FIRST COMMUNITY BANKSHARES INC /VA/ - Quarter Report: 2013 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2013

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		24605-0989
(Address of principal executive offices)		(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. x Yes ¨ 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). x Yes ¨ 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x 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; 19,985,212 shares outstanding as of April 26, 2013

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

For the quarter ended March 31, 2013

INDEX


			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012		3
		Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		4
		Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		6
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		7
		Notes to Condensed Consolidated Financial Statements (Unaudited)		8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		50

	Item 4.	Controls and Procedures		51

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings		52

	Item 1A.	Risk Factors		52

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52

	Item 3.	Defaults Upon Senior Securities		52

	Item 4.	Mine Safety Disclosures		52

	Item 5.	Other Information		53

	Item 6.	Exhibits		53

SIGNATURES				56

EXHIBIT INDEX				57

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31, 2013			December 31, 2012
(Amounts in thousands, except share and per share data)	(Unaudited)
Assets
Cash and due from banks	$	41,467		$	50,405
Federal funds sold		110,544			66,509
Interest-bearing deposits in banks		15,030			27,933

Total cash and cash equivalents		167,041			144,847
Securities available-for-sale		537,507			534,358
Securities held-to-maturity		816			816
Loans held for sale		2,794			6,672
Loans held for investment, net of unearned income:
Covered under loss share agreements		195,060			207,106
Not covered under loss share agreements		1,494,232			1,517,547
Less allowance for loan losses		(24,850	)		(25,770	)

Loans held for investment, net		1,664,442			1,698,883
FDIC indemnification asset		45,393			48,073
Property, plant, and equipment, net		64,812			64,868
Other real estate owned:
Covered under loss share agreements		6,911			3,255
Not covered under loss share agreements		4,439			5,749
Interest receivable		8,166			7,842
Goodwill		104,689			104,866
Intangible assets		3,344			3,522
Other assets		109,937			105,116

Total assets	$	2,720,291		$	2,728,867


Liabilities
Deposits:
Noninterest-bearing	$	355,918		$	343,352
Interest-bearing		1,691,579			1,686,823

Total deposits		2,047,497			2,030,175
Interest, taxes, and other liabilities		26,740			28,816
Securities sold under agreements to repurchase		121,506			136,118
FHLB borrowings		150,000			161,558
Other borrowings		15,877			15,877

Total liabilities		2,361,620			2,372,544


Stockholders’ equity
Preferred stock, undesignated par value; 1,000,000 shares authorized: Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; 17,421 shares outstanding at March 31, 2013, and December 31, 2012		17,421			17,421
Common stock, $1 par value; 50,000,000 shares authorized; 20,343,327 shares issued at March 31, 2013, and December 31, 2012, respectively; 358,115 and 289,861 shares in treasury at March 31, 2013, and December 31, 2012, respectively		20,343			20,343
Additional paid-in capital		213,855			213,829
Retained earnings		117,489			113,013
Treasury stock, at cost		(7,517	)		(6,458	)
Accumulated other comprehensive loss		(2,920	)		(1,825	)

Total stockholders’ equity		358,671			356,323

Total liabilities and stockholders’ equity	$	2,720,291		$	2,728,867

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended March 31,
(Amounts in thousands, except share and per share data)	2013			2012
Interest income
Interest and fees on loans held for investment	$	24,844		$	19,368
Interest on securities — taxable		1,886			2,079
Interest on securities — nontaxable		1,208			1,196
Interest on deposits in banks		66			39

Total interest income		28,004			22,682

Interest expense
Interest on deposits		2,362			2,405
Interest on short-term borrowings		590			595
Interest on long-term borrowings		1,690			1,705

Total interest expense		4,642			4,705

Net interest income		23,362			17,977
Provision for loan losses		1,142			922

Net interest income after provision for loan losses		22,220			17,055

Noninterest income
Wealth management income		846			894
Service charges on deposit accounts		3,168			3,013
Other service charges and fees		1,786			1,585
Insurance commissions		1,666			1,576
Net gain on sale of securities		117			51
Change in FDIC indemnification asset		(1,539	)		—
Other operating income		1,817			872

Total noninterest income		7,861			7,991

Noninterest expense
Salaries and employee benefits		10,110			8,222
Occupancy expense of bank premises		1,855			1,526
Furniture and equipment		1,343			811
Amortization of intangible assets		179			233
FDIC premiums and assessments		472			322
Merger related expense		49			163
Other operating expense		5,536			4,916

Total noninterest expense		19,544			16,193

Income before income taxes		10,537			8,853
Income tax expense		3,396			2,852

Net income		7,141			6,001
Dividends on preferred stock		258			283

Net income available to common shareholders	$	6,883		$	5,718


Basic earnings per common share	$	0.34		$	0.32
Diluted earnings per common share	$	0.33		$	0.31

Cash dividends per common share	$	0.12		$	0.10

Weighted average basic shares outstanding		20,032,694			17,849,376
Weighted average diluted shares outstanding		21,394,066			19,189,923

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended
	March 31,
	2013			2012
(Amounts in thousands, except share and per share data)
Net income	$	7,141		$	6,001
Other comprehensive (loss) income, before tax
Available-for-sale securities:
Unrealized (losses) gains on securities available-for-sale with other-than-temporary impairment		(197	)		209
Unrealized (losses) gains on securities available-for-sale without other-than-temporary impairment		(1,121	)		495
Less: reclassification adjustment for gains realized in net income		(117	)		(51	)

Unrealized (losses) gains on available-for-sale securities in OCI		(1,435	)		653
Benefit plans:
Net actuarial losses on pension and other postretirement benefit plans		(394	)		(22	)
Amortization of prior service cost, transition asset/obligation, and net actuarial losses included in net periodic benefit cost		81			65

Unrealized (losses) gains on benefit plans		(313	)		43

Other comprehensive (loss) income, before tax		(1,748	)		696
Income tax benefit (expense) related to items of OCI		653			(263	)

Other comprehensive (loss) income, net of tax		(1,095	)		433

Total comprehensive income	$	6,046		$	6,434

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


														Accumulated
					Additional									Other
	Preferred		Common		Paid-in			Retained			Treasury			Comprehensive
	Stock		Stock		Capital			Earnings			Stock			Income (Loss)			Total
(Amounts in thousands, except share and per share data)
Balance January 1, 2012	$	18,921	$	18,083	$	188,118		$	93,656		$	(5,721	)	$	(7,328	)	$	305,729
Net income		—		—		—			6,001			—			—			6,001
Other comprehensive income		—		—		—			—			—			433			433
Common dividends declared — $0.10 per share		—		—		—			(1,786	)		—			—			(1,786	)
Preferred dividends declared — $15.00 per share		—		—		—			(283	)		—			—			(283	)
Equity-based compensation expense		—		—		31			—			—			—			31

Balance March 31, 2012	$	18,921	$	18,083	$	188,149		$	97,588		$	(5,721	)	$	(6,895	)	$	310,125


Balance January 1, 2013	$	17,421	$	20,343	$	213,829		$	113,013		$	(6,458	)	$	(1,825	)	$	356,323
Net income		—		—		—			7,141			—			—			7,141
Other comprehensive loss		—		—		—			—			—			(1,095	)		(1,095	)
Common dividends declared — $0.12 per share		—		—		—			(2,407	)		—			—			(2,407	)
Preferred dividends declared — $15.00 per share		—		—		—			(258	)		—			—			(258	)
Equity-based compensation expense		—		—		32			—			—			—			32
Common stock options exercised — 800 shares		—		—		(6	)		—			18			—			12
Purchase of treasury shares — 69,054 shares at $15.55 per share		—		—		—			—			(1,077	)		—			(1,077	)

Balance March 31, 2013	$	17,421	$	20,343	$	213,855		$	117,489		$	(7,517	)	$	(2,920	)	$	358,671

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Three Months Ended
	March 31,
(Amounts in thousands)	2013			2012
Operating activities
Net income	$	7,141		$	6,001
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,142			922
Depreciation and amortization of property, plant, and equipment		1,227			937
Accretion of discounts and amortization of premiums on investments		(330	)		467
Accretion of FDIC receivable for loss share agreements		1,539			—
Amortization of intangible assets		179			233
Gain on sale of loans		(454	)		(239	)
Equity-based compensation expense		32			31
Gain on sale of property, plant, and equipment		(48	)		(1	)
Loss on sales of other real estate		613			649
Gain on sale of securities		(117	)		(51	)
Gain on prepayment of debt		(296	)		—
Proceeds from sale of mortgage loans		28,226			19,163
Origination of mortgage loans		(23,894	)		(16,626	)
(Increase) decrease in accrued interest receivable		(324	)		307
(Increase) decrease in other operating activities		(9,112	)		8,318

Net cash provided by operating activities		5,524			20,111


Investing activities
Proceeds from sale of securities available-for-sale		75,506			10,051
Proceeds from maturities, prepayments, and calls of securities available-for-sale		19,757			21,232
Proceeds from maturities, prepayments, and calls of securities held-to-maturity		—			620
Payments to acquire securities available-for-sale		(99,532	)		(27,059	)
Collections of loans		31,277			8,028
Proceeds from the redemption of (payments to acquire) FHLB stock, net		1,184			(720	)
Proceeds from the FDIC		1,141			—
Payments to acquire property, plant, and equipment		(1,219	)		(833	)
Proceeds from sale of property, plant, and equipment		96			2
Proceeds from sale of other real estate		1,041			1,623

Net cash provided by investing activities		29,251			12,944


Financing activities
Net increase in noninterest-bearing deposits		12,566			13,084
Net increase in interest-bearing deposits		4,756			23,199
Repayments of securities sold under agreements to repurchase		(14,612	)		(4,942	)
Repayments of long-term debt		(11,558	)		(8	)
Proceeds from stock options exercised		12			—
Payments for repurchase of treasury stock		(1,077	)		—
Excess tax benefit from share-based compensation		—			—
Payments of common dividends		(2,407	)		(1,786	)
Payments of preferred dividends		(261	)		(284	)

Net cash (used in) provided by financing activities		(12,581	)		29,263

Increase in cash and cash equivalents		22,194			62,318
Cash and cash equivalents at beginning of period		144,847			47,294

Cash and cash equivalents at end of period	$	167,041		$	109,612


Supplemental information — noncash items
Transfer of other real estate	$	6,865		$	1,027
Loans originated to finance other real estate	$	2,864		$	840

See Notes to Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. General

The accompanying unaudited condensed consolidated financial statements of First Community Bancshares, Inc. and subsidiaries (“First Community” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“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. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full calendar year. The Company has made certain reclassifications of prior period information necessary to conform to the current period presentation. These reclassifications had no effect on the Company’s financial position, results of operations, or stockholders’ equity.

The condensed consolidated balance sheet as of December 31, 2012, has been derived from the audited consolidated financial statements included in the Company’s 2012 Annual Report on Form 10-K (the “2012 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2013. 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 2012 Form 10-K.

The Company operates in one business segment, Community Banking. The Community Banking segment consists of all operations, including commercial and consumer banking, lending activities, wealth management, and insurance services.

Significant Accounting Policies

A complete and detailed description of the Company’s significant accounting policies is included in Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial and Supplementary Data,” of the Company’s 2012 Form 10-K and Note 1, “General,” of the Notes to Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1, “Financial Statements,” of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2013. Additional discussion of the Company’s application of critical accounting estimates is included within “Application of Critical Accounting Estimates” in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” herein.

Reclassifications and Corrections

The Company has made certain reclassifications of prior years’ amounts necessary to conform to the current year’s presentation. These reclassifications had no effect on the Company’s financial position, stockholders’ equity, or results of operations.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which amends Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” The amended guidance requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amended guidance does not change the current requirements for reporting net income or other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted this update in the first quarter of 2013. The adoption of the guidance had no significant impact on the Company’s consolidated financial statements other than supplemental disclosure. See Note 11, “Accumulated Other Comprehensive Income,” for additional information.

In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805) – Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force),” to address the diversity in practice about how to subsequently measure an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. The amendments in ASU 2012-06 require a reporting entity to subsequently account for a change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. ASU 2012-06 further requires that any amortization of changes in value be limited to the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets. The amendments in ASU 2012-06 are effective prospectively for fiscal years beginning on or after December 15, 2012, and early adoption is permitted. The Company adopted this update in the first quarter of 2013. The adoption of the guidance resulted in the recognition of amortization in noninterest income in the Company’s Condensed Consolidated Statements of Income. See Part I, Item 1, “Financial Statements,” and Note 5, “FDIC Indemnification Asset,” for additional information.

Earnings per Common Share

Basic earnings per common share is determined by dividing net income available to common shareholders by the weighted average common shares outstanding. Diluted earnings per common share is determined by dividing net income by the weighted average common shares outstanding, including diluted shares for stock options, warrants, contingently issuable shares, and convertible preferred shares. The calculation for basic and diluted earnings per common share follows:


	Three Months Ended
	March 31,
	2013		2012
(Amounts in thousands, except share and per share data)
Net income	$	7,141	$	6,001
Dividends on preferred stock		258		283

Net income available to common shareholders	$	6,883	$	5,718

Weighted average common shares outstanding, basic		20,032,694		17,849,376
Diluted shares for stock options		159,323		34,998
Weighted average convertible preferred shares		1,202,049		1,305,549

Weighted average common shares outstanding, diluted		21,394,066		19,189,923


Basic earnings per common share	$	0.34	$	0.32
Diluted earnings per common share	$	0.33	$	0.31

The Company’s Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) carries a 6% dividend rate. Each share is convertible into 69 shares of the Company’s Common Stock (“Common Stock”) at any time and mandatorily converts after five years. The Company may redeem the shares at face value after May 20, 2014. There were 17,421 shares of Series A Preferred Stock outstanding at March 31, 2013, 17,421 shares outstanding at December 31, 2012, and 18,921 shares outstanding at March 31, 2012.

