussions or negotiations, or otherwise communicate in any way with any Person (other than Purchaser), regarding an Acquisition Proposal, (iv) approve, endorse or recommend any Acquisition Proposal, (v) release any Person from, waive any provisions of, or fail to use its reasonable best efforts to enforce any confidentiality agreement or standstill agreement to which the Company is a party or (vi) enter into or consummate any agreement, agreement in principle, letter of intent, arrangement or understanding contemplating any Acquisition Proposal or requiring the Company to abandon, terminate or fail to consummate the transactions contemplated hereby. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding sentence by any Representative of the Company shall be deemed to be a breach of this *Section 5.1* by the Company. Notwithstanding the foregoing, before the adoption and approval of this Agreement by the holders of Company Common Stock and Company Class A Common Stock at the Company Shareholder Meeting, this *Section 5.1(a)* shall not prohibit the Company from furnishing non- public information regarding the Company and its Subsidiaries to, or entering into discussions with, any Person in response to an Acquisition Proposal that is submitted to the Company by such Person (and not withdrawn) if (1) the Company's Board of Directors determines in good faith, after consultation with the Company's outside legal counsel and financial advisors, the Acquisition Proposal constitutes or is reasonably expected to result in a Superior Proposal, (2) the Company has not breached any of the covenants set forth in this *Section 5.1,* (3) the Company's Board of Directors determines in good faith, after consultation with outside legal counsel, that the failure to take such action would reasonably be expected to violate the directors' fiduciary obligations to the Company's shareholders under applicable law, and (4) before furnishing any non-public information to, or entering into discussions with, such Person, the Company gives Purchaser written notice of the identity of such Person and of the Company's intention to furnish non-public information to, or enter into discussions with, such Person and the Company receives from such Person an executed confidentiality agreement on terms no more favorable to such Person than the Mutual Confidentiality and Non-Disclosure Agreement, dated as of August 9, 2022, between Purchaser and the Company (the "**Confidentiality Agreement**") is to Purchaser and the Company also provides Purchaser, prior to or substantially concurrently with the time such information is provided or made available to such Person, any non-public information furnished to such other Person that was not previously furnished to Purchaser. During the term of this Agreement, the Company shall not, and shall cause its Subsidiaries and its and their Representatives not to on its behalf, enter into any binding acquisition agreement, merger agreement, or other definitive transaction agreement (other than a confidentiality agreement referred to and entered into in accordance with this *Section 5.1(a)*) relating to any Acquisition Proposal.

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(b) The Company will notify Purchaser orally within One (1) Business Day and in writing (within two (2) Business Days) of receipt of any Acquisition Proposal, any request for non-public information that could reasonably be expected to lead to an Acquisition Proposal, or any inquiry with respect to or that could reasonably be expected to lead to an Acquisition Proposal, including, in each case, the identity of the Person making such Acquisition Proposal, the request or inquiry and the terms and conditions thereof, and shall provide to Purchaser any written materials received by the Company or any of its Subsidiaries in connection therewith. The Company will keep Purchaser informed of any developments with respect to any such Acquisition Proposal, request or inquiry promptly orally (within one (1) calendar day) and in writing (within two (2) calendar days) upon the occurrence thereof.

(c) The Company will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted before the date of this Agreement with respect to any of the foregoing, including terminating access to any physical or electronic data rooms relating to a possible Acquisition Proposal by such Person.

**5.2 Advice of Changes**. Before the Closing, each party shall promptly advise the other party orally and in writing to the extent that it has Knowledge of (i) any representation or warranty made by it contained in this Agreement becoming untrue or inaccurate in any material respect or (ii) the failure by it to comply in any material respect with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; *provided, however*, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement.

**5.3 Access and Information**.

(a) Upon reasonable notice and subject to applicable laws relating to the exchange of information, each of Purchaser and the Company, for purposes of verifying the representations and warranties of the other and preparing for the Merger and other matters contemplated by this Agreement, shall (and shall cause its respective Subsidiaries to) afford to the other party and its representatives (including, without limitation, officers and employees of the other party and its Affiliates and counsel, accountants and other professionals retained by the other party) such reasonable access throughout the period before the Effective Time to the books, records, contracts, properties, personnel, information technology and to such other information relating to the other party and its Subsidiaries as may be reasonably requested, except where such materials (i) constitute attorney-client privileged communications or information, (ii) relate to pending or threatened litigation or investigations if, in the opinion of counsel, the presence of such designees would or might jeopardize any privilege relating to, the matters being discussed or (iii) constitute confidential supervisory information if, in the opinion of counsel, disclosure is prohibited by applicable laws; *provided, however*, that no investigation pursuant to this *Section 5.3* shall affect or be deemed to modify any representation or warranty made in this Agreement. Neither party nor any of its Subsidiaries shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of its customers, or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into before the date of this Agreement. The parties will endeavor to make appropriate and reasonable substitute disclosure arrangements, consistent with law, in the case of circumstances where the restrictions in clauses (ii) or (iii) above.

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(b) From the date hereof until the Effective Time, the Company shall, and shall cause its respective Subsidiaries to, promptly provide to Purchaser (i) a copy of each report filed with a Governmental Entity (other than publicly available periodic reports filed with the SEC), (ii) a copy of each periodic report provided to its senior management and all materials relating to its business or operations furnished to its Board of Directors, (iii) a copy of each press release made available to the public and (iv) all other information concerning its business, properties and personnel as may be reasonably requested; *provided* that Purchaser shall not be entitled to receive reports or other documents relating to (w) solely in the case of clause (ii), matters involving this Agreement, (x) pending or threatened litigation or investigations if, in the opinion of counsel, the disclosure of such information would or might jeopardize any privilege relating to, the matters being discussed, or (y) confidential supervisory information if, in the opinion of counsel, disclosure is prohibited by applicable laws. The Company will endeavor to make appropriate and reasonable substitute disclosure arrangements, consistent with law, in the case of circumstances where the restrictions in clause (w) or (x) apply.

(c) The Company shall permit, and shall cause its Subsidiaries to permit, Purchaser and/or a cybersecurity consulting firm selected by Purchaser, at the sole expense of Purchaser, to conduct such IT security audits, studies and tests on the Company IT Systems.

(d) The Company and Purchaser will not, and will cause its respective representatives not to, use any information and documents obtained in the course of the consideration of the consummation of the transactions contemplated by this Agreement, including any information obtained pursuant to this *Section 5.3*, for any purpose unrelated to the consummation of the transactions contemplated by this Agreement and will hold such information and documents in confidence and treat such information and documents as secret and confidential and will use all reasonable efforts to safeguard the confidentiality of such information and documents in accordance with the provisions of the Confidentiality Agreement.

(e) From and after the date hereof, representatives of Purchaser and the Company shall meet on a regular basis to discuss and plan for the Closing and the conversion of the Company's and its Subsidiaries' data processing and related electronic informational systems to those used by Purchaser and its Subsidiaries with the goal of conducting such conversion as soon as practicable following the consummation of the Bank Merger.

(f) Within fifteen (15) Business Days of the end of each calendar month, the Company shall provide Purchaser with an updated list of Loans described in *Section 3.2(w)(vi)*.

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(g) The information regarding the Company and its Subsidiaries to be supplied by the Company for inclusion in the Registration Statement, any filings or approvals under applicable state securities laws, or any filing pursuant to Rule 165 or Rule 425 under the Securities Act or Rule 14a-12 under the Exchange Act will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The information supplied, or to be supplied, by the Company for inclusion in applications to Governmental Entities to obtain all permits, consents, approvals and authorizations necessary or advisable to consummate the transactions contemplated by this Agreement shall be accurate in all material respects.

(h) The information regarding Purchaser and its Subsidiaries to be supplied by Purchaser for inclusion in the Registration Statement, any filings or approvals under applicable state securities laws, or any filing pursuant to Rule 165 or Rule 425 under the Securities Act or Rule 14a-12 under the Exchange Act will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement-Prospectus (except for such portions thereof supplied by the Company or any of its Subsidiaries) will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. The information supplied, or to be supplied, by Purchaser for inclusion in applications to Governmental Entities to obtain all permits, consents, approvals and authorizations necessary or advisable to consummate the transactions contemplated by this Agreement shall be accurate in all material respects. The Registration Statement will comply as to form in all material respects with the provisions of the Securities Act and the rules and regulations thereunder.

**5.4 Applications; Consents**.

(a) The Company and Purchaser shall, upon request, furnish each other with all information concerning themselves, their Subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with the Proxy Statement-Prospectus, the Registration Statement or any other statement, filing, notice or application made by or on behalf of the Company and Purchaser or any of their respective Subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement. The parties hereto shall cooperate with each other and shall use their reasonable best efforts to prepare and file as soon as practicable after the date hereof, all necessary applications, notices and filings to obtain all permits, consents, approvals and authorizations of all Governmental Entities that are necessary or advisable to consummate the transactions contemplated by this Agreement. The Company and Purchaser shall furnish each other with all information concerning themselves, their respective Subsidiaries, and their respective Subsidiaries' directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with any application, notice or filing made by or on behalf of Purchaser, the Company or any of their respective Subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement. Purchaser and the Company shall have the right to review in advance, and to the extent practicable each will consult with the other on, in each case subject to applicable laws relating to the exchange of information, all the information relating to Purchaser and the Company, as applicable, and any of their respective Subsidiaries, that appears in any filing made with, or written materials submitted to, any Governmental Entity pursuant to this *Section 5.4(a)*. In exercising the foregoing right, each of the parties hereto shall act reasonably and as promptly as practicable.

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(b) As soon as practicable after the date hereof, each of the parties hereto shall, and they shall cause their respective Subsidiaries to, use its reasonable best efforts to obtain any consent, authorization or approval of any third party that is required to be obtained in connection with the transactions contemplated by this Agreement.

(c) Purchaser and the Company shall promptly advise each other upon receiving any communication from any Governmental Entity whose consent or approval is required for consummation of the transactions contemplated by this Agreement that causes such party to believe that there is a reasonable likelihood that such consent or approval will not be obtained or that the receipt of any such required consent or approval will be materially delayed.

**5.5 Anti-Takeover Provisions**. The Company and its Subsidiaries shall take all steps required by any relevant federal or state law or regulation or under any relevant agreement or other document to exempt or continue to exempt Purchaser, this Agreement, the Bank Agreement and Plan of Merger, the Merger and the Bank Merger from the effects of an anti-takeover provision in the Company's or its Subsidiaries' charter and bylaws, or similar organizational documents, and the provisions of any federal or state anti-takeover laws.

**5.6 Additional Agreements**. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use reasonable best efforts to take promptly, or cause to be taken promptly, all actions and to do promptly, or cause to be done promptly, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as possible, including using efforts to obtain all necessary actions or non-actions, extensions, waivers, consents and approvals from all applicable Governmental Entities, effecting all necessary registrations, applications and filings (including, without limitation, filings under any applicable state securities laws) and obtaining any required contractual consents and regulatory approvals. Notwithstanding anything in this Agreement to the contrary, nothing in this Agreement shall require Purchaser or its Affiliates to agree to, and without the prior consent of Purchaser the Company and its subsidiaries shall not agree to, in connection with obtaining any actions or non- actions, extensions, waivers, consents or approvals of any Governmental Entity any condition or requirement that would so materially and adversely impact the economic or business benefits to Purchaser of the transactions contemplated hereby that, had such condition or requirement been known, Purchaser would not, in its reasonable judgment, have entered into this Agreement (such condition or requirement, a "**Burdensome Condition**").

**5.7 Publicity**. The initial press release announcing this Agreement shall be a joint press release. Thereafter, the Company and Purchaser shall consult with each other and obtain the advance approval of the other party (which approval shall not be unreasonably withheld, conditioned or delayed) before issuing any press releases or, to the extent practical, otherwise making public statements (including any written communications to shareholders) with respect to the Merger and any other transaction contemplated hereby; *provided, however*, that nothing in this *Section 5.7* shall be deemed to prohibit any party from making any disclosure (i) that its counsel deems necessary to satisfy such party's disclosure obligations imposed by law, (ii) at the request of a Governmental Entity or (iii) that is substantially similar to communications previously approved pursuant to this *Section 5.7*.

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**5.8 Shareholder Meeting**.

(a) The Company shall submit to its shareholders this Agreement and any other matters required to be approved or adopted by its shareholders to carry out the intentions of this Agreement. In furtherance of that obligation, the Company will take, in accordance with applicable law and its articles of incorporation and bylaws, all action necessary to call, give notice of, convene and hold a meeting of its shareholders (the "**Company Shareholder Meeting**") as promptly as practicable to consider and vote on approval and adoption of this Agreement and the transactions provided for in this Agreement. Subject to *Section 5.8(b)*, the Company shall, (i) through its Board of Directors, recommend to its shareholders the adoption and approval of this Agreement, (ii) include such recommendation in the Proxy Statement-Prospectus and (iii) use reasonable best efforts to obtain from its shareholders the necessary votes approving and adopting this Agreement.

(b) Notwithstanding anything in this Agreement to the contrary, at any time before the Company Shareholder Meeting, the Company's Board of Directors may, if it concludes in good faith (after consultation with its outside legal advisors) that the failure to do so would be reasonably likely to result in a violation of its fiduciary duties under applicable law, withdraw or modify or change in a manner adverse to Purchaser its recommendation that the shareholders of the Company approve this Agreement (a "**Change of Recommendation**") (although the resolutions approving this Agreement as of the date hereof may not be rescinded or amended); *provided* that before any such Change of Recommendation, the Company shall have complied in all material respects with *Section 5.1*, given Purchaser at least three (3) Business Days' prior written notice advising it of the intention of the Company's Board of Directors to take such action and a reasonable description of the event or circumstances giving rise to its determination to take such action and, if the decision relates to an Acquisition Proposal, given Purchaser the material terms and conditions of the Acquisition Proposal or inquiry, including the identity of the Person making any such Acquisition Proposal and any written materials received by the Company or any of its Subsidiaries in connection therewith; and *provided, further*, that if the decision relates to an Acquisition Proposal: (i) the Company shall have given Purchaser three (3) Business Days after delivery of such notice to Purchaser to propose revisions to the terms of this Agreement (or make another proposal) and if Purchaser proposes to revise the terms of this Agreement, throughout such period the Company shall have negotiated in good faith with Purchaser with respect to such proposed revisions or other proposal; and (ii) the Company's Board of Directors shall have determined in good faith, after consultation with the Company's outside legal counsel and financial advisors and after considering the results of such negotiations and giving effect to any proposals, amendments or modifications made or agreed to by Purchaser, if any, that such Acquisition Proposal constitutes a Superior Proposal. If the Company's Board of Directors does not make the determination that such Acquisition Proposal constitutes a Superior Proposal and thereafter determines not to withdraw, modify or change its recommendation that the shareholders of the Company approve this Agreement in connection with a new Acquisition Proposal, the procedures referred to above shall apply anew and shall also apply to any subsequent withdrawal, modification or change. In the event of any material revisions to the Acquisition Proposal, the Company shall be required to deliver a new written notice to Purchaser and to again comply with the requirements of this *Section 5.8(c)* with respect to such new written notice, except that the three (3) Business Day period referred to above shall be reduced to two (2) Business Days.

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**5.9 Registration of Purchaser Common Stock**.

