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FIRST COMMUNITY BANKSHARES INC /VA/ - Quarter Report: 2011 June (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2011
Commission file number 000-19297
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
     
Nevada   55-0694814
     
(State or other jurisdiction of incorporation)   (IRS Employer Identification No.)
     
P.O. Box 989
Bluefield, Virginia
 
(Address of principal executive offices)
  24605-0989
 
(Zip Code)
(276) 326-9000
(Registrant’s telephone number, including area 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 such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
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; 17,917,824 shares outstanding as of August 5, 2011
 
 


 

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended June 30, 2011
INDEX
         
       
 
       
    3  
    4  
    5  
    6  
    7  
 
       
    33  
 
       
    46  
 
       
    48  
 
       
       
 
       
    48  
 
       
    48  
 
       
    48  
 
       
    49  
 
       
    49  
 
       
    49  
 
       
    49  
 
       
    52  
 
       
    53  
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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ITEM 1. Financial Statements
FIRST COMMUNITY BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    June 30,     December 31,  
    2011     2010  
(Dollars in Thousands)   (Unaudited)          
Assets
               
Cash and due from banks
  $ 31,451     $ 28,816  
Federal funds sold
    162,629       81,526  
Interest-bearing balances with banks
    36,539       1,847  
 
           
Total cash and cash equivalents
    230,619       112,189  
Securities available-for-sale
    349,976       480,064  
Securities held-to-maturity
    4,106       4,637  
Loans held for sale
    920       4,694  
Loans held for investment, net of unearned income
    1,373,944       1,386,206  
Less allowance for loan losses
    26,482       26,482  
 
           
Net loans held for investment
    1,347,462       1,359,724  
Premises and equipment, net
    55,808       56,244  
Other real estate owned
    5,585       4,910  
Interest receivable
    6,202       7,675  
Goodwill
    85,132       84,914  
Other intangible assets
    5,205       5,725  
Other assets
    115,385       123,462  
 
           
Total assets
  $ 2,206,400     $ 2,244,238  
 
           
 
               
Liabilities
               
Deposits:
               
Noninterest-bearing
  $ 219,488     $ 205,151  
Interest-bearing
    1,360,188       1,415,804  
 
           
Total deposits
    1,579,676       1,620,955  
Interest, taxes and other liabilities
    20,563       21,318  
Securities sold under agreements to repurchase
    137,778       140,894  
FHLB borrowings
    150,000       175,000  
Other indebtedness
    16,179       16,193  
 
           
Total liabilities
    1,904,196       1,974,360  
 
           
 
               
Stockholders’ Equity
               
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued or outstanding at June 30, 2011, or December 31, 2010
           
Series A preferred stock, $0.01 par value; 25,000 shares authorized; 18,921 shares issued at June 30, 2011, and no shares issued at December 31, 2010
    18,921        
Common stock, $1 par value; 50,000,000 shares authorized; 18,082,822 shares issued at June 30, 2011, and 18,082,822 issued at December 31, 2010, and 164,998 and 216,487 shares in treasury, respectively
    18,083       18,083  
Additional paid-in capital
    188,278       189,239  
Retained earnings
    89,257       81,486  
Treasury stock, at cost
    (5,137 )     (6,740 )
Accumulated other comprehensive loss
    (7,198 )     (12,190 )
 
           
Total stockholders’ equity
    302,204       269,878  
 
           
Total liabilities and stockholders’ equity
  $ 2,206,400     $ 2,244,238  
 
           
See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(Dollars In Thousands, Except Share and Per Share Data)   2011     2010     2011     2010  
Interest Income
                               
Interest and fees on loans held for investment
  $ 20,094     $ 20,997     $ 40,549     $ 42,351  
Interest on securities — taxable
    1,850       3,730       4,383       7,516  
Interest on securities — nontaxable
    1,291       1,394       2,824       2,820  
Interest on deposits in banks
    100       34       169       80  
 
                       
Total interest income
    23,335       26,155       47,925       52,767  
 
                       
Interest Expense
                               
Interest on deposits
    3,273       5,106       7,153       10,608  
Interest on borrowings
    2,308       2,507       4,743       4,998  
 
                       
Total interest expense
    5,581       7,613       11,896       15,606  
 
                       
Net interest income
    17,754       18,542       36,029       37,161  
Provision for loan losses
    3,079       3,596       4,691       7,261  
 
                       
Net interest income after provision for loan losses
    14,675       14,946       31,338       29,900  
 
                       
Noninterest Income
                               
Wealth management income
    930       1,012       1,824       1,897  
Service charges on deposit accounts
    3,353       3,347       6,384       6,339  
Other service charges and fees
    1,461       1,250       2,867       2,531  
Insurance commissions
    1,561       1,389       3,504       3,590  
Total impairment losses on securities
          (185 )     (527 )     (185 )
Portion of loss recognized in other comprehensive income
                       
 
                       
Net impairment losses recognized in earnings
          (185 )     (527 )     (185 )
Net gains on sale of securities
    3,224       1,201       5,060       1,451  
Other operating income
    834       890       1,750       1,859  
 
                       
Total noninterest income
    11,363       8,904       20,862       17,482  
 
                       
Noninterest Expense
                               
Salaries and employee benefits
    8,685       8,487       17,814       16,456  
Occupancy expense of bank premises
    1,568       1,570       3,215       3,279  
Furniture and equipment expense
    909       918       1,824       1,822  
Amortization of intangible assets
    261       253       520       509  
FDIC premiums and assessments
    414       710       1,292       1,411  
Prepayment penalties on FHLB advances
                471        
Other operating expense
    5,901       4,660       10,665       9,193  
 
                       
Total noninterest expense
    17,738       16,598       35,801       32,670  
 
                       
Income before income taxes
    8,300       7,252       16,399       14,712  
Income tax expense
    2,572       2,121       4,920       4,303  
 
                       
Net income
    5,728       5,131       11,479       10,409  
Dividends on preferred stock
    131             131        
 
                       
Net income available to common shareholders
  $ 5,597     $ 5,131     $ 11,348     $ 10,409  
 
                       
 
                               
Basic earnings per common share
  $ 0.31     $ 0.29     $ 0.63     $ 0.59  
Diluted earnings per common share
  $ 0.31     $ 0.29     $ 0.63     $ 0.59  
 
                               
Cash dividends per common share
  $ 0.10     $ 0.10     $ 0.20     $ 0.20  
 
                               
Weighted average basic shares outstanding
    17,895,904       17,787,325       17,882,006       17,776,500  
Weighted average diluted shares outstanding
    18,534,489       17,805,393       18,200,184       17,792,535  
See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                 
    Six Months Ended  
    June 30,  
(Dollars In Thousands)   2011     2010  
Operating activities:
               
Net income
  $ 11,479     $ 10,409  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    4,691       7,261  
Depreciation and amortization of premises and equipment
    2,034       2,036  
Intangible amortization
    520       509  
Net investment amortization and accretion
    162       7  
Net loss on the sale of property, plant, and equipment
    42       56  
Net gain on the sale of securities
    (5,060 )     (1,425 )
Mortgage loans originated for sale
    (19,704 )     (17,365 )
Proceeds from sales of mortgage loans
    23,884       27,157  
Gain on sales of loans
    (406 )     (357 )
Equity-based compensation expense
    21       36  
Deferred income tax expense (benefit)
    2,618       (147 )
Decrease in interest receivable
    1,473       751  
FHLB debt prepayment fees
    471        
Net impairment losses recognized in earnings
    527       185  
Other operating activities, net
    1,638       10,116  
 
           
Net cash provided by operating activities
    24,390       39,229  
 
           
 
               
Investing activities:
               
Proceeds from sales of securities available-for-sale
    182,167       71,708  
Proceeds from maturities and calls of securities available-for-sale
    19,317       38,488  
Proceeds from maturities and calls of securities held-to-maturity
    535       998  
Purchase of securities available-for-sale
    (59,334 )     (113,690 )
Proceeds from (originations of) loans and leases
    6,822       (15,098 )
Proceeds from the redemption of FHLB stock
    736        
Purchase of property, plant, and equipment
    (1,799 )     (1,552 )
Proceeds from sales of property, plant, and equipment
    175       86  
 
           
Net cash provided by (used in) investing activities
    148,619       (19,060 )
 
           
 
               
Financing activities:
               
Net increase (decrease) in noninterest-bearing deposits
    14,337       (2,513 )
Net decrease in interest-bearing deposits
    (55,616 )     (30,028 )
Net decrease in FHLB and other borrowings
    (25,014 )     (3,059 )
FHLB debt prepayment fees
    (471 )      
Net decrease in securities sold under agreement to repurchase
    (3,116 )     (5,862 )
Proceeds from the exercise of stock options
    32       30  
Net proceeds from the issuance of preferred stock
    18,841        
Excess tax benefit from stock-based compensation
    5       9  
Common dividends paid
    (3,577 )     (3,556 )
 
           
Net cash used in financing activities
    (54,579 )     (44,979 )
 
           
Increase (decrease) in cash and cash equivalents
    118,430       (24,810 )
Cash and cash equivalents at beginning of period
    112,189       101,341  
 
           
Cash and cash equivalents at end of period
  $ 230,619     $ 76,531  
 
           
 
Supplemental information — noncash items
  $ 5,065     $ 5,075  
Transfer of loans to other real estate
               
See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
                                                         
                                            Accumulated        
                    Additional                     Other        
    Preferred     Common     Paid-in     Retained     Treasury     Comprehensive        
(Dollars in Thousands)   Stock     Stock     Capital     Earnings     Stock     Income (Loss)     Total  
Balance January 1, 2010
  $     $ 18,083     $ 190,967     $ 66,760     $ (9,891 )   $ (13,652 )   $ 252,267  
Comprehensive income:
                                                       
Net income
                      10,409                   10,409  
Other comprehensive income — see note 9
                                  8,205       8,205  
 
                                         
Comprehensive income
                      10,409             8,205       18,614  
 
                                         
Common dividends declared and paid
                      (3,556 )                 (3,556 )
Issuance of vested shares
                (25 )           25              
Equity-based compensation expense
                36                         36  
Retirement plan contribution — 38,560 shares issued
                (667 )           1,201             534  
Option exercises — 2,631 shares
                (52 )           82             30  
 
                                         
Balance June 30, 2010
  $     $ 18,083     $ 190,259     $ 73,613     $ (8,583 )   $ (5,447 )   $ 267,925  
 
                                         
 
                                                       
Balance January 1, 2011
  $     $ 18,083     $ 189,239     $ 81,486     $ (6,740 )   $ (12,190 )   $ 269,878  
Comprehensive income:
                                                       
Net income
                      11,479                   11,479  
Other comprehensive income — see note 9
                                  4,992       4,992  
 
                                         
Comprehensive income
                      11,479             4,992       16,471  
 
                                         
Common dividends declared and paid
                      (3,577 )                 (3,577 )
Preferred dividends declared
                      (131 )                 (131 )
Issuance of preferred stock
    18,921             (80 )                       18,841  
Issuance of vested shares
                (22 )           22              
Equity-based compensation expense
                13             8             21  
Retirement plan contribution — 47,570 shares issued
                (812 )           1,481             669  
Option exercises — 2,969 shares
                (60 )           92             32  
 
                                         
Balance June 30, 2011
  $ 18,921     $ 18,083     $ 188,278     $ 89,257     $ (5,137 )   $ (7,198 )   $ 302,204  
 
                                         
See Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
Unaudited Consolidated Financial Statements
The accompanying unaudited 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 (“GAAP”) 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. All significant intercompany balances and transactions have been eliminated in consolidation. 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, 2010, has been derived from the audited consolidated financial statements included in the Company’s 2010 Annual Report on Form 10-K (the “2010 Form 10-K”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP 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 2010 Form 10-K.
A more complete and detailed description of First Community’s significant accounting policies is included within Note 1 of Item 8, “Financial Statements and Supplementary Data” in the Company’s 2010 Form 10-K. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.
The Company operates within two business segments-community banking and insurance services. Insurance services are comprised of agencies that sell property and casualty and life and health insurance policies and arrangements. All other operations, including commercial and consumer banking, lending activities, and wealth management are included within the banking segment.
Earnings Per Share
Basic earnings per share are determined by dividing net income available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per share are determined by dividing net income by the weighted average shares outstanding, which includes the dilutive effect of stock options, warrants, contingently issuable shares, and convertible preferred shares. Basic and diluted net income per common share calculations follow:
                                 
    For the Three Months     For the Six Months  
    ended June 30,     ended June 30,  
(In Thousands, Except Share and Per Share Data)   2011     2010     2011     2010  
Net income
  $ 5,728     $ 5,131     $ 11,479     $ 10,409  
Dividends on preferred stock
    131             131        
 
                       
Net income available to common shareholders
  $ 5,597     $ 5,131     $ 11,348     $ 10,409  
 
                               
Weighted average shares outstanding
    17,895,904       17,787,325       17,882,006       17,776,500  
Diluted shares for stock options
    27,497       6,487       6,706       4,454  
Contingently issuable shares
    8,527       11,581       8,527       11,581  
Convertible preferred shares
    602,561             302,945        
 
                       
Weighted average dilutive shares outstanding
    18,534,489       17,805,393       18,200,184       17,792,535  
 
                       
 
                               
Basic earnings per share
  $ 0.31     $ 0.29     $ 0.63     $ 0.59  
Diluted earnings per share
  $ 0.31     $ 0.29     $ 0.63     $ 0.59  
For the three- and six-month periods ended June 30, 2011, options and warrants to purchase 457,045 and 480,396 shares, respectively, of common stock were outstanding but were not included in the computation of diluted earnings per common

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share because they would have an anti-dilutive effect. Likewise, options and warrants to purchase 576,962 and 699,156 shares, respectively, of common stock were excluded from the three- and six-month periods ended June 30, 2010, computation of diluted earnings per common share because their effect would be anti-dilutive.
Series A Preferred Stock
On May 20, 2011, the Company completed a private placement of 18,921 shares of its Series A Preferred Stock. The shares carry a 6% dividend rate and are non-cumulative. Each share is convertible into 69 shares of the Company’s common stock at any time and mandatorily convert after five years. The Company may redeem the shares at face value after the third anniversary.
Recent Accounting Pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 310, Receivables. New authoritative accounting guidance under ASC Topic 310 amends prior guidance to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables by providing additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 310 during the fourth quarter of 2010. Other than the additional disclosures, the adoption of the new guidance had no significant impact on the Company’s financial statements.
In April 2011, FASB issued Accounting Standard Update (“ASU”) 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and is applied retrospectively to restructurings at the beginning of the year of adoption. The guidance on measuring the impairment of a receivable restructured in a troubled restructuring is effective on a prospective basis. The Company is currently assessing the impact on its financial statements.
In April 2011, FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements,” which simplifies the accounting for financial assets transferred under repurchase agreements and similar arrangements by eliminating the transferor’s ability criteria from the assessment of effective control over those assets as well as the related implementation guidance. The guidance is effective for interim and annual periods beginning on or after December 15, 2011, and is applied on a prospective basis. The Company is currently assessing the impact on its financial statements.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requires in the U.S. GAAP and IFRSs,” which was issued primarily to provide largely identical guidance about fair value measurement and disclosure requirements for International Financial Reporting Standards (“IFRS”) and U.S. GAAP. The new standards do not extend the use of fair value but rather provide guidance about how fair value should be determined where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. Public companies are required to apply the standard prospectively for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the impact on its financial statements.
In June 2011, FASB issued ASU 2011-05, “Presentation of Comprehensive Income”, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 22 and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income. The amendments of ASU 2011-05 are effective for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company is currently assessing the impact on its financial statements.
Conversion to State Charter
Effective with the close of business June 28, 2011, the Company’s wholly-owned banking subsidiary, First Community Bank, converted its charter from a national association to a Virginia state-chartered banking institution. First Community Bank will continue operating under the name First Community Bank. The charter conversion does not affect insurance coverage of First Community Bank’s deposits, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum amounts permitted by law, and does not affect the financial services or products provided by First Community Bank. As a Virginia state-chartered bank, First Community Bank is supervised and regulated by the Virginia Bureau of Financial Institutions and its primary federal regulator is the Federal Reserve Bank of Richmond, both of which are based in the Company’s home state of Virginia. As a financial holding company, the Company will continue to be supervised and regulated by the Board of Governors of the Federal Reserve System.
Note 2. Mergers, Acquisitions, and Branching Activity
In July 2010, GreenPoint Insurance Group, Inc. (“GreenPoint”), the Company’s wholly-owned insurance subsidiary, acquired Murphy Insurance Agency, based in Princeton, West Virginia, issuing cash consideration of approximately $190 thousand. Acquisition terms call for additional cash consideration if certain operating performance targets are met. The Company has recorded the fair value of the expected additional cash consideration as $477 thousand in long-term debt. If those targets are not met, the value of the consideration ultimately paid will decrease the liability and will be recognized as a gain in the period in which the targets are not met. Goodwill and other intangibles associated with the acquisition total approximately $667 thousand.