The following outstanding options to purchase Common Stock were excluded from the calculation of diluted earnings per share because the exercise price was greater than the market value of the Common Stock, which would result in an antidilutive effect on diluted earnings per share:


	Three Months Ended
	March 31,
	2013		2012

Options		337,693		451,915

Note 2. Investment Securities

The amortized cost and estimated fair value of available-for-sale securities, including gross unrealized gains and losses, at March 31, 2013, and December 31, 2012, were as follows:


	March 31, 2013
	Amortized		Unrealized		Unrealized			Fair		OTTI in
	Cost		Gains		Losses			Value		AOCI⁽¹⁾
(Amounts in thousands)
Municipal securities	$	150,706	$	6,933	$	(411	)	$	157,228	$	—
Single issue trust preferred securities		55,721		—		(9,970	)		45,751		—
Mortgage-backed securities:
Agency		317,713		5,655		(1,084	)		322,284		—
Non-Agency Alt-A residential		14,009		—		(3,140	)		10,869		(3,140	)

Total mortgage-backed securities		331,722		5,655		(4,224	)		333,153		(3,140	)
Equity securities		1,249		193		(67	)		1,375		—

Total	$	539,398	$	12,781	$	(14,672	)	$	537,507	$	(3,140	)


	December 31, 2012
	Amortized		Unrealized		Unrealized			Fair		OTTI in
	Cost		Gains		Losses			Value		AOCI⁽¹⁾
(Amounts in thousands)
Municipal securities	$	151,119	$	8,195	$	(97	)	$	159,217	$	—
Single issue trust preferred securities		55,707		—		(11,061	)		44,646		—
Mortgage-backed securities:
Agency		310,323		6,023		(449	)		315,897		—
Non-Agency Alt-A residential		14,215		—		(3,148	)		11,067		(3,148	)

Total mortgage-backed securities		324,538		6,023		(3,597	)		326,964		(3,148	)
Equity securities		3,446		190		(105	)		3,531		—

Total	$	534,810	$	14,408	$	(14,860	)	$	534,358	$	(3,148	)

(1)	Other-than-temporary impairment in accumulated other comprehensive income

The amortized cost and estimated fair value of held-to-maturity securities, including gross unrealized gains and losses, at March 31, 2013, and December 31, 2012, were as follows:


	March 31, 2013
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
(Amounts in thousands)
Municipal securities	$	816	$	8	$	—	$	824

Total	$	816	$	8	$	—	$	824


	December 31, 2012
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
(Amounts in thousands)
Municipal securities	$	816	$	16	$	—	$	832

Total	$	816	$	16	$	—	$	832

The amortized cost and estimated fair value of available-for-sale and held-to-maturity securities by contractual maturity at March 31, 2013, 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
(Amounts in thousands)	Cost		Fair Value
Available-for-sale securities
Due within one year	$	393	$	399
Due after one year but within five years		19,005		19,634
Due after five years but within ten years		18,071		19,027
Due after ten years		168,958		163,919

		206,427		202,979
Mortgage-backed securities		331,722		333,153
Equity securities		1,249		1,375

Total	$	539,398	$	537,507


Held-to-maturity securities
Due within one year	$	60	$	61
Due after one year but within five years		756		763
Due after five years but within ten years		—		—
Due after ten years		—		—

Total	$	816	$	824

Available-for-sale securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer at March 31, 2013, and December 31, 2012, were as follows:


	March 31, 2013
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
(Amounts in thousands)
Municipal securities	$	17,126	$	(411	)	$	—	$	—		$	17,126	$	(411	)
Single issue trust preferred securities		—		—			45,751		(9,970	)		45,751		(9,970	)
Mortgage-backed securities:
Agency		112,922		(1,084	)		15		—			112,937		(1,084	)
Non-Agency Alt-A residential		—		—			10,870		(3,140	)		10,870		(3,140	)

Total mortgage-backed securities		112,922		(1,084	)		10,885		(3,140	)		123,807		(4,224	)
Equity securities		930		(5	)		126		(62	)		1,056		(67	)

Total	$	130,978	$	(1,500	)	$	56,762	$	(13,172	)	$	187,740	$	(14,672	)


	December 31, 2012
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
(Amounts in thousands)
Municipal securities	$	6,436	$	(97	)	$	—	$	—		$	6,436	$	(97	)
Single issue trust preferred securities		—		—			44,646		(11,061	)		44,646		(11,061	)
Mortgage-backed securities:
Agency		74,197		(449	)		15		—			74,212		(449	)
Non-Agency Alt-A residential		—		—			11,066		(3,148	)		11,066		(3,148	)

Total mortgage-backed securities		74,197		(449	)		11,081		(3,148	)		85,278		(3,597	)
Equity securities		3,106		(25	)		108		(80	)		3,214		(105	)

Total	$	83,739	$	(571	)	$	55,835	$	(14,289	)	$	139,574	$	(14,860	)

There were no held-to-maturity securities in a continuous unrealized loss position at March 31, 2013, or December 31, 2012. At March 31, 2013, the combined depreciation in value of the 78 individual securities in an unrealized loss position was 2.73% of the combined reported value of the aggregate securities portfolio. At December 31, 2012, the combined depreciation in value of the 57 individual securities in an unrealized loss position was 2.78% of the combined reported value of the aggregate securities portfolio.

The following table details the Company’s gross gains and gross losses realized from the sale of securities for the periods indicated:


	Three Months Ended
	March 31,
	2013			2012
(Amounts in thousands)
Gross realized gains	$	155		$	89
Gross realized losses		(38	)		(38	)

Net gain on sale of securities	$	117		$	51

The carrying value of securities pledged to secure public deposits and for other purposes was $280.88 million at March 31, 2013, and $292.88 million at December 31, 2012.

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 debt security and its cash flow needs, liquidity position, capital adequacy, and interest rate risk position.

For nonbeneficial 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. Nonbeneficial interest debt securities consist of U.S. Treasury securities, municipal securities, 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 impairment and records any credit-related OTTI through earnings and noncredit-related OTTI through OCI. During the three months ended March 31, 2013 and 2012, the Company incurred no OTTI charges related to nonbeneficial interest debt securities. Temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, destabilization in the Eurozone, and other current economic factors.

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 corporate FDIC insured securities and mortgage-backed securities (“MBS”). 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 noncredit-related OTTI is accounted for in OCI. During the three months ended March 31, 2013 and 2012, the Company incurred no credit-related OTTI charges associated with beneficial interest debt securities.

For the non-Agency Alt-A residential MBS, the Company uses a discounted cash flow model with the following assumptions: voluntary constant prepayment rate of 5%, a customized constant default rate scenario that assumes approximately 20% of the remaining underlying mortgages will default within three years, and a customized loss severity rate scenario that ramps the loss rate down from 71% to 15% over the course of approximately seven years.

The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities for which a portion of the OTTI is recognized in OCI:


	Three Months Ended
	March 31,
	2013		2012
(Amounts in thousands)
Beginning balance ⁽¹⁾	$	7,478	$	6,536
Additions for credit losses on securities not previously recognized		—		—
Additions for credit losses on securities previously recognized		—		—
Reduction for increases in cash flows		—		—
Reduction for securities management no longer intends to hold to recovery		—		—
Reduction for securities sold/realized losses		—		—

Ending balance	$	7,478	$	6,536

(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 months ended March 31, 2013 and 2012, the Company recognized no OTTI charges on equity securities.

As a condition to membership in the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) systems, the Company is required to subscribe to a minimum level of stock in the FHLB of Atlanta (“FHLBA”) and FRB of Richmond (“FRB Richmond”). The Company feels the FHLBA ownership position provides access to relatively inexpensive wholesale and overnight funding. FHLBA and FRB Richmond stock are reported as long-term investments in “Other assets” on the Company’s “Condensed Consolidated Balance Sheets.” At March 31, 2013, and December 31, 2012, the Company owned $10.00 million and $11.30 million, respectively, of FHLBA stock. The Company’s policy is to review the stock for impairment at each reporting period. Based on the Company’s review and publicly available information concerning the FHLBA, it believes that as of March 31, 2013, its FHLBA stock was not impaired. At March 31, 2013, and December 31, 2012, the Company owned $5.58 million of FRB Richmond stock.

Note 3. Loans

Loan Portfolio

The Company’s loan portfolio is grouped into three segments (commercial loans, consumer real estate loans, and consumer and other loans) and each segment is divided further into various classes. Loans, net of unearned income, consisted of the following at March 31, 2013, and December 31, 2012:


	March 31, 2013					December 31, 2012
(Amounts in thousands)	Amount		Percent			Amount		Percent

Covered loans	$	195,060		11.55	%	$	207,106		12.01	%
Non-covered loans
Commercial loans
Construction, development, and other land		55,220		3.27	%		57,434		3.33	%
Commercial and industrial		91,666		5.43	%		88,738		5.15	%
Multi-family residential		63,929		3.78	%		65,694		3.81	%
Single family non-owner occupied		136,334		8.07	%		135,912		7.88	%
Non-farm, non-residential		440,226		26.06	%		448,810		26.02	%
Agricultural		2,117		0.12	%		1,709		0.10	%
Farmland		33,930		2.01	%		34,570		2.00	%

Total commercial loans		823,422		48.74	%		832,867		48.29	%
Consumer real estate loans
Home equity lines		108,385		6.42	%		111,081		6.44	%
Single family owner occupied		470,437		27.85	%		473,547		27.46	%
Owner occupied construction		19,760		1.17	%		16,223		0.94	%

Total consumer real estate loans		598,582		35.44	%		600,851		34.84	%
Consumer and other loans
Consumer loans		68,625		4.06	%		78,163		4.53	%
Other		3,603		0.21	%		5,666		0.33	%

Total consumer and other loans		72,228		4.27	%		83,829		4.86	%

Total non-covered loans		1,494,232		88.45	%		1,517,547		87.99	%

Total loans held for investment, net of unearned income	$	1,689,292		100.00	%	$	1,724,653		100.00	%


Loans held for sale	$	2,794				$	6,672

Covered loans held for investment consisted of the following at March 31, 2013, and December 31, 2012:


(Amounts in thousands)	March 31, 2013		December 31, 2012
Covered loans
Commercial loans
Construction, development, and other land	$	24,495	$	26,595
Commercial and industrial		5,205		6,948
Multi-family residential		2,549		2,611
Single family non-owner occupied		10,672		11,428
Non-farm, non-residential		42,857		48,565
Agricultural		128		144
Farmland		1,222		1,091

Total commercial loans		87,128		97,382
Consumer real estate loans
Home equity lines		80,463		81,445
Single family owner occupied		23,042		22,961
Owner occupied construction		1,628		1,644

Total consumer real estate loans		105,133		106,050
Consumer and other loans
Consumer loans		2,799		3,674

Total covered loans	$	195,060	$	207,106

See Note 12, “Litigation, Commitments and Contingencies,” for information concerning the Company’s off-balance sheet credit risk related to lending activities.

Acquired Impaired Loans

When the fair values of acquired loans are established, certain loans are identified as impaired. The Company has estimated the cash flows to be collected on the acquired impaired loans and discounted those cash flows at a market rate of interest. The outstanding principal balance of acquired impaired loans was $168.87 million at March 31, 2013, $198.34 million at December 31, 2012, and $6.28 million at March 31, 2012. The following tables present the carrying balance of acquired impaired loans during the periods indicated:


	Three Months Ended March 31, 2013
	Peoples		Waccamaw		Other		Total
(Amounts in thousands)
Balance, January 1	$	26,907	$	110,115	$	2,340	$	139,362
Balance, March 31		21,715		96,537		2,364		120,616

	Three Months Ended March 31, 2012
	Peoples		Waccamaw		Other		Total
(Amounts in thousands)
Balance, January 1	$	—	$	—	$	2,886	$	2,886
Balance, March 31		—		—		2,388		2,388

The following tables present changes in the accretable yield on acquired impaired loans during the periods indicated:


	Three Months Ended March 31, 2013
	Peoples			Waccamaw			Other			Total
(Amounts in thousands)
Balance, January 1, 2013	$	2,342		$	21,886		$	15		$	24,243
Additions		7			66			—			73
Accretion		(376	)		(1,385	)		(51	)		(1,812	)
Transfers to accretable difference (exit events), net		2,302			(12,482	)		46			(10,134	)
Disposals		(537	)		(585	)		—			(1,122	)

Balance, March 31, 2013	$	3,738		$	7,500		$	10		$	11,248


	Three Months Ended March 31, 2012
	Peoples			Waccamaw			Other			Total
(Amounts in thousands)
Balance, January 1, 2012	$	—		$	—		$	919		$	919
Additions		—			—			—			—
Accretion		—			—			(934	)		(934	)
Transfers to accretable difference, net		—			—			46			46
Disposals		—			—			—			—

Balance, March 31, 2012	$	—		$	—		$	31		$	31

Note 4. Allowance for Loan Losses and Credit Quality Indicators

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems 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. Purchased credit impaired loan pools are evaluated separately from the non-purchased credit impaired portfolio for impairment.

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 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 loans and credit relationships and allocations to the remaining nonhomogeneous and homogeneous pools of loans that have been deemed impaired. Additionally, a loan that becomes adversely classified or graded is removed from a group of loans with similar risk characteristics that are not classified or graded to evaluate the removed loan collectively in a group of adversely classified or graded loans with similar risk characteristics. Management’s general reserve allocations are based on judgment of qualitative and quantitative factors about 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 nonaccruals. 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.

Purchased performing loans are recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments, as accounted for under the contractual cash flow method of accounting. The fair value adjustment is accreted as an adjustment to yield over the estimated contractual 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 the acquisition. In accordance with GAAP, there was no carryover of previously established allowance for loan losses on acquired portfolios.

