FIRST COMMUNITY BANKSHARES INC /VA/ - Quarter Report: 2007 June (Form 10-Q)

 

 

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

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Nevada		55-0694814
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation)
P.O. Box 989
Bluefield, Virginia		24605-0989
(Address of principal executive offices)		(Zip Code)

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 the to such filing requirements for the past 90 days.

þ  Yes       o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   o       Accelerated filer  þ       Non-accelerated filer    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o  Yes       þ  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class – Common Stock, $1.00 Par Value; 11,207,262 shares outstanding as of July 31, 2007

 

 

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended June 30, 2007

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2007 (Unaudited), and December 31, 2006			3
Consolidated Statements of Income for the Three- and Six-Month Periods Ended June 30, 2007 and 2006 (Unaudited)			4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (Unaudited)			5
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2007 and 2006 (Unaudited)			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures about Market Risk			24
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3. Defaults Upon Senior Securities			27
Item 4. Submission of Matters to a Vote of Security Holders			27
Item 5. Other Information			27
Item 6. Exhibits			28
SIGNATURES			30
EXHIBIT INDEX			31
EX-31.1
EX-31.2
EX-32

PART I. ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

		June 30,				December 31,
		2007				2006
(Dollars in Thousands, Except Share and Per Share Data)		(Unaudited)
Assets
Cash and due from banks		$	40,879			$	47,909
Interest-bearing balances with banks			33,380				9,850
Total cash and cash equivalents			74,259				57,759
Securities available-for-sale (amortized cost of $666,701 at June 30, 2007; $508,423 at December 31, 2006)			658,901				508,370
Securities held-to-maturity (fair value of $13,389 at June 30, 2007; $20,350 at December 31, 2006)			13,177				20,019
Loans held for sale			1,818				781
Loans held for investment, net of unearned income			1,243,076				1,284,863
Less allowance for loan losses			13,934				14,549
Net loans held for investment			1,229,142				1,270,314
Premises and equipment			42,274				36,889
Other real estate owned			593				258
Interest receivable			12,892				12,141
Goodwill and other intangible assets			62,017				62,196
Other assets			73,522				64,971
Total Assets		$	2,168,595			$	2,033,698
Liabilities
Deposits:
Noninterest-bearing		$	241,423			$	244,771
Interest-bearing			1,180,537				1,150,000
Total Deposits			1,421,960				1,394,771
Interest, taxes and other liabilities			21,000				19,641
Federal funds purchased			—				7,700
Securities sold under agreements to repurchase			217,987				201,185
FHLB borrowings and other indebtedness			291,387				197,671
Total Liabilities			1,952,334				1,820,968
Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; none issued			—				—
Common stock, $1 par value; 25,000,000 shares authorized; 11,499,018 shares issued at June 30, 2007, and December 31, 2006, including 266,552 and 253,276 shares in treasury, respectively			11,499				11,499
Additional paid-in capital			108,633				108,806
Retained earnings			108,601				100,117
Treasury stock, at cost			(8,341	)			(7,924	)
Accumulated other comprehensive (loss) income			(4,131	)			232
Total Stockholders’ Equity			216,261				212,730
Total Liabilities and Stockholders’ Equity		$	2,168,595			$	2,033,698

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in Thousands, Except Share and Per Share Data)		2007				2006				2007				2006
Interest Income
Interest and fees on loans held for investment		$	23,404			$	24,506			$	46,923			$	48,431
Interest on securities-taxable			6,030				3,224				11,011				6,101
Interest on securities-nontaxable			2,150				1,816				4,062				3,642
Interest on deposits in banks			395				479				669				774
Total interest income			31,979				30,025				62,665				58,948
Interest Expense
Interest on deposits			9,748				8,326				19,048				15,973
Interest on borrowings			5,217				3,526				9,588				6,737
Total interest expense			14,965				11,852				28,636				22,710
Net interest income			17,014				18,173				34,029				36,238
Provision for loan losses			—				811				—				1,219
Net interest income after provision for loan losses			17,014				17,362				34,029				35,019
Noninterest Income
Wealth management income			1,005				732				2,023				1,415
Service charges on deposit accounts			2,662				2,655				5,071				5,072
Other service charges, commissions and fees			837				711				1,707				1,451
Gain (loss) on sale of securities			30				(94	)			159				66
Other operating income			1,013				1,516				1,802				2,664
Total noninterest income			5,547				5,520				10,762				10,668
Noninterest Expense
Salaries and employee benefits			6,165				6,782				12,576				14,683
Occupancy expense of bank premises			1,020				1,011				2,077				2,051
Furniture and equipment expense			780				858				1,603				1,708
Intangible amortization			105				144				208				234
Other operating expense			4,005				3,793				7,769				7,245
Total noninterest expense			12,075				12,588				24,233				25,921
Income before income taxes			10,486				10,294				20,558				19,766
Income tax expense			3,047				3,002				5,995				5,630
Net income		$	7,439			$	7,292			$	14,563			$	14,136
Basic earnings per common share		$	0.66			$	0.65			$	1.29			$	1.26
Diluted earnings per common share		$	0.66			$	0.65			$	1.28			$	1.25
Dividends declared per common share		$	0.27			$	0.26			$	0.54			$	0.52
Weighted average basic shares outstanding			11,260,868				11,201,052				11,260,126				11,216,940
Weighted average diluted shares outstanding			11,320,227				11,258,581				11,334,486				11,277,032

