FIRST COMMUNITY BANKSHARES INC VA

**Note1. **Basis of Presentation

General

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in1989 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 in1874. 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” 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”) for interim financial information and with the instructions to Form10-Q and Rule10-01 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by U.S. GAAP for complete financial statements. 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 inone business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management. Operating results for interim periods arenot 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 Form10-K for the year ended* December 31, 2023* (the “2023 Form10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on* March 8, 2024.The condensed consolidated balance sheet as of December 31, 2023*, 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 hadno 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.

Significant Accounting Policies

The Company’s significant accounting policies are included in Note1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item8 of the Company’s2023 Form10-K.

9

Recent AccountingStandards

StandardsNot* Yet Adopted*

In* December 2023,the FASB issued ASU2023*-09, “Income Taxes (Topic740).” The amendments in this ASU are related to the rate reconciliation and income taxes paid disclosures and are designed to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. Early adoption is permitted for annual financial statements that havenot yet been issued or made available for issuance. The adoption of this pronouncement isnot expected to have a material impact on the Consolidated Financial Statements.

The Company hasnot yet adopted any new accounting standards in2024** that have been issued by the FASB or other standards-setting bodies. The Company doesnot anticipate any of the recent standards issued to have a material impact on the consolidated financial statements.

Note*2***. Acquisitions**

On* November 18, 2022,the Company and NC-based Surrey Bancorp ("Surrey"), parent company of Surrey Bank & Trust, jointly announced their entry into an agreement and plan of merger pursuant to which First Community would acquire Surrey and its wholly-owned bank subsidiary, Surrey Bank & Trust. Under the terms of the agreement and plan of merger, each share of Surrey common stock immediately converted into the right to receive 0.7159 shares of the Company's common stock. The transaction was consummated on April 21, 2023.*The total purchase price for the transaction was $71.37 million.

The Surrey 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. The Company incurred a total of $2.99 million in merger expenses related to the Surrey transaction, $596 thousand was recorded in the last quarter of2022 and $2.39 million in2023. These costs were primarily related to data conversion, investment banking fees, and legal fees.

Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the fair value of the liabilities assumed. The Surrey acquisition resulted in the Company recognizing $14.38 million in goodwill.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. Core deposit intangibles for the Surrey transaction totaled $12.70 million.

When loans are acquired they are identified as either purchased credit deteriorated PCD or non-PCD. PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since the origination of the loans as of the acquisition date. The ACL for PCD assets is recognized within business combination accounting withno initial impact to net income. Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise. Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which* mayinclude prepayment estimates in certain circumstances. The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated loan losses for acquired loans are determined using methodologies and applying estimates and assumptions similar to originated performing loans. The fair value of purchased loans with credit deterioration was $101.42 million on the date of acquisition with the gross contractual amount totaling $111.22 million. The Company estimates that $2.01 million of contractual cash flows specific to the purchased loans with credit deterioration willnot* be collected. Non purchased credit deteriorated loans acquired had a fair value of $137.55 million with a gross contractual value of $143.55 million.

10

Explanation of fair value adjustments:

11

Note*3***.DebtSecurities**

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:

There wasno allowance for credit losses for debt securities as of* March 31, 2024*; therefore, it isnot presented in the table below. The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the debt securities and doesnot record an allowance for credit losses on accrued interest receivable. Accrued interest receivable for debt securities was $1.12 million and $1.25 million as of* March 31, 2024*, and* December 31, 2023*, respectively.

12

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.

The following tables present the fair values and unrealized losses for available-for-sale debt securities in a continuous unrealized loss position for less than12 months and for12 months or longer as of the dates indicated:

13

There were 115 individual debt securities in an unrealized loss position as of* March 31, 2024*, and the combined depreciation in value represented 9.20% of the debt securities portfolio. There were 112 individual debt securities in an unrealized loss position as of* December 31, 2023*, and their combined depreciation in value represented 5.02% 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 orone of its agencies. Municipal securities and all other securities that donot have azero 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, 2024*, continue to perform as scheduled and we donot 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 donot currently intend to sell the securities within the portfolio and it isnot more-likely-than-not that we will be required to sell the debt securities.

Management continues to monitor all of our securities with a high degree of scrutiny. There can beno assurance that we willnot 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 wereno available-for-sale securities sold in thefirst three months2024. In thefirst three months of2023, approximately $17.01 million in securities available-for-sale were sold. The following table presents gross realized gains and losses from the sale of available-for-sale debt securities for the periods indicated:

The carrying amount of securities pledged for various purposes totaled $44.55 million as of* March 31, 2024*, and $145.09 million as of* December 31, 2023*.

Note*4***. Loans**

The Company groups loans held for investment intothree 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 $1.39 million as of* March 31, 2024*, and $1.50 million as of* December 31, 2023*. Deferred loan fees, net of loan costs, totaled $7.27 million as of* March 31, 2024*, and $7.71 million as of* December 31, 2023*.