The following tables detail activity within the allowance for loan losses, by portfolio segment, for the dates indicated:


	Three Months Ended March 31,
	2013												2012
				Consumer			Consumer									Consumer			Consumer
	Commercial			Real Estate			and Other			Total			Commercial			Real Estate			and Other			Total
(Amounts in thousands)
Beginning balance	$	17,267		$	7,906		$	597		$	25,770		$	17,752		$	7,711		$	742		$	26,205
Provision for loan losses		483			480			179			1,142			262			618			42			922
Loans charged off		(783	)		(1,396	)		(580	)		(2,759	)		(253	)		(1,105	)		(204	)		(1,562	)
Recoveries credited to allowance		283			13			401			697			104			35			96			235

Net charge-offs		(500	)		(1,383	)		(179	)		(2,062	)		(149	)		(1,070	)		(108	)		(1,327	)

Ending balance	$	17,250		$	7,003		$	597		$	24,850		$	17,865		$	7,259		$	676		$	25,800

Credit Quality Indicators

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.

During the quarterly cash flow analysis, three of the Company’s seven purchased credit impaired loan pools were deemed impaired. These pools had a combined recorded investment of $20.08 million, a current unpaid principal balance of $26.61 million, and impairment of $276 thousand at March 31, 2013. For the three months ended March 31, 2013, the Company had an average recorded investment of $20.23 million and recognized interest income of $84 thousand in connection with the impaired loan pools. These amounts are not included in the tables below.


	March 31, 2013						December 31, 2012
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Amounts in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	1,473	$	1,675	$	—	$	2,916	$	2,916	$	—
Commercial and industrial		913		912		—		284		284		—
Multi-family residential		70		87		—		—		—		—
Single family non-owner occupied		1,299		2,301		—		383		684		—
Non-farm, non-residential		6,628		7,227		—		5,282		5,362		—
Agricultural		—		—		—		—		—		—
Farmland		177		197		—		—		—		—
Consumer real estate loans
Home equity lines		321		444		—		276		277		—
Single family owner occupied		816		1,449		—		277		383		—
Owner occupied construction		—		—		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—		—		—

Total impaired loans with no allowance		11,697		14,292		—		9,418		9,906		—

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		5,339		5,356		1,822		—		—		—
Commercial and industrial		3,108		8,236		3,100		3,318		8,502		3,192
Multi-family residential		375		396		15		378		397		18
Single family non-owner occupied		1,046		1,107		204		2,411		2,460		996
Non-farm, non-residential		2,730		2,926		430		2,781		2,958		358
Agricultural		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Consumer real estate loans
Home equity lines		222		230		222		223		230		223
Single family owner occupied		4,296		4,550		608		4,673		4,903		806
Owner occupied construction		—		—		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—		—		—

Total impaired loans with an allowance		17,116		22,801		6,401		13,784		19,450		5,593

Total impaired loans	$	28,813	$	37,093	$	6,401	$	23,202	$	29,356	$	5,593


	For the Three Months Ended				For the Three Months Ended
	March 31, 2013				March 31, 2012
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	2,195	$	43	$	30	$	—
Commercial and industrial		599		11		483		—
Multi-family residential		35		2		596		—
Single family non-owner occupied		841		79		1,514		9
Non-farm, non-residential		5,955		212		2,684		10
Agricultural		—		—		—		—
Farmland		88		9		—		—
Consumer real estate loans
Home equity lines		298		25		502		6
Single family owner occupied		547		70		7,185		21
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		2		—

Total impaired loans with no allowance		10,558		451		12,996		46

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		2,670		117		111		1
Commercial and industrial		3,217		—		2,210		—
Multi-family residential		376		7		—		—
Single family non-owner occupied		1,728		3		2,541		31
Non-farm, non-residential		2,756		26		7,310		91
Agricultural		—		—		—		—
Farmland		—		—		—		—
Consumer real estate loans
Home equity lines		222		3		—		—
Single family owner occupied		4,485		37		3,372		25
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—

Total impaired loans with an allowance		15,454		193		15,544		148

Total impaired loans	$	26,012	$	644	$	28,540	$	194

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 March 31, 2013, and December 31, 2012.


	March 31, 2013
	Non-acquired		Allowance		Loans		Allowance		Acquired		Allowance
	Loans Individually		for Loans		Collectively		for Loans		Impaired Loans		for Acquired
	Evaluated for		Individually		Evaluated for		Collectively		Evaluated for		Impaired Loans
(Amounts in thousands)	Impairment		Evaluated		Impairment		Evaluated		Impairment		Evaluated
Commercial loans
Construction, development, and other land	$	6,812	$	1,822	$	58,022	$	885	$	14,881	$	—
Commercial and industrial		4,013		3,100		89,818		1,002		3,040		8
Multi-family residential		445		15		65,407		1,486		626		—
Single family non-owner occupied		2,345		204		135,636		3,303		9,025		—
Non-farm, non-residential		9,358		430		441,359		4,595		32,366		—
Agricultural		—		—		2,244		24		1		—
Farmland		177		—		34,099		372		876		—

Total commercial loans		23,150		5,571		826,585		11,672		60,815		8
Consumer real estate loans
Home equity lines		543		222		137,680		1,265		50,625		—
Single family owner occupied		5,112		608		481,047		4,586		7,320		—
Owner occupied construction		—		—		20,292		321		1,096		—

Total consumer real estate loans		5,655		830		639,019		6,172		59,041		—
Consumer and other loans
Consumer loans		—		—		70,664		516		760		—
Other		—		—		3,603		81		—		—

Total consumer and other loans		—		—		74,267		597		760		—

Total loans	$	28,805	$	6,401	$	1,539,871	$	18,441	$	120,616	$	8


	December 31, 2012
	Non-acquired		Allowance		Loans		Allowance		Acquired		Allowance
	Loans Individually		for Loans		Collectively		for Loans		Impaired Loans		for Acquired
	Evaluated for		Individually		Evaluated for		Collectively		Evaluated for		Impaired Loans
(Amounts in thousands)	Impairment		Evaluated		Impairment		Evaluated		Impairment		Evaluated
Commercial loans
Construction, development, and other land	$	2,916	$	—	$	55,369	$	1,214	$	25,744	$	—
Commercial and industrial		3,602		3,192		88,540		1,159		3,544		8
Multi-family residential		378		18		67,278		1,612		649		—
Single family non-owner occupied		2,794		858		134,323		3,509		10,223		—
Non-farm, non-residential		8,063		358		451,240		4,901		38,072		—
Agricultural		—		—		1,852		22		1		—
Farmland		—		—		34,779		416		882		—

Total commercial loans		17,753		4,426		833,381		12,833		79,115		8
Consumer real estate loans
Home equity lines		499		223		139,706		1,351		50,343		—
Single family owner occupied		4,950		944		483,559		5,051		8,005		—
Owner occupied construction		—		—		16,768		337		1,099		—

Total consumer real estate loans		5,449		1,167		640,027		6,739		59,447		—
Consumer and other loans
Consumer loans		—		—		81,037		597		800		—
Other		—		—		5,666		—		—		—

Total consumer and other loans		—		—		86,703		597		800		—

Total loans	$	23,202	$	5,593	$	1,560,111	$	20,169	$	139,362	$	8

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, nonperforming loans, and general economic conditions. The Company’s loan review function generally reviews all commercial loan relationships greater than $3.0 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 aggregates purchase credit impaired loans with common risk characteristics into the following loan pools: construction and development, commercial and industrial, commercial real estate, consumer, home equity lines of credit, residential real estate – 1st lien, residential real estate – 2nd lien, and lines of credit. However, these loan pools are disaggregated in the following tables for disclosure purposes.

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, liquidity 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 nonaccrual 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.

•

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 realized in the future.

The following tables present the Company’s investment in loans held for investment by internal credit grade indicator at March 31, 2013, and December 31, 2012.


	March 31, 2013
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	38,976	$	1,279	$	13,968	$	997	$	—	$	55,220
Commercial and industrial		80,683		1,576		5,792		3,615		—		91,666
Multi-family residential		58,241		4,141		1,547		—		—		63,929
Single family non-owner occupied		119,349		4,835		11,180		970		—		136,334
Non-farm, non-residential		401,887		10,983		27,196		160		—		440,226
Agricultural		2,071		17		29		—		—		2,117
Farmland		28,411		1,413		4,106		—		—		33,930
Consumer real estate loans
Home equity lines		101,881		2,992		3,476		36		—		108,385
Single family owner occupied		433,486		9,270		27,252		429		—		470,437
Owner occupied construction		19,343		417		—		—		—		19,760
Consumer and other loans
Consumer loans		66,166		1,989		466		4		—		68,625
Other		3,585		5		13		—		—		3,603

Total non-covered loans	$	1,354,079	$	38,917	$	95,025	$	6,211	$	—	$	1,494,232


	March 31, 2013
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Covered loans
Commercial loans
Construction, development, and other land	$	12,747	$	963	$	10,751	$	34	$	—	$	24,495
Commercial and industrial		4,320		179		658		48		—		5,205
Multi-family residential		1,928		—		621		—		—		2,549
Single family non-owner occupied		5,050		—		5,536		86		—		10,672
Non-farm, non-residential		19,973		1,939		20,900		45		—		42,857
Agricultural		127		—		1		—		—		128
Farmland		1,125		—		97		—		—		1,222
Consumer real estate loans
Home equity lines		16,989		11,762		51,687		25		—		80,463
Single family owner occupied		16,668		200		5,943		231		—		23,042
Owner occupied construction		473		—		1,155		—		—		1,628
Consumer and other loans
Consumer loans		2,133		—		666		—		—		2,799
Other		—		—		—		—		—		—

Total covered loans	$	81,533	$	15,043	$	98,015	$	469	$	—	$	195,060


	December 31, 2012
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	41,850	$	1,497	$	13,546	$	541	$	—	$	57,434
Commercial and industrial		77,573		2,506		4,821		3,838		—		88,738
Multi-family residential		60,161		4,043		1,490		—		—		65,694
Single family non-owner occupied		112,562		5,938		16,092		1,320		—		135,912
Non-farm, non-residential		399,907		15,975		32,808		120		—		448,810
Agricultural		1,657		19		33		—		—		1,709
Farmland		28,887		2,262		3,421		—		—		34,570
Consumer real estate loans
Home equity lines		104,750		2,739		3,592		—		—		111,081
Single family owner occupied		436,587		9,599		27,319		—		42		473,547
Owner occupied construction		15,841		382		—		—		—		16,223
Consumer and other loans
Consumer loans		76,787		867		501		8		—		78,163
Other		5,657		8		1		—		—		5,666

Total non-covered loans	$	1,362,219	$	45,835	$	103,624	$	5,827	$	42	$	1,517,547


	December 31, 2012
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Covered loans
Commercial loans
Construction, development, and other land	$	6,463	$	2,120	$	17,834	$	178	$	—	$	26,595
Commercial and industrial		6,225		445		197		81		—		6,948
Multi-family residential		1,962		—		649		—		—		2,611
Single family non-owner occupied		6,065		2,223		3,015		125		—		11,428
Non-farm, non-residential		23,855		5,477		19,189		44		—		48,565
Agricultural		143		—		1		—		—		144
Farmland		935		—		156		—		—		1,091
Consumer real estate loans
Home equity lines		16,323		11,981		53,116		25		—		81,445
Single family owner occupied		16,011		927		5,786		237		—		22,961
Owner occupied construction		484		—		1,160		—		—		1,644
Consumer and other loans
Consumer loans		2,987		562		125		—		—		3,674
Other		—		—		—		—		—		—

Total covered loans	$	81,453	$	23,735	$	101,228	$	690	$	—	$	207,106

Nonaccrual loans, presented by loan class, consisted of the following at March 31, 2013, and December 31, 2012. Loans acquired with credit deterioration through business combinations, for which a discount exists, are generally not considered to be nonaccrual as a result of the accretion of the discount which is based on the expected cash flows of the loans.


(Amounts in thousands)	March 31, 2013						December 31, 2012
	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	6,842	$	2,113	$	8,955	$	405	$	1,990	$	2,395
Commercial and industrial		5,375		48		5,423		3,912		35		3,947
Multi-family residential		445		—		445		378		—		378
Single family non-owner occupied		4,600		29		4,629		7,071		21		7,092
Non-farm, non-residential		5,644		562		6,206		5,938		951		6,889
Agricultural		17		—		17		2		—		2
Farmland		177		—		177		—		—		—
Consumer real estate loans
Home equity lines		925		538		1,463		872		436		1,308
Single family owner occupied		5,874		1,218		7,092		5,219		831		6,050
Owner occupied construction		—		59		59		—		59		59
Consumer and other loans
Consumer loans		169		—		169		126		—		126
Other		—		—		—		—		—		—

Total		30,068		4,567		34,635		23,923		4,323		28,246
Acquired impaired loans		8		—		8		8		—		8

Total nonaccrual loans	$	30,076	$	4,567	$	34,643	$	23,931	$	4,323	$	28,254

The following tables present the aging of past due loans, by loan class, at March 31, 2013, and December 31, 2012. Nonaccrual loans, excluding those 0 to 29 days past due, are included in the applicable delinquency category. There were no accruing loans contractually past due 90 days or more at March 31, 2013, and December 31, 2012. Acquired loans that are past due continue to accrue interest through the accretable yield under the accretion method of accounting and therefore are not considered to be nonaccrual.