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Note 3. Investment Securities
As of June 30, 2011, and December 31, 2010, the amortized cost and estimated fair value of available-for-sale securities were as follows:
                                         
    June 30, 2011  
    Amortized     Unrealized     Unrealized     Fair     OTTI in  
(In Thousands)   Cost     Gains     Losses     Value     AOCI*  
States and political subdivisions
  $ 124,579     $ 2,653     $ (452 )   $ 126,780     $  
Single issue trust preferred securities
    55,618             (9,021 )     46,597        
Corporate FDIC insured
    13,830             (28 )     13,802        
Mortgage-backed securities:
                                       
Agency
    147,304       3,748       (126 )     150,926        
Non-Agency Alt-A residential
    18,191             (6,935 )     11,256       (6,935 )
 
                             
Total mortgage-backed securities
    165,495       3,748       (7,061 )     162,182       (6,935 )
Equity securities
    440       218       (43 )     615        
 
                             
Total
  $ 359,962     $ 6,619     $ (16,605 )   $ 349,976     $ (6,935 )
 
                             
                                         
    December 31, 2010  
    Amortized     Unrealized     Unrealized     Fair     OTTI in  
(In Thousands)   Cost     Gains     Losses     Value     AOCI*  
U.S. Government agency securities
  $ 10,000     $     $ (168 )   $ 9,832     $  
States and political subdivisions
    178,149       2,649       (4,660 )     176,138        
Trust preferred securities:
                                       
Single issue
    55,594             (14,350 )     41,244        
Pooled
    23       241             264        
 
                             
Total trust preferred securities
    55,617       241       (14,350 )     41,508        
Corporate FDIC insured
    25,282       378             25,660        
Mortgage-backed securities:
                                       
Agency
    209,281       7,039       (1,307 )     215,013        
Non-Agency Alt-A residential
    19,181             (7,904 )     11,277       (7,904 )
 
                             
Total mortgage-backed securities
    228,462       7,039       (9,211 )     226,290       (7,904 )
Equity securities
    495       206       (65 )     636        
 
                             
Total
  $ 498,005     $ 10,513     $ (28,454 )   $ 480,064     $ (7,904 )
 
                             
 
*   Other-than-temporary impairment in accumulated other comprehensive income.

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As of June 30, 2011, and December 31, 2010, the amortized cost and estimated fair value of held-to-maturity securities were as follows:
                                 
    June 30, 2011  
    Amortized     Unrealized     Unrealized     Fair  
(In Thousands)   Cost     Gains     Losses     Value  
States and political subdivisions
  $ 4,106     $ 51     $     $ 4,157  
 
                       
Total
  $ 4,106     $ 51     $     $ 4,157  
 
                       
                                 
    December 31, 2010  
    Amortized     Unrealized     Unrealized     Fair  
(In Thousands)   Cost     Gains     Losses     Value  
States and political subdivisions
  $ 4,637     $ 67     $     $ 4,704  
 
                       
Total
  $ 4,637     $ 67     $     $ 4,704  
 
                       
The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 2011, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
                 
    Amortized        
(In Thousands)   Cost     Fair Value  
Due within one year
  $ 116     $ 118  
Due after one year but within five years
    27,147       27,545  
Due after five years but within ten years
    24,073       25,072  
Due after ten years
    142,691       134,444  
 
           
 
    194,027       187,179  
Mortgage-backed securities
    165,495       162,182  
Equity securities
    440       615  
 
           
Total
  $ 359,962     $ 349,976  
 
           
The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2011, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
                 
    Amortized          
(In Thousands)   Cost     Fair Value  
Due within one year
  $ 1,426     $ 1,441  
 
               
Due after one year but within five years
    2,310       2,340  
Due after five years but within ten years
    370       376  
Due after ten years
           
 
           
Total
  $ 4,106     $ 4,157  
 
           
The carrying value of securities pledged to secure public deposits as required by law and for other purposes was $246.86 million and $302.67 million at June 30, 2011, and December 31, 2010, respectively.
During the three months ended June 30, 2011, gross gains on the sale of securities were $4.33 million while gross losses were $1.10 million. During the six months ended June 30, 2011, gross gains on the sale of securities were $6.68 million while gross losses were $1.62 million. During the three months ended June 30, 2010, gross gains on the sale of securities were $1.23 million while gross losses were $26 thousand. During the six months ended June 30, 2010, gross gains on the sale of securities were $1.49 million while gross losses were $34 thousand.

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The following tables reflect those investments, both available-for-sale and held-to-maturity, in a continuous unrealized loss position for less than 12 months and for 12 months or longer at June 30, 2011, and December 31, 2010.
                                                 
    June 30, 2011  
    Less than 12 Months     12 Months or longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
(In Thousands)   Value     Losses     Value     Losses     Value     Losses  
States and political subdivisions
  $ 27,090     $ (452 )   $     $     $ 27,090     $ (452 )
Single issue trust preferred securities
                46,597       (9,021 )     46,597       (9,021 )
FDIC-backed securities
    13,802       (28 )                 13,802       (28 )
Mortgage-backed securities:
                                               
Agency
    29,319       (119 )     4,924       (7 )     34,243       (126 )
Alt-A residential
                11,256       (6,935 )     11,256       (6,935 )
 
                                   
Total mortgage-backed securities
    29,319       (119 )     16,180       (6,942 )     45,499       (7,061 )
Equity securities
    127       (23 )     116       (20 )     243       (43 )
 
                                   
Total
  $ 70,338     $ (622 )   $ 62,893     $ (15,983 )   $ 133,231     $ (16,605 )
 
                                   
                                                 
    December 31, 2010  
    Less than 12 Months     12 Months or longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
(In Thousands)   Value     Losses     Value     Losses     Value     Losses  
U.S. Government agency securities
  $ 9,832     $ (168 )   $     $     $ 9,832     $ (168 )
States and political subdivisions
    80,420       (4,660 )                 80,420       (4,660 )
Single issue trust preferred securities
                41,244       (14,350 )     41,244       (14,350 )
Mortgage-backed securities:
                                               
Agency
    71,613       (1,307 )     18             71,631       (1,307 )
Alt-A residential
                11,277       (7,904 )     11,277       (7,904 )
 
                                   
Total mortgage-backed securities
    71,613       (1,307 )     11,295       (7,904 )     82,908       (9,211 )
Equity securities
    155       (55 )     93       (10 )     248       (65 )
 
                                   
Total
  $ 162,020     $ (6,190 )   $ 52,632     $ (22,264 )   $ 214,652     $ (28,454 )
 
                                   
At June 30, 2011, the combined depreciation in value of the 90 individual securities in an unrealized loss position was approximately 4.74% of the combined reported value of the aggregate securities portfolio. At December 31, 2010, the combined depreciation in value of the 214 individual securities in an unrealized loss position was approximately 5.93% of the combined reported value of the aggregate securities portfolio.
The Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. For debt securities, the Company has determined that it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that the Company will have to sell impaired securities before recovery of the impairment occurs. This determination is based upon the Company’s investment strategy for the particular type of security and its cash flow needs, liquidity position, capital adequacy and interest rate risk position.
For non-beneficial interest debt securities, the Company analyzes several qualitative factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating agencies and other qualitative factors to determine if the impairment will be recovered. Non-beneficial interest debt securities consist of U. S. government agency securities, states and political subdivisions, and single issue trust preferred securities. If it is determined that there is evidence that the impairment will not be recovered, the Company performs a present value calculation to determine the amount of credit related impairment and records any credit related OTTI through earnings and the non-credit related OTTI through other comprehensive income (“OCI”). During the three- and six-month periods ended June 30, 2011, the Company incurred no OTTI charges related to non-beneficial interest debt securities. The temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, and other current economic factors.

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For beneficial interest debt securities, the Company reviews cash flow analyses on each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. Beneficial interest debt securities consist of mortgage-backed securities and pooled trust preferred securities. An adverse change in cash flows expected to be collected has occurred if the present value of cash flows previously projected is greater than the present value of cash flows projected at the current reporting date and less than the current book value. If an adverse change in cash flows is deemed to have occurred, then an OTTI has occurred. The Company then compares the present value of cash flows using the current yield for the current reporting period to the reference amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI is then recorded through earnings and the non-credit related OTTI is accounted for in OCI.
During the three-month period ended June 30, 2011, the Company incurred no credit-related OTTI charges related to beneficial interest debt securities. During the six-month period ended June 30, 2011, the Company incurred credit-related OTTI charges related to beneficial interest debt securities of $527 thousand. These charges were related to a non-Agency mortgage-backed security (“MBS”). During the three- and six-month periods ended June 30, 2010, the Company incurred credit-related OTTI charges on beneficial interest debt securities of $134 thousand. These charges were related to two pooled trust preferred security holdings and brought the carrying value of those securities to zero.
For the non-Agency, Alt-A residential MBS, the Company models cash flows using the following assumptions: voluntary constant prepayment speed of 5, a customized constant default rate scenario that assumes approximately 22% of the remaining underlying mortgages will default, and a loss severity of 60.
The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities for which a portion of an OTTI is recognized in OCI:
                 
    For the Three Months     For the Six Months  
(In Thousands)   Ended June 30, 2011     Ended June 30, 2011  
Estimated credit losses, beginning balance (1)
  $ 4,778     $ 4,251  
Additions for credit losses on securities not previously OTTI
           
Additions for credit losses on securities previously OTTI
          527  
Reduction for increases in cash flows
           
Reduction for securities management no longer intends to hold to recovery
           
Reduction for realized losses
           
 
           
Estimated credit losses, ending balance
  $ 4,778     $ 4,778  
 
           
 
(1)   The beginning balance includes credit-related losses included in OTTI charges recognized on debt securities in prior periods.
For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During the three- and six-month periods ended June 30, 2011, the Company did not recognize any OTTI charges on equity securities. For the three- and six-month periods ended June 30, 2010, the Company recognized OTTI charges on certain of its equity securities of $51 thousand.
As a condition to membership in the Federal Home Loan Bank (“FHLB”) system, the Company is required to subscribe to a minimum level of stock in the FHLB of Atlanta (“FHLBA”). The Company believes this ownership position provides access to relatively inexpensive wholesale and overnight funding. The Company accounts for FHLBA and Federal Reserve Bank stock as a long-term investment in other assets. At June 30, 2011, and December 31, 2010, the Company owned approximately $11.50 million and $12.24 million, respectively, in FHLBA stock, which is classified as other assets. The Company’s policy is to review for impairment of such assets at the end of each reporting period. Based on the Company’s review of publicly available information about the FHLBA and its own internal analysis, the Company believes that its FHLBA stock was not impaired as of June 30, 2011.

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Note 4. Loans
Loans, net of unearned income, consist of the following:
                                 
    June 30, 2011     December 31, 2010  
(Dollars in Thousands)   Amount     Percent     Amount     Percent  
Commercial loans
                               
Construction — commercial
  $ 34,966       2.55 %   $ 42,694       3.08 %
Land development
    4,694       0.34 %     16,650       1.20 %
Other land loans
    23,354       1.70 %     24,468       1.77 %
Commercial and industrial
    92,891       6.76 %     94,123       6.79 %
Multi-family residential
    78,163       5.69 %     67,824       4.89 %
Non-farm, non-residential
    333,475       24.27 %     351,904       25.39 %
Agricultural
    1,677       0.12 %     1,342       0.10 %
Farmland
    37,227       2.71 %     36,954       2.67 %
 
                       
Total commercial loans
    606,447       44.14 %     635,959       45.89 %
Consumer real estate loans
                               
Home equity lines
    111,995       8.15 %     111,620       8.05 %
Single family residential mortgage
    560,527       40.80 %     549,157       39.61 %
Owner-occupied construction
    18,062       1.31 %     18,349       1.32 %
 
                       
Total consumer real estate loans
    690,584       50.26 %     679,126       48.98 %
Consumer and other loans
                               
Consumer loans
    64,692       4.71 %     63,475       4.58 %
Other
    12,221       0.89 %     7,646       0.55 %
 
                       
Total consumer and other loans
    76,913       5.60 %     71,121       5.13 %
 
                       
Total loans
  $ 1,373,944       100.00 %   $ 1,386,206       100.00 %
 
                       
 
                               
Loans held for sale
  $ 920             $ 4,694          
 
                           
Acquired, Impaired Loans
Loans acquired in a business combination are recorded at estimated fair value on their purchase date. Under applicable accounting standards, it is not appropriate to carryover a valuation for the allowance for loan losses at the time of acquisition when the acquired loans have evidence of credit deterioration. Evidence of credit quality deterioration as of the purchase date may include measures such as credit scores, decline in collateral value, past due and non-accrual status. For acquired, impaired loans the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Acquired performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

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The following table presents information regarding acquired, impaired loans for the three- and six-month periods ended June 30, 2011 and 2010. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest.
                                                 
    Acquired, Impaired Loans  
    2011     2010  
    TriStone     Other     Total     TriStone     Other     Total  
(In thousands)                                                
Balance, January 1
  $ 2,814     $ 407     $ 3,221     $ 3,838     $ 4,196     $ 8,034  
Principal payments received
    (173 )           (173 )     (961 )     (224 )     (1,185 )
Accretion
    13             13       30             30  
Other
    60             60       426             426  
Charge-offs
                      (499 )           (499 )
 
                                   
Balance, June 30
  $ 2,714     $ 407     $ 3,121     $ 2,834     $ 3,972     $ 6,806  
 
                                   
 
                                               
Balance, March 31
  $ 2,884     $ 407     $ 3,291     $ 3,323     $ 3,972     $ 7,295  
Principal payments received
    (138 )           (138 )     (94 )           (94 )
Accretion
    6             6       15             15  
Other
    (38 )           (38 )     10             10  
Charge-offs
                      (420 )           (420 )
 
                                   
Balance, June 30
  $ 2,714     $ 407     $ 3,121     $ 2,834     $ 3,972     $ 6,806  
 
                                   
The remaining balance of the accretable difference at June 30, 2011, and December 31, 2010, was $931 thousand and $944 thousand, respectively
Off-Balance Sheet Financial Instruments
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 are commitments to extend credit (including availability of lines of credit) of $210.53 million and standby letters of credit and financial guarantees written of $2.93 million at June 30, 2011. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $3.50 million at June 30, 2011.