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

		Six Months Ended
		June 30,
(In Thousands)		2007				2006
Operating activities:
Net Income		$	14,563			$	14,136
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			—				1,219
Depreciation and amortization of premises and equipment			1,585				1,709
Intangible amortization			208				234
Net investment amortization and accretion			282				303
Net gain on the sale of assets			(154	)			(785	)
Mortgage loans originated for sale			(23,737	)			(13,332	)
Proceeds from sales of mortgage loans			22,831				13,372
Gain on sales of loans			(131	)			(59	)
Deferred income tax (benefit) expense			(164	)			60
(Increase) decrease in interest receivable			(751	)			43
Other operating activities, net			(3,494	)			1,197
Net cash provided by operating activities			11,038				18,097
Investing activities:
Proceeds from sales of securities available-for-sale			827				1,824
Proceeds from maturities and calls of securities available-for-sale			16,784				12,807
Proceeds from maturities and calls of securities held-to-maturity			6,809				3,574
Purchase of securities available-for-sale			(175,977	)			(20,379	)
Net decrease in loans held for investment			40,832				9,514
Purchase of bank-owned life insurance			—				(25,000	)
Net cash used in branch divestiture			—				(13,721	)
Purchase of premises and equipment			(6,977	)			(3,237	)
Proceeds from sale of equipment			—				298
Net cash used in investing activities			(117,702	)			(34,320	)
Financing activities:
Net increase in demand and savings deposits			15,331				13,344
Net increase in time deposits			11,858				10,141
Net decrease in federal funds purchased			(7,700	)			(82,500	)
Net increase in securities sold under agreement to repurchase			16,802				25,632
Net increase in FHLB and other borrowings			93,716				74,927
Proceeds from the exercise of stock options			681				322
Excess tax benefit from stock-based compensation			284				105
Acquisition of treasury stock			(1,729	)			(4,125	)
Dividends paid			(6,079	)			(5,828	)
Net cash provided by financing activities			123,164				32,018
Increase in cash and cash equivalents			16,500				15,795
Cash and cash equivalents at beginning of period			57,759				57,539
Cash and cash equivalents at end of period		$	74,259			$	73,334
Supplemental information — Noncash items
Transfer of loans to other real estate		$	853			$	490

FIRST COMMUNITY BANCSHARES, INC.

																		Accumulated
						Additional												Other
		Common				Paid-in				Retained				Treasury				Comprehensive
		Stock				Capital				Earnings				Stock				Income (Loss)				Total
(Dollars in Thousands, Except Share Data)
Balance January 1, 2006		$	11,496			$	108,573			$	82,828			$	(7,625	)		$	(771	)		$	194,501
Comprehensive income:
Net income			—				—				14,136				—				—				14,136
Other comprehensive income, net of tax:
Unrealized loss on securities available for sale			—				—				—				—				(3,352	)			(3,352	)
Less reclassification adjustment for gains realized in net income																			(16	)			(16	)
Unrealized gain on derivative security			—				—				—				—				902				902
Comprehensive income			—				—				14,136				—				(2,466	)			11,670
Common dividends declared			—				—				(5,828	)			—				—				(5,828	)
Net acquisition of 130,861 treasury shares			—				—				—				(4,125	)			—				(4,125	)
Acquisition of Stone Capital 2,706 shares issued			3				85				—				—				—				88
Stock awards 5,132 shares issued			—				(36	)			—				160				—				124
ESOP allocation 27,733 shares			—				16				—				867				—				883
Equity-based compensation expense			—				140				—				—				—				140
Tax benefit from exercise of stock options			—				139				—				—				—				139
Option exercise 19,942 shares			—				(315	)			—				626				—				311
Balance June 30, 2006		$	11,499			$	108,602			$	91,136			$	(10,097	)		$	(3,237	)		$	197,903
Balance January 1, 2007		$	11,499			$	108,806			$	100,117			$	(7,924	)		$	232			$	212,730
Comprehensive income:
Net income			—				—				14,563				—				—				14,563
Other comprehensive income, net of tax:
Unrealized loss on securities available-for-sale			—				—				—				—				(4,601	)			(4,601	)
Less reclassification adjustment for gains realized in net income			—				—				—				—				(47	)			(47	)
Unrealized gain on derivative security			—				—				—				—				285				285
Comprehensive income			—				—				14,563				—				(4,363	)			10,200
Common dividends declared			—				—				(6,079	)			—				—				(6,079	)
Acquisition of 55,200 treasury shares			—				—				—				(1,729	)			—				(1,729	)
Equity-based compensation expense			—				66				—				87				—				153
Tax benefit from exercise stock options			—				328				—				—				—				328
Option exercises 39,174 shares			—				(567	)			—				1,225				—				658
Balance June 30, 2007		$	11,499			$	108,633			$	108,601			$	(8,341	)		$	(4,131	)		$	216,261

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

Unaudited Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements of First Community Bancshares, Inc. and subsidiaries (“First Community” or the “Company”) have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments including normal recurring accruals, necessary for a fair presentation, have been made. These results are not necessarily indicative of the results of consolidated operations that might be expected for the full calendar year.