	March 31, 2013
(Amounts in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total Past Due		Current Loans		Total Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	301	$	1,413	$	5,275	$	6,989	$	48,231	$	55,220
Commercial and industrial		258		55		1,549		1,862		89,804		91,666
Multi-family residential		37		—		70		107		63,822		63,929
Single family non-owner occupied		258		107		2,332		2,697		133,637		136,334
Non-farm, non-residential		2,394		1,245		3,540		7,179		433,047		440,226
Agricultural		—		—		17		17		2,100		2,117
Farmland		42		—		177		219		33,711		33,930
Consumer real estate loans
Home equity lines		968		745		623		2,336		106,049		108,385
Single family owner occupied		6,837		1,113		1,654		9,604		460,833		470,437
Owner occupied construction		—		—		—		—		19,760		19,760
Consumer and other loans
Consumer loans		181		1,213		58		1,452		67,173		68,625
Other		—		—		—		—		3,603		3,603

Total non-covered loans	$	11,276	$	5,891	$	15,295	$	32,462	$	1,461,770	$	1,494,232


	March 31, 2013
(Amounts in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total Past Due		Current Loans		Total Loans
Covered loans
Commercial loans
Construction, development, and other land	$	152	$	155	$	1,121	$	1,428	$	23,067	$	24,495
Commercial and industrial		147		—		33		180		5,025		5,205
Multi-family residential		—		—		—		—		2,549		2,549
Single family non-owner occupied		—		—		29		29		10,643		10,672
Non-farm, non-residential		22		38		562		622		42,235		42,857
Agricultural		—		—		—		—		128		128
Farmland		22		—		—		22		1,200		1,222
Consumer real estate loans
Home equity lines		194		165		180		539		79,924		80,463
Single family owner occupied		437		264		577		1,278		21,764		23,042
Owner occupied construction		119		—		59		178		1,450		1,628
Consumer and other loans
Consumer loans		—		—		—		—		2,799		2,799
Other		—		—		—		—		—		—

Total covered loans	$	1,093	$	622	$	2,561	$	4,276	$	190,784	$	195,060


	December 31, 2012
(Amounts in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total Past Due		Current Loans		Total Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	344	$	—	$	188	$	532	$	56,902	$	57,434
Commercial and industrial		387		84		1,432		1,903		86,835		88,738
Multi-family residential		624		—		—		624		65,070		65,694
Single family non-owner occupied		1,841		1,348		3,715		6,904		129,008		135,912
Non-farm, non-residential		2,702		936		3,621		7,259		441,551		448,810
Agricultural		—		—		—		—		1,709		1,709
Farmland		216		196		—		412		34,158		34,570
Consumer real estate loans
Home equity lines		315		93		495		903		110,178		111,081
Single family owner occupied		6,564		1,176		1,644		9,384		464,163		473,547
Owner occupied construction		382		—		—		382		15,841		16,223
Consumer and other loans
Consumer loans		715		73		47		835		77,328		78,163
Other		—		—		—		—		5,666		5,666

Total non-covered loans	$	14,090	$	3,906	$	11,142	$	29,138	$	1,488,409	$	1,517,547


	December 31, 2012
(Amounts in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total Past Due		Current Loans		Total Loans
Covered loans
Commercial loans
Construction, development, and other land	$	252	$	161	$	1,121	$	1,534	$	25,061	$	26,595
Commercial and industrial		45		—		—		45		6,903		6,948
Multi-family residential		—		—		—		—		2,611		2,611
Single family non-owner occupied		8		—		21		29		11,399		11,428
Non-farm, non-residential		501		—		927		1,428		47,137		48,565
Agricultural		—		—		—		—		144		144
Farmland		6		—		—		6		1,085		1,091
Consumer real estate loans
Home equity lines		217		112		204		533		80,912		81,445
Single family owner occupied		413		135		475		1,023		21,938		22,961
Owner occupied construction		—		—		59		59		1,585		1,644
Consumer and other loans
Consumer loans		—		—		—		—		3,674		3,674
Other		—		—		—		—		—		—

Total covered loans	$	1,442	$	408	$	2,807	$	4,657	$	202,449	$	207,106

The Company’s troubled debt restructurings (“TDRs”) totaled $11.87 million at March 31, 2013, and $12.05 million at December 31, 2012, which are reported net of those on nonaccrual status of $2.34 million and $3.83 million, respectively. Accruing nonperforming TDRs amounted to $1.60 million, or 13.45% of total accruing TDRs at March 31, 2013, and $6.01 million, or 49.88% of total TDRs at December 31, 2012. The allowance for loan losses included reserves related to TDRs of $1.65 million and $1.87 million at March 31, 2013, and December 31, 2012, respectively. Interest income recognized on TDRs for the three months ended March 31, 2013 and 2012 totaled $246 thousand and $94 thousand, respectively. There were no covered loans recorded as TDRs at September 30, 2012. Loans acquired with credit deterioration through business combinations, for which a discount exists, are generally not considered a TDR as long as the loan remains in the loan pool.

When restructuring loans for borrowers experiencing financial difficulty, the Company generally makes concessions in interest rates, loan terms and/or amortization terms. All restructured loans to borrowers experiencing financial difficulty in excess of $250 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are classified as nonperforming at time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

The following table presents information for loans modified as TDRs that were restructured during the three months ended March 31, 2013 and 2012 by type of concession made and loan class. The post-modification recorded investment represents the loan balance immediately following modification.


	Three Months Ended March 31,
	2013						2012
	Total		Pre-Modification		Post-Modification		Total		Pre-Modification		Post-Modification
(Amounts in thousands)	Contracts		Recorded Investment		Recorded Investment		Contracts		Recorded Investment		Recorded Investment
Extended payment term
Single family owner occupied		—		—		—		1	$	351	$	319

Total		—	$	—	$	—		1	$	351	$	319

There were no payment defaults on loans modified as TDRs during the three months ended March 31, 2013 or 2012 that were restructured within the previous 12 months.

Note 5. FDIC Indemnification Asset

On June 8, 2012, the Company entered into a purchase and assumption agreement with loss share arrangements with the FDIC to purchase certain assets and assume substantially all of the customer deposits and certain liabilities of Waccamaw Bank. The FDIC indemnification asset is measured separately from the related covered asset as it is not contractually embedded in the assets and is not transferable with the assets should the Company choose to dispose of them. Fair value was estimated at the acquisition date using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages. Under the loss share agreements, the FDIC has agreed to cover 80% of most loan and foreclosed real estate losses. These expected reimbursements do not include reimbursable amounts related to future covered expenditures. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. The Company will offset any recorded provision for loan losses related to acquired covered loans by recording an increase in the FDIC indemnification asset by the increase in expected cash flow, which is the result of a decrease in expected cash flow of acquired loans. An increase in cash flows on acquired loans results in a decrease in cash flows on the FDIC indemnification asset, which is recognized in the future as negative accretion through noninterest income over the shorter of the remaining life of the FDIC indemnification asset or the underlying loans. The Company incurs expenses related to the assets indemnified by the FDIC and pursuant to the loss share agreements certain costs are reimbursable by the FDIC and are included in monthly and quarterly claims made by the Company. The estimates of reimbursements are netted against these covered expenses in the income statement. The following table presents changes in the receivable from the FDIC for the periods indicated:


(Amounts in thousands)
Beginning balance, January 1, 2013	$	48,073
Increase in expected losses on loans		—
Additional losses on OREO		—
Reimbursable expenses		—
Amortization of discounts and premiums, net		(1,539	)
Reimbursements from the FDIC		(1,141	)

Ending balance, March 31, 2013	$	45,393

Note 6. Deposits

The following table summarizes interest-bearing deposits by type for the periods indicated:


	March 31, 2013		December 31, 2012
(Amounts in thousands)
Interest-bearing demand deposits	$	377,445	$	353,321
Money market deposits		240,101		237,257
Savings deposits		273,221		263,019
Individual retirement accounts		125,552		126,658
Certificates of deposit		675,260		706,568

Total	$	1,691,579	$	1,686,823

Note 7. Borrowings

The following table summarizes borrowings by type for the periods indicated:


	March 31, 2013		December 31, 2012
(Amounts in thousands)
Securities sold under agreements to repurchase	$	121,506	$	136,118
FHLB borrowings		150,000		161,558
Subordinated debt		15,464		15,464
Other debt		413		413

Total	$	287,383	$	313,553

Securities sold under agreements to repurchase consisted of retail overnight and term repurchase agreements of $71.51 million at March 31, 2013, and $77.92 million at December 31, 2012, and wholesale repurchase agreements of $50.00 million at March 31, 2013, and $58.20 million at December 31, 2012. During the first quarter of 2013, the Company prepaid wholesale repurchase agreements totaling $8.15 million that resulted in a $79 thousand gain. The weighted average rate of wholesale repurchase agreements was 3.71% at March 31, 2013, and 3.34% at December 31, 2012. Securities sold under agreements to repurchase are collateralized with agency MBS and municipal securities.

FHLB borrowings included convertible and callable advances totaling $150.00 million at March 31, 2013, and $155.28 million at December 31, 2012, and fixed rate credit of $6.27 million at December 31, 2012. During the first quarter of 2013, the Company prepaid FHLB borrowings totaling $11.47 million that resulted in a $217 thousand gain. 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. The weighted average rate of FHLB borrowings was 4.12% at March 31, 2013, and 3.86% at December 31, 2012. Advances from the FHLB were secured by qualifying loans of $1.13 billion at March 31, 2013, and $998.14 million at December 31, 2012. At March 31, 2013, unused borrowing capacity with the FHLB totaled $331.57 million.

At March 31, 2013, the FHLB borrowings had approximate contractual maturities between four and eight years. The scheduled maturities of the advances are as follows:


	Amount
(Amounts in thousands)
2013	$	—
2014		—
2015		—
2016		—
2017		100,000
2018 and thereafter		50,000

	$	150,000

Also included in borrowings 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 net proceeds from the offering were contributed as capital to the Bank to support further growth. The Company’s obligations under the Debentures and other relevant Trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of the Trust’s obligations.

Note 8. Defined Benefit Plans

The Company maintains a Supplemental Executive Retention Plan (the “SERP”) for key members of senior management. The following sets forth the components of the net periodic pension cost of the Company’s domestic non-contributory, non-qualified defined SERP for the periods indicated:


	Three Months Ended
	March 31,
	2013		2012
(Amounts in thousands)
Service cost	$	34	$	39
Interest cost		61		51
Amortization of losses		12		11
Amortization of prior service cost		47		34

Net periodic cost	$	154	$	135

The Company maintains a Directors’ Supplemental Retirement Plan (the “Directors’ Plan”) for its non-management directors. The following sets forth the components of the net periodic pension cost of the Company’s domestic non-contributory, non-qualified Directors’ Plan for the periods indicated:


	Three Months Ended
	March 31,
	2013		2012
(Amounts in thousands)
Service cost	$	7	$	7
Interest cost		10		10
Amortization of prior service cost		22		22

Net periodic cost	$	39	$	39

Note 9. Derivative Instruments and Hedging Activities

The Company uses derivative instruments primarily to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These derivatives may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract. Derivative assets and liabilities are recorded at fair value on the balance sheet.

Like other financial instruments, derivatives contain an element of credit risk due to the possibility the Company may incur a loss if a counterparty 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 primary derivative instrument the Company uses is interest rate lock commitments (“IRLCs”). Generally, this instrument helps the Company 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, prices, or other economic factors.

In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan market. The Company enters into IRLCs to provide potential borrowers an interest rate guarantee. 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. From the loan closing date through the date of sale into the secondary market, the Company has exposure to interest rate movement resulting from the risk that interest rates will change from the rate quoted to the borrower. Due to these interest rate fluctuations, the Company’s balance of mortgage loans held for sale is subject to changes in fair value. Typically, the fair value of these loans decline when interest rates increase and rise when interest rates decrease.

The following table presents the aggregate contractual or notional amounts of derivative financial instruments as of the dates indicated:


	March 31, 2013		December 31, 2012		March 31, 2012
(Amounts in thousands)
Derivatives not designated as hedges IRLCs	$	14,097	$	14,841	$	11,118

The following table presents the fair value of derivative financial instruments as of the dates indicated:


	March 31, 2013			December 31, 2012			March 31, 2012
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(Amounts in thousands)
Asset derivatives
Derivatives not designated as hedges IRLCs	Other assets	$	142	Other assets	$	144	Other assets	$	100

Total		$	142		$	144		$	100

Liability derivatives
Derivatives not designated as hedges IRLCs	Other liabilities	$	10	Other liabilities	$	16	Other liabilities	$	56

Total		$	10		$	16		$	56

Effect of Derivatives and Hedging Activities on the Income Statement. For the quarters ended March 31, 2013 and 2012, the Company determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains and losses recognized in income on derivatives for the dates indicated:


		Three Months Ended
		March 31,
	Income Statement Location	2013		2012
(Amounts in thousands)
Derivatives not designated as hedges IRLCs	Other income	$	4	$	(85	)

Total		$	4	$	(85	)

Note 10. Fair Value

Financial Instruments Measured at Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. 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 and provide a reasonable basis for fair value determination, such as interest rates, yield curves, volatilities, prepayment speeds, default rates, and credit risks, or inputs that are derived principally from observable market data.

Level 3 Inputs –		Unobservable inputs for determining the fair values of assets or liabilities for which there is little, if any, market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort. These inputs and assumptions may include model-derived inputs that are not corroborated by observable market data and an entity’s own assumptions.

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, Level 2, and Level 3 inputs. Securities are classified as Level 1 within the valuation hierarchy when quoted prices are available in an active 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. government agency securities, single issue and pooled trust preferred securities, corporate FDIC insured securities, MBS, and certain equity securities that are not actively traded.

Securities are classified as Level 3 within the valuation hierarchy in certain cases when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current or pricing variations are significant. The Company’s fair value from third party models utilizes modeling software that uses market participant data and knowledge of the structures of each individual security to develop cash flows specific to each security. The fair values of the securities are determined by using the cash flows developed by the fair value model and applying appropriate market observable discount rates. The discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity developed based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Specific securities that have increased uncertainty regarding the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of the specific markets and the general economic indicators.

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 on a nonrecurring basis 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 and considers liquidation costs. The result of the internal valuation is compared with 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 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 with 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.

The Company’s Special Assets staff assumes the management and monitoring of all loans determined to be impaired. While awaiting the completion of the third party appraisal, 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.

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 when banks are the sellers, and the Company deemed these adjustments as 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 on a nonrecurring basis using Level 3 inputs based on current and prior appraisals, estimates of costs to sell, and proprietary qualitative adjustments.