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Note 5. Allowance for Loan Losses and Credit Quality
The allowance for loan losses is maintained at a level that the Company believes is 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. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
Management performs quarterly assessments to determine the appropriate level of allowance for loan losses. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the allowance based upon current measurement criteria. Commercial, consumer real estate, and non-real estate consumer 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 that have been deemed impaired. Management’s general reserve 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. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. 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 tables detail the Company’s allowance for loan loss activity, by portfolio segment, for the three- and six-month periods ended June 30, 2011 and 2010.
                                 
    For the Three Months Ended June 30, 2011  
            Consumer Real     Consumer and        
(In Thousands)   Commercial     Estate     Other     Total  
Allowance for credit losses:
                               
Beginning balance
  $ 12,300     $ 12,641     $ 1,541     $ 26,482  
Provision for loan losses
    2,504       408       167       3,079  
Loans charged off
    (2,727 )     (457 )     (272 )     (3,456 )
Recoveries credited to allowance
    223       49       105       377  
 
                       
Net charge-offs
    (2,504 )     (408 )     (167 )     (3,079 )
 
                       
Ending balance
  $ 12,300     $ 12,641     $ 1,541     $ 26,482  
 
                       
                                 
    For the Three Months Ended June 30, 2010  
            Consumer Real     Consumer and        
(In Thousands)   Commercial     Estate     Other     Total  
Allowance for credit losses:
                               
Beginning balance
  $ 14,043     $ 8,417     $ 2,048     $ 24,508  
Provision for loan losses
    1,989       1,304       303       3,596  
Loans charged off
    (2,503 )     (588 )     (282 )     (3,373 )
Recoveries credited to allowance
    120       24       136       280  
 
                       
Net charge-offs
    (2,383 )     (564 )     (146 )     (3,093 )
 
                       
Ending balance
  $ 13,649     $ 9,157     $ 2,205     $ 25,011  
 
                       

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    For the Six Months Ended June 30, 2011  
            Consumer Real     Consumer and        
(In Thousands)   Commercial     Estate     Other     Total  
Allowance for credit losses:
                               
Beginning balance
  $ 12,300     $ 12,641     $ 1,541     $ 26,482  
Provision for loan losses
    2,865       1,621       205       4,691  
Loans charged off
    (3,167 )     (1,829 )     (487 )     (5,483 )
Recoveries credited to allowance
    302       208       282       792  
 
                       
Net charge-offs
    (2,865 )     (1,621 )     (205 )     (4,691 )
 
                       
Ending balance
  $ 12,300     $ 12,641     $ 1,541     $ 26,482  
 
                       
                                 
    For the Six Months Ended June 30, 2010  
            Consumer Real     Consumer and        
(In Thousands)   Commercial     Estate     Other     Total  
Allowance for credit losses:
                               
Beginning balance
  $ 13,802     $ 8,457     $ 2,018     $ 24,277  
Provision for loan losses
    4,082       2,582       597       7,261  
Loans charged off
    (4,582 )     (1,918 )     (605 )     (7,105 )
Recoveries credited to allowance
    347       36       195       578  
 
                       
Net charge-offs
    (4,235 )     (1,882 )     (410 )     (6,527 )
 
                       
Ending balance
  $ 13,649     $ 9,157     $ 2,205     $ 25,011  
 
                       
The Company identifies loans for potential impairment through a variety of means including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If it is determined that it is probable that the Company will not collect all principal and interest amounts contractually due, the loan is generally deemed to be impaired.

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The following table presents the Company’s recorded investment in loans considered to be impaired and related information on those impaired loans for the period ended June 30, 2011, and December 31, 2010. Data for December 31, 2010, has been modified from the presentation in previous periods to match the current period presentation.
                                                         
    June 30, 2011  
                            Quarter-to-Date     Year-to-Date  
                    Unpaid     Average     Interest     Average     Interest  
    Recorded     Related     Principal     Recorded     Income     Recorded     Income  
(Amounts in Thousands)   Investment     Allowance     Balance     Investment     Recognized     Investment     Recognized  
Loans without a related allowance
                                                       
Construction — commercial
  $ 758     $     $ 770     $ 888     $ 3     $ 953     $ 3  
Land development
    185             185       916             916        
Other land loans
    1,083             1,083       1,588       1       2,517       1  
Commercial and industrial
    3,908             3,930       3,937       4       4,363       4  
Multi-family residential
    1,422             1,433       1,539       2       1,545       15  
Non-farm, non-residential
    2,503             2,615       2,684       30       3,072       30  
Farmland
                                         
Home equity lines
    1,293             1,331       1,318       14       1,398       20  
Single family residential mortgage
    8,666             8,875       9,034       98       9,639       132  
Owner-occupied construction
    259             264       332       3       333       4  
Consumer loans
    53             57       58       2       60       2  
 
                                         
 
  $ 20,130     $     $ 20,543     $ 22,294     $ 156     $ 24,796     $ 211  
 
                                         
Loans with a related allowance
                                                       
Construction — commercial
  $ 268     $ 25     $ 268     $ 269     $     $ 269     $  
Land development
                                         
Other land loans
    112       4       112       113       2       113       3  
Commercial and industrial
    612       340       637       641       8       651       8  
Multi-family residential
    788       310       788       780             786        
Non-farm, non-residential
    3,129       883       3,129       3,048       8       3,052       11  
Farmland
    334       60       334       333             333        
Home equity lines
                                         
Single family residential mortgage
    8,230       1,317       8,298       8,247       83       8,342       146  
Owner-occupied construction
                                         
Consumer loans
                                         
 
                                         
 
  $ 13,473     $ 2,939     $ 13,566     $ 13,431     $ 101     $ 13,546     $ 168  
 
                                         

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    December 31, 2010  
                            Year-to-Date  
                    Unpaid     Average     Interest  
    Recorded     Related     Principal     Recorded     Income  
(Amounts in Thousands)   Investment     Allowance     Balance     Investment     Recognized  
Loans without a related allowance
                                       
Construction — commercial
  $ 285     $     $ 732     $ 730     $ 3  
Land development
    50             144       143       2  
Other land loans
    323             742       152       13  
Commercial and industrial
    3,518             5,384       6,237       10  
Multi-family residential
    2,526             2,673       2,680       105  
Non-farm, non-residential
    3,824             4,985       4,658       53  
Home equity lines
    1,302             1,595       1,605       38  
Single family residential mortgage
    7,992             10,882       9,093       330  
Owner-occupied construction
    6             6       6        
Consumer loans
    98             102       11       5  
 
                             
 
  $ 19,924     $     $ 27,245     $ 25,315     $ 559  
 
                             
Loans with a related allowance
                                       
Construction — commercial
  $     $     $     $     $  
Land development
    113       5       113       114       7  
Other land loans
                             
Commercial and industrial
                             
Multi-family residential
    723       257       759       768       21  
Non-farm, non-residential
    1,070       158       1,140       1,151       26  
Home equity lines
    95       34       98       98       2  
Single family residential mortgage
    8,801       1,870       7,548       8,913       310  
Owner-occupied construction
                             
Consumer loans
                             
 
                             
 
  $ 10,802     $ 2,324     $ 9,658     $ 11,044     $ 366  
 
                             
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, non-performing loans and general economic conditions. The Company’s loan review function generally reviews all commercial loan relationships greater than $2.00 million on an annual basis and at various times through the year. Smaller commercial and retail loans are sampled for review throughout the year by our internal loan review department. Through the loan review process, loans are identified for upgrade or downgrade in risk rating and changed to reflect current information as part of the process.
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of the risk grades is as follows:
    Pass — This grade includes loans to borrowers of acceptable credit quality and risk. The Company further differentiates within this grade based upon borrower characteristics which include: capital strength, earnings stability, leverage, and industry.
 
    Special Mention — This grade includes loans that require more than a normal degree of supervision and attention. These loans have all the characteristics of an adequate asset, but due to being adversely affected by economic or financial conditions have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan.
 
    Substandard — This grade includes loans that have well defined weaknesses which make payment default or principal exposure possible, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business to meet the repayment terms.
 
    Doubtful — This grade includes loans that are placed on non-accrual status. These loans have all the weaknesses inherent in a “substandard’ loan with the added factor that the weaknesses are so severe that collection or liquidation in full, on the basis of current existing facts, conditions and values, is extremely unlikely, but because of certain specific pending factors, the amount of loss cannot yet be determined.

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    Loss — This grade includes loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the asset has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off all or some portion of the loan, even though partial recovery may be affected in the future.
The following tables present the Company’s investment in loans by internal credit grade indicator at June 30, 2011, and December 31, 2010.
                                                 
    June 30, 2011  
            Special                          
(Amounts in Thousands)   Pass     Mention     Substandard     Doubtful     Loss     Total  
Construction — commercial
  $ 33,028     $ 518     $ 1,420     $     $     $ 34,966  
Land development
    4,255       254       185                   4,694  
Other land loans
    16,103       5,924       1,327                   23,354  
Commercial and industrial
    87,151       443       4,560       737             92,891  
Multi-family residential
    73,360       1,235       3,568                   78,163  
Non-farm, non-residential
    304,944       7,245       20,814       472             333,475  
Agricultural
    1,654             23                   1,677  
Farmland
    34,700       1,636       891                   37,227  
Home equity lines
    106,964       1,979       3,052                   111,995  
Single family residential mortgage
    511,574       11,146       37,807                   560,527  
Owner-occupied construction
    17,272       132       658                   18,062  
Consumer loans
    64,013       115       564                   64,692  
Other
    12,206       3       12                   12,221  
 
                                   
Total loans
  $ 1,267,224     $ 30,630     $ 74,881     $ 1,209     $     $ 1,373,944  
 
                                   
                                                 
    December 31, 2010  
            Special                          
(Amounts in Thousands)   Pass     Mention     Substandard     Doubtful     Loss     Total  
Construction — commercial
  $ 40,497     $ 663     $ 1,534     $     $     $ 42,694  
Land development
    14,458       1,226       966                   16,650  
Other land loans
    16,723       6,138       1,607                   24,468  
Commercial and industrial
    87,156       1,756       5,211                   94,123  
Multi-family residential
    61,059       2,553       4,212                   67,824  
Non-farm, non-residential
    316,026       18,942       16,936                   351,904  
Agricultural
    1,318             24                   1,342  
Farmland
    33,042       2,569       1,343                   36,954  
Home equity lines
    106,803       1,923       2,894                   111,620  
Single family residential mortgage
    498,830       15,224       34,449       654             549,157  
Owner-occupied construction
    17,389       789       171                   18,349  
Consumer loans
    62,676       306       493                   63,475  
Other
    7,635       11                         7,646  
 
                                   
Total loans
  $ 1,263,612     $ 52,100     $ 69,840     $ 654     $     $ 1,386,206  
 
                                   

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The following tables detail the Company’s recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology at June 30, 2011, and December 31, 2010.
                                                 
    June 30, 2011  
                                    Acquired,     Allowance for  
    Loans     Allowance     Loans     Allowance     Impaired     Acquired,  
    Individually     for Loans     Collectively     for Loans     Loans     Impaired  
    Evaluated for     Individually     Evaluated for     Collectively     Evaluated for     Loans  
(Amounts in Thousands)   Impairment     Evaluated     Impairment     Evaluated     Impairment     Evaluated  
Commercial loans
                                               
Construction — commercial
  $ 1,026     $ 25     $ 33,940     $ 821     $     $  
Land development
    185             4,509       224              
Other land loans
    1,195       4       21,734       584       425        
Commercial and industrial
    4,520       340       87,752       1,849       619        
Multi-family residential
    2,210       310       75,953       1,773              
Non-farm, non-residential
    5,632       883       327,399       5,055       444        
Agricultural
                1,677       23              
Farmland
    334       60       36,893       380              
 
                                   
Total commercial loans
    15,102       1,622       589,857       10,709       1,488        
Consumer real estate loans
                                               
Home equity lines
    1,293             110,702       2,029              
Single family residential mortgage
    16,896       1,317       541,998       8,943       1,633        
Owner-occupied construction
    259             17,803       276              
 
                                   
Total consumer real estate loans
    18,448       1,317       670,503       11,248       1,633        
Consumer and other loans
                                               
Consumer loans
    53             64,639       1,586              
Other
                12,221                    
 
                                   
Total consumer and other loans
    53             76,860       1,586              
 
                                   
Total loans
  $ 33,603     $ 2,939     $ 1,337,220     $ 23,543     $ 3,121     $  
 
                                   
                                                 
    December 31, 2010  
                                    Acquired,     Allowance for  
    Loans     Allowance     Loans     Allowance     Impaired     Acquired,  
    Individually     for Loans     Collectively     for Loans     Loans     Impaired  
    Evaluated for     Individually     Evaluated for     Collectively     Evaluated for     Loans  
(Amounts in Thousands)   Impairment     Evaluated     Impairment     Evaluated     Impairment     Evaluated  
Commercial loans
                                               
Construction — commercial
  $ 285     $     $ 42,409     $ 1,472     $     $  
Land development
    50       5       16,600       1,767              
Other land loans
    436             23,520       747       512        
Commercial and industrial
    3,518             90,084       4,511       521        
Multi-family residential
    3,249       257       64,575       824              
Non-farm, non-residential
    4,894       158       346,586       2,688       424        
Agricultural
                1,342       19              
Farmland
                36,954       70              
 
                                   
Total commercial loans
    12,432       420       622,070       12,098       1,457        
Consumer real estate loans
                                               
Home equity lines
    1,397       34       110,223       2,104              
Single family residential mortgage
    16,793       1,870       530,600       7,999       1,764        
Owner-occupied construction
    6             18,343       193              
 
                                   
Total consumer real estate loans
    18,196       1,904       659,166       10,296       1,764        
Consumer and other loans
                                               
Consumer loans
    98             63,377       1,764              
Other
                7,646                    
 
                                   
Total consumer and other loans
    98             71,023       1,764              
 
                                   
Total loans
  $ 30,726     $ 2,324     $ 1,352,259     $ 24,158     $ 3,221     $  
 
                                   

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Non-accrual and Past Due Loans
Non-accrual loans, presented by loan class, consisted of the following at June 30, 2011, and December 31, 2010:
                 
    June 30,     December 31,  
(Amounts in Thousands)   2011     2010  
Construction — commercial
  $ 1,026     $ 285  
Land development
    185       50  
Other land loans
    807       321  
Commercial and industrial
    4,113       3,518  
Multi-family residential
    2,210       2,463  
Non-farm, non-residential
    5,304       4,670  
Farmland
    334        
Home equity lines
    900       868  
Single family residential mortgage
    6,163       6,364  
Owner-occupied construction
    259       6  
Consumer loans
    53       99  
 
           
Total
    21,354       18,644  
Acquired, impaired loans
    683       770  
 
           
Total non-accrual loans
  $ 22,037     $ 19,414  
 
           
The following tables present the aging of the recorded investment in past due loans, by loan class, as of June 30, 2011, and December 31, 2010. There were no loans past due 90 days and still accruing interest at June 30, 2011 or December 31, 2010. Non-accrual loans, excluding those 0 to 29 days past due, are included in the applicable delinquency category.
                                                 
    June 30, 2011  
                            Total     Current     Total  
(Amounts in Thousands)   30 - 59 Days     60-89 Days     90+ Days     Past Due     Loans     Loans  
Construction — commercial
  $ 139     $ 281     $ 348     $ 768     $ 34,198     $ 34,966  
Land development
                            4,694       4,694  
Other land loans
                359       359       22,995       23,354  
Commercial and industrial
    117             4,505       4,622       88,269       92,891  
Multi-family residential
    395             1,626       2,021       76,142       78,163  
Non-farm, non-residential
    2,178       868       2,381       5,427       328,048       333,475  
Agricultural
    25                   25       1,652       1,677  
Farmland
    567                   567       36,660       37,227  
Home equity lines
    165       362       900       1,427       110,568       111,995  
Single family residential mortgage
    3,040       668       4,246       7,954       552,573       560,527  
Owner-occupied construction
    120             51       171       17,891       18,062  
Consumer loans
    188             53       241       64,451       64,692  
Other
          1             1       12,220       12,221  
 
                                   
Total loans
  $ 6,934     $ 2,180     $ 14,469     $ 23,583     $ 1,350,361     $ 1,373,944  
 
                                   

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    December 31, 2010  
                            Total     Current     Total  
(Amounts in Thousands)   30 - 59 Days     60-89 Days     90+ Days     Past Due     Loans     Loans  
Construction — commercial
  $ 531     $     $ 122     $ 653     $ 42,041     $ 42,694  
Land development
                50       50       16,600       16,650  
Other land loans
                684       684       23,784       24,468  
Commercial and industrial
    3,648       121       356       4,125       89,998       94,123  
Multi-family residential
    956             1,793       2,749       65,075       67,824  
Non-farm, non-residential
    3,251       2,056       3,249       8,556       343,348       351,904  
Agricultural
    19                   19       1,323       1,342  
Farmland
    110                   110       36,844       36,954  
Home equity lines
    682       250       608       1,540       110,080       111,620  
Single family residential mortgage
    10,287       1,741       4,213       16,241       532,916       549,157  
Owner-occupied construction
    855       326       6       1,187       17,162       18,349  
Consumer loans
    433       47       31       511       62,964       63,475  
Other
                            7,646       7,646  
 
                                   
Total loans
  $ 20,772     $ 4,541     $ 11,112     $ 36,425     $ 1,349,781     $ 1,386,206  
 
                                   
Note 6. Deposits
The following is a summary of interest-bearing deposits by type as of June 30, 2011, and December 31, 2010.
                 