The consolidated balance sheet as of December 31, 2006, has been derived from the audited financial statements included in the Company’s 2006 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.

A more complete and detailed description of First Community’s significant accounting policies is included within Footnote 1 to the Company’s Annual Report on Form 10-K for December 31, 2006. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.

The Company operates within one business segment, community banking.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company adopted FIN 48 on January 1, 2007, and the adoption did not have an effect on its consolidated financial statements. The Company includes interest and penalties related to income tax liabilities in income tax expense. The Company and its subsidiaries’ tax filings for the years ended December 31, 2003 through 2006 are currently open to audit under statutes of limitation by the Internal Revenue Service and various state tax departments.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.” SFAS 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value and permits (but does not require) subsequent measurement of servicing assets and liabilities at fair value. This statement is effective for fiscal years beginning after September 15, 2006. The adoption of this standard did not have a material effect on the financial condition, the results of operations, or liquidity of the Company.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company must adopt these new requirements no later than the first quarter of 2008. The Company has not yet determined the effect of adopting SFAS 157 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 123(R).” SFAS 158 requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the

fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company does not expect the full adoption of this standard to have a significant impact on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company does not expect the adoption of this EITF to have a significant impact on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-5 “Accounting for Purchases of Life Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” The scope of EITF 06-5 is limited to the determination of net cash surrender value of a life insurance contract in accordance with Technical Bulletin 85-4. This EITF outlines when contractual limitations of the policy should be considered when determining the net realizable value of the contract. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted. The adoption of EITF 06-5 did not have a material effect on the condition, results of operations, or liquidity of the Company.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. The Company did not elect early adoption as provided for in the Statement, and is currently evaluating the impact, if any, of adopting this Statement on the consolidated financial statements.

Note 2. Mergers, Acquisitions and Branching Activity

In March 2007, the Company opened two new branch locations in the Winston-Salem, North Carolina, area. The Company currently has plans to open five more branch offices during 2007. In Richmond, Virginia, locations are planned for the Chesterfield Towne Center and on Mechanicsville Turnpike, Route 360. In West Virginia, locations are planned for Daniels, Summersville, and Princeton. These locations are all in various stages of construction, and are anticipated to be open by the third and fourth quarters of 2007.

In December 2006, the Company completed the sale of its Rowlesburg, West Virginia, branch location. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $10.6 million and loans of approximately $2.2 million. The transaction resulted in a pre-tax gain of approximately $333 thousand.

In November 2006, the Company completed the acquisition of Investment Planning Consultants, Inc. (“IPC”), a registered investment advisory firm. In connection with the initial payment of approximately $1.47 million, the Company issued 39,874 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of IPC are entitled to additional consideration aggregating up to $1.43 million in the form of the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition.

In June 2006, the Company sold its Drakes Branch, Virginia, location. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $16.4 million and loans of approximately $1.9 million. The transaction resulted in a pre-tax gain of approximately $702 thousand.

Note 3. Investment Securities

As of June 30, 2007, and December 31, 2006, the amortized cost and estimated fair value of available-for-sale securities are as follows:

		June 30, 2007
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
(In Thousands)
U.S. Government agency securities		$	136,784			$	—			$	(2,885	)		$	133,899
States and political subdivisions			188,303				1,220				(3,909	)			185,614
Corporate notes			145,023				393				(430	)			144,986
Mortgage-backed securities			188,391				138				(4,129	)			184,400
Equities			8,200				1,940				(138	)			10,002
Total		$	666,701			$	3,691			$	(11,491	)		$	658,901

		December 31, 2006
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Government agency securities		$	117,777			$	—			$	(1,716	)		$	116,061
States and political subdivisions			152,189				2,379				(521	)			154,047
Corporate notes			85,080				350				(397	)			85,033
Mortgage-backed securities			146,444				206				(1,896	)			144,754
Equities			6,933				1,615				(73	)			8,475
Total		$	508,423			$	4,550			$	(4,603	)		$	508,370

As of June 30, 2007, and December 31, 2006, the amortized cost and estimated fair value of held-to-maturity securities are as follows:

		June 30, 2007
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
(In Thousands)
States and political subdivisions		$	12,799			$	219			$	(7	)		$	13,011
Mortgage-backed securities			3				—				—				3
Other securities			375				—				—				375
Total		$	13,177			$	219			$	(7	)		$	13,389

		December 31, 2006
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
States and political subdivisions		$	19,638			$	334			$	(2	)		$	19,970
Mortgage-backed securities			6				—				—				6
Other securities			375				—				(1	)			374
Total		$	20,019			$	334			$	(3	)		$	20,350

The following table reflects those investments in an unrealized loss position at June 30, 2007, and December 31, 2006. There were no securities in a continuous unrealized loss position for 12 or more months which the Company does not have the ability to hold until the security matures or recovers in value.

