UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q/A




QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
quarter ended March 31,
2010





Commission
file number 000-19297





FIRST COMMUNITY BANCSHARES,
INC.


(Exact
name of registrant as specified in its charter)





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





(276) 326-9000





(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





þ
              Yes
              o
              No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every


Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).





o
              Yes
              o
              No





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





Large
      accelerated filer
                 ̈
                
                Accelerated
      filer
                þNon-accelerated
      filer
                 ̈
                
                Smaller
      reporting company
                 ̈


(Do not
check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





 ̈
              Yes
              þ
              No





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





Class –
Common Stock, $1.00 Par Value; 17,782,791 shares outstanding as of April 26,
2010





FIRST
COMMUNITY BANCSHARES, INC.


FORM
10-Q/A


For the
quarter ended March 31, 2010





INDEX





PART
      I.
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      StatementsConsolidated
      Balance Sheets as of March 31, 2010 (Unaudited) and December
      31,2009
                4Consolidated
      Statements of Income for the Three Month Periods Ended March 31, 2010and
      2009 (Unaudited)
                5Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2010 and
      2009 (Unaudited)
                6Consolidated
      Statements of Changes in Stockholders’ Equity for the Three Months Ended
      March 31, 2010 and 2009 (Unaudited)
                7Notes
      to Consolidated Financial Statements
                8Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                27Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                37Item
      4.
                Controls
      and Procedures
                38PART
      II.
                OTHER
      INFORMATIONItem
      1.
                Legal
      Proceedings
                39Item
      1A.
                Risk
      Factors
                39Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                39Item
      3.
                Defaults
      Upon Senior Securities
                39Item
      4.
                Reserved
                40Item
      5.
                Other
      Information
                40Item
      6.
                Exhibits
                40SIGNATURES
                44EXHIBIT
      INDEX
                45


- 2
-




Explanatory
Note
 
 Overview
 
 First
Community Bancshares, Inc. (“the Company”) is filing this amendment to its
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (the
“Original Filing”) to amend and restate financial statements and other financial
information in the Original Filing as filed with the Securities and Exchange
Commission (“SEC”) to reflect the correction of a computational error in its
model used to calculate its allowance for loan losses. For the same
reason, Company also is restating the financial statements and other
financial information filed with the SEC for the years ended December 31, 2009
and 2008 and each of the quarters ended March 31, 2009, June 30, 2009 and
September 30, 2009.
 
 Background
 
 The
reason for the restatement is to correct a computational error in the model that
the Company used to calculate the quantitative basis for its allowance for loan
losses for the periods indicated.  The Company identified the
computational error as a result of one of its routine internal
audits.  In connection with its determination of the appropriate loan
loss reserves at December 31, 2008, the Company made certain modifications to
its loan loss reserves model with respect to a $130.76 million pool of
loans.  However, in calculating the loan loss reserves for this pool
of loans, the computational error resulted in the Company’s historical quarterly
net charge-off rates not being annualized.
 
 The
Company has corrected the computational error in its model for calculating the
allowance for loan losses.  Based on the Company’s modeling using the
corrected computations, the Company, in consultation with the Audit Committee of
its Board of Directors, determined that the amount of the allowance for loan
losses should be increased by an aggregate of $2.55 million for
the  period beginning December 31, 2008 and ending March 31,
2010.
 
 Amendments
to the Original Filing
 
 The
following sections of this Quarterly Report on Form 10-Q/A have been revised to
reflect the restatement: Part I - Item 1 – Financial Statements, Item 2 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Item 4 - Controls and Procedures, and Part II – Item 6 –
Exhibits.  Except to the extent relating to the restatement
of the Company’s financial statements and other financial information
described above, the financial statements and other disclosures in this
Quarterly Report on Form 10-Q/A do not reflect any events that have occurred
after the Original Filing was filed with the SEC on May 7, 2010.  This
Quarterly Report on Form 10-Q/A does not modify or update those disclosures
affected by subsequent events.  Information not affected by the
restatement is unchanged and reflects the disclosures made at the time of the
Original Filing.  Although the Company is amending only certain
portions of its Quarterly Report on Form 10-Q for the quarter ended March
31, 2010, for convenience and ease of reference, it is filing the entire
Quarterly Report on this Form 10-Q/A.
  - 3
-


PART
I. ITEM 1.   Financial Statements





FIRST
COMMUNITY BANCSHARES, INC.


