FIRST COMMUNITY BANKSHARES INC /VA/ - Quarter Report: 2014 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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 quarterly period ended March 31, 2014

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; 18,392,020 shares outstanding as of May 1, 2014

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

For the quarter ended March 31, 2014

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013		3
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		7
	Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		53

Item 4.	Controls and Procedures		54

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		55

Item 1A.	Risk Factors		55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		55

Item 3.	Defaults Upon Senior Securities		55

Item 4.	Mine Safety Disclosures		55

Item 5.	Other Information		55

Item 6.	Exhibits		56

SIGNATURES			58

EXHIBIT INDEX			59

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2014			2013
(Amounts in thousands, except share and per share data)	(Unaudited)
Assets
Cash and due from banks	$	45,879		$	43,598
Federal funds sold		22,352			1,817
Interest-bearing deposits in banks		10,771			11,152

Total cash and cash equivalents		79,002			56,567
Securities available for sale		483,864			519,820
Securities held to maturity		8,161			568
Loans held for sale		1,743			883
Loans held for investment, net of unearned income:
Covered under loss share agreements		143,170			151,682
Not covered under loss share agreements		1,588,694			1,559,039
Less allowance for loan losses		(23,798	)		(24,077	)

Loans held for investment, net		1,708,066			1,686,644
FDIC indemnification asset		32,510			34,691
Premises and equipment, net		60,043			61,116
Other real estate owned:
Covered under loss share agreements		8,705			7,541
Not covered under loss share agreements		5,923			7,318
Interest receivable		6,259			7,521
Goodwill		105,455			105,455
Other intangible assets		2,691			2,866
Other assets		107,924			111,524

Total assets	$	2,610,346		$	2,602,514

Liabilities
Deposits:
Noninterest-bearing	$	353,137		$	339,680
Interest-bearing		1,621,552			1,611,062

Total deposits		1,974,689			1,950,742
Interest, taxes, and other liabilities		23,323			22,770
Federal funds purchased		—			16,000
Securities sold under agreements to repurchase		112,337			118,308
FHLB borrowings		150,000			150,000
Other borrowings		16,087			16,088

Total Liabilities		2,276,436			2,273,908
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; 15,151 and 15,251 shares outstanding at March 31, 2014, and December 31, 2013, respectively		15,151			15,251
Common stock, $1 par value; 50,000,000 shares authorized; 20,499,683 and 20,493,057 shares issued at March 31, 2014, and December 31, 2013, respectively; 2,107,663 and 1,978,478 shares in treasury at March 31, 2014, and December 31, 2013, respectively		20,500			20,493
Additional paid-in capital		215,827			215,663
Retained earnings		129,115			125,826
Treasury stock, at cost		(35,996	)		(33,887	)
Accumulated other comprehensive loss		(10,687	)		(14,740	)

Total stockholders’ equity		333,910			328,606

Total Liabilities and Stockholders’ Equity	$	2,610,346		$	2,602,514

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)	2014			2013
Interest income
Interest and fees on loans held for investment	$	22,834		$	24,844
Interest on securities — taxable		2,097			1,886
Interest on securities — nontaxable		1,122			1,208
Interest on deposits in banks		30			66

Total interest income		26,083			28,004
Interest expense
Interest on deposits		1,888			2,362
Interest on short-term borrowings		502			590
Interest on long-term debt		1,668			1,690

Total interest expense		4,058			4,642

Net interest income		22,025			23,362
Provision for loan losses		1,793			1,142

Net interest income after provision for loan losses		20,232			22,220
Noninterest income
Wealth management		1,008			846
Service charges on deposit accounts		3,070			3,168
Other service charges and fees		1,771			1,786
Insurance commissions		1,964			1,666
Impairment losses on securities		(264	)		—
Portion of losses recognized in other comprehensive income		—			—

Net impairment losses recognized in earnings		(264	)		—
Net gain on sale of securities		45			117
Net FDIC indemnification asset amortization		(1,134	)		(1,539	)
Other operating income		774			1,817

Total noninterest income		7,234			7,861
Noninterest expense
Salaries and employee benefits		9,905			10,110
Occupancy expense of bank premises		1,778			1,855
Furniture and equipment		1,194			1,343
Amortization of intangible assets		175			179
FDIC premiums and assessments		434			472
Merger related expense		—			49
Other operating expense		5,694			5,536

Total noninterest expense		19,180			19,544

Income before income taxes		8,286			10,537
Income tax expense		2,561			3,396

Net income		5,725			7,141
Dividends on preferred stock		228			258

Net income available to common shareholders	$	5,497		$	6,883

Basic earnings per common share	$	0.30		$	0.34
Diluted earnings per common share		0.29			0.34
Cash dividends per common share		0.12			0.12
Weighted average basic shares outstanding		18,423,123			20,032,694
Weighted average diluted shares outstanding		19,506,647			21,258,490

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


	Three Months Ended
	March 31,
(Amounts in thousands, except share and per share data)	2014			2013
Comprehensive Income
Net income	$	5,725		$	7,141
Other comprehensive income (loss), before tax:
Available-for-sale securities:
Unrealized gains (losses) on securities available for sale with other-than-temporary impairment		482			(197	)
Unrealized gains (losses) on securities available for sale without other-than-temporary impairment		5,706			(1,121	)
Less: reclassification adjustment for gains realized in net income		(45	)		(117	)
Less: reclassification adjustment for credit related other-than-temporary impairments recognized in net income		264			—

Unrealized gains (losses) on available-for-sale securities		6,407			(1,435	)
Employee benefit plans:
Net actuarial gain (loss) on pension and other postretirement benefit plans		29			(300	)
Net prior service cost attributed to plan amendments		—			(94	)
Less: reclassification adjustment for amortization of prior service cost and net actuarial loss included in net periodic benefit cost		65			81

Unrealized gains (losses) on employee benefit plans		94			(313	)

Other comprehensive income (loss), before tax		6,501			(1,748	)
Income tax (expense) benefit		(2,448	)		653

Other comprehensive income (loss), net of tax		4,053			(1,095	)

Total comprehensive income	$	9,778		$	6,046

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
(Amounts in thousands, except share and per share data)	Stock			Stock		Capital			Earnings			Stock			Income (Loss)			Total
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

Balance January 1, 2014	$	15,251		$	20,493	$	215,663		$	125,826		$	(33,887	)	$	(14,740	)	$	328,606
Net income		—			—		—			5,725			—			—			5,725
Other comprehensive income		—			—		—			—			—			4,053			4,053
Common dividends declared — $0.12 per share		—			—		—			(2,208	)		—			—			(2,208	)
Preferred dividends declared — $15.00 per share		—			—		—			(228	)		—			—			(228	)
Preferred stock converted to common stock — 6,900 shares		(100	)		7		93			—			—			—			—
Equity-based compensation expense		—			—		73			—			—			—			73
Common stock options exercised — 554 shares		—			—		—			—			9			—			9
Restricted stock awards — 1,761 shares		—			—		(2	)		—			30			—			28
Purchase of treasury shares — 131,500 shares at $16.30 per share		—			—		—			—			(2,148	)		—			(2,148	)

Balance March 31, 2014	$	15,151		$	20,500	$	215,827		$	129,115		$	(35,996	)	$	(10,687	)	$	333,910

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)	2014			2013
Operating activities
Net income	$	5,725		$	7,141
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,793			1,142
Depreciation and amortization of property, plant, and equipment		1,105			1,227
Amortization (accretion) of premiums on investments, net		1,104			(330	)
Amortization of FDIC indemnification asset, net		1,134			1,539
Amortization of intangible assets		175			179
Gain on sale of loans		(153	)		(454	)
Equity-based compensation expense		73			32
Gain on sale of property, plant, and equipment		(4	)		(48	)
Loss on sales of other real estate		1,292			613
Gain on sale of securities		(45	)		(117	)
Net impairment losses recognized in earnings		264			—
FHLB debt prepayment fees		—			(296	)
Proceeds from sale of mortgage loans		5,264			28,226
Origination of mortgage loans		(5,971	)		(23,894	)
Decrease (increase) in accrued interest receivable		1,262			(324	)
Decrease (increase) in other operating activities		12			(9,112	)

Net cash provided by operating activities		13,030			5,524
Investing activities
Proceeds from sale of securities available for sale		24,204			75,506
Proceeds from maturities, prepayments, and calls of securities available for sale		18,785			19,757
Payments to acquire securities available for sale		(2,082	)		(99,532	)
Payments to acquire securities held to maturity		(7,594	)		—
(Originations) collections of loans, net		(25,705	)		31,277
Proceeds from the redemption of FHLB stock, net		1,649			1,184
Proceeds from the FDIC		1,143			1,141
Payments to acquire property, plant, and equipment		(204	)		(1,219	)
Proceeds from sale of property, plant, and equipment		176			96
Proceeds from sale of other real estate		1,632			1,041

Net cash provided by investing activities		12,004			29,251
Financing activities
Net increase in noninterest-bearing deposits		13,457			12,566
Net increase in interest-bearing deposits		10,490			4,756
Net decrease in federal funds purchased		(16,000	)		—
Repayments of securities sold under agreements to repurchase		(5,971	)		(14,612	)
Repayments of long-term debt		(1	)		(11,558	)
Proceeds from stock options exercised		9			12
Excess tax benefit from equity-based compensation		1			—
Payments for repurchase of treasury stock		(2,148	)		(1,077	)
Payments of common dividends		(2,208	)		(2,407	)
Payments of preferred dividends		(228	)		(261	)

Net cash used in financing activities		(2,599	)		(12,581	)

Net increase in cash and cash equivalents		22,435			22,194
Cash and cash equivalents at beginning of period		56,567			144,847

Cash and cash equivalents at end of period	$	79,002		$	167,041

Supplemental transactions — noncash items
Transfer of loans to other real estate	$	2,693		$	6,865
Loans originated to finance other real estate		—			2,864

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 (“GAAP”) in the United States 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 condensed consolidated balance sheet as of December 31, 2013, has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K (the “2013 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2014. 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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s 2013 Form 10-K.

The Company operates in one business segment, Community Banking, which consists of commercial and consumer banking, lending activities, wealth management, and insurance services. The Company’s executive office is located at One Community Place, Bluefield, Virginia. As of March 31, 2014, our operations were conducted through 74 locations in 5 states: Virginia, West Virginia, North Carolina, South Carolina, and Tennessee.

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 of the Company’s 2013 Form 10-K. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.

Reclassifications and Corrections

Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or cash flow.

Recent Accounting Pronouncements

There were no recent accounting pronouncements that had, or are likely to have, a material effect on the Company’s financial position or results of operations.

Earnings per Common Share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that could be issued by the Company. In accordance with the treasury stock method of accounting, potential common stock could be issued for stock options, nonvested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that have an exercise price greater than the average market value of the Company’s common stock because the effect would be antidilutive.

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


	Three Months Ended
	March 31,
(Amounts in thousands, except share and per share data)	2014		2013
Net income	$	5,725	$	7,141
Dividends on preferred stock		228		258

Net income available to common shareholders	$	5,497	$	6,883

Weighted average number of common shares outstanding, basic		18,423,123		20,032,694
Dilutive effect of potential common shares from:
Stock options		22,636		17,101
Restricted stock		730		6,646
Convertible preferred stock		1,048,486		1,202,049
Contingently issuable shares		11,672		—

Weighted average number of common shares outstanding, diluted		19,506,647		21,258,490

Basic earnings per common share	$	0.30	$	0.34
Diluted earnings per common share		0.29		0.34
Antidilutive potential common shares:
Stock options		245,030		337,693

The Company’s Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) carries a 6% dividend rate. Each share of the Series A Preferred Stock is convertible into 69 shares of the Company’s common stock at any time and mandatorily converts after five years. The Company may redeem the shares at face value after May 20, 2014. The number of Series A Preferred Stock outstanding was 15,151 shares as of March 31, 2014, 15,251 shares as of December 31, 2013, and 17,421 shares as of March 31, 2013.

Note 2. Investment Securities

The following tables present the amortized cost and fair value of available-for-sale securities, including gross unrealized gains and losses, as of the dates indicated:


	March 31, 2014
	Amortized		Unrealized		Unrealized			Fair		OTTI in
(Amounts in thousands)	Cost		Gains		Losses			Value		AOCI⁽¹⁾
U.S. Treasury securities	$	9,715	$	—	$	(451	)	$	9,264	$	—
Municipal securities		144,438		3,075		(2,641	)		144,872		—
Single issue trust preferred securities		55,778		—		(9,649	)		46,129		—
Corporate securities		5,000		—		—			5,000		—
Mortgage-backed securities:
Agency		271,524		2,332		(6,567	)		267,289		—
Non-Agency Alt-A residential		12,110		—		(1,838	)		10,272		(1,838	)

Total mortgage-backed securities		283,634		2,332		(8,405	)		277,561		(1,838	)
Equity securities		733		318		(13	)		1,038		—

Total	$	499,298	$	5,725	$	(21,159	)	$	483,864	$	(1,838	)


	December 31, 2013
	Amortized		Unrealized		Unrealized			Fair		OTTI in
(Amounts in thousands)	Cost		Gains		Losses			Value		AOCI⁽¹⁾
U.S. Treasury securities	$	9,708	$	—	$	(695	)	$	9,013	$	—
Municipal securities		147,049		1,868		(4,637	)		144,280		—
Single issue trust preferred securities		55,764		—		(9,530	)		46,234		—
Corporate securities		5,000		—		(129	)		4,871		—
Mortgage-backed securities:
Agency		306,319		2,575		(8,508	)		300,386		—
Non-Agency Alt-A residential		12,543		—		(2,754	)		9,789		(2,754	)

Total mortgage-backed securities		318,862		2,575		(11,262	)		310,175		(2,754	)
Equity securities		5,259		24		(36	)		5,247		—

Total	$	541,642	$	4,467	$	(26,289	)	$	519,820	$	(2,754	)

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

The following tables present the amortized cost and fair value of held-to-maturity securities, including gross unrealized gains and losses, as of the dates indicated:


	March 31, 2014
	Amortized		Unrealized		Unrealized			Fair
(Amounts in thousands)	Cost		Gains		Losses			Value
U.S. Agency securities	$	4,464	$	—	$	(16	)	$	4,448
Municipal securities		568		4		—			572
Corporate securities		3,129		—		(1	)		3,128

Total	$	8,161	$	4	$	(17	)	$	8,148


	December 31, 2013
	Amortized		Unrealized		Unrealized			Fair
(Amounts in thousands)	Cost		Gains		Losses			Value
Municipal securities	$	568	$	11	$	—		$	579

Total	$	568	$	11	$	—		$	579

The following table presents the amortized cost and fair value of available-for-sale securities and held-to-maturity securities, by contractual maturity, as of March 31, 2014. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.