		June 30, 2007
		Less than 12 Months								12 Months or longer								Total
Description of Securities		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
(In Thousands)
U. S. Government agency securities		$	79,440			$	(1,493	)		$	54,459			$	(1,392	)		$	133,899			$	(2,885	)
States and political subdivisions			86,000				(2,792	)			33,968				(1,124	)			119,968				(3,916	)
Other securities			62,662				(430	)			—				—				62,662				(430	)
Mortgage-backed securities			115,870				(2,359	)			53,028				(1,770	)			168,898				(4,129	)
Equity securities			1,144				(58	)			1,665				(80	)			2,809				(138	)
Total		$	345,116			$	(7,132	)		$	143,120			$	(4,366	)		$	488,236			$	(11,498	)

		December 31, 2006
		Less than 12 Months								12 Months or longer								Total
Description of Securities		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U. S. Government agency securities		$	60,416			$	(517	)		$	55,645			$	(1,199	)		$	116,061			$	(1,716	)
States and political subdivisions			10,732				(34	)			36,797				(489	)			47,529				(523	)
Other securities			28,339				(213	)			27,698				(185	)			56,037				(398	)
Mortgage-backed securities			50,093				(223	)			66,620				(1,673	)			116,713				(1,896	)
Equity securities			2,186				(70	)			32				(3	)			2,218				(73	)
Total		$	151,766			$	(1,057	)		$	186,792			$	(3,549	)		$	338,558			$	(4,606	)

At June 30, 2007, the combined depreciation in value of the 351 individual security holdings in an unrealized loss position was 1.71% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of June 30, 2007, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the declines in value are attributable to changes in market interest rates and not the credit quality of the issuer.

Note 4. Loans

Loans, net of unearned income, consist of the following:

		June 30, 2007								December 31, 2006
(Dollars in Thousands)		Amount				Percent				Amount				Percent
Loans held for investment:
Commercial and agricultural		$	96,835				7.79	%		$	106,645				8.30	%
Commercial real estate			394,418				31.73	%			421,067				32.77	%
Residential real estate			498,156				40.07	%			506,370				39.41	%
Construction			166,010				13.35	%			158,566				12.34	%
Consumer			83,665				6.73	%			88,666				6.90	%
Other			3,992				0.33	%			3,549				0.28	%
Total		$	1,243,076				100.00	%		$	1,284,863				100.00	%
Loans held for sale		$	1,818							$	781

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 on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. 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 not a 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 of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit and written 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 loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.

Financial instruments whose contract amounts represent credit risk at June 30, 2007, are commitments to extend credit (including availability of lines of credit) of $224.31 million and standby letters of credit and financial guarantees written of $4.70 million.

Note 5. Allowance for Loan Losses

The allowance for loan losses is maintained at a level sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio.

Management performs periodic assessments to determine the appropriate level of allowance. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the loss provision based upon current measurement criteria. Commercial, consumer and mortgage loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans. Management’s allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.

The following table details the Company’s allowance for loan loss activity for the three- and six-month periods ended June 30, 2007 and 2006.

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
(In Thousands)
Beginning balance		$	14,510			$	14,797			$	14,549			$	14,736
Provision for loan losses			—				811				—				1,219
Charge-offs			(911	)			(1,389	)			(1,804	)			(2,104	)
Recoveries			335				491				1,189				859
Ending balance		$	13,934			$	14,710			$	13,934			$	14,710

Note 6. Deposits

The following is a summary of interest-bearing deposits by type as of June 30, 2007, and December 31, 2006.

		June 30,				December 31,
		2007				2006
(In Thousands)
Interest-bearing demand deposits		$	143,080			$	140,578
Savings deposits			333,855				317,678
Certificates of deposit			703,602				691,744
Total		$	1,180,537			$	1,150,000

Note 7. Borrowings

The following schedule details the Company’s Federal Home Loan Bank (“FHLB”) borrowings and other indebtedness at June 30, 2007, and December 31, 2006.

		June 30,				December 31,
		2007				2006
(In thousands)
FHLB borrowings		$	275,923			$	182,207
Subordinated debt			15,464				15,464
Total		$	291,387			$	197,671

FHLB borrowings include $275.00 million in convertible and callable advances and $923 thousand of noncallable term advances from the FHLB at June 30, 2007. The weighted average interest rates of advances are 4.46% and 4.64% at June 30, 2007, and December 31, 2006, respectively.