Goodwill. The fair value of the Company’s goodwill is reported on a nonrecurring basis when it has been adjusted to fair value. The values of the Company’s reporting units are determined using Level 3 inputs based on discounted cash flow and market multiple models.

Recurring and Nonrecurring Fair Value

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy for the periods indicated:


	March 31, 2013
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Municipal securities	$	157,228	$	—	$	157,228	$	—
Single issue trust preferred securities		45,751		—		45,751		—
Agency MBS		322,284		—		322,284		—
Non-Agency Alt-A residential MBS		10,869		—		10,869		—
Equity securities		1,375		1,353		22		—

Total available-for-sale securities	$	537,507	$	1,353	$	536,154	$	—

Deferred compensation assets	$	3,786	$	3,786	$	—	$	—

Derivatives
Interest rate lock commitments	$	142	$	—	$	142	$	—

Deferred compensation liabilities	$	3,786	$	3,786	$	—	$	—

Derivative liabilities
Interest rate lock commitments	$	10	$	—	$	10	$	—


	December 31, 2012
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Municipal securities	$	159,217	$	—	$	159,217	$	—
Single issue trust preferred securities		44,646		—		44,646		—
Agency MBS		315,897		—		315,897		—
Non-Agency Alt-A residential MBS		11,067		—		11,067		—
Equity securities		3,531		3,511		20		—

Total available-for-sale securities	$	534,358	$	3,511	$	530,847	$	—

Deferred compensation assets	$	3,625	$	3,625	$	—	$	—

Derivatives
Interest rate lock commitments	$	144	$	—	$	144	$	—

Deferred compensation liabilities	$	3,625	$	3,625	$	—	$	—

Derivative liabilities
Interest rate lock commitments	$	16	$	—	$	16	$	—

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in certain circumstances such as evidence of impairment. The following tables summarize financial and nonfinancial assets measured at fair value on a nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy that were held for the periods indicated.


	March 31, 2013
	Total		Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
(Amounts in thousands)
Impaired loans not covered by loss share agreements	$	7,743		—		—	$	7,743
OREO not covered by loss share agreements		2,870		—		—		2,870
OREO covered by loss share agreements		3,938		—		—		3,938

There were no transfers between valuation levels for any asset during the three months ended March 31, 2013 or 2012. If valuation techniques are deemed necessary, the Company considers those transfers to occur at the end of the period when the assets are valued.

The following table presents quantitative information about financial and nonfinancial assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs:


	Fair Value at		Valuation	Unobservable	Range
	March 31, 2013		Technique	Input	(Weighted Average)
(Amounts in thousands)
Impaired loans	$	7,743	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	2% to 100% (42%)
OREO not covered by loss share agreements		2,870	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	0% to 96% (61%)
OREO covered by loss share agreements		3,938	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	0% to 39% (26%)

(1)	Fair value is generally based on appraisals of the underlying collateral.

(2)	Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

Fair Value of Financial Instruments

Information used to determine fair value is highly subjective and judgmental in nature; therefore, the results may not be precise. Subjective factors may include 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. The following summary describes the methodologies and assumptions used by the Company to estimate the fair value of certain financial instruments:

Cash and Cash Equivalents: The carrying amount of cash and due from banks and federal funds sold/purchased is considered equal to the fair value as a result of the short-term nature of these instruments.

Investment Securities: The determination of the fair value of available-for-sale securities is described within “Fair Value Measurements” presented above. The determination of the fair value of held-to-maturity securities is based on quoted market prices or dealer quotes.

Loans Held for Sale: Loans held for sale are recorded at the lower of cost or estimated fair value. The determination of the fair value of loans held for sale is based on the market price of similar loans.

Loans Held for Investment: The determination of the fair value of loans held for investment is based on discounted future cash flows using current rates for similar loans.

FDIC Receivable under Loss Share Agreements: The determination of the fair value is based on discounted future cash flows using current discount rates.

Accrued Interest Receivable/Payable: The carrying amount of accrued interest receivable/payable is considered equal to the fair value as a result of the short-term nature of these instruments.

Derivative Financial Instruments: The determination of the fair value of derivative financial instruments is described within “Fair Value Measurements” presented above.

Deferred Compensation Instruments: The determination of the fair value of deferred compensation instruments is described within “Fair Value Measurements” presented above.

Deposits and Securities Sold Under Agreements to Repurchase: The fair value of deposits without a stated maturity, including demand, interest-bearing demand, and savings, is considered equal to the carrying amount which is the amount payable on demand at the reporting date. The fair value of deposits and repurchase agreements with fixed maturities and rates is estimated using discounted future cash flows that apply interest rates currently being offered on instruments with similar characteristics and maturities.

FHLB and Other Indebtedness: The determination of the fair value of FHLB and other indebtedness is based on interest rates currently available to the Company for borrowings with similar characteristics and maturities. The determination of fair value for trust preferred obligations is based on credit spreads seen in the marketplace for similar issues.

Off-Balance Sheet Instruments: The value of off-balance sheet instruments, including commitments to extend credit, standby letters of credit, and financial guarantees, is considered equal to fair value. Due to the uncertainty involved in assessing 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.

The following tables summarize the carrying amount and fair value of the Company’s financial instruments for the dates indicated:


	March 31, 2013
	Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	167,041	$	167,041	$	167,041	$	—	$	—
Available-for-sale securities		537,507		537,507		1,353		536,154		—
Held-to-maturity securities		816		824		—		824		—
Loans held for sale		2,794		2,820		—		2,820		—
Loans held for investment less allowance		1,664,442		1,661,139		—		—		1,661,139
FDIC indemnification asset		45,393		45,393		—		—		45,393
Accrued interest receivable		8,166		8,166		—		8,166		—
Derivative financial assets		142		142		—		142		—
Deferred compensation assets		3,786		3,786		3,786		—		—

Liabilities
Demand deposits	$	355,918	$	355,918	$	—	$	355,918	$	—
Interest-bearing demand deposits		377,445		377,445		—		377,445		—
Savings deposits		513,322		513,322		—		513,322		—
Time deposits		800,812		807,107		—		807,107		—
Securities sold under agreements to repurchase		121,506		125,972		—		125,972		—
Accrued interest payable		2,351		2,351		—		2,351		—
FHLB and other indebtedness		165,877		192,853		—		192,853		—
Derivative financial liabilities		10		10		—		10		—
Deferred compensation liabilities		3,786		3,786		3,786		—		—


	December 31, 2012
	Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	144,847	$	144,847	$	144,847	$	—	$	—
Available-for-sale securities		534,358		534,358		3,511		530,847		—
Held-to-maturity securities		816		832		—		832		—
Loans held for sale		6,672		6,774		—		6,774		—
Loans held for investment less allowance		1,698,883		1,702,128		—		—		1,702,128
FDIC receivable under loss share agreements		48,073		48,073		—		—		48,073
Accrued interest receivable		7,842		7,842		—		7,842		—
Derivative financial assets		144		144		—		144		—
Deferred compensation assets		3,625		3,625		3,625		—		—

Liabilities
Demand deposits	$	343,352	$	343,352	$	—	$	343,352	$	—
Interest-bearing demand deposits		353,321		353,321		—		353,321		—
Savings deposits		500,276		500,276		—		500,276		—
Time deposits		833,226		842,331		—		842,331		—
Securities sold under agreements to repurchase		136,118		142,417		—		142,417		—
Accrued interest payable		2,481		2,481		—		2,481		—
FHLB and other indebtedness		177,435		200,418		—		200,418		—
Derivative financial liabilities		16		16		—		16		—
Deferred compensation liabilities		3,625		3,625		3,625		—		—

Note 11. Accumulated Other Comprehensive Income

The following table presents the changes in the Company’s accumulated other comprehensive income (“AOCI”), net of tax, by component for the period indicated:


	Unrealized Gains (Losses) on Available-for-Sale Securities			Defined Benefit Pension Plan Items			Total
(Amounts in thousands)
Beginning balance, January 1, 2013	$	(283	)	$	(1,542	)	$	(1,825	)
Other comprehensive loss before reclassifications		(971	)		(248	)		(1,219	)
Amounts reclassified from AOCI		73			51			124

Net comprehensive loss		(898	)		(197	)		(1,095	)

Ending balance, March 31, 2013	$	(1,181	)	$	(1,739	)	$	(2,920	)

The following table presents reclassifications out of the Company’s AOCI for the period ended March 31, 2013:


Details about AOCI Components	Amount Reclassified from AOCI		Affected Line Item in the Statement Where Net Income is Presented
(Amounts in thousands)
Available-for-sale securities
	$	117	Net gains on sale of securities
		—	Net impairment losses recognized in earnings

		117	Total before tax
		44	Income tax expense

		73	Total net of tax

Defined benefit pension plan items
Amortization of prior service costs		69	See Note 1 below
Amortization of net losses		12	See Note 1 below
Net actuarial losses		—	See Note 1 below

		81	Total before tax
		30	Income tax expense

		51	Total net of tax

Total reclassifications	$	124	Total net of tax

Note 1: These items are included in the computation of net periodic pension cost. See Note 8, “Defined Benefit Plans,” for additional information.

Note 12. Litigation, Commitments and Contingencies

Litigation

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.

Commitments and Contingencies

The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized 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 nonperformance 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 no 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 upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. Commitments to extend credit, including availability on lines of credit, totaled $198.04 million at March 31, 2013, and $215.77 million at December 31, 2012. Additionally, the Company had gross notional amounts of outstanding commitments related to secondary market mortgage loans of $14.10 million at March 31, 2013, and $14.84 million at December 31, 2012.

Standby letters of credit and 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. Standby letters of credit and financial guarantees totaled $5.89 million at March 31, 2013, and $6.81 million at December 31, 2012. The Company maintained a reserve for unfunded lending commitments of $326 thousand at March 31, 2013, and December 31, 2012.

The Company has issued, through the Trust, $15.0 million of trust preferred securities in a private placement. In connection with the issuance of the trust preferred securities, the Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the trust preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions and has the funds therefore: (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.

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 Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information that will enhance understanding of our Company’s financial condition, changes in financial condition, and results of operations. This MD&A contains forward-looking statements and should be read in conjunction with our 2012 Annual Report on Form 10-K (the “2012 Form 10-K”) and the other financial information included in this report.

Forward-Looking Statements

We may make forward-looking statements in filings with the Securities and Exchange Commission (the “SEC”) including this Annual Report on Form 10-K and the Exhibits hereto and thereto in our reports to shareholders and other communications that are made in good faith by our 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 our 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 our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and other similar expressions are intended to identify 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;

•

the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

•

inflation, interest rate, market and monetary fluctuations;

•

our timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

•

the willingness of customers to substitute competitors’ products and services for our products and services and vice versa;

•

the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and insurance) and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);

•

the impact of the federal banking regulators’ continued implementation of a number of programs to address capital and liquidity in the banking system; further, future and proposed rules, including those that are part of the Basel III process, which are expected to increase minimum acceptable levels of capital for the industry;

•

technological changes;

•

the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

•

the growth and profitability of our noninterest, or fee, income being less than expected;

•

unanticipated regulatory or judicial proceedings;

•

changes in consumer spending and saving habits; and

•

our success at managing the risks involved in the foregoing.

We caution that the foregoing list of important factors is not all-inclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we filed with the SEC. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not intend to update any forward-looking statements, whether written or oral, to reflect change. All forward-looking statements attributable to our Company are expressly qualified by these cautionary statements. These factors and other risks and uncertainties are discussed in Part II, Item 1A, “Risk Factors,” herein, and Part I, Item 1A, “Risk Factors,” of our 2012 Form 10-K.

Company Overview

Our Company is a financial holding company headquartered in Bluefield, Virginia. We operate through our community bank subsidiary, First Community Bank (the “Bank”), which provides financial, trust, and investment advisory services to individuals and commercial customers through seventy-two locations in Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. Our Company is also the parent company of Greenpoint Insurance Group, Inc. (“Greenpoint”), headquartered in High Point, North Carolina, a full-service insurance agency offering commercial and personal lines of insurance through five locations in Virginia, West Virginia, and North Carolina. The Bank is the parent of First Community Wealth Management, a registered investment advisory firm that offers wealth management and investment advice with $906 million in aggregate assets under management as of March 31, 2013. These assets are not assets of our Company, but are managed under various fee-based arrangements as fiduciary or agent. We reported total assets of $2.72 billion as of March 31, 2013. Our Common Stock is traded on the NASDAQ Global Select Market under the symbol, “FCBC.”

We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network. Retail and wholesale repurchase agreements and borrowings from the Federal Home Loan Bank (“FHLB”) provide additional funding. We invest our funds primarily in loans to retail and commercial customers. In addition to loans, we invest a portion of our funds in various debt securities, including those of United States and its agencies, municipals, and certain corporate notes, debt instruments, and equity securities. We also maintain 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 our primary source of earnings. Our net interest income is supplemented by fees for services, commissions on sales, and various deposit service charges.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and conform to general practices within the banking industry. Our financial position and results of operations require management to make judgments and estimates to develop the amounts reflected and disclosed in the consolidated financial statements. Different assumptions in the application of these estimates could result in material changes to our consolidated financial position and consolidated results of operations. Estimates, assumptions, and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Our accounting estimates are fundamental to understanding MD&A and the disclosures presented in the Notes to Condensed Consolidated Financial Statements and in MD&A provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Our critical accounting estimates are described in detail in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our 2012 Form 10-K.

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, sweeping financial regulatory reform legislation entitled the Dodd-Frank Act was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

•

Centralizes responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the “CFPB”), responsible for implementing, examining and enforcing compliance with federal consumer financial laws.

•

Requires financial holding companies, such as our Company, to be well capitalized and well managed as of July 21, 2011. Bank holding companies and banks must also be well capitalized and well managed to engage in interstate bank acquisitions.

•

Imposes 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.

•

Implements corporate governance revisions, including with regard to executive compensation and proxy access by shareholders.

•

Makes permanent the $250 thousand limit for federal deposit insurance.

