Note

Basis of Presentation

General

First Community Bankshares, Inc. (the “Company”), 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 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 (the “Bank”), a Virginia-chartered banking institution founded in

1874.

The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. 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. 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

-K for the year ended

December 31, 2019 (

the

“2019

Form

-K”), as filed with the Securities and Exchange Commission (the “SEC”) on

March 13, 2020.

The condensed consolidated balance sheet as of

December 31, 2019,

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

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

of this report.

Significant Accounting Policies

The Company’s significant accounting policies are included in Note

“Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item

of the Company’s

2019

Form

-K.

Risks and Uncertainties

Recent COVID-

Virus Developments

–

During the

first

quarter of

2020,

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.

Company Response to COVID-

–

As COVID-

events unfolded during the

first

quarter, 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. In particular, the Company took the following actions, among others:

●

Implemented its board-approved pandemic business continuity plan.

●

Appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed by COVID-

●

Modified branch operations:

Branch lobbies remain available, but on a limited appointment-only basis

Most transactions conducted via drive-throughs

Increased emphasis on digital banking platforms

●

Implemented physical separation of critical operational workforce for Bank and non-Bank financial services subsidiaries

●

Expanded paid time off and health benefits for employees

●

Implemented work from home strategy:

The majority of the Company’s non-branch, operational employees (approximately

60%

of the Company’s back office workforce) are working remotely

Geographically separated work locations of bank and Company CEO’s and most other executive management team members

Suspended work-related travel

●

Implemented a pay differential for employees continuing to work at branch or back office locations.

●

Adopted self-quarantine procedures

●

Implemented enhanced facility cleaning protocols

●

Redeployed staff to critical customer service operations to expedite loan payment deferral requests, Paycheck Protection Program lending efforts, and other operations

Potential Effects of COVID-

–

The adverse impact of COVID-

to the economy

may

impair the Company’s customers’ ability to fulfill their financial obligations to the Company, reducing interest income on loans or increasing loan losses. In keeping with Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, the Company continues to work with COVID-

affected borrowers to defer loan payments, interest, and fees. Through

May 1, 2020,

the Company has modified or deferred payments on a total of

2,176

loans totaling

$327.52

million in principal (

887

commercial loans totaling

$254.72

million in principal,

698

consumer installment loans totaling

$9.22

million in principal,

484

consumer mortgages totaling

$57.47

million in principal, and

107

home equity loans totaling

$6.10

million in principal). Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. At this time, the Company is unable to project the materiality of any such impact.

The general economic slowdown caused by COVID-

in local economies in communities served by the Company could affect 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 is participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist its customers. Per the terms of the program, PPP loans have a

two

-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 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

May 1, 2020,

the Company closed

234

loans for proceeds of

$37.68

million through the PPP. Additionally, SBA has approved

407

additional loans for proceeds of

$20.58

million that we expect to close in the coming weeks.

COVID-

could cause a sustained decline in the Company’s stock price or the occurrence of an event that could, under certain circumstances, trigger the performance of a goodwill impairment test. In the event the Company deems all or a portion of its goodwill to be impaired, the Company could record a non-cash charge to earnings for the amount of such impairment. Such a charge would have

impact on tangible or regulatory capital.

To date, the Company has identified

material, unmitigated operational or internal control challenges or risks and anticipates

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

material resource constraints arising due to implementation of the business continuity plan.

It is impossible to predict the full extent to which COVID-

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.

Recent Accounting

Standards

Standards Adopted in

August 2018,

the FASB issued ASU

2018

13,

“Fair Value Measurement (Topic

820

): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement,

Conceptual Framework for Financial Reporting—Chapter

Notes to Financial Statements

. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

Early adoption is permitted, including adoption in any interim period for which financial statements have

not

yet been issued. The update did

not

have a material effect on the Company’s financial statements.

Standards

Not

Yet Adopted

June 2016,

the FASB issued ASU

2016

13,

“Financial Instruments – Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments.” This ASU purportedly requires earlier recording of credit losses on loans and other financial instruments 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 on available-for-sale debt securities and purchased financial assets with credit deterioration. The CARES Act was passed by the United States Congress and signed into law by the President of the United States at the end of

March 2020.

The CARES Act states that “Notwithstanding any other provision of law,

insured depository institution, bank holding company, or any affiliate thereof shall be required to comply with the Financial Accounting Standards Board Accounting Standards Update

No.

2016

(“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses, during the period beginning on

March 27, 2020

and ending on the earlier of: (

) the date on which the national emergency concerning the novel coronavirus disease (COVID-

) outbreak declared by the President on

March 13, 2020

under the National Emergencies Act (

U.S.C.

1601

et seq.) terminates; or (

)

December 31, 2020.

U.S.C. §

9052

(b) (

2020

). The Company has elected to

“not

comply with” ASU

2016

for the period specified in the CARES Act and any subsequent controlling legislation or regulation. In preparation for expiration of the period specified in the CARES Act, the Company has selected loss estimation methodologies for its allowance for credit losses, performed testing on the chosen methodologies, and determined a qualitative adjustment methodology that aligns with the requirements of the new standard. The Company has also subjected the model to

third

party validation. Based upon the aforesaid preparatory measures, upon expiration of the period specified in the CARES Act and any subsequent controlling legislation or regulation, the Company anticipates recording a cumulative-effect adjustment to retained earnings of approximately

$5.61

million in connection with adoption of the new standard, consisting of tax-effected increases in the allowance for credit losses associated with the Company’s legacy loan portfolio prior to the addition of Highlands and the portfolio of purchased performing loans associated with Highlands of approximately

$2.89

million and

$4.44

million, respectively. The Company also anticipates making an approximate

$7.04

million adjustment to the opening balance of the allowance for credit losses associated with the required gross-up of purchased credit deteriorated loans from the Highlands transaction.

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. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2020.

Early adoption is permitted, including adoption in any interim period for which financial statements have

not

yet been issued. The update is

not

expected to have any material effect on the Company’s financial statements.

March 2020,

the FASB issued ASU

2020

04,

“Reference Rate Reform (Topic

848

) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary”. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR (London Inter-bank Offered Rate) and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. With global capital markets expected to move away from LIBOR and other inter-bank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late

2018

to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is effective

March 12, 2020

through

December 31, 2022.

The Company adopted this ASU on

March 12, 2020.

The update is

not

expected to have any 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.