    June 30,     December 31,  
(In Thousands)   2011     2010  
Interest-bearing demand deposits
  $ 271,622     $ 262,420  
Savings and money market deposits
    405,409       426,547  
Certificates of deposit and individual retirement accounts
    683,157       726,837  
 
           
Total
  $ 1,360,188     $ 1,415,804  
 
           
Note 7. Borrowings
The following schedule details the Company’s indebtedness at June 30, 2011, and December 31, 2010.
                 
    June 30,     December 31,  
(In Thousands)   2011     2010  
Securities sold under agreements to repurchase
  $ 137,778     $ 140,894  
FHLB borrowings
    150,000       175,000  
Subordinated debt
    15,464       15,464  
Other long-term debt
    715       729  
 
           
Total
  $ 303,957     $ 332,087  
 
           
Securities sold under agreements to repurchase consist of $87.78 million and $90.89 million of retail overnight and term repurchase agreements at June 30, 2011, and December 31, 2010, respectively, and $50.00 million of wholesale repurchase agreements at both June 30, 2011, and December 31, 2010.
The Company had a derivative interest rate swap instrument where it received LIBOR-based variable interest payments and paid fixed interest payments that expired in January 2011. The instrument effectively fixed $50.00 million of FHLB borrowings at 4.34% for a period of five years. For a more detailed discussion of activities regarding derivatives, please see Note 13 to the Consolidated Financial Statements.

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FHLB borrowings included $150.00 million in convertible and callable advances at June 30, 2011, and $175.00 million at December 31, 2010. During the first quarter of 2011, the Company prepaid a $25.00 million FHLB advance. The weighted average interest rate of all the advances was 4.12% at June 30, 2011, and 2.39% at December 31, 2010.
At June 30, 2011, the FHLB advances have approximate contractual maturities between five and ten years. The scheduled maturities of the advances are as follows:
         
(In Thousands)   Amount  
2011
  $  
2012
     
2013
     
2014
     
2015
     
2016 and thereafter
    150,000  
Total
  $ 150,000  
 
     
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 or converted to another FHLB credit product. Prepayment of the advances may result in substantial penalties based upon the differential between contractual note rates and current advance rates for similar maturities. At June 30, 2011, advances from the FHLB were secured by qualifying loans of $310.71 million.
Also included in other indebtedness is $15.46 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 currently callable.
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.
In addition to investment securities, at June 30, 2011, wholesale repurchase agreements were collateralized by $35.77 million of interest-bearing balances with banks.
Note 8. Net Periodic Benefit Cost-Defined Benefit Plans
The following sets forth the components of the net periodic benefit cost of the Company’s domestic non-contributory, non-qualified defined executive retention plan for the three- and six-month periods ended June 30, 2011 and 2010.
                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
(In Thousands)   2011     2010     2011     2010  
Service cost
  $ 73     $ 53     $ 146     $ 106  
Interest cost
    56       47       111       94  
 
                       
Net periodic cost
  $ 129     $ 100     $ 257     $ 200  
 
                       

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The following sets forth the components of the net periodic benefit cost of the Company’s domestic non-contributory, non-qualified directors’ retirement plan, which was effective as of January 1, 2011, for the three- and six-month periods ended June 30, 2011.
                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
(In Thousands)   2011     2011  
Service cost
  $ 29     $ 58  
Interest cost
    11       22  
 
           
Net periodic cost
  $ 40     $ 80  
 
           
Note 9. Comprehensive Income
The components of the Company’s comprehensive income, net of deferred income taxes, for the three- and six-month periods ended June 30, 2011 and 2010, are as follows:
                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
(In Thousands)   2011     2010     2011     2010  
Net income
  $ 5,728     $ 5,131     $ 11,479     $ 10,409  
Other comprehensive income
                               
Unrealized (loss) gain on securities available-for-sale with other-than-temporary impairment
    (964 )     (164 )     (21 )     3  
Unrealized gain on securities available-for-sale without other-than-temporary impairment
    6,357       5,435       12,479       13,319  
Reclassification adjustment for gains realized in net income
    (2,574 )     (1,201 )     (5,060 )     (1,451 )
Reclassification adjustment for credit related other-than-temporary impairments recognized in earnings
          185       527       185  
Unrealized gain on derivative contract
          596       30       1,020  
Income tax effect
    (1,050 )     (1,807 )     (2,963 )     (4,871 )
 
                       
Total other comprehensive income
    1,769       3,044       4,992       8,205  
 
                       
Comprehensive income
  $ 7,497     $ 8,175     $ 16,471     $ 18,614  
 
                       
Note 10. 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 Company believes 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.
Note 11. Segment Information
The Company operates within two business segments, Community Banking and Insurance Services. The Community Banking segment includes both commercial and consumer lending and deposit services. This segment provides customers with such products as commercial loans, real estate loans, business financing, and consumer loans. This segment also provides customers with a range of deposit products including demand deposit accounts, savings accounts, and certificates of deposit. In addition, the Community Banking segment provides wealth management services to a broad range of customers. The Insurance Services segment is a full-service insurance agency providing commercial and personal lines of insurance.

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The following table sets forth information about the reportable operating segments and reconciliation of this information to the consolidated financial statements at and for the three-and six-month periods ended June 30, 2011 and 2010.
                                 
            For the Three Months          
    Ended June 30, 2011  
    Community     Insurance     Parent/        
    Banking     Services     Elimination     Total  
(In Thousands)                                
Net interest income (expense)
  $ 17,864     $ (31 )   $ (79 )   $ 17,754  
Provision for loan losses
    3,079                   3,079  
Noninterest income (loss)
    9,920       1,584       (141 )     11,363  
Noninterest expense (income)
    16,357       1,542       (161 )     17,738  
 
                       
Income before income taxes
    8,348       11       (59 )     8,300  
Provision for income taxes
    2,587       4       (19 )     2,572  
 
                       
Net income (loss)
    5,761       7       (40 )     5,728  
Preferred dividend
                131       131  
 
                       
Net income to common shareholders
  $ 5,761     $ 7     $ (171 )   $ 5,597  
 
                       
End of period goodwill and other intangibles
  $ 78,339     $ 11,998     $     $ 90,337  
 
                       
End of period assets
  $ 2,184,336     $ 12,836     $ 9,228     $ 2,206,400  
 
                       
                                 
            For the Six Months          
    Ended June 30, 2011  
    Community     Insurance     Parent/        
    Banking     Services     Elimination     Total  
(In Thousands)                                
Net interest income (expense)
  $ 36,210     $ (69 )   $ (112 )   $ 36,029  
Provision for loan losses
    4,691                   4,691  
Noninterest income (loss)
    17,724       3,550       (412 )     20,862  
Noninterest expense (income)
    33,293       3,067       (559 )     35,801  
 
                       
Income before income taxes
    15,950       414       35       16,399  
Provision for income taxes
    4,738       163       19       4,920  
 
                       
Net income (loss)
    11,212       251       16       11,479  
Preferred dividend
                131       131  
 
                       
Net income to common shareholders
  $ 11,212     $ 251     $ (115 )   $ 11,348  
 
                       
End of period goodwill and other intangibles
  $ 78,339     $ 11,998     $     $ 90,337  
 
                       
End of period assets
  $ 2,184,336     $ 12,836     $ 9,228     $ 2,206,400  
 
                       
                                 
            For the Three Months          
    Ended June 30, 2010  
    Community     Insurance     Parent/        
    Banking     Services     Elimination     Total  
(In Thousands)                                
Net interest income (expense)
  $ 18,581     $ (24 )   $ (15 )   $ 18,542  
Provision for loan losses
    3,596                   3,596  
Noninterest income
    7,431       1,408       65       8,904  
Noninterest expense (income)
    15,362       1,402       (166 )     16,598  
 
                       
Income before income taxes
    7,054       (18 )     216       7,252  
Provision for income taxes
    2,014       (19 )     126       2,121  
 
                       
Net income
  $ 5,040     $ 1     $ 90     $ 5,131  
 
                       
End of period goodwill and other intangibles
  $ 79,057     $ 11,700     $     $ 90,757  
 
                       
End of period assets
  $ 2,227,198     $ 12,163     $ 7,485     $ 2,246,846  
 
                       

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            For the Six Months          
    Ended June 30, 2010  
    Community     Insurance     Parent/        
(In Thousands)   Banking     Services     Elimination     Total  
Net interest income (expense)
  $ 37,259     $ (57 )   $ (41 )   $ 37,161  
Provision for loan losses
    7,261                   7,261  
Noninterest income (loss)
    14,040       3,627       (185 )     17,482  
Noninterest expense (income)
    30,383       2,881       (594 )     32,670  
 
                       
Iincome before income taxes
    13,655       689       368       14,712  
Provision for income taxes
    3,883       272       148       4,303  
 
                       
Net income
  $ 9,772     $ 417     $ 220     $ 10,409  
 
                       
End of period goodwill and other intangibles
  $ 79,057     $ 11,700     $     $ 90,757  
 
                       
End of period assets
  $ 2,227,198     $ 12,163     $ 7,485     $ 2,246,846  
 
                       
Note 12. 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. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal, or most advantageous, market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The fair value hierarchy is as follows:
  Level 1 Inputs —   Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
  Level 2 Inputs —   Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, volatilities, prepayment speeds, and credit risks, or inputs that are derived principally from or corroborated by market data by correlation or other means.
 
  Level 3 Inputs —   Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s assets and liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon third party models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities Available-for-Sale: Securities classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. Securities are classified as Level 1 within the valuation hierarchy when quoted prices are available in an active

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market. This includes securities whose value is based on quoted market prices in active markets for identical assets. The Company also uses Level 1 inputs for the valuation of equity securities traded in active markets. Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U. S. Agency securities, mortgage-backed securities, municipal securities, single issue trust preferred securities, pooled trust preferred securities, and certain equity securities that are not actively traded.
Other Assets and Associated Liabilities: Securities held for trading purposes are recorded at fair value and included in “other assets” on the consolidated balance sheets. Securities held for trading purposes include assets related to employee deferred compensation plans. The assets associated with these plans are generally invested in equities and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.
Derivatives: Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations based on observable data to value its derivatives.
Impaired Loans: Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on appraisals adjusted for customized discounting criteria.
The Company maintains an active and robust problem credit identification system. When a credit is identified as exhibiting characteristics of weakening, the Company will assess the credit for potential impairment. Examples of weakening include delinquency and deterioration of the borrower’s capacity to repay as determined by the Company’s regular credit review function. As part of the impairment review, the Company will evaluate the current collateral value. It is the Company’s standard practice to obtain updated third party collateral valuations to assist management in measuring potential impairment of a credit and the amount of the impairment to be recorded.
Internal collateral valuations are generally performed within two to four weeks of the original identification of potential impairment and receipt of the third party valuation. The internal valuation is performed by comparing the original appraisal to current local real estate market conditions and experience with consideration of liquidation costs. The result of the internal valuation is compared to the outstanding loan balance, and, if warranted, a specific impairment reserve will be established at the completion of the internal evaluation.
A third party evaluation is typically received within thirty to forty-five days of the completion of the internal evaluation. Once received, the third party evaluation is reviewed by Special Assets staff and/or Credit Appraisal staff for reasonableness. Once the evaluation is reviewed and accepted, discounts to fair market value are applied based upon such factors as the bank’s historical liquidation experience of like collateral, and an estimated net realizable value is established. That estimated net realizable value is then compared to the outstanding loan balance to determine the amount of specific impairment reserve. The specific impairment reserve, if necessary, is adjusted to reflect the results of the updated evaluation. A specific impairment reserve is generally maintained on impaired loans during the time period while awaiting receipt of the third party evaluation as well as on impaired loans that continue to make some form of payment and liquidation is not imminent. Impaired loans not meeting the aforementioned criteria and that do not have a specific impairment reserve have usually been previously written down through a partial charge-off, to their net realizable value.
Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan less the specific reserve is any downward adjustment to the appraised value that the Company determines appropriate. These differences generally consist of costs to sell the property, as well as a deflator for the devaluation of property seen by bank sellers. The Company considers these factors in fair value adjustments.
In the Company’s experience, it rarely returns loans to performing status after they have been partially charged off. Generally, credits identified as impaired move quickly through the process towards ultimate resolution.
Other Real Estate Owned. The fair value of the Company’s other real estate owned is determined using current and prior appraisals, estimates of costs to sell, and proprietary qualitative adjustments. Accordingly, other real estate owned is stated at a Level 3 fair value.