	Amortized
(Amounts in thousands)	Cost		Fair Value
Available-for-sale securities
Due within one year	$	2,030	$	2,041
Due after one year but within five years		11,245		11,522
Due after five years but within ten years		42,252		42,497
Due after ten years		159,404		149,205

		214,931		205,265
Mortgage-backed securities		283,634		277,561
Equity securities		733		1,038

Total	$	499,298	$	483,864

Held-to-maturity securities
Due within one year	$	—	$	—
Due after one year but within five years		8,161		8,148
Due after five years but within ten years		—		—
Due after ten years		—		—

Total	$	8,161	$	8,148

The following tables present the fair values and unrealized losses for available-for-sale securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated:


	March 31, 2014
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities	$	9,264	$	(451	)	$	—	$	—		$	9,264	$	(451	)
Municipal securities		29,944		(1,629	)		8,840		(1,012	)		38,784		(2,641	)
Single issue trust preferred securities		—		—			46,129		(9,649	)		46,129		(9,649	)
Mortgage-backed securities:
Agency		98,271		(2,707	)		69,063		(3,860	)		167,334		(6,567	)
Non-Agency Alt-A residential		—		—			10,272		(1,838	)		10,272		(1,838	)

Total mortgage-backed securities		98,271		(2,707	)		79,335		(5,698	)		177,606		(8,405	)
Equity securities		143		(13	)		—		—			143		(13	)

Total	$	137,622	$	(4,800	)	$	134,304	$	(16,359	)	$	271,926	$	(21,159	)


	December 31, 2013
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities	$	9,013	$	(695	)	$	—	$	—		$	9,013	$	(695	)
Municipal securities		57,950		(4,147	)		3,049		(490	)		60,999		(4,637	)
Single issue trust preferred securities		—		—			46,234		(9,530	)		46,234		(9,530	)
Corporate securities		4,871		(129	)		—		—			4,871		(129	)
Mortgage-backed securities:
Agency		114,047		(4,361	)		55,706		(4,147	)		169,753		(8,508	)
Non-Agency Alt-A residential		—		—			9,789		(2,754	)		9,789		(2,754	)

Total mortgage-backed securities		114,047		(4,361	)		65,495		(6,901	)		179,542		(11,262	)
Equity securities		4,976		(24	)		20		(12	)		4,996		(36	)

Total	$	190,857	$	(9,356	)	$	114,798	$	(16,933	)	$	305,655	$	(26,289	)

The following table presents the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated. There were no held-to-maturity securities in a continuous unrealized loss position as of December 31, 2013.


	March 31, 2014
	Less than 12 Months					12 Months or longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Amounts in thousands)	Value		Losses			Value		Losses		Value		Losses
U.S. Agency securities	$	4,448	$	(16	)	$	—	$	—	$	4,448	$	(16	)
Corporate securities		3,128		(1	)		—		—		3,128		(1	)

Total	$	7,576	$	(17	)	$	—	$	—	$	7,576	$	(17	)

As of March 31, 2014, there were 149 individual securities in an unrealized loss position, and their combined depreciation in value represented 4.30% of the investment securities portfolio. As of December 31, 2013, there were 219 individual securities in an unrealized loss position, and their combined depreciation in value represented 5.06% of the available-for-sale securities portfolio.

The following table presents the components of the Company’s net gain from the sale of securities in the periods indicated:


	Three Months Ended
	March 31,
(Amounts in thousands)	2014			2013
Gross realized gains	$	223		$	155
Gross realized losses		(178	)		(38	)

Net gain on sale of securities	$	45		$	117

The carrying value of securities pledged to secure public deposits and for other purposes was $284.59 million as of March 31, 2014, and $284.77 million as of December 31, 2013.

The Company reviews its investment portfolio on a quarterly basis for indications of OTTI. Debt securities not beneficially owned by the Company include securities issued from the U.S. Department of the Treasury (the “Treasury”), municipal securities, and single issue trust preferred securities. For debt securities not beneficially owned, the Company analyzes 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. If the evaluation suggests that the impairment will not be recovered, the Company calculates the present value of the security to determine the amount of OTTI. The security is then written down to its current present value and the Company calculates and records the amount of the loss due to credit factors in earnings through noninterest income and the amount due to other factors in stockholders’ equity through OCI. During the three months ended March 31, 2014, and March 31, 2013, the Company incurred no OTTI charges related to debt securities not beneficially owned. 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.

Debt securities beneficially owned by the Company consist of corporate FDIC securities and mortgage-backed securities (“MBS”). For debt securities beneficially owned, the Company analyzes the cash flows for each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. If the projected value of cash flows at the current reporting date is less than the present value previously projected, and less than the current book value, an adverse change has occurred. The Company then compares the current present value of cash flows to the current net book value to determine the credit-related portion of the OTTI. The credit-related OTTI is recorded in earnings through noninterest income and any remaining noncredit-related OTTI is recorded in stockholders’ equity through OCI. During the three months ended March 31, 2014, the Company incurred credit-related OTTI charges related to debt securities beneficially owned of $232 thousand. These charges were related to a non-Agency MBS. During the three months ended March 31, 2013, the Company incurred no credit-related OTTI charges.

The Company uses a discounted cash flow model for the non-Agency Alt-A residential MBS with the following assumptions: constant voluntary prepayment rate of 2.5%, a customized constant default rate scenario that assumes approximately 15% of the remaining underlying mortgages will default over the life of the security, and a customized loss severity rate scenario that ramps the loss rate down from 51% to 10% over the course of approximately 33 months. The following table presents the activity for credit-related losses recognized in earnings on debt securities where a portion of an OTTI was recognized in OCI for the periods indicated:


	Three Months Ended
	March 31,
(Amounts in thousands)	2014		2013
Beginning balance⁽¹⁾	$	7,798	$	7,478
Additions for credit losses on securities previously recognized		232		—

Ending balance	$	8,030	$	7,478

(1)	The beginning balance includes credit related losses included in OTTI charges recognized on debt securities in prior periods.

For equity securities, the Company considers its intent to hold or sell the security before recovery, the severity and duration of the decline in fair value of the security below its cost, the financial condition and near-term prospects of the issuer, and whether the decline appears to be related to issuer, general market, or industry conditions to determine if the impairment will be recovered. If the Company deems the impairment other-than-temporary in nature, the security is written down to its current present value and the OTTI loss is charged to earnings. During the three months ended March 31, 2014, the Company incurred OTTI charges related to certain equity holdings of $32 thousand. During the three months ended March 31, 2013, the

Company recognized no OTTI charges related to equity securities.

Note 3. Loans

Loan Portfolio

The Company’s loans held for investment are grouped into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are defined as loans acquired in FDIC-assisted transactions that are covered by loss share agreements. The following table presents loans, net of unearned income and disaggregated by class, as of the periods indicated:


	March 31, 2014					December 31, 2013
(Amounts in thousands)	Amount		Percent			Amount		Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land	$	45,661		2.64	%	$	35,255		2.06	%
Commercial and industrial		94,403		5.45	%		95,455		5.58	%
Multi-family residential		75,594		4.36	%		70,197		4.10	%
Single family non-owner occupied		137,969		7.97	%		135,559		7.92	%
Non-farm, non-residential		484,361		27.97	%		475,911		27.82	%
Agricultural		2,093		0.12	%		2,324		0.14	%
Farmland		32,410		1.87	%		32,614		1.91	%

Total commercial loans		872,491		50.38	%		847,315		49.53	%
Consumer real estate loans
Home equity lines		113,137		6.53	%		111,770		6.53	%
Single family owner occupied		492,627		28.45	%		496,012		28.99	%
Owner occupied construction		34,360		1.98	%		28,703		1.68	%

Total consumer real estate loans		640,124		36.96	%		636,485		37.20	%
Consumer and other loans
Consumer loans		72,111		4.16	%		71,313		4.17	%
Other		3,968		0.23	%		3,926		0.23	%

Total consumer and other loans		76,079		4.39	%		75,239		4.40	%

Total non-covered loans		1,588,694		91.73	%		1,559,039		91.13	%
Total covered loans		143,170		8.27	%		151,682		8.87	%

Total loans held for investment, net of unearned income	$	1,731,864		100.00	%	$	1,710,721		100.00	%

Loans held for sale	$	1,743				$	883

The following table presents the components of the Company’s covered loan portfolio, disaggregated by class, as of the dates indicated:


	March 31,		December 31,
(Amounts in thousands)	2014		2013
Covered loans
Commercial loans
Construction, development, and other land	$	15,956	$	15,865
Commercial and industrial		3,062		3,325
Multi-family residential		1,903		1,933
Single family non-owner occupied		6,794		7,449
Non-farm, non-residential		31,458		34,646
Agricultural		162		164
Farmland		817		873

Total commercial loans		60,152		64,255
Consumer real estate loans
Home equity lines		66,895		69,206
Single family owner occupied		15,287		16,919
Owner occupied construction		727		1,184

Total consumer real estate loans		82,909		87,309
Consumer and other loans
Consumer loans		109		118

Total covered loans	$	143,170	$	151,682

For information concerning off-balance sheet financing, see Note 13, “Litigation, Commitments and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

Purchased Credit Impaired Loans

When the fair values of purchased loans are established at acquisition, certain loans are identified as impaired. These purchased credit impaired (“PCI”) loans are aggregated into loan pools that have common risk characteristics. The Company’s loan pools consist of Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. The following table presents the carrying and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:


(Amounts in thousands)	Peoples		Waccamaw		Other		Total
Carrying balance, January 1, 2013	$	26,907	$	112,093	$	2,340	$	141,340
Carrying balance, March 31, 2013		21,715		96,537		2,364		120,616
Unpaid principal balance, March 31, 2013		28,821		134,158		5,892		168,871
Carrying balance, January 1, 2014	$	9,196	$	70,584	$	1,931	$	81,711
Carrying balance, March 31, 2014		9,196		65,780		1,918		76,894
Unpaid principal balance, March 31, 2014		16,825		99,582		5,385		121,792

The following table presents the activity in the accretable yield related to PCI loans, by acquisition, in the periods indicated:


(Amounts in thousands)	Peoples			Waccamaw			Other			Total
Balance, January 1, 2013	$	2,342		$	21,886		$	15		$	24,243
Additions		7			66			—			73
Accretion		(376	)		(1,385	)		(51	)		(1,812	)
Reclassifications from (to) nonaccretable difference		2,302			(12,482	)		46			(10,134	)
Disposals		(537	)		(585	)		—			(1,122	)

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

Balance, January 1, 2014	$	5,294		$	10,338		$	8		$	15,640
Additions		1			7			—			8
Accretion		(563	)		(1,563	)		(11	)		(2,137	)
Reclassifications from nonaccretable difference		337			8,977			11			9,325
Disposals		(112	)		(167	)		—			(279	)

Balance, March 31, 2014	$	4,957		$	17,592		$	8		$	22,557

Note 4. Credit Quality

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 the Company determines that it is probable all principal and interest amounts contractually due will not be collected, the loan is generally deemed to be impaired.