(a) Within sixty (60) days following the date hereof, Purchaser shall prepare and file the Registration Statement with the SEC. The Registration Statement shall contain proxy materials relating to the matters to be submitted to the Company shareholders at the Company Shareholder Meeting and shall also constitute the prospectus relating to the shares of Purchaser Common Stock to be issued in the Merger (such proxy statement/prospectus, and any amendments or supplements thereto, the "**Proxy Statement-Prospectus**"). The Company will furnish to Purchaser the information required to be included in the Registration Statement with respect to its business and affairs and shall have the right to review and consult with Purchaser and approve the form of, and any characterizations of such information included in, the Registration Statement before its being filed with the SEC. Each of Purchaser and the Company shall use its reasonable best efforts to have the Registration Statement declared effective by the SEC and to keep the Registration Statement effective as long as needed to consummate the Merger and the transactions contemplated hereby. Each of Purchaser and the Company will use its reasonable best efforts to cause the Proxy Statement-Prospectus to be mailed to the Company's shareholders as promptly as practicable after the Registration Statement is declared effective under the Securities Act. Purchaser will advise the Company, promptly after it receives notice thereof, of the time when the Registration Statement has become effective, the issuance of any stop order, the suspension of the qualification of Purchaser Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Proxy Statement-Prospectus or the Registration Statement. If, at any time before the Effective Time, any information relating to Purchaser or the Company, or any of their respective Affiliates, officers or directors, should be discovered by Purchaser or the Company that should be set forth in an amendment or supplement to any of the Registration Statement or the Proxy Statement-Prospectus so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party that discovers such information shall promptly notify the other party hereto and, to the extent required by law, rules or regulations, an appropriate amendment or supplement describing such information shall be promptly filed by Purchaser or the Company, as applicable, with the SEC and disseminated by Purchaser and the Company to their respective shareholders.

(b) Purchaser shall also take any action required to be taken under any applicable state securities laws in connection with the Merger and each of the Company and Purchaser shall furnish all information concerning it and the holders of Company Common Stock and Company Class A Common Stock as may be reasonably requested in connection with any such action.

(c) Before the Effective Time, Purchaser shall notify or file an application with the NASDAQ with respect to the additional shares of Purchaser Common Stock to be issued by Purchaser in exchange for the shares of Company Common Stock and Company Class A Common Stock.

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**5.10 Notification of Certain Matters**. Each party shall give prompt notice to the other of: (i) any event or notice of, or other communication relating to, a default or event that, with notice or lapse of time or both, would become a default, received by it or any of its Subsidiaries after the date of this Agreement and before the Effective Time, under any contract material to the financial condition, properties, businesses or results of operations of each party and its Subsidiaries taken as a whole to which each party or any Subsidiary is a party or is subject; (ii) any event, condition, change or occurrence which it believes would or would be reasonably likely to cause or constitute a material breach of any of its representations, warranties or covenants contained herein or that reasonably could be expected to give rise, individually or in the aggregate, to the failure of a condition in Article VI and (iii) any event, condition, change or occurrence that individually or in the aggregate has, or that, so far as reasonably can be foreseen at the time of its occurrence, is reasonably likely to result in a Material Adverse Effect. Each of the Company and Purchaser shall give prompt notice to the other party of any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with any of the transactions contemplated by this Agreement.

**5.11 Employee Benefit Matters**.

(a) At the sole discretion of Purchaser, Purchaser may maintain the Company's health and welfare plans for Persons who are employees of the Company and its Subsidiaries immediately before the Effective Time and whose employment is not terminated before the Effective Time (a "**Continuing Employee**") through the end of the calendar year in which the Effective Time occurs. Notwithstanding the foregoing, if Purchaser determines to terminate one or more of the Company's health and/or other welfare plans, then, at the request of Purchaser, made at least thirty (30) days before the Effective Time, the Company or its Subsidiaries shall adopt resolutions, to the extent required, providing that the Company's applicable health and welfare plans will be terminated effective immediately before the Effective Time (or such later date as requested by Purchaser in writing or as may be required to comply with any applicable advance notice or other requirements contained in such plans or provided for by law) and shall arrange for termination of all corresponding insurance policies, service agreements and related arrangements effective on the same date to the extent not prohibited by the terms of the arrangements or applicable law. Notwithstanding the foregoing, no coverage of any of the Continuing Employees or their dependents shall terminate under any of the Company's health and welfare plans before the time the Continuing Employees or their dependents, as applicable, become eligible to participate in the health and welfare plans, programs and benefits common to similarly situated employees of Purchaser and its Subsidiaries and their dependents and, consequently, no Continuing Employee shall experience a gap in coverage. Subject to the provisions of this *Section 5.11*, Continuing Employees shall, if applicable, be subject to the employment terms, conditions and rules applicable to other similarly situated employees of Purchaser. Purchaser shall use commercially reasonable efforts to ensure that Continuing Employees who become covered under health and welfare plans, programs and benefits of Purchaser or any of its Subsidiaries shall (i) receive credit for any co-payments and deductibles paid under the Company's health and welfare plans for the plan year in which coverage commences under Purchaser's health and welfare plans and (ii) shall not be subject to any pre-existing conditions under any such plans or arrangements, in each case, to the same extent as applied under the Company's health and welfare plans immediately prior to the Effective Time. Company employees who are not Continuing Employees and their qualified beneficiaries will have the right to continued coverage under group health plans of Purchaser only in accordance with COBRA.

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(b) Purchaser shall cause each Purchaser Benefit Plan in which Continuing Employees are eligible to participate to take into account for purposes of eligibility and vesting (but not benefit accrual) under the Purchaser Benefit Plans the service of the Continuing Employees with the Company and its Subsidiaries to the same extent as such service was credited for such purpose by the Company and its subsidiaries; *provided, however*, that such service shall not be recognized: (i) to the extent that such recognition would result in a duplication of benefits under any Purchaser Benefit Plans, (ii) to the extent, at the sole discretion of Purchaser, the cash value of unused paid time-off is paid to Continuing Employees at the Effective Time, (iii) if similarly situated employees of Purchaser and its Subsidiaries do not receive credit for service under the applicable Purchaser Benefit Plan or (iv) with respect to any Purchaser Benefit Plan that is grandfathered or frozen, either with respect to level of benefits or participation. The value of each Company employee's (including employees of the Company's Subsidiaries) unused paid time-off is set forth in *Section 3.2(r)* of the Company's Disclosure Letter. This Agreement shall not be construed to limit the ability of Purchaser to terminate the employment of any employee of the Company or its Subsidiaries or to review any employee benefit plan or program from time to time and to make such changes (including terminating any such plan or program) as Purchaser deems appropriate.

(c) If requested in writing by Purchaser no later than sixty (60) days before Closing, the Company's Board of Directors will also adopt resolutions (which shall be provided to Purchaser at least five (5) Business Days prior to adoption for Purchaser's review and approval) either, as applicable, (i) terminating the Company 401(k) Plan immediately before the Effective Time, subject to the occurrence of the Effective Time, and if further requested, shall prepare and submit a request to the IRS for a favorable determination letter on termination, or (ii) authorizing and directing an officer of Company or any of its Subsidiaries, as applicable, to send the required sixty (60) day (or other applicable) written notice to terminate and end participation of Company or any of its Subsidiaries, as the case may be, in any Multiple Employer 401(k) Plan, without, unless Purchaser requests otherwise, permitting any transfer of accounts therein to any Purchaser Benefit Plan as a successor plan. If Purchaser requests that the Company apply for a favorable determination letter, then before the Effective Time, the Company shall take all such actions as are necessary (determined in consultation with Purchaser) to submit the application for favorable determination letter in advance of the Effective Time, and following the Effective Time, Purchaser shall use commercially reasonable efforts in good faith to obtain such favorable determination letter as promptly as possible (including, but not limited to, making such changes to the Company 401(k) Plan as may be required by the IRS as a condition to its issuance of a favorable determination letter).

(d) For those employees of the Company and Company Bank whose employment is eliminated as a result of the Bank Merger, except for employees with individual agreements that provide for payment of severance under certain circumstances (who will be paid severance only in accordance with such agreements), Purchaser will provide severance in accordance with the Purchaser's standard severance policy as disclosed on Section 5.11(d) of Purchaser's Disclosure Letter; *provided*, that the severance periods will be modified in accordance with the terms set forth on Section 5.11(d) of Purchaser's Disclosure Letter.

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(e) Except as set forth on Section 5.11(e) of Purchaser's Disclosure Letter, Purchaser and the Company may jointly elect, in amounts mutually satisfactory to Purchaser and the Company, to enter into retention bonus agreements with key employees of the Company; *provided*, that (i) no retention bonus payment shall be made that would be considered an "excess parachute payment" within the meaning of Section 280G of the IRC or result in any other adverse tax consequence to Purchaser and (ii) the aggregate retention bonus pool amount will not exceed the amount set forth in Section 5.11(e) of Purchaser's Disclosure Letter.

(f) In the sole discretion of Purchaser, Purchaser may enter into mutually agreeable arrangements with executives and other employees of the Company, including agreements regarding grants or awards of Purchaser Common Stock under Purchaser's stock-based benefit plans.

(g) Without limiting the generality of *Section 8.8*, the provisions of this *Section 5.11* are solely for the benefit of the parties to this Agreement, and no current or former employee, director or service provider shall be regarded for any purpose as a third-party beneficiary to this Agreement. The terms of this Agreement shall not be deemed to (i) establish, amend or modify any Company Benefit Plan, Purchaser Benefit Plan or any employee benefit plan, program, agreement or arrangement maintained or sponsored by the Company, Purchaser or any of their Affiliates, (ii) alter or limit the ability of Purchaser and its Subsidiaries to amend, modify or terminate any compensation or benefit plan, program or agreement after the Effective Time or (iii) confer on any current or former employee, director or service provider any right to employment or continued employment or service with the Company, Purchaser or any of their Affiliates.

**5.12 Indemnification**.

(a) From and after the Effective Time, Purchaser shall indemnify and hold harmless each of the current or former directors or officers of the Company or any of its Subsidiaries (each, an "**Indemnified Party**"), and any person who becomes an Indemnified Party between the date hereof and the Effective Time, against any costs or expenses (including reasonable attorneys' fees and expenses), judgments, fines, losses, claims, damages or liabilities and amounts paid in settlement incurred in connection with any actual or threatened claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or before the Effective Time, whether asserted or claimed before, at or after the Effective Time, based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he or she is or was a director or officer of the Company, any of its Subsidiaries or any of their respective predecessors or was before the Effective Time serving at the request of any such party as a director, officer, employee, trustee or partner of another corporation, partnership, trust, joint venture, employee benefit plan or other entity or (ii) any matters arising in connection with the transactions contemplated by this Agreement, to the fullest extent such Person would have been indemnified or have the right to advancement of expenses pursuant to the Company's articles of incorporation and bylaws as in effect on the date of this Agreement and as permitted by applicable law, and Purchaser and the Surviving Corporation shall also advance expenses as incurred by such Indemnified Party to the fullest extent permitted under applicable law; *provided, however*, that the Person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined by a court of competent jurisdiction that such Person is not entitled to indemnification.

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(b) Any Indemnified Party wishing to claim indemnification under *Section 5.12(a)*, upon learning of any action, suit, proceeding or investigation described above, shall promptly notify Purchaser thereof. Any failure to so notify shall not affect the obligations of Purchaser under *Section 5.12(a)* unless and to the extent that Purchaser is actually prejudiced as a result of such failure.

(c) For a period of six (6) years following the Effective Time, Purchaser shall maintain in effect the Company's current directors' and officers' liability insurance covering each Person currently covered by the Company's directors' and officers' liability insurance policy with respect to claims against such Persons arising from facts or events occurring at or before the Effective Time (*provided* that Purchaser may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are no less favorable in any material respect to the insured); *provided, however*, that in no event shall Purchaser be required to expend in the aggregate pursuant to this *Section 5.12(c*) more than 200% of the annual premium currently paid by the Company for such insurance (the "**Premium Cap**") and, if Purchaser is unable to maintain such policy as a result of this proviso, Purchaser shall obtain as much comparable insurance as is available at a premium equal to the Premium Cap; *provided further*, that after consultation with Purchaser, the Company may (i) obtain an extended reporting period endorsement under the Company's existing directors' and officers' liability insurance policy or (ii) substitute therefor "tail" policies the material terms of which, including coverage and amount, are no less favorable in any material respect to such Person than the Company's existing insurance policies as of the date hereof, in either case, if and to the extent that the same may be obtained for an amount that, in the aggregate, does not exceed the Premium Cap.

(d) If Purchaser or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving Person of such consolidation or merger or (ii) liquidates, dissolves, transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, proper provision shall be made so that such successor and assign of Purchaser and its successors and assigns assume the obligations set forth in this *Section 5.12*.

(e) The provisions of this *Section 5.12* are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her representatives.

(f) Any indemnification payments made pursuant to this *Section 5.12* are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. 1828(k)) and the regulations promulgated thereunder by the Federal Deposit Insurance Corporation (12 C.F.R. Part 359).

**5.13 Shareholder Litigation**. The Company shall give Purchaser the opportunity to participate at Purchaser's own expense in the defense or settlement of any shareholder litigation against the Company and/or its directors relating to the transactions contemplated by this Agreement, and no such settlement shall be agreed to without Purchaser's prior written consent (such consent not to be unreasonably withheld, conditioned or delayed).

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**5.14 Disclosure Supplements**. From time to time before the Effective Time, the Company and Purchaser will promptly notify the other party in writing with respect to any matter hereafter arising that, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Disclosure Letters or that is necessary to correct any information in such Disclosure Letters that has been rendered materially inaccurate thereby. For the avoidance of doubt, such written notice shall not be deemed to be a supplement or amendment to such Disclosure Letters.

**5.15 Director Appointments**. Before the Closing Date, each of Purchaser and Purchaser Bank shall take all required action to appoint the Designated Directors (as hereinafter defined) to serve as directors of Purchaser Bank effective as of the Effective Time. "**Designated Directors**" shall mean two (2) members of the current Board of Directors of the Company, selected by Purchaser in consultation with the Company, and subject to the bylaws and the requirements of the nominating and governance committee of Purchaser Bank, and the requirements regarding service as a member of the Board of Directors of Purchaser Bank.

**5.16 Dividends**. Purchaser and the Company shall coordinate with each other regarding the declaration, setting of record dates, and payment dates of dividends with respect to shares of Company Common Stock, Company Class A Common Stock and Purchaser Common Stock, it being the intention of the parties that, with respect to the second calendar quarter of 2023 (or any subsequent calendar quarter), holders of shares of Company Common Stock and Class A Common Stock shall receive either a quarterly dividend on shares of Company Common Stock or Class A Common Stock or a quarterly dividend declared with respect to shares of Purchaser Common Stock received as Merger Consideration and shall not receive dividends declared in the second calendar quarter of 2023 (or any subsequent calendar quarter) with respect to both shares of Company Common Stock or Class A Common Stock and shares of Purchaser Common Stock received as Merger Consideration.

**5.17 Loan Program Credentialing.** Purchaser and the Company each agree to cooperate with one another and exercise reasonable best efforts to qualify Purchaser Bank with the SBA, USDA and any other lending program of a Governmental Entity in which Company Bank participates as of the date hereof so that Purchaser Bank may participate in any such programs after the Closing.