•

Repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

•

Amends the Electronic Fund Transfer Act to, among other things, give the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and enforces a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

•

Increases the authority of the Federal Reserve Board to examine bank holding companies, such as our Company, and their nonbank subsidiaries.

Another section of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act (the “Mortgage Reform Act”), contains new underwriting and servicing standards for the mortgage industry, as well as restrictions on compensation for mortgage originators. In addition, the Mortgage Reform Act grants broad discretionary regulatory authority to the CFPB to prohibit or condition terms, acts, or practices relating to residential mortgage loans that the CFPB finds abusive, unfair, deceptive, or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure that responsible affordable mortgage credit remains available to consumers. The Dodd-Frank Act also contains laws affecting the securitization of mortgages, and other assets, with requirements for risk retention by securitizers and requirements for regulating credit rating agencies. Many aspects of the Dodd-Frank Act continue to be subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on our Company, our customers, or the general financial industry. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase costs associated with deposits, as well as place limitations on certain revenues those deposits may generate.

Recent Business Combinations

On June 8, 2012, the Company entered into a purchase and assumption agreement with loss share arrangements with the Federal Deposit Insurance Corporation (“FDIC”) to purchase certain assets and assume substantially all of the customer deposits and certain liabilities of Waccamaw Bank (“Waccamaw”). Waccamaw, a full service community bank headquartered in Whiteville, North Carolina, operated sixteen branches throughout North and South Carolina. At acquisition, Waccamaw had total assets of approximately $500.64 million, loans of approximately $318.35 million, and deposits of approximately $414.13 million. As a result of the acquisition and the preliminary purchase price allocation, approximately $10.90 million was recorded as goodwill, which represents the excess of the value of the consideration transferred over the fair value of the net assets acquired including indentified intangibles. Under the Single-Family Shared-Loss Agreement and the Commercial Shared-Loss Agreement with the FDIC, the FDIC has agreed to cover 80% of most loan and foreclosed real estate losses. All assets acquired and liabilities assumed are recorded at estimated fair value on the date of acquisition. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values may become available. After the initial acquisition, the Company agreed to purchase four properties totaling $1.80 million from the FDIC.

On May 31, 2012, the Company completed the acquisition of Peoples Bank of Virginia (“Peoples”), based in Richmond, Virginia. Peoples, a full service community bank, operated four branches throughout the Richmond area. At acquisition, Peoples had total assets of approximately $275.76 million, loans of approximately $184.84 million, and deposits of approximately $232.75 million. Under the terms of the merger agreement, shares of Peoples were exchanged for $6.08 in cash and 1.07 shares of the Company’s common stock, resulting in a purchase price of approximately $40.28 million. As a result of the acquisition and the preliminary purchase price allocation, approximately $10.21 million was recorded as goodwill, which represents the excess of the value of the consideration transferred over the fair market value of the net assets acquired including indentified intangibles. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values may become available.

Results Of Operations

Overview

The following list includes significant developments regarding our Company and operations during the first quarter of 2013:

•

Tax equivalent net interest margin increased 24 basis points to 4.15% for the first quarter of 2013 compared with the first quarter of 2012.

•

Net interest income was $23.36 million, an increase of $5.39 million, or 29.95%, compared with the first quarter of 2012.

•

Total assets grew $517.02 million, or 23.47%, compared with the first quarter of 2012, which includes the Peoples and Waccamaw acquisitions that occurred during the second quarter of 2012.

•

Total stockholders’ equity increased $48.55 million, or 15.65% compared with the first quarter of 2012, which includes the stock issued during the Peoples acquisition.

Net Income

Net income increased $1.14 million, or 19.00%, to $7.14 million for the first quarter of 2013 compared with $6.00 million for the first quarter of 2012. Net income available to common shareholders increased $1.17 million, or 20.37%, to $6.88 million for the first quarter of 2013 compared with $5.72 million for the first quarter of 2012. The increase was largely attributed to the substantial growth in earning assets as a result of the Peoples and Waccamaw acquisitions. Basic and diluted earnings per common share for the first quarter of 2013 were $0.34 and $0.33, respectively, compared to basic and diluted earnings per common share for the first quarter of 2012 of $0.32 and $0.31, respectively.

Net Interest Income – Quarterly Comparison (See Table I)

For purposes of this discussion, net interest income is presented on a tax equivalent basis to provide a comparison among all types of interest earning assets. The tax equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. The Company uses this measure to monitor net interest income performance and to manage its balance sheet composition.

Net interest income, the largest contributor to earnings, increased $5.39 million, or 29.95%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. Tax equivalent net interest income increased $5.40 million, or 28.92%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. The increase in tax equivalent net interest income was primarily due to growth in average earning assets resulting from the Peoples and Waccamaw acquisitions and reductions in the rates paid on interest-bearing deposits resulting from the sustained low rate environment.

Average earning assets increased $432.32 million and average interest-bearing liabilities increased $382.11 million for the quarter ended March 31, 2013, compared with the same quarter of 2012. The yield on average earning assets increased 5 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average rate paid on interest-bearing liabilities decreased 23 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. Average balances and interest yield/rate changes for earning assets and interest-bearing liabilities resulted in a net interest rate spread that was 28 basis points higher for the first quarter of 2013 compared with the first quarter of 2012. Our net interest margin increased 24 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012.

The tax equivalent yield on loans increased 32 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. Tax equivalent loan interest income increased $5.48 million, or 28.24%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. Interest on loans for the first quarter of 2013 also includes accretion related to the Peoples and Waccamaw acquisitions of $831 thousand and $3.01 million, respectively. The Company expects the purchase accounting interest accretion to decline in future periods based on acquired portfolio attrition.

The tax equivalent yield on available-for-sale securities decreased 46 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. This decrease was primarily due to the reinvestment of proceeds from sales, maturities, prepayments, and cash in lower yielding securities. The average balance of held-to-maturity securities continued to decline as securities were called or matured and were not replaced.

The tax equivalent yield on interest-bearing deposits with banks decreased 10 basis points for the first quarter of 2013 compared with the first quarter of 2012. Interest-bearing deposits with banks are comprised primarily of excess liquidity kept at the Federal Reserve that bears overnight market rates.

The average balance of interest-bearing demand deposits increased $70.79 million, or 25.02%, and the average rate paid on those deposits increased 2 basis points for the first quarter of 2013 compared with the first quarter of 2012. The average balance of savings deposits increased $110.33 million, or 27.89%, and the average rate paid on those deposits increased 1 basis point for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average balance of time deposits increased $181.67 million, or 28.64%, and the average rate paid on those deposits decreased 37 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average balance of noninterest-bearing demand deposits increased $93.32 million, or 39.07%, for the first quarter of 2013 compared with the third quarter of 2012.

There were no federal funds purchased on average for the first quarter of 2013, compared to $1.97 million for the first quarter of 2012. The average balance of retail repurchase agreements, including collateralized retail deposits and commercial treasury accounts, increased $3.58 million, or 4.96%, and the average rate paid on those funds decreased 8 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average balance of wholesale repurchase agreements increased $7.65 million, or 15.29%, and the average rate paid on those funds decreased 42 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average balance of FHLB and other borrowings increased $10.06 million, or 6.07%, and the average rate paid on those funds decreased 24 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The changes in the average balances and costs of wholesale repurchase agreements and FHLB advances were primarily due to the Waccamaw acquisition.


Table I	Average Balance Sheets and Net Interest Income Analysis
	Three Months Ended March 31,
	2013							2012
(Amounts in thousands)	Average Balance		Interest ⁽¹⁾		Average Yield/ Rate ⁽¹⁾			Average Balance		Interest ⁽¹⁾		Average Yield/ Rate ⁽¹⁾
Assets
Earning assets
Loans ⁽²⁾	$	1,706,296	$	24,887		5.92	%	$	1,394,246	$	19,407		5.60	%
Securities available-for-sale		544,681		3,728		2.78	%		478,358		3,857		3.24	%
Securities held-to-maturity		816		17		8.45	%		3,237		62		7.70	%
Interest-bearing deposits		98,893		66		0.27	%		42,525		39		0.37	%

Total earning assets		2,350,686		28,698		4.95	%		1,918,366		23,365		4.90	%
Other assets		352,343							255,638

Total assets	$	2,703,029						$	2,174,004


Liabilities
Interest-bearing deposits
Demand deposits	$	353,677	$	56		0.06	%	$	282,887	$	31		0.04	%
Savings deposits		505,917		155		0.12	%		395,588		110		0.11	%
Time deposits		816,060		2,151		1.07	%		634,390		2,264		1.44	%

Total interest-bearing deposits		1,675,654		2,362		0.57	%		1,312,865		2,405		0.74	%
Borrowings
Federal funds purchased		—		—		—			1,970		2		0.00	%
Retail repurchase agreements		75,751		105		0.56	%		72,171		115		0.64	%
Wholesale repurchase agreements		57,645		475		3.34	%		50,000		468		3.76	%
FHLB advances and other borrowings		175,937		1,699		3.92	%		165,874		1,715		4.16	%

Total borrowings		309,333		2,279		2.99	%		290,015		2,300		3.19	%

Total interest-bearing liabilities		1,984,987		4,641		0.95	%		1,602,880		4,705		1.18	%

Noninterest-bearing demand deposits		332,186							238,863
Other liabilities		24,307							21,466

Total liabilities		2,341,480							1,863,209
Stockholders’ equity		361,549							310,795

Total liabilities and stockholders’ equity	$	2,703,029						$	2,174,004

Net interest income, tax equivalent			$	24,057						$	18,660

Net interest rate spread ⁽³⁾						4.00	%						3.72	%

Net interest margin ⁽⁴⁾						4.15	%						3.91	%

(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 nontaxable amounts.

(2)	Nonaccrual loans are included in average balances outstanding but with no related interest income during the period of nonaccrual.

(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.

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 March 31, 2013 Compared to 2012 Dollar Increase (Decrease) due to
(Amounts in thousands)	Volume			Rate			Rate/ Volume			Total
Interest earned on:
Loans (FTE)	$	4,344		$	1,089		$	47		$	5,480
Securities available-for-sale (FTE)		535			(551	)		(113	)		(129	)
Securities held-to-maturity (FTE)		(46	)		6			(5	)		(45	)
Interest-bearing deposits with other banks		51			(10	)		(14	)		27

Total interest earning assets		4,884			534			(85	)		5,333


Interest paid on:
Demand deposits		8			14			3			25
Savings deposits		31			12			2			45
Time deposits		648			(573	)		(188	)		(113	)
Federal funds purchased		—			—			(2	)		(2	)
Retail repurchase agreements		6			(14	)		(2	)		(10	)
Wholesale repurchase agreements		71			(52	)		(12	)		7
FHLB advances and other borrowings		103			(99	)		(20	)		(16	)

Total interest-bearing liabilities		867			(712	)		(219	)		(64	)


Change in net interest income, tax equivalent	$	4,017			1,246			134			5,397

Provision for Loan Losses

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses was increased $220 thousand for the first quarter of 2013 compared with the first quarter of 2012. We incurred net charge-offs of $2.06 million for the quarter ended March 31, 2013, compared with $1.33 million for the same quarter of 2012. Annualized net charge-offs as a percentage of average non-covered loans were 0.56% for the quarter ended March 31, 2013, compared with 0.38% for the same quarter of 2012. Non-covered loans exclude loans acquired in the Waccamaw transaction that are covered under the FDIC loss share agreements.

Noninterest Income

Noninterest income, consisting of all revenues not included in interest and fee income related to earning assets, decreased $130 thousand, or 1.63%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. Exclusive of the impact of gains on the sale of securities and prepaid borrowings, as well as the change in the indemnification asset, noninterest income increased $1.05 million, or 13.19%, to $8.99 million for the quarter ended March 31, 2013, compared with $7.94 million for the same quarter of 2012.

Wealth management revenues, including fees and commissions for trust services and investment advisory services, decreased $48 thousand, or 5.37%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. Service charges on deposit accounts increased $155 thousand, or 5.14%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. Other service charges, commissions, and fees increased $201 thousand, or 12.68%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. Insurance commissions increased $90 thousand, or 5.71%, for the quarter ended March 31, 2013, compared with the same quarter of 2012.

Other operating income increased $945 thousand for the quarter ended March 31, 2013, compared with the same quarter of 2012. The increase was primarily due to a $300 thousand increase in secondary market income and $296 thousand gain on the prepayment of borrowings. We incurred a net gain on sale of securities of $117 thousand for the quarter ended March 31, 2013, which was a $66 thousand increase from the same quarter of 2012. During the first quarter of 2013, the change in the FDIC indemnification asset totaled $1.54 million, including $1.57 million resulting from negative accretion.

Noninterest Expense

Noninterest expense increased $3.35 million, or 20.69%, for the first quarter of 2013 compared with the first quarter of 2012. Salaries and employee benefits increased $1.89 million, or 22.96%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. The Peoples and Waccamaw acquisitions completed during the second quarter of 2012 accounted for an increase in salaries and employee benefits of $1.25 million during the first quarter of 2013. At March 31, 2013, we had 746 full-time equivalent employees compared to 619 at March 31, 2012. The Peoples and Waccamaw acquisitions resulted in the addition of 100 full-time equivalent employees for the period ended March 31, 2013.

Occupancy, furniture, and equipment expense increased $861 thousand, or 36.84%, to $3.20 million for the quarter ended March 31, 2013, compared with $2.34 million for the same quarter of 2012 as a result of the Peoples and Waccamaw acquisitions. FDIC premiums and assessments increased $150 thousand, or 46.58%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. We incurred $49 thousand in merger related costs for the quarter ended March 31, 2013, in connection with the Peoples and Waccamaw acquisitions. Other operating expense increased $620 thousand, or 12.61%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. The increase in other operating expense was primarily due to our expanded branch network. These increases were offset by a $196 thousand decrease in expenses and net losses associated with other real estate owned (“OREO”) to $625 thousand for the first quarter of 2013, compared with $821 thousand for the first quarter of 2012.