CONSOLIDATED
BALANCE SHEETS





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009*(Dollars
      in Thousands, Except Per Share Data)
                      
                      (Restated)
                      
                      
                      (Restated)AssetsCash
      and due from banks
                      
                      $
                      33,071
                      
                      
                      $
                      36,265Federal
      funds sold
                      
                      
                      41,891
                      
                      
                      
                      61,376Interest-bearing
      balances with banks
                      
                      
                      12,744
                      
                      
                      
                      3,700Total
      cash and cash equivalents
                      
                      
                      87,706
                      
                      
                      
                      101,341Securities
      available for sale
                      
                      
                      524,297
                      
                      
                      
                      486,057Securities
      held to maturity
                      
                      
                      7,155
                      
                      
                      
                      7,454Loans
      held for sale
                      
                      
                      1,494
                      
                      
                      
                      11,576Loans
      held for investment, net of unearned income
                      
                      
                      1,390,874
                      
                      
                      
                      1,393,931Less
      allowance for loan losses
                      
                      
                      24,508
                      
                      
                      
                      24,277Net
      loans held for investment
                      
                      
                      1,366,366
                      
                      
                      
                      1,369,654Premises
      and equipment, net
                      
                      
                      56,772
                      
                      
                      
                      56,946Other
      real estate owned
                      
                      
                      4,740
                      
                      
                      
                      4,578Interest
      receivable
                      
                      
                      8,630
                      
                      
                      
                      8,610Goodwill
      and other intangible assets
                      
                      
                      90,805
                      
                      
                      
                      91,061Other
      assets
                      
                      
                      130,974
                      
                      
                      
                      136,006Total
      Assets
                      
                      $
                      2,278,939
                      
                      
                      $
                      2,273,283LiabilitiesDeposits:Noninterest
      bearing
                      
                      $
                      205,810
                      
                      
                      $
                      208,244Interest
      bearing
                      
                      
                      1,449,801
                      
                      
                      
                      1,437,716Total
      Deposits
                      
                      
                      1,655,611
                      
                      
                      
                      1,645,960Interest,
      taxes and other liabilities
                      
                      
                      21,912
                      
                      
                      
                      22,498Securities
      sold under agreements to repurchase
                      
                      
                      144,381
                      
                      
                      
                      153,634FHLB
      borrowings and other indebtedness
                      
                      
                      195,873
                      
                      
                      
                      198,924Total
      Liabilities
                      
                      
                      2,017,777
                      
                      
                      
                      2,021,016Stockholders'
      EquityCommon
      stock, $1 par value; 25,000,000 shares authorized; 18,082,822 shares
      issued at March 31, 2010, and December 31, 2009, including 300,031 and
      317,658 shares in treasury, respectively
                      
                      
                      18,083
                      
                      
                      
                      18,083Additional
      paid-in capital
                      
                      
                      190,650
                      
                      
                      
                      190,967Retained
      earnings
                      
                      
                      70,262
                      
                      
                      
                      66,760Treasury
      stock, at cost
                      
                      
                      (9,342
                      )
                      
                      
                      (9,891
                      )Accumulated
      other comprehensive loss
                      
                      
                      (8,491
                      )
                      
                      
                      (13,652
                      )Total
      Stockholders' Equity
                      
                      
                      261,162
                      
                      
                      
                      252,267Total
      Liabilities and Stockholders' Equity
                      
                      $
                      2,278,939
                      
                      
                      $
                      2,273,283





* Derived
from audited financial statements.




See
Notes to Consolidated Financial Statements.