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The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2011, and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
                                 
    June 30, 2011  
    Fair Value Measurements Using        
                            Total  
(In Thousands)   Level 1     Level 2     Level 3     Fair Value  
Available-for-sale securities:
                               
Agency mortgage-backed securities
  $     $ 150,926     $     $ 150,926  
Non-Agency Alt-A residential MBS
          11,256             11,256  
Municipal securities
          126,780             126,780  
FDIC-backed securities
          13,802             13,802  
Single issue trust preferred securities
          46,597             46,597  
Equity securities
    595       20             615  
 
                       
Total available-for-sale securities
  $ 595     $ 349,381     $     $ 349,976  
 
                       
Deferred compensation assets
  $ 3,188     $     $     $ 3,188  
 
                       
Derivative assets
                               
Interest rate lock commitments
          39             39  
 
                       
Total derivative assets
  $     $ 39     $     $ 39  
 
                       
Deferred compensation liabilities
  $ 3,188     $     $     $ 3,188  
 
                       
Derivative liabilities
                               
Interest rate lock commitments
          7             7  
 
                       
Total derivative liabilities
  $     $ 7     $     $ 7  
 
                       
                                 
    December 31, 2010  
    Fair Value Measurements Using        
                            Total  
    Level 1     Level 2     Level 3     Fair Value  
(In Thousands)                                
Available-for-sale securities:
                               
Agency securities
  $     $ 9,832     $     $ 9,832  
Agency mortgage-backed securities
          215,013             215,013  
Non-Agency Alt-A residential MBS
          11,277             11,277  
Municipal securities
          176,138             176,138  
FDIC-backed securities
            25,660               25,660  
Single issue trust preferred securities
          41,244             41,244  
Pooled trust preferred securities
          264             264  
Equity securities
    616       20             636  
 
                       
Total available-for-sale securities
  $ 616     $ 479,448     $     $ 480,064  
 
                       
Deferred compensation assets
  $ 3,192     $     $     $ 3,192  
 
                       
Derivative assets
                               
Interest rate lock commitments
          28             28  
 
                       
Total derivative assets
  $     $ 28     $     $ 28  
 
                       
Deferred compensation liabilities
  $ 3,192     $     $     $ 3,192  
 
                       
Derivative liabilities
                               
Interest rate swap
          31             31  
Interest rate lock commitments
          59             59  
 
                       
Total derivative liabilities
  $     $ 90     $     $ 90  
 
                       

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Certain financial and non-financial assets are measured at fair value on a nonrecurring basis; thus, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as, when there is evidence of impairment. Items subject to nonrecurring fair value adjustments at June 30, 2011, and December 31, 2010, are as follows:
                                 
    June 30, 2011  
    Fair Value Measurements Using     Total  
    Level 1     Level 2     Level 3     Fair Value  
(In Thousands)                                
Impaired loans
  $     $     $ 6,580     $ 6,580  
Restructured loans
                7,600       7,600  
Other real estate owned
                5,585       5,585  
                                 
    December 31, 2010  
    Fair Value Measurements Using     Total  
    Level 1     Level 2     Level 3     Fair Value  
(In Thousands)                                
Impaired loans
  $     $     $ 10,906     $ 10,906  
Restructured loans
                5,771       5,771  
Other real estate owned
                4,910       4,910  

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Fair Value of Financial Instruments
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists.
                                 
    June 30, 2011     December 31, 2010  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
(In Thousands)                                
Assets
                               
Cash and cash equivalents
  $ 230,619     $ 230,619     $ 112,189     $ 112,189  
Investment securities
    354,082       354,133       484,701       484,768  
Loans held for sale
    920       924       4,694       4,700  
Loans held for investment, less allowance
    1,347,462       1,371,895       1,359,724       1,370,173  
Accrued interest receivable
    6,202       6,202       7,675       7,675  
Bank owned life insurance
    43,607       43,607       42,241       42,241  
Derivative financial assets
    39       39       28       28  
Deferred compensation assets
    3,188       3,188       3,192       3,192  
 
                               
Liabilities
                               
Demand deposits
  $ 219,488     $ 219,488     $ 205,151     $ 205,151  
Interest-bearing demand deposits
    271,622       271,622       262,420       262,420  
Savings deposits
    405,409       405,409       426,547       426,547  
Time deposits
    683,157       692,867       726,837       735,332  
Securities sold under agreements to repurchase
    137,778       144,173       140,894       161,100  
Accrued interest payable
    2,872       2,872       3,264       3,264  
FHLB and other indebtedness
    166,179       177,903       191,193       203,539  
Derivative financial liabilities
    7       7       90       90  
Deferred compensation liabilities
    3,188       3,188       3,192       3,192  
The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
Cash and Cash Equivalents: The book values of cash and due from banks and federal funds sold and purchased are considered to be equal to fair value as a result of the short-term nature of these items.
Investment Securities and Deferred Compensation Assets and Liabilities: Fair values are determined in the same manner as described above.
Loans: The estimated fair value of loans held for investment is measured based upon discounted future cash flows using current rates for similar loans. Loans held for sale are recorded at lower of cost or estimated fair value. The fair value of loans held for sale is determined based upon the market sales price of similar loans.
Accrued Interest Receivable and Payable: The book value is considered to be equal to the fair value due to the short-term nature of the instrument.
Bank-owned Life Insurance: The fair value is determined by stated contract values.

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Derivative Financial Instruments: The estimated fair value of derivative financial instruments is based upon the current market price for similar instruments.
Deposits and Securities Sold Under Agreements to Repurchase: Deposits without a stated maturity, including demand, interest-bearing demand, and savings accounts, are reported at their carrying value. No value has been assigned to the franchise value of these deposits. For other types of deposits and repurchase agreements with fixed maturities and rates, fair value has been estimated by discounting future cash flows based on interest rates currently being offered on instruments with similar characteristics and maturities.
FHLB and Other Indebtedness: Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar characteristics and maturities. The fair value for trust preferred obligations has been estimated based on credit spreads seen in the marketplace for like issues.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees: The amount of off-balance sheet commitments to extend credit, standby letters of credit, and financial guarantees is considered equal to fair value. Because of the uncertainty involved in attempting to assess the likelihood and timing of commitments being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures, the Company does not believe it is meaningful to provide an estimate of fair value that differs from the given value of the commitment.
Note 13. Derivatives and Hedging Activities
The Company, through its mortgage banking and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers’ financing needs. Derivative assets and liabilities are recorded at fair value on the balance sheet.
The primary derivatives that the Company uses are interest rate swaps and interest rate lock commitments (“IRLC’s”). Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors, such as interest rates, market-driven loan rates and prices or other economic factors.
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments as of the dates indicated:
                         
    June 30, 2011     December 31, 2010     June 30, 2010  
(In Thousands)                        
Interest rate swap
  $     $ 50,000     $ 50,000  
IRLC’s
    3,500       7,566       6,823  
As of June 30, 2011, December 31, 2010, and June 30, 2010, the fair values of the Company’s derivatives were as follows:
                                                 
    Asset Derivatives  
    June 30, 2011     December 31, 2010     June 30, 2010  
    Balance Sheet     Fair     Balance Sheet     Fair     Balance Sheet     Fair  
(In Thousands)   Location     Value     Location     Value     Location     Value  
Derivatives not designated as hedges
                                               
IRLC’s
  Other assets   $ 39     Other assets   $ 28     Other assets   $ 52  
 
                                   
Total
          $ 39             $ 28             $ 52  
 
                                   

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    Liability Derivatives  
    June 30, 2011     December 31, 2010     June 30, 2010  
    Balance Sheet     Fair     Balance Sheet     Fair     Balance Sheet     Fair  
    Location     Value     Location     Value     Location     Value  
(In Thousands)                                                
Derivatives designated as hedges
                                               
Interest rate swap
  Other liabilities   $     Other liabilities   $ 31     Other liabilities   $ 1,093  
 
                                   
Total
          $             $ 31             $ 1,093  
 
                                   
 
                                               
Derivatives not designated as hedges
                                               
IRLC’s
  Other liabilities   $ 7     Other liabilities   $ 59     Other liabilities   $ 22  
 
                                   
Total
          $ 7             $ 59             $ 22  
 
                                   
 
                                               
Total derivatives
          $ 7             $ 90             $ 1,115  
 
                                   
Interest Rate Swaps. The Company uses interest rate swap contracts to modify its exposure to interest rate risk. The Company had a derivative interest rate swap instrument that ended in January 2011. The Company employed a cash flow hedging strategy to effectively convert certain floating-rate liabilities into fixed-rate instruments. The interest rate swap was accounted for under the “short-cut” method as required by the Derivatives and Hedging Topic 815 of the ASC. Changes in fair value of the interest rate swap were reported as a component of other comprehensive income. The Company does not currently employ fair value hedging strategies.
Interest Rate Lock Commitments. In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan market. During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with mortgage loans that are in the “mortgage pipeline.” A pipeline loan is one on which the potential borrower has set the interest rate for the loan by entering into an IRLC. Once a mortgage loan is closed and funded, it is included within loans held for sale and awaits sale and delivery into the secondary market. During the term of an IRLC, the Company has the risk that interest rates will change from the rate quoted to the borrower.
The Company’s balance of mortgage loans held for sale is subject to changes in fair value due to fluctuations in interest rates from the loan closing date through the date of sale of the loan into the secondary market. Typically, the fair value of these loans declines when interest rates increase and rises when interest rates decrease.
Effect of Derivatives and Hedging Activities on the Income Statement
For the quarters ended June 30, 2011 and 2010, the Company has determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains and losses recognized in income on non-designated hedging instruments for the three- and six-month periods ended June 30, 2011 and 2010.
                                         
                    Amount of Gain (Loss)          
Derivatives Not   Location of Gain (Loss)     Recognized in Income on Derivative  
Designated as Hedging   Recognized in Income on     Three Months Ended June 30,     Six Months Ended June 30,  
Instruments   Derivative     2011     2010     2011     2010  
(In Thousands)                                        
IRLC’s
  Other income   $ (18 )   $ 79     $ 63     $ 102  
 
                             
Total
          $ (18 )   $ 79     $ 63     $ 102  
 
                             
Counterparty Credit Risk. Like other financial instruments, derivatives contain an element of “credit risk.” Credit risk is the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee. The Company reviews its counterparty risk regularly and has determined that, as of June 30, 2011, there is no significant counterparty credit risk.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity.
The following discussion and analysis is provided to address information about the Company’s financial condition and results of operations for the periods covered. This discussion and analysis should be read in conjunction with the Company’s 2010 Annual Report on Form 10-K (“2010 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 $2.21 billion at June 30, 2011. Through its community bank subsidiary, First Community Bank (the “Bank”), the Company provides financial, trust and investment advisory services to individuals and commercial customers through 54 locations in Virginia, West Virginia, North Carolina, and Tennessee. The Company is also the parent of GreenPoint Insurance Group, Inc. (“GreenPoint”), a North Carolina based full-service insurance agency offering commercial and personal lines of insurance. The Bank is the parent of Investment Planning Consultants, Inc. (“IPC”), a 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 Securities and Exchange Commission (“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. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements. The following factors, among others, could cause our 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 we conduct operations;
 
    Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
 
    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 (the “Federal Reserve”);
 
    Inflation, interest rate, market and monetary fluctuations;
 
    The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
 
    The willingness of users to substitute competitors’ products and services for our products and services;
 
    The impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
 
    Technological changes;
 
    The effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
 
    The growth and profitability of noninterest or fee income being less than expected;
 
    Changes in the level of our non-performing assets and charge-offs;
 
    The effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters;
 
    Possible other-than-temporary impairments of securities held by us;
 
    The impact of current governmental efforts to restructure the U. S. financial regulatory system, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);

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    Changes in consumer spending and savings habits; and
 
    Unanticipated regulatory or judicial proceedings.
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports filed by us with the SEC. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.
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 and other risks and uncertainties are discussed in Item 1A., “Risk Factors,” in Part II of this Quarterly Report on Form 10-Q and the Company’s 2010 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 financial 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 accounting for and valuation of investment securities, the determination of the allowance for loan losses, accounting for acquisitions and intangible assets, and accounting for income taxes as the four accounting areas that require the most subjective or complex judgments. The identified critical accounting policies are described in detail in the Company’s 2010 Form 10-K.
COMPANY OVERVIEW
The Company is a financial holding company which operates within the four-state region of Virginia, West Virginia, North Carolina, and Tennessee. The Company operates through the Bank, IPC, and GreenPoint to offer a wide range of financial services. The Company reported total assets of $2.21 billion at June 30, 2011.
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 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 Federal Reserve and other correspondent banks. The difference between interest earned on assets and interest paid on liabilities is the Company’s primary source of earnings. The Company’s net interest income is supplemented by fees for services, commissions on sales, and various deposit service charges.
The Company also conducts asset management activities through the Bank’s Trust and Financial Services Division (“Trust Division”) and its registered investment advisory firm, IPC. The Bank’s Trust Division and IPC manage assets with an

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aggregate market value of $892 million as of June 30, 2011. These assets are not assets of the Company, but are managed under various fee-based arrangements as fiduciary or agent.
RECENT LEGISLATION
On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” was signed into law by President Obama. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:
    Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws.
 
    Require financial holding companies, such as First Community, to be well-capitalized and well-managed as of July 21, 2011. Bank holding companies and banks must also be both well-capitalized and well-managed in order to engage in interstate bank acquisitions.
 
    Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institutions themselves.
 
    Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders.
 
    Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.
 
    Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
 
    Amend the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
 
    Increase the authority of the Federal Reserve to examine bank holding companies, such as First Community, and their non-bank subsidiaries.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.
RESULTS OF OPERATIONS
Overview
The following includes significant developments regarding the Company and its operations in the second quarter and first half of 2011:
    Net income increased $597 thousand, or 11.64%, to $5.73 million for the second quarter of 2011, as compared to the second quarter of 2010.
 
    Return on average assets for the second quarter of 2011 improved to 1.02%, as compared to 0.91% for the second quarter of 2010.
 
    The ratio of non-performing assets to total assets was 129 basis points for the second quarter of 2011, an improvement of 3 basis points from year-end 2010.

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Net Income
Net income available to common shareholders for the three months ended June 30, 2011, was $5.60 million, or $0.31 per diluted common share, compared with net income available to common shareholders of $5.13 million, or $0.29 per diluted common share, for the three months ended June 30, 2010, an increase of $466 thousand. The increase in net income was primarily due to net gains on the sale of securities, a decrease in the provision for loan losses, and the reduction of interest on deposits and borrowings, which were partially offset by the increase in other operating expenses and reduction of interest on earning assets.
Net income available to common shareholders for the six months ended June 30, 2011, was $11.35 million, or $0.63 per diluted common share, compared with net income available to common shareholders of $10.41 million, or $0.59 per diluted common share, for the six months ended June 30, 2010, an increase of $939 thousand. The increase in net income was primarily due to net gains on the sale of securities, a decrease in the provision for loan losses, and the reduction of interest on deposits and borrowings, which were partially offset by the increase in other operating expenses, reduction of interest on earning assets, and increase in salaries and employee benefits.
Net Interest Income — Quarterly Comparison (See Table I)
Net interest income, the largest contributor to earnings, was $17.75 million for the three months ended June 30, 2011, compared with $18.54 million for the corresponding period in 2010, a decrease of $788 thousand, or 4.25%. Tax-equivalent net interest income totaled $18.49 million for the three months ended June 30, 2011, a decrease of $843 thousand, or 4.36%, from $19.33 million for the corresponding period in 2010. The decrease in tax-equivalent net interest income was largely due to decreases in average earning assets and the interest earned on those assets as a result of a sustained low rate environment.
Average earning assets decreased $40.65 million while average interest-bearing liabilities decreased $88.89 million during the second quarter of 2011 compared with the same period of 2010. The yield on average earning assets decreased 48 basis points to 4.99% from 5.47% between the three-month periods ended June 30, 2011 and 2010, respectively. Total cost of interest-bearing liabilities decreased 39 basis points between the second quarters of 2011 and 2010, which resulted in a net interest rate spread that was 9 basis points lower, at 3.66%, for the second quarter of 2011 compared with 3.75% for the same period last year. The Company’s tax-equivalent net interest margin of 3.83% for the three months ended June 30, 2011, decreased 9 basis points from 3.92% for the same period of 2010.
The yield on loans decreased 16 basis points to 5.88% from 6.04% for the three months ended June 30, 2011 and 2010, respectively. Tax-equivalent loan interest income for the second quarter of 2011 decreased $905 thousand, or 4.30%, compared with the second quarter of 2010 due to the effect of the extended low interest rate environment in the United States and reduction in loans stemming from significant prepayments and scheduled amortization of loans.
The tax-equivalent yield on available-for-sale securities decreased 68 basis points to 3.93% during the three months ended June 30, 2011, while the average balance decreased by $116.50 million, or 23.35%, compared with the same period in 2010. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.
Average interest-bearing balances with banks were $174.78 million during the second quarter of 2011, and the yield was 0.23%. Interest-bearing balances with banks are comprised largely of excess liquidity kept at the Federal Reserve and bear overnight market rates.
The average balances of interest-bearing demand deposits increased $31.40 million, or 12.64%, while the average rate paid during the second quarter of 2011 decreased 24 basis points when compared with the same period in 2010. During the three months ended June 30, 2011, the average balances of savings deposits decreased $7.23 million, or 1.71%, while the average rate paid decreased 51 basis points compared to the same period in 2010. Average time deposits decreased $70.92 million, or 9.30%, while the average rate paid on time deposits decreased 45 basis points from 2.14% in the second quarter of 2010 to 1.69% in the second quarter of 2011. The level of average noninterest-bearing demand deposits increased $12.01 million, or 5.79%, to $219.40 million during the quarter ended June 30, 2011, compared with the corresponding period of the prior year. During the quarter ended June 30, 2011, the Company reduced the level of time deposit only customer relationships during the same period.