The Company has entered into a derivative interest rate swap instrument where it receives LIBOR-based variable interest payments and pays fixed interest payments. The notional amount of the derivative swap is $50 million and effectively fixes a portion of the FHLB borrowings at approximately 4.34%. After considering the effect of the interest rate swap, the effective weighted average interest rate of all FHLB borrowings is 4.35% at June 30, 2007. The fair value of the interest rate swap was $915 thousand at June 30, 2007.

At June 30, 2007, the FHLB advances have maturities between three and fourteen years. The scheduled maturities of the advances are as follows:

		Amount
(In Thousands)
2007		$	—
2008			—
2009			—
2010			25,000
2011			—
2012 and thereafter			250,923
Total		$	275,923

The callable advances may be redeemed at quarterly intervals after various lockout periods. These call options may substantially shorten the lives of these instruments. If these advances are called, the debt may be paid in full, converted to another FHLB credit product, or converted to a fixed or adjustable rate advance. Prepayment of the advances may result in substantial penalties based upon the differential between contractual note rates and current advance rates for similar maturities. Advances from the FHLB are secured by stock in the FHLB of Atlanta, qualifying first mortgage loans, mortgage-backed securities, and certain other securities.

Also included in borrowings is $15.5 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”) with an interest rate of three-month

LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are callable beginning October 8, 2008. The net proceeds from the offering were contributed as capital to the Company’s subsidiary bank to support further growth.

The Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the trust remaining available for distribution, in each case to the extent the Trust has funds available.

Note 8. Comprehensive Income

Comprehensive income is the total of net income and other comprehensive income. The following table summarizes the components of comprehensive income.

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
(In Thousands)
Net income		$	7,439			$	7,292			$	14,563			$	14,136
Other comprehensive income
Unrealized loss on securities available-for-sale			(8,453	)			(3,121	)			(7,668	)			(5,586	)
Reclassification adjustment for losses (gains) realized in net income			14				133				(79	)			(27	)
Unrealized loss on derivative securities			727				675				475				1,503
Income tax effect			3,086				925				2,909				1,644
Total other comprehensive loss			(4,626	)			(1,388	)			(4,363	)			(2,466	)
Comprehensive income		$	2,813			$	5,904			$	10,200			$	11,670

Note 9. Commitments and Contingencies

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 resolution of these actions, singly or in the aggregate, should not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

PART I. ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is provided to address information about First Community Bancshares, Inc.’s (the “Company”) financial condition and results of operations. This discussion and analysis should be read in conjunction with the Company’s 2006 Annual Report on Form 10-K and the other financial information included in this report.

The Company is a multi-state financial holding company headquartered in Bluefield, Virginia, with total assets of $2.17 billion at June 30, 2007. Through its community bank subsidiary, First Community Bank, N. A. (the “Bank”), the Company provides financial, trust and investment advisory services to individuals and commercial customers through fifty-six locations and four wealth management offices located in the four states of Virginia, West Virginia, North Carolina and Tennessee. The Bank is the parent of Investment Planning Consultants, Inc., a SEC-registered investment advisory firm that offers wealth management and investment advice. The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “FCBC”.

FORWARD LOOKING STATEMENTS

The Company may from time to time make written or oral “forward-looking statements”, including statements contained in its filings with the SEC (including this Quarterly Report on Form 10-Q and the Exhibits hereto and thereto), in its reports to stockholders and in other communications which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include, among others, statements with respect to the Company’s beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (many of which are beyond the Company’s control). The words “may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company’s financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of competitive new products and services of the Company 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 concerning taxes, banking, securities and insurance); technological changes; 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 the Company’s non-interest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. These factors are described in greater detail in Item 1A. Risk Factors of the Company’s 2006 Annual Report on Form 10-K.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and consolidated results of operations.

Estimates, assumptions, and judgments are necessary principally 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 valuation reserve to be established, or when an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third party sources, when available. When third party information

is not available, valuation adjustments are estimated by management primarily through the use of internal modeling techniques and appraisal estimates.

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operation. The disclosures presented in the Notes to the Consolidated Financial Statements and in Management’s Discussion and Analysis provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, accounting for acquisitions and intangible assets, and accounting for income taxes as the accounting areas that require the most subjective or complex judgments. The identified critical accounting policies are described in detail in the Company’s 2006 Annual Report on Form 10-K. There have been no material changes in the Company’s critical accounting policies since December 31, 2006.

COMPANY OVERVIEW

The Company is a full service commercial bank holding company which operates within the four-state region of Virginia, West Virginia, North Carolina, and Tennessee. The Company operates through the Bank, and offers a wide range of financial services. The Company reported total assets of $2.17 billion at June 30, 2007, and operates through fifty-six offices and four wealth management offices.

The Company funds its lending activities primarily through the retail deposit operations of its branch banking network. Retail and wholesale repurchase agreements and borrowings from the Federal Home Loan Bank (“FHLB”) provide additional funding as needed. The Company invests its funds primarily in loans to retail and commercial customers. In addition to loans, the Company also invests a portion of its funds in various debt securities, including those of United States agencies, state and political subdivisions, and certain corporate notes and debt instruments. The Company also maintains overnight interest-bearing balances with the FHLB and correspondent banks. The difference between interest earned on assets and interest paid on liabilities is the Company’s primary source of earnings.