- 4
-


FIRST
COMMUNITY BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)





Three
      Months EndedMarch 31,(Dollars
      In Thousands, Except Per Share Data)
                        
                        2010
                        
                        
                        2009(Restated)Interest
      IncomeInterest
      and fees on loans held for investment
                        
                        $
                        21,354
                        
                        
                        $
                        19,984Interest
      on securities-taxable
                        
                        
                        3,786
                        
                        
                        
                        5,164Interest
      on securities-nontaxable
                        
                        
                        1,426
                        
                        
                        
                        1,676Interest
      on federal funds sold and deposits in banks
                        
                        
                        46
                        
                        
                        
                        39Total
      interest income
                        
                        
                        26,612
                        
                        
                        
                        26,863Interest
      ExpenseInterest
      on deposits
                        
                        
                        5,502
                        
                        
                        
                        7,567Interest
      on borrowings
                        
                        
                        2,491
                        
                        
                        
                        2,863Total
      interest expense
                        
                        
                        7,993
                        
                        
                        
                        10,430Net
      interest income
                        
                        
                        18,619
                        
                        
                        
                        16,433Provision
      for loan losses
                        
                        
                        3,665
                        
                        
                        
                        2,148Net
      interest income after provision for loan losses
                        
                        
                        14,954
                        
                        
                        
                        14,285Noninterest
      IncomeWealth
      management income
                        
                        
                        885
                        
                        
                        
                        984Service
      charges on deposit accounts
                        
                        
                        2,992
                        
                        
                        
                        3,157Other
      service charges and fees
                        
                        
                        1,281
                        
                        
                        
                        1,178Insurance
      commissions
                        
                        
                        2,201
                        
                        
                        
                        2,317Total
      impairment losses on securities
                        
                        
                        -
                        
                        
                        
                        (209
                        )Portion
      of loss recognized in other comprehensive income
                        
                        
                        -
                        
                        
                        
                        -Net
      impairment losses recognized in earnings
                        
                        
                        -
                        
                        
                        
                        (209
                        )Net
      gains on sale of securities
                        
                        
                        250
                        
                        
                        
                        411Other
      operating income
                        
                        
                        969
                        
                        
                        
                        579Total
      noninterest income
                        
                        
                        8,578
                        
                        
                        
                        8,417Noninterest
      ExpenseSalaries
      and employee benefits
                        
                        
                        7,969
                        
                        
                        
                        7,866Occupancy
      expense of bank premises
                        
                        
                        1,709
                        
                        
                        
                        1,603Furniture
      and equipment expense
                        
                        
                        904
                        
                        
                        
                        938Amortization
      of intangible assets
                        
                        
                        256
                        
                        
                        
                        245FDIC
      premiums and assessments
                        
                        
                        701
                        
                        
                        
                        188Merger
      related expenses
                        
                        
                        -
                        
                        
                        
                        1Other
      operating expense
                        
                        
                        4,533
                        
                        
                        
                        4,346Total
      noninterest expense
                        
                        
                        16,072
                        
                        
                        
                        15,187Income
      before income taxes
                        
                        
                        7,460
                        
                        
                        
                        7,515Income
      tax expense
                        
                        
                        2,182
                        
                        
                        
                        2,323Net
      income
                        
                        
                        5,278
                        
                        
                        
                        5,192Dividends
      on preferred stock
                        
                        
                        -
                        
                        
                        
                        571Net
      income available to common shareholders
                        
                        $
                        5,278
                        
                        
                        $
                        4,621Basic
      earnings per common share
                        
                        $
                        0.30
                        
                        
                        $
                        0.40Diluted
      earnings per common share
                        
                        $
                        0.30
                        
                        
                        $
                        0.40Dividends
      declared per common share
                        
                        $
                        0.10
                        
                        
                        $
                        -Weighted
      average basic shares outstanding
                        
                        
                        17,765,556
                        
                        
                        
                        11,567,769Weighted
      average diluted shares outstanding
                        
                        
                        17,784,449
                        
                        
                        
                        11,616,568




See
Notes to Consolidated Financial Statements.




- 5
-


FIRST
COMMUNITY BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)





Three
      Months EndedMarch 31,(In
      Thousands)
                    
                    2010
                    
                    
                    2009(Restated)Operating
      activities:Net
      income
                    
                    $
                    5,278
                    
                    
                    $
                    5,192Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
                    
                    
                    3,665
                    
                    
                    
                    2,148Depreciation
      and amortization of premises and equipment
                    
                    
                    1,021
                    
                    
                    
                    1,096Intangible
      amortization
                    
                    
                    256
                    
                    
                    
                    245Net
      investment amortization and accretion
                    
                    
                    1
                    
                    
                    