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The average balance of retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, decreased $12.46 million, or 13.23%, to $81.74 million for the second quarter of 2011 compared with the same period in 2010. During this same period, the interest rate paid on the retail repurchase agreements decreased 38 basis points to 0.69%. The decrease in the average balance of retail repurchase agreements is largely attributed to customers converting retail repurchase agreements to time deposit and lower balances in commercial treasury accounts in the slow economy. There were no federal funds purchased on average during the second quarters of 2011 and 2010. Wholesale repurchase agreements remained unchanged at $50.00 million and the rate remained at 3.75% for the second quarters of 2011 and 2010. The average balance of FHLB borrowings and other long-term debt decreased by $29.68 million, or 15.16%, in the second quarter of 2011 to $166.12 million, compared with the same period in 2010, while the rate paid on those borrowings increased 44 basis points between the periods.
Net Interest Income — Year-to-Date Comparison (See Table II)
Net interest income was $36.03 million for the six months ended June 30, 2011, compared with $37.16 million for the corresponding period in 2010, a decrease of $1.13 million, or 3.05%. Tax-equivalent net interest income totaled $37.63 million for the six months ended June 30, 2011, a decrease of $1.13 million, or 2.92%, from $38.76 million for the corresponding period in 2010. The decrease in tax-equivalent net interest income was largely due to decreases in average earning assets and decreases in the interest earned on those assets as a result of a sustained low rate environment.
Average earning assets decreased $19.94 million while interest-bearing liabilities decreased $67.77 million during the first half of 2011 compared with the same period of 2010. The yield on average earning assets decreased 44 basis points to 5.13% from 5.57% between the six months ended June 30, 2011 and 2010, respectively. Total cost of interest-bearing liabilities decreased 37 basis points between the first six months of 2011 and 2010, which resulted in a net interest rate spread that was 7 basis points lower, at 3.73%, for the first half of 2011 compared with 3.80% for the same period last year. The Company’s tax-equivalent net interest margin of 3.89% for the six months ended June 30, 2011, decreased 8 basis points from 3.97% for the same period of 2010.
The yield on loans decreased 19 basis points to 5.94% from 6.13% for the six months ended June 30, 2011 and 2010, respectively. Tax-equivalent loan interest income for the first half of 2011 decreased $1.81 million, or 4.26%, compared with the first half of 2010 due to the effect of the extended low interest rate environment in the United States and reduction in loan volume.
The tax-equivalent yield on available-for-sale securities decreased 70 basis points to 4.06% during the six months ended June 30, 2011, while the average balance decreased by $65.96 million, or 13.46%, compared with the same period in 2010. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.
Average interest-bearing balances with banks were $141.66 million during the first half of 2011, and the yield was 0.24%. Interest-bearing balances with banks are comprised largely of excess liquidity kept at the Federal Reserve and bear overnight market rates.
The average balances of interest-bearing demand deposits increased $33.25 million, or 13.71%, while the average rate paid during the first half of 2011 decreased 13 basis points when compared with the same period in 2010. During the six months ended June 30, 2011, the average balances of savings deposits increased $3.67 million, or 0.88%, while the average rate paid decreased 49 basis points compared to the same period in 2010. Average time deposits decreased $71.64 million, or 9.22%, while the average rate paid on time deposits decreased 44 basis points from 2.22% in the first half of 2010 to 1.78% in the first half of 2011. The level of average noninterest-bearing demand deposits increased $12.42 million, or 6.11%, to $215.67 million for the six months ended June 30, 2011, compared with the corresponding period of the prior year.
The average balance of retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, decreased $7.90 million, or 8.49%, to $85.19 million for the first half of 2011 compared with the same period in 2010. During this same period, the interest rate paid on the retail repurchase agreements decreased 40 basis points to 0.74%. The decrease in the average balance of retail repurchase agreements is largely attributed to customers converting retail repurchase agreements to time deposit and lower balances in commercial treasury accounts in the slow economy. There were no federal funds purchased on average during the first half of 2011 and 2010. Wholesale repurchase agreements remained unchanged at $50.00 million for the six months ended June 30, 2011 and 2010, while the rate increased 2 basis points between the two periods due to changes in the structure within those borrowings. The average balance of FHLB borrowings and other long-term debt decreased by $25.15 million, or 12.75%, in the first half of 2011 to $172.12 million compared to the same period in 2010, while the rate paid on those borrowings increased 47 basis points between the periods. The Company prepaid a $25.00 million FHLB advance that carried a 4.00% interest rate during the first quarter of 2011.

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Table I
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
                                                 
    Three Months Ended     Three Months Ended  
    June 30, 2011     June 30, 2010  
    Average             Average     Average             Average  
(Dollars in Thousands)   Balance     Interest (1)     Rate (1)     Balance     Interest (1)     Rate (1)  
Assets
                                               
Earning assets
                                               
Loans (2)
  $ 1,373,988     $ 20,134       5.88 %   $ 1,397,528     $ 21,039       6.04 %
Securities available-for-sale
    382,385       3,747       3.93 %     498,880       5,728       4.61 %
Securities held-to-maturity
    4,321       90       8.35 %     6,928       145       8.39 %
Interest-bearing deposits
    174,776       100       0.23 %     72,782       34       0.19 %
 
                                       
Total earning assets
    1,935,470       24,071       4.99 %     1,976,118       26,946       5.47 %
Other assets
    261,221                       281,473                  
Total assets
  $ 2,196,691                     $ 2,257,591                  
 
                                           
 
                                               
Liabilities
                                               
Interest-bearing deposits
                                               
Demand deposits
  $ 279,912     $ 113       0.16 %   $ 248,512     $ 250       0.40 %
Savings deposits
    414,439       241       0.23 %     421,669       781       0.74 %
Time deposits
    691,941       2,919       1.69 %     762,858       4,075       2.14 %
 
                                       
Total interest-bearing deposits
    1,386,292       3,273       0.95 %     1,433,039       5,106       1.43 %
Borrowings
                                               
Retail repurchase agreements
    81,736       141       0.69 %     94,197       252       1.07 %
Wholesale repurchase agreements
    50,000       468       3.75 %     50,000       468       3.75 %
FHLB borrowings and other indebtedness
    166,121       1,699       4.10 %     195,804       1,787       3.66 %
 
                                       
Total borrowings
    297,857       2,308       3.11 %     340,001       2,507       2.96 %
 
                                       
Total interest-bearing liabilities
    1,684,149       5,581       1.33 %     1,773,040       7,613       1.72 %
Noninterest-bearing demand deposits
    219,402                       207,393                  
Other liabilities
    1,666                       10,940                  
Stockholders’ equity
    291,474                       266,218                  
 
                                           
Total liabilities and stockholders’ equity
  $ 2,196,691                     $ 2,257,591                  
 
                                           
Net interest income, tax-equivalent
          $ 18,490                     $ 19,333          
 
                                           
Net interest rate spread (3)
                    3.66 %                     3.75 %
 
                                           
Net interest margin (4)
                    3.83 %                     3.92 %
 
                                           
 
(1)   Fully taxable equivalent at the rate of 35% (“FTE”). The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
 
(2)   Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual.
 
(3)   Represents the difference between the yield on earning assets and cost of funds.
 
(4)   Represents tax-equivalent net interest income divided by average earning assets.

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Table II
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
                                                 
    Six Months Ended     Six Months Ended  
    June 30, 2011     June 30, 2010  
    Average             Average     Average             Average  
(Dollars in Thousands)   Balance     Interest (1)     Rate (1)     Balance     Interest (1)     Rate (1)  
Assets
                                               
Earning assets
                                               
Loans (2)
  $ 1,378,233     $ 40,629       5.94 %   $ 1,396,603     $ 42,436       6.13 %
Securities available-for-sale
    424,104       8,544       4.06 %     490,062       11,561       4.76 %
Securities held-to-maturity
    4,432       185       8.42 %     7,033       293       8.40 %
Interest-bearing deposits
    141,662       169       0.24 %     74,675       80       0.22 %
 
                                       
Total earning assets
    1,948,431       49,527       5.13 %     1,968,373       54,370       5.57 %
Other assets
    263,457                       282,363                  
 
                                           
Total assets
  $ 2,211,888                     $ 2,250,736                  
 
                                           
 
                                               
Liabilities
                                               
Interest-bearing deposits
                                               
Demand deposits
  $ 275,781     $ 324       0.24 %   $ 242,531     $ 450       0.37 %
Savings deposits
    421,046       598       0.29 %     417,377       1,612       0.78 %
Time deposits
    705,632       6,231       1.78 %     777,268       8,546       2.22 %
 
                                       
Total interest-bearing deposits
    1,402,459       7,153       1.03 %     1,437,176       10,608       1.49 %
Borrowings
                                               
Retail repurchase agreements
    85,191       314       0.74 %     93,093       528       1.14 %
Wholesale repurchase agreements
    50,000       935       3.77 %     50,000       931       3.75 %
FHLB borrowings and other indebtedness
    172,117       3,494       4.09 %     197,266       3,539       3.62 %
 
                                       
Total borrowings
    307,308       4,743       3.11 %     340,359       4,998       2.96 %
 
                                       
Total interest-bearing liabilities
    1,709,767       11,896       1.40 %     1,777,535       15,606       1.77 %
 
                                           
Noninterest-bearing demand deposits
    215,669                       203,252                  
Other liabilities
    2,995                       8,097                  
Stockholders’ equity
    283,457                       261,852                  
 
                                           
Total liabilities and stockholders’ equity
  $ 2,211,888                     $ 2,250,736                  
 
                                           
Net interest income, tax-equivalent
          $ 37,631                     $ 38,764          
 
                                           
Net interest rate spread (3)
                    3.73 %                     3.80 %
 
                                           
Net interest margin (4)
                    3.89 %                     3.97 %
 
                                           
 
(1)   Fully taxable equivalent at the rate of 35% (“FTE”). The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
 
(2)   Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual.
 
(3)   Represents the difference between the yield on earning assets and cost of funds.
 
(4)   Represents tax-equivalent net interest income divided by average earning assets.

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The following table summarizes the changes in tax-equivalent interest earned and paid detailing the amounts attributable to (i) changes in volume (change in the average volume times the prior year’s average rate), (ii) changes in rate (changes in the average rate times the prior year’s average volume), and (iii) changes in rate/volume (change in the average volume column times the change in average rate).
                                                                 
    Three Months Ended     Six Months Ended  
    June 30, 2011, Compared to 2010     June 30, 2011, Compared to 2010  
    Dollar Increase (Decrease) due to     Dollar Increase (Decrease) due to  
                    Rate/                             Rate/        
(In Thousands)   Volume     Rate     Volume     Total     Volume     Rate     Volume     Total  
Interest earned on:
                                                               
Loans (FTE)
  $ (354 )   $ (560 )   $ 9     $ (905 )   $ (558 )   $     $ (1,249 )   $ (1,807 )
Securities available-for-sale (FTE)
    (1,338 )     (839 )     196       (1,981 )     (1,556 )     429       (1,890 )     (3,017 )
Securities held-to-maturity (FTE)
    (54 )     (1 )     0       (55 )     (108 )           0       (108 )
Interest-bearing deposits with other banks
    48       7       11       66       71       (1,266 )     1,284       89  
 
                                               
Total interest earning assets
    (1,698 )     (1,393 )     217       (2,875 )     (2,151 )     (837 )     (1,855 )     (4,843 )
 
                                               
 
                                                               
Interest paid on:
                                                               
Demand deposits
    32       (150 )     (19 )     (137 )     62       (165 )     (23 )     (126 )
Savings deposits
    (13 )     (536 )     9       (540 )     14       (1,019 )     (9 )     (1,014 )
Time deposits
    (379 )     (857 )     80       (1,156 )     (788 )     (1,682 )     155       (2,315 )
Retail repurchase agreements
    (33 )     (90 )     12       (111 )     (45 )     (185 )     16       (214 )
Wholesale repurchase agreement
                                  4       0       4  
FHLB borrowings and other long-term debt
    (271 )     216       (33 )     (88 )     (451 )     465       (59 )     (45 )
 
                                               
Total interest-bearing liabilities
    (664 )     (1,416 )     49       (2,032 )     (1,208 )     (2,582 )     80       (3,710 )
 
                                               
 
                                                               
Change in net interest income, tax-equivalent
  $ (1,034 )   $ 23     $ 168     $ (843 )   $ (943 )   $ 1,745     $ (1,935 )   $ (1,133 )
 
                                               
Provision and Allowance for Loan Losses
During the last four years, there has been significant stress in both commercial and residential real estate markets, resulting in significant declines in real estate valuations. Decreases in real estate values adversely affect the value of property used as collateral for loans, including loans originated by the Company. In addition, adverse changes in the economy, particularly continued high rates of unemployment may have a negative effect on the ability of the Company’s borrowers to make timely loan payments. A further increase in loan delinquencies could adversely impact loan loss experience, causing potential increases in the provision and allowance for loan losses.
The Company’s allowance for loan losses was $26.48 million at June 30, 2011, $26.48 million at December 31, 2010, and $25.01 million at June 30, 2010. The Company’s allowance for loan loss activity for the three- and six-month periods ended June 30, 2011 and 2010 is as follows:
                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
(In Thousands)   2011     2010     2011     2010  
Allowance for loan losses
                               
Beginning balance
  $ 26,482     $ 24,508     $ 26,482     $ 24,277  
Provision for loan losses
    3,079       3,596       4,691       7,261  
Charge-offs
    (3,456 )     (3,373 )     (5,483 )     (7,105 )
Recoveries
    377       280       792       578  
 
                       
Net charge-offs
    (3,079 )     (3,093 )     (4,691 )     (6,527 )
 
                       
Ending balance
  $ 26,482     $ 25,011     $ 26,482     $ 25,011  
 
                       