**ARTICLE VI**<br> **CONDITIONS TO CONSUMMATION**

**6.1 Conditions to Each Party**'**s Obligations**. The respective obligations of each party to effect the Merger shall be subject to the satisfaction of the following conditions:

(a) *Shareholder Approval*. This Agreement shall have been approved by the requisite vote of the Company's shareholders in accordance with applicable laws and regulations.

(b) *Regulatory Approvals*. All approvals, consents or waivers of any Governmental Entity required to permit consummation of the transactions contemplated by this Agreement, including the Merger and the Bank Merger, shall have been obtained and shall remain in full force and effect, and all statutory waiting periods shall have expired or been terminated.

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(c) *No Injunctions or Restraints; Illegality*. No party hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the Merger or the Bank Merger and no Governmental Entity shall have instituted any proceeding to enjoin or prohibit the consummation of the Merger, the Bank Merger or any transactions contemplated by this Agreement. No statute, rule or regulation shall have been enacted, entered, promulgated or enforced by any Governmental Entity that prohibits or makes illegal consummation of the Merger or the Bank Merger.

(d) *Registration Statement*. The Registration Statement shall have been declared effective by the SEC and no proceedings shall be pending or threatened by the SEC to suspend the effectiveness of the Registration Statement and not withdrawn.

(e) *Stock Listing*. Purchaser shall have filed with the NASDAQ a notification form or application, as applicable, for the listing of all shares of Purchaser Common Stock to be delivered as Merger Consideration, and the NASDAQ shall not have objected to the listing of such shares of Purchaser Common Stock.

(f) *Tax Opinions*. Purchaser and the Company shall have received written opinions of Bowles Rice LLP and Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, respectively, dated as of the Closing Date, in form and substance customary in transactions of the type contemplated hereby, and reasonably satisfactory to Purchaser and the Company, as the case may be, substantially to the effect that on the basis of the facts, representations and assumptions set forth in such opinions, which are consistent with the state of facts existing at the Effective Time, (i) the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the IRC and (ii) Purchaser and the Company will each be a party to that reorganization within the meaning of Section 368(b) of the IRC. Such opinions may be based on, in addition to the review of such matters of fact and law as counsel considers appropriate, representations contained in certificates of officers of Purchaser, the Company and others.

**6.2 Conditions to the Obligations of Purchaser**. The obligations of Purchaser to effect the Merger shall be further subject to the satisfaction of the following additional conditions, any one or more of which may be waived by Purchaser:

(a) *The Company*'*s Representations and Warranties*. Subject to the standard set forth in *Section 3.1(b)*, each of the representations and warranties of the Company contained in this Agreement and in any certificate or other writing delivered by the Company pursuant hereto shall be true and correct at and as of the date of this Agreement and at and as of Closing Date as though made at and as of the Closing Date, except that those representations and warranties that address matters only as of a particular date need only be true and correct as of such date.

(b) *Performance of the Company*'*s Obligations*. The Company shall have performed in all material respects all obligations and covenants required to be performed by it under this Agreement at or before the Effective Time.

(c) *Officers*' *Certificate*. Purchaser shall have received a certificate signed by the chief executive officer and the chief financial or principal accounting officer of the Company to the effect that the conditions set forth in *Sections 6.2(a)* and *(b)* have been satisfied.

(d) *No Material Adverse Effect*. Since the date of this Agreement, there shall not have occurred any Material Adverse Effect with respect to the Company.

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(e) *Burdensome Condition*. None of the approvals, consents or waivers of any Governmental Entity required to permit consummation of the transactions contemplated by this Agreement shall contain a Burdensome Condition.

(f) *Execution of Executive Agreement*. Edward C. Ashby, III shall have entered into a consulting agreement with Purchaser, and, except as provided in Section 6.2(f) of the Company's Disclosure Letter, Mr. Ashby shall not have taken any action on or before the Effective Time to cancel or terminate such agreement.

(g) *Loan Program Credentialing*. Purchaser Bank shall have been qualified with SBA, USDA and any other lending program of a Governmental Entity in which Company Bank participates as of the date hereof so that Purchaser Bank may participate in any such programs after the Closing.

**6.3 Conditions to the Obligations of the Company**. The obligations of the Company to effect the Merger shall be further subject to the satisfaction of the following additional conditions, any one or more of which may be waived by the Company:

(a) *Purchaser*'*s Representations and Warranties*. Subject to the standard set forth in *Section 3.1(b)*, each of the representations and warranties of Purchaser contained in this Agreement and in any certificate or other writing delivered by Purchaser pursuant hereto shall be true and correct at and as of date of this Agreement and at and as of Closing Date as though made at and as of the Closing Date, except that those representations and warranties that address matters only as of a particular date need only be true and correct as of such date.

(b) *Performance of Purchaser*'*s Obligations*. Purchaser shall have performed in all material respects all obligations and covenants required to be performed by it under this Agreement at or before the Effective Time.

(c) *Officers*' *Certificate*. The Company shall have received a certificate signed by the chief executive officer and the chief financial or principal accounting officer of Purchaser to the effect that the conditions set forth in *Sections 6.3(a)* and *(b)* have been satisfied.

(d) *No Material Adverse Effect*. Since the date of this Agreement, there shall not have occurred any Material Adverse Effect with respect to Purchaser.

**ARTICLE VII**<br> **TERMINATION**

**7.1 Termination**. This Agreement may be terminated, and the Merger abandoned, at any time before the Effective Time, by action taken or authorized by the Board of Directors of the terminating party, either before or after any requisite shareholder approval:

(a) by the mutual written consent of Purchaser and the Company;

(b) by either Purchaser or the Company, in the event of the failure of the Company's shareholders to approve this Agreement at the Company Shareholder Meeting ("**Requisite Company Vote**"); *provided, however*, that the Company shall only be entitled to terminate this Agreement pursuant to this clause if it has complied in all material respects with its obligations under *Section 5.8* (subject to *Section 5.8(b)*);

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(c) by either Purchaser or the Company, if either (i) any approval, consent or waiver of a Governmental Entity required to permit consummation of the transactions contemplated by this Agreement shall have been denied and such denial has become final and non-appealable or (ii) any court or other Governmental Entity of competent jurisdiction shall have issued a final, unappealable order permanently enjoining or otherwise prohibiting consummation of the transactions contemplated by this Agreement, unless the failure to obtain such required approval, consent or waiver shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein;

(d) by either Purchaser or the Company, if the Merger is not consummated by July 31, 2023 (the "**Outside Date**"); in each case, unless the failure to so consummate by such time is due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein;

(e) by either Purchaser or the Company (*provided* that the party seeking termination is not then in material breach of any representation, warranty, covenant or other agreement contained herein), in the event of a breach of any covenant or agreement on the part of the other party set forth in this Agreement, or if any representation or warranty of the other party shall have become untrue, which breach or failure to be true, either individually or in the aggregate with all other breaches by such party (or failures of such representations or warranties to be true), would constitute, if occurring or continuing on the Closing Date, the failure of the conditions set forth in *Sections 6.2(a)* and *(b)* or *Sections 6.3(a)* and *(b)*, as the case may be and such breach or untrue representation or warranty has not been or cannot be cured within the earlier of the Outside Date and thirty (30) days following written notice to the party committing such breach or making such untrue representation or warranty, or by its nature or timing cannot be cured during such period;

(f) by Purchaser, if (i) the Company shall have breached its obligations under *Section 5.1* or *Section 5.8* in any material respect or (ii) if the Board of Directors of the Company does not unanimously publicly recommend in the Proxy Statement-Prospectus that shareholders approve and adopt this Agreement or if the Board of Directors effects a Change of Recommendation; and

(g) by the Company, at any time during the five (5) day period following the Determination Date, if both of the following conditions are satisfied:

(i) the Average Purchaser Stock Price is less than $27.14; and

(ii) (A) the quotient of the Average Purchaser Stock Price divided by the Starting Purchaser Price (such quotient being the "**Purchaser Ratio**"), is less than eighty-five percent (85%) of (B) the quotient of the Average Index Price divided by the Starting Index Price (such quotient being the "**Index Ratio**"); subject, however, to the following provisions.

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If the Company elects to exercise its termination right pursuant to this *Section 7.1(g)*, it shall give written notice to Purchaser (*provided* that such notice of election to terminate may be withdrawn at any time within the aforementioned five (5) day period). During the five (5) day period commencing with its receipt of such notice, Purchaser shall have the option to increase the consideration to be received by the holders of the Company Common Stock and Company Class A Common Stock hereunder, by either:

(a) increasing the Exchange Ratio (calculated to the nearest one ten-thousandth); or

(b) provided that it does not and will not prevent or impede the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code, paying, as part of the Merger Consideration, to each recipient of Merger Consideration, a cash payment (in addition to, and not in lieu of, issuing shares of Purchaser Common Stock to them) (the "**Additional Cash Payment Per Share**");

in either case so that the value of the Merger Consideration (calculated based on the Average Purchaser Stock Price and including any Additional Cash Payment Per Share) to be received by each recipient thereof equals the *lesser of*:

(x) the product of the Starting Purchaser Price, 0.85 and the Exchange Ratio (as in effect immediately prior to any increase in the Exchange Ratio pursuant to this *Section 7.1(g))*; and

(y) an amount equal to (1) the product of the Index Ratio, 0.85, the Exchange Ratio (as in effect immediately prior to any increase in the Exchange Ratio pursuant to this *Section 7.1(g)*), and the Average Purchaser Stock Price, divided by (2) the Purchaser Ratio.

If Purchaser so elects within such five (5) day period, it shall give prompt written notice to the Company of such election and the revised Exchange Ratio or the Additional Cash Payment Per Share, as applicable, whereupon no termination shall have occurred pursuant to this Section 7.1(g) and this Agreement shall remain in effect in accordance with its terms; *provided* that any references in this Agreement to the "Exchange Ratio" shall thereafter be deemed to refer to the Exchange Ratio as increased pursuant to this section, if applicable, and any references in this Agreement to the Merger Consideration shall thereafter include the Additional Cash Payment Per Share as set forth in this section, if applicable.

For purposes of this *Section 7.1(g)* the following terms shall have the meanings indicated:

"**Average Index Price**" means the average of the closing price for the NASDAQ Bank Index for the thirty (30) consecutive full trading days ending at the closing of trading on the trading day immediately prior to the Determination Date.

**Average Purchaser Stock Price**" means the average of the closing sale prices of Purchaser Common Stock as reported on NASDAQ during the thirty (30) consecutive full trading days ending at the closing of trading on the trading day immediately prior to the Determination Date.

"**Starting Purchaser Price**" means $31.93 per share.

"**Starting Index Price**" means $4,269.44.

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**7.2 Termination Fee; Expenses**.

(a) If Purchaser terminates this Agreement pursuant to *Section 7.1(f)*, the Company shall make payment to Purchaser of a termination fee of $4,000,000 (the "**Termination Fee**").

(b) If (i) this Agreement is terminated (A) by either party pursuant to *Section 7.1(b)* if the Company made a Change in Recommendation or (B) by either party pursuant to *Section 7.1(d)* without the Requisite Company Vote having been obtained or (C) by Purchaser pursuant to *Section 7.1(e),* (ii) before the Company Shareholder Meeting (in the case of termination pursuant to *Section 7.1(b)*) or the date of termination (in the case of termination pursuant to *Section 7.1(d)* and *Section 7.1(e)*), an Acquisition Proposal has been publicly announced, disclosed or communicated and (iii) within twelve (12) months of such termination the Company shall consummate or enter into any agreement with respect to an Acquisition Proposal (whether or not the same Acquisition Proposal as set forth in clause (ii) of this *Section 7.2(b)*), then the Company shall make payment to Purchaser of the Termination Fee.

(c) The fees payable pursuant to *Section 7.2(a)* shall be made by wire transfer of immediately available funds at the time of termination. Any fee payable pursuant to *Section 7.2(b)* shall be made by wire transfer of immediately available funds within two (2) Business Days after notice of demand for payment. The Company acknowledges that the agreements contained in this *Section 7.2* are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Purchaser would not enter into this Agreement. The amount payable by the Company pursuant to *Section 7.2(a)* or *(b)*, in each case, constitutes liquidated damages and not a penalty and shall be the sole remedy of Purchaser, in the event of termination of this Agreement on the bases specified in such sections.

**7.3 Effect of Termination**. If this Agreement is terminated by either Purchaser or the Company as provided *in Section 7.1*, this Agreement shall forthwith become void and, subject to *Section 7.2*, have no effect, and there shall be no liability on the part of any party hereto or their respective officers and directors, except that (i) *Sections 5.3(c)*, *7.2* and Article VIII, shall survive any termination of this Agreement, and (ii) notwithstanding anything to the contrary contained in this Agreement, no party shall be relieved or released from any liabilities or damages arising out of its fraud or willful and material breach of any provision of this Agreement.

**ARTICLE VIII**<br> **CERTAIN OTHER MATTERS**

**8.1 Interpretation**. When a reference is made in this Agreement to Sections or Exhibits such reference shall be to a Section of, or Exhibit to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for ease of reference only and shall not affect the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed followed by the words "without limitation." Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Any reference to gender in this Agreement shall be deemed to include any other gender.

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**8.2 Survival**. Only those agreements and covenants of the parties that are by their terms applicable in whole or in part after the Effective Time, including *Section 5.12* of this Agreement, shall survive the Effective Time. All other representations, warranties, agreements and covenants shall be deemed to be conditions of this Agreement and shall not survive the Effective Time.

**8.3 Waiver; Amendment**. Before the Effective Time, any provision of this Agreement may be: (i) waived in writing by the party benefited by the provision or (ii) amended or modified at any time (including the structure of the transaction) by an agreement in writing between the parties hereto except that, after the vote by the shareholders of the Company, no amendment or modification may be made that would reduce the amount or alter or change the kind of consideration to be received by holders of Company Common Stock and Company Class A Common Stock or that would contravene any provision of the VSCA, the NCBCA or the applicable state and federal banking laws, rules and regulations.

**8.4 Counterparts**. This Agreement may be executed in counterparts each of which shall be deemed to constitute an original, but all of which together shall constitute one and the same instrument.

**8.5 Governing Law**. This Agreement shall be governed by, and interpreted in accordance with, the laws of the Commonwealth of Virginia, without regard to conflicts of laws principles.

**8.6 Expenses**. Except as otherwise provided in *Section 7.2*, each party hereto will bear all expenses incurred by it in connection with this Agreement and the transactions contemplated hereby.

**8.7 Notices**. All notices and other communications in connection with this Agreement shall be in writing and shall be deemed given if delivered personally, sent via facsimile (with confirmation), by electronic mail, by registered or certified mail (return receipt requested) or by commercial overnight delivery service, or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

If to Purchaser, to:

First Community Bankshares, Inc.