                    193Net
      gain on the sale of assets
                    
                    
                    (214
                    )
                    
                    
                    (439
                    )Mortgage
      loans originated for sale
                    
                    
                    (7,583
                    )
                    
                    
                    (8,481
                    )Proceeds
      from sales of mortgage loans
                    
                    
                    17,886
                    
                    
                    
                    8,083Gain
      on sales of loans
                    
                    
                    (221
                    )
                    
                    
                    (23
                    )Equity-based
      compensation expense
                    
                    
                    22
                    
                    
                    
                    40Deferred
      income tax expense (benefit)
                    
                    
                    73
                    
                    
                    
                    (340
                    )(Increase)
      decrease in interest receivable
                    
                    
                    (20
                    )
                    
                    
                    1,235Net
      impairment losses recognized in earnings
                    
                    
                    -
                    
                    
                    
                    209Other
      operating activities, net
                    
                    
                    1,925
                    
                    
                    
                    945Net
      cash provided by operating activities
                    
                    
                    22,089
                    
                    
                    
                    10,103Investing
      activities:Proceeds
      from sales of securities available-for-sale
                    
                    
                    11,512
                    
                    
                    
                    46,394Proceeds
      from maturities and calls of securities
    available-for-sale
                    
                    
                    23,490
                    
                    
                    
                    10,346Proceeds
      from maturities and calls of securities
    held-to-maturity
                    
                    
                    301
                    
                    
                    
                    200Purchase
      of securities available-for-sale
                    
                    
                    (65,168
                    )
                    
                    
                    (97,018
                    )Net
      (increase) decrease in loans held for investment
                    
                    
                    (580
                    )
                    
                    
                    18,065Proceeds
      from the redemption of FHLB stock
                    
                    
                    -
                    
                    
                    
                    324Proceeds
      from sales of equipment
                    
                    
                    3
                    
                    
                    
                    7Purchase
      of premises and equipment
                    
                    
                    (853
                    )
                    
                    
                    (971
                    )Net
      cash used in investing activities
                    
                    
                    (31,295
                    )
                    
                    
                    (22,653
                    )Financing
      activities:Net
      increase in demand and savings deposits
                    
                    
                    58,674
                    
                    
                    
                    27,482Net
      (decrease) increase in time deposits
                    
                    
                    (49,023
                    )
                    
                    
                    52,204Net
      decrease in securities sold under agreement to
    repurchase
                    
                    
                    (9,253
                    )
                    
                    
                    (12,090
                    )Net
      decrease in FHLB and other borrowings
                    
                    
                    (3,051
                    )
                    
                    
                    (7
                    )Preferred
      dividends paid
                    
                    
                    -
                    
                    
                    
                    (518
                    )Common
      dividends paid
                    
                    
                    (1,776
                    )
                    
                    
                    -Net
      cash (used in) provided by financing activities
                    
                    
                    (4,429
                    )
                    
                    
                    67,071(Decrease)
      increase in cash and cash equivalents
                    
                    
                    (13,635
                    )
                    
                    
                    54,521Cash
      and cash equivalents at beginning of period
                    
                    
                    101,341
                    
                    
                    
                    46,439Cash
      and cash equivalents at end of period
                    
                    $
                    87,706
                    
                    
                    $
                    100,960Supplemental
      information — Noncash itemsTransfer
      of loans to other real estate
                    
                    $
                    1,587
                    
                    
                    $
                    2,030Cumulative
      effect adjustment, net of tax*
                    
                    $
                    -
                    
                    
                    $
                    6,131





* In
accordance with FASB Accounting Standards Codification Investments — Debt and
Equity Securities Topic 320





See
Notes to Consolidated Financial Statements.