The following tables present the recorded investment and related information for loans considered to be impaired, excluding PCI loans, as of the periods indicated:


	March 31, 2014						December 31, 2013
			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
Commercial and industrial	$	292	$	292	$	—	$	292	$	292	$	—
Multi-family residential		—		—		—		—		—		—
Single family non-owner occupied		420		420		—		289		317		—
Non-farm, non-residential		5,559		5,903		—		5,352		5,682		—
Farmland		351		363		—		351		363		—
Consumer real estate loans
Home equity lines		254		264		—		257		264		—
Single family owner occupied		1,690		2,101		—		2,006		2,414		—

Total impaired loans with no allowance		8,566		9,343		—		8,547		9,332		—
Impaired loans with a related allowance:
Commercial loans
Commercial and industrial		4,943		5,319		3,504		4,897		10,244		3,794
Multi-family residential		5,601		5,601		500		—		—		—
Single family non-owner occupied		364		371		38		375		375		47
Non-farm, non-residential		4,458		4,459		377		600		600		114
Farmland		—		—		—		—		—		—
Consumer real estate loans
Home equity lines		208		229		171		215		230		52
Single family owner occupied		4,377		4,578		692		4,844		5,035		735

Total impaired loans with an allowance		19,951		20,557		5,282		10,931		16,484		4,742

Total impaired loans	$	28,517	$	29,900	$	5,282	$	19,478	$	25,816	$	4,742

The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, in the periods indicated:


	For the Three Months Ended
	March 31, 2014				March 31, 2013
	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
Commercial and industrial		292		12		599		11
Multi-family residential		—		—		35		2
Single family non-owner occupied		420		1		841		79
Non-farm, non-residential		5,918		36		5,955		212
Farmland		363		11		88		9
Consumer real estate loans
Home equity lines		265		2		298		25
Single family owner occupied		2,101		51		547		70

Total impaired loans with no allowance		9,359		113		10,558		451
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		2,670		117
Commercial and industrial		5,157		47		3,217		—
Multi-family residential		5,603		22		376		7
Single family non-owner occupied		372		1		1,728		3
Non-farm, non-residential		4,399		25		2,756		26
Farmland		—		—		—		—
Consumer real estate loans
Home equity lines		229		1		222		3
Single family owner occupied		4,580		34		4,485		37

Total impaired loans with an allowance		20,340		130		15,454		193

Total impaired loans	$	29,699	$	243	$	26,012	$	644

The Company determined that 3 of the 7 PCI loan pools were impaired as of March 31, 2014, compared to 4 impaired pools as of December 31, 2013. The following tables present balance and interest income related to the impaired loan pools as of the dates, and in the periods, indicated:


(Amounts in thousands)	March 31, 2014		December 31, 2013
Recorded investment	$	47,382	$	52,033
Unpaid principal balance		62,325		69,320
Allowance for loan losses		485		747


	Three Months Ended March 31,
(Amounts in thousands)	2014		2013
Interest income recognized	$	782	$	84
Average recorded investment		49,276		20,233

As part of the ongoing monitoring of the Company’s loan portfolio, management tracks certain credit quality indicators that include: 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 analyzes all commercial loan relationships greater than $3.0 million on an annual basis and at various times during the year. In addition, smaller commercial and retail loans are sampled for review during the year. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. The general characteristics of each risk grade are as follows:

•

Pass — This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include: capital strength, earnings stability, liquidity leverage, and industry conditions.

•

Special Mention — This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.

•

Substandard — This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. In order to meet repayment terms, these loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business.

•

Doubtful — This grade is assigned to loans on nonaccrual status. These loans have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is extremely unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.

•

Loss — This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are determined to be uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.

Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately in the following credit quality discussion. PCI loan pools are disaggregated and included in their applicable loan class in the following discussion. In addition, PCI loans are generally not classified as nonaccrual or nonperforming due to the accrual of interest income under the accretion method of accounting.

The following tables present loans held for investment, by internal credit risk grade, as of the periods indicated:


	March 31, 2014
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	41,707	$	1,138	$	2,664	$	152	$	—	$	45,661
Commercial and industrial		86,139		953		3,371		3,940		—		94,403
Multi-family residential		67,083		2,095		6,416		—		—		75,594
Single family non-owner occupied		123,772		4,021		9,812		364		—		137,969
Non-farm, non-residential		446,848		18,478		19,035		—		—		484,361
Agricultural		2,077		7		9		—		—		2,093
Farmland		29,277		1,307		1,826		—		—		32,410
Consumer real estate loans
Home equity lines		109,135		1,390		2,404		208		—		113,137
Single family owner occupied		454,285		10,179		27,999		164		—		492,627
Owner occupied construction		33,495		422		443		—		—		34,360
Consumer and other loans
Consumer loans		70,929		794		386		2		—		72,111
Other		3,968		—		—		—		—		3,968

Total non-covered loans		1,468,715		40,784		74,365		4,830		—		1,588,694
Covered loans
Commercial loans
Construction, development, and other land		9,607		1,465		4,837		47		—		15,956
Commercial and industrial		2,474		468		119		1		—		3,062
Multi-family residential		1,458		—		445		—		—		1,903
Single family non-owner occupied		3,832		1,474		1,478		10		—		6,794
Non-farm, non-residential		11,352		6,606		13,483		17		—		31,458
Agricultural		162		—		—		—		—		162
Farmland		512		—		305		—		—		817
Consumer real estate loans
Home equity lines		64,707		1,147		1,039		2		—		66,895
Single family owner occupied		10,117		201		4,969		—		—		15,287
Owner occupied construction		88		235		404		—		—		727
Consumer and other loans
Consumer loans		109		—		—		—		—		109
Other		—		—		—		—		—		—

Total covered loans		104,418		11,596		27,079		77		—		143,170

Total loans	$	1,573,133	$	52,380	$	101,444	$	4,907	$	—	$	1,731,864


	December 31, 2013
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	30,719	$	1,094	$	3,139	$	303	$	—	$	35,255
Commercial and industrial		87,589		1,056		2,919		3,891		—		95,455
Multi-family residential		67,257		2,237		703		—		—		70,197
Single family non-owner occupied		121,367		4,501		9,316		375		—		135,559
Non-farm, non-residential		440,334		21,046		14,500		31		—		475,911
Agricultural		2,306		8		10		—		—		2,324
Farmland		27,421		1,721		3,472		—		—		32,614
Consumer real estate loans
Home equity lines		107,411		1,355		2,789		215		—		111,770
Single family owner occupied		460,166		8,170		27,507		169		—		496,012
Owner occupied construction		28,242		261		200		—		—		28,703
Consumer and other loans
Consumer loans		69,973		864		472		—		4		71,313
Other		3,918		—		8		—		—		3,926

Total non-covered loans		1,446,703		42,313		65,035		4,984		4		1,559,039
Covered loans
Commercial loans
Construction, development, and other land		9,722		1,378		4,714		51		—		15,865
Commercial and industrial		2,865		247		189		24		—		3,325
Multi-family residential		1,472		—		461		—		—		1,933
Single family non-owner occupied		4,362		1,519		1,552		16		—		7,449
Non-farm, non-residential		13,077		4,630		16,901		38		—		34,646
Agricultural		164		—		—		—		—		164
Farmland		572		—		301		—		—		873
Consumer real estate loans
Home equity lines		66,797		1,138		1,269		2		—		69,206
Single family owner occupied		10,832		148		5,939		—		—		16,919
Owner occupied construction		198		—		986		—		—		1,184
Consumer and other loans
Consumer loans		118		—		—		—		—		118
Other		—		—		—		—		—		—

Total covered loans		110,179		9,060		32,312		131		—		151,682

Total loans	$	1,556,882	$	51,373	$	97,347	$	5,115	$	4	$	1,710,721

Credit quality continued to improve in the covered loan portfolio with special mention and classified loans declining $2.75 million, or 6.63%, as of March 31, 2014, compared to December 31, 2013.

The following table presents nonaccrual loans, by loan class, as of the dates indicated:


	March 31, 2014						December 31, 2013
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	816	$	127	$	943	$	1,187	$	761	$	1,948
Commercial and industrial		5,357		75		5,432		5,341		92		5,433
Multi-family residential		115		—		115		—		—		—
Single family non-owner occupied		2,407		114		2,521		1,966		222		2,188
Non-farm, non-residential		2,972		—		2,972		2,685		—		2,685
Farmland		432		—		432		441		301		742
Consumer real estate loans
Home equity lines		774		246		1,020		765		232		997
Single family owner occupied		7,890		582		8,472		6,567		1,555		8,122
Owner occupied construction		—		117		117		—		190		190
Consumer and other loans
Consumer loans		138		—		138		201		—		201

Total		20,901		1,261		22,162		19,153		3,353		22,506
Purchased impaired loans		8		—		8		8		—		8

Total nonaccrual loans	$	20,909	$	1,261	$	22,170	$	19,161	$	3,353	$	22,514

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. There were no non-covered accruing loans contractually past due 90 days or more as of March 31, 2014, or December 31, 2013. Accruing loans contractually past due 90 days or more totaled $109 thousand as of March 31, 2014, and $86 thousand as of December 31, 2013 which were attributed to covered home equity lines.


	March 31, 2014
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	111	$	113	$	217	$	441	$	45,220	$	45,661
Commercial and industrial		59		—		2,576		2,635		91,768		94,403
Multi-family residential		85		—		115		200		75,394		75,594
Single family non-owner occupied		432		254		1,527		2,213		135,756		137,969
Non-farm, non-residential		1,216		203		2,325		3,744		480,617		484,361
Agricultural		8		—		—		8		2,085		2,093
Farmland		—		—		432		432		31,978		32,410
Consumer real estate loans
Home equity lines		479		80		191		750		112,387		113,137
Single family owner occupied		4,771		2,951		3,390		11,112		481,515		492,627
Owner occupied construction		—		—		—		—		34,360		34,360
Consumer and other loans
Consumer loans		509		76		29		614		71,497		72,111
Other		—		—		—		—		3,968		3,968

Total non-covered loans		7,670		3,677		10,802		22,149		1,566,545		1,588,694
Covered loans
Commercial loans
Construction, development, and other land		178		10		74		262		15,694		15,956
Commercial and industrial		—		—		35		35		3,027		3,062
Multi-family residential		—		—		—		—		1,903		1,903
Single family non-owner occupied		—		—		114		114		6,680		6,794
Non-farm, non-residential		195		354		—		549		30,909		31,458
Agricultural		—		—		—		—		162		162
Farmland		—		—		—		—		817		817
Consumer real estate loans
Home equity lines		353		1		187		541		66,354		66,895
Single family owner occupied		148		58		434		640		14,647		15,287
Owner occupied construction		—		—		117		117		610		727
Consumer and other loans												—
Consumer loans		—		—		—		—		109		109
Other		—		—		—		—		—		—

Total covered loans		874		423		961		2,258		140,912		143,170

Total loans	$	8,544	$	4,100	$	11,763	$	24,407	$	1,707,457	$	1,731,864


	December 31, 2013
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	118	$	10	$	532	$	660	$	34,595	$	35,255
Commercial and industrial		93		39		2,631		2,763		92,692		95,455
Multi-family residential		115		—		—		115		70,082		70,197
Single family non-owner occupied		611		554		1,203		2,368		133,191		135,559
Non-farm, non-residential		1,014		318		1,770		3,102		472,809		475,911
Agricultural		—		—		—		—		2,324		2,324
Farmland		245		—		—		245		32,369		32,614
Consumer real estate loans
Home equity lines		289		317		442		1,048		110,722		111,770
Single family owner occupied		7,428		1,228		145		8,801		487,211		496,012
Owner occupied construction		205		—		2,284		2,489		26,214		28,703
Consumer and other loans
Consumer loans		811		86		105		1,002		70,311		71,313
Other		—		—		—		—		3,926		3,926

Total non-covered loans		10,929		2,552		9,112		22,593		1,536,446		1,559,039
Covered loans
Commercial loans
Construction, development, and other land		479		—		453		932		14,933		15,865
Commercial and industrial		5		44		92		141		3,184		3,325
Multi-family residential		—		—		—		—		1,933		1,933
Single family non-owner occupied		—		—		184		184		7,265		7,449
Non-farm, non-residential		209		—		—		209		34,437		34,646
Agricultural		—		—		—		—		164		164
Farmland		—		—		301		301		572		873
Consumer real estate loans
Home equity lines		488		86		163		737		68,469		69,206
Single family owner occupied		197		120		1,466		1,783		15,136		16,919
Owner occupied construction		—		—		190		190		994		1,184
Consumer and other loans												—
Consumer loans		—		—		—		—		118		118
Other		—		—		—		—		—		—

Total covered loans		1,378		250		2,849		4,477		147,205		151,682

Total loans	$	12,307	$	2,802	$	11,961	$	27,070	$	1,683,651	$	1,710,721

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. 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. Specific reserves in the allowance for loan losses attributed to TDRs totaled $1.83 million as of March 31, 2014, and $1.84 million as of December 31, 2013. 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 the 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 Company recognized interest income on TDRs of $149 thousand for the three months ended March 31, 2014, and $240 thousand for the three months ended March 31, 2013.

Loans acquired with credit deterioration, with a discount, are generally not considered TDRs as long as the loans remain in the assigned loan pool. There were no covered loans recorded as TDRs as of March 31, 2014, or December 31, 2013. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated:


	March 31, 2014						December 31, 2013
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total
Commercial loans
Commercial and industrial	$	1,115	$	—	$	1,115	$	1,115	$	—	$	1,115
Single family non-owner occupied		364		—		364		375		—		375
Non-farm, non-residential		124		5,742		5,866		128		5,490		5,618
Consumer real estate loans
Home equity lines		—		50		50		159		51		210
Single family owner occupied		532		6,930		7,462		423		6,670		7,093
Owner occupied construction		—		246		246		—		—		—

Total TDRs	$	2,135	$	12,968	$	15,103	$	2,200	$	12,211	$	14,411

(1)	TDRs on nonaccrual status are included in the total nonaccrual loan balance disclosed in the table above.

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated. The post-modification recorded investment represents the loan balance immediately following modification.