The Company also conducts asset management activities through its Trust Division and its registered investment advisory firm, Investment Planning Consultants. These two divisions manage assets with a market value of over $840 million. These assets are not assets of the Company, but are managed under various fee-based arrangements as fiduciary or agent.

MERGERS, ACQUISITIONS AND BRANCHING ACTIVITY

In March 2007, the Company opened two new branch locations in the Winston-Salem, North Carolina, area. The Company currently has plans to open five more branch offices during 2007. In Richmond, Virginia, locations are planned for the Chesterfield Towne Center and on Mechanicsville Turnpike, Route 360. In West Virginia, locations are planned for Daniels, Summersville, and Princeton. These locations are all in various stages of construction, and are anticipated to be open by the third and fourth quarters of 2007.

In December 2006, the Company completed the sale of its Rowlesburg, West Virginia, branch location. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $10.6 million and loans of approximately $2.2 million. The transaction resulted in a pre-tax gain of approximately $333 thousand.

In November 2006, the Company completed the acquisition of Investment Planning Consultants, Inc. (“IPC”), a registered investment advisory firm. In connection with the initial payment of approximately $1.47 million, the Company issued 39,874 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of IPC are entitled to additional consideration aggregating up to $1.43 million in the form of the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition.

In June 2006, the Company sold its Drakes Branch, Virginia, branch office. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $16.4 million and loans of approximately $1.9 million. The transaction resulted in a gain of approximately $702 thousand. The sale of this and the previously referenced Rowlesburg branch were designed to enhance the efficiency of the Company’s branch network.

RESULTS OF OPERATIONS

Overview

Net income for the three months ended June 30, 2007, was $7.44 million, or $0.66 per basic and diluted share, compared with $7.29 million or $0.65 per basic and diluted share for the three months ended June 30, 2006, an improvement of $147 thousand, or 2.02%. Return on average equity for the three months ended June 30, 2007, was 13.56% compared with 14.74% for the three months ended June 30, 2006. Return on average assets was 1.40% for the three months ended June 30, 2007, compared with 1.47% for the same period in 2006.

Net income for the six months ended June 30, 2007, was $14.56 million, or $1.29 per basic and $1.28 per diluted share, compared with $14.14 million or $1.26 per basic and $1.25 per diluted share for the six months ended June 30, 2006, an improvement of $427 thousand, or 3.02%. Return on average equity for the six months ended June 30, 2007, was 13.45% compared with 14.42% for the six months ended June 30, 2006. Return on average assets was 1.41% for the six months ended June 30, 2007, compared with 1.45% for the same period in 2006.

Net Interest Income – Quarterly Comparison (See Table I)

Net interest income, the largest contributor to earnings, was $17.01 million for the three months ended June 30, 2007, compared with $18.17 million for the corresponding period in 2006, a decrease of $1.16 million, or 6.38%. Tax-equivalent net interest income totaled $18.19 million for the three months ended June 30, 2007, a decrease of $975 thousand from $19.16 million for the second quarter of 2006. The net decrease was due mostly to increases in rates paid on interest-bearing liabilities which outpaced increases in the rates earned on loans and securities.

Compared with the second quarter of 2006, average earning assets increased $134.03 million while interest-bearing liabilities increased $133.11 million. The yield on average earning assets decreased by three basis points to 6.89% from 6.92%. Total cost of interest-bearing liabilities increased 50 basis points between the second quarter of 2006 and 2007, which resulted in a net interest rate spread that was 53 basis points lower at 3.28% compared with 3.81% for the same period last year. The Company’s tax-equivalent net interest margin of 3.78% for the three months ended June 30, 2007, decreased 50 basis points from 4.28% for the same period of 2006.

The rate earned on loans increased to 7.49% from 7.40%, which is attributable to the general rise in market rates of interest since the beginning of 2006. Declines in the average portfolio balances contributed largely to a net $1.10 million decrease in tax-equivalent loan interest income compared with the second quarter of 2006.

The largest contributors to the increase in the tax-equivalent interest income in 2007 were the increases in both average balance and rate earned on the securities portfolio. During the three months ended June 30, 2007, the tax-equivalent yield on available-for-sale securities increased 23 basis points to 5.75%, while the average balance increased by $223.32 million. The average tax-equivalent yield increased due to the addition of higher rate securities and the reduction of lower rate securities. As net payoffs in the loan portfolio are realized, the Company has been reinvesting those funds in securities. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured and called and were not replaced.

Compared with the second quarter of 2006, average interest-bearing balances with banks decreased to $32.30 million during the second quarter of 2007, as the yield increased 25 basis points to 4.90%. Interest-bearing balances with banks is made up largely of excess liquidity bearing overnight market rates. The rate earned on those balances has risen along with increases in short-term benchmark interest rates. The balance has decreased as the Company has invested in higher yielding securities.