- 6
-


FIRST
COMMUNITY BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)





AccumulatedAdditional
                          
                          
                          
                          
                          
                          
                          
                          
                          OtherPreferred
                          
                          
                          Common
                          
                          
                          Paid-in
                          
                          
                          Retained
                          
                          
                          Treasury
                          
                          
                          ComprehensiveStock
                          
                          
                          Stock
                          
                          
                          Capital
                          
                          
                          Earnings
                          
                          
                          Stock
                          
                          
                          Income
      (Loss)
                          
                          
                          Total(Dollars
      in Thousands)Balance
      January 1, 2009 (restated)
                          
                          $
                          40,419
                          
                          
                          $
                          12,051
                          
                          
                          $
                          128,526
                          
                          
                          $
                          106,104
                          
                          
                          $
                          (15,368
                          )
                          
                          $
                          (52,517
                          )
                          
                          $
                          219,215Cumulative
      effect of change in accounting principle
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,131
                          
                          
                          
                          -
                          
                          
                          
                          (6,131
                          )
                          
                          
                          -Comprehensive
      income:Net
      income (restated)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,192
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,192Other
      comprehensive loss — See Note 10
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (7,724
                          )
                          
                          
                          (7,724
                          )Comprehensive
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          11,323
                          
                          
                          
                          -
                          
                          
                          
                          (13,855
                          )
                          
                          
                          (2,532
                          )Preferred
      dividend, net
                          
                          
                          52
                          
                          
                          
                          -
                          
                          
                          
                          (38
                          )
                          
                          
                          (571
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (557
                          )Equity-based
      compensation expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          40
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          40Retirement
      plan contribution — 28,800 shares issued
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (536
                          )
                          
                          
                          -
                          
                          
                          
                          915
                          
                          
                          
                          -
                          
                          
                          
                          379Balance
      March 31, 2009 (restated)
                          
                          $
                          40,471
                          
                          
                          $
                          12,051
                          
                          
                          $
                          127,992
                          
                          
                          $
                          116,856
                          
                          
                          $
                          (14,453
                          )
                          
                          $
                          (66,372
                          )
                          
                          $
                          216,545Balance
      January 1, 2010 (restated)
                          
                          $
                          -
                          
                          
                          $
                          18,083
                          
                          
                          $
                          190,967
                          
                          
                          $
                          66,760
                          
                          
                          $
                          (9,891
                          )
                          
                          $
                          (13,652
                          )
                          
                          $
                          252,267Comprehensive
      income:Net
      income (restated)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,278
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,278Other
      comprehensive income — See Note 10
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,161
                          
                          
                          
                          5,161Comprehensive
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,278
                          
                          
                          
                          -
                          
                          
                          
                          5,161
                          
                          
                          
                          10,439Common
      dividends paid
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,776
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,776
                          )Equity-based
      compensation expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          22
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          22Retirement
      plan contribution — 17,627 shares issued
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (339
                          )
                          
                          
                          -
                          
                          
                          
                          549
                          
                          
                          
                          -
                          
                          
                          
                          210Balance
      March 31, 2010 (restated)
                          
                          $
                          -
                          
                          
                          $
                          18,083
                          
                          
                          $
                          190,650
                          
                          
                          $
                          70,262
                          
                          
                          $
                          (9,342
                          )
                          
                          $
                          (8,491
                          )
                          
                          $
                          261,162





See
Notes to Consolidated Financial Statements.


- 7
-


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note
1.  General





Unaudited
Consolidated Financial Statements





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





The
consolidated balance sheet as of December 31, 2009, has been derived from the
restated audited consolidated financial statements included in the Company’s
2009 Annual Report on Form 10-K/A, as amended (the “2009 Form
10-K/A”).  Certain information and footnote disclosures normally
included in annual consolidated financial statements prepared in accordance with
GAAP have been omitted in accordance with standards for the preparation of
interim consolidated financial statements.  These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s 2009 on Form
10-K/A.





A more
complete and detailed description of First Community’s significant accounting
policies is included within Footnote 1 of Item 8, “Financial Statements and
Supplementary Data” in the Company’s 2009 Form 10-K/A.  Further
discussion of the Company’s application of critical accounting policies is
included within the “Application of Critical Accounting Policies” section of
Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” included herein.





The
Company operates within two business segments, banking and insurance
services.   Insurance services are comprised of agencies which
sell property and casualty and life and health insurance policies and
arrangements.  All other operations, including commercial and consumer
banking, lending activities, and wealth management are included within the
banking segment.