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The total allowance for loan losses to loans held for investment ratio was 1.93% at June 30, 2011, compared with 1.91% at December 31, 2010, and 1.89% at June 30, 2010. Management considers the allowance to be adequate based upon its analysis of the portfolio as of June 30, 2011. Although management utilizes its best judgment and information available, the adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. In addition, the determination of the allowance for loan losses necessarily requires management to make various assumptions. Therefore, actual loan losses could differ materially from management’s determination if actual conditions differ significantly from the assumptions utilized. While management believes the allowance for loan losses is adequate as of June 30, 2011, actual results may prove different and these differences could be significant. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates for each risk grade are adjusted by environmental factors to estimate the amount of reserve needed by segment. The Company believes this enhancement results in increased granularity within the allowance for loan losses and will be more reflective of trends within the commercial loan portfolio.
During the second quarter and first half of 2011, the Company incurred net charge-offs of $3.08 million and $4.69 million, respectively, compared with $3.09 million and $6.53 million in the respective periods of 2010. Annualized net charge-offs for the second quarter of 2011 were 0.90% of the average loan balance, compared to 0.69% of the average loan balance for the same period of 2010. The Company made provisions for loan losses of $3.08 million and $4.69 million, respectively, for the three- and six-month periods ended June 30, 2011, compared to $3.60 million and $7.26 million, respectively, in the same period of 2010. Provisions for loan losses covered 100.00% of net charge-offs for the three- and six-month periods ended June 30, 2011.
Total delinquent loans as of June 30, 2011, measured 2.12% of total loans, of which 0.52% were comprised of loans 30-89 days delinquent and 1.60% were comprised of loans in non-accrual status. Total delinquent loans have decreased approximately $7.29 million, or 20.02%, since December 31, 2010. Non-performing loans, comprised of non-accrual loans and unseasoned loan restructurings (as the Company does not have any loans that are 90 days past due and still accruing), as a percentage of total loans were 1.67% at June 30, 2011, 1.78% at December 31, 2010, and 1.35% at June 30, 2010.
At June 30, 2011, non-accrual loans, including acquired, impaired non-accrual loans, were primarily composed of the following categories of loans: 27.97% were single family residential mortgage; 24.07% were non-farm, non-residential commercial loans; and 20.51% were commercial and industrial loans. Approximately $3.50 million, or 15.88%, of non-accrual loans is attributed to the TriStone loan portfolio that was acquired during the third quarter of 2009.
During the second quarter of 2011, the company downgraded a $4.60 million loan within the hospitality industry to substandard, which accounted for a majority of the increase in sub-standard loans within the non-farm, non-residential loan segment.
Noninterest Income
Noninterest income consists of all revenues that are not included in interest and fee income related to earning assets. Total noninterest income for the second quarter of 2011 was $11.36 million compared with noninterest income of $8.90 million in the same period of 2010, an increase of $2.46 million. Exclusive of the impact of other-than-temporary impairment (“OTTI”) charges and gains on the sale of securities, noninterest income for the quarter ended June 30, 2011, increased $251 thousand, or 3.18%, compared to the same period in 2010. Wealth management revenues decreased $82 thousand, or 8.10%, to $930 thousand for the three months ended June 30, 2011, compared with the same period in 2010. Service charges on deposit accounts increased $6 thousand, or 0.18%, to $3.35 million for the three months ended June 30, 2011, compared with the same period in 2010. Other service charges and fees increased $211 thousand, or 16.88%, to $1.46 million for the three months ended June 30, 2011, compared with the same period in 2010. Insurance commissions for the second quarter of 2011 were $1.56 million, an increase of $172 thousand, or 12.38%, from the comparable period in 2010. Other operating income totaled $834 thousand for the three months ended June 30, 2011, a decrease of $56 thousand, or 6.29%, compared with the same period in 2010. For the quarter ended June 30, 2011, the Company recognized no OTTI charges, compared to $185 thousand of OTTI charges related to two pooled trust preferred securities and several small equity holdings during the same period of 2010. During the second quarter of 2011, net securities gains of $3.22 million were realized compared with net gains of $1.20 million in the comparable period in 2010.
Noninterest income for the first half of 2011 was $20.86 million compared with noninterest income of $17.48 million in the same period of 2010, an increase of $3.38 million. Exclusive of the impact of OTTI charges and gains on the sale of securities, noninterest income for the six months ended June 30, 2011, increased $113 thousand, or 0.70%, compared to the same period in 2010. Wealth management revenues decreased $73 thousand, or 3.85%, to $1.82 million for the first half of 2011, compared with the same period in 2010. Service charges on deposit accounts increased $45 thousand, or 0.71%, to $6.38 million for the six months ended June 30, 2011, compared with the same period in 2010. Other service charges and fees increased $336 thousand, or 13.28%, to $2.87 million for the six months ended June 30, 2011, compared with the same period in 2010. Insurance commissions for the first half of 2011 were $3.50 million, a decrease of $86 thousand, or 2.40%, from the comparable period in 2010. The decrease in insurance commissions reflects the effects of the recent recession, as well as the soft insurance market. Other operating income totaled $1.75 million for the six months ended June 30, 2011, a decrease of $109 thousand, or 5.86%, compared with the same period in 2010. For the six months ended June 30, 2011, the Company recognized $527 thousand of OTTI charges related to a non-agency mortgage-backed security, compared to $185 thousand of OTTI charges related to two pooled trust preferred securities and several small equity holdings during the same period of 2010.

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During the first half of 2011, net securities gains of $5.06 million were realized compared with net gains of $1.45 million in the comparable period in 2010.
Over the course of the first half of 2011, the Company strategically harvested gains in the investment portfolio as changes in the interest rate environment presented opportunities. Additionally, approximately $967 thousand of the gains realized during the period were recoveries of investment security impairments that occurred during 2009.
For a more detailed discussion of activities regarding investment securities and impairment charges, please see Note 3 to the Consolidated Financial Statements included in Part I.
Noninterest Expense
Noninterest expense totaled $17.74 million for the quarter ended June 30, 2011, an increase of $1.14 million, or 6.87%, from the same period in 2010. Salaries and employee benefits for the second quarter of 2011 increased $198 thousand, or 2.33%, compared to the same period in 2010. Occupancy and furniture and equipment expenses decreased $11 thousand, or 0.44%, between the comparable periods. Deposit insurance premiums and assessments were $414 thousand for the three-month period ended June 30, 2011, a decrease of $296 thousand, or 41.69%, compared to the same period in 2010, which was primarily due to the FDIC’s change in assessment methodology for deposit insurance to one based on tangible assets. Other operating expense totaled $5.90 million for the second quarter of 2011, an increase of $1.24 million, or 26.63%, from $4.66 million for the second quarter of 2010. The increase in other operating expense was primarily due to a $1.27 million increase in expenses and losses associated with other real estate owned between the comparable quarters.
Noninterest expense totaled $35.80 million for the six months ended June 30, 2011, an increase of $3.13 million, or 9.58%, from the same period in 2010. Salaries and employee benefits for the first half of 2011 increased $1.36 million, or 8.25%, compared to the same period in 2010. The Company has increased staffing levels in credit administration, marketing, and compliance due to increasing regulatory burdens. The Company has also experienced a significant increase in health insurance costs in recent quarters. Occupancy and furniture and equipment expenses decreased $13 thousand, or 0.56%, between the comparable periods. Deposit insurance premiums and assessments were $1.29 million for the six-month period ended June 30, 2011, a decrease of $119 thousand, or 8.43%, compared to the same period in 2010. Other operating expense totaled $10.67 million for the first half of 2011, an increase of $1.47 million, or 16.01%, from $9.19 million for the first half of 2010. The increase in other operating expenses includes an increase of $772 thousand in expenses and losses associated with other real estate owned.
During the first quarter of 2011, the Company prepaid a $25.00 million FHLB advance, and the expense associated with that prepayment was $471 thousand.
Income Tax Expense
Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax earnings of the Company. Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the calculation of taxable income. These items are commonly referred to as permanent differences. The most significant permanent differences for the Company include income on municipal securities which are exempt from federal income tax and the increases in the cash surrender values of life insurance policies.
For the second quarter of 2011, income taxes were $2.57 million compared with income taxes of $2.12 million for the second quarter of 2010. For the quarters ended June 30, 2011 and 2010, the effective tax expense rates were 30.99% and 29.25%, respectively. For the six months ended June 30, 2011, income taxes were $4.92 million compared with $4.30 million for the same period of 2010. For the six months ended June 30, 2011 and 2010, the effective tax expense rates were 30.00% and 29.25%, respectively.
FINANCIAL CONDITION
Total assets at June 30, 2011, decreased $37.84 million, or 1.69%, to $2.21 billion from December 31, 2010. At June 30, 2011, cash and cash equivalents increased $118.43 million since year-end 2010. At June 30, 2011, total liabilities were $1.90 billion, a decrease of $70.16 million, or 3.55%, from December 31, 2010. Deposits decreased $41.28 million, securities sold under agreements to repurchase decreased $3.12 million, and borrowings decreased $25.01 million during the six-month period ended June 30, 2011.
Securities
Available-for-sale securities were $349.98 million at June 30, 2011, compared with $480.06 million at December 31, 2010, a decrease of $130.09 million, or 27.10%. The market value of securities available-for-sale as a percentage of amortized cost improved from 96.40% at December 31, 2010, to 97.23% at June 30, 2011, reflecting improved pricing on certain issues. Held-to-maturity securities declined to $4.11 million at June 30, 2011, compared with $4.64 million at December 31, 2010.

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During the second quarter of 2011, the Company recognized no OTTI charges. For the first half of 2011, the Company recognized OTTI charges in earnings related to a non-agency mortgage-backed security of $527 thousand. During the three- and six-month periods ended June 30, 2011, the Company recognized no OTTI charges on equity securities.
For a more detailed discussion of investment securities, please see Note 3 to the Consolidated Financial Statements included in Part I.
Loan Portfolio
Loans Held for Sale
The $920 thousand balance of loans held for sale at June 30, 2011, represents mortgage loans that are sold to investors on a best efforts basis. Accordingly, the Company does not retain the interest rate risk involved in the commitment. The gross notional amount of outstanding commitments to originate mortgage loans for customers at June 30, 2011, was $3.50 million on 22 loans.
Loans Held for Investment
Total loans held for investment were $1.37 billion at June 30, 2011, representing a decrease of $12.26 million from December 31, 2010, and a decrease of $25.94 million from June 30, 2010. The average loan to deposit ratio was 85.57% for the second quarter of 2011, compared with 85.54% for the fourth quarter of 2010, and 85.19% for the second quarter of 2010. Year-to-date average loans of $1.38 billion decreased $18.37 million when compared to year-to-date average loans of $1.40 billion in 2010.
The held for investment loan portfolio continues to be diversified among loan types and industry segments. The following table presents the various loan categories and changes in composition as of June 30, 2011, December 31, 2010, and June 30, 2010.
                                                 
    June 30, 2011     December 31, 2010     June 30, 2010  
(Dollars in Thousands)   Amount     Percent     Amount     Percent     Amount     Percent  
Loans Held for Investment
                                               
Commercial loans
                                               
Construction — commercial
  $ 34,966       2.55 %   $ 42,694       3.08 %   $ 45,134       3.22 %
Land development
    4,694       0.34 %     16,650       1.20 %     20,414       1.46 %
Other land loans
    23,354       1.70 %     24,468       1.77 %     27,313       1.95 %
Commercial and industrial
    92,891       6.76 %     94,123       6.79 %     101,672       7.26 %
Multi-family residential
    78,163       5.69 %     67,824       4.89 %     70,850       5.06 %
Non-farm, non-residential
    333,475       24.27 %     351,904       25.39 %     352,842       25.21 %
Agricultural
    1,677       0.12 %     1,342       0.10 %     1,354       0.10 %
Farmland
    37,227       2.71 %     36,954       2.67 %     39,053       2.79 %
 
                                   
Total commercial loans
    606,447       44.14 %     635,959       45.89 %     658,632       47.05 %
Consumer real estate loans
Home equity lines
    111,995       8.15 %     111,620       8.05 %     113,036       8.07 %
Single family residential mortgage
    560,527       40.80 %     549,157       39.61 %     536,540       38.33 %
Owner-occupied construction
    18,062       1.31 %     18,349       1.32 %     21,346       1.52 %
 
                                   
Total consumer real estate loans
    690,584       50.26 %     679,126       48.98 %     670,922       47.92 %
Consumer and other loans
Consumer loans
    64,692       4.71 %     63,475       4.58 %     62,659       4.48 %
Other
    12,221       0.89 %     7,646       0.55 %     7,672       0.55 %
 
                                   
Total consumer and other loans
    76,913       5.60 %     71,121       5.13 %     70,331       5.03 %
 
                                   
Total
  $ 1,373,944       100.00 %   $ 1,386,206       100.00 %   $ 1,399,885       100.00 %
 
                                   
Loans Held for Sale
  $ 920             $ 4,694             $ 2,141          
 
                                   

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Non-Performing Assets
Non-performing assets include loans on non-accrual status, unseasoned loan restructurings, loans contractually past due 90 days or more and still accruing interest, and other real estate owned (“OREO”). Non-performing assets were $28.50 million at June 30, 2011, $29.65 million at December 31, 2010, and $25.98 million at June 30, 2010. The percentage of non-performing assets to total assets was 1.29% at June 30, 2011, 1.32% at December 31, 2010, and 1.16% at June 30, 2010.
The following table details non-performing assets by category at the close of each of the quarters ended June 30, 2011, December 31, 2010, and June 30, 2010.
                         
(Dollars in Thousands)   June 30, 2011     December 31, 2010     June 30, 2010  
Non-accrual loans
  $ 22,037     $ 19,414     $ 17,668  
Restructured loans
    878       5,325       1,206  
Loans 90 days or more past due and still accruing interest
                 
 
                 
Total non-performing loans
    22,915       24,739       18,874  
Other real estate owned
    5,585       4,910       7,108  
 
                 
Total non-performing assets
  $ 28,500     $ 29,649     $ 25,982  
 
                 
Restructured loans performing in accordance with modified terms
  $ 7,044     $ 3,911     $ 1,557  
 
                 
Non-performing loans as a percentage of total loans
    1.67 %     1.78 %     1.35 %
Non-performing assets as a percentage of total assets
    1.29 %     1.32 %     1.16 %
Non-performing assets as a percentage of total loans and other real estate owned
    2.07 %     2.13 %     1.85 %
Allowance for loan losses as a percentage of non-performing loans
    115.6 %     107.0 %     132.5 %
Ongoing activity within the classification and categories of non-performing loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the non-performing classification as a result of changing economic conditions, borrower financial capacity, and resolution efforts on the part of the Company. There were no loans 90 days past due and still accruing at June 30, 2011, December 31, 2010, or June 30, 2010. OREO was $5.59 million at June 30, 2011, an increase of $675 thousand from December 31, 2010, and is carried at the lesser of estimated net realizable value or cost. OREO increased from December 31, 2010, as a result of escalation in asset resolution and foreclosure activity. At June 30, 2011, OREO consisted of 49 properties with an average book value of $193 thousand and an average holding period of 7 months. During the three- and six-month periods ended June 30, 2011, net losses on the sale of OREO totaled $1.55 million and $1.70 million, respectively.
The Company’s Special Assets staff assumes the management and monitoring of all loans determined to be seriously delinquent or impaired. When resolution of delinquent loans through secondary repayment sources becomes evident, updated appraisals are ordered and the Company generally begins to complete the tasks necessary to gain control of the collateral and prepare for liquidation including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower, if appropriate. Special Assets staff also regularly reviews the relationship to identify any potential adverse developments during this time and continues to seek alternative resolution processes, where possible.
At June 30, 2011, the allowance for loan losses related to loan restructurings totaled $1.32 million. Total interest income recognized on loan restructurings for the three- and six- month periods ended June 30, 2011, totaled $132 thousand and $254 thousand, respectively. When restructuring loans for troubled borrowers, the Company generally makes concessions in interest rates and amortization terms.