	Three Months Ended March 31,
	2014						2013
(Amounts in thousands)	Total Contracts		Pre-Modification Recorded Investment		Post- Modification Recorded Investment		Total Contracts		Pre-Modification Recorded Investment		Post- Modification Recorded Investment
Below market interest rate
Owner occupied construction		1	$	245	$	245		—	$	—	$	—
Extended payment term
Non-farm, non-residential		1	$	303	$	303		—		—		—
Single family owner occupied		1		134		134		—		—		—

Total		2		437		437		—		—		—
Below market interest rate and extended payment term
Single family owner occupied		2		266		266		—		—		—

Total		5	$	948	$	948		—	$	—	$	—

There were no payment defaults on loans modified as TDRs, that were restructured within the previous 12 months, for the three months ended March 31, 2014 or 2013.

Note 5. Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems adequate to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by provisions charges to operations and reduced by net charge-offs. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent on a variety of factors that may be beyond the Company’s control: the performance of the Company’s loan portfolio, the economy, changes in interest rates, the view of regulatory authorities towards loan classifications, and other factors. These uncertainties may result in a material change to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated.

The Company’s allowance is comprised of specific reserves related to loans individually evaluated, including credit relationships, and general reserves related to loans not individually evaluated that are segmented into groups with similar risk characteristics, based on an internal risk grading matrix. General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and micro economic conditions reflected within the loan portfolio and the economy. For loans acquired in a business combination, loans identified as credit impaired at the acquisition date are grouped into pools and evaluated separately from the non-PCI portfolio. The Company has aggregated PCI loans into the following pools: Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. Provisions calculated for PCI loans are offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion, 80%, of the post-acquisition exposure. While allocations are made to various portfolio segments, the allowance for loan losses, excluding reserves allocated to specific loans and PCI loan pools, is available for use against any loan loss management deems appropriate. As of March 31, 2014, management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio.

The following table presents the aggregate activity in the allowance for loan losses in the periods indicated:


(Amounts in thousands)	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
Balance, January 1, 2013	$	25,762		$	8		$	25,770
Provision for loan losses		1,142			—			1,142
Benefit attributable to the FDIC indemnification asset		—			—			—

Provision for loan losses charged to operations		1,142			—			1,142
Provision for loan losses recorded through the FDIC indemnification asset		—			—			—
Charge-offs		(2,759	)		—			(2,759	)
Recoveries		697			—			697

Net charge-offs		(2,062	)		—			(2,062	)

Balance, March 31, 2013	$	24,842		$	8		$	24,850

Balance, January 1, 2014	$	23,322		$	755		$	24,077
Provision for loan losses		1,852			(262	)		1,590
Benefit attributable to the FDIC indemnification asset		—			203			203

Provision for loan losses charged to operations		1,852			(59	)		1,793
Provision for loan losses recorded through the FDIC indemnification asset		—			(203	)		(203	)
Charge-offs		(2,216	)		—			(2,216	)
Recoveries		347			—			347

Net charge-offs		(1,869	)		—			(1,869	)

Balance, March 31, 2014	$	23,305		$	493		$	23,798

The following table presents the components of the activity in the allowance for loan losses, excluding PCI loans, by loan segment, in the periods indicated:


				Consumer			Consumer
(Amounts in thousands)	Commercial			Real Estate			and Other			Total
Balance, January 1, 2013	$	17,259		$	7,906		$	597		$	25,762
Provision for loan losses charged to operations		483			480			179			1,142
Loans charged off		(783	)		(1,396	)		(580	)		(2,759	)
Recoveries credited to allowance		283			13			401			697

Net charge-offs		(500	)		(1,383	)		(179	)		(2,062	)

Balance, March 31, 2013	$	17,242		$	7,003		$	597		$	24,842

Balance, January 1, 2014	$	16,090		$	6,597		$	635		$	23,322
Provision for loan losses charged to operations		1,218			485			149			1,852
Loans charged off		(1,051	)		(710	)		(455	)		(2,216	)
Recoveries credited to allowance		82			21			244			347

Net charge-offs		(969	)		(689	)		(211	)		(1,869	)

Balance, March 31, 2014	$	16,339		$	6,393		$	573		$	23,305

The following table presents the components of the activity in the allowance for loan losses for PCI loans, by loan segment, in the periods indicated:


				Consumer			Consumer
(Amounts in thousands)	Commercial			Real Estate			and Other		Total
Balance, January 1, 2013	$	8		$	—		$	—	$	8
Purchased impaired provision		—			—			—		—
Benefit attributable to FDIC indemnificaton asset		—			—			—		—

Provision for loan losses charged to operations		—			—			—		—
Provision for loan losses recorded through the FDIC indemnificaton asset		—			—			—		—

Balance, March 31, 2013	$	8		$	—		$	—	$	8

Balance, January 1, 2014	$	77		$	678		$	—	$	755
Purchased impaired provision		(69	)		(193	)		—		(262	)
Benefit attributable to FDIC indemnificaton asset		55			148			—		203

Provision for loan losses charged to operations		(14	)		(45	)		—		(59	)
Provision for loan losses recorded through the FDIC indemnificaton asset		(55	)		(148	)		—		(203	)

Balance, March 31, 2014	$	8		$	485		$	—	$	493

The following tables present the Company’s allowance for loan losses and recorded investment in loans, excluding PCI loans, by loan class, as of the dates indicated:


	March 31, 2014
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated
Commercial loans
Construction, development, and other land	$	—	$	—	$	56,996	$	1,293
Commercial and industrial		5,235		3,504		91,317		1,312
Multi-family residential		5,601		500		71,451		1,216
Single family non-owner occupied		784		38		138,357		3,431
Non-farm, non-residential		10,017		377		486,594		4,411
Agricultural		—		—		2,255		19
Farmland		351		—		32,876		238

Total commercial loans		21,988		4,419		879,846		11,920
Consumer real estate loans
Home equity lines		462		171		137,869		1,289
Single family owner occupied		6,067		692		498,010		4,029
Owner occupied construction		—		—		34,565		212

Total consumer real estate loans		6,529		863		670,444		5,530
Consumer and other loans
Consumer loans		—		—		72,195		573
Other		—		—		3,968		—

Total consumer and other loans		—		—		76,163		573

Total loans, excluding PCI loans	$	28,517	$	5,282	$	1,626,453	$	18,023


	December 31, 2013
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated
Commercial loans
Construction, development, and other land	$	—	$	—	$	46,404	$	1,141
Commercial and industrial		5,189		3,794		92,612		1,421
Multi-family residential		—		—		71,669		1,211
Single family non-owner occupied		664		47		136,567		3,502
Non-farm, non-residential		5,952		114		483,126		4,536
Agricultural		—		—		2,488		23
Farmland		351		—		33,136		301

Total commercial loans		12,156		3,955		866,002		12,135
Consumer real estate loans
Home equity lines		472		52		136,896		1,309
Single family owner occupied		6,850		735		502,229		4,295
Owner occupied construction		—		—		29,090		206

Total consumer real estate loans		7,322		787		668,215		5,810
Consumer and other loans
Consumer loans		—		—		71,389		635
Other		—		—		3,926		—

Total consumer and other loans		—		—		75,315		635

Total loans, excluding PCI loans	$	19,478	$	4,742	$	1,609,532	$	18,580

The Company aggregates PCI loans into the following loan pools: Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. The following table presents the Company’s allowance for loan losses and recorded investment in PCI loans, by loan pool, as of the dates indicated:


	March 31, 2014				December 31, 2013
(Amounts in thousands)	Loan Pools		Allowance for Loan Pools With Impairment		Loan Pools		Allowance for Loan Pools With Impairment
Commercial loans
Waccamaw commercial	$	17,755	$	—	$	19,851	$	—
Waccamaw lines of credit		1,950		—		2,594		69
Peoples commercial		7,875		—		7,862		—
Other		1,918		8		1,931		8

Total commercial loans		29,498		8		32,238		77
Consumer real estate loans
Waccamaw serviced home equity lines		41,701		277		43,608		277
Waccamaw residential		4,359		33		4,497		217
Peoples residential		1,321		175		1,334		184

Total consumer real estate loans		47,381		485		49,439		678
Consumer and other loans
Waccamaw consumer		15		—		34		—

Total loans	$	76,894	$	493	$	81,711	$	755

Note 6. FDIC Indemnification Asset

The Company entered into loss share agreements with the FDIC in 2012 in connection with the FDIC-assisted acquisition of Waccamaw. Under the loss share agreements, the FDIC agreed to cover 80% of most loan and foreclosed real estate losses. Certain expenses incurred in relation to these covered assets are reimbursable by the FDIC. Estimated reimbursements are netted against the expense on covered assets in the Company’s consolidated statements of income. The following table presents activity in the FDIC indemnification asset in the periods indicated:


	Three Months Ended March 31,
(Amounts in thousands)	2014			2013
Beginning balance	$	34,691		$	48,149
Decrease in estimated losses on covered loans		(203	)		—
Increase in estimated losses on covered OREO		149			1,338
Reimbursable expenses from the FDIC		150			341
Net amortization		(1,134	)		(1,539	)
Reimbursements from the FDIC		(1,143	)		(4,368	)

Ending balance	$	32,510		$	43,921

Note 7. Deposits

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


(Amounts in thousands)	March 31, 2014		December 31, 2013
Noninterest-bearing demand deposits	$	353,137	$	339,680
Interest-bearing deposits:
Interest-bearing demand deposits		382,752		361,821
Money market accounts		236,914		237,845
Savings deposits		294,183		286,165
Certificates of deposit		589,469		606,178
Individual retirement accounts		118,234		119,053

Total interest-bearing deposits		1,621,552		1,611,062

Total deposits	$	1,974,689	$	1,950,742

Note 8. Borrowings

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


(Amounts in thousands)	March 31, 2014		December 31, 2013
Federal funds purchased	$	—	$	16,000
Securities sold under agreements to repurchase:
Retail		62,337		68,308
Wholesale		50,000		50,000

Total securities sold under agreements to repurchase		112,337		118,308
FHLB borrowings		150,000		150,000
Subordinated debt		15,464		15,464
Other debt		623		624

Total borrowings	$	278,424	$	300,396

Short-term borrowings consist of federal funds purchased and retail repurchase agreements, which are typically collateralized with agency MBSs. The weighted average rate of federal funds purchased was 0.34% as of March 31, 2014, and 0.36% as of December 31, 2013. The weighted average rate of retail repurchase agreements was 0.16% as of March 31, 2014, and 0.38% as of December 31, 2013.

Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other obligations. The weighted average contractual rate of wholesale repurchase agreements was 3.71% as of March 31, 2014, and December 31, 2013. As of March 31, 2014, the weighted average contractual maturity of wholesale repurchase agreements was 3.83 years. The weighted average contractual rate of FHLB borrowings was 4.12% as of March 31, 2014, and December 31, 2013. As of March 31, 2014, the weighted average contractual maturity of FHLB borrowings was 4.32 years. The following schedule presents contractual maturities of FHLB borrowings, by year, as of March 31, 2014:


(Amounts in thousands)
2014	$	—
2015		—
2016		—
2017		100,000
2018		—
2019 and thereafter		50,000

	$	150,000

FHLB callable advances may be redeemed by the FHLB at quarterly intervals after various lockout periods that could substantially shorten the lives of the advances. If called, the advance may be paid in full or converted into another FHLB credit product. Prepayment of an advance may result in substantial penalties based on the differential between the contractual note and current advance rate for similar maturities. FHLB advances were secured by qualifying loans that totaled $1.16 billion as of March 31, 2014, and $1.13 billion as of December 31, 2013. Unused borrowing capacity with the FHLB was $362.35 million as of March 31, 2014.

Subordinated debt consists of junior subordinated debentures (“Debentures”) of $15.46 million that were issued by the Company in October 2003 to the Trust. The Debentures had 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. 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. The preferred securities issued by the Trust are not included in the Company’s consolidated balance sheets; however, these securities qualify as Tier 1 capital for regulatory purposes, subject to guidelines issued by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve’s quantitative limits did not prevent the Company from including all $15.46 million in trust preferred securities outstanding in Tier 1 capital as of March 31, 2014, and December 31, 2013.

Note 9. Derivative Instruments and Hedging Activities

The Company primarily uses derivative instruments 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. 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. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative instruments are subject to counterparty credit risk due to the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. Derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.

As of March 31, 2014, the Company’s derivative instruments consisted of IRLCs, forward sale loan commitments, and interest rate swaps. Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors.

IRLCs and forward sale loan commitments. In the normal course of business, the Company enters into interest rate lock commitments (“IRLCs”) with customers on mortgage loans intended to be sold in the secondary market and commitments to sell those originated mortgage loans. 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 date we issue the commitment 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 declines when interest rates increase and rise when interest rates decrease. The fair values of the Company’s IRLCs and forward sale loan commitments are recorded at fair value as a component of other assets and other liabilities in the consolidated balance sheets. These derivatives do not qualify as hedging instruments; therefore, changes in fair value are recorded in earnings.

Interest rate swaps. The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the London InterBank Offered Rate (“LIBOR”) curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify as fair value hedging instruments; therefore, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period.

The Company entered into a fifteen-year, $4.34 million notional interest rate swap agreement in February 2014 and a ten-year, $3.50 million notional interest rate swap agreement in October 2013. The swap agreements, which are accounted for as fair value hedges, and the loans hedged by the agreements are recorded at fair value. The fair value hedges were effective as of March 31, 2014.

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


	March 31, 2014		December 31, 2013		March 31, 2013
(Amounts in thousands)	Notional or Contractual Amount		Notional or Contractual Amount		Notional or Contractual Amount
Derivatives designated as hedges:
Interest rate swaps	$	7,872	$	3,453	$	—
Derivatives not designated as hedges:
IRLCs		2,039		3,677		14,097
Forward sale loan commitments		3,782		4,560		—

Total derivatives not designated as hedges		5,821		8,237		14,097

Total derivatives	$	13,693	$	11,690	$	14,097

The following table presents the fair values of the Company’s derivative instruments as of the dates indicated:


	March 31, 2014				December 31, 2013				March 31, 2013
(Amounts in thousands)	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Derivatives designated as hedges:
Interest rate swaps	$	—	$	59	$	43	$	—	$	—	$	—
Derivatives not designated as hedges:
IRLCs		—		7		—		41		142		10
Forward sale loan commitments		7		—		41		—		—		—

Total derivities not designated as hedges		7		7		41		41		142		10

Total derivaties	$	7	$	66	$	84	$	41	$	142	$	10

The following table presents the effect of the Company’s derivative and hedging activity, if applicable, on the statement of income in the periods indicated:


		Three Months Ended
		March 31,
(Amounts in thousands)	Income Statement Location	2014		2013
Derivatives designated as hedges:
Interest rate swaps	Other income	$	—	$	—
Derivatives not designated as hedges:
IRLCs	Other income		—		4
Forward sale loan commitments	Other income		—		—

Total derivatives not designated as hedges			—		4

Total derivatives		$	—	$	4

Note 10. Employee Benefit Plans

The Company maintains the Supplemental Executive Retention Plan (the “SERP”) for key members of senior management. The following table presents the components of the SERP’s net periodic pension cost in the periods indicated:


	Three Months Ended March 31,
(Amounts in thousands)	2014		2013
Service cost	$	26	$	34
Interest cost		73		61
Amortization of losses		—		12
Amortization of prior service cost		47		47

Net periodic cost	$	146	$	154

The Company maintains the Directors’ Supplemental Retirement Plan (the “Directors’ Plan”) for non-management directors. The following table presents the components of the Directors’ Plan’s net periodic pension cost in the periods indicated:


	Three Months Ended March 31,
(Amounts in thousands)	2014		2013
Service cost	$	5	$	7
Interest cost		12		10
Amortization of gains (losses)		—		—
Amortization of prior service cost		18		22

Net periodic cost	$	35	$	39

Note 11. Accumulated Other Comprehensive Income

The following table presents the activity in accumulated other comprehensive income (“AOCI”), net of tax, by component for the periods indicated:


(Amounts in thousands)	Unrealized Gains (Losses) on Available-for-Sale Securities			Employee Benefit Plan			Total
Three months ended March 31, 2013
Beginning balance	$	(283	)	$	(1,542	)	$	(1,825	)
Other comprehensive loss before reclassifications		(972	)		(145	)		(1,117	)
Reclassified from AOCI		73			(51	)		22

Net comprehensive loss		(899	)		(196	)		(1,095	)

Ending balance	$	(1,182	)	$	(1,738	)	$	(2,920	)

Three months ended March 31, 2014
Beginning balance	$	(13,640	)	$	(1,100	)	$	(14,740	)
Other comprehensive gain before reclassifications		4,132			98			4,230
Reclassified from AOCI		(137	)		(40	)		(177	)

Net comprehensive gain		3,995			58			4,053

Ending balance	$	(9,645	)	$	(1,042	)	$	(10,687	)

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


	Three Months Ended March 31,						Income Statement
(Amounts in thousands)	2014			2013			Line Item Affected
Available-for-sale securities
Gains realized in net income	$	45		$	117		Net gain on sale of securities
Credit-related OTTI recognized in net income		(264	)		—		Net impairment losses recognized in earnings

		(219	)		117		Income before taxes
Income tax effect		(82	)		44		Income tax expense (benefit)

		(137	)		73		Net income
Employee benefit plans
Amortization of prior service cost		(65	)		(69	)	(1)
Amortization of losses		—			(12	)	(1)

		(65	)		(81	)	Income before taxes
Income tax effect		(25	)		(30	)	Income tax expense (benefit)

		(40	)		(51	)	Net income

Reclassified from AOCI, net of tax	$	(177	)	$	23		Net income

(1)	Amortization is included in net periodic pension cost. See Note 10, “Employee Benefit Plans.”

Note 12. 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 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 presented in the following discussion. The fair value hierarchy prioritizes the inputs used in measuring fair value as follows:

•

Level 1 – Observable, unadjusted quoted prices in active markets

•

Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability

•

Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions

The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. Additionally, the Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value may be highly subjective and judgmental in nature, such as cash flow estimates, risk characteristics, credit quality measurements, and interest rates; therefore, valuations may not be precise. Since fair values are estimated as of a specific date, the amounts actually realized or paid on the settlement or maturity of these instruments may be significantly different from estimates. See “Summary of Significant Accounting Policies” in Note 1, “General,” to the Condensed Consolidated Financial Statements of this report.

Assets and Liabilities Reported at Fair Value on a Recurring Basis

Available-for-Sale Securities. Securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. The Company also uses Level 1 inputs to value equity securities that are traded in active markets. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Treasury securities, single issue trust preferred securities, corporate securities, MBS, and certain equity securities that are not actively traded. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying appropriate market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with 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.

Deferred Compensation Assets and Liabilities. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans are carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

Derivative Assets and Liabilities. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, segregated by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:


	March 31, 2014
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. Treasury securities	$	9,264	$	—	$	9,264	$	—
Municipal securities		144,872		—		144,872		—
Single issue trust preferred securities		46,129		—		46,129		—
Corporate securities		5,000		—		5,000		—
Agency MBS		267,289		—		267,289		—
Non-Agency Alt-A residential MBS		10,272		—		10,272		—
Equity securities		1,038		1,020		18		—

Total available-for-sale securities	$	483,864	$	1,020	$	482,844	$	—

Deferred compensation assets	$	3,712	$	3,712	$	—	$	—

Derivatives
Forward sale loan commitments	$	7	$	—	$	7	$	—

Total derivative assets	$	7	$	—	$	7	$	—

Deferred compensation liabilities	$	3,712	$	3,712	$	—	$	—

Derivative liabilities
Interest rate swaps	$	59	$	—	$	59	$	—
IRLCs		7		—		7		—

Total derivative liabilities	$	66	$	—	$	66	$	—


	December 31, 2013
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. Treasury securities	$	9,013	$	—	$	9,013	$	—
Municipal securities		144,280		—		144,280		—
Single issue trust preferred securities		46,234		—		46,234		—
Corporate securities		4,871		—		4,871		—
Agency MBS		300,386		—		300,386		—
Non-Agency Alt-A residential MBS		9,789		—		9,789		—
Equity securities		5,247		251		4,996		—

Total available-for-sale securities	$	519,820	$	251	$	519,569	$	—

Deferred compensation assets	$	4,200	$	4,200	$	—	$	—

Derivatives
Interest rate swaps	$	43	$	—	$	43	$	—
Forward sale loan commitments		41		—		41		—

Total derivative assets	$	84	$	—	$	84	$	—

Deferred compensation liabilities	$	4,200	$	4,200	$	—	$	—

Derivative liabilities
IRLCs	$	41	$	—	$	41	$	—

There were no changes in valuation techniques during the three months ended March 31, 2014 or 2013. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. In addition, there were no transfers in to or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2014 or 2013.

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Impaired loans are recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.

The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third-party collateral valuations to assist management in identifying potential credit impairment and determining the amount of impairment to record. The Company’s Special Assets staff assumes the management and monitoring of all loans determined to be impaired. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. A third-party valuation is typically received within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.

Specific reserves are generally recorded for impaired loans while third-party valuations are in process and for impaired loans that continue to make some form of payment. While waiting to receive the third-party appraisal, the Company regularly reviews the relationship to identify any potential adverse developments and begins the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower, if appropriate. Generally, the only difference between the current appraised value, less liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to the appraised value that the Company deems appropriate, such as the costs to sell the property and a deflator for the devaluation of property when banks are the sellers. Impaired loans that do not meet the aforementioned criteria and do not have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the process towards ultimate resolution except in cases involving bankruptcy and various state judicial processes, which may extend the time for ultimate resolution.

Other Real Estate Owned. OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.

The following tables summarize assets measured at fair value on a nonrecurring basis, segregated by the level of valuation inputs in the fair value hierarchy, in the periods indicated:


	March 31, 2014
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Impaired loans not covered by loss share agreements	$	13,838		—		—	$	13,838
OREO, not covered by loss share agreements		2,188		—		—		2,188
OREO, covered by loss share agreements		2,144		—		—		2,144


	December 31, 2013
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Impaired loans not covered by loss share agreements	$	8,935		—		—	$	8,935
OREO, not covered by loss share agreements		7,180		—		—		7,180
OREO, covered by loss share agreements		6,433		—		—		6,433

Quantitative Information about Level 3 Fair Value Measurements

The following table presents quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs in the periods indicated:


	Valuation	Unobservable	Range (Weighted Average)
	Technique	Input	March 31, 2014	December 31, 2013

Impaired loans	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	4% to 100% (14%)	6% to 100% (47%)
OREO, not covered	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	30% to 74% (33%)	0% to 65% (34%)
OREO, covered	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	17% to 43% (43%)	4% to 70% (41%)

(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

The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of the valuation methodologies used for instruments not previously discussed is as follows:

Cash and Cash Equivalents. Cash and cash equivalents are reported at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

Held-to-Maturity Securities. Securities held to maturity are reported at fair value using quoted market prices or dealer quotes.

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

Loans Held for Investment. Loans held for investment are reported at fair value using discounted future cash flows that apply current interest rates for loans with similar terms and borrower credit quality.

FDIC Indemnification Asset. The FDIC indemnification asset is reported at fair value using discounted future cash flows that apply current discount rates.

Accrued Interest Receivable/Payable. Accrued interest receivable/payable is reported at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

Deposits and Securities Sold Under Agreements to Repurchase. Deposits without a stated maturity, such as demand, interest-bearing demand, and savings, are reported at their carrying amount, the amount payable on demand as of the reporting date, which is considered a reasonable estimate of fair value. Deposits and repurchase agreements with fixed maturities and rates are reported at fair value using discounted future cash flows that apply interest rates currently available in the market for instruments with similar characteristics and maturities.

FHLB and Other Indebtedness. FHLB and other indebtedness is reported at fair value using discounted future cash flows that apply interest rates currently available to the Company for borrowings with similar characteristics and maturities. Trust preferred obligations are reported at fair value using current credit spreads in the market for similar issues.

Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. Due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures, the Company believes it is not feasible or practicable to accurately disclose the fair values of off-balance sheet instruments. For additional information regarding the unfunded, contractual value of off-balance sheet financial instruments see Note 13, “Litigation, Commitments and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

The following tables present the carrying amount and fair value of the Company’s financial instruments, segregated by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:


	March 31, 2014
	Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	79,002	$	79,002	$	79,002	$	—	$	—
Available-for-sale securities		483,864		483,864		1,020		482,844		—
Held-to-maturity securities		8,161		8,148		—		8,148		—
Loans held for sale		1,743		1,747		—		1,747		—
Loans held for investment less allowance		1,708,066		1,737,995		—		—		1,737,995
FDIC indemnification asset		32,510		32,510		—		—		32,510
Accrued interest receivable		6,259		6,259		—		6,259		—
Derivative financial assets		7		7		—		7		—
Deferred compensation assets		3,712		3,712		3,712		—		—
Liabilities
Demand deposits	$	353,137	$	353,137	$	—	$	353,137	$	—
Interest-bearing demand deposits		382,752		382,752		—		382,752		—
Savings deposits		531,096		531,096		—		531,096		—
Time deposits		707,704		710,872		—		710,872		—
Securities sold under agreements to repurchase		112,337		115,091		—		115,091		—
Accrued interest payable		2,119		2,119		—		2,119		—
FHLB and other indebtedness		166,087		177,437		—		177,437		—
Derivative financial liabilities		66		66		—		66		—
Deferred compensation liabilities		3,712		3,712		3,712		—		—


	December 31, 2013
	Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	56,567	$	56,567	$	56,567	$	—	$	—
Available-for-sale securities		519,820		519,820		251		519,569		—
Held-to-maturity securities		568		579		—		579		—
Loans held for sale		883		883		—		883		—
Loans held for investment less allowance		1,686,644		1,655,430		—		—		1,655,430
FDIC indemnification asset		34,691		34,691		—		—		34,691
Accrued interest receivable		7,521		7,521		—		7,521		—
Derivative financial assets		84		84		—		84		—
Deferred compensation assets		4,200		4,200		4,200		—		—
Liabilities
Demand deposits	$	339,680	$	339,680	$	—	$	339,680	$	—
Interest-bearing demand deposits		361,821		361,821		—		361,821		—
Savings deposits		524,010		524,010		—		524,010		—
Time deposits		725,231		728,999		—		728,999		—
Securities sold under agreements to repurchase		118,308		121,320		—		121,320		—
Accrued interest payable		2,169		2,169		—		2,169		—
FHLB and other indebtedness		166,088		178,031		—		178,031		—
Derivative financial liabilities		41		41		—		41		—
Deferred compensation liabilities		4,200		4,200		4,200		—		—

Note 13. 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 in the balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there 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, is based on management’s credit evaluation of the customer. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. Commitments to extend credit also include outstanding commitments related to mortgage loans that are sold on a best efforts basis into the secondary loan market. The Company maintains a reserve for the risk inherent in unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.

Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based on management’s credit evaluation of the customer.

The following table presents the Company’s off-balance sheet financial instruments as of the dates indicated:


(Amounts in thousands)	March 31, 2014		December 31, 2013
Commitments to extend credit	$	226,031	$	216,179
Commitments related to secondary market mortgage loans		2,039		3,677
Standby letters of credit and financial guarantees		4,233		4,193

Total off-balance sheet risk	$	232,303	$	224,049

Reserve for unfunded commitments	$	326	$	326

The Company issued $15.46 million of trust preferred securities in a private placement through the Trust. In connection with the issuance, 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 help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this Quarterly Report on Form 10-Q and our 2013 Annual Report on Form 10-K (the “2013 Form 10-K”).

Cautionary Statement Regarding 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, filings incorporated by reference, reports to our shareholders, and other communications that we make in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions. Such statements are subject to significant risks, uncertainties, and 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 U.S. 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 System;

•

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 impact of the U.S. Department of the Treasury and federal banking regulators’ continued implementation of programs to address capital and liquidity in the banking system; further, future and proposed rules, including those that are part of the process outlined in the International Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” which are expected to require banking institutions to increase levels of capital;

•

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, our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Annual Report on Form 10-K 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 changes. All forward-looking statements attributable to our Company are expressly qualified by these cautionary statements. See Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of our 2013 Form 10-K.

Company Overview

First Community Bancshares, Inc. (“the Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides commercial banking services through its wholly-owned subsidiary First Community Bank (the “Bank”). The Bank operates sixty-eight locations under the name First Community Bank in West Virginia, Virginia, and North Carolina and under the trade name Peoples Community Bank, a Division of First Community Bank, in Tennessee and South Carolina. The Bank offers wealth management and investment advice through its wholly-owned subsidiary First Community Wealth Management (“FCWM”) and the Bank’s Trust Division, which reported combined assets under management of $697 million as of March 31, 2014. These assets are not our assets, but are managed under various fee-based arrangements as fiduciary or agent. The Company provides insurance services through its wholly-owned subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”), headquartered in High Point, North Carolina, which operates nine locations under the Greenpoint name and under the trade names First Community Insurance Services (“FCIS”) and Carolina Insurers Associates in North Carolina, Carr & Hyde Insurance and FCIS in Virginia, and FCIS in West Virginia. We reported total assets of $2.61 billion as of March 31, 2014. 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, with additional funding provided by retail and wholesale repurchase agreements and borrowings from the Federal Home Loan Bank (“FHLB”). 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 the 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 generally accepted accounting principles (“GAAP”) in the United States 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 based on historical experience and other factors including expectations of future events believed to be reasonable under the circumstances that are periodically evaluated. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or establishment of a valuation reserve, or an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or, when available, are provided by third-party sources. When third-party information is not available, valuation adjustments are estimated by management primarily through the use of financial modeling techniques and appraisal estimates. Our accounting policies are fundamental in understanding MD&A and the disclosures presented in the notes to consolidated statements. Our critical accounting estimates are described in detail in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2013 Form 10-K.

Performance Overview

Highlights of our results of operations for the quarter ended March 31, 2014, and financial condition as of March 31, 2014, include the following:

•

The non-covered loan portfolio increased $29.66 million compared to year-end 2013 and $94.46 million compared to the first quarter of 2013. The increase from March 31, 2013, is primarily attributed to new commercial real estate volume in Southern West Virginia and Central North Carolina. This marks the fourth consecutive quarter non-covered loan growth has exceeded covered loan declines.

•

Annualized growth in the non-covered loan portfolio was 7.71% during the quarter.

•

Non-covered delinquent loans as a percentage of total non-covered loans experienced a significant decrease of 104 basis points, or 36.78%, to 1.79% compared to the first quarter of 2013. The decrease is attributed to declines in both past due and nonaccrual loans.

•

The Company repurchased 131,500 shares during the quarter.

•

The Company significantly exceeds regulatory “well capitalized” targets as of March 31, 2014, with a total risk-based capital ratio of 16.24%, a Tier 1 risk-based capital ratio of 14.98%, and a Tier 1 leverage ratio of 10.13%.

Results of Operations

Net Income

The following table presents our net income and related information in the periods indicated:


	Three Months Ended						Three Months Ended
	March 31,						Increase
(Amounts in thousands, except per share data)	2014			2013			(Decrease)			% Change
Net income	$	5,725		$	7,141		$	(1,416	)		-19.83	%
Net income available to common shareholders		5,497			6,883			(1,386	)		-20.14	%
Basic earnings per common share		0.30			0.34			(0.04	)		-11.76	%
Diluted earings per common share		0.29			0.34			(0.05	)		-14.71	%
Return on average assets		0.86	%		1.03	%		-0.17	%		-16.50	%
Return on average common equity		7.02	%		8.11	%		-1.09	%		-13.44	%

Three Month Comparison. Net income decreased in the first quarter of 2014 compared to the same quarter of the prior year primarily due to the decrease in interest earned on loans as the average loan yield decreased 52 basis points, or 8.63% in the first quarter of 2014 compared to the same quarter of the prior year.

Net Interest Income

Net interest income, our largest contributor to earnings, comprised 75.28% of total net interest and noninterest income in the first quarter of 2014 compared to 74.82% in the same quarter of 2013. For the following 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 non-GAAP, management believes this financial measure is more widely used in the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. We use this non-GAAP financial measure to monitor net interest income performance and manage the composition of our balance sheet. The following table presents our average consolidated balance sheets in the periods indicated:


	Three Months Ended March 31,
	2014							2013
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾
Assets
Earning assets
Loans⁽²⁾	$	1,717,908	$	22,893		5.40	%	$	1,706,296	$	24,888		5.92	%
Securities available-for-sale		499,851		3,808		3.09	%		544,681		3,728		2.78	%
Securities held-to-maturity		1,367		15		4.45	%		816		17		8.45	%
Interest-bearing deposits		26,395		30		0.46	%		98,893		66		0.27	%

Total earning assets		2,245,521		26,746		4.83	%		2,350,686		28,699		4.95	%
Other assets		346,019							352,343

Total assets	$	2,591,540						$	2,703,029

Liabilities
Interest-bearing deposits
Demand deposits	$	370,021	$	54		0.06	%	$	353,677	$	56		0.06	%
Savings deposits		530,031		137		0.10	%		505,917		155		0.12	%
Time deposits		714,402		1,697		0.96	%		816,060		2,151		1.07	%

Total interest-bearing deposits		1,614,454		1,888		0.47	%		1,675,654		2,362		0.57	%
Borrowings
Federal funds purchased		3,547		3		0.34	%		—		—		—
Retail repurchase agreements		67,356		26		0.16	%		75,751		105		0.56	%
Wholesale repurchase agreements		50,000		463		3.76	%		57,645		475		3.34	%
FHLB advances and other borrowings		166,087		1,678		4.10	%		175,937		1,700		3.92	%

Total borrowings		286,990		2,170		3.07	%		309,333		2,280		2.99	%

Total interest-bearing liabilities		1,901,444		4,058		0.87	%		1,984,987		4,642		0.95	%

Noninterest-bearing demand deposits		336,573							332,186
Other liabilities		20,918							24,307

Total liabilities		2,258,935							2,341,480
Stockholders’ equity		332,605							361,549

Total liabilities and stockholders’ equity	$	2,591,540						$	2,703,029

Net interest income, tax equivalent			$	22,688						$	24,057

Net interest rate spread⁽³⁾						3.96	%						4.00	%

Net interest margin⁽⁴⁾						4.10	%						4.15	%

(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 presents the impact on tax equivalent net interest income resulting from changes in volume, the average volume times the prior year’s average rate; rate, the average rate times the prior year’s average volume; and rate/volume, the average volume column times the change in average rate, in the periods indicated:


	Three Months Ended
	March 31, 2014 Compared to 2013
	Dollar Increase (Decrease) due to
							Rate/
(Amounts in thousands)	Volume			Rate			Volume			Total
Interest earned on:
Loans (FTE)	$	169		$	(2,150	)	$	(14	)	$	(1,995	)
Securities available-for-sale (FTE)		(307	)		422			(35	)		80
Securities held-to-maturity (FTE)		11			(8	)		(5	)		(2	)
Interest-bearing deposits with other banks		(48	)		46			(34	)		(36	)

Total interest earning assets		(175	)		(1,690	)		(88	)		(1,953	)
Interest paid on:
Demand deposits		3			(4	)		(1	)		(2	)
Savings deposits		7			(24	)		(1	)		(18	)
Time deposits		(268	)		(213	)		27			(454	)
Federal funds purchased		—			—			3			3
Retail repurchase agreements		(12	)		(76	)		9			(79	)
Wholesale repurchase agreements		(63	)		59			(8	)		(12	)
FHLB advances and other borrowings		(95	)		78			(5	)		(22	)

Total interest-bearing liabilities		(428	)		(180	)		24			(584	)

Change in net interest income, tax equivalent	$	253		$	(1,510	)	$	(112	)	$	(1,369	)

The following table reconciles the differences between net interest income under GAAP and net interest income on a tax equivalent basis in the periods indicated:


	Three Months Ended March 31,
(Amounts in thousands)	2014		2013
Net interest income, GAAP basis	$	22,025	$	23,362
Tax equivalent adjustment⁽¹⁾		663		695

Net interest income, tax equivalent	$	22,688	$	24,057

(1)

Interest and yield on loans include accretion income from the Peoples and Waccamaw acquired loan portfolios. We expect the purchase accounting interest accretion to continue to decline in future periods due to acquired portfolio attrition. The following table presents net interest margin and related average balance sheet information excluding the impact of purchase accounting accretion in the periods indicated:


	Three Months Ended March 31,
	2014					2013
(Amounts in thousands)	Interest⁽¹⁾		Average Yield/ Rate⁽¹⁾			Interest⁽¹⁾		Average Yield/ Rate⁽¹⁾
Earning assets
Loans⁽²⁾	$	22,893		5.40	%	$	24,888		5.92	%
Accretion income		3,122					3,842
Less: cash accretion income		600					1,782

Non-cash accretion income		2,522					2,060

Loans, excluding non-cash accretion		20,371		4.81	%		22,828		5.43	%
Other earning assets		3,853		2.96	%		3,811		2.40	%

Total earning assets		24,224		4.38	%		26,639		4.60	%
Total interest-bearing liabilities		4,058		0.87	%		4,642		0.95	%

Net interest income, tax equivalent	$	20,166				$	21,997

Net interest rate spread⁽³⁾, less non-cash accretion				3.51	%				3.65	%

Net interest margin⁽⁴⁾, less non-cash accretion				3.64	%				3.80	%

(1)

(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.

Three Month Comparison. Net interest income under GAAP decreased $1.34 million, or 5.72%, and tax equivalent net interest income decreased $1.37 million, or 5.69%, in the first quarter of 2014 compared to the same quarter of the prior year. Changes in the average balances of and yields/rates on earning assets and interest-bearing liabilities resulted in a 4 basis point decrease in the net interest rate spread and a 5 basis point decrease in the net interest margin.

Loan interest accretion stemming from the Peoples and Waccamaw acquisitions totaled $3.12 million in the first quarter of 2014, of which $600 thousand was received in cash, and $3.84 million in the same quarter of the prior year, of which $1.78 million was received in cash. Excluding non-cash accretion income, the yield on loans decreased 62 basis points, which compares to a decrease of 52 basis points under GAAP. Excluding non-cash accretion income, the net interest margin decreased 16 basis points, which compares to a decrease of 5 basis points under GAAP. We expect the effect of accretion income on acquired loans to continue to be lessened in future periods.

Average earning assets decreased $105.17 million, or 4.47%, in the first quarter of 2014 compared to the same quarter of the prior year primarily due to decreases in interest-bearing deposits with banks, which are primarily comprised of excess liquidity kept at the Federal Reserve Bank (“FRB”) of Richmond bearing overnight market rates, and securities available for sale. The yield on earning assets decreased 12 basis points, which was largely due to a 52 basis point decrease in the yield on loans, a result of the continued low rate environment, and a 400 basis point decrease in the yield on held-to-maturity securities, due to new investments in lower yielding securities. During the first quarter of 2014, we purchased medium-term bonds in the held-to-maturity category to provide for the funding necessary to extinguish certain wholesale borrowings as they come due.

As of March 31, 2014, interest-bearing liabilities included interest-bearing deposits; retail repurchase agreements, consisting of collateralized retail deposits and commercial treasury accounts; wholesale repurchase agreements; Federal Home Loan Bank (“FHLB”) advances; and other borrowings. Average interest-bearing liabilities decreased $83.54 million, or 4.21%, in the first quarter of 2014 compared to the same quarter of the prior year, primarily due to declines in average time deposit balances. The yield on interest-bearing liabilities decreased 8 basis points, which was largely due to a 10 basis point decrease in the rate on interest-bearing deposits. Average interest-bearing deposits decreased $61.20 million, or 3.65% which was driven by a $101.66 million, or 12.46%, decrease in average time deposits, partially offset by increases in average interest-bearing demand deposits of $16.34 million, or 4.62%, and average savings deposits, which include money market and savings accounts, of $24.11 million, or 4.77%. Average borrowings decreased $22.34 million, or 7.22%, largely due to the prepayment of certain borrowings acquired from Waccamaw totaling $19.62 million during the first quarter of 2013.

Provision for Loan Losses

The provision for loan losses is the amount added to the allowance for loan losses after net charge-offs have been deducted in order to bring the allowance to a level management determines necessary to absorb probable losses in the existing loan portfolio. The provision charged to operations was increased by $651 thousand in the first quarter of 2014 compared to the same quarter of the prior year due to an increase in specific reserves on loans identified as impaired during the quarter and growth in the non-covered loan portfolio. A net recovery of $262 thousand was attributed to the provision for purchased credit impaired (“PCI”) loans in the first quarter of 2014 due to better than expected performance in the Waccamaw PCI loan portfolio, of which $59 thousand was credited to operations and $203 thousand was recorded through the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure. There was no provision attributed to PCI loans prior to the second quarter of 2013. See “Allowance for Loan Losses” in the “Financial Condition” section below.

Noninterest Income

Noninterest income consists of all revenues not included in interest and fee income related to earning assets. Noninterest income comprised 24.72% of total net interest and noninterest income in the first quarter of 2014 compared to 25.18% in the same quarter of the prior year. The following table presents the components of, and changes in, noninterest income in the periods indicated:


	Three Months Ended						Three Months Ended
	March 31,						Increase
(Amounts in thousands)	2014			2013			(Decrease)			% Change
Wealth management	$	1,008		$	846		$	162			19.15	%
Service charges on deposit accounts		3,070			3,168			(98	)		-3.09	%
Other service charges and fees		1,771			1,786			(15	)		-0.84	%
Insurance commissions		1,964			1,666			298			17.89	%
Net impairment loss		(264	)		—			(264	)		0.00	%
Net gain on sale of securities		45			117			(72	)		-61.54	%
Net FDIC indemnification asset amortization		(1,134	)		(1,539	)		405			-26.32	%
Other operating income		774			1,817			(1,043	)		-57.40	%

Noninterest income	$	7,234		$	7,861		$	(627	)		-7.98	%

Three Month Comparison. Noninterest income decreased $627 thousand, or 7.98%, in the first quarter of 2014 compared to the same quarter of the prior year. Wealth management revenues, which include fees and commissions for trust and investment advisory services, increased as a result of the recognition of estate settlement fees. Service charges on deposit accounts and other charges and fees decreased primarily from a reduction in non-sufficient funds and interchange fee income. Insurance commissions increased largely due to increased levels of contingent profit-sharing commissions and a general increase in premium commissions. In the first quarter of 2014, we incurred OTTI charges of $264 thousand related to a non-Agency mortgage-backed security (“MBS”) and certain equity holdings and realized a net gain of $45 thousand on the sale of securities. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report. We recorded net amortization related to the FDIC indemnification asset of $1.13 million as a result of improved loss estimates in the covered Waccamaw loan portfolio. Other operating income decreased primarily due to a $301 thousand decrease in secondary market income, a $296 thousand decrease in income from bank owned life insurance policies, and a $392 thousand decrease in gains recognized in 2013 from debt prepayments.

Excluding the impact from OTTI charges, the sale of securities, and the net amortization on the FDIC indemnification asset, noninterest income decreased $696 thousand, or 7.50%, to $8.59 million in the first quarter of 2014, compared with $9.28 million in the same quarter of the prior year.

Noninterest Expense

The following table presents the components of, and changes in, noninterest expense in the periods indicated:


	Three Months Ended				Three Months Ended
	March 31,				Increase
(Amounts in thousands)	2014		2013		(Decrease)			% Change
Salaries and employee benefits	$	9,905	$	10,110	$	(205	)		-2.03	%
Occupancy of bank premises		1,778		1,855		(77	)		-4.15	%
Furniture and equipment		1,194		1,343		(149	)		-11.09	%
Amortization of intangible assets		175		179		(4	)		-2.23	%
FDIC premiums and assessments		434		472		(38	)		-8.05	%
Merger related expense		—		49		(49	)		-100.00	%
Other operating expense		5,694		5,536		158			2.85	%

Total noninterest expense	$	19,180	$	19,544	$	(364	)		-1.86	%

Three Month Comparison. Noninterest expense decreased $364 thousand, or 1.86%, in the first quarter of 2014 compared to the same quarter of the prior year. Full-time equivalent employees, calculated using the number of hours worked, decreased to 706 as of March 31, 2014, from 746 as of March 31, 2013. The reduction in full-time equivalent employees was seen throughout our corporate and branch network. Occupancy, furniture, and equipment expense decreased $226 thousand, or 7.07%, in the first quarter of 2014, which included a $76 thousand decrease in property taxes and a $71 thousand decrease in depreciation costs. The increase in other operating expense included a net loss on sales and expenses on OREO of $857 thousand in the first quarter of 2014 compared to $625 thousand in the same period of the prior year 2012, as well as an increase in ATM processing expense of $171 thousand.

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 generally include interest income on municipal securities and increases in the cash surrender value of officers’ life insurance policies, which are both exempt from federal income tax. Income tax expense decreased $835 thousand, or 24.59%, and the effective rate decreased 132 basis points to 30.91% in the first quarter of 2014 compared to the same quarter of the prior year. The decrease in the effective tax rate was largely due to a decrease in taxable revenues as a percent of net earnings.

Financial Condition

Total assets were $2.61 billion as of March 31, 2014, an increase of $7.83 million, or 0.30%, compared with $2.60 billion as of December 31, 2013. Total liabilities were $2.28 billion as of March 31, 2014, an increase of $2.53 million, or 0.11%, compared with $2.27 billion as of December 31, 2013. Our book value per as-converted common share was $17.18 as of March 31, 2014, an increase of $0.39, compared to December 31, 2013.

Investment Securities

Available-for-sale securities as of March 31, 2014, decreased $35.96 million, or 6.92%, compared to December 31, 2013. The market value of securities available-for-sale as a percentage of amortized cost was 96.91% as of March 31, 2014, compared to 95.97% as of December 31, 2013.

Held-to-maturity securities as of March 31, 2014, increased $7.59 million compared to $568 thousand as of December 31, 2013, due to the purchase of medium-term bonds to provide funding to extinguish certain wholesale borrowings when due. Investment securities classified as held to maturity are comprised primarily of U.S. Agency securities and high grade municipal bonds. The market value of securities held to maturity as a percentage of amortized cost was 99.84% as of March 31, 2014, compared with 101.94% as of December 31, 2013.

We recognized credit-related OTTI charges in earnings associated with debt securities beneficially owned of $232 thousand for the three months ended March 31, 2014, and no charges for the three months ended March 31, 2013. These charges were related to a non-Agency MBS. Temporary impairment on the non-Agency MBS is primarily related to changes in interest rates. We recognized OTTI charges in earnings associated with certain equity securities of $32 thousand for the three months ended March 31, 2014, and no charges for the three months ended March 31, 2013. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

Loans Held for Sale

Loans held for sale as of March 31, 2014, increased $860 thousand, or 97.40%, compared to December 31, 2013. 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 as of March 31, 2014, was $2.04 million for 10 loans compared to $3.68 million for 19 loans as of December 31, 2013.

Loans Held for Investment

Loans held for investment as of March 31, 2014, increased $21.14 million, or 1.24%, compared to December 31, 2013. The increase was primarily due to increased draw activity related to existing construction loans coupled with continued growth in commercial real estate originations. The non-covered loan portfolio increased $29.66 million, or 1.90%, compared to December 31, 2013. The average loan to deposit ratio was 88.05% for the three months ended March 31, 2014, compared to 84.98% for the same period of 2013. Our loans held for investment are grouped into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are defined as loans acquired in FDIC-assisted transactions that are covered by loss share agreements. See Note 3, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

The following table presents loans, net of unearned income with non-covered loans disaggregated by class, as of the periods indicated.


	March 31, 2014					December 31, 2013					March 31, 2013
(Amounts in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land	$	45,661		2.64	%	$	35,255		2.06	%	$	55,220		3.27	%
Commercial and industrial		94,403		5.45	%		95,455		5.58	%		91,666		5.43	%
Multi-family residential		75,594		4.36	%		70,197		4.10	%		63,929		3.78	%
Single family non-owner occupied		137,969		7.97	%		135,559		7.92	%		136,334		8.07	%
Non-farm, non-residential		484,361		27.97	%		475,911		27.82	%		440,226		26.06	%
Agricultural		2,093		0.12	%		2,324		0.14	%		2,117		0.12	%
Farmland		32,410		1.87	%		32,614		1.91	%		33,930		2.01	%

Total commercial loans		872,491		50.38	%		847,315		49.53	%		823,422		48.74	%
Consumer real estate loans
Home equity lines		113,137		6.53	%		111,770		6.53	%		108,385		6.42	%
Single family owner occupied		492,627		28.45	%		496,012		28.99	%		470,437		27.85	%
Owner occupied construction		34,360		1.98	%		28,703		1.68	%		19,760		1.17	%

Total consumer real estate loans		640,124		36.96	%		636,485		37.20	%		598,582		35.44	%
Consumer and other loans
Consumer loans		72,111		4.16	%		71,313		4.17	%		68,625		4.06	%
Other		3,968		0.23	%		3,926		0.23	%		3,603		0.21	%

Total consumer and other loans		76,079		4.39	%		75,239		4.40	%		72,228		4.27	%

Non-covered loans held for investment		1,588,694		91.73	%		1,559,039		91.13	%		1,494,232		88.45	%
Covered loans		143,170		8.27	%		151,682		8.87	%		195,060		11.55	%
Less unearned income		—		—			—					—

Total loans held for investment		1,731,864		100.00	%		1,710,721		100.00	%		1,689,292		100.00	%
Allowance for loan losses		23,798					24,077					24,850

Total loans held for investment, less allowance		1,708,066					1,686,644					1,664,442

Loans held for sale	$	1,743				$	883				$	2,794

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 with a discount continue to accrue interest based on expected cash flows; therefore, PCI loans are generally not considered nonaccrual. See Note 5, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

The following table summarizes the components of nonperforming assets and presents additional details for nonperforming and restructured loans as of the periods indicated:


(Amounts in thousands)	March 31, 2014			December 31, 2013			March 31, 2013
Non-covered nonperforming
Nonaccrual loans	$	20,909		$	19,161		$	30,076
Accruing loans past due 90 days or more		—			—			—
TDRs⁽¹⁾		1,775			1,311			1,596

Total nonperforming loans		22,684			20,472			31,672
Non-covered OREO		5,923			7,318			4,439

Total nonperforming assets	$	28,607		$	27,790		$	36,111

Covered nonperforming
Nonaccrual loans	$	1,261		$	3,353		$	4,567
Accruing loans past due 90 days or more		109			86			—

Total nonperforming loans		1,370			3,439			4,567
Covered OREO		8,705			7,541			6,911

Total nonperforming assets	$	10,075		$	10,980		$	11,478

Total nonperforming
Nonaccrual loans	$	22,170		$	22,514		$	34,643
Accruing loans past due 90 days or more		109			86			—
TDRs⁽¹⁾		1,775			1,311			1,596

Total nonperforming loans		24,054			23,911			36,239
OREO		14,628			14,859			11,350

Total nonperforming assets	$	38,682		$	38,770		$	47,589

Additional Information
Performing TDRs⁽²⁾	$	11,193		$	10,900		$	10,272
Total TDRs⁽³⁾		12,968			12,211			11,868
Non-covered ratios
Nonperforming loans to total loans		1.43	%		1.31	%		2.12	%
Nonperforming assets to total assets		1.16	%		1.14	%		1.43	%
Non-PCI allowance to nonperforming loans		102.74	%		113.92	%		78.46	%
Non-PCI allowance to total loans		1.47	%		1.50	%		1.66	%
Total ratios
Nonperforming loans to total loans		1.39	%		1.40	%		2.15	%
Nonperforming assets to total assets		1.48	%		1.49	%		1.75	%
Allowance for loan losses to nonperforming loans		98.94	%		100.69	%		68.57	%
Allowance for loan losses to total loans		1.37	%		1.41	%		1.47	%

(1)	TDRs restructured within the past six months, excludes nonaccrual TDRs of $722 thousand, $734 thousand, and $675 thousand for the periods ended March 31, 2014, December 31, 2013, and March 31, 2013, respectively.

(2)	TDRs with six months or more of satisfactory payment performance, excludes nonaccrual TDRs of $1.41 million, $1.47 million, and $1.67 million for the periods ended March 31, 2014, December 31, 2013, and March 31, 2013, respectively.

(3)	Perfoming and nonperforming TDRs, excludes nonaccrual TDRs of $2.13 million, $2.20 million, and $2.34 million for the periods ended March 31, 2014, December 31, 2013, and March 31, 2013, respectively.

Non-covered nonperforming assets totaled $28.61 million as of March 31, 2014, an $817 thousand increase over December 31, 2013, and a $7.50 million decrease from March 31, 2013. Non-covered nonperforming assets as a percentage of total non-covered assets were 1.16% as of March 31, 2014, 1.14% as of December 31, 2013, and 1.43% as of March 31, 2013.

Non-covered nonaccrual loans totaled $20.91 million as of March 31, 2014, $19.16 million as of December 31, 2013, and $30.08 million as of March 31, 2013. As of March 31, 2014, non-covered nonaccrual loans were largely attributed to the following loan classes: single family owner occupied (37.74%); commercial and industrial (25.66%); non-farm, non-residential (14.22%); and single family nonowner occupied (11.51%). As of March 31, 2014, approximately $2.65 million, or 12.67%, of non-covered nonaccrual loans were attributed to performing 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 $12.97 million as of March 31, 2014, $12.21 million as of December 31, 2013, and $11.87 million as of March 31, 2013. Nonperforming accruing TDRs totaled $1.78 million, or 13.69%, of total accruing TDRs as of March 31, 2014, as compared to 10.74% of accruing TDRs as of December 31, 2013, and 13.45% of accruing TDRs as of March 31, 2013. The allowance for loan losses attributed to TDRs totaled $1.83 million as of March 31, 2014, $1.84 million as of December 31, 2013, and $1.65 million as of March 31, 2013.

Ongoing activity in 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. Covered accruing loans contractually past due 90 days or more totaled $109 thousand as of March 31, 2014, compared to $86 thousand as of December 31, 2013, and none as of March 31, 2013.

Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, totaled $5.92 million as of March 31, 2014, a decrease of $1.40 million, or 19.06%, compared with December 31, 2013. As of March 31, 2014, non-covered OREO consisted of 55 properties with an average holding period of 8 months. The net loss on the sale of OREO totaled $714 thousand in the first quarter of 2014 and $400 thousand in the same quarter of the prior year. Pursuant to FDIC loss share agreements, covered OREO is presented net of the related fair value discount. The following tables detail activity within OREO for the periods indicated:


(Amounts in thousands)	Non-covered			Covered			Total
Beginning balance, January 1, 2013	$	5,749		$	3,255		$	9,004
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

Beginning balance, January 1, 2014	$	7,318		$	7,541		$	14,859
Additions		533			2,160			2,693
Disposals		(1,469	)		(382	)		(1,851	)
Valuation adjustments		(459	)		(614	)		(1,073	)

Ending balance, March 31, 2014	$	5,923		$	8,705		$	14,628

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $28.41 million as of March 31, 2014, a decrease of $2.46 million, or 7.96%, compared with December 31, 2013. Non-covered delinquent loans as a percentage of total non-covered loans measured 1.79% as of March 31, 2014, which is attributed to loans 30 to 89 days past due of 0.47% and nonaccrual loans of 1.32%. Non-covered nonperforming loans, comprised of nonaccrual loans, nonperforming TDRs, and unseasoned TDRs, as a percentage of total non-covered loans were 1.43% as of March 31, 2014, 1.31% at December 31, 2013, and 2.12% at March 31, 2013.

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 and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates.

Management performs quarterly assessments to determine the appropriate level of the allowance for loan losses. The allowance for loan losses includes specific allocations to significant individual loans and credit relationships and general reserves to the remaining loans that have been deemed impaired. Loans not specifically identified are grouped into pools based on similar risk characteristics. Management’s general reserve allocations are based on judgments of qualitative and quantitative factors about macro and micro economic conditions reflected in the loan portfolio and the economy. For loans acquired in business combinations, a provision is recorded for any credit deterioration after the acquisition. Loans identified with credit impairment at acquisition are grouped into pools and evaluated separately from the non-PCI portfolio. The provision calculated for PCI loans is offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure. See “Critical Accounting Estimates” above, as well as “Significant Accounting Policies” in Note 1, “General,” and Note 6, “Allowance for Loan Losses,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

Our allowance for loan losses, excluding PCI loans, as a percentage of non-covered loans declined during the first quarter of 2014. Our qualitative risk factors reflected a reduced risk of loan losses due to improvements in unemployment trends, general economic conditions, and asset quality metrics. As of March 31, 2014, management considered the allowance to be adequate based upon analysis of the portfolio; however, no assurance can be made that additions to the allowance will not be required in future periods. Net charge-offs decreased $193 thousand, or 9.36%, in the first quarter of 2014 compared to the same quarter of the prior year.

Our allowance for loan losses totaled $23.80 million as of March 31, 2014, $24.08 million as of December 31, 2013, and $24.85 million as of March 31, 2013. The allowance attributed to non-PCI loans as a percentage of non-covered loans held for investment was 1.47% as of March 31, 2014, 1.50% at December 31, 2013, and 1.66% at March 31, 2013. The cash flow analysis performed for the first quarter of 2014 identified three of our seven PCI loan pools as impaired with a cumulative impairment of $485 thousand at March 31, 2014. 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.

The following table presents activity in our allowance for loan losses for the periods indicated.


	Three Months Ended March 31,
	2014									2013
(Amounts in thousands)	Non-acquired Impaired			Acquired Impaired			Total			Non-acquired Impaired			Acquired Impaired		Total
Beginning balance	$	23,322		$	755		$	24,077		$	25,762		$	8	$	25,770
Provision for loan losses		1,852			(262	)		1,590			1,142			—		1,142
Benefit attributable to the FDIC indemnification asset		—			203			203			—			—		—

Provision for loan losses charged to operations		1,852			(59	)		1,793			1,142			—		1,142
Provision for loan losses recorded through the FDIC indemnification asset		—			(203	)		(203	)		—			—		—
Charge-offs		(2,216	)		—			(2,216	)		(2,759	)		—		(2,759	)
Recoveries		347			—			347			697			—		697

Net charge-offs		(1,869	)		—			(1,869	)		(2,062	)		—		(2,062	)

Ending balance	$	23,305		$	493		$	23,798		$	24,842		$	8	$	24,850

Deposits

Total deposits as of March 31, 2014, increased $23.95 million, or 1.23%, compared to December 31, 2013. Noninterest-bearing deposits increased $13.46 million, interest-bearing deposits increased $20.93 million, and savings deposits, which include money market and savings accounts, increased $7.09 million as of March 31, 2014, compared to December 31, 2013. Time deposits decreased $17.53 million as of March 31, 2014, compared to December 31, 2013.

Borrowings

Total borrowings as of March 31, 2014, decreased $21.97 million, or 7.31%, compared to December 31, 2013. Short-term borrowings consist of federal funds purchased and retail repurchase agreements. No federal funds were purchased as of March 31, 2014, compared to $16.00 million as of December 31, 2013. The balance of retail repurchase agreements decreased $5.97 million, or 5.05%, as of March 31, 2014, compared to December 31, 2013. Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other obligations. The balance and weighted average rate of wholesale repurchase agreements remained constant at $50.00 million and 3.71%, respectively, as of March 31, 2014, compared to December 31, 2013. As of March 31, 2014, wholesale repurchase agreements had contractual maturities between two and five years. The balance and weighted average rate of FHLB borrowings remained unchanged at $150.00 million and 4.12%, respectively, as of March 31, 2014, compared to December 31, 2013. As of March 31, 2014, FHLB borrowings had contractual maturities between three and seven years.

Stockholders’ Equity

Total stockholders’ equity increased $5.30 million, or 1.61%, from $328.61 million as of December 31, 2013, to $333.91 million as of March 31, 2014. The change in stockholders’ equity was impacted by net income of $5.73 million, dividends declared on our common and Series A Noncumulative Convertible Preferred Stock of $2.44 million, repurchases of 131,500 shares of our common stock totaling $2.15 million, and other comprehensive income (“OCI”) of $4.05 million. OCI was driven by unrealized gains on available-for-sale securities.

Liquidity and Capital Resources

We maintain a liquidity risk management policy and contingency funding policy (the “Liquidity Plan”) that is designed to detect potential liquidity issues in order to protect depositors, creditors, and shareholders. The Liquidity Plan includes various internal and external indicators that are reviewed on a recurring basis by our Asset/Liability Management Committee (“ALCO”) and the Board of Directors. ALCO is responsible for reviewing liquidity risk exposure and policies related to liquidity management and ensuring that systems and internal controls are consistent with liquidity policies and provide accurate reports regarding liquidity needs, sources, and compliance.

As of March 31, 2014, we maintained liquidity in the form of unencumbered cash on hand and deposits with other financial institutions of $79.00 million, availability on federal funds lines with correspondent banks of $105.00 million, credit available from the FRB’s discount window of $9.09 million, unused borrowing capacity with the FHLB of $362.35 million, and unpledged available-for-sale securities of $199.27 million. Cash on hand and deposits with other financial institutions, as well as lines of credit extended from correspondent banks and the FHLB, are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Available-for-sale securities represent a secondary source of liquidity upon conversion to a liquid asset. Our approved lines of credit with correspondent banks are available as backup liquidity sources.

As a holding company, the Company does not conduct significant operations. The Company’s primary sources of liquidity are dividends received from the Bank and borrowings. Dividends paid by the Bank are subject to certain regulatory limitations. As of March 31, 2014, the Company’s liquid assets consisted of cash and investment securities totaling $24.21 million. The Company’s cash reserves and investments provide adequate working capital to meet obligations and projected dividends to shareholders for the next twelve months. The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution. As of March 31, 2014, there was no outstanding balance on the line.

Capital Resources

Risk-based capital guidelines, promulgated by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. As of March 31, 2014, and December 31, 2013, the Company and the Bank were deemed “well capitalized” under regulatory capital adequacy standards. The following table presents our capital ratios as of the dates indicated:


	March 31, 2014			December 31, 2013
Total risk-based capital ratio
First Community Bancshares, Inc.		16.24	%		16.44	%
First Community Bank		14.38	%		14.55	%
Tier 1 risk-based capital ratio
First Community Bancshares, Inc.		14.98	%		15.19	%
First Community Bank		13.12	%		13.30	%
Tier 1 leverage ratio
First Community Bancshares, Inc.		10.13	%		9.95	%
First Community Bank		8.81	%		8.63	%

Off-Balance Sheet Arrangements

We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the instrument. The following table presents the Company’s off-balance sheet financial instruments as of the dates indicated:


(Amounts in thousands)	March 31, 2014		December 31, 2013
Commitments to extend credit	$	226,031	$	216,179
Commitments related to secondary market mortgage loans		2,039		3,677
Standby letters of credit and financial guarantees		4,233		4,193

Total off-balance sheet risk	$	232,303	$	224,049

Reserve for unfunded commitments	$	326	$	326

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes are presented in accordance with GAAP, which requires the measurement of results of operations and financial position in terms of historical dollars. Inflation may cause a rise in price levels and changes in the relative purchasing power of money. These inflationary effects are not reflected in historical dollar measurements. The primary effect of inflation on our operations is increased operating costs. In management’s opinion, interest rates have a greater impact on our financial performance than inflation. Interest rates do not necessarily fluctuate in the same direction, or to the same extent, as the price of goods and services; therefore, the effect of inflation on financial institutions is generally not as significant as the effect on businesses with large investments in property, plant, and inventory. The U.S. inflation rate continues to be relatively stable, and management believes that any changes in inflation will not have a material impact on our financial performance.

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, 2014, 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, 2014				December 31, 2013
(Amounts in thousands, except basis points)	Change in		Percent		Change in		Percent
Increase (Decrease) in Interest Rates/Basis Points	Net Interest Income		Change		Net Interest Income		Change
300	$	1,047		1.2	$	2,649		3.1
200		535		0.6		1,517		1.8
100		60		0.1		454		0.5
(100)		11		0.0		497		0.6

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with this report, 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, 2014, our disclosure controls and procedures were effective.

Disclosure controls and procedures are our Company’s 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, 2014, 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 we are unable to assess the ultimate outcome of each of these matters with certainty, we 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

A description of the Company’s risk factors is included in Part I, Item 1A, “Risk Factors,” of our 2013 Form 10-K. Our risk factors discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, our risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes from the risk factors previously disclosed in our 2013 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 regarding purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the dates indicated:


	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, 2014		112,500	$	16.37		112,500		909,422
February 1-28, 2014		19,000		15.88		19,000		891,222
March 1-31, 2014		—		—		—		892,337

Total		131,500	$	16.30		131,500

(1)

Our stock repurchase plan, as amended, authorizes the purchase and retention of up to 3,000,000 shares. The plan has no expiration date and is currently in effect. No determination has been made to terminate the plan or to cease making purchases. We held 2,107,663 shares in treasury as of March 31, 2014.

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Mine Safety Disclosures

None

ITEM 5. Other Information

None

ITEM 6. Exhibits

(a)	Exhibits and index required


Exhibit No.		Exhibit

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

3.2		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. (32)

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)

10.9**		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)

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

10.12**		First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan (31)

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

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

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

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

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

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

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

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

10.22**		Form of Restricted Stock Grant Agreement under First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan. (33)

10.23**		Separation Agreement and Release between First Community Bancshares, Inc. and John M. Mendez dated August 28, 2013. (34)

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

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101***		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of March 31, 2014, (Unaudited), and December 31, 2013; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2014 and 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2014 and 2013; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2014 and 2013; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).

*	Incorporated herewith.

**	Indicates a management contract or compensation plan.

***	Submitted electronically herewith.

(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 September 24, 2013, filed on September 26, 2013.

(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)	Incorporated by reference from Exhibit 10.1 and Exhibit 10.2 of the Current Report on Form 8-K dated February 25, 2014, filed on March 3, 2014.

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

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

(33)	Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013.

(34)	Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K/A dated August 12, 2013, filed on September 3, 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, on the 9^th day of May, 2014.

First Community Bancshares, Inc.

(Registrant)

/s/ William P. Stafford, II

William P. Stafford, II

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		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of March 31, 2014, (Unaudited), and December 31, 2013; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2014 and 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2014 and 2013; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2014 and 2013; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).