Earnings
Per Share





Basic
earnings per share is determined by dividing net income available to common
shareholders by the weighted average number of shares
outstanding.  Diluted earnings per share is determined by dividing net
income available to common shareholders by the weighted average shares
outstanding, which includes the dilutive effect of stock options, warrants and
contingently issuable shares.  Basic and diluted net income per common
share calculations follow:





For
      the three monthsended March 31,2010
                  
                  
                  2009(Amounts
      in Thousands, Except Share and Per Share Data)
                  
                  
                  
                  
                  (Restated)Net
      income available to common shareholders
                  
                  $
                  5,278
                  
                  
                  $
                  4,621Weighted
      average shares outstanding
                  
                  
                  17,765,556
                  
                  
                  
                  11,567,769Dilutive
      shares for stock options
                  
                  
                  4,336
                  
                  
                  
                  6,332Contingently
      issuable shares
                  
                  
                  14,557
                  
                  
                  
                  42,467Weighted
      average dilutive shares outstanding
                  
                  
                  17,784,449
                  
                  
                  
                  11,616,568Basic
      earnings per share
                  
                  $
                  0.30
                  
                  
                  $
                  0.40Diluted
      earnings per share
                  
                  $
                  0.30
                  
                  
                  $
                  0.40





For the
three month period ended March 31, 2010, options and warrants to purchase
576,962 shares of common stock were outstanding but were not included in the
computation of diluted earnings per common share because they would have an
anti-dilutive effect. Likewise, options and warrants to purchase 391,104 shares
of common stock were excluded from the 2009 computations of diluted earnings per
common share because their effect would be anti-dilutive.




Reclassifications
 
 The
Company has made certain reclassifications of March 31, 2010 and 2009 amounts
necessary to conform with the current year presentation.  These
reclassifications had no effect on the Company’s financial position,
shareholders’ equity, or results of operations.




- 8
-


Recent
Accounting Pronouncements





FASB ASC Topic 810,
Consolidation.  New authoritative accounting guidance under ASC
Topic 810 amends prior guidance to change how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated.  The determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance.  The new authoritative accounting guidance requires
additional disclosures about the reporting entity’s involvement with variable
interest entities and any significant changes in risk exposure due to that
involvement as well as its affect on the entity’s financial
statements.  The Company adopted the provisions of the new
authoritative accounting guidance under ASC Topic 810 during the first quarter
of 2010. The adoption of the guidance had no significant impact on the Company’s
financial statements.





FASB ASC Topic 820, Fair Value
Measurements and Disclosures.  New authoritative guidance under
ASC Topic 820, “Fair Value Measurements and Disclosures,” amends prior guidance
that requires entities to disclose additional information regarding assets and
liabilities that are transferred between levels of the fair value hierarchy.
Entities are also required to disclose information in the Level 3 rollforward
about purchases, sales, issuances and settlements on a gross basis. In addition
to these new disclosure requirements, existing guidance pertaining to the level
of disaggregation at which fair value disclosures should be made and the
requirements to disclose information about the valuation techniques and inputs
used in estimating Level 2 and Level 3 fair value measurements is further
clarified. The Company adopted the new authoritative accounting guidance under
ASC Topic 820 in the first quarter of 2010 and new disclosures are presented in
Note 13 — Fair Value of the Notes to Consolidated Financial
Statements.





FASB ASC Topic 860, Transfers and
Servicing.  New authoritative accounting guidance under ASC
Topic 860, “Transfers and Servicing,” amends prior accounting guidance to
enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks
related to transferred financial assets. The authoritative accounting guidance
eliminates the concept of a “qualifying special purpose entity” and changes the
requirements for derecognizing financial assets.  The authoritative
accounting guidance also requires additional disclosures about all continuing
involvements with transferred financial assets including information about gains
and losses resulting from transfers during the period.  The Company
adopted the new authoritative accounting guidance under ASC Topic 860 effective
January 1, 2010, and it did not have a significant impact on the Company’s
financial statements.