Income Tax Expense

Income tax as a percentage of pretax income may vary significantly from statutory rates due to permanent differences, which are items of income and expense excluded by law from the calculation of taxable income. Our most significant permanent differences include income on municipal securities, which are exempt from federal income tax; certain dividend payments, which are deductible; and increases in the cash surrender value of life insurance policies. Consolidated income taxes were $3.40 million for the first quarter of 2013 compared to $2.85 million for the first quarter of 2012. The effective tax expense rates for the quarters ended March 31, 2013 and 2012 were 32.23% and 32.22%, respectively.

Financial Condition

Total assets were $2.72 billion as of March 31, 2013, a decrease of $8.58 million, or 0.31%, compared with $2.73 billion at December 31, 2012. Total liabilities were $2.36 billion as of March 31, 2013, a decrease of $10.92 million, or 0.46%, compared with $2.37 billion at December 31, 2012. As of March 31, 2013, our book value per as-converted common share was $16.93, an increase of $0.17, compared with December 31, 2012.

Investment Securities

Available-for-Sale Securities

Available-for-sale securities as of March 31, 2013, increased $3.15 million, or 0.59%, compared with December 31, 2012. The market value of securities available-for-sale as a percentage of amortized cost was 99.65% at March 31, 2013, compared with 99.92% at December 31, 2012.

During the first quarters of 2013 and 2012, we recognized no other-than-temporary impairment (“OTTI”) charges in earnings related to nonbeneficial interest debt securities. We incurred no OTTI charges on equity securities during the three months ended March 31, 2013 and 2012. See Note 2, “Investment Securities,” of the Notes to Condensed Consolidated Financial Statements in Item 1, “Financial Statements,” herein for additional information.

Held-to-Maturity Securities

Held-to-maturity securities as of March 31, 2013, remained constant at $816 thousand compared with December 31, 2012. The market value of securities held-to-maturity as a percentage of amortized cost was 100.96% at March 31, 2013, compared with 101.96% at December 31, 2012.

Loan Portfolio

Loans Held for Sale

Loans held for sale as of March 31, 2013, decreased $3.88 million, or 58.12% compared with December 31, 2012. Loans held for sale consist of mortgage loans sold on a best efforts basis into the secondary loan market; accordingly, we do not retain the interest rate risk involved in these long-term commitments. The gross notional amount of outstanding commitments related to secondary market mortgage loans at March 31, 2013, was $14.10 million for 79 loans compared to $14.84 million for 88 loans at December 31, 2012.

Loans Held for Investment

Loans held for investment as of March 31, 2013, decreased $35.36 million, or 2.05%, compared with December 31, 2012, and increased $302.77 million, or 21.84%, compared with March 31, 2012. The significant increase between the first quarter of 2013 and first quarter of 2012 was primarily due to the Peoples and Waccamaw acquisitions that occurred during the second quarter of 2012. The average loan to deposit ratio was 84.98% for the first quarter of 2013 compared to 85.71% for the fourth quarter of 2012, and 89.85% for the first quarter of 2012. The held for investment portfolio continues to be diversified among loan types and industry segments. The following table details the loan portfolio for the dates indicated:


	March 31, 2013					December 31, 2012					March 31, 2012
	Amount		Percent			Amount		Percent			Amount		Percent
(Amounts in thousands)
Covered loans	$	195,060		11.55	%	$	207,106		12.01	%	$	—		0.00	%
Non-covered loans
Commercial loans
Construction, development, and other land		55,220		3.27	%		57,434		3.38	%		45,736		3.29	%
Commercial and industrial		91,666		5.43	%		88,738		5.15	%		80,637		5.82	%
Multi-family residential		63,929		3.78	%		65,694		3.81	%		78,815		5.68	%
Single family non-owner occupied		136,334		8.07	%		135,912		7.88	%		108,247		7.81	%
Non-farm, non-residential		440,226		26.06	%		448,810		26.02	%		356,029		25.68	%
Agricultural		2,117		0.12	%		1,709		0.10	%		1,607		0.12	%
Farmland		33,930		2.01	%		34,570		2.00	%		37,751		2.72	%

Total commercial loans		823,422		48.74	%		832,867		48.29	%		708,822		51.12	%
Consumer real estate loans
Home equity lines		108,385		6.42	%		111,081		6.44	%		109,751		7.91	%
Single family owner occupied		470,437		27.85	%		473,547		27.46	%		479,411		34.58	%
Owner occupied construction		19,760		1.17	%		16,223		0.94	%		17,995		1.30	%

Total consumer real estate loans		598,582		35.44	%		600,851		34.84	%		607,157		43.79	%
Consumer and other loans
Consumer loans		68,625		4.06	%		78,163		4.53	%		65,036		4.69	%
Other		3,603		0.21	%		5,666		0.33	%		5,510		0.40	%

Total consumer and other loans		72,228		4.27	%		83,829		4.86	%		70,546		5.09	%

Total non-covered loans		1,494,232		88.45	%		1,517,547		87.99	%		1,386,525		100.00	%

Total loans held for investment	$	1,689,292		100.00	%	$	1,724,653		100.00	%	$	1,386,525		100.00	%


Loans held for sale	$	2,794				$	6,672				$	3,522

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provisions for loan losses and recoveries of prior loan charge-offs and decreased by loans charged off. The determination of the allowance requires management to make various assumptions and judgments. As a result, actual loan losses may differ materially from management’s determination if actual conditions differ significantly from the assumptions utilized. The ultimate adequacy of the allowance for loan losses is dependent upon a variety of factors beyond our control including, among other things, the economy, changes in interest rates, and the view of regulatory authorities toward loan classifications. Management considers the allowance to be adequate based upon analysis of the portfolio as of March 31, 2013; however, no assurance can be made that additions to the allowance for loan losses will not be required in future periods.

Qualitative risk factors for the loan portfolio remain relatively high which reflect the elevated risk of loan losses due to high unemployment, effects of the recent recession, and devaluations of various categories of collateral. Significant stress continues in 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 we originated. In addition, adverse changes in the economy, particularly continued high rates of unemployment, may have a negative effect on the ability of our 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.

Our allowance for loan losses totaled $24.85 million at March 31, 2013, $25.77 million at December 31, 2012, and $25.80 million at March 31, 2012. The allowance for loan losses as a percentage of non-covered loans held for investment was 1.66% at March 31, 2013, 1.70% at December 31, 2012, and 1.86% at March 31, 2012. The decrease between March 31, 2013, and March 31, 2012, was largely due to the addition of Peoples loans at fair value with no corresponding allowance for loan losses. The cash flow analysis performed for the first quarter of 2013 identified three of the Company’s seven purchased credit impaired loan pools as impaired with a combined impairment of $276 thousand at March 31, 2013. The portfolio will continue to be monitored for deterioration in credit, which may result in the need to record an allowance for loan losses in a future period. As a result of stable credit metrics and the general downward trend in net charge-offs over recent quarters, management deemed the reduced allowance and provision for loan losses as adequate and directionally consistent.

The following table details the allowance for loan loss activity and related information for the three months ended March 31, 2013 and 2012.


	Three Months Ended
	March 31,
	2013			2012
(Amounts in thousands)
Beginning balance	$	25,770		$	26,205
Provision for loan losses		1,142			922
Charge-offs		(2,759	)		(1,562	)
Recoveries		697			235

Net charge-offs		(2,062	)		(1,327	)

Ending balance	$	24,850		$	25,800


Non-covered loans
Annualized net charge-offs to average loans		0.56	%		0.38	%
Allowance for loan losses to total loans		1.66	%		1.86	%

Risk Elements

Nonperforming assets consist of loans accounted for on a nonaccrual basis, accruing loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Loans acquired with credit deterioration through business combinations, for which a discount exists, are not considered to be nonaccrual as a result of the accretion of the discount based on the expected cash flow of the loans. The following table summarizes the components of nonperforming assets and presents additional detail for nonperforming and restructured loans for the periods indicated:


(Amounts in thousands)	March 31, 2013			December 31, 2012			March 31, 2012
Non-covered loans
Nonaccrual loans	$	30,076		$	23,931		$	24,617
Accruing loans past due 90 days or more		—			—			—
TDRs ⁽¹⁾		1,596			6,009			2,668

Total nonperforming loans		31,672			29,940			27,285
OREO not covered under FDIC loss share agreements		4,439			5,749			3,829

Total nonperforming assets	$	36,111		$	35,689		$	31,114

Covered loans
Nonaccrual loans	$	4,567		$	4,323		$	—
Accruing loans past due 90 days or more		—			—			—

Total nonperforming loans		4,567			4,323			—
OREO covered under FDIC loss share agreements		6,911			3,255			—

Total nonperforming assets	$	11,478		$	7,578		$	—

Total loans
Nonaccrual loans	$	34,643		$	28,254		$	24,617
Accruing loans past due 90 days or more		—			—			—
TDRs ⁽¹⁾		1,596			6,009			2,668

Total nonperforming loans		36,239			34,263			27,285
OREO		11,350			9,004			3,829

Total nonperforming assets	$	47,589		$	43,267		$	31,114


Performing TDRs ⁽²⁾	$	10,272		$	6,038		$	7,052
Total TDRs ⁽³⁾	$	11,868			12,047		$	9,720

Non-covered loans
Nonperforming loans to total loans		2.12	%		1.97	%		1.97	%
Nonperforming assets to total assets		1.43	%		1.42	%		1.41	%
Allowance for loan losses to nonperforming loans		78.46	%		86.07	%		94.56	%
Total loans (includes covered assets)
Nonperforming loans to total loans		2.15	%		1.99	%		1.97	%
Nonperforming assets to total assets		1.75	%		1.59	%		1.41	%
Allowance for loan losses to nonperforming loans		68.57	%		75.21	%		94.56	%

(1)	TDRs restructured within the past six months or nonperforming, excluding nonaccrual TDRs of $675 thousand , $3.04 million, and $2.81 million at March 31, 2013, December 31, 2012, and March 31, 2012, respectively.

(2)	TDRs with six months or more of satisfactory payment performance, excluding nonaccrual TDRs of $1.67 million, $792 thousand, and $24 thousand at March 31, 2013, December 31, 2012, and March 31, 2012, respectively.

(3)	Perfoming and nonperforming TDRs, excluding nonaccrual TDRs of $2.34 million, $3.83 million, and $2.83 million at March 31, 2013, December 31, 2012, and March 31, 2012, respectively.

Non-covered loans exclude loans acquired in the Waccamaw transaction that are covered under the FDIC loss share agreements. Non-covered nonperforming assets totaled $36.11 million at March 31, 2013, a $422 thousand increase over December 31, 2012, and a $5.00 million increase over March 31, 2012. Non-covered nonperforming assets as a percentage of total non-covered assets were 1.43% at March 31, 2013, 1.42% at December 31, 2012, and 1.41% at March 31, 2012.

Non-covered nonaccrual loans totaled $30.08 million at March 31, 2013, $23.93 million at December 31, 2012, and $24.62 million at March 31, 2012. As of March 31, 2013, non-covered nonaccrual loans were largely attributed to the following loan classes: commercial construction (22.75%); single family owner occupied (19.53%); non-farm, non-residential (18.76%); commercial and industrial (17.90%); and single family non-owner occupied (15.30%). The increase in non-covered nonaccrual loans during the first quarter of 2013 was primarily due to one commercial loan relationship totaling $6.40 million. Approximately $5.66 million, or 18.81%, of non-covered nonaccrual loans were attributed to loans acquired in business combinations. Certain loans included in the nonaccrual category have been written down to the estimated realizable value or assigned specific reserves within the allowance for loan losses based upon management’s estimate of loss at ultimate resolution.

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, and/or amortization terms. Certain TDRs are classified as nonperforming at time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs totaled $11.87 million at March 31, 2013, $12.05 million at December 31, 2012, and $9.72 million at March 31, 2012. Accruing nonperforming TDRs amounted to $1.60 million, or 13.45%, of total accruing TDRs as of March 31, 2013, as compared to 49.88% of accruing TDRs at December 31, 2012, and 27.45% of accruing TDRs at March 31, 2012. The allowance for loan losses attributed to TDRs totaled $1.65 million at March 31, 2013, $1.87 million at December 31, 2012, and $675 thousand at March 31, 2012.

Ongoing activity within the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification as a result of changing economic conditions, borrower financial capacity, or resolution efforts. There were no accruing loans contractually past due 90 days or more as of March 31, 2013.

Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, totaled $4.44 million as of March 31, 2013, a decrease of $1.31 million, or 22.79%, compared with December 31, 2012. As of March 31, 2013, non-covered OREO consisted of 48 properties with an average holding period of 10 months. During the first quarter of 2013 the net loss on OREO totaled $400 thousand. Covered OREO is pursuant to the FDIC Loss Share Agreements and is presented net of the related fair value discount. The following table details activity within OREO for the periods indicated:


	Non-covered			Covered			Total
(Amounts in thousands)
Beginning balance, January 1, 2013	$	5,749		$	3,255		$	9,004
Acquired		—			—			—
Additions		2,451			4,414			6,865
Disposals		(3,378	)		(534	)		(3,912	)
Valuation adjustments		(383	)		(224	)		(607	)

Ending balance, March 31, 2013	$	4,439		$	6,911		$	11,350


	Non-covered			Covered		Total
(Amounts in thousands)
Beginning balance, January 1, 2012	$	5,914		$	—	$	5,914
Acquired		—			—		—
Additions		1,027			—		1,027
Disposals		(2,550	)		—		(2,550	)
Valuation adjustments		(562	)		—		(562	)

Ending balance, March 31, 2012	$	3,829		$	—	$	3,829

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $42.26 million as of March 31, 2013, an increase of $3.26 million, or 8.36%, compared with December 31, 2012. Non-covered delinquent loans as a percentage of total non-covered loans measured 2.83% at March 31, 2013, of which loans 30 to 89 days past due comprised 0.82% and nonaccrual loans comprised 2.01%. Non-covered nonperforming loans, comprised of nonaccrual loans, nonperforming TDRs, and unseasoned TDRs, as a percentage of total non-covered loans were 2.12% at March 31, 2013, 1.97% at December 31, 2012, and 1.97% at March 31, 2012.