Compared with the same period in 2006, the average balances of interest-bearing demand and savings deposits decreased $932 thousand and $31.07 million, respectively, for the three months ended June 30, 2007. The average rate paid on interest-bearing demand deposits increased by two basis points, while the average rate paid on savings increased 20 basis points. Average time deposits increased $21.39 million while the average rate paid increased 68 basis points from 3.79% in 2006 to 4.47% in 2007. The level of average non-interest-bearing demand deposits decreased $5.76 million to $234.54 million during the quarter ended June 30, 2007, compared with the corresponding period of the prior year.

The changes in average deposits between the two quarters include the effect of the previously disclosed sale of the Company’s Drakes Branch, Virginia, and Rowlesburg, West Virginia, branch offices. The average deposit balances held by those two branches in the second quarter of 2006 totaled $26.07 million.

Compared with the same period in 2006, average federal funds purchased and repurchase agreements increased $92.33 million to $228.86 million during the second quarter of 2007, while the average rate increased 51 basis points. The Company added approximately $50.00 million of wholesale repurchase agreement funding in the latter part of 2006. The average balance of FHLB borrowings and other long-term debt increased by $51.38 million in 2007 to $255.55 million, while the rate paid on those borrowings increased only five basis points. The Company borrowed an additional $100 million in FHLB advances early in the second quarter that have a weighted-average cost of 4.18%.

Net Interest Income – Year-to-Date Comparison (See Table II)

Net interest income was $34.03 million for the six months ended June 30, 2007, compared with $36.24 million for the corresponding period in 2006, a decrease of $2.21 million, or 6.10%. Tax-equivalent net interest income totaled $36.24 million for the six months ended June 30, 2007, a decrease of $1.98 million from $38.22 million for the first half of 2006. The net decrease was due mostly to increases in rates paid on interest-bearing liabilities which outpaced increases in the rates earned on loans and securities.

Compared with the first half of 2006, average earning assets increased $92.43 million while interest-bearing liabilities increased $95.93 million. The yield on average earning assets increased nine basis points to 6.94% from 6.85%. Total cost of interest-bearing liabilities increased 56 basis points during the first half of 2007, which resulted in a net interest rate spread that was 47 basis points lower at 3.37% compared with 3.84% for the same period last year. The Company’s tax-equivalent net interest margin of 3.87% for the six months ended June 30, 2007, decreased 43 basis points from 4.30% for the same period of 2006.

The rate earned on loans increased to 7.52% from 7.34%, which is attributable to the general rise in market rates of interest since the beginning of 2006. Declines in the average portfolio balances contributed largely to a net $1.51 million decrease in tax-equivalent loan interest income compared with the first half of 2006.

The largest contributors to the increase in the tax-equivalent interest income in 2007 were the increases in both average balance and rate earned on the securities portfolio. During the six months ended June 30, 2007, the tax-equivalent yield on available-for-sale securities increased 35 basis points to 5.74%, while the average balance increased by $176.40 million. The average tax-equivalent yield increased due to the addition of higher rate securities and the reduction of lower rate securities. As net payoffs in the loan portfolio are realized, the Company has been reinvesting those funds in securities. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured and called and were not replaced.

Compared with the first half of 2006, average interest-bearing balances with banks decreased to $27.79 million during the first half of 2007, as the yield increased 41 basis points to 4.85%. Interest-bearing balances with banks is made up largely of excess liquidity bearing overnight market rates. The rate earned on those balances has risen along with increases in short-term benchmark interest rates. The balance has decreased as the Company has invested in higher yielding securities.

Compared with the same period in 2006, the average balances of interest-bearing demand and savings deposits decreased $720 thousand and $35.58 million, respectively, for the six months ended June 30, 2007. The average rate paid on interest-bearing demand deposits increased by one basis point, while the average rate paid on savings increased 25 basis points. Average time deposits increased $21.14 million while the average rate paid increased 75 basis points from 3.67% in 2006 to 4.42% in 2007. The level of average non-interest-bearing demand deposits decreased slightly to $232.07 million during the six months ended June 30, 2007, compared with the corresponding period of the prior year.

The changes in average deposits between the two periods include the effect of the previously disclosed sale of the Company’s Drakes Branch, Virginia, and Rowlesburg, West Virginia, branch offices. The average deposit balances held by those two branches in the first half of 2006 totaled $26.40 million.

Compared with the same period in 2006, average federal funds purchased and repurchase agreements increased $88.13 million to $221.70 million during the first half of 2007, while the average rate increased 68 basis points. The Company added approximately $50.00 million of wholesale repurchase agreement funding in the latter part of 2006. The average balance of FHLB borrowings and other long-term debt increased by $22.96 million in 2007 to $225.08 million, while the rate paid on those borrowings increased 17 basis points. The Company borrowed an additional $100 million in FHLB advances early in the second quarter that have a weighted-average cost of 4.18%.