Note
2. Restatement of Consolidated Financial Statements
 
 As a
result of a routine internal audit, the Company determined there was a
computational error in the model that it uses to calculate the quantitative
basis for its allowance for loan losses.  In connection with its
determination of the appropriate loan loss reserve at December 31, 2008, the
Company made certain modifications to its loan loss reserve model with respect
to a $130.76 million pool of loans.  However, in calculating the loan
loss reserves for this pool of loans, the historical quarterly net charge-off
rates were not annualized as was the case with all other quarterly loss rates in
the model.  The Company has corrected the computational error in its
model for calculating the allowance for loan losses. Based on
the Company’s modeling using the corrected computations, the Company, in
consultation with the Audit Committee of its Board of Directors, determined that
the amount of the allowance for loan losses should be increased by an aggregate
of $2.55 million for the period beginning December 31, 2008 and ending March 31,
2010.
  In
this Form 10-Q/A, the Company is restating its unaudited consolidated balance
sheet as of March 31, 2010, and the consolidated statement of changes
in stockholders’ equity for the three months ended March 31,
2010.  The consolidated statements of income and cash flows for the
three months ended March 31, 2010, were not affected by the
restatement.
  In its
2009 Form 10-K/A, which has been filed with SEC , the
Company restated its consolidated balance sheet, statements of income,
statements of cash flows and statement of changes in stockholders’ equity at and
for the year ended December 31, 2009. In its
Form 10-Q/A for the three months ended March 31, 2009, the Company restated
its unaudited consolidated balance sheet, statement of income, statement of cash
flows and statement of changes in stockholders’ equity. For ease
of reference, the effects of the restatement on the consolidated balance
sheet for the year ended December 31, 2009 is provided below in this Note
2. 
 The
effects of the restatement by line item for the periods presented in this
Quarterly Report on Form 10-Q/A follow.
  - 9
-
  Impact on ConsolidatedBalanceSheetsMarch31,2010
                      
                      
                      December31,2009AsPreviously
                        Reported
                      
                      AsRestated
                      
                      
                      EffectofChange
                      
                      
                      AsPreviously
                        Reported
                      
                      AsRestated
                      
                      
                      EffectofChange(Amounts
      in Thousands)Allowance
      for loan losses
                      
                      $
                      21,956
                      
                      
                      $
                      24,508
                      
                      
                      $
                      2,552
                      
                      
                      $
                      21,725
                      
                      
                      $
                      24,277
                      
                      
                      $
                      2,552Net
      loans held for investment
                      
                      
                      1,368,918
                      
                      
                      
                      1,366,366
                      
                      
                      
                      (2,552
                      )
                      
                      
                      1,372,206
                      
                      
                      
                      1,369,654
                      
                      
                      
                      (2,552
                      )Other
      assets
                      
                      
                      130,017
                      
                      
                      
                      130,974
                      
                      
                      
                      957
                      
                      
                      
                      135,049
                      
                      
                      
                      136,006
                      
                      
                      
                      957Total
      assets
                      
                      
                      2,280,534
                      
                      
                      
                      2,278,939
                      
                      
                      
                      (1,595
                      )
                      
                      
                      2,274,878
                      
                      
                      
                      2,273,283
                      
                      
                      
                      (1,595
                      )Retained
      earnings
                      
                      
                      71,857
                      
                      
                      
                      70,262
                      
                      
                      
                      (1,595
                      )
                      
                      
                      68,355
                      
                      
                      
                      66,760
                      
                      
                      
                      (1,595
                      )Total
      stockholders' equity
                      
                      
                      262,757
                      
                      
                      
                      261,162
                      
                      
                      
                      (1,595
                      )
                      
                      
                      253,862
                      
                      
                      
                      252,267
                      
                      
                      
                      (1,595
                      )
 
 Impact on ConsolidatedStatements of IncomeThreeMonthsEndedMarch31,2009As Previously
                    
                    
                    
                    
                    
                    Effect ofReported
                    
                    
                    AsRestated
                    
                    
                    Change(Amounts
      in Thousands, except per share data)Provision
      for loan losses
                    
                    $
                    2,087
                    
                    
                    $
                    2,148
                    
                    
                    $
                    61Net
      interest income after provision for loan losses
                    
                    
                    14,346
                    
                    
                    
                    14,285
                    
                    
                    
                    (61
                    )Income
      before income taxes
                    
                    
                    7,576
                    
                    
                    
                    7,515
                    
                    
                    
                    (61
                    )Income
      tax expense
                    
                    
                    2,346
                    
                    
                    
                    2,323
                    
                    
                    
                    (23
                    )Net
      income
                    
                    
                    5,230
                    
                    
                    