29 College Drive

Bluefield, Virginia 24605-0989

Attention: Sarah W. Harmon, General Counsel

E-mail: <u>swharmon@fcbinc.com</u>

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With copies to:

Bowles Rice LLP

600 Quarrier Street

Charleston, WV 25301

Attention: Sandra M. Murphy

E-mail: <u>smurphy@bowlesrice.com</u>

If to the Company, to:

Surrey Bancorp

PO Box 1227

Mount Airy, NC 27030

Attention: Edward C. Ashby, III

E-mail: <u>tashby@surreybank.com</u>

With copies to:

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP

230 North Elm Street

2000 Renaissance Plaza

Greensboro, NC 27401

Attention: Robert A. Singer

E-mail: <u>rsinger@brookspierce.com</u>

**8.8 Entire Agreement; etc.**. This Agreement (including the documents and the instruments referred to herein), together with the Exhibits and Disclosure Letters hereto and the Confidentiality Agreement, represent the entire understanding of the parties hereto with reference to the transactions contemplated hereby and supersedes any and all other oral or written agreements heretofore made. Except for *Section 5.12*, which confers rights on the parties described therein, nothing in this Agreement is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement, including the right to rely upon the representations and warranties set forth herein. The representations and warranties in this Agreement are the product of negotiations among the parties hereto and are for the sole benefit of the parties. Any inaccuracies in such representations and warranties are subject to waiver by the parties hereto in accordance herewith without notice or liability to any other Person. In some instances, the representations and warranties in this Agreement may represent an allocation among the parties hereto of risks associated with particular matters regardless of the Knowledge of any of the parties hereto. Consequently, Persons other than the parties may not rely upon the representations and warranties in this Agreement as characterizations of actual facts or circumstances as of the date of this Agreement or as of any other date.

**8.9 Successors and Assigns; Assignment**. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; *provided*, *however*, that this Agreement may not be assigned by either party hereto without the prior written consent of the other party.

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**8.10 Severability**. If any one or more provisions of this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, by any court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement and the parties shall use their reasonable efforts to substitute a valid, legal and enforceable provision which, insofar as practical, implements the purposes and intents of this Agreement.

**8.11 Specific Performance**. The parties hereto agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and, accordingly, that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement or to enforce specifically the performance of the terms and provisions hereof (including the parties' obligation to consummate the Merger), in addition to any other remedy to which they are entitled at law or in equity. Each of the parties hereby further waives (a) any defense in any action for specific performance that a remedy at law would be adequate and (b) any requirement under any law to post security or a bond as a prerequisite to obtaining equitable relief.

**8.12 Waiver of Jury Trial**. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW AT THE TIME OF INSTITUTION OF THE APPLICABLE LITIGATION, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT: (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS *SECTION 8.12*.

**8.13 Delivery by Facsimile or Electronic Transmission**. This Agreement and any signed agreement or instrument entered into in connection with this Agreement, and any amendments or waivers hereto or thereto, to the extent signed and delivered by means of a facsimile machine or by e-mail delivery of a ".pdf" format data file, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in Person. No party hereto or to any such agreement or instrument shall raise the use of a facsimile machine or e-mail delivery of a ".pdf" format data file to deliver a signature to this Agreement or any amendment hereto or the fact that any signature or agreement or instrument was transmitted or communicated by means of a facsimile machine or e-mail delivery of a ".pdf" format data file as a defense to the formation of a contract and each party hereto forever waives any such defense.

*[Signature page immediately follows]*

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**In Witness Whereof**, the parties hereto have caused this Agreement and Plan of Merger to be executed by their duly authorized officers as of the date first above written.

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| | |
|:---|:---|
|  | **FIRST COMMUNITY BANKSHARES, INC.** |
| By: | <u>/s/ William P. Stafford, II</u><u> </u><u> </u><u> </u> |
|  | Name: William P. Stafford, II |
|  | Title: Chairman of the Board of Directors |
|  | **SURREY BANCORP** |
| By: | <u>/s/ Robert H. Moody</u><u> </u><u> </u><u> </u><u> </u> |
|  | Name: Robert H. Moody |
|  | Title: Chairman of the Board of Directors |

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**EXHIBIT A**

**BANK AGREEMENT AND PLAN OF MERGER** 

This Bank Agreement and Plan of Merger (this "**Agreement**"), dated as of November 17, 2022, is made by and between First Community Bank, a state commercial bank chartered under the laws of the Commonwealth of Virginia ("**Purchaser Bank**"), and Surrey Bank & Trust, a state commercial bank chartered under the laws of the State of North Carolina ("**Company Bank**").

**RECITALS**

WHEREAS, all of the issued and outstanding capital stock of Purchaser Bank is owned as of the date hereof directly by First Community Bankshares, Inc., a Virginia corporation ("**Purchaser**");

WHEREAS, all of the issued and outstanding capital stock of Company Bank is owned as of the date hereof directly by Surrey Bancorp, a North Carolina corporation (the "**Company**");

WHEREAS, Purchaser and the Company have entered into an Agreement and Plan of Merger, dated as of the same date hereof (as amended and/or supplemented from time to time, the "**Merger Agreement**"), pursuant to which, subject to the terms and conditions thereof, the Company will merge with and into Purchaser, with Purchaser surviving such merger (collectively, the "**HoldCo Merger**");

WHEREAS, contingent upon the HoldCo Merger, on the terms and subject to the conditions contained in this Agreement, the parties to this Agreement intend to effect the merger of Company Bank with and into Purchaser Bank, with Purchaser Bank surviving such merger (the "**Bank Merger**"); and

WHEREAS, the board of directors of Purchaser Bank and the board of directors of Company Bank deem the Bank Merger advisable and in the best interests of their respective shareholders, and have authorized and approved the execution and delivery of this Agreement and the transactions contemplated hereby.

NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto do hereby agree as follows:

**ARTICLE I** 

**BANK MERGER**

Section 1.1 <u>The Bank Merger</u>. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined below), Company Bank shall be merged with and into Purchaser Bank in accordance with the provisions of the Virginia Stock Corporation Act, the North Carolina Business Corporation Act, Title 6.2 of the Code of Virginia and Chapter 53C of the North Carolina General Statutes. At the Effective Time, the separate existence of Company Bank shall cease, and Purchaser Bank, as the surviving entity (the "**Surviving Bank**"), shall continue unaffected and unimpaired by the Bank Merger. All assets of Company Bank as they exist at the Effective Time of the Bank Merger shall pass to and vest in the Surviving Bank without any conveyance or other transfer. The Surviving Bank shall be responsible for all of the liabilities of every kind and description of each of the merging banks existing as of the Effective Time.

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Section 1.2 <u>Closing</u>. The closing of the Bank Merger will take place as soon as practicable following the HoldCo Merger or at such other time and date as specified by the parties, but in no case prior to the date on which all of the conditions precedent to the consummation of the Bank Merger specified in this Agreement shall have been satisfied or duly waived by the party entitled to satisfaction thereof, at such place as is agreed by the parties hereto.

Section 1.3 <u>Effective Time</u>. Subject to applicable law, the Bank Merger shall become effective at the later of: (i) the issuance by the Virginia State Corporation Commission (the "**VSCC**<u>"</u>) of a certificate of merger relating to the Bank Merger; (ii) the issuance by the North Carolina Office of the Commissioner of Banks of a certificate of authority relating to the Bank Merger; and (iii) the time set forth in the articles of merger relating to the Bank Merger filed with the VSCC and the North Carolina Secretary of State or such other time and date as shall be provided by law and agreed to by the parties hereto (such date and time being herein referred to as the "**Effective Time**"); *provided*, *however*<u>,</u> that in no event shall the Effective Time be earlier than, or at the same time as, the effective time of the HoldCo Merger,

Section 1.4 <u>Articles of Incorporation and Bylaws</u>. The articles of incorporation and bylaws of Purchaser Bank in effect immediately prior to the Effective Time shall be the articles of incorporation and the bylaws of the Surviving Bank, in each case until amended in accordance with applicable law and the terms thereof.

Section 1.5 <u>Board of Directors and Officers</u>. At the Effective Time, the board of directors of the Surviving Bank shall consist of the board of directors of Purchaser Bank as of immediately prior to the Bank Merger as well as the Designated Directors (as defined in the Merger Agreement) appointed to the board of directors of Purchaser Bank effective as of the effective time of the HoldCo Merger in accordance with Section 5.15 of the Merger Agreement. The officers of the Surviving Bank shall consist of the officers of Purchaser Bank as of immediately prior to the Bank Merger.

**ARTICLE II** 

**CONSIDERATION**

Section 2.1 <u>Effect on Company Bank Capital Stock</u>. By virtue of the Bank Merger and without any action on the part of the holder of any capital stock of Company Bank, at the Effective Time, all shares of Company Bank capital stock issued and outstanding shall be automatically cancelled and retired and shall cease to exist, and no cash, new shares of common stock, or other property shall be delivered in exchange therefor.

Section 2.2 <u>Effect on Purchaser Bank Capital Stock</u>. Each share of Purchaser Bank capital stock issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding and unaffected by the Bank Merger.

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**ARTICLE III** 

**COVENANTS AND CONDITIONS PRECEDENT**

Section 3.1 During the period from the date of this Agreement and continuing until the Effective Time, subject to the provisions of the Merger Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement.

Section 3.2 The Bank Merger and the respective obligations of each party hereto to consummate the Bank Merger are subject to the fulfillment or written waiver of each of the following conditions prior to the Effective Time:

(a) All approvals, consents or waivers of any Governmental Entity (as defined in the Merger Agreement) required for the consummation the Bank Merger shall have been obtained or made and shall be in full force and effect and all waiting periods required by law shall have expired or been terminated.

(b) The HoldCo Merger shall have been consummated in accordance with the terms of the Merger Agreement.

(c) No jurisdiction or governmental authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and prohibits consummation of the Bank Merger.

(d) This Agreement shall have been adopted by the sole shareholder of each of Purchaser Bank and Company Bank.

**ARTICLE IV** 

**TERMINATION AND AMENDMENT**

Section 4.1 <u>Termination</u>*.* This Agreement may be terminated at any time prior to the Effective Time by an instrument executed by each of the parties hereto. This Agreement will terminate automatically upon the termination of the Merger Agreement.

Section 4.2 <u>Amendment</u>*.* This Agreement may be amended by an instrument in writing signed on behalf of each of the parties hereto except that no provision in Section 3.2 may be amended or waived at any time pursuant to its terms.

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**ARTICLE V** 

**GENERAL PROVISIONS**

Section 5.1 <u>Nonsurvival of Agreements</u>. None of the agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time.

Section 5.2 <u>Notices</u>. All notices and other communications in connection with this Agreement shall be in writing and shall be deemed given if delivered personally, sent via facsimile (with confirmation), by email, by registered or certified mail (return receipt requested) or by commercial overnight delivery service, or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

If to Purchaser Bank, to:

First Community Bank

29 College Drive

Bluefield, Virginia 24605-0989

Attention: Gary R. Mills, CEO and President

Email: <u>GRMILLS@fcbinc.com</u>

With a copy (which shall not constitute notice) t:

Bowles Rice LLP

600 Quarrier Street

Charleston, WV 25301

Attention: Sandra M. Murphy

E-mail: <u>smurphy@bowlesrice.com</u>

If to the Company Bank, to:

Surrey Bank & Trust

PO Box 1227

Mount Airy, NC 27030

Attention: Edward C. Ashby, III

E-mail: <u>tashby@surreybank.com</u>

With a copy (which shall not constitute notice):

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP

230 North Elm Street

2000 Renaissance Plaza

Greensboro, NC 27401

Attention: Robert A. Singer

E-mail: <u>rsinger@brookspierce.com</u>

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All notices and other communications shall be deemed to have been given (i) when received if given in person, (ii) on the date of electronic confirmation of receipt if sent by facsimile, electronic mail or other wire transmission, (iii) three (3) business days after being deposited in the U.S. mail, certified or registered mail, postage prepaid, or (iv) one (1) business day after being deposited with a reputable overnight courier.

Section 5.3 <u>Interpretation</u>. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section references are to this Agreement unless otherwise specified. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

Section 5.4 <u>Counterparts</u>. This Agreement may be executed in two (2) or more counterparts (including by facsimile, e-mail delivery of a ".pdf" format data file, or other electronic means), all of which shall be considered one (1) and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other party, it being understood that each party need not sign the same counterpart.

Section 5.5 <u>Entire Agreement</u>. This Agreement (including any exhibits thereto, the documents and the instruments referred to in this Agreement) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement, other than the Merger Agreement.

Section 5.6 <u>Governing Law</u>. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Virginia applicable to agreements made and to be performed wholly within such state, except to the extent that the federal laws of the United States shall be applicable hereto.

Section 5.7 <u>Assignment</u>. Neither this Agreement nor any of the rights, interests or obligations may be assigned by any of the parties hereto and any attempted assignment in contravention of this Section 5.7 shall be null and void.

*[Signature page follows]*

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in counterparts by their duly authorized officers and attested by their officers thereunto duly authorized, all as of the day and year first above written.

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| | |
|:---|:---|
| FIRST COMMUNITY BANK | FIRST COMMUNITY BANK |
| By: |  |
| Name: | William P. Stafford, II |
| Title: | Chairman of the Board of Directors |
| SURREY BANK & TRUST | SURREY BANK & TRUST |
| By: |  |
| Name: | Robert H. Moody |
| Title: | Chairman of the Board of Directors |

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*Signature Page to Bank Agreement and Plan of Merger*

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**EXHIBIT B**

**FORM OF VOTING AND SUPPORT AGREEMENT**

This Voting and Support Agreement (this "**Agreement**"), dated as of November 17, 2022, is entered into by and among First Community Bankshares, Inc., a Virginia corporation ("**Purchaser**"), Surrey Bancorp, a North Carolina corporation (the "**Company**"), and [●], a shareholder of the Company (the "**Shareholder**"). Each of Purchaser, the Company and the Shareholder may be referred to in this Agreement separately as a "**Party**" and collectively as the "**Parties**."

WHEREAS, pursuant to the terms of the Agreement and Plan of Merger (as the same may be amended or supplemented, the "**Merger Agreement**"), dated as of the date hereof, by and between Purchaser and the Company, the Company will be merged with and into Purchaser, with Purchaser as the surviving corporation (the "**Merger**");

WHEREAS, the Shareholder beneficially owns the number of shares of common stock of the Company ("**Company Common Stock**") as set forth on <u>Schedule A</u> hereto (collectively, the "**Existing Shares**"); and

WHEREAS, as an inducement and a condition to Purchaser and the Company to entering into the Merger Agreement, Purchaser and the Company have required that the Shareholder, in his or her capacity as a shareholder of the Company, enter into this Agreement.

NOW THEREFORE, in consideration of the foregoing, the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agrees as follows:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. **Definitions.** Capitalized terms not defined in this Agreement have the meaning assigned to those terms in the Merger Agreement.