In accordance with the adoption of ASU2016-13, the table below reflects the loan portfolio at the amortized cost basis to include net deferred loan fees of $7.27 million and $7.71 million and unamortized discount related to loans acquired of $14.51 million and $15.29 million for* March 31, 2024*, and* December 31, 2023*, respectively. Accrued interest receivable of $9.59 million as of* March 31, 2024*, and $9.64 million as of* December 31, 2023*, is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

14

15

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:

The following table presents the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated:

16

The following tables present the amortized cost basis and current period gross write-offs of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:

17

18

19

20

The Company generally places a loan on nonaccrual status when it is90 days or more past due. The following table presents nonaccrual loans, by loan class, as of the dates indicated:

Loans are considered past due when either principal or interest payments become contractually delinquent by30 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 are90 days or more past due are placed on nonaccrual status. Management* mayelect to continue the accrual of interest when the loan is well secured and in process of collection. When interest accruals are discontinued, interest accrued andnot* collected in the current year is reversed from income, and interest accrued andnot collected from prior years is charged to the allowance for credit losses. Nonaccrual loans* maybe 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 leastsix* months of repayment performance by the borrower in accordance with the contractual terms. There wasno material nonaccrual loan interest recognized in income during thefirst quarter of2024 or2023.

The following tables presents the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans30 days or more past due are included in the applicable delinquency category:

21

ASC326 prescribes that when an entity determines foreclosure is probable, the expected credit loss can 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.

22

The Company* maymake concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Effective, January 1, 2023,the Company adopted ASU2022*-02, Financial Instruments-Credit Losses (Topic326), Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminated TDR accounting guidance for issuers that adopted ASU2016-13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs. Presented below are the amortized cost basis and percentage of loan class for loan modifications made to borrowers experiencing financial difficulty by loan class, concession type, and financial effect as of the dates indicated:

23

24

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. There wereno modified loans (or portions of a loan) deemed uncollectible as of* March 31, 2024*, or* December 31, 2023*.

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the lastthree months:

25

The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:

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:

26

Note*7***. Deposits**

The following table presents the components of deposits as of the dates indicated:

27

Note*8***. Borrowings**

The following table presents the components of borrowings as of the dates indicated:

Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements.

The Company hadno long-term borrowings as of* March 31, 2024*, or* December 31, 2023*.

Unused borrowing capacity with the FHLB totaled $402.00 million, net of FHLB letters of credit of $123.34 million, as of* March 31, 2024*. As of* March 31, 2024*, the Company maintains $525.34 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 has used interest rate swap contracts to modify its exposure to interest rate risk caused by changes in benchmark interest rates 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 Secured Overnight Financing Rate ("SOFR") plus a spread 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 the floating rate and the stated fixed rate. If SOFR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between the floating rate 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* March 31, 2024*, and* December 31, 2023*.

Through* July 2022,the Company had certain interest rate swaps that didnot* 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:

The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:

28

Note10**.EmployeeBenefit Plans**

The Company maintainstwo 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 of2021; 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:

Note*11***. Earnings per**** Share**

The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:

29

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:

30

The following table presents reclassifications out of AOCI, by component, during the periods indicated:

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:

The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company* maybe 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.

31

Assets and Liabilities Reported at Fair Value on a Recurring Basis

Available-for-saleDebtSecurities

Debt securities available-for-sale are reported at fair value on a recurring basis. The fair value of Level1 securities is based on quoted market prices in active markets, if available. If quoted market prices arenot 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. Level2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that* mayinclude 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 Level2* securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level3 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* maybe required when trading activity has declined significantly or doesnot* exist, prices arenot current, or pricing variations are significant. For Level3 securities, the Company obtains the cash flow of specific securities fromthird 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 Level3 securities are determined by applying proper market observable discount rates to the cash flow derived fromthird-party models. 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 Level1 inputs to value equity securities that are traded in active markets. Equity securities that arenot actively traded are classified in Level2.

Loans Held for Investment. Loans held for investment that are subject to a fair value hedge are reported at fair value derived fromthird-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 Level1 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, Level2 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:

32

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Fair value is based on appraised value adjusted for customized discounting criteria, Level3 inputs.

The Company maintains an active and robust problem credit identification system. The impairment review includes obtainingthird-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 withintwo tofour 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 athird-party valuation withinthirty toforty-five days of completing the internal valuation. When athird-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, butnot 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 Level3 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:

Quantitative Information about Level3* Fair Value Measurements*

The following tables provides quantitative information for assets measured at fair value on a nonrecurring basis using Level3 valuation inputs as of the dates indicated:

33

Fair Value of Financial Instruments

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:

34

Note*14***.Litigation, Commitments,**** and Contingencies**** **

Litigation

On* June 24, 2022,the Bank was sued in a putative class action lawsuit filed bytwo* customers of the Bank in federal court. The plaintiffs, individually and as putative class representatives, allege that the Bank breached its deposit account agreements and was unjustly enriched by collecting overdraft fees with respect to certain debit card transactions and the assessment of multiple nonsufficient funds fees as to items presented for payment against nonsufficient funds more thanone time.No class has been certified. The Bank disputes the allegations and has actively defended itself, but it is exploring settlement opportunities. We cannot provide assurance whether a settlement will be reached, the final terms or timing of any such settlement, or the negotiated amount of any settlement with respect to this matter. The Bank previously accrued for a settlement; however, if the Bank cannot reach a settlement or if the court rejects any settlement proposed by the Bank and plaintiffs’ counsel, the Bank* mayneed to litigate the matter in court. If the Bank must litigate, it will defend itself vigorously. Management, after consultation with legal counsel, believes it is currentlynot* possible to predict the ultimate resolution with respect to this litigation.

We are currently a defendant in other 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 shouldnot have a material adverse effect on our financial position, 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 doesnot 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 isno violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and* mayrequire payment of a fee. Since many commitments are expected to expire without being drawn on, the total commitment amounts donot* 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 athird 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: