##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended June 30, 2009
 Commission file number 000-19297
 FIRST COMMUNITY BANCSHARES, INC.
  Nevada
    
    55-0694814(State or other jurisdiction of incorporation)
    
    (IRS Employer Identification No.)
 P.O. Box 989Bluefield, Virginia
    
    24605-0989(Address of principal executive offices)
    
    (Zip Code)
 (276) 326-9000
 (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer  o(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008
    
    
    3Consolidated Statements of Income for the Three- and Six-Month Periods Ended June 30, 2009 and 2008 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    5Consolidated Statements of Changes in Stockholders Equity for the Six Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    41PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 3. Defaults Upon Senior Securities
    
    
    49Item 4. Submission of Matters to a Vote of Security Holders
    
    
    49Item 5. Other Information
    
    
    50Item 6. Exhibits
    
    
    50SIGNATURES
    
    
    53EXHIBIT INDEX
    
    
    54EX-31.1EX-31.2EX-32
  - 2 -




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##### Table of Contents



PART I. ITEM 1. Financial Statements
 FIRST
COMMUNITY BANCSHARES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2009
    
    
    2008*(Dollars in Thousands, Except Per Share Data)
    
    (Unaudited)AssetsCash and due from banks
    
    $
    116,095
    
    
    $
    39,310Interest-bearing balances with banks
    
    
    28,354
    
    
    
    7,129Total cash and cash equivalents
    
    
    144,449
    
    
    
    46,439Securities available-for-sale
    
    
    521,879
    
    
    
    520,723Securities held-to-maturity
    
    
    7,725
    
    
    
    8,670Loans held for sale
    
    
    802
    
    
    
    1,024Loans held for investment, net of unearned income
    
    
    1,269,443
    
    
    
    1,298,159Less allowance for loan losses
    
    
    16,678
    
    
    
    15,978Net loans held for investment
    
    
    1,252,765
    
    
    
    1,282,181Premises and equipment
    
    
    55,193
    
    
    
    55,024Other real estate owned
    
    
    3,615
    
    
    
    1,326Interest receivable
    
    
    8,935
    
    
    
    10,084Goodwill and other intangible assets
    
    
    89,534
    
    
    
    89,612Other assets
    
    
    118,313
    
    
    
    118,231Total Assets
    
    $
    2,203,210
    
    
    $
    2,133,314LiabilitiesDeposits:Noninterest-bearing
    
    $
    202,543
    
    
    $
    199,712Interest-bearing
    
    
    1,344,815
    
    
    
    1,304,046Total Deposits
    
    
    1,547,358
    
    
    
    1,503,758Interest, taxes and other liabilities
    
    
    27,630
    
    
    
    27,423Securities sold under agreements to repurchase
    
    
    153,804
    
    
    
    165,914FHLB borrowings and other indebtedness
    
    
    190,863
    
    
    
    215,877Total Liabilities
    
    
    1,919,655
    
    
    
    1,912,972Stockholders EquityPreferred stock, par value undesignated; 1,000,000 shares authorized; 41,500 issued
at June 30, 2009, and December 31, 2008.
    
    
    40,525
    
    
    
    40,419Common stock, $1 par value; 25,000,000 shares authorized; 17,341,234 shares
issued at June 30, 2009, and 12,051,234 issued December 31, 2008, including
431,642 and 483,785 shares in treasury, respectively
    
    
    17,341
    
    
    
    12,051Additional paid-in capital
    
    
    183,955
    
    
    
    128,526Retained earnings
    
    
    116,997
    
    
    
    107,231Treasury stock, at cost
    
    
    (13,712
    )
    
    
    (15,368
    )Accumulated other comprehensive loss
    
    
    (61,551
    )
    
    
    (52,517
    )Total Stockholders Equity
    
    
    283,555
    
    
    
    220,342Total Liabilities and Stockholders Equity
    
    $
    2,203,210
    
    
    $
    2,133,314
 
 *
    
    Derived from audited financial statements. See Notes to Consolidated Financial Statements.
 - 3 -




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##### Table of Contents



FIRST
COMMUNITY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(Dollars In Thousands, Except Per Share Data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest IncomeInterest and fees on loans held for investment
    
    $
    19,571
    
    
    $
    19,891
    
    
    $
    39,555
    
    
    $
    41,128Interest on securities-taxable
    
    
    5,177
    
    
    
    5,467
    
    
    
    10,341
    
    
    
    11,534Interest on securities-nontaxable
    
    
    1,402
    
    
    
    2,004
    
    
    
    3,078
    
    
    
    4,067Interest on federal funds sold and deposits
    
    
    39
    
    
    
    71
    
    
    
    78
    
    
    
    251Total interest income
    
    
    26,189
    
    
    
    27,433
    
    
    
    53,052
    
    
    
    56,980Interest ExpenseInterest on deposits
    
    
    7,076
    
    
    
    7,118
    
    
    
    14,643
    
    
    
    15,859Interest on borrowings
    
    
    2,792
    
    
    
    3,690
    
    
    
    5,655
    
    
    
    8,136Total interest expense
    
    
    9,868
    
    
    
    10,808
    
    
    
    20,298
    
    
    
    23,995Net interest income
    
    
    16,321
    
    
    
    16,625
    
    
    
    32,754
    
    
    
    32,985Provision for loan losses
    
    
    2,552
    
    
    
    937
    
    
    
    4,639
    
    
    
    1,260Net interest income after provision for loan losses
    
    
    13,769
    
    
    
    15,688
    
    
    
    28,115
    
    
    
    31,725Noninterest IncomeWealth management income
    
    
    1,133
    
    
    
    1,098
    
    
    
    2,117
    
    
    
    1,997Service charges on deposit accounts
    
    
    3,491
    
    
    
    3,463
    
    
    
    6,648
    
    
    
    6,562Other service charges and fees
    
    
    1,133
    
    
    
    1,064
    
    
    
    2,311
    
    
    
    2,185Insurance commissions
    
    
    1,639
    
    
    
    1,146
    
    
    
    3,956
    
    
    
    2,490Total impairment losses on securities
    
    
    (25,169
    )
    
    
    
    
    
    
    (25,378
    )
    
    
    Portion of loss recognized in other comprehensive income
    
    
    21,393
    
    
    
    
    
    
    
    21,393
    
    
    
    Net impairment losses recognized in earnings
    
    
    (3,776
    )
    
    
    
    
    
    
    (3,985
    )
    
    
    Security gains
    
    
    1,653
    
    
    
    150
    
    
    
    2,064
    
    
    
    1,970Other operating income
    
    
    349
    
    
    
    803
    
    
    
    935
    
    
    
    1,661Total non-interest income
    
    
    5,622
    
    
    
    7,724
    
    
    
    14,046
    
    
    
    16,865Noninterest ExpenseSalaries and employee benefits
    
    
    7,405
    
    
    
    7,580
    
    
    
    15,271
    
    
    
    15,370Occupancy expense of bank premises
    
    
    1,333
    
    
    
    1,256
    
    
    
    2,936
    
    
    
    2,420Furniture and equipment expense
    
    
    892
    
    
    
    973
    
    
    
    1,830
    
    
    
    1,874Amortization of intangible assets
    
    
    244
    
    
    
    158
    
    
    
    489
    
    
    
    318FHLB debt prepayment fees
    
    
    88
    
    
    
    
    
    
    
    88
    
    
    
    1,647FDIC premiums and assessments
    
    
    1,287
    
    
    
    39
    
    
    
    1,475
    
    
    
    79Other operating expense
    
    
    4,894
    
    
    
    4,753
    
    
    
    9,248
    
    
    
    9,334Total noninterest expense
    
    
    16,143
    
    
    
    14,759
    
    
    
    31,337
    
    
    
    31,042Income before income taxes
    
    
    3,248
    
    
    
    8,653
    
    
    
    10,824
    
    
    
    17,548Income tax expense
    
    
    843
    
    
    
    2,415
    
    
    
    3,189
    
    
    
    4,998Net income
    
    
    2,405
    
    
    
    6,238
    
    
    
    7,635
    
    
    
    12,550Dividends on preferred stock
    
    
    578
    
    
    
    
    
    
    
    1,149
    
    
    
    Net income available to common shareholders
    
    $
    1,827
    
    
    $
    6,238
    
    
    $
    6,486
    
    
    $
    12,550Basic earnings per common share
    
    $
    0.14
    
    
    $
    0.57
    
    
    $
    0.53
    
    
    $
    1.14Diluted earnings per common share
    
    $
    0.14
    
    
    $
    0.56
    
    
    $
    0.53
    
    
    $
    1.13Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.28
    
    
    $
    0.20
    
    
    $
    0.56Weighted average basic shares outstanding
    
    
    12,696,202
    
    
    
    10,992,301
    
    
    
    12,135,103
    
    
    
    11,011,116Weighted average diluted shares outstanding
    
    
    12,741,080
    
    
    
    11,073,440
    
    
    
    12,181,843
    
    
    
    11,091,714
 See Notes to Consolidated Financial Statements
 - 4 -




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##### Table of Contents



FIRST
COMMUNITY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Six Months EndedJune 30,(In Thousands)
    
    2009
    
    
    2008Operating activities:Net Income
    
    $
    7,635
    
    
    $
    12,550Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    4,639
    
    
    
    1,260Depreciation and amortization of premises and equipment
    
    
    2,189
    
    
    
    1,855Intangible amortization
    
    
    489
    
    
    
    318Net investment amortization and accretion
    
    
    768
    
    
    
    (526
    )Net gain on the sale of assets
    
    
    (2,154
    )
    
    
    (1,929
    )Mortgage loans originated for sale
    
    
    (18,422
    )
    
    
    (22,964
    )Proceeds from sales of mortgage loans
    
    
    18,685
    
    
    
    22,376Gain on sales of loans
    
    
    (41
    )
    
    
    (123
    )Deferred income tax benefit
    
    
    (588
    )
    
    
    (330
    )Decrease in interest receivable
    
    
    1,148
    
    
    
    2,473Non-cash other-than-temporary impairment charge
    
    
    3,985
    
    
    
    Other operating activities, net
    
    
    (25
    )
    
    
    (118
    )Net cash provided by operating activities
    
    
    18,308
    
    
    
    14,842Investing activities:Proceeds from sales of securities available-for-sale
    
    
    89,827
    
    
    
    73,731Proceeds from maturities and calls of securities available-for-sale
    
    
    28,051
    
    
    
    54,521Proceeds from maturities and calls of securities held-to-maturity
    
    
    946
    
    
    
    1,578Purchase of securities available-for-sale
    
    
    (125,496
    )
    
    
    (97,491
    )Net decrease in loans held for investment
    
    
    22,375
    
    
    
    43,740Proceeds from the redemption of FHLB stock
    
    
    351
    
    
    
    Proceeds from sales of equipment
    
    
    188
    
    
    
    Purchase of premises and equipment
    
    
    (2,393
    )
    
    
    (3,549
    )Net cash provided by investing activities
    
    
    13,849
    
    
    
    72,530Financing activities:Net increase in demand and savings deposits
    
    
    15,477
    
    
    
    4,139Net increase (decrease) in time deposits
    
    
    28,123
    
    
    
    (58,175
    )Net decrease in federal funds purchased
    
    
    
    
    
    
    48,000Net (decrease) increase in securities sold under agreement to repurchase
    
    
    (12,110
    )
    
    
    8,183Net decrease in FHLB and other borrowings
    
    
    (25,014
    )
    
    
    (75,054
    )FHLB debt
prepayment fees
    
    
    (88
    )
    
    
    (1,647
    )Net proceeds from the issuance of common stock
    
    
    61,668
    
    
    
    Proceeds from the exercise of stock options
    
    
    
    
    
    
    97Excess tax benefit from stock-based compensation
    
    
    
    
    
    
    22Acquisition of treasury stock
    
    
    
    
    
    
    (4,112
    )Preferred dividends paid
    
    
    (1,043
    )
    
    
    Common dividends paid
    
    
    (1,160
    )
    
    
    (6,154
    )Net cash (used in) provided by financing activities
    
    
    65,853
    
    
    
    (84,701
    )Increase in cash and cash equivalents
    
    
    98,010
    
    
    
    2,671Cash and cash equivalents at beginning of period
    
    
    46,439
    
    
    
    52,746Cash and cash equivalents at end of period
    
    $
    144,449
    
    
    $
    55,417Supplemental information  Noncash itemsTransfer of loans to other real estate
    
    $
    2,485
    
    
    $
    637Cumulative effect adjustment of FAS 115-2, net of tax
    
    $
    6,131
    
    
    $
    
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



FIRST
COMMUNITY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    OtherPreferred
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    ComprehensiveStock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Loss
    
    
    Total(Dollars in Thousands)Balance January 1, 2008
    
    $
    
    
    
    $
    11,499
    
    
    $
    108,825
    
    
    $
    117,670
    
    
    $
    (13,613
    )
    
    $
    (7,283
    )
    
    $
    217,098Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,550
    
    
    
    
    
    
    
    
    
    
    
    12,550Other comprehensive loss, net of tax:Unrealized loss on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,631
    )
    
    
    (21,631
    )Reclassification adjustment for
gains realized in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (810
    )
    
    
    (810
    )Unrealized gain on derivative securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,550
    
    
    
    
    
    
    
    (22,454
    )
    
    
    (9,904
    )Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (813
    )
    
    
    
    
    
    
    
    
    
    
    (813
    )Common dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,154
    )
    
    
    
    
    
    
    
    
    
    
    (6,154
    )Acquisition of 128,100 treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,112
    )
    
    
    
    
    
    
    (4,112
    )Acquisition of GreenPoint Insurance Group -
7,728 shares issued
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    267Equity-based compensation expense
    
    
    
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29Option exercises - 4,804 shares
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    95Balance June 30, 2008
    
    $
    
    
    
    $
    11,499
    
    
    $
    108,926
    
    
    $
    123,253
    
    
    $
    (17,328
    )
    
    $
    (29,737
    )
    
    $
    196,613Balance January 1, 2009
    
    $
    40,419
    
    
    $
    12,051
    
    
    $
    128,526
    
    
    $
    107,231
    
    
    $
    (15,368
    )
    
    $
    (52,517
    )
    
    $
    220,342Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,131
    
    
    
    
    
    
    
    (6,131
    )
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,635
    
    
    
    
    
    
    
    
    
    
    
    7,635Other comprehensive loss, net of tax:Unrealized loss on securities
available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,890
    )
    
    
    (2,890
    )Reclassification adjustment for
gains realized in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (363
    )
    
    
    (363
    )Unrealized gain on derivative securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350
    
    
    
    350Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,635
    
    
    
    
    
    
    
    (2,903
    )
    
    
    4,732Preferred dividend, net
    
    
    106
    
    
    
    
    
    
    
    (37
    )
    
    
    (1,149
    )
    
    
    
    
    
    
    
    
    
    
    (1,080
    )Common dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,851
    )
    
    
    
    
    
    
    
    
    
    
    (2,853
    )Issuance of vested shares
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    Equity-based compensation expense
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72Common stock issuance -
5,290,000 shares issued
    
    
    
    
    
    
    5,290
    
    
    
    56,378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,668Retirement plan contribution -
51,443 shares issued
    
    
    
    
    
    
    
    
    
    
    (962
    )
    
    
    
    
    
    
    1,634
    
    
    
    
    
    
    
    672Balance June 30, 2009
    
    $
    40,525
    
    
    $
    17,341
    
    
    $
    183,955
    
    
    $
    116,997
    
    
    $
    (13,712
    )
    
    $
    (61,551
    )
    
    $
    283,555
 See Notes to Consolidated Financial Statements.
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. General
 Unaudited Consolidated Financial Statements
     Earnings Per Share
  For the three months
    
    
    For the six monthsended June 30,
    
    
    ended June 30,(Amounts in Thousands, Except Share and Per Share Data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income available to common shareholders
    
    $
    1,827
    
    
    $
    6,238
    
    
    $
    6,486
    
    
    $
    12,550Weighted average shares outstanding
    
    
    12,696,202
    
    
    
    10,992,301
    
    
    
    12,135,103
    
    
    
    11,011,116Dilutive shares for stock options
    
    
    2,411
    
    
    
    58,134
    
    
    
    4,274
    
    
    
    57,593Contingently issuable shares
    
    
    42,467
    
    
    
    23,005
    
    
    
    42,467
    
    
    
    23,005Common stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average dilutive shares outstanding
    
    
    12,741,080
    
    
    
    11,073,440
    
    
    
    12,181,843
    
    
    
    11,091,714Basic earnings per share
    
    $
    0.14
    
    
    $
    0.57
    
    
    $
    0.53
    
    
    $
    1.14Diluted earnings per share
    
    $
    0.14
    
    
    $
    0.56
    
    
    $
    0.53
    
    
    $
    1.13
  - 7 -




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##### Table of Contents



Recent Accounting Pronouncements
        - 8 -




---



##### Table of Contents



Note 2. Mergers, Acquisitions, and Branching Activity
     - 9 -




---



##### Table of Contents



Note 3. Investment Securities
  June 30, 2009Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(In Thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government agency securities
    
    $
    53,426
    
    
    $
    428
    
    
    $
    (24
    )
    
    $
    53,830States and political subdivisions
    
    
    136,358
    
    
    
    1,143
    
    
    
    (3,535
    )
    
    
    133,966Trust preferred securities:Single issue
    
    
    55,552
    
    
    
    
    
    
    
    (23,041
    )
    
    
    32,511Pooled
    
    
    90,270
    
    
    
    
    
    
    
    (62,120
    )
    
    
    28,150Total trust preferred securities
    
    
    145,822
    
    
    
    
    
    
    
    (85,162
    )
    
    
    60,661Mortgage-backed securities:Agency
    
    
    250,279
    
    
    
    3,823
    
    
    
    (1,600
    )
    
    
    252,502Non-Agency prime residential
    
    
    6,596
    
    
    
    
    
    
    
    (1,338
    )
    
    
    5,258Non-Agency Alt-A residential
    
    
    20,968
    
    
    
    
    
    
    
    (10,465
    )
    
    
    10,503Total mortgage-backed securities
    
    
    277,843
    
    
    
    3,823
    
    
    
    (13,403
    )
    
    
    268,263Equities
    
    
    5,476
    
    
    
    400
    
    
    
    (717
    )
    
    
    5,159Total
    
    $
    618,925
    
    
    $
    5,794
    
    
    $
    (102,840
    )
    
    $
    521,879
 December 31, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government agency securities
    
    $
    53,425
    
    
    $
    1,393
    
    
    $
    
    
    
    $
    54,818States and political subdivisions
    
    
    163,042
    
    
    
    864
    
    
    
    (4,487
    )
    
    
    159,419Trust preferred securities:Single Issue
    
    
    55,491
    
    
    
    
    
    
    
    (21,950
    )
    
    
    33,541Pooled
    
    
    93,269
    
    
    
    
    
    
    
    (60,757
    )
    
    
    32,512Total trust preferred securities
    
    
    148,760
    
    
    
    
    
    
    
    (82,707
    )
    
    
    66,053Mortgage-backed securities:Agency
    
    
    212,315
    
    
    
    4,649
    
    
    
    (2
    )
    
    
    216,962Non-Agency prime residential
    
    
    7,423
    
    
    
    
    
    
    
    (1,657
    )
    
    
    5,766Non-Agency Alt-A residential
    
    
    10,750
    
    
    
    
    
    
    
    
    
    
    
    10,750Total mortgage-backed securities
    
    
    230,488
    
    
    
    4,649
    
    
    
    (1,659
    )
    
    
    233,478Equities
    
    
    7,979
    
    
    
    357
    
    
    
    (1,381
    )
    
    
    6,955Total
    
    $
    603,694
    
    
    $
    7,263
    
    
    $
    (90,234
    )
    
    $
    520,723
 - 10 -




---



##### Table of Contents



June 30, 2009Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(In Thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueStates and political subdivisions
    
    $
    7,725
    
    
    $
    121
    
    
    $
    
    
    
    $
    7,846Total
    
    $
    7,725
    
    
    $
    121
    
    
    $
    
    
    
    $
    7,846
 December 31, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueStates and political subdivisions
    
    $
    8,670
    
    
    $
    133
    
    
    $
    (1
    )
    
    $
    8,802Total
    
    $
    8,670
    
    
    $
    133
    
    
    $
    (1
    )
    
    $
    8,802
  AmortizedCost
    
    
    Fair Value(Dollars in Thousands)Due within one year
    
    $
    1,329
    
    
    $
    1,340Due after one year but within
five years
    
    
    4,680
    
    
    
    4,763Due after five years but within
ten years
    
    
    71,416
    
    
    
    71,751Due after ten years
    
    
    258,181
    
    
    
    170,603335,606
    
    
    
    248,457Mortgage-backed securities
    
    
    277,843
    
    
    
    268,263Equity securities
    
    
    5,476
    
    
    
    5,159Total
    
    $
    618,925
    
    
    $
    521,879
  AmortizedCost
    
    
    Fair Value(Dollars in Thousands)Due within one year
    
    $
    1,091
    
    
    $
    1,105Due after one year but within
five years
    
    
    3,988
    
    
    
    4,053Due after five years but
within ten years
    
    
    
    
    
    
    Due after ten years
    
    
    2,646
    
    
    
    2,688Total
    
    $
    7,725
    
    
    $
    7,846
   - 11 -




---



##### Table of Contents



June 30, 2009Description of Securities
    
    Less than 12 Months
    
    
    12 Months or longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized(In Thousands)
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU. S. Government
agency securities
    
    $
    9,411
    
    
    $
    (24
    )
    
    $
    
    
    
    $
    
    
    
    $
    9,411
    
    
    $
    (24
    )States and political
subdivisions
    
    
    47,796
    
    
    
    (1,757
    )
    
    
    16,844
    
    
    
    (1,778
    )
    
    
    64,640
    
    
    
    (3,535
    )Trust preferred securities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Single Issue
    
    
    
    
    
    
    
    
    
    
    32,511
    
    
    
    (23,041
    )
    
    
    32,511
    
    
    
    (23,041
    )Pooled
    
    
    
    
    
    
    
    
    
    
    26,906
    
    
    
    (62,120
    )
    
    
    26,906
    
    
    
    (62,120
    )Total trust preferred
securities
    
    
    
    
    
    
    
    
    
    
    59,417
    
    
    
    (85,162
    )
    
    
    59,417
    
    
    
    (85,162
    )Mortgage-backed securities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Agency
    
    
    73,616
    
    
    
    (1,599
    )
    
    
    42
    
    
    
    (1
    )
    
    
    73,658
    
    
    
    (1,600
    )Prime residential
    
    
    
    
    
    
    
    
    
    
    5,258
    
    
    
    (1,338
    )
    
    
    5,258
    
    
    
    (1,338
    )Alt-A residential
    
    
    
    
    
    
    
    
    
    
    10,503
    
    
    
    (10,465
    )
    
    
    10,503
    
    
    
    (10,465
    )Total mortgage-backed
securities
    
    
    73,616
    
    
    
    (1,599
    )
    
    
    15,803
    
    
    
    (11,804
    )
    
    
    89,419
    
    
    
    (13,403
    )Equity securities
    
    
    565
    
    
    
    (164
    )
    
    
    1,229
    
    
    
    (553
    )
    
    
    1,794
    
    
    
    (717
    )Total
    
    $
    131,388
    
    
    $
    (3,544
    )
    
    $
    93,293
    
    
    $
    (99,296
    )
    
    $
    234,681
    
    
    $
    (102,840
    )
 December 31, 2008Less than 12 Months
    
    
    12 Months or longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU. S. Government agency
securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    States and political
subdivisions
    
    
    85,374
    
    
    
    (2,948
    )
    
    
    16,413
    
    
    
    (1,539
    )
    
    
    101,787
    
    
    
    (4,487
    )Trust preferred securities:Single Issue
    
    
    
    
    
    
    
    
    
    
    30,693
    
    
    
    (21,950
    )
    
    
    30,693
    
    
    
    (21,950
    )Pooled
    
    
    
    
    
    
    
    
    
    
    29,567
    
    
    
    (60,757
    )
    
    
    29,567
    
    
    
    (60,757
    )Total trust preferred
securities
    
    
    
    
    
    
    
    
    
    
    60,260
    
    
    
    (82,707
    )
    
    
    60,260
    
    
    
    (82,707
    )Mortgage-backed securities:Agency
    
    
    42,674
    
    
    
    (1
    )
    
    
    43
    
    
    
    (1
    )
    
    
    42,717
    
    
    
    (2
    )Prime residential
    
    
    5,766
    
    
    
    (1,657
    )
    
    
    
    
    
    
    
    
    
    
    5,766
    
    
    
    (1,657
    )Alt-A residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total mortgage-backed
securities
    
    
    48,440
    
    
    
    (1,658
    )
    
    
    43
    
    
    
    (1
    )
    
    
    48,483
    
    
    
    (1,659
    )Equity securities
    
    
    2,167
    
    
    
    (1,161
    )
    
    
    2,201
    
    
    
    (220
    )
    
    
    4,368
    
    
    
    (1,381
    )Total
    
    $
    135,981
    
    
    $
    (5,767
    )
    
    $
    78,917
    
    
    $
    (84,467
    )
    
    $
    214,898
    
    
    $
    (90,234
    )
    - 12 -




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##### Table of Contents



- 13 -




---



##### Table of Contents



(Dollars In Thousands)
    
    June 30, 2009Deferrals/Defaults
    
    
    Excess SubordinationCurrent
    
    CreditClass/
    
    Credit
    
    Rating at
    
    Issuing

    
    Book
    
    
    Fair
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofDeal Name
    
    Tranche
    
    Rating
    
    Purchase
    
    Banks

    
    Value
    
    
    Value
    
    
    Amount
    
    
    Deal
    
    
    Amount
    
    
    DealSingle-issuerBankAmerica Cap
    
    n/a
    
    BBB
    
    A+
    
    
    1
    
    
    $
    3,079
    
    
    $
    2,329
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aBankBoston Cap
    
    n/a
    
    AA
    
    A+
    
    
    1
    
    
    
    4,901
    
    
    
    2,956
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aChase Capital II
    
    n/a
    
    A
    
    A
    
    
    1
    
    
    
    3,618
    
    
    
    2,128
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aCoreStates Capital I
    
    n/a
    
    A
    
    A+
    
    
    1
    
    
    
    2,933
    
    
    
    1,498
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aFirst Chicago NDB CA
    
    n/a
    
    A
    
    A
    
    
    1
    
    
    
    1,435
    
    
    
    840
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aJPMorgan Chase Cap X
    
    n/a
    
    A
    
    A
    
    
    1
    
    
    
    5,013
    
    
    
    2,818
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aNB-Global
    
    n/a
    
    BBB
    
    A+
    
    
    1
    
    
    
    20,751
    
    
    
    12,486
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aNTC Capital I Float
    
    n/a
    
    A
    
    A2
    
    
    1
    
    
    
    4,006
    
    
    
    2,119
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aSunTrust Banks
    
    n/a
    
    BBB
    
    A
    
    
    1
    
    
    
    4,940
    
    
    
    2,625
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aWachovia Cap II
    
    n/a
    
    A
    
    A+
    
    
    1
    
    
    
    4,876
    
    
    
    2,712
    
    
    None
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a$
    55,552
    
    
    $
    32,511PooledPreTSL X
    
    B1
    
    CC
    
    A
    
    
    58
    
    
    $
    8,779
    
    
    $
    4,436
    
    
    $
    126,625
    
    
    
    32.5
    %
    
    $
    14,000
    
    
    
    4.0
    %PreTSL XII
    
    B1
    
    CC
    
    A
    
    
    79
    
    
    
    19,551
    
    
    
    10,006
    
    
    
    142,600
    
    
    
    22.4
    %
    
    
    48,500
    
    
    
    8.0
    %PreTSL XIV
    
    B1
    
    CC
    
    A
    
    
    64
    
    
    
    9,000
    
    
    
    6,439
    
    
    
    51,000
    
    
    
    11.9
    %
    
    
    77,000
    
    
    
    18.0
    %PreTSL XVI
    
    C
    
    CC
    
    A
    
    
    50
    
    
    
    4,024
    
    
    
    914
    
    
    
    111,910
    
    
    
    22.5
    %
    
    
    57,500
    
    
    
    12.0
    %PreTSL XXII
    
    C1
    
    CC
    
    A
    
    
    82
    
    
    
    12,631
    
    
    
    1,293
    
    
    
    231,500
    
    
    
    20.0
    %
    
    
    182,500
    
    
    
    16.0
    %PreTSL XXIII
    
    C1
    
    CCC
    
    A
    
    
    70
    
    
    
    7,934
    
    
    
    2,480
    
    
    
    191,500
    
    
    
    16.0
    %
    
    
    250,000
    
    
    
    21.0
    %PreTSL XXVI
    
    C1
    
    CC
    
    A
    
    
    64
    
    
    
    6,984
    
    
    
    395
    
    
    
    159,000
    
    
    
    19.7
    %
    
    
    125,000
    
    
    
    16.0
    %SLOSO 2007 1A
    
    A3L
    
    CC
    
    A
    
    
    56
    
    
    
    1,244
    
    
    
    1,244
    
    
    
    52,500
    
    
    
    11.1
    %
    
    
    140
    
    
    
    0.0
    %TRAPEZA SER 13A
    
    D
    
    C
    
    A
    
    
    63
    
    
    
    20,123
    
    
    
    943
    
    
    
    66,000
    
    
    
    9.7
    %
    
    
    1,263
    
    
    
    0.2
    %$
    90,270
    
    
    $
    28,150
   For the Three Months
    
    
    For the Six Months(In Thousands)
    
    Ended June 30, 2009
    
    
    Ended June 30, 2009Estimated credit losses, beginning balance*
    
    
    19,707
    
    
    
    19,707Additions for credit losses not previously recognized
    
    
    3,370
    
    
    
    3,370Reduction for increases in cash flows
    
    
    
    
    
    
    Reduction for realized losses
    
    
    
    
    
    
    Estimated credit losses as of June 30, 2009
    
    $
    23,077
    
    
    $
    23,077
 
 *
    
    The beginning balance includes credit related losses included in other-than-temporary impairment
charges recognized on debt securities in prior periods.  - 14 -




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##### Table of Contents



Note 4. Loans
  June 30, 2009
    
    
    December 31, 2008(Dollars in Thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentLoans held for investment:Commercial, financial, and agricultural
    
    $
    83,873
    
    
    
    6.61
    %
    
    $
    85,034
    
    
    
    6.55
    %Real estate  commercial
    
    
    410,473
    
    
    
    32.33
    %
    
    
    407,638
    
    
    
    31.40
    %Real estate  construction
    
    
    112,361
    
    
    
    8.85
    %
    
    
    130,610
    
    
    
    10.06
    %Real estate  residential
    
    
    594,646
    
    
    
    46.85
    %
    
    
    602,573
    
    
    
    46.42
    %Consumer
    
    
    62,077
    
    
    
    4.89
    %
    
    
    66,258
    
    
    
    5.10
    %Other
    
    
    6,014
    
    
    
    0.47
    %
    
    
    6,046
    
    
    
    0.47
    %Total
    
    $
    1,269,443
    
    
    
    100.00
    %
    
    $
    1,298,159
    
    
    
    100.00
    %Loans held for sale
    
    $
    802
    
    
    
    
    
    
    $
    1,024
     - 15 -




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##### Table of Contents



Note 5. Allowance for Loan Losses
    For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,(In Thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Beginning balance
    
    $
    16,555
    
    
    $
    12,862
    
    
    $
    15,978
    
    
    $
    12,833Provision for loan
losses
    
    
    2,552
    
    
    
    937
    
    
    
    4,639
    
    
    
    1,260Charge-offs
    
    
    (2,681
    )
    
    
    (1,198
    )
    
    
    (4,411
    )
    
    
    (2,164
    )Recoveries
    
    
    252
    
    
    
    832
    
    
    
    472
    
    
    
    1,504Ending balance
    
    $
    16,678
    
    
    $
    13,433
    
    
    $
    16,678
    
    
    $
    13,433
 Note 6. Deposits
  June 30,
    
    
    December 31,(In Thousands)
    
    2009
    
    
    2008Interest-bearing demand deposits
    
    $
    195,905
    
    
    $
    185,117Savings and money market deposits
    
    
    311,435
    
    
    
    309,577Certificates of deposit
    
    
    837,475
    
    
    
    809,352Total
    
    $
    1,344,815
    
    
    $
    1,304,046
 - 16 -




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Note 7. Borrowings
  June 30,
    
    
    December 31,(In Thousands)
    
    2009
    
    
    2008FHLB borrowings
    
    $
    175,000
    
    
    $
    200,000Subordinated debt
    
    
    15,464
    
    
    
    15,464Other long-term debt
    
    
    399
    
    
    
    413Total
    
    $
    190,863
    
    
    $
    215,877
    (In Thousands)
    
    Amount2009
    
    $
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014 and thereafter
    
    
    175,000Total
    
    $
    175,000
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Note 8. Net Periodic Benefit Cost-Defined Benefit Plans
  Three Months Ended
    
    
    Six Months Ended(In Thousands)
    
    June 30, 2009
    
    
    June 30, 2009Service cost
    
    $
    53
    
    
    $
    106Interest cost
    
    
    47
    
    
    
    94Net periodic cost
    
    $
    100
    
    
    $
    200
 Note 9. Comprehensive Income
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,(In Thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    2,405
    
    
    $
    6,238
    
    
    $
    7,635
    
    
    $
    12,550Other comprehensive incomeUnrealized gain/(loss) on securities available-for-sale
with other-than-temporary impairment
    
    
    (25,169
    )
    
    
    
    
    
    
    (25,378
    )
    
    
    Unrealized gain/(loss) on securities available-for-sale
without other-than-temporary impairment
    
    
    32,979
    
    
    
    
    
    
    
    20,716
    
    
    
    Unrealized loss on securities available-for-sale
prior to adoption of FSP115-2
    
    
    
    
    
    
    (22,138
    )
    
    
    
    
    
    
    (36,052
    )Reclassification adjustment for losses (gains)
realized in net income
    
    
    (360
    )
    
    
    (460
    )
    
    
    (585
    )
    
    
    (1,350
    )Unrealized (loss) gain on derivative securities
    
    
    326
    
    
    
    1,562
    
    
    
    565
    
    
    
    (22
    )Income tax effect
    
    
    (2,955
    )
    
    
    8,415
    
    
    
    1,779
    
    
    
    14,969Total other comprehensive income/(loss)
    
    
    4,821
    
    
    
    (12,622
    )
    
    
    (2,903
    )
    
    
    (22,454
    )Comprehensive income/(loss)
    
    $
    7,226
    
    
    $
    (6,384
    )
    
    $
    4,732
    
    
    $
    (9,904
    )
  Note 10. Commitments and Contingencies
  Note 11. Segment Information
  - 18 -




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For the Three Months EndedJune 30, 2009Community
    
    
    Insurance
    
    
    Parent/(In Thousands)
    
    Banking
    
    
    Services
    
    
    Elimination
    
    
    TotalNet interest income
    
    $
    16,343
    
    
    $
    (16
    )
    
    $
    (6
    )
    
    $
    16,321Provision for loan losses
    
    
    2,552
    
    
    
    
    
    
    
    
    
    
    
    2,552Noninterest income
    
    
    6,613
    
    
    
    1,665
    
    
    
    (2,656
    )
    
    
    5,622Noninterest expense
    
    
    17,595
    
    
    
    1,474
    
    
    
    (2,926
    )
    
    
    16,143Income before income taxes
    
    
    2,809
    
    
    
    175
    
    
    
    264
    
    
    
    3,248Provision for income taxes
    
    
    429
    
    
    
    51
    
    
    
    363
    
    
    
    843Net income
    
    $
    2,380
    
    
    $
    124
    
    
    $
    (99
    )
    
    $
    2,405End of period goodwill and other intangibles
    
    $
    78,506
    
    
    $
    11,028
    
    
    $
    
    
    
    
    89,534End of period assets
    
    $
    2,176,111
    
    
    $
    11,252
    
    
    $
    15,847
    
    
    
    2,203,210
 For the Six Months EndedJune 30, 2009Community
    
    
    Insurance
    
    
    Parent/(In Thousands)
    
    Banking
    
    
    Services
    
    
    Elimination
    
    
    TotalNet interest income
    
    $
    32,835
    
    
    $
    (34
    )
    
    $
    (47
    )
    
    $
    32,754Provision for loan losses
    
    
    4,639
    
    
    
    
    
    
    
    
    
    
    
    4,639Noninterest income
    
    
    12,737
    
    
    
    4,009
    
    
    
    (415
    )
    
    
    16,331Noninterest expense
    
    
    31,177
    
    
    
    3,112
    
    
    
    (667
    )
    
    
    33,622Income before income taxes
    
    
    9,756
    
    
    
    863
    
    
    
    205
    
    
    
    10,824Provision for income taxes
    
    
    2,361
    
    
    
    254
    
    
    
    574
    
    
    
    3,189Net income
    
    $
    7,395
    
    
    $
    609
    
    
    $
    (369
    )
    
    $
    7,635End of period goodwill and other intangibles
    
    $
    78,506
    
    
    $
    11,028
    
    
    $
    
    
    
    
    89,534End of period assets
    
    $
    2,176,111
    
    
    $
    11,252
    
    
    $
    15,847
    
    
    
    2,203,210
 For the Three Months EndedJune 30, 2008Community
    
    
    Insurance
    
    
    Parent/(In Thousands)
    
    Banking
    
    
    Services
    
    
    Elimination
    
    
    TotalNet interest income
    
    $
    16,840
    
    
    $
    (5
    )
    
    $
    (210
    )
    
    $
    16,625Provision for loan losses
    
    
    937
    
    
    
    
    
    
    
    
    
    
    
    937Noninterest income
    
    
    6,644
    
    
    
    1,146
    
    
    
    (66
    )
    
    
    7,724Noninterest expense
    
    
    14,046
    
    
    
    991
    
    
    
    (278
    )
    
    
    14,759Income before income taxes
    
    
    8,501
    
    
    
    150
    
    
    
    2
    
    
    
    8,653Provision for income taxes
    
    
    2,369
    
    
    
    44
    
    
    
    2
    
    
    
    2,415Net income
    
    $
    6,132
    
    
    $
    106
    
    
    $
    
    
    
    $
    6,238End of period goodwill and other intangibles
    
    $
    62,247
    
    
    $
    8,934
    
    
    $
    
    
    
    
    71,181End of period assets
    
    $
    2,034,670
    
    
    $
    9,067
    
    
    $
    9,950
    
    
    
    2,053,687
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##### Table of Contents



For the Six Months EndedJune 30, 2008Community
    
    
    Insurance
    
    
    Parent/(In Thousands)
    
    Banking
    
    
    Services
    
    
    Elimination
    
    
    TotalNet interest income
    
    $
    33,475
    
    
    $
    (11
    )
    
    $
    (479
    )
    
    $
    32,985Provision for loan losses
    
    
    1,260
    
    
    
    
    
    
    
    
    
    
    
    1,260Noninterest income
    
    
    14,638
    
    
    
    2,490
    
    
    
    (263
    )
    
    
    16,865Noninterest expense
    
    
    29,838
    
    
    
    2,037
    
    
    
    (833
    )
    
    
    31,042Income before income taxes
    
    
    17,015
    
    
    
    442
    
    
    
    91
    
    
    
    17,548Provision for income taxes
    
    
    4,801
    
    
    
    130
    
    
    
    67
    
    
    
    4,998Net income
    
    $
    12,214
    
    
    $
    312
    
    
    $
    24
    
    
    $
    12,550End of period goodwill and other intangibles
    
    $
    62,247
    
    
    $
    8,934
    
    
    $
    
    
    
    
    71,181End of period assets
    
    $
    2,034,670
    
    
    $
    9,067
    
    
    $
    9,950
    
    
    
    2,053,687
 Note 12. Fair Value Disclosures
   Level 1 Inputs 
    
    Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date.
 Level 2 Inputs 
    
    Inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These might include quoted prices
for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that
are observable for the asset or liability, such as interest rates, volatilities, prepayment
speeds, and credit risks, or inputs that are derived principally from or corroborated by
market data by correlation or other means.
 Level 3 Inputs 
    
    Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities.
  - 20 -




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Securities Available-for-Sale
     Other Assets and Associated Liabilities
 Derivatives
 Impaired Loans
 Other Real Estate Owned
 - 21 -




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June 30, 2009Fair Value Measurements Using
    
    
    Total(In Thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair ValueAvailable-for-sale securities:Agency securities
    
    $
    
    
    
    $
    53,830
    
    
    $
    
    
    
    $
    53,830Agency mortgage-backed securities
    
    
    
    
    
    
    252,502
    
    
    
    
    
    
    
    252,502Non-Agency prime residential MBS
    
    
    
    
    
    
    5,258
    
    
    
    
    
    
    
    5,258Non-Agency Alt-A residential MBS
    
    
    
    
    
    
    10,503
    
    
    
    
    
    
    
    10,503Municipal securities
    
    
    
    
    
    
    133,966
    
    
    
    
    
    
    
    133,966Single-issue trust preferred securities
    
    
    
    
    
    
    32,511
    
    
    
    
    
    
    
    32,511Pooled trust preferred securities
    
    
    
    
    
    
    
    
    
    
    28,150
    
    
    
    28,150Equity securities
    
    
    5,015
    
    
    
    144
    
    
    
    
    
    
    
    5,159Total Available-for-sale securities
    
    
    5,015
    
    
    
    488,714
    
    
    
    28,150
    
    
    
    521,879Other assets
    
    
    2,509
    
    
    
    
    
    
    
    
    
    
    
    2,509Derivative assets
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    23Other liabilities
    
    
    2,509
    
    
    
    
    
    
    
    
    
    
    
    2,509Derivative liabilities
    
    
    
    
    
    
    2,792
    
    
    
    
    
    
    
    2,792
 December 31, 2008Fair Value Measurements Using
    
    
    Total(In Thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair ValueAvailable-for-sale securities:Agency securities
    
    $
    
    
    
    $
    54,818
    
    
    $
    
    
    
    $
    54,818Agency mortgage-backed securities
    
    
    
    
    
    
    216,962
    
    
    
    
    
    
    
    216,962Non-Agency prime residential MBS
    
    
    
    
    
    
    5,766
    
    
    
    
    
    
    
    5,766Non-Agency Alt-A residential MBS
    
    
    
    
    
    
    10,750
    
    
    
    
    
    
    
    10,750Municipal securities
    
    
    
    
    
    
    159,419
    
    
    
    
    
    
    
    159,419Single-issue trust preferred securities
    
    
    
    
    
    
    33,541
    
    
    
    
    
    
    
    33,541Pooled trust preferred securities
    
    
    
    
    
    
    4,445
    
    
    
    28,067
    
    
    
    32,512Equity securities
    
    
    6,811
    
    
    
    144
    
    
    
    
    
    
    
    6,955Total Available-for-sale securities
    
    
    6,811
    
    
    
    485,845
    
    
    
    28,067
    
    
    
    520,723Other assets
    
    
    2,637
    
    
    
    
    
    
    
    
    
    
    
    2,637Derivative assets
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    39Other liabilities
    
    
    2,637
    
    
    
    
    
    
    
    
    
    
    
    2,637Derivative liabilities
    
    
    
    
    
    
    3,343
    
    
    
    
    
    
    
    3,343
 - 22 -




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Available-for-Sale SecuritiesThree Months Ended
    
    
    Six Months Ended(In Thousands)
    
    June 30, 2009
    
    
    June 30, 2009Beginning balance
    
    $
    22,705
    
    
    $
    28,067Total gains or loss (realized/unrealized)Included in earnings
    
    
    (3,370
    )
    
    
    (3,370
    )Included in other comprehensive income
    
    
    8,815
    
    
    
    1,307Paydowns and maturities
    
    
    
    
    
    
    (33
    )Transfers into Level 3
    
    
    
    
    
    
    2,179Ending balance June 30, 2009
    
    $
    28,150
    
    
    $
    28,150
  June 30, 2009Fair Value Measurements Using
    
    Total(In Thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    Fair ValueImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    3,379
    
    
    $
    3,379Other real estate owned
    
    
    
    
    
    
    
    
    
    
    3,615
    
    
    
    3,615
 December 31. 2008Fair Value Measurements Using
    
    Total(In Thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    Fair ValueImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    5,980
    
    
    $
    5,980
 - 23 -




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##### Table of Contents



Fair Value of Financial Instruments
  June 30, 2009
    
    December 31, 2008Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair Value(In Thousands)AssetsCash and cash equivalents
    
    $
    144,449
    
    
    $
    144,449
    
    
    $
    46,439
    
    
    $
    46,439Investment Securities
    
    
    529,604
    
    
    
    529,725
    
    
    
    529,393
    
    
    
    529,525Loans held for sale
    
    
    802
    
    
    
    802
    
    
    
    1,024
    
    
    
    1,026Loans held for investment
    
    
    1,252,766
    
    
    
    1,249,909
    
    
    
    1,282,181
    
    
    
    1,276,479Accrued interest receivable
    
    
    8,934
    
    
    
    8,934
    
    
    
    10,084
    
    
    
    10,084Bank owned life insurance
    
    
    40,272
    
    
    
    40,272
    
    
    
    40,784
    
    
    
    40,784Derivative financial assets
    
    
    23
    
    
    
    23
    
    
    
    39
    
    
    
    39Deferred compensation assets
    
    
    2,509
    
    
    
    2,509
    
    
    
    2,637
    
    
    
    2,637LiabilitiesDemand deposits
    
    $
    202,543
    
    
    $
    202,543
    
    
    $
    199,712
    
    
    $
    199,712Interest-bearing demand deposits
    
    
    195,905
    
    
    
    195,905
    
    
    
    185,117
    
    
    
    185,117Savings deposits
    
    
    311,435
    
    
    
    311,435
    
    
    
    309,577
    
    
    
    309,577Time deposits
    
    
    837,475
    
    
    
    851,933
    
    
    
    809,352
    
    
    
    824,068Securities sold under agreements to repurchase
    
    
    153,804
    
    
    
    161,317
    
    
    
    165,914
    
    
    
    177,454Accrued interest payable
    
    
    4,659
    
    
    
    4,659
    
    
    
    5,326
    
    
    
    5,326FHLB and other indebtedness
    
    
    190,863
    
    
    
    203,351
    
    
    
    215,877
    
    
    
    242,223Derivative financial liabilities
    
    
    2,792
    
    
    
    2,792
    
    
    
    3,343
    
    
    
    3,343Deferred compensation liabilities
    
    
    2,509
    
    
    
    2,509
    
    
    
    2,637
    
    
    
    2,637
  Cash and Cash Equivalents:
 Investment Securities and Deferred Compensation Assets and Liabilities:
 Loans:
 Accrued
Interest Receivable and Payable:
 Bank-Owned
Life Insurance:
 Derivative Financial Instruments:
 Deposits and Securities Sold Under Agreements to Repurchase:
 - 24 -




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FHLB and Other Indebtedness:
 Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees:
 Note 13. Derivatives and Hedging Activities
    (In Thousands)
    
    June 30, 2009
    
    
    December 31, 2008
    
    
    June 30, 2008Interest rate swap
    
    $
    50,000
    
    
    $
    50,000
    
    
    $
    50,000IRLCs
    
    
    7,314
    
    
    
    10,500
    
    
    
    7,201
  Asset DerivativesJune 30, 2009
    
    
    December 31, 2008
    
    
    June 30, 2008Balance Sheet
    
    
    Fair
    
    
    Balance Sheet
    
    
    Fair
    
    
    Balance Sheet
    
    
    Fair(In Thousands)
    
    Location
    
    
    Value
    
    
    Location
    
    
    Value
    
    
    Location
    
    
    ValueDerivatives designated as hedgesInterest rate swap
    
    Other assets
    
    $
    
    
    
    Other assets
    
    $
    
    
    
    Other assets
    
    $
    Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Derivatives not designated as hedgesIRLCs
    
    Other assets
    
    $
    23
    
    
    Other assets
    
    $
    39
    
    
    Other assets
    
    $
    19Total
    
    
    
    
    
    $
    23
    
    
    
    
    
    
    $
    39
    
    
    
    
    
    
    $
    19Total derivatives
    
    
    
    
    
    $
    23
    
    
    
    
    
    
    $
    39
    
    
    
    
    
    
    $
    19
 - 25 -




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##### Table of Contents



Liability DerivativesJune 30, 2009
    
    
    December 31, 2008
    
    
    June 30, 2008Balance Sheet
    
    
    Fair
    
    
    Balance Sheet
    
    
    Fair
    
    
    Balance Sheet
    
    
    Fair(In Thousands)
    
    Location
    
    
    Value
    
    
    Location
    
    
    Value
    
    
    Location
    
    
    ValueDerivatives designated as hedgesInterest rate swap
    
    Other liabilities
    
    $
    2,745
    
    
    Other liabilities
    
    $
    3,327
    
    
    Other liabilities
    
    $
    1,342Total
    
    
    
    
    
    $
    2,745
    
    
    
    
    
    
    $
    3,327
    
    
    
    
    
    
    $
    1,342Derivatives not designated as hedgesIRLCs
    
    Other liabilities
    
    $
    47
    
    
    Other liabilities
    
    $
    16
    
    
    Other liabilities
    
    $
    46Total
    
    
    
    
    
    $
    47
    
    
    
    
    
    
    $
    16
    
    
    
    
    
    
    $
    46Total derivatives
    
    
    
    
    
    $
    2,792
    
    
    
    
    
    
    $
    3,343
    
    
    
    
    
    
    $
    1,388
 Interest Rate Swaps.
 Interest Rate Lock Commitments.
  Effect of Derivatives and Hedging Activities on the Income Statement
  Derivatives not
    
    
    
    
    
    Amount of Gain/(Loss)designated as hedging
    
    Location of Gain/(Loss)
    
    
    Recognized in Income on Derivativeinstruments under
    
    Recognized in Income on
    
    
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,SFAS 133
    
    Derivative
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008IRLCs
    
    Other income
    
    $
    (107
    )
    
    $
    (33
    )
    
    $
    (77
    )
    
    $
    (3
    )Total
    
    
    
    
    
    $
    (107
    )
    
    $
    (33
    )
    
    $
    (77
    )
    
    $
    (3
    )
 Counterparty Credit Risk.
 - 26 -




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Note 14. Subsequent Events
   - 27 -




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##### Table of Contents



PART I. ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
   FORWARD-LOOKING STATEMENTS
   
    
    The strength of the United States economy in general and the strength of the local
economies in which we conduct operations;
    
    Geopolitical conditions, including acts or threats of terrorism, actions taken by the
United States or other governments in response to acts or threats of terrorism and/or
military conflicts, which could impact business and economic conditions in the United
States and abroad;
    
    The effects of, and changes in, trade, monetary and fiscal policies and laws, including
interest rate policies of the Board of Governors of the Federal Reserve System (the
Federal Reserve Board);
    
    Inflation, interest rate, market and monetary fluctuations;
    
    The timely development of competitive new products and services and the acceptance of
these products and services by new and existing customers;
    
    The willingness of users to substitute competitors products and services for our
products and services;
    
    The impact of changes in financial services policies, laws and regulations, including
laws, regulations and policies concerning taxes, banking, securities and insurance, and the
application thereof by regulatory bodies;
    
    Technological changes;
    
    The effect of acquisitions we may make, including, without limitation, the failure to
achieve the expected revenue growth and/or expense savings from such acquisitions;
    
    The growth and profitability of non-interest or fee income being less than expected;
    
    Changes in the level of our non-performing assets and charge-offs;
    
    The effect of changes in accounting policies and practices, as may be adopted from
time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight
Board, the FASB or other accounting standards setters;
    
    Possible other-than-temporary impairments of securities held by us;
    
    The impact of current governmental efforts to restructure the U.S. financial regulatory
system;
    
    Changes in consumer spending and savings habits; and
    
    Unanticipated regulatory or judicial proceedings.
 - 28 -




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##### Table of Contents



APPLICATION OF CRITICAL ACCOUNTING POLICIES
    COMPANY OVERVIEW
    - 29 -




---



##### Table of Contents



RECENT MARKET DEVELOPMENTS
  MERGERS, ACQUISITIONS AND BRANCHING ACTIVITY
     RESULTS OF OPERATIONS
 Overview
   Net Interest Income  Quarterly Comparison (See Table I)
  - 30 -




---



##### Table of Contents



Net Interest Income  Year-to-Date Comparison (See Table II)
   - 31 -




---



##### Table of Contents



- 32 -




---



##### Table of Contents



Table I
 AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
 Three Months Ended
    
    
    Three Months EndedJune 30, 2009
    
    
    June 30, 2008Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest (1)
    
    
    Rate (1)
    
    
    Balance
    
    
    Interest (1)
    
    
    Rate (1)(Dollars in Thousands)ASSETSEarning AssetsLoans (2)
    
    $
    1,269,584
    
    
    $
    19,588
    
    
    
    6.19
    %
    
    $
    1,180,813
    
    
    $
    19,912
    
    
    
    6.78
    %Securities available for sale
    
    
    557,110
    
    
    
    7,169
    
    
    
    5.16
    %
    
    
    612,411
    
    
    
    8,278
    
    
    
    5.44
    %Securities held to maturity
    
    
    7,824
    
    
    
    164
    
    
    
    8.40
    %
    
    
    10,927
    
    
    
    273
    
    
    
    10.05
    %Interest-bearing deposits
    
    
    57,885
    
    
    
    39
    
    
    
    0.27
    %
    
    
    13,171
    
    
    
    71
    
    
    
    2.17
    %Total Earning Assets
    
    
    1,892,403
    
    
    
    26,960
    
    
    
    5.71
    %
    
    
    1,817,322
    
    
    
    28,534
    
    
    
    6.31
    %Other assets
    
    
    288,376
    
    
    
    
    
    
    
    
    
    
    
    228,451TOTAL ASSETS
    
    $
    2,180,779
    
    
    
    
    
    
    
    
    
    
    $
    2,045,773LIABILITIESInterest-bearing depositsDemand deposits
    
    $
    197,710
    
    
    $
    81
    
    
    
    0.17
    %
    
    $
    174,100
    
    
    $
    65
    
    
    
    0.15
    %Savings deposits
    
    
    317,700
    
    
    
    540
    
    
    
    0.68
    %
    
    
    308,344
    
    
    
    1,188
    
    
    
    1.55
    %Time deposits
    
    
    846,560
    
    
    
    6,454
    
    
    
    3.06
    %
    
    
    640,236
    
    
    
    5,865
    
    
    
    3.68
    %Total interest-bearing deposits
    
    
    1,361,970
    
    
    
    7,076
    
    
    
    2.08
    %
    
    
    1,122,680
    
    
    
    7,118
    
    
    
    2.55
    %BorrowingsFederal funds purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,932
    
    
    
    60
    
    
    
    2.43
    %Retail repurchase agreements
    
    
    101,525
    
    
    
    333
    
    
    
    1.32
    %
    
    
    153,768
    
    
    
    789
    
    
    
    2.06
    %Wholesale repurchase agreements
    
    
    50,000
    
    
    
    465
    
    
    
    3.73
    %
    
    
    50,000
    
    
    
    214
    
    
    
    1.72
    %FHLB borrowings and other indebtedness
    
    
    208,103
    
    
    
    1,994
    
    
    
    3.84
    %
    
    
    264,661
    
    
    
    2,627
    
    
    
    3.99
    %Total borrowings
    
    
    359,627
    
    
    
    2,792
    
    
    
    3.11
    %
    
    
    478,361
    
    
    
    3,690
    
    
    
    3.10
    %Total interest-bearing liabilities
    
    
    1,721,597
    
    
    
    9,868
    
    
    
    2.30
    %
    
    
    1,601,041
    
    
    
    10,808
    
    
    
    2.72
    %Non-interestbearing demand deposits
    
    
    201,670
    
    
    
    
    
    
    
    
    
    
    
    217,704Other liabilities
    
    
    24,419
    
    
    
    
    
    
    
    
    
    
    
    19,368Stockholders Equity
    
    
    233,093
    
    
    
    
    
    
    
    
    
    
    
    207,660TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    2,180,779
    
    
    
    
    
    
    
    
    
    
    $
    2,045,773Net Interest Income, Tax Equivalent
    
    
    
    
    
    $
    17,093
    
    
    
    
    
    
    
    
    
    
    $
    17,726Net Interest Rate Spread (3)
    
    
    
    
    
    
    
    
    
    
    3.42
    %
    
    
    
    
    
    
    
    
    
    
    3.59
    %Net Interest Margin (4)
    
    
    
    
    
    
    
    
    
    
    3.62
    %
    
    
    
    
    
    
    
    
    
    
    3.92
    %
 
 (1)
    
    Fully Taxable Equivalent (FTE) at the rate of 35%. The FTE basis adjusts for the tax
benefits of income on certain tax-exempt loans and investments using the federal statutory rate of
35% for each period presented. The Company believes this measure to be the preferred industry
measurement of net interest income and provides relevant comparison between taxable and non-taxable
amounts.(2)
    
    Non-accrual loans are included in average balances outstanding but with no related interest
income during the period of non-accrual.(3)
    
    Represents the difference between the yield on earning assets and cost of funds.(4)
    
    Represents tax equivalent net interest income divided by average interest-earning assets. - 33 -




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##### Table of Contents



Table II
 AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
 Six Months Ended
    
    
    Six Months EndedJune 30, 2009
    
    
    June 30, 2008Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest (1)
    
    
    Rate (1)
    
    
    Balance
    
    
    Interest (1)
    
    
    Rate (1)(Dollars in Thousands)ASSETSEarning AssetsLoans (2)
    
    $
    1,280,394
    
    
    $
    39,584
    
    
    
    6.23
    %
    
    $
    1,193,147
    
    
    $
    41,169
    
    
    
    6.94
    %Securities available for sale
    
    
    535,326
    
    
    
    14,741
    
    
    
    5.55
    %
    
    
    617,843
    
    
    
    17,276
    
    
    
    5.62
    %Securities held to maturity
    
    
    8,147
    
    
    
    336
    
    
    
    8.31
    %
    
    
    11,501
    
    
    
    515
    
    
    
    9.00
    %Interest-bearing deposits
    
    
    65,713
    
    
    
    78
    
    
    
    0.24
    %
    
    
    17,887
    
    
    
    251
    
    
    
    2.82
    %Total Earning Assets
    
    
    1,889,580
    
    
    
    54,739
    
    
    
    5.84
    %
    
    
    1,840,378
    
    
    
    59,211
    
    
    
    6.47
    %Other assets
    
    
    289,273
    
    
    
    
    
    
    
    
    
    
    
    228,202TOTAL ASSETS
    
    $
    2,178,853
    
    
    
    
    
    
    
    
    
    
    $
    2,068,580LIABILITIESInterest-bearing depositsDemand deposits
    
    $
    193,983
    
    
    $
    160
    
    
    
    0.17
    %
    
    $
    168,138
    
    
    $
    140
    
    
    
    0.17
    %Savings deposits
    
    
    315,146
    
    
    
    1,196
    
    
    
    0.77
    %
    
    
    317,702
    
    
    
    2,675
    
    
    
    1.69
    %Time deposits
    
    
    852,258
    
    
    
    13,287
    
    
    
    3.14
    %
    
    
    656,440
    
    
    
    13,044
    
    
    
    4.00
    %Total interest-bearing deposits
    
    
    1,361,387
    
    
    
    14,643
    
    
    
    2.17
    %
    
    
    1,142,280
    
    
    
    15,859
    
    
    
    2.79
    %BorrowingsFederal funds purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,875
    
    
    
    79
    
    
    
    2.70
    %Retail repurchase agreements
    
    
    103,983
    
    
    
    723
    
    
    
    1.40
    %
    
    
    151,675
    
    
    
    1,809
    
    
    
    2.40
    %Wholesale repurchase agreements
    
    
    50,000
    
    
    
    975
    
    
    
    3.93
    %
    
    
    50,000
    
    
    
    687
    
    
    
    2.76
    %FHLB borrowings and other indebtedness
    
    
    211,511
    
    
    
    3,956
    
    
    
    3.77
    %
    
    
    270,583
    
    
    
    5,561
    
    
    
    4.13
    %Total borrowings
    
    
    365,494
    
    
    
    5,655
    
    
    
    3.12
    %
    
    
    478,133
    
    
    
    8,136
    
    
    
    3.42
    %Total interest-bearing liabilities
    
    
    1,726,881
    
    
    
    20,298
    
    
    
    2.37
    %
    
    
    1,620,413
    
    
    
    23,995
    
    
    
    2.98
    %Non-interestbearing demand deposits
    
    
    200,497
    
    
    
    
    
    
    
    
    
    
    
    215,338Other liabilities
    
    
    25,064
    
    
    
    
    
    
    
    
    
    
    
    20,159Stockholders Equity
    
    
    226,410
    
    
    
    
    
    
    
    
    
    
    
    212,670TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    2,178,853
    
    
    
    
    
    
    
    
    
    
    $
    2,068,580Net Interest Income, Tax Equivalent
    
    
    
    
    
    $
    34,442
    
    
    
    
    
    
    
    
    
    
    $
    35,216Net Interest Rate Spread (3)
    
    
    
    
    
    
    
    
    
    
    3.47
    %
    
    
    
    
    
    
    
    
    
    
    3.49
    %Net Interest Margin (4)
    
    
    
    
    
    
    
    
    
    
    3.68
    %
    
    
    
    
    
    
    
    
    
    
    3.85
    %
 
 (1)
    
    Fully Taxable Equivalent (FTE) at the rate of 35%. The FTE basis adjusts for the tax
benefits of income on certain tax-exempt loans and investments using the federal statutory rate of
35% for each period presented. The Company believes this measure to be the preferred industry
measurement of net interest income and provides relevant comparison between taxable and non-taxable
amounts.(2)
    
    Non-accrual loans are included in average balances outstanding but with no related interest
income during the period of non-accrual.(3)
    
    Represents the difference between the yield on earning assets and cost of funds.(4)
    
    Represents tax equivalent net interest income divided by average interest-earning assets. - 34 -




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30, 2009 Compared to 2008
    
    
    June 30, 2009 Compared to 2008$ Increase/(Decrease) due to
    
    
    $ Increase/(Decrease) due toRate/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rate/(In Thousands)
    
    Volume
    
    
    Rate
    
    
    Volume
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Volume
    
    
    TotalInterest Earned On:Loans (1)
    
    $
    1,501
    
    
    $
    (1,748
    )
    
    $
    (77
    )
    
    $
    (324
    )
    
    $
    3,002
    
    
    $
    (4,168
    )
    
    $
    (419
    )
    
    $
    (1,585
    )Securities available-for-sale (1)
    
    
    (750
    )
    
    
    (420
    )
    
    
    61
    
    
    
    (1,109
    )
    
    
    (2,301
    )
    
    
    (215
    )
    
    
    (19
    )
    
    
    (2,535
    )Securities held-to-maturity (1)
    
    
    (78
    )
    
    
    (45
    )
    
    
    13
    
    
    
    (109
    )
    
    
    (150
    )
    
    
    (39
    )
    
    
    10
    
    
    
    (179
    )Interest-bearing deposits
with other banks
    
    
    242
    
    
    
    (62
    )
    
    
    (211
    )
    
    
    (32
    )
    
    
    669
    
    
    
    (229
    )
    
    
    (613
    )
    
    
    (173
    )Total interest-earning assets
    
    
    915
    
    
    
    (2,275
    )
    
    
    (214
    )
    
    
    (1,574
    )
    
    
    1,221
    
    
    
    (4,651
    )
    
    
    (1,041
    )
    
    
    (4,472
    )Interest Paid On:Demand deposits
    
    
    9
    
    
    
    6
    
    
    
    1
    
    
    
    16
    
    
    
    21
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    20Savings deposits
    
    
    36
    
    
    
    (667
    )
    
    
    (17
    )
    
    
    (648
    )
    
    
    (21
    )
    
    
    (1,462
    )
    
    
    4
    
    
    
    (1,479
    )Time deposits
    
    
    1,895
    
    
    
    (1,000
    )
    
    
    (306
    )
    
    
    589
    
    
    
    3,880
    
    
    
    (2,774
    )
    
    
    (864
    )
    
    
    243Fed funds purchased
    
    
    (60
    )
    
    
    
    
    
    
    0
    
    
    
    (60
    )
    
    
    (79
    )
    
    
    
    
    
    
    (0
    )
    
    
    (79
    )Retail repurchase agreements
    
    
    (269
    )
    
    
    (287
    )
    
    
    100
    
    
    
    (456
    )
    
    
    (567
    )
    
    
    (749
    )
    
    
    231
    
    
    
    (1,086
    )Wholesale repurchase
agreement
    
    
    
    
    
    
    250
    
    
    
    1
    
    
    
    251
    
    
    
    
    
    
    
    290
    
    
    
    (2
    )
    
    
    288FHLB borrowings and other
long-term debt
    
    
    (563
    )
    
    
    (98
    )
    
    
    28
    
    
    
    (633
    )
    
    
    (1,211
    )
    
    
    (485
    )
    
    
    90
    
    
    
    (1,605
    )Total interest-bearing liabilities
    
    
    1,048
    
    
    
    (1,796
    )
    
    
    (194
    )
    
    
    (941
    )
    
    
    2,024
    
    
    
    (5,181
    )
    
    
    (541
    )
    
    
    (3,698
    )Change in net interest income,
tax-equivalent
    
    $
    (133
    )
    
    $
    (480
    )
    
    $
    (21
    )
    
    $
    (633
    )
    
    $
    (803
    )
    
    $
    529
    
    
    $
    (500
    )
    
    $
    (774
    )
 
 (1)
    
    Fully taxable equivalent using a rate of 35%. Provision and Allowance for Loan Losses
  - 35 -




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##### Table of Contents



For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,(In Thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Allowance for loan lossesBeginning balance
    
    $
    16,555
    
    
    $
    12,862
    
    
    $
    15,978
    
    
    $
    12,833Provision for loan losses
    
    
    2,552
    
    
    
    937
    
    
    
    4,639
    
    
    
    1,260Charge-offs
    
    
    (2,681
    )
    
    
    (1,198
    )
    
    
    (4,411
    )
    
    
    (2,164
    )Recoveries
    
    
    252
    
    
    
    832
    
    
    
    472
    
    
    
    1,504Net charge-offs
    
    
    (2,429
    )
    
    
    (366
    )
    
    
    (3,939
    )
    
    
    (660
    )Ending balance
    
    $
    16,678
    
    
    $
    13,433
    
    
    $
    16,678
    
    
    $
    13,433
   Noninterest Income
   - 36 -




---



##### Table of Contents



Noninterest Expense
    Income Tax Expense
   FINANCIAL CONDITION
  - 37 -




---



##### Table of Contents



Securities
    Loan Portfolio
 Loans Held for Sale:
 Loans Held for Investment:
   June 30, 2009
    
    
    December 31, 2008
    
    
    June 30, 2008(Dollars in Thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentLoans Held for InvestmentCommercial and agricultural
    
    $
    83,873
    
    
    
    6.61
    %
    
    $
    85,034
    
    
    
    6.55
    %
    
    $
    85,833
    
    
    
    7.27
    %Commercial real estate
    
    
    410,473
    
    
    
    32.33
    %
    
    
    407,638
    
    
    
    31.40
    %
    
    
    385,870
    
    
    
    32.67
    %Residential real estate
    
    
    594,646
    
    
    
    46.85
    %
    
    
    602,573
    
    
    
    46.42
    %
    
    
    490,519
    
    
    
    41.53
    %Construction
    
    
    112,361
    
    
    
    8.85
    %
    
    
    130,610
    
    
    
    10.06
    %
    
    
    144,094
    
    
    
    12.20
    %Consumer
    
    
    62,077
    
    
    
    4.89
    %
    
    
    66,258
    
    
    
    5.10
    %
    
    
    67,572
    
    
    
    5.72
    %Other
    
    
    6,014
    
    
    
    0.47
    %
    
    
    6,046
    
    
    
    0.47
    %
    
    
    7,219
    
    
    
    0.61
    %Total
    
    $
    1,269,443
    
    
    
    100.00
    %
    
    $
    1,298,159
    
    
    
    100.00
    %
    
    $
    1,181,107
    
    
    
    100.00
    %Loans Held for Sale
    
    $
    802
    
    
    
    
    
    
    $
    1,024
    
    
    
    
    
    
    $
    1,522
 Non-Performing Assets
  - 38 -




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##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,(In Thousands)
    
    2009
    
    
    2008
    
    
    2008Non-accrual
    
    $
    11,645
    
    
    $
    12,763
    
    
    $
    4,126Ninety days past due and accruing
    
    
    
    
    
    
    
    
    
    
    Other real estate owned
    
    
    3,615
    
    
    
    1,326
    
    
    
    500Total non-performing assets
    
    $
    15,260
    
    
    $
    14,089
    
    
    $
    4,626
  Deposits and Other Borrowings
   Stockholders Equity
   Risk-Based Capital
  - 39 -




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##### Table of Contents



PART I. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
 Liquidity and Capital Resources
   Interest Rate Risk and Asset/Liability Management
     - 40 -




---



##### Table of Contents



Rate Sensitivity Analysis(Dollars in Thousands)
    
    June 30, 2009Change in
    
    
    
    
    
    Change inIncrease (Decrease) in
    
    Net Interest
    
    %
    
    Econcomic Value
    
    %Interest Rates (Basis Points)
    
    Income
    
    Change
    
    of Equity
    
    Change200
    
    $
    3,260
    
    
    
    4.8
    
    
    $
    11,848
    
    
    
    4.9100
    
    
    2,178
    
    
    
    3.2
    
    
    
    16,734
    
    
    
    6.9(100)
    
    
    221
    
    
    
    0.3
    
    
    
    (12,078
    )
    
    
    (5.0
    )
 December 31, 2008Change in
    
    
    
    
    
    Change inIncrease (Decrease) in
    
    Net Interest
    
    %
    
    Econcomic Value
    
    %Interest Rates (Basis Points)
    
    Income
    
    Change
    
    of Equity
    
    Change200
    
    $
    1,479
    
    
    
    2.3
    
    
    $
    (8,040
    )
    
    
    (3.7
    )100
    
    
    1,493
    
    
    
    2.3
    
    
    
    719
    
    
    
    0.3(100)
    
    
    1,874
    
    
    
    2.9
    
    
    
    (21,443
    )
    
    
    (9.9
    )
 
 PART I. ITEM 4. Controls and Procedures
 Disclosure Controls and Procedures
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Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  RISK FACTORS
 Risks Related to Ownership of Our Common Stock
 The price of our common stock may fluctuate significantly, and this may make it difficult for you
to resell shares of common stock owned by you at times or at prices you find attractive.
  
    
    Actual or anticipated variations in quarterly results of operations;
    
    Recommendations by securities analysts;
    
    Operating and stock price performance of other companies that investors deem comparable to us;
    
    News reports relating to trends, concerns and other issues in the financial services
industry, including the failures of other financial institutions in the current economic
downturn;
    
    Perceptions in the marketplace regarding us and/or our competitors;
    
    New technology used, or services offered, by competitors;
    
    Significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our competitors;
    
    Failure to integrate acquisitions or realize anticipated benefits from acquisitions;
    
    Changes in government regulations; and
    
    Geopolitical conditions such as acts or threats of terrorism or military conflicts.
  The trading volume in our common stock is less than that of other larger financial services
companies which may adversely affect the price of our common stock.
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An investment in our common stock is not an insured deposit.
  There may be future sales or other dilutions of our equity which may adversely affect the market
price of our common stock.
   Future offerings of debt, which would be senior to our common stock upon liquidation, and/or
preferred equity securities which may be senior to our common stock for purposes of dividend
distributions or upon liquidation, may adversely affect the market price of our common stock.
  The Banks ability to pay dividends is subject to regulatory limitations which, to the extent we
require such dividends in the future, may affect our ability to pay our obligations and pay
dividends.
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Potential acquisitions may disrupt our business and dilute stockholder value.
  
    
    Potential exposure to unknown or contingent liabilities of the target company;
    
    Exposure to potential asset quality issues of the target company;
    
    Difficulty and expense of integrating the operations and personnel of the target company;
    
    Potential disruption to our business;
    
    Potential diversion of our managements time and attention;
    
    The possible loss of key employees and customers of the target company;
    
    Difficulty in estimating the value of the target company; and
    
    Potential changes in banking or tax laws or regulations that may affect the target company.
  Risks Related to Our Business
 Changes in the fair value of our securities may reduce our stockholders equity and net income.
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If dividends paid on our investment in the Federal Home Loan Bank of Atlanta continue to be
suspended, or if our investment is classified as OTTI or as permanently impaired, our earnings
and/or stockholders equity could decrease.
  The current economic environment poses significant challenges for us and could adversely affect our
financial condition and results of operations.
  
    
    Economic conditions that negatively affect housing prices and the job market have
resulted, and may continue to result, in a deterioration in credit quality of our loan
portfolios, and such deterioration in credit quality has had, and could continue to have, a
negative impact on our business;
    
    Market developments may affect consumer confidence levels and may cause adverse changes
in payment patterns, causing increases in delinquencies and default rates on loans and
other credit facilities;
    
    The processes we use to estimate our allowance for loan losses and reserves may no
longer be reliable because they rely on complex judgments, including forecasts of economic
conditions, which may no longer be capable of accurate estimation;
    
    Our ability to assess the creditworthiness of our customers may be impaired if the
models and approaches we use to select, manage, and underwrite our customers become less
predictive of future charge-offs; and
    
    We expect to face increased regulation of our industry, and compliance with such
regulation may increase our costs, limit our ability to pursue business opportunities, and
increase compliance challenges.
    
    As these conditions or similar ones continue to exist or worsen, we could experience
continuing or increased adverse effects on our financial condition.
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Our business is subject to interest rate risk and variations in interest rates may negatively
affect our financial performance.
  The Banks allowance for loan losses may not be adequate to cover actual losses.
  Our business is subject to various lending and other economic risks that could adversely impact our
results of operations and financial condition.
  
    
    Loan delinquencies may further increase causing additional increases in our provision
and allowance for loan losses;
    
    Problem assets and foreclosures may continue to increase;
    
    Demand for our products and services may further decline; and
    
    Collateral for loans made by the Bank, especially real estate, may continue to decline
in value, in turn reducing a clients borrowing power, and reducing the value of assets and
collateral associated with our loans held for investment.
 The declining real estate market could impact our business.
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Our level of credit risk is increasing due to our focus on commercial and construction lending, and
the concentration on small businesses and middle market customers with heightened vulnerability to
economic conditions.
   The Bank may suffer losses in its loan portfolio despite its underwriting practices.
   We and our subsidiaries are subject to extensive regulation which could adversely affect us.
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We face strong competition from other financial institutions, financial service companies and other
organizations offering services similar to those offered by us and our subsidiaries, which could
hurt our business.
   The FDIC is imposing an emergency assessment on financial institutions, which will decrease our
earnings in 2009.
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We may fail to realize the anticipated benefits of the TriStone Acquisition.
  Our goodwill may be determined to be impaired.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Not Applicable(b)
    
    Not Applicable(c)
    
    Issuer Purchases of Equity Securities
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    The Annual Meeting of Stockholders was held on April 28, 2009.(b)
    
    The following directors were elected to serve a three-year term through the date of the
2012 Annual Meeting of Stockholders:I. Norris Kantor, A. A. Modena, William P. Stafford, IIThe following directors terms continued after the Annual Meeting:Franklin P. Hall, Allen T. Hamner, John M. Mendez, Robert E. Perkinson, and William P.
Stafford
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(c)
    
    Three proposals were voted upon at the annual meeting, which included: 1) the election
of the aforementioned directors as the Class of 2012; 2) ratification of the selection of
Dixon Hughes PLLC, Asheville, North Carolina, as independent registered public accountants
for the year ending December 31, 2008; and 3) approval, on a non-binding advisory basis,
the Companys named executive officer compensation. The results of the proposals and
voting are as follows:
  Votes
    
    For AllVotes For
    
    Withheld
    
    ExceptI. Norris Kantor
    
    
    8,956,476
    
    
    
    384,048
    
    
    
    91,947A. A. Modena
    
    
    8,929,404
    
    
    
    384,048
    
    
    
    119,019William P. Stafford, II
    
    
    8,670,847
    
    
    
    384,048
    
    
    
    377,576
  Votes For
    
    
    9,095,202Votes Against
    
    
    303,512Votes Abstained
    
    
    33,756
  Votes For
    
    
    7,901,769Votes Against
    
    
    1,466,195Votes Abstained
    
    
    64,505
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 (a)
    
    Exhibits
 ExhibitNo.
    
    Exhibit2.1
    
    Reserved.2.2
    
    Agreement and Plan of Merger dated April 2, 2009, among First Community Bancshares, Inc.
and TriStone Community Bank (25)3(i)
    
    Articles of Incorporation of First Community Bancshares, Inc., as amended. (1)3(ii)
    
    Certificate of Designation Series A Preferred Stock (22)3(iii)
    
    Bylaws of First Community Bancshares, Inc., as amended. (17)4.1
    
    Specimen stock certificate of First Community Bancshares, Inc. (3)4.2
    
    Indenture Agreement dated September 25, 2003. (11)4.3
    
    Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. (11)4.4
    
    Preferred Securities Guarantee Agreement dated September 25, 2003. (11)4.5
    
    Form of Certificate for the Series A Preferred Stock (22)4.6
    
    Warrant to purchase 176,546 shares of common stock of First Community Bancshares, Inc (22)10.1
    
    First Community Bancshares, Inc. 1999 Stock Option Contracts (2) and Plan. (4)10.1.1
    
    Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan. (11)10.2
    
    First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (5)10.3
    
    Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
John M. Mendez. (6)10.4
    
    First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended. (24)10.5
    
    First Community Bancshares, Inc. Split Dollar Plan and Agreement. (2)10.6
    
    First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. (2)10.6.1
    
    First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second
Amendment (B.W. Harvey, Sr.  October 19, 2004). (14)
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ExhibitNo.
    
    Exhibit10.7
    
    First Community Bancshares, Inc. Wrap Plan. (7)10.8
    
    Reserved.10.9
    
    Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors
and Certain Executive Officers. (9)10.10
    
    Form of Indemnification Agreement between First Community Bank, N. A, its Directors and
Certain Executive Officers. (9)10.11
    
    Reserved.10.12
    
    First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Award Agreement. (13)10.13
    
    Reserved.10.14
    
    First Community Bancshares, Inc. Directors Deferred Compensation Plan. (7)10.15
    
    First Community Bancshares, Inc. Deferred Compensation and Supplemental Bonus Plan For Key
Employees. (15)10.16
    
    Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and
Ronald L. Campbell. (19)10.17
    
    Employment Agreement dated September 28, 2007, between GreenPoint Insurance Group, Inc.
and Shawn C. Cummings. (20)10.18
    
    Securities Purchase Agreement by and between the United States Department of the Treasury
and First Community Bancshares, Inc. dated November 21, 2008. (22)10.19
    
    Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
David D. Brown. (23)10.20
    
    Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
Robert L. Buzzo (26)10.21
    
    Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
E. Stephen Lilly (26)10.22
    
    Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Gary
R. Mills (26)10.23
    
    Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and
Martyn A. Pell (26)10.24
    
    Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and
Robert L. Schumacher (26)10.25
    
    Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Simpson
O. Brown (25)10.25
    
    Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Mark R.
Evans (25)31.1*
    
    Rule 13a-14(a)/a5d-14(a) Certification of Chief Executive Officer.31.2*
    
    Rule 13a-14(a)/a5d-14(a) Certification of Chief Financial Officer.32*
    
    Certification of Chief Executive Officer and Chief Financial Officer Section 1350.
 
 *
    
    Furnished herewith.(1)
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June
30, 2005, filed on August 5, 2005.(2)
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June
30, 2002, filed on August 14, 2002.(3)
    
    Incorporated by reference from the Annual Report on Form 10-K for the period ended December
31, 2002, filed on March 25, 2003, as amended on March 31, 2003.(4)
    
    Incorporated by reference from the Annual Report on Form 10-K for the period ended December
31, 1999, filed on March 30, 2000, as amended April 13, 2000.(5)
    
    The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001
Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly
Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.(6)
    
    Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and
filed December 16, 2008.(7)
    
    Incorporated by reference from the Current Report on Form 8-K dated August 22, 2006, and
filed August 23, 2006.(8)
    
    Reserved.(9)
    
    Form of indemnification agreement entered into by the Company and by First Community Bank,
N. A. with their respective directors and certain officers of each including, for the
Registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, E. Stephen Lilly,
David D. Brown, and Gary R. Mills. Incorporated - 51 -




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by reference from the Annual Report on Form 10-K for the period ended December 31, 2003,
filed on March 15, 2004, and amended on May 19, 2004.(10)
    
    Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy
filed on March 19, 2004.(11)
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended
September 30, 2003, filed on November 10, 2003.(12)
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March
31, 2004, filed on May 7, 2004.(13)
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June
30, 2004, filed on August 6, 2004.(14)
    
    Incorporated by reference from the Annual Report on Form 10-K for the period ended December
31, 2004, and filed on March 16, 2005.
 Amendments in substantially similar form were
executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford, and 
Stafford II.(15)
    
    Incorporated by reference from the Current Report on Form 8-K dated October 24, 2006, and
filed October 25, 2006.(16)
    
    Reserved.(17)
    
    Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated February
14, 2008, filed on February 20, 2008.(18)
    
    Reserved(19)
    
    Incorporated by reference from Exhibit 2.1 of the Form S-3 registration statement filed May
2, 2007.(20)
    
    Incorporated by reference from the Annual Report on Form 10-K for the period ended December
31, 2007, filed on March 13, 2008.(21)
    
    Reserved.(22)
    
    Incorporated by reference from the Current Report on Form 8-K dated November 21, 2008, and
filed November 24, 2008.(23)
    
    Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and
filed December 16, 2008.(24)
    
    Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated
December 30, 2008, and filed January 5, 2009.(25)
    
    Incorporated by reference from Exhibit 2.2 of the Current Report on Form 8-K dated April 2,
2009 and filed April 3, 2009.(26)
    
    Incorporated by reference from the Current Report on Form 8-K dated and filed July 6, 2009. - 52 -




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/s/ John M. Mendez

John M. MendezPresident & Chief Executive Officer(Principal Executive Officer)
  /s/ David D. Brown

David D. BrownChief Financial Officer(Principal Accounting Officer)
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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32
    
    Certification of Chief Executive and Chief Financial Officer pursuant to 18 USC Section 1350
 - 54 -