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2. **Voting Agreement.** From the date hereof until the earlier of (a) the Closing Date and (b) the termination of the Merger Agreement in accordance with its terms (the "**Support Period**"), the Shareholder irrevocably and unconditionally hereby agrees, that at any meeting (whether annual or special and each adjourned meeting) of the Company's shareholders, however called, or in connection with any written consent of the Company's shareholders, the Shareholder shall (i) appear at such meeting or otherwise cause all of the Existing Shares, and other shares of Company Common Stock over which he or she has acquired beneficial ownership after the date hereof (including any shares of Company Common Stock acquired by means of purchase, dividend or distribution, or issued upon the exercise of any stock options to acquire Company Common Stock, or warrants or the conversion of any convertible securities or otherwise) (collectively, the "**New Shares**" and, together with the Existing Shares, the "**Shares**"), which he or she owns or controls as of the applicable record date, to be counted as present at such meeting for purposes of calculating a quorum and (ii) vote or cause to be voted (including by proxy or written consent, if applicable) all such Shares, (A) in favor of the adoption of the Merger Agreement and the approval of the transactions contemplated thereby, including the Merger, (B) in favor of any proposal to adjourn such meeting of the Company's shareholders to a later date if there are not sufficient votes to adopt the Merger Agreement, (C) against any action or proposal in favor of an Acquisition Proposal, without regard to the terms of such Acquisition Proposal, and (D) against any action, proposal, transaction or agreement that would reasonably be likely to (1) result in a material breach of any covenant, representation or warranty or any other obligation or agreement of the Company contained in the Merger Agreement, or of the Shareholder contained in this Agreement, or (2) prevent, materially impede or materially delay the Company's or Purchaser's ability to consummate the transactions contemplated by the Merger Agreement, including the Merger; *provided*, that the foregoing applies solely to Shareholder in his or her capacity as a shareholder or as a trustee or a partner, shareholder or member in any entity holding Shares, and, to the extent the Shareholder serves as a member of the Board of Directors of the Company or as an officer of the Company, nothing in this Agreement shall limit or affect any actions or omissions taken by the Shareholder in Shareholder's capacity as such a director or officer, including in exercising rights under the Merger Agreement, and no such actions or omissions shall be deemed a breach of this Agreement or shall be construed to prohibit, limit or restrict Shareholder from exercising Shareholder's fiduciary duties as a director or officer to the Company or its shareholders. For the avoidance of doubt, the foregoing commitments apply to any Shares held by any trust, partnership or other entity holding Shares for which the Shareholder serves in any partner, shareholder, member or trustee capacity and for any Shares held jointly with a spouse or other individual. To the extent the Shareholder does not control, by himself or herself, the determinations of such shareholder trust, partnership or other entity, the Shareholder agrees to exercise all voting or other determination rights he or she has in such shareholder trust, partnership or other entity in furtherance of the intent and purposes of his or her support and voting obligations in this *Section 2* and otherwise set forth in this Agreement. The Shareholder covenants and agrees that, except for this Agreement, he or she (x) has not entered into, and shall not enter during the Support Period, any voting agreement or voting trust with respect to the Shares and (y) has not granted, and shall not grant during the Support Period, a proxy, consent or power of attorney with respect to the Shares except any proxy to carry out the intent of this Agreement.

3. **GRANT OF IRREVOCABLE PROXY.** IN THE EVENT OF A FAILURE BY THE SHAREHOLDER TO ACT IN ACCORDANCE WITH THE SHAREHOLDER'S OBLIGATIONS AS TO VOTING PURSUANT TO *SECTION 2* DURING THE SUPPORT PERIOD, THE SHAREHOLDER HEREBY IRREVOCABLY (DURING THE SUPPORT PERIOD) GRANTS TO AND APPOINTS PURCHASER AS THE SHAREHOLDER'S PROXY AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION), FOR AND IN THE NAME, PLACE AND STEAD OF SHAREHOLDER, TO REPRESENT, VOTE AND OTHERWISE ACT BY VOTING AT ANY MEETING OF THE COMPANY'S SHAREHOLDERS, HOWEVER CALLED, OR IN CONNECTION WITH ANY WRITTEN CONSENT OF THE COMPANY'S SHAREHOLDERS, WITH RESPECT TO THE SHARES REGARDING THE MATTERS REFERRED TO IN *SECTION 2* DURING THE SUPPORT PERIOD, TO THE SAME EXTENT AND WITH THE SAME EFFECT AS THE SHAREHOLDER MIGHT OR COULD DO UNDER APPLICABLE LAW, RULES AND REGULATIONS. THE PROXY GRANTED PURSUANT TO THIS *SECTION 3* IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE DURING THE SUPPORT PERIOD. DURING THE SUPPORT PERIOD, THE SHAREHOLDER WILL TAKE SUCH FURTHER ACTION AND WILL EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE INTENT OF THIS PROXY. THE SHAREHOLDER HEREBY REVOKES ANY AND ALL PREVIOUS PROXIES OR POWERS OF ATTORNEY GRANTED WITH RESPECT TO ANY OF THE SHARES THAT MAY HAVE HERETOFORE BEEN APPOINTED OR GRANTED WITH RESPECT TO THE MATTERS REFERRED TO IN *SECTION 2* AND THIS *SECTION 3*.

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4. **Transfer Restrictions Prior to Merger.** The Shareholder hereby agrees that he or she will not, during the Support Period, sell, transfer, assign, tender in any tender or exchange offer, pledge, encumber, hypothecate or similarly dispose of (by merger, by testamentary disposition, by operation of law or otherwise), either voluntarily or involuntarily, enter into any swap or other arrangements that transfers to another, in whole or in part, any of the economic consequences of ownership of, enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, assignment, pledge, lien, hypothecation or other disposition of (by merger, by testamentary disposition, by operation of law or otherwise) or otherwise convey or dispose of, any of the Shares, or any interest therein, including the right to vote any Shares, as applicable (a "**Transfer**"), except with the prior consent of Purchaser (which consent shall not be unreasonably withheld, conditioned or delayed); *provided* that the Shareholder may Transfer Shares for estate planning, tax planning or philanthropic purposes, so long as the transferee, prior to the date of a Transfer, agrees in a signed writing reasonably acceptable to Purchaser to be bound by and comply with the provisions of this Agreement, or upon the death of the Shareholder.

5. **Non-Solicitation.** Unless this Agreement shall have been terminated, the Shareholder shall not solicit, initiate, induce, knowingly encourage, or knowingly take any other action to facilitate, any inquiries, offers, discussions, or proposals with respect to, or engage in any negotiations concerning, or provide any confidential or nonpublic information or data to, or have any discussions with, any Person relating to, any proposal that constitutes or could reasonably be expected to lead to an Acquisition Proposal. The Shareholder will immediately cease and cause to be terminated any activities, discussions or negotiations conducted before the date of this Agreement with any Persons other than Purchaser with respect to any Acquisition Proposal.

6. **No Exercise of Appraisal Rights.** The Shareholder hereby waives and agrees not to exercise any appraisal rights or right to dissent in respect of the Shares that may arise with respect to the Merger.

7. **Confidential Information.** From and after the date of this Agreement, the Shareholder shall not disclose any confidential information of Purchaser or the Company obtained by such person while serving as a director of the Company except in accordance with a judicial or other governmental order or the Merger Agreement. For purposes of this Agreement, "confidential information" does not include: (a) information that is or becomes generally available to the public other than as a result of an unauthorized disclosure by the Shareholder; (b) information that was in the Shareholder's possession prior to serving as a director or information received by the Shareholder from another person without any limitations on disclosure, but only if the Shareholder had no reason to believe that the other person was prohibited from using or disclosing such information by a contractual or fiduciary obligation; or (c) information that was independently developed by the Shareholder without using any confidential information of Purchaser or the Company.

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9. **Effectiveness.** This Agreement shall be effective upon signing and is irrevocable. If the Merger Agreement is terminated for any reason in accordance with its terms, this Agreement (other than *Sections 10* through *16*) shall automatically terminate and be null and void and of no effect.

10. **Entire Agreement; Assignment.** The recitals are incorporated as a part of this Agreement. This Agreement constitutes the entire agreement among the Parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof. Nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. This Agreement shall not be assigned by operation of law or otherwise and shall be binding upon and inure solely to the benefit of each Party; *provided*, *however*, that the rights under this Agreement are assignable by Purchaser to a majority-owned affiliate or any successor-in-interest of Purchaser, but no such assignment shall relieve Purchaser of its obligations hereunder.

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11. **Remedies/Specific Enforcement.** Each Party agrees that this Agreement is intended to be legally binding and specifically enforceable pursuant to its terms and that Purchaser would be irreparably harmed if any of the provisions of this Agreement are not performed in accordance with its specific terms and that monetary damages would not provide adequate remedy in such event. Accordingly, in the event of any breach or threatened breach by the Shareholder of any covenant or obligation contained in this Agreement, in addition to any other remedy to which Purchaser may be entitled (including monetary damages), Purchaser shall be entitled to injunctive relief to prevent breaches of this Agreement and to specifically enforce the terms and provisions hereof. The Shareholder further agrees that neither Purchaser nor any other person or entity shall be required to obtain, furnish or post any bond or similar instrument in connection with or as a condition to obtaining any remedy referred to in this paragraph, and the Shareholder irrevocably waives any right he or she may have to require the obtaining, furnishing or posting of any such bond or similar instrument.

12. **Governing Law; Jurisdiction and Venue**. All questions concerning the construction, validity enforcement and interpretation of this Agreement shall be governed by the internal law of the Commonwealth of Virginia, without giving effect to any choice of law of conflict of law provision or rule (whether of the Commonwealth of Virginia or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Virginia. Each Party irrevocably and unconditionally submits to the exclusive jurisdiction of the Courts of Virginia or federal court within the Commonwealth of Virginia), in any action or proceeding arising out of or relating to this Agreement and each Party irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such court. Each Party agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each Party irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, (a) any objection that he, she or it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement in any court referred to in this *Section 12*, and (b) the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

13. **Severability**. If any provision of this Agreement (or any portion thereof) or the application of any such provision (or any portion thereof) to any Person or circumstance is unenforceable, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such unenforceable provision had never comprised a part of this Agreement, the remaining provisions of this Agreement shall remain in full force and effect, and the court construing this Agreement shall add as a part of this Agreement, a provision as similar in terms and effect to such unenforceable provision as may be enforceable, in lieu of the unenforceable provision.

14. **Amendments; Waivers**. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed (a) in the case of an amendment, by Purchaser and the Shareholder, and (b) in the case of a waiver, by the Party against whom the waiver is to be effective. No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

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15. **Capacity as a Shareholder only.** Notwithstanding anything herein to the contrary, the foregoing covenants, agreements and restrictions shall not apply to any shares of the Company Common Stock or Company Class A Common Stock that the Shareholder may beneficially own as a fiduciary for others. In addition, this Agreement and the foregoing covenants, agreements and restrictions shall only apply to actions taken by the Shareholder in his or her capacity as a shareholder of the Company, and, if applicable, shall not in any way limit or affect actions the Shareholder may take in his or her capacity as a director or officer of the Company.

16. **Counterparts.** The Parties may execute this Agreement in one or more counterparts, including by facsimile, e-mail delivery of a ".pdf" format data file, or other form of electronic signature. All the counterparts will be construed together and will constitute one Agreement.

*[Signature pages follow]*

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SIGNED as of the date first set forth above:

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| | |
|:---|:---|
| **First Community Bankshares, Inc.** | **First Community Bankshares, Inc.** |
| By: |  |
|  | William P. Stafford, II |
|  | Chairman of the Board of Directors |
| **Surrey Bancorp** | **Surrey Bancorp** |
| By: |  |
| Name: |  |
| Title: |  |

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[Signature Page to Company Voting and Support Agreement]

*Additional Signatures on Next Page*

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SHAREHOLDER:

<u> </u>

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**Schedule A**

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| | |
|:---|:---|
| **Shareholder** | **Number of**<br> **Company Common Shares** |
|  | &nbsp;&nbsp;&nbsp;&nbsp; _____ shares of Common Stock<br> _____ shares of Class A Common Stock<br>|

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List of Disclosure Schedules

to the Agreement and Plan of Merger

dated November 17, 2022

between

First Community Bankshares, Inc. and Surrey Bancorp

<u>First Community Disclosure Schedule</u>

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| | |
|:---|:---|
| Article 1 | Knowledge |
| Section 5.11(d) | Severance Policy |
| Section 5.11(e) | Retention Bonuses |

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<u>Surrey Disclosure Schedule</u>

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| | |
|:---|:---|
| Article 1 | Knowledge |
| Section 3.2(b) | Subsidiaries |
| Section 3.2(c)(ii)(C) | Stock Awards |
| Section 3.2(h) | Financial Statements |
| Section 3.2(i) | Undisclosed Liabilities |
| Section 3.2(o) | Material Agreements |
| Section 3.2(p) | Intellectual Property; Company IT Systems |
| Section 3.2(q) | Labor Matters |
| Section 3.2(r)(i) | Employee Benefit Plans |
| Section 3.2(r)(iv) | Qualified Plans |
| Section 3.2(r)(vii) | Post-Employment Benefit Plans |
| Section 3.2(r)(xi) | Acceleration of Vesting Benefits |
| Section 3.2(s) | Real Estate |
| Section 3.2(v)(i) | Environmental Matters |
| Section 3.2(w)(iii) | SBA Loans |
| Section 3.2(w)(vi) | Regulation O Loans |
| Section 3.2(w)(vii) | Loan Matters |
| Section 3.2(z) | Insurance |
| Section 3.2(gg) | Related Party Transactions |
| Section 4.1(c) | Dividends |
| Section 4.1(f) | Contract Amendments |
| Section 4.1(i)(i) | Compensation and Benefit Plan Changes |
| Section 6.2(f) | Action on Executive Agreements |

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**Exhibit 99.1**

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|:---|:---|
| ![ex_448832img001.jpg](ex_448832img001.jpg) | ![ex_448832img002.jpg](ex_448832img002.jpg) |

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**First Community Bankshares, Inc. to Enhance its Small Business Expertise Pending Merger with Surrey Bancorp**

BLUEFIELD, Va., November 18, 2022 (GLOBE NEWSWIRE) – Bluefield, VA-based First Community Bankshares, Inc. ("First Community") (NASDAQ: FCBC), parent company of First Community Bank, and Mount Airy, NC-based Surrey Bancorp ("Surrey") (OTCPK: SRYB), parent company of Surrey Bank & Trust, jointly announced today their entry into an agreement and plan of merger pursuant to which First Community will acquire Surrey and its wholly owned bank subsidiary, Surrey Bank & Trust. As of September 30, 2022, Surrey Bank & Trust had total assets of approximately $500 million. Upon completion of the transaction, First Community is expected to have total consolidated assets in excess of $3.6 billion with branch locations in four states.

This combination will bring together two high-performing community banks that have historically produced returns on average assets well-above one percent and efficiency ratios below sixty percent while maintaining low-risk profiles. "We have long admired Surrey Bank & Trust for its financial performance and its government lending platform. We are looking forward to bringing the two franchises together to better serve our customers and local communities" said Gary R. Mills, President and CEO of First Community Bank.

Edward (Ted) C. Ashby III, CEO and Director of Surrey, commented, "When considering a long-term partner, we wanted a bank that shared our values of providing the highest level of banking services to our community, valued its employees and performed at a level worthy of its shareholders. In First Community, we found all those qualities and are confident that our combined franchise will continue to generate value for all our stakeholders."

"We are pleased to announce our partnership with Surrey Bank & Trust, and I am confident the combination will create a leading community banking institution in northwestern North Carolina and southwestern Virginia. First Community's commercial loan customers will benefit from Surrey's government guarantee lending expertise, and Surrey's customers will benefit from the additional scale, increased lending limits, and enhanced product and technology offerings of First Community. Shareholders, customers and employees of both banks will benefit greatly from future synergies and efficiencies," said William (Will) P. Stafford, II, Chairman and Chief Executive Officer of First Community.

The agreement and plan of merger provides for the merger of Surrey with and into First Community, with First Community as the surviving corporation. Under the terms of the agreement and plan of merger, each share of Surrey common and Class A common stock outstanding immediately prior to the merger will be converted into the right to receive 0.7159 shares of First Community common stock, which equates to $26.95 per share of Surrey common stock and an aggregate transaction value of approximately $113.2 million based on First Community's recent 10-day volume-weighted average price.