Deposits

Total deposits as of March 31, 2013, increased $17.32 million, or 0.85%, compared with December 31, 2012. Noninterest-bearing deposits and interest-bearing demand deposits as of March 31, 2013, increased $12.57 million and $24.12 million, respectively, compared with December 31, 2012. Savings deposits, which include money market accounts and savings accounts, as of March 31, 2013, increased $13.05 million compared with December 31, 2012. Time deposits as of March 31, 2013, decreased $32.41 million compared with December 31, 2012.

Borrowings

Our borrowings consist primarily of securities sold under agreements to repurchase and FHLB advances. Short-term borrowings consist of overnight federal funds purchased and repurchase agreements. There were no federal funds purchased at March 31, 2013, or December 31, 2012. The balance of retail repurchase agreements decreased $6.42 million, or 8.23%, as of March 31, 2013, compared with December 31, 2012. The balance of wholesale repurchase agreements decreased $8.20 million, or 14.08%, and the weighted average rate increased 37 basis points to 3.71% as of March 31, 2013, compared with December 31, 2012. The balance of FHLB borrowings, including convertible and callable advances and fixed rate credit, decreased $11.56 million, or 7.15%, and the weighted average rate increased 26 basis points to 4.12% as of March 31, 2013, compared with December 31, 2012. As of March 31, 2013, the FHLB borrowings had maturities between four and eight years. During the first quarter of 2013, the Company prepaid $8.15 million of wholesale repurchase agreements and $11.47 million of FHLB borrowings that resulted in gains totaling $296 thousand.

Stockholders’ Equity

Total stockholders’ equity increased 2.35 million, or 0.66%, from $356.32 million at December 31, 2012, to $358.67 million at March 31, 2013. The change in stockholders’ equity during the first quarter of 2013 was primarily due to net income of $7.14 million, dividends declared on common and preferred stock of $2.67 million, treasury share purchases of $1.08 million, and an increase in accumulated other comprehensive loss of $1.10 million.

Risk-Based Capital

Risk-based capital guidelines promulgated by state and federal banking agencies weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. As of March 31, 2013, the Bank was deemed “well capitalized” under regulatory capital adequacy standards. Our Company’s and the Bank’s capital ratios are presented in the following table for the dates indicated.


	March 31, 2013			December 31, 2012
Total risk-based capital ratio
First Community Bancshares, Inc.		17.65	%		16.70	%
First Community Bank		16.06	%		15.23	%
Tier 1 risk-based capital ratio
First Community Bancshares, Inc.		16.40	%		15.44	%
First Community Bank		14.81	%		13.97	%
Tier 1 leverage ratio
First Community Bancshares, Inc.		10.35	%		9.96	%
First Community Bank		9.31	%		8.98	%

Liquidity and Capital Resources

We maintain 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 us to detect liquidity issues promptly 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 our quarterly earnings to a decline in the market price of our 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 our Company and Board of Directors.

As of March 31, 2013, we maintained liquidity in the form of unencumbered cash on hand and deposits with other financial institutions of $167.04 million, unpledged available-for-sale securities of $256.62 million, FHLB unused borrowing capacity of $331.57 million, and federal funds lines availability of $114.51 million. Cash on hand and deposits with other financial institutions, as well as the FHLB, are immediately available for satisfaction of deposit withdrawals, customer credit needs, and our operations. Available-for-sale securities represent a secondary level of liquidity available for conversion to liquid funds in the event of extraordinary needs. Our approved lines of credit with correspondent banks are available as backup liquidity sources.

As a holding company, we do not conduct significant operations and our primary sources of liquidity are dividends upstreamed from the Bank and borrowings from outside sources. Banking regulations limit the amount of dividends that may be paid by the Bank. As of March 31, 2013, our liquid assets, including cash and investment securities, totaled $23.27 million. Our cash reserves and investments, as well as management fee arrangements, provide adequate working capital to meet obligations and projected dividends to shareholders for the next twelve months. Additionally, we maintain a $15.00 million unsecured, committed line of credit. There was no balance on the line as of March 31, 2013.

Off-Balance Sheet Risk

As of March 31, 2013, our off-balance sheet risk included $198.04 million in commitments to extend credit and $5.89 million in standby letters of credit and financial guarantees. Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is represented by the contractual amount of those instruments.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Our profitability is dependent to a large extent upon net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our Company, like other financial institutions, is subject to interest rate risk to the degree that interest-earning assets reprice differently than interest-bearing liabilities. We manage our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment.

Our 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.

To mitigate the effect of changes in the general level of interest rates, we manage repricing opportunities and thus, our interest rate sensitivity. We seek to control our interest rate risk exposure to insulate net interest income and net earnings from fluctuations in the general level of interest rates. To measure our 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. We use a simulation model that 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 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 our 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 our strategies. However, the earnings simulation model is currently the best tool available to us and the industry for managing interest rate risk.

We have 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 our defined policy limits.

The following table summarizes the impact of immediate and sustained rate shocks in the interest rate environment on net interest income. The model simulates plus 300 to minus 100 basis point changes from the base case rate simulation and illustrates the prospective effects of hypothetical interest rate changes over a twelve-month time period. This modeling technique, although useful, does not take into account all strategies that management might undertake in response to a sudden and sustained rate shock as depicted. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. As of March 31, 2013, the Federal Open Market Committee maintained a target range for federal funds of 0 to 25 basis points, rendering a complete downward shock of 200 basis points meaningless; accordingly, downward rate scenarios are limited to minus 100 basis points. In the downward rate shocks presented, benchmark interest rates are assumed at levels with floors near 0%.


	March 31, 2013				December 31, 2012
(Amounts in thousands, except basis points) Increase (Decrease) in Interest Rates/Basis Points	Change in Net Interest Income		Percent Change		Change in Net Interest Income			Percent Change

300	$	9,330		11.3	$	10,928			13.2
200		5,842		7.1		7,455			9.0
100		2,617		3.2		3,606			4.4
(100)		68		0.1		(35	)		—

During the next twelve months we have more assets than liabilities projected to reprice. As a result, projected net interest income will increase if and when benchmark rates increase. If benchmark interest rates decrease further than current levels, projected net interest income will remain roughly level.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on our operations is reflected in increased operating costs. In management’s opinion, interest rates have a greater impact on our consolidated performance than do the effects of general levels of inflation. Interest rates do not necessarily fluctuate in the same direction or to the same extent as the price of goods and services.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with this report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of March 31, 2013, our disclosure controls and procedures were effective.

Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management, including the CEO and CFO, does not expect that our 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 our 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, collusion of two or more people, or management’s override of the controls.

Changes in Internal Control over Financial Reporting

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2013, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

Legal Proceedings

We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although our 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 effect on our financial position, results of operations, or cash flows.

ITEM 1A.

Risk Factors

Refer to our 2012 Form 10-K for disclosures with respect to our risk factors which could materially affect our business, financial condition, or future results. The risks described in the 2012 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition, or operating results. There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our 2012 Form 10-K.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not Applicable

(b)	Not Applicable

(c)	Issuer Purchases of Equity Securities

The following table provides information with respect to purchases made by or on behalf of our Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of our Company’s Common Stock during the first quarter of 2013:


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan		Maximum Number of Shares that May Yet be Purchased Under the Plan ⁽¹⁾
January 1-31, 2013		1,015	$	15.50		1,015		809,124
February 1-28, 2013		6,767		15.58		6,767		803,157
March 1-31, 2013		61,272		15.55		61,272		741,885

Total		69,054	$	15.55		69,054

(1)

Our Company’s stock repurchase plan, as amended, authorizes the purchase and retention of up to 1,100,000 shares. The plan has no expiration date and currently is in effect. No determination has been made to terminate the plan or to cease making purchases. We held 358,115 shares in treasury as of March 31, 2013.

ITEM 3.

Defaults Upon Senior Securities

Not Applicable

ITEM 4.

Mine Safety Disclosures

Not Applicable

ITEM 5.

Other Information

None

ITEM 6.

Exhibits

(a)

Exhibits and index required


Exhibit No.		Exhibit

3(i)		Articles of Incorporation of First Community Bancshares, Inc., as amended (1)

3(ii)		Amended and Restated Bylaws of First Community Bancshares, Inc. (2)

4.1		Specimen stock certificate of First Community Bancshares, Inc. (3)

4.2		Indenture Agreement dated September 25, 2003. (4)

4.3		Declaration of Trust of FCBI Capital Trust dated September 25, 2003, as amended and restated. (5)

4.4		Preferred Securities Guarantee Agreement dated September 25, 2003. (6)

4.5		Certificate of Designation of 6.00% Series A Noncumulative Convertible Preferred Stock. (7)

10.1**		First Community Bancshares, Inc. 1999 Stock Option Agreement (8) and Plan. (9)

10.1.1**		First Community Bancshares, Inc. 1999 Stock Option Plan, Amendment One. (10)

10.2**		First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Plan. (11)

10.3**		Employment Agreement between First Community Bancshares, Inc. and John M. Mendez dated December 16, 2008, as amended and restated (21) and Waiver Agreement. (29)

10.4**		First Community Bancshares, Inc. and Affiliates Executive Retention Plan (12), Amendment #1 (13), and Amendment #2 (33).

10.5**		First Community Bancshares, Inc. Split Dollar Plan and Agreement. (14)

10.6**		First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated. (15)

10.7**		First Community Bancshares, Inc. Wrap Plan, as amended and restated. (16)

10.8**		Employment Agreement between First Community Bank and Marshall E. McCall dated March 1, 2012. (31)

10.9**		Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors, and Certain Executive Officers. (17)

10.10**		Form of Indemnification Agreement between First Community Bank, its Directors, and Certain Executive Officers. (17)

10.12**		First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (18) and Stock Award Agreement. (19)

10.13**		First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan (32)

10.14**		First Community Bancshares, Inc. Directors Deferred Compensation Plan, as amended and restated. (20)

10.19**		Employment Agreement between First Community Bancshares, Inc. and David D. Brown dated December 16, 2008. (22)

10.20**		Employment Agreement between First Community Bancshares, Inc. and Robert L. Buzzo dated December 16, 2008, as amended and restated. (23)

10.21**		Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly dated December 16, 2008, as amended and restated. (24)

10.22**		Employment Agreement between First Community Bank and Gary R. Mills dated December 16, 2008. (25)

10.23**		Employment Agreement between First Community Bank and Martyn A. Pell dated December 16, 2008. (26)

10.24**		Employment Agreement between First Community Bank and Robert L. Schumacher dated December 16, 2008. (27)

10.25**		Employment Agreement between First Community Bank and Simpson O. Brown dated July 31, 2009. (28)

10.26**		Employment Agreement between First Community Bank and Mark R. Evans dated July 31, 2009. (28)

11		Statement Regarding Computation of Earnings per Share. (30)

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.

101.INS***		XBRL Instance Document #

101.SCH***		XBRL Taxonomy Extension Schema Document #

101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document #

101.LAB***		XBRL Taxonomy Extension Label Linkbase Document #

101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document #

101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document #

In accordance with Rule 406T of SEC Regulation S-T, the XBRL related documents in Exhibit 101 to this Quarterly Report on Form 10-Q for the period ended March 31, 2013, are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections.

*	Incorporated herewith.

**	Indicates a management contract or compensation plan.

***	Submitted electronically herewith.

Attached as Exhibit 101 to the Quarterly Report on Form 10-Q for the period ended March 31, 2013, of First Community Bancshares, Inc. are the following documents formatted in XBRL (eXtensive Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2013, (Unaudited), and December 31, 2012; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2013 and 2012; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2013 and 2012; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2013 and 2012; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).

(1)	Incorporated by reference from Exhibit 3(i) of the Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed on August 16, 2010.

(2)	Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated and filed on August 28, 2012.

(3)	Incorporated by reference from Exhibit 4.1 of the Annual Report on Form 10-K for the period ended December 31, 2002, filed on March 25, 2003, amended on March 31, 2003.

(4)	Incorporated by reference from Exhibit 4.2 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.

(5)	Incorporated by reference from Exhibit 4.3 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.

(6)	Incorporated by reference from Exhibit 4.4 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.

(7)	Incorporated by reference from Exhibit 4.1 of the Current Report on Form 8-K dated May 20, 2011, filed on May 23, 2011.

(8)	Incorporated by reference from Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.

(9)	Incorporated by reference from Exhibit 10.1 of the Annual Report on Form 10-K for the period ended December 31, 1999, filed on March 30, 2000, amended on April 13, 2000.

(10)	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.

(11)	Incorporated by reference from Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.

(12)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009.

(13)	Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.

(14)	Incorporated by reference from Exhibit 10.5 of the Annual Report on Form 10-K for the period ended December 31, 1999, filed on March 30, 2000, amended on April 13, 2000.

(15)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.

(16)	Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.

(17)

Form of indemnification agreement entered into by the Company and First Community Bank 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, amended on May 19, 2004.

(18)	Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 15, 2004.

(19)	Incorporated by reference from Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004.

(20)	Incorporated by reference from Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.

(21)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on December 16, 2008.

(22)	Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed on December 16, 2008.

(23)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(24)	Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(25)	Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(26)	Incorporated by reference from Exhibit 10.4 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(27)	Incorporated by reference from Exhibit 10.5 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(28)	Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed on April 3, 2009.

(29)	Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.

(30)	Incorporated by reference from Note 1 of the Notes to Condensed Consolidated Financial Statements included herein.

(31)	Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated and filed on March 1, 2012.

(32)	Incorporated by reference from the 2012 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 7, 2012.

(33)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013.

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: May 10, 2013

/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)

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.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document