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Deposits and Other Borrowings
Total deposits decreased by $41.28 million, or 2.55%, during the first six months of 2011. Noninterest-bearing demand deposits increased $14.34 million to $219.49 million at June 30, 2011, compared with $205.15 million at December 31, 2010. Interest-bearing demand deposits increased $9.20 million to $271.62 million at June 30, 2011, from December 31, 2010. Savings decreased $21.14 million, or 4.96%, and time deposits decreased $43.68 million, or 6.01%, during the first half of 2011.
Securities sold under repurchase agreements decreased $3.12 million, or 2.21%, in the first six months of 2011 to $137.78 million. There were no federal funds purchased outstanding at June 30, 2011, as the Company maintained a very strong liquidity position throughout the first half of 2011.
Stockholders’ Equity
Total stockholders’ equity increased $32.33 million, or 11.98%, from $269.88 million at December 31, 2010, to $302.20 million at June 30, 2011. Changes in stockholders’ equity during the period were primarily the result of net income of $11.48 million, an increase in accumulated other comprehensive income of $4.99 million, the completion of an $18.92 million capital raise through the private placement of convertible preferred stock, and the payment of common dividends of $3.58 million. The convertible preferred stock was issued for general corporate purposes, including the possible capitalization of the Company’s future growth plans.
Risk-Based Capital
Risk-based capital guidelines promulgated by federal banking agencies weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. At June 30, 2011, the Company’s total risk-based capital ratio was 17.59% compared with 15.33% at December 31, 2010. The Company’s Tier 1 risk-based capital ratio was 16.33% at June 30, 2011, compared with 14.07% at December 31, 2010. The Company’s Tier 1 leverage ratio at June 30, 2011, was 11.00% compared with 9.44% at December 31, 2010. At June 30, 2011, the Bank was deemed “well-capitalized” under regulatory capital adequancy standards.
Liquidity and Capital Resources
At June 30, 2011, the Company maintained liquidity in the form of cash and cash equivalent balances of $194.85 million, unpledged securities available-for-sale of $103.12 million, and total FHLB credit availability of approximately $160.71 million. Cash and cash equivalents as well as advances from the FHLB are immediately available for satisfaction of deposit withdrawals, customer credit needs and operations of the Company. Investment securities available-for-sale represent a secondary level of liquidity available for conversion to liquid funds in the event of extraordinary needs. The Company also maintains approved lines of credit with correspondent banks as backup liquidity sources.
The Company is a holding company, which is a separate legal entity from the Bank, and at June 30, 2011, maintained cash balances of $23.36 million. The principal source of the Company’s income is dividends from the Bank, which are subject to regulatory restrictions and limitations. As a result of investment securities impairments in 2009, the Bank is limited as to the dividends it can pay to the Company. Accordingly, the Bank would need permission from the Virginia Bureau of Financial Institutions prior to paying dividends to the Company. The cash reserves and investments held by the Company, as well as management fee arrangements provide adequate working capital to meet its obligations and projected dividends to shareholders for the next twelve months and through the projected period of dividend restrictions.
The Company maintains a liquidity policy as a means to manage liquidity and the associated risk. The policy includes a Liquidity Contingency Plan (the “Liquidity Plan”) that is designed as a tool for the Company to detect liquidity issues promptly in order to protect depositors, creditors and shareholders. The Liquidity Plan includes monitoring various internal and external indicators such as changes in core deposits and changes in market conditions. It provides for timely responses to a wide variety of funding scenarios ranging from changes in loan demand to a decline in the Company’s quarterly earnings to a decline in the market price of the Company’s stock. The Liquidity Plan calls for specific responses designed to meet a wide range of liquidity needs based upon assessments on a recurring basis by the Company and its Board of Directors.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk and Asset/Liability Management
The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company, like other financial institutions, is subject to interest rate risk to the degree that interest-earning assets reprice differently than interest-bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment.
The Company’s primary component of operational revenue, net interest income, is subject to variation as a result of changes in interest rate environments in conjunction with unbalanced repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has four primary components: repricing risk, basis risk, yield curve risk and option risk. Repricing risk occurs when earning assets and paying liabilities reprice at differing times as interest rates change. Basis risk occurs when the underlying rates on the assets and liabilities the institution holds change at different levels or in varying degrees. Yield curve risk is the risk of adverse consequences as a result of unequal changes in the spread between two or more rates for different maturities for the same instrument. Lastly, option risk is due to embedded options, often put or call options, given or sold to holders of financial instruments.
In order to mitigate the effect of changes in the general level of interest rates, the Company manages repricing opportunities and thus, its interest rate sensitivity. The Company seeks to control its interest rate risk exposure to insulate net interest income and net earnings from fluctuations in the general level of interest rates. To measure its exposure to interest rate risk, quarterly simulations of net interest income are performed using financial models that project net interest income through a range of possible interest rate environments including rising, declining, most likely and flat rate scenarios. The simulation model used by the Company captures all earning assets, interest-bearing liabilities and off-balance sheet financial instruments and combines the various factors affecting rate sensitivity into an earnings outlook and estimates of the economic value of equity in a range for a range of assumed interest rate scenarios. The results of these simulations indicate the existence and severity of interest rate risk in each of those rate environments based upon the current balance sheet position, assumptions as to changes in the volume and mix of interest-earning assets and interest-paying liabilities and the Company’s estimate of yields to be attained in those future rate environments and rates that will be paid on various deposit instruments and borrowings. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and the Company’s strategies. However, the earnings simulation model is currently the best tool available to the Company and the industry for managing interest rate risk.
Specific strategies for management of interest rate risk have included shortening the amortized maturity of new fixed-rate loans, increasing the volume of adjustable-rate loans to reduce the average maturity of the Company’s interest-earning assets, and monitoring the term and structure of liabilities to maintain a balanced mix of maturity and repricing structures to mitigate potential exposure. At June 30, 2011, modeling indicates that the Company is in a relatively neutral position with respect to sensitivity to interest rate changes.
The Company has established policy limits for tolerance of interest rate risk in various interest rate scenarios. In addition, the policy addresses exposure limits to changes in the economic value of equity according to predefined policy guidelines. The most recent simulation indicates that current exposure to interest rate risk is within the Company’s defined policy limits.

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The following table summarizes the projected impact on the next twelve months’ net interest income and the economic value of equity as of June 30, 2011, and December 31, 2010, of immediate and sustained rate shocks in the interest rate environments of plus 300 to minus 100 basis points from the base case rate simulation, assuming no remedial measures are effected. At June 30, 2011, the Federal Open Market Committee maintained a target range for federal funds of 0 to 25 basis points, rendering complete downward shocks greater than 100 basis points unrealistic and not meaningful. In the downward rate shocks presented, benchmark interest rates are dropped with floors near 0%.
                                 
Rate Sensitivity Analysis
      June 30, 2011
(Dollars in Thousands)   Change in             Change in      
Increase (Decrease) in   Net Interest     Percent     Economic Value     Percent
Interest Rates (Basis Points)   Income     Change     of Equity     Change
300
  $ 5,645       8.3     $ 13,009       3.9
200
    3,452       5.1       11,293       3.4
100
    1,599       2.4       7,950       2.4
(100)
    (318     (0.5     (26,750     (8.0 )
                                 
    December 31, 2010  
(Dollars in Thousands)   Change in             Change in        
Increase (Decrease) in   Net Interest     Percent     Economic Value     Percent  
Interest Rates (Basis Points)   Income     Change     of Equity     Change  
300
  $ 932       1.2     $ (10,634 )     (3.6 )
200
    121       0.2       (1,530 )     (0.5 )
100
    329       0.4       4,734       1.6  
(100)
    (105 )     (0.1 )     (21,503 )     (7.3 )
The economic value of equity is a measure which reflects the impact of changing rates on the underlying values of the Company’s assets and liabilities in various rate scenarios. The scenarios illustrate the potential estimated impact of instantaneous rate shocks on the underlying value of equity. The economic value of equity is based on the present value of all the future cash flows under the different rate scenarios.

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ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) along with the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(b). Based on that evaluation, the Company’s CEO along with the Company’s CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2011, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
Changes in Internal Control over Financial Reporting
The Company assesses the adequacy of its internal control over financial reporting quarterly and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2011, that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is currently a defendant in various legal actions and asserted claims in the normal course of business. Although the Company and legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, they are of the belief that the resolution of these actions should not have a material adverse affect on the financial position, results of operations, or cash flows of the Company.
ITEM 1A. Risk Factors
There were no material changes to the risk factors as previously disclosed under Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  (a)   Not Applicable
  (b)   Not Applicable
  (c)   Issuer Purchases of Equity Securities

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The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of the Company’s Common Stock during the second quarter of 2011.
                                 
                    Total Number     Maximum  
    Total             of Shares     Number of  
    Number of     Average     Purchased as     Shares That May  
    Shares     Price Paid     Part of a Publicly     Yet be Purchased  
    Purchased     per Share     Announced Plan     Under the Plan (1)  
April 1-30, 2011
        $             912,777  
May 1-31, 2011
                      913,027  
June 1-30, 2011
                      935,002  
 
                         
Total
        $                
 
                         
 
(1)   The Company’s stock repurchase plan, as amended, allows the purchase and retention of up to 1,100,000 shares. The plan has no expiration date, remains open and no plans have expired during the reporting period covered by this table. No determination has been made to terminate the plan or to cease making purchases. The Company held 164,998 shares in treasury at June 30, 2011.
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Reserved
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits
  (a)   Exhibits
     
Exhibit    
No.   Exhibit
3(i)
  Articles of Incorporation of First Community Bancshares, Inc. (31)
 
   
3(ii)
  Bylaws of First Community Bancshares, Inc., as amended. (17)
 
   
3.1
  Reserved.
 
   
4.1
  Specimen stock certificate of First Community Bancshares, Inc. (3)
 
   
4.2
  Indenture Agreement dated September 25, 2003. (11)
 
   
4.3
  Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. (11)
 
   
4.4
  Preferred Securities Guarantee Agreement dated September 25, 2003. (11)
 
   
4.5
  Certificate of Designation of 6.00% Series A Noncumulative Convertible Preferred Stock. (21)
 
   
4.6
  Warrant to purchase 88,273 shares of Common Stock of First Community Bancshares, Inc. (29)
 
   
4.7
  Reserved.
 
   
4.8
  Reserved.
 
   
10.1**
  First Community Bancshares, Inc. 1999 Stock Option Contracts (2) and Plan. (4)
 
   
10.1.1**
  Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan, as amended. (18)
 
   
10.2**
  First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (5)
 
   
10.3**
  Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and John M. Mendez (6) and Waiver Agreement. (27)
 
   
10.4**
  First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended (24) and Amendment #1. (28)
 
   
10.5**
  First Community Bancshares, Inc. Split Dollar Plan and Agreement. (8)
 
   
10.6**
  First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan, as amended. (22)
 
   
10.7**
  First Community Bancshares, Inc. Wrap Plan. (7)
 
   
10.8
  Reserved.
 
   
10.9**
  Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors and Certain Executive Officers. (9)
 
   
10.10**
  Form of Indemnification Agreement between First Community Bank, N. A, its Directors and Certain Executive Officers. (9)
 
   
10.11
  Reserved.
 
   
10.12**
  First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Form of Award Agreement. (13)
 
   
10.13
  Reserved.

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Exhibit    
No.   Exhibit
10.14**
  First Community Bancshares, Inc. Directors Deferred Compensation Plan. (7)
 
   
10.15
  Reserved.
 
   
10.16**
  Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and Ronald L. Campbell. (19)
 
   
10.17
  Reserved.
 
   
10.18
  Securities Purchase Agreement by and between the United States Department of the Treasury and First Community Bancshares, Inc. dated November 21, 2008. (22)
 
   
10.19**
  Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and David D. Brown. (23)
 
   
10.20**
  Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and Robert L. Buzzo. (26)
 
   
10.21**
  Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and E. Stephen Lilly. (26)
 
   
10.22**
  Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Gary R. Mills. (26)
 
   
10.23**
  Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Martyn A. Pell. (26)
 
   
10.24**
  Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Robert. L. Schumacher. (26)
 
   
10.25**
  Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Simpson O. Brown. (25)
 
   
10.26**
  Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Mark R. Evans. (25)
 
   
11
  Statement regarding computation of earnings per share. (16)
 
   
31.1*
  Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
 
   
31.2*
  Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
 
   
32*
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*   Furnished herewith.
 
**   Indicates a management contract or compensation plan.
 
(1)   Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed on August 16, 2010
 
(2)   Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.
 
(3)   Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002, filed on March 25, 2003, as amended on March 31, 2003.
 
(4)   Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 1999, filed on March 30, 2000, as amended April 13, 2000.
 
(5)   The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.
 
(6)   Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed December 16, 2008. The Registrant has entered into substantially identical agreements with Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title and salary.

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(7)   Incorporated by reference from Item 1.01 of the Current Report on Form 8-K dated August 22, 2006, and filed August 23, 2006.
 
(8)   Incorporated by reference from Exhibit 10.5 of the Annual Report on Form 10-K for the period ended December 31, 1999, and filed on April 4, 2000, and amended on April 13, 2000.
 
(9)   Form of indemnification agreement entered into by the Company and by First Community Bank, N. A. with their respective directors and certain officers of each including, for the Registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, E. Stephen Lilly, David D. Brown, and Gary R. Mills. Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2003, filed on March 15, 2004, and amended on May 19, 2004.
 
(10)   Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 15, 2004.
 
(11)   Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.
 
(12)   Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004.
 
(13)   Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004.
 
(14)   Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2004, and filed on March 16, 2005. Amendments in substantially similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford, and Stafford II.
 
(15)   Incorporated by reference from the Current Report on Form 8-K dated October 24, 2006, and filed October 25, 2006.
 
(16)   Incorporated by reference from Note 1 of the Notes to Consolidated Financial Statements included herein.
 
(17)   Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated February 14, 2008, filed on February 20, 2008.
 
(18)   Incorporated by reference from Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004.
 
(19)   Incorporated by reference from Exhibit 2.1 of the Form S-3 registration statement filed May 2, 2007.
 
(20)   Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated June 28, 2011, and filed June 28, 2011.
 
(21)   Incorporated by reference from Exhibit 4.1 of the Current Report on Form 8-K dated May 20, 2011, and filed May 23, 2011.
 
(22)   Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, and filed December 17, 2010.
 
(23)   Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed December 16, 2008.
 
(24)   Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, and filed January 5, 2009.
 
(25)   Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009 and filed April 3, 2009.
 
(26)   Incorporated by reference from the Current Report on Form 8-K dated and filed July 6, 2009.
 
(27)   Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated December 16, 2010, and filed December 17, 2010.
 
(28)   Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, and filed December 17, 2010. (29) Incorporated by reference from Exhibit 99.3 of the Current Report on Form 8-K dated and filed July 27, 2010.
 
(30)   Reserved.
 
(31)   Incorporated by reference from Exhibit 3(i) of the Quarterly Report on Form 10-Q for the period dated June 30, 2010, and filed August 16, 2010.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE: August 9, 2011
         
     
  /s/ John M. Mendez    
  John M. Mendez   
  President & Chief Executive Officer
(Principal Executive Officer) 
 
 
     
  /s/ David D. Brown    
  David D. Brown   
  Chief Financial Officer
(Principal Accounting Officer) 
 

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EXHIBIT INDEX
     
Exhibit No.   Exhibit
31.1
  Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
 
31.2
  Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
 
32
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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