Table I

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

		Three Months Ended												Three Months Ended
		June 30, 2007												June 30, 2006
		Average								Yield/				Average								Yield/
		Balance				Interest (1)				Rate (1)				Balance				Interest (1)				Rate (1)
										(Dollars in Thousands)
ASSETS
Earning Assets:
Loans: (2)
Taxable		$	1,251,696			$	23,379				7.49	%		$	1,327,278			$	24,487				7.40	%
Tax-exempt			1,983				38				7.69	%			1,490				30				8.08	%
Total			1,253,679				23,417				7.49	%			1,328,768				24,517				7.40	%
Securities available for sale:
Taxable			439,504				6,024				5.50	%			257,838				3,218				5.01	%
Tax-exempt			189,526				2,993				6.33	%			147,869				2,367				6.42	%
Total			629,030				9,017				5.75	%			405,707				5,585				5.52	%
Securities held to maturity:
Taxable			378				6				6.37	%			388				5				5.17	%
Tax-exempt			15,858				316				7.99	%			20,990				427				8.16	%
Total			16,236				322				7.95	%			21,378				432				8.11	%
Interest-bearing deposits			32,302				395				4.90	%			41,361				479				4.65	%
Total Earning Assets			1,931,247				33,151				6.89	%			1,797,214				31,013				6.92	%
Other assets			203,365												187,527
TOTAL ASSETS		$	2,134,612											$	1,984,741
LIABILITIES
Interest-bearing liabilities:
Demand deposits		$	147,570			$	118				0.32	%		$	148,502			$	111				0.30	%
Savings deposits			324,759				1,776				2.19	%			355,826				1,761				1.99	%
Time deposits			704,611				7,854				4.47	%			683,221				6,454				3.79	%
Total interest-bearing deposits			1,176,940				9,748				3.32	%			1,187,549				8,326				2.81	%
Federal funds purchased and repurchase agreements			228,856				2,206				3.87	%			136,522				1,142				3.36	%
FHLB borrowings and other long-term debt			255,554				3,011				4.73	%			204,172				2,384				4.68	%
Total interest-bearing liabilities			1,661,350				14,965				3.61	%			1,528,243				11,852				3.11	%
Non-interestbearing demand deposits			234,536												240,296
Other liabilities			18,737												17,762
Stockholders’ Equity			219,989												198,440
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,134,612											$	1,984,741
Net Interest Income, Tax Equivalent						$	18,186											$	19,161
Net Interest Rate Spread (3)											3.28	%											3.81	%
Net Interest Margin (4)											3.78	%											4.28	%

Table II

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

		Six Months Ended												Six Months Ended
		June 30, 2007												June 30, 2006
		Average								Yield/				Average								Yield/
		Balance				Interest (1)				Rate (1)				Balance				Interest (1)				Rate (1)
										(Dollars in Thousands)
ASSETS
Earning Assets:
Loans: (2)
Taxable		$	1,257,722			$	46,877				7.52	%		$	1,330,375			$	48,391				7.34	%
Tax-exempt			1,898				71				7.54	%			1,531				62				8.17	%
Total			1,259,620				46,948				7.52	%			1,331,906				48,453				7.34	%
Securities available for sale:
Taxable			405,390				10,999				5.47	%			254,702				6,091				4.82	%
Tax-exempt			175,701				5,553				6.37	%			149,991				4,726				6.35	%
Total			581,091				16,552				5.74	%			404,693				10,817				5.39	%
Securities held to maturity:
Taxable			380				12				6.37	%			389				10				5.18	%
Tax-exempt			17,611				699				8.00	%			21,938				876				8.05	%
Total			17,991				711				7.97	%			22,327				886				8.00	%
Interest-bearing deposits			27,788				669				4.85	%			35,134				774				4.44	%
Total Earning Assets			1,886,490				64,880				6.94	%			1,794,060				60,930				6.85	%
Other assets			199,588												178,179
TOTAL ASSETS		$	2,086,078											$	1,972,239
LIABILITIES
Interest-bearing liabilities:
Demand deposits		$	146,770			$	229				0.31	%		$	147,490			$	217				0.30	%
Savings deposits			322,223				3,449				2.16	%			357,804				3,393				1.91	%
Time deposits			700,884				15,370				4.42	%			679,745				12,363				3.67	%
Total interest-bearing deposits			1,169,877				19,048				3.28	%			1,185,039				15,973				2.72	%
Federal funds purchased and repurchase agreements			221,695				4,241				3.86	%			133,566				2,103				3.18	%
FHLB borrowings and other long-term debt			225,082				5,347				4.79	%			202,118				4,634				4.62	%
Total interest-bearing liabilities			1,616,654				28,636				3.57	%			1,520,723				22,710				3.01	%
Non-interestbearing demand deposits			232,069												235,987
Other liabilities			18,949												17,806
Stockholders’ Equity			218,406												197,723
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,086,078											$	1,972,239
Net Interest Income, Tax Equivalent						$	36,244											$	38,220
Net Interest Rate Spread (3)											3.37	%											3.84	%
Net Interest Margin (4)											3.87	%											4.30	%