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First Community Bank and Surrey Bank & Trust have entered into a separate merger agreement providing for the merger of Surrey Bank & Trust with and into First Community Bank immediately following the merger of First Community and Surrey, with First Community Bank as the surviving bank.

The transaction, which received unanimous approval by both First Community's and Surrey's Board of Directors, is subject to customary closing conditions, including the approval of Surrey's shareholders and the receipt of all required regulatory approvals. All members of the Surrey Board of Directors owning shares have entered into support agreements to vote the shares of Surrey they own in favor of the transaction. The transaction is expected to be consummated in the second quarter of 2023. At that time, Mr. Ashby and one other current member of Surrey's Board of Directors will join the Board of First Community Bank. Additionally, Pedro (Peter) A. Pequeno, II, Surrey's President, and other key executives and employees plan to join the First Community team. We believe that joining together these two strong teams will ensure a successful transition of Surrey's loan and deposit relationships.

Pequeno commented, "We wanted to partner with a financial institution that shared our values on how we treated our employees, customers, and community. The ability to combine our expertise in government guaranteed lending with a full suite of banking services offered by First Community was a winning combination for the families and businesses in the markets we serve."

First Community expects the transaction to be minimally dilutive to tangible book value per share (non-GAAP) and to provide mid-single digit accretion to earnings per share. Performance Trust Capital Partners, LLC served as financial advisor to First Community, and Bowles Rice LLP served as legal counsel. Raymond James & Associates, Inc. served as financial advisor to Surrey, and Brooks, Pierce, McLendon, Humphrey & Leonard, LLP served as legal counsel.

<u>About First Community Bankshares, Inc.</u>

First Community is a financial holding company headquartered in Bluefield, Virginia that provides banking products and services through its wholly owned subsidiary First Community Bank. First Community Bank operates 48 branch banking locations in Virginia, West Virginia, North Carolina, and Tennessee. The company reported consolidated assets of $3.16 billion as of September 30, 2022. The company's common stock is listed on the NASDAQ Global Select Market under the trading symbol "FCBC." Additional investor information is available on the company's website at www.firstcommunitybank.com.

<u>About Surrey Bancorp</u>

Surrey offers a relationship-based and highly bespoke banking experience to individuals, professional, and small to mid-sized business clients. With a customer-focused and value driven approach, Surrey delivers banking services through talented employees and digital channels, with 7 branch banking locations in northwestern North Carolina and southwestern Virginia.

<u>Investor Contacts</u>

David D. Brown

Chief Financial Officer

First Community Bankshares, Inc.

Phone: (276) 326-9000

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<u>Important Information for Shareholders</u>

This press release shall not constitute an offer to sell, the solicitation of an offer to sell, or the solicitation of an offer to buy any securities or the solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. In connection with the proposed transaction, First Community will file a registration statement on Form S-4 with the Securities and Exchange Commission (the "SEC"), which will contain the proxy statement of Surrey and a prospectus of First Community. Shareholders of Surrey are encouraged to read the registration statement, including the proxy statement/prospectus that will be part of the registration statement, because it will contain important information about the proposed transaction, Surrey, and First Community. After the registration statement is filed with the SEC, the proxy statement/prospectus and other relevant documents will be mailed to Surrey shareholders and will be available for free on the SEC's website (www.sec.gov). The proxy statement/prospectus will also be made available for free by contacting David D. Brown, First Community's Chief Financial Officer, at 276-326-9000 or Pedro A. Pequeno, the President of Surrey, at 336-783-3902. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

<u>Forward-Looking Statements</u>

Certain of the statements made in this press release may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements, including statements regarding the intent, belief, or current expectations of First Community's management regarding the company's strategic direction, prospects, or future results or the benefits of the proposed transaction, are subject to numerous risks and uncertainties. These forward-looking statements are based upon the current beliefs and expectations of the respective managements of First Community and Surrey and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of First Community and Surrey. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the anticipated results discussed in these forward-looking statements because of possible uncertainties. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) the risk that the cost savings and revenue synergies anticipated in connection with the proposed transaction may not be realized or may take longer than anticipated to be realized, (2) disruption from the proposed transaction with customers, suppliers, or employee or other business relationships, (3) the occurrence of any event, change, or other circumstances that could give rise to the termination of the agreement and plan of merger, (4) the risk of successful integration of the two organizations' businesses, (5) the failure of Surrey shareholders to approve the proposed transaction, (6) the amount of costs, fees, expenses, and charges related to the proposed transaction, (7) the ability to obtain required governmental and regulatory approvals for the proposed transaction, (8) reputational risk and the reaction of the parties' customers to the proposed transaction, (9) the failure of the conditions to closing of the proposed transaction to be satisfied, (10) the risk that the integration of Surrey's operations with those of First Community will be materially delayed or will be more costly or difficult than expected, (11) the possibility that the proposed transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events, (12) the dilution caused by First Community's issuance of additional shares of its common stock in the proposed transaction, (13) changes in management's plans for the future, (14) prevailing economic and political conditions, particularly in our market areas, (15) credit risk associated with our lending activities, (16) changes in interest rates, loan demand, real estate values, and competition, (17) changes in accounting principles, policies, or guidelines, (18) changes in applicable laws, rules, or regulations, and (19) other competitive, economic, political, and market factors affecting our business, operations, pricing, products, and services. Certain additional factors which could affect the forward-looking statements can be found in First Community's annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, in each case filed with or furnished to the SEC and available on the SEC's website at <u>http://www.sec.gov</u> and in Surrey's annual reports by accessing Surrey's website at www.surreybank.com under the tab "About Us" and then under the heading "Investor Relations" and "Shareholder Relations". First Community and Surrey caution that the foregoing list of factors is not exclusive. All subsequent written and oral forward-looking statements concerning the proposed transaction or other matters attributable to First Community or Surrey or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements above. First Community and Surrey disclaim any obligation to update or revise any forward-looking statements contained in this press release, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise.

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<u>Participants in the Transactions</u> 

First Community, Surrey and their respective directors, executive officers and certain other members of management and employees may be deemed "participants" in the solicitation of proxies from Surrey's shareholders in favor of the merger with First Community. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of the Surrey shareholders in connection with the proposed merger will be set forth in the proxy statement/prospectus when it is filed with the SEC.

You can find information about the executive officers and directors of First Community in its Annual Report on Form 10-K for the year ended December 31, 2021, and in its definitive proxy statement filed with the SEC on March 16, 2022. You can find information about Surrey's executive officers and directors in Surrey's annual report for the year ended December 31, 2020, by accessing Surrey's website at www.surreybank.com under the tab "About Us" and then under the heading "Investor Relations" and "Shareholder Relations". You can obtain free copies of these documents from First Community or Surrey using the contact information above.

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**Exhibit 99.2**

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| |
|:---|
| **UNITED STATES** |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **Washington, D.C. 20549** |
| **FORM **8-K** |
| **CURRENT REPORT**  |
| **Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934** |
| Date of Report (Date of earliest event reported): December 1, 2022 |

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| | |
|:---|:---|
|  | **FIRST COMMUNITY BANKSHARES, INC.** |
| (Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) |

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| | | |
|:---|:---|:---|
| **Virginia** | **000-19297** | **55-0694814** |
| (State or other jurisdiction | (Commission | (IRS Employer |
| of incorporation) | File Number) | Identification No.) |

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| | |
|:---|:---|
| **P.O. Box 989**<br> **Bluefield**, Virginia** | **24605-0989** |
| (Address of principal executive offices) | (Zip Code) |

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Registrant's telephone number, including area code: **(**276**) 326-9000**

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| |
|:---|
| Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |
| ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |

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**Securities registered pursuant to Section 12(b) of the Act:**

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| | |
|:---|:---|
| **Title of each class** | **Name of each exchange on which registered** |
| Common Stock ($1.00 par value)<br> FCBC | NASDAQ Global Select |

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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). <br> Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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**Item 5.04 Temporary Suspension of Trading Under Registrant**'**s Employee Benefit Plans.**

First Community Bankshares, Inc. (the "Company") has selected Principal Financial Group ("Principal") as the Third Party Administrator for the First Community Bankshares, Inc. Employee Stock Ownership and Savings Plan (the "Plan"). On October 31, 2022, the Plan participants received notice that, as part of the transition to Principal's platform, the participants' accounts must be converted from the American Trust platform to the Principal platform. The conversion will result in a brief period, between December 1<sup>st</sup> and approximately December 22<sup>nd</sup>, (the "Transition"), when the participants will not have access to their assets. As a result of the Transition, participants in the Plan were notified that they will be temporarily unable to direct or diversify the investment of assets in their Plan accounts beginning on December 1st and ending on approximately December 22, 2022 (the "Blackout Period").

On December 1, 2022, the Company transmitted a notice dated November 30, 2022, (the "Notice") to its directors and executive officers informing them of the Blackout Period regarding the Plan. The Notice also informed the directors and executive officers that during the Blackout Period, directors and executive officers will be prohibited from directly or indirectly purchasing, selling or otherwise acquiring or transferring any Company equity securities or certain derivative securities previously acquired in connection with their service as a director or executive officer, unless exempt under Regulation BTR of the Securities Exchange Act of 1934.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For additional information or if you have any questions regarding the Blackout Period please contact Sarah W. Harmon, Chief Administrative Officer, General Counsel, and Secretary at (276) 326-9000, or in writing at P. O. Box 989, Bluefield, VA, 24605.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Notice is attached hereto as Exhibit 99.1 and is incorporated by reference herein.

**Item 9.01 Financial Statements and Exhibits.**

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| | | |
|:---|:---|:---|
| (d) | The following exhibit is included with this report: | The following exhibit is included with this report: |
|  | <u>Exhibit No.</u> | <u>Exhibit Description</u> |
|  | 99.1 | [Important Notice of Blackout Period to Directors and Executive Officers of First Community Bankshares, Inc.](#a8k120122ex991) |
|  | 104 | Cover-Page Interactive Data File (embedded within the Inline XBRL document) |

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SIGNATURE

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

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| | | | |
|:---|:---|:---|:---|
| | | FIRST COMMUNITY BANKSHARES, INC. | FIRST COMMUNITY BANKSHARES, INC. |
| Date: | December 1, 2022 | By: | /s/ William P. Stafford II |
|  |  |  | William P. Stafford II |
|  |  |  | Chairman & Chief Executive Officer |

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**Exhibit 99.1**

**Important Notice of Blackout Period to Directors and Executive Officers of**

**First Community Bankshares, Inc.**

**November 30, 2022**

**Pursuant to the Sarbanes-Oxley Act of 2002, and Rule 104 under Securities and Exchange Commission Regulation BTR, First Community Bankshares, Inc. (the "Company**"**) is hereby notifying you of upcoming temporary restrictions on your ability to engage in certain activities regarding Company equity securities.**

As a result of updating the trading platform of First Community Bankshares, Inc. Employee Stock Ownership and Savings Plan (the "Plan"), there will be a blackout period for Plan participants scheduled to begin on November 30, 2022 at 4:00 p.m. EST and expected to conclude December 22, 2022 (the "Blackout Period"). During the Blackout Period, Plan participants will not be permitted to direct or diversify investments in their accounts.

In accordance with Section 306(a) of the Sarbanes-Oxley Act of 2002 and the SEC's rules promulgated thereunder, during the Blackout Period, all directors and executive officers of the Company are prohibited, with limited exceptions from purchasing, selling or otherwise acquiring, disposing or transferring any Company common stock (including exercising Company stock options) or any derivatives of Company common stock, regardless of whether the individual participates in the Plan. As a director or executive officer of the Company, these prohibitions are not limited to those transactions involving your direct ownership but include any transaction in which you have a pecuniary interest (for example, transactions by your immediate family members living in your household).

If you engage in a transaction that violates these rules, you may be required to disgorge your profits from the transaction, and you may be subject to civil and criminal penalties. **Because of the complexity of these rules and the severity of the penalties and other remedies, please contact Sarah W. Harmon, Chief Administrative Officer, General Counsel, and Secretary at (276) 326-9000, or in writing at First Community Bank, P. O. Box 989, Bluefield, VA, 24605 before engaging in <u>any</u> transaction involving the Company**'**s equity securities during the Blackout Period.**

For additional information or if you have any questions regarding the Blackout Period please contact **Sarah W. Harmon, Chief Administrative Officer, General Counsel, and Secretary at (276) 326-9000, or in writing at P. O. Box 989, Bluefield, VA, 24605**.

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**PART II**

**INFORMATION NOT REQUIRED IN PROSPECTUS**

**Item 20. *Indemnification of Directors and Officers***

Set forth below is a description of certain provisions of the Registrant's Articles of Incorporation and the Bylaws of the Registrant and the Virginia Stock Corporation Act ("VSCA"), as such provisions relate to the indemnification of the directors and officers of the Registrant. This description is intended only as a summary and is qualified in its entirety by reference to the Registrant's Articles of Incorporation and Bylaws and the VSCA.

The Registrant's Articles of Incorporation provide indemnification to directors and certain officers and employees in accordance with the bylaws of the Registrant. The Registrant's Articles of Incorporation further provide that in addition to any indemnification provided in the bylaws, to the full extent permitted by the VSCA and any other applicable law, as they exist on the date of the Articles of Incorporation or may be amended later, the Registrant will indemnify a Director or Officer of the Registrant who is or was a party to any proceeding (including a proceeding by or in the right of the Registrant) by reason of the fact that he or she is or was such a Director or Officer, or is or was serving at the request of the Registrant as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. These provisions in the Articles of Incorporation are intended to provide indemnification with respect to those monetary damages for which the VSCA permits the limitation or elimination of liability. The Articles of Incorporation also provide that to the full extent, if any, that the VSCA, as it exists on the date of the Articles of Incorporation or may be amended later, permits the limitation or elimination of the liability of Officers and Directors, an Officer or Director of the Registrant will not be liable to the Registrant or its shareholders.

With respect to third party proceedings, the bylaws of the Registrant provide that:

● the Registrant shall indemnify any Covered Person, with respect to any Proceeding (excluding a Proceeding by or for the benefit of the Registrant or a Related Entity), against Liabilities and Expenses incurred by such Covered Person in connection with such Proceeding if such Covered Person acted in good faith and in a manner that such Covered Person reasonably believed to be in or unopposed to the best interest of the Registrant; or, with respect to any criminal Proceeding, such Covered Person had no reasonable cause to believe his conduct was unlawful.

● With respect to any administrative proceeding or civil action initiated by any federal or state banking agency, the Registrant shall provide such indemnification only after the Board of Directors determines, in writing, after due investigation and consideration, without any involvement by the Covered Person prior to and as a condition to any indemnification therefor, that (a) the Covered Person acted in good faith and in a manner Covered Person reasonably believed to be in or unopposed to the best interests of the Registrant, (b) that any requested payment of indemnification will not materially adversely affect the safety and soundness of either the Registrant or its subsidiaries, (c) that such indemnification payment is consistent with safe and sound banking practice, and (d) that the payment of indemnification is not a "prohibited indemnification payment" as defined in 12 C.F.R. Section 359.1(1).

