Note

Acquisitions

and

Divestitures

The following are business combinations and divestitures which have occurred over the past

three

years:

Highlands Bankshares, Inc.

September 11, 2019,

the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands” )of Abingdon, Virginia. Under the terms of the agreement and plan of merger, 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 was consummated the close of business

December 31, 2019.

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.

The Highlands transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition.

	As recorded by		Fair Value				As recorded by
(Amounts in thousands, except share data)	Highlands		Adjustments				the Company
Assets
Cash and cash equivalents	$	25,879	$	-			$	25,879
Securities available for sale		53,732		-				53,732
Loans held for sale		263		-				263
Loans held for investment, net of allowance and mark		438,896		(11,429	)	( a )		427,467
Premises and equipment		16,722		(2,317	)	( b )		14,405
Other real estate		1,963		-				1,963
Other assets		25,556		2,250		( c )		27,806
Intangible assets		-		4,490		( d )		4,490
Total assets	$	563,011	$	(7,006	)		$	556,005

LIABILITIES
Deposits:
Noninterest-bearing	$	155,714	$	-			$	155,714
Interest-bearing		346,028		1,261		( e )		347,289
Total deposits		501,742		1,261				503,003
Long term debt		40		-				40
Other liabilities		2,938		198		( f )		3,136
Total liabilities		504,720		1,459				506,179
Net identifiable assets acquired over (under) liabilities assumed		58,291		(8,465	)			49,826
Goodwill		-		36,821				36,821
Net assets acquired over liabilities assumed	$	58,291	$	28,356			$	86,647

Consideration:
First Community Bankshares, Inc. common								2,792,729
Purchase price per share of the Company's common stock							$	31.02
Fair Value of Company common stock issued							$	86,631
Cash paid for fractional shares								16
Fair Value of total consideration transferred							$	86,647

Explanation of fair value adjustments:

( a ) - Adjustment reflects the fair value adjustments of $(

14.70

) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loan losses ("ALLL") and deferred loan fees of

$3.27

million recorded by Highlands.

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

( c ) - Adjustment to record the deferred tax asset related to the fair value adjustments.

( d ) - Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.

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

( f ) - Adjustment reflects the fair value adjustment for death benefits payable of

$320

thousand, the fair value adjustment for lease liability of $(

) thousand and the fair value adjustment to the reserve for unfunded commitments of $(

) thousand.

The following table presents the carrying amount of acquired loans at

December 31, 2019,

which consist of loans with

credit deterioration, or performing loans, and loans with credit deterioration, or impaired loans.

	December 31, 2019
	Purchased		Purchased
(Amounts in thousands)	Performing		Impaired		Total
Commercial loans
Construction, development, and other land	$	15,763	$	1,956	$	17,719
Commercial and industrial		44,474		2,829		47,303
Multi-family residential		21,032		1,663		22,695
Single family non-owner occupied		29,357		4,564		33,921
Non-farm, non-residential		107,489		21,710		129,199
Agricultural		2,298		-		2,298
Farmland		3,287		3,722		7,009
Total commercial loans		223,700		36,444		260,144
Consumer real estate loans
Home equity lines		23,654		2,157		25,811
Single family owner occupied		116,413		13,174		129,587
Owner occupied construction		1,097		-		1,097
Total consumer real estate loans		141,164		15,331		156,495
Consumer and other loans
Consumer loans		9,487		1,341		10,828
Loans acquired at fair value	$	374,351	$	53,116	$	427,467

Comparative and Pro Forma Financial Information for Acquisitions in

2019

As the merger date was the close of business,

December 31, 2019,

Highlands had

earnings contribution to the

2019

consolidated statement of income for the Company. Merger-related expenses of

$2.12

million are recorded in the consolidated statement of income and include incremental costs related to the closing of the acquisition, including legal, investment banker costs, and other costs.

The following table discloses the impact of the merger. The table also presents certain pro forma information as if Highlands had been acquired on

January 1, 2019

and

January, 1 2018.

These results combine the historical results of Highlands in the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are

not

indicative of what would have occurred had the acquisition taken place on

January 1, 2019

January 1, 2018.

Merger-related costs of

$7.16

million incurred by both the Company and Highlands during the year ended

December 31, 2019,

have been excluded from the proforma information below.

adjustments have been made to the pro formas to eliminate the provision for loan losses for the years ended

December 31, 2019

and

2018

of Highlands in the amount of

$738,000

and

$1.84

million, respectively. Additional expenses related to systems conversions and other costs of integration are expected to be recorded during

2020.

The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisitions which are

not

reflected in the pro forma amounts below:

	ProForma		ProForma
	Year Ended		Year Ended
(Dollars in thousands)	December 31, 2019		December 31, 2018
Total revenues (net interest income plus noninterest income)	$	150,618	$	145,656
Net adjusted income available to the common shareholder	$	43,463	$	42,470

Bankers Insurance, LLC

October 1, 2018,

the Company completed the sale of its remaining insurance agency assets to Bankers Insurance, LLC (“BI”) of Glen Allen, Virginia, in exchange for an equity interest in BI. The sale strategically allows the Company to continue offering insurance products to its customers through a larger, more diversified insurance agency. In connection with the divestiture, the Company recognized a

one

-time goodwill impairment charge of

$1.49

million during the

third

quarter of

2018.

The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment.

	Year Ended December 31,
(Amounts in thousands)	2019		2018			2017
Divestitures
Book value of assets sold		-		(1,685	)		-
Book value of liabilities sold		-		37			-
Sales price in excess of net liabilities assumed		-		-			-
Total sales price		-		(1,648	)		-
Cash sold		-		35			-
Non-cash sales price		-		1,603			-
Amount due remaining on books		-		-			-
Net cash received in divestitures		-		(10	)		-
Net cash received in acquisitions and divestitures	$	-	$	-		$	-