With respect to proceedings by or for the benefit of the Registrant or Related Entity, the bylaws provide that the Registrant shall indemnify Covered Persons who were or are a party or are threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of any action or inaction on the part of the Covered Person in his or her corporate capacity against Liabilities and Expenses incurred by such Covered Persons if such Covered Person acted in good faith and in a manner that Covered Person reasonably believed to be in or unopposed to the best interest of the Registrant; provided, however, that no such indemnification shall be made in respect of any claim, issue or matter as to which said Covered Person shall have been adjudged to be liable to the Registrant, unless and only to the extent that the appropriate court of the State of Virginia or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Covered Person is fairly and reasonably entitled to indemnity for such Expenses and Liabilities which the appropriate court shall deem proper.

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If a Covered Person is entitled to indemnification by the Registrant, for some or a portion of the Expenses or Liabilities, but not, however, for the total amount thereof, the Registrant shall nevertheless indemnify Covered Person for the portion of such Expenses and Liabilities to which Covered Person is entitled. If indemnification provided for in the bylaws is unavailable by reason of a Court decision, other than a decision described in a proceeding by or for the benefit of the Registrant or Related Entity or by a ruling regarding a statutory prohibition against indemnification, or unavailable under the VSCA, then in respect of any Proceeding in which the Registrant is jointly liable with Covered Person (or would be if joined in such Proceeding), the Registrant shall contribute to the amount of Expenses and Liabilities in such proportion as is appropriate to reflect (i) the relative benefits received by the Registrant and any Related Entity on one hand and Covered Person on the other hand from the transaction form which such Proceeding arose, and (ii) the relative fault of the Registrant on the one hand and of the Covered Person on the other in connection with the events which resulted in such Expenses and Liabilities as well as any other relevant equitable considerations.

The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Covered Person did not satisfy the standards set forth in the bylaws for indemnification. Further, a Covered Person's right to indemnification shall not be affected by the act, conduct, or knowledge of any other director, officer, or employee of the Registrant or Related Entities, and no such act, conduct, or knowledge will be imputed to Covered Person.

All determinations as to whether a Covered Person has satisfied the standards set forth in the bylaws for indemnification, all determinations as to the reasonableness of Expenses, and all determinations as to whether a Covered Person is entitled to receive advance payments of Expenses pursuant to the bylaws shall be made:

● by the Board of Directors by majority vote of a quorum consisting of Disinterested Directors;

● if a quorum of Disinterested Directors is not obtainable, then by majority vote of a committee that consists solely of two or more Disinterested Directors and that is duly designated by majority vote of a quorum of the full Board of Directors (including directors that are not Disinterested Directors); or

● by independent legal counsel that is selected by (i) a majority of a quorum of Disinterested Directors or by a majority of a committee designated pursuant to clause (b) of this Section 5.4; or (ii) if such a quorum of Disinterested Directors cannot be obtained and such a committee cannot be designated, then by a majority vote of a quorum of the full Board of Directors (including directors that are not Disinterested Directors).

A determination as to the entitlement of any Covered Person to indemnification under the bylaws shall be made promptly after there has been any judgment, order, settlement, dismissal, award or other disposition of the related Proceeding, or any partial disposition of such Proceeding that is sufficient to allow such a determination to be made. Without limitation of the foregoing, the Registrant shall exercise its best efforts to cause such a determination to be made prior to the time that such Covered Person is obligated to pay any Liabilities that he or she has incurred in such Proceeding.

Any adverse determination made shall be in writing and shall state the reason therefore. A copy of such writing with respect to any adverse determination made shall be provided to the Covered Person within ten (10) business days of the date of determination.

In the event of a determination pursuant to the preceding subparagraph that a Covered Person has not satisfied the standards set forth in the bylaws for indemnification, such Covered Person shall be entitled to a final adjudication of such issue in a de novo judicial proceeding in an appropriate court of competent jurisdiction. Any action seeking such an adjudication must be commenced within thirty (30) days of the date that the Covered Person is notified of such adverse determination.

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The Expenses of any Covered Person provided indemnification by the Registrant shall be paid by the Registrant in advance of the final disposition of such Proceeding upon receipt of an undertaking in writing by or on behalf of such Covered Person to repay such amount if it shall ultimately be determined that such Covered Person is not entitled to be indemnified by the Registrant as provided in the bylaws. No indemnification shall be paid or expenses advanced by the Registrant under the bylaws, and none shall be ordered by any court, if such action would be inconsistent with any provisions of applicable law or regulation in effect at the time of the events which are the subject of the Proceeding which prohibits, limits, or otherwise conditions the exercise of indemnification powers by the Registrant or the rights of indemnification to which a Covered Person may be entitled.

Notwithstanding the forgoing, should the Expenses of any Covered Person described herein be covered by the D&O Policy of the Registrant and should such D&O Policy not require repayment by the Covered Person of advances made pursuant to the bylaws, then the Covered Person shall not be required to repay such advances.

In the event the Registrant shall be obligated hereunder to pay the Expenses of any Proceeding against a Covered Person, the Registrant, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by the Covered Person (which approval shall not be unreasonably withheld), which counsel may be counsel for the Registrant, upon the delivery to the Covered Person of written notice of its election to do so. After delivery of such notice, approval of such counsel by the Covered Person, and the retention of such counsel by the Registrant, the Registrant will not be liable to the Covered Person for any fees or counsel subsequently incurred by the Covered Person with respect to the same Proceeding, provided that (i) the Covered Person shall have the right to employee his or her counsel in any such proceeding, at the Covered Person's sole expense.

The capitalized terms set forth above have the following definitions as set forth in the bylaws of the Registrant:

Covered Person means any person who, by reason of his or her current or former status as one of the following, is, was or is threatened to be made a defendant in a Proceeding, or is involved as a witness (but not as a plaintiff or as a witnesses for the plaintiff) in a Proceeding where another Covered Person, the Registrant, and/or a Related Entity is, was or is threatened to be made a defendant: (i) a director or officer of the Registrant (as defined in Article III or IV hereof) or a Related Entity; (ii) agent or employee of the Company or a Related Entity specifically designated by the Board to be indemnified based on the nature of their duties or assignment(s); or (iii) a director or officer of the Registrant who is or was serving at the request of the Registrant, which request shall be documented in writing, as a director, officer, employee, agent, administrator or trustee of an Other Entity.

Disinterested Director means a director of the Registrant who is not and has not been a party to or involved in the Proceeding with respect to which indemnification is sought.

Expenses means all costs and expenses (including, without limitation, attorneys' fees and court costs) actually and reasonably incurred by a Covered Person in connection with a Proceeding or in connection with successfully establishing a right to indemnification hereunder.

Liabilities means final judgments, fines (including, without limitation, excise taxes assessed in connection with an employee benefit plan), penalties, amounts paid in settlement (if such settlement is approved in advance by the Registrant, which approval shall not be unreasonably withheld), and other liabilities of any type (other than Expenses) actually incurred by a Covered Person in connection with a Proceeding.

Other Entity means any corporation (other than the Registrant or a Related Entity), agency, general partnership, limited partnership, limited liability company, employee benefit plan, bank, joint venture, trust, business trust, cooperative, association, enterprise, or other generally recognized business form.

Proceeding includes any threatened, pending or completed action, suit, claim, or proceeding, whether civil, criminal, administrative, or investigative, whether formal or informal (including, without limitation, arbitrations and other means of alternative dispute resolution, targeted or general investigations, requests for voluntary cooperation, production of documents, and the like by any regulatory agency), and any appeal or other proceeding for review. A Proceeding does not include any action or claim initiated or brought voluntarily by a Covered Person, including an action or claim brought against the Registrant or its directors, officers, employees, agents, or other Covered Persons, and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification, unless such is deemed a covered Proceeding by the Board of Directors prior to its initiation.

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Related Entity means any corporation (other than the Registrant), agency, general partnership, limited partnership, limited liability company, employee benefit plan, bank, joint venture, trust, business trust, cooperative, association, enterprise, or other generally recognized business form which is, directly or indirectly, controlling, controlled by, or under common ownership with the Registrant whether control is by management authority, equity ownership, contract or otherwise. Control in this context means direct or indirect ownership of 50% or more of the voting equity.

In addition to any indemnification provided in the bylaws, Article 10 of the Virginia Stock Corporation Act ("VSCA") allows, in general, for indemnification, in certain circumstances, by a corporation of any person threatened with or made a party to any action, suit or proceeding by reason of the fact that he or she is, or was, a director or officer of such corporation or, while a director or officer, is or was serving at such corporation's request as a director, officer, manager, partner, trustee, employee or agent of another entity, if such person acted in good faith and believed his or her conduct to be in the best interests of such corporation. Indemnification is also authorized with respect to a criminal proceeding where the person had no reasonable cause to believe that his or her conduct was unlawful. Article 10 of the VSCA also provides that a corporation may make any other or further indemnity (including indemnity with respect to a proceeding by or in the right of the corporation) if authorized by its articles of incorporation or a shareholder-adopted bylaw, except an indemnity against willful misconduct or a knowing violation of the criminal law. Article 9 of the VSCA authorizes the elimination of liability of, and provides limitations on damages payable by, officers and directors, except in cases of willful misconduct or knowing violation of criminal law or any federal or state securities law.

**Item 21. *Exhibits and Financial Statement Schedules***

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| | |
|:---|:---|
| 2.1 | [Agreement and Plan of Merger dated as of November 17, 2022, by and between First Community Bankshares, Inc. and Surrey Bancorp (included as ***Appendix A*** to the proxy statement/prospectus).\*](#appendixa) |
| 3.1 | [Articles of Incorporation of First Community Bankshares, Inc. as in effect on the date hereof (incorporated by reference to ***Appendix B*** of the Definitive Proxy Statement on Form DEF14A dated April 24, 2018 filed on March 13, 2018).](http://www.sec.gov/Archives/edgar/data/859070/000143774918004502/fcbc20180309_def14a.htm#appendix_b) |
| 3.2 | [Bylaws of First Community Bankshares, Inc., as in effect on the date hereof (incorporated by reference to Exhibit 3.2 to First Community's Current Report on Form 8-K dated and filed October 2, 2018).](http://www.sec.gov/Archives/edgar/data/859070/000143774918017765/ex_124896.htm) |
| 5.1 | [Opinion of Bowles Rice LLP, including consent.](ex_464052.htm) |
| 8.1 | [Tax Opinion of Bowles Rice LLP, including consent.](ex_464049.htm) |
| 8.2 | Tax Opinion of Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, including consent.\*\* |
| 10.1 | [Form of Voting Agreement (incorporated herein by reference to Exhibit A of ***Appendix A*** of the proxy statement/prospectus).](#appendixa) |
| 21 | [Subsidiaries of Registrant (incorporated herein by reference to First Community Bankshares, Inc.'s Form 10-K for the year ended December 31, 2021).](http://www.sec.gov/Archives/edgar/data/859070/000143774922005177/ex_313625.htm) |
| 23.1 | Consent of Bowles Rice LLP (included in Legal Opinion, Exhibits [5.1](ex_464052.htm) and [8.1](ex_464049.htm)). |
| 23.2 | Consent of Brooks, Pierce, McLendon, Humphrey & Leonard, LLP (included in Legal Opinion, Exhibit 8.2).\*\* |
| 23.3 | [Consent of FORVIS, LLP, formerly known as Dixon Hughes Goodman LLP.](ex_464545.htm) |
| 24 | [Powers of Attorney (included on signature page to this proxy statement/prospectus).](#poa) |
| 99.1 | Form of Proxy Card for Surrey Bancorp - Holders of Common Stock\*\* |
| 99.2 | Form of Proxy Card for Surrey Bancorp - Holders of Class A Common Stock\*\* |

---

---

| | |
|:---|:---|
| 99.3 | [Consent of Raymond James & Associates, Inc.](ex_464050.htm) |
| 107 | [Calculation of Registration Fee.](ex_464051.htm) |

---

------

\* Annexes, schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. First Community Bankshares, Inc. agrees to furnish supplementally a copy of any omitted attachment to the Securities and Exchange Commission on a confidential basis upon request.

\*\* To be filed by amendment.

------

[**Table of Contents**](#toc)

**Item 22. *Undertakings***

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial, bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(c) (1) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.

------

[**Table of Contents**](#toc)

(2) The registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

(e) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.

(f) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.

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[**Table of Contents**](#toc)

**SIGNATURES**

In accordance with the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed in its behalf by the undersigned, thereunto duly authorized, in the City of Bluefield, Virginia, on January 18, 2023.

---

| |
|:---|
| FIRST COMMUNITY BANKSHARES, INC. |
| /s/ William P. Stafford, II |
| William P. Stafford, II<br> Chairman of the Board and Chief Executive Officer |
| /s/ David D. Brown |
| David D. Brown<br> Chief Financial Officer |

---

------

[**Table of Contents**](#toc)

**POWER OF ATTORNEY**

Each of the undersigned hereby appoints William P. Stafford, II as attorney-in-fact and agent for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the Securities and Exchange Commission under the Securities Act, any and all amendments (including post-effective amendments) to this Registration Statement, with any schedules or exhibits thereto, and any and all supplements or other documents to be filed with the Securities and Exchange Commission pertaining to the registration of securities covered hereby, with full power and authority to do and perform any and all acts and things as may be necessary or desirable in furtherance of such registration

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

---

| | | |
|:---|:---|:---|
| <u>Signature</u> | <u>Title</u> | <u>Date</u> |
| /s/ William P. Stafford, II | Chairman of the Board, Director and | January 18, 2023 |
| William P. Stafford, II | Chief Executive Officer (Principal<br> Executive Officer) |  |
| /s/ David D. Brown | Chief Financial Officer and Secretary | January 18, 2023 |
| David D. Brown | (Principal Financial Officer and Principal<br> Accounting Officer) |  |
| /s/ Gary R. Mills | President and Director | January 18, 2023 |
| Gary R. Mills |  |  |
| /s/ C. William Davis | Director | January 18, 2023 |
| C. William Davis |  |  |
| /s/ M. Adam Sarver | Director | January 18, 2023 |
| M. Adam Sarver |  |  |
| /s/ Samuel L. Elmore | Director | January 18, 2023 |
| Samuel L. Elmore |  |  |
| /s/ Richard S. Johnson | Director | January 18, 2023 |
| Richard S. Johnson |  |  |
| /s/ Harriet B. Price | Director | January 18, 2023 |
| Harriet B. Price |  |  |
| /s/ Beth A. Taylor | Director | January 18, 2023 |
| Beth A. Taylor |  |  |

---

## Exhibit 5.1

**Exhibit 5.1**

---

| | |
|:---|:---|
| ![a02.jpg](a02.jpg)<br>600 Quarrier Street, Charleston, WV 25301<br> P.O. Box 1386, Charleston, WV 25325-1386<br> 304.347.1100<br>T 304-347-1100<br> F 304-343-3058 | 101 South Queen Street<br> Martinsburg, WV 25401<br>125 Granville Square, Suite 400<br> Morgantown, WV 26501<br>501 Avery Street<br> Parkersburg, WV 26101<br>Post Office Box 390<br> Wheeling, WV 26003<br>Southpointe Town Center<br> 1800 Main Street, Suite 200<br> Canonsburg, PA 15317<br>480 West Jubal Early Drive, Suite 130<br> Winchester, VA 22601 |
| January 18, 2023 | **bowlesrice.com** |

---

Board of Directors First Community Bankshares Inc. 29 College Drive Bluefield, Virginia 24605

Re: <u>Registration Statement on Form S-4</u>

Ladies and Gentlemen:

We have acted as counsel to First Community Bankshares, Inc., a Virginia corporation (the "Corporation"), and are furnishing this opinion letter to the Corporation in connection with the preparation and filing of a Registration Statement on Form S-4 (the "Registration Statement," which term does not include any other document or agreement whether or not specifically referred to therein or attached as an exhibit or schedule thereto) by the Corporation with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement relates to the registration under the Securities Act of the offering of 2,997,390 shares of the Corporation's common stock, par value $1.00 per share (the "Shares"), which may be issued to the shareholders of Surrey Bancorp, a North Carolina corporation ("Surrey"), in connection with the merger contemplated by the Agreement and Plan of Merger, dated as of November 17, 2022, by and between the Corporation and Surrey (the "Merger Agreement," and such merger, the "Merger").

For purposes of giving this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of all such documents as we considered necessary to enable us to render this opinion, including, but not limited to, the Registration Statement and all exhibits thereto, the Merger Agreement, the Articles of Incorporation of the Corporation (the "Articles of Incorporation"), the Bylaws of the Corporation, effective on April 14, 2018, the corporate minutes, proceedings, records and instruments of the Corporation, and such laws and regulations as we have deemed necessary for purposes of rendering the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as certified or photostatic copies, the authenticity of the originals of such latter documents, and the accuracy and completeness of all records, information and statements submitted to us by officers and representatives of the Corporation. We have also assumed that the Shares will be issued upon receipt of valid consideration under applicable law and that the Registration Statement, as then amended, will have become effective under the Securities Act and such effectiveness shall not have been terminated or rescinded. As to any facts material to the opinions expressed herein, which were not independently established or verified, we have relied upon statements, representations and certifications of officers and other representatives of the Corporation and others.

------

![a03.jpg](a03.jpg)

January 18, 2023<br> Page 2

We express no opinion herein as to the law of any state or jurisdiction other than the statutory laws of the Commonwealth of Virginia and the federal laws of the United States of America.

Based upon the foregoing, we are of the opinion that the Shares have been duly authorized and, when the Shares shall have been issued in accordance with the terms of the Merger Agreement, including the receipt by the Corporation of the consideration therefor, the Shares will be validly issued, fully paid and non-assessable.

We hereby consent to the reference to this firm under the caption "Legal Matters" in the Registration Statement and in the related prospectus and proxy statement contained therein and to the filing of a copy of this opinion as an exhibit to the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder. This opinion is based upon currently existing statutes, rules, regulations and judicial decisions and we disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments that might affect any matters or opinions set forth herein.

Sincerely,<br>/s/Bowles Rice LLP<br>Bowles Rice LLP<br>

## Exhibit 8.1

**Exhibit 8.1**

---

| | |
|:---|:---|
| ![a02.jpg](a02.jpg)<br>600 Quarrier Street, Charleston, WV 25301<br> P.O. Box 1386, Charleston, WV 25325-1386<br> 304.347.1100<br>T 304-347-1100<br> F 304-343-3058 | 101 South Queen Street<br> Martinsburg, WV 25401<br> 125 Granville Square, Suite 400<br> Morgantown, WV 26501<br> 501 Avery Street<br> Parkersburg, WV 26101<br> Post Office Box 390<br> Wheeling, WV 26003<br> Southpointe Town Center<br> 1800 Main Street, Suite 200<br> Canonsburg, PA 15317<br> 480 West Jubal Early Drive, Suite 130<br> Winchester, VA 22601 |
| January 18, 2023 | **bowlesrice.com** |

---

William P. Stafford, II First Community Bankshares, Inc. 29 College Drive Bluefield, Virginia 26405

Dear Mr. Stafford:

We have acted as counsel to First Community Bankshares, Inc., a Virginia corporation ("First Community"), in connection with the proposed merger ("Merger") of Surrey Bancorp, a North Carolina corporation ("Surrey"), with and into First Community, pursuant to the Agreement and Plan of Merger executed by First Community and Surrey dated as of November 18, 2022 (the "Merger Agreement").

At your request, and in connection with the filing by First Community of a Registration Statement on Form S-4, including the proxy statement/prospectus contained therein with the Securities and Exchange Commission (the "Commission"), we are rendering our opinions concerning material United States federal income tax matters.

All capitalized terms used herein and not otherwise defined herein shall have the same meanings given to them in the Merger Agreement.

<u>REPRESENTATIONS</u> 

With your permission, we have relied upon statements and representations set forth in the Merger Agreement, in the Registration Statement on Form S-4, and any exhibits attached thereto, initially filed on January 17, 2023, as amended or supplemented (the "Registration Statement"), and in letters of each of First Community and Surrey addressed to this firm dated January 17, 2023, concerning the Merger (collectively, the "Tax Certificates"). The relevant facts concerning the Merger are set forth in the Merger Agreement and the Registration Statement. The facts and the description of the Merger set forth in the Merger Agreement and the Registration Statement are incorporated herein by this reference.

<u>ASSUMPTIONS</u> 

In rendering the opinions set forth below, we have assumed, with your permission, that (i) the Merger will be consummated in accordance with the Merger Agreement and as described in the Registration Statement (and no transaction or condition described therein and affecting this opinion will be waived by any party), (ii) the statements concerning the Merger and the parties thereto set forth in the Merger Agreement and the Registration Statement are true, complete and correct as of the date thereof and will remain true, complete and correct at all times up to the Effective Time (other than the information provided in the Registration Statement under the caption "MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER"), (iii) the parties have complied with and, if applicable, will continue to comply with, the covenants contained in the Merger Agreement, (iv) none of the documents that have been executed will be amended, and any documents that have been presented to us but that will be executed at a later date, will be executed without any material changes, (v) the statements and representations of fact (which statements and representations of fact we have neither investigated nor verified) contained in the Tax Certificates are true, complete and correct as of the date thereof and will remain true, complete and correct at all times up to the Effective Time, and (vi) any statements and representations made in the Tax Certificates "to the knowledge of," or similarly qualified, are and will be true, complete and correct without such qualification. If any of the above-described assumptions are untrue for any reason, or if the Merger is consummated in a manner that is different from the manner in which it is described in the Merger Agreement or the Registration Statement, our opinions as expressed below may be adversely affected.

------

![a03.jpg](a03.jpg)

William P. Stafford, II<br> First Community Bankshares, Inc.<br> January 18, 2023<br> Page 2

We have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement, (ii) the Merger Agreement, and (iii) such corporate records, agreements, documents and other instruments as we have deemed necessary or appropriate to enable us to render the opinion set forth below. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies. We have not, however, undertaken any independent investigation of any factual matter set forth in any of the foregoing.

In rendering our opinion, we have considered the applicable provisions of (i) the Internal Revenue Code of 1986, as amended and as in effect on the date hereof (the "Code"), and our interpretations of the Code, (ii) the applicable Treasury Regulations promulgated under the Code and as currently in effect (the "Regulations"), (iii) current administrative interpretations by the Internal Revenue Service of the Code and the Regulations as they apply to reorganizations, and (iv) existing judicial decisions, all of which are subject to change or modification at any time (possibly with retroactive effect) and such other authorities as we have considered relevant.

<u>OPINION</u> 

Based upon and subject to the foregoing and to the limitations, qualifications, exceptions and assumptions set forth in the section of the Registration Statement entitled "MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER," (i) we are of the opinion that the Merger will constitute a tax-free reorganization within the meaning of Section 368(a) of the Code, (ii) First Community and Surrey will each be a party to that reorganization within the meaning of Section 368(b) of the Code, and (iii) the discussion in the Registration Statement under the heading "MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER" constitutes our opinion as to the material U.S. federal income tax consequences of the Merger.

Our opinion is a limited scope opinion that addresses only the issues described above. Additional issues may exist that affect the federal income tax treatment of the Merger or the parties to the Merger that are not addressed by this limited scope opinion and this opinion cannot be relied on for the purpose of avoiding tax penalties with regard to any such federal income tax issue that is not addressed herein.

It should be noted that the opinions expressed in this letter are based upon statutory, judicial and administrative authority as of the date of this opinion. There can be no assurance that such authority will not be changed in the future, or that such changes will not be made retroactively applicable to the transactions considered herein. If the laws or regulations applicable to the proposed transactions are changed or reinterpreted by competent tribunals, the opinions expressed in this letter may become inapplicable. These opinions reflect our best professional judgment as to the correct United States federal income tax consequences of the matters that it addresses.

This opinion is expressed as of the date hereof, and we are under no obligation to supplement or revise our opinion to reflect any changes (including changes that have retroactive effect) (i) in applicable law or (ii) that would cause any statement, representation or assumption herein to be no longer be true or correct.

Except as set forth above, we express no opinion as to the tax consequences, whether federal, state, local or foreign, of the Merger or any transaction related thereto or contemplated thereby.

------

![a03.jpg](a03.jpg)

William P. Stafford, II<br> First Community Bankshares, Inc.<br> January 18, 2023<br> Page 3

We are furnishing this opinion in connection with the filing of the Registration Statement and this opinion is not to be relied upon for any other purpose without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the use of our name and to the reference to this opinion under the caption "MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER" in the Registration Statement and elsewhere in the proxy statement/prospectus included therein. In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Commission promulgated thereunder.

Sincerely,<br>/s/ Bowles Rice LLP<br>

## Exhibit 23.3

**Exhibit 23.3**

**Consent of Independent Registered Public Accounting Firm**

We consent to the incorporation by reference in this Registration Statement on Form S-4 of First Community Bankshares Inc. for the registration of securities of our reports dated March 3, 2022, with respect to the consolidated financial statements of First Community Bankshares Inc. and the effectiveness of internal control over financial reporting, included in this Annual Report on Form 10-K for the year ended December 31, 2021. We also consent to the reference to our firm under the caption "Experts" in this registration statement.

/s/ FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP)

**Charlotte, North Carolina**

**January 18, 2023**

## Exhibit 99.3

**Exhibit 99.3**

![rjlogosml.jpg](rjlogosml.jpg)

Consent of Raymond James & Associates, Inc.

Raymond James & Associates, Inc. ("Raymond James") consents to (i) the inclusion and description of our opinion letter dated November 17, 2022 to the Board of Directors of Surrey Bancorp (the "Company") included as Appendix **B** to the Proxy Statement/ Prospectus of First Community Bankshares, Inc. ("First Community") which forms a part of the Registration Statement on Form S-4 of First Community (the "Registration Statement") and (ii) the references to our firm and our opinion included in such Registration Statement.

In giving such consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder, not do we admit that we are experts with respect to any part of such Registration Statement within the meaning of the terms "experts" as used in the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchanges Commission thereunder.

![a04.jpg](a04.jpg)

RAYMOND JAMES & ASSOCIATES, INC.

January 18, 2023

## Ex-Filing

**Exhibit 107**

**Calculation of Filing Fee Tables**

**Form S-4**

(Form Type)

**First Community Bankshares, Inc.** 

(Exact Name of Registrant as Specified in its Charter)

<u>Table 1: Newly Registered and Carry Forward Securities</u>

---

| | | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | Security<br> Type | Security<br> Class<br> Title | Fee<br> Calculation<br> or Carry<br> Forward<br> Rule | Amount<br> Registered | Proposed<br> Maximum<br> Offering<br> Price Per<br> Unit | Maximum<br> Aggregate<br> Offering<br> Price | Fee<br> Rate | Amount of<br> Registration<br> Fee | Carry<br> Forward<br> Form<br> Type | Carry<br> Forward<br> File<br> Number | Carry<br> Forward<br> Initial<br> effective<br> date | Filing Fee<br> Previously<br> Paid In<br> Connection<br> with Unsold<br> Securities to<br> be Carried<br> Forward |
| Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities | Newly Registered Securities |
| Fees to Be<br> Paid | Equity | Common Stock, $2.50 par value | Rule 457 (c) | 2997390<sup>(1)</sup> | N/A | $99229127<sup>(2)</sup> | $110.20<br> per million | $10935.05<sup>(2)</sup> |  |  |  |  |
| Fees<br> Previously Paid | - | - | - | - | - | - |  | - |  |  |  |  |
| Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities | Carry Forward Securities |
| Carry<br> Forward Securities | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; - | - | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; - | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; - |  | - |  |  | - | - | - | - |
|  | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Offering Amounts | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Offering Amounts | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Offering Amounts | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Offering Amounts |  | $99229127 |  | $10935.05 |  |  |  |  |
|  | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Fees Previously Paid | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Fees Previously Paid | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Fees Previously Paid | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Fees Previously Paid |  |  |  | $0 |  |  |  |  |
|  | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Fee Offsets | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Fee Offsets | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Fee Offsets | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total Fee Offsets |  |  |  | $0 |  |  |  |  |
|  | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net Fee Due | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net Fee Due | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net Fee Due | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net Fee Due |  |  |  | $10935.05 |  |  |  |  |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Represents the estimated maximum number of shares of First Community Bankshares, Inc., or First Community, common stock, par value $1.00 per share, that could be issued to holders of Surrey Bancorp, or Surrey, in connection with the merger between First Community and Surrey described in the Form S-4 to which this document is an exhibit, which number may be higher or lower in accordance with the formula described below. This number is based upon (i) 4,099,788 shares of Surrey common stock outstanding as of January 12, 2023 plus 87,095 shares of Surrey Class A common stock, multiplied by (ii) the exchange ratio of 0.7159 shares of First Community's common stock for each share of Surrey common stock and Surrey Class A common stock. If the average closing price of First Community common stock (which is the average of the closing sales price of First Community common stock reported on NASDAQ over the 30 consecutive trading days ending on the later of (A) the date on which the last regulatory approval necessary is received (disregarding any waiting period) or (B) the date on which the Surrey shareholders approve the merger (the "determination date")) is less than $27.14 and the ratio, the numerator of which is the First Community average closing price and the denominator which is $31.93 is less than 85% of the index ratio calculated by dividing the average of closing price for the NASDAQ Bank Index for the 30 consecutive trading days ending on the trading date immediately prior to the determination date by $4,269.44, then Surrey may terminate the merger agreement unless First Community agrees to increase the number of shares to be issued to the holders of Surrey common stock and Surrey Class A common stock or pay additional cash consideration. Pursuant to Rule 416, this registration statement also covers additional shares that may be issued as a result of stock splits, stock dividends or similar transactions. In the event the number of shares of common stock required to be issued to consummate the merger described herein is increased after the date this registration statement is declared effective, First Community will register such additional shares in accordance with Rule 413 under the Securities Act of 1933, as amended (the "Securities Act"), by filing a registration statement pursuant to Rule 462(b) or Rule 429 under the Securities Act, as applicable, with respect to such additional shares.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act and computed pursuant to Rules 457(f)(1) and 457(c) of the Securities Act, based on a rate of $110.20 per $1,000,000 of the proposed maximum aggregate offering price. The proposed maximum aggregate offering price of the registrant's common stock was calculated based upon the average of the bid and asked price of shares of Surrey common stock (the securities to be cancelled in the merger) in accordance with Rule 457(c) under the Securities Act as follows: the product of (1) $23.70, the average of the bid and asked price of shares of Surrey common stock on January 12, 2023 and (2) 4,186,883 the estimated maximum number of shares of Surrey common stock, Surrey Class A common stock and Surrey unvested restricted stock outstanding and reserved for issuance as of January 12, 2023.