                    5,192
                    
                    
                    
                    (38
                    )Net
      income to common shareholders
                    
                    
                    4,659
                    
                    
                    
                    4,621
                    
                    
                    
                    (38
                    )Net
      income per shareBasic
                    
                    $
                    0.40
                    
                    
                    $
                    0.40
                    
                    
                    $
                    -Diluted
                    
                    $
                    0.40
                    
                    
                    $
                    0.40
                    
                    
                    $
                    -
 
 Impact
      on ConsolidatedStatements
      of Cash FlowsThree
      Months Ended March 31,
      2009As
      Previously
                    
                    
                    
                    
                    
                    Effect
      ofReported
                    
                    
                    As Restated
                    
                    
                    Change(Amounts
      in Thousands)Operating
      Activities:Net
      income
                    
                    $
                    5,230
                    
                    
                    $
                    5,192
                    
                    
                    $
                    (38
                    )Provision
      for loan losses
                    
                    
                    2,087
                    
                    
                    
                    2,148
                    
                    
                    
                    61Deferred
      income tax benefit
                    
                    
                    (317
                    )
                    
                    
                    (340
                    )
                    
                    
                    (23
                    )
 
 Impact on ConsolidatedStatements ofChanges in Stockholders' EquityThreeMonthsEndedMarch31,2010
                      
                      
                      ThreeMonthsEndedMarch31,2009As Previously
                      
                      
                      
                      
                      
                      Effect of
                      
                      
                      As Previously
                      
                      
                      
                      
                      
                      Effect ofReported
                      
                      
                      AsRestated
                      
                      
                      Change
                      
                      
                      Reported
                      
                      
                      AsRestated
                      
                      
                      Change(Amounts
      in Thousands)Total
      retained earnings, January 1
                      
                      $
                      68,355
                      
                      
                      $
                      66,760
                      
                      
                      $
                      (1,595
                      )
                      
                      $
                      107,231
                      
                      
                      $
                      106,104
                      
                      
                      $
                      (1,127
                      )Net
      income
                      
                      
                      5,278
                      
                      
                      
                      5,278
                      
                      
                      
                      -
                      
                      
                      
                      5,230
                      
                      
                      
                      5,192
                      
                      
                      
                      (38
                      )Total
      retained earnings, March 31
                      
                      
                      71,857
                      
                      
                      
                      70,262
                      
                      
                      
                      (1,595
                      )
                      
                      
                      118,021
                      
                      
                      
                      116,856
                      
                      
                      
                      (1,165
                      )


Note
3.  Mergers, Acquisitions, and Branching Activity





In July
2009, the Company acquired TriStone Community Bank (“TriStone”), based in
Winston-Salem, North Carolina.  TriStone had two full service
locations in Winston-Salem.  At acquisition, TriStone had total assets
of $166.82 million, total loans of $132.23 million and total deposits of $142.27
million. Each outstanding common share of TriStone was exchanged for .5262
shares of the Company’s common stock and the overall acquisition cost was
approximately $10.78 million. The acquisition of TriStone significantly
augmented the Company’s market presence and human resources in the
Winston-Salem, North Carolina market.


- 10
-


Note
4.  Investment Securities





As of
March 31, 2010, and December 31, 2009, the amortized cost and estimated fair
value of available-for-sale securities were as follows:


March31,2010Amortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  OTTI inCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  AOCI(In
      Thousands)U.S.
      Government agency securities
                  
                  $
                  50,042
                  
                  
                  $
                  329
                  
                  
                  $
                  (97
                  )
                  
                  $
                  50,274
                  
                  
                  $
                  -States
      and political subdivisions
                  
                  
                  130,923
                  
                  
                  
                  3,732
                  
                  
                  
                  (848
                  )
                  
                  
                  133,807
                  
                  
                  
                  -Trust
      preferred securities:Single
      issue
                  
                  
                  55,664
                  
                  
                  
                  -
                  
                  
                  
                  (12,461
                  )
                  
                  
                  43,203
                  
                  
                  
                  -Pooled
                  
                  
                  1,648
                  
                  
                  
                  1,926
                  
                  
                  
                  -
                  
                  
                  
                  3,574
                  
                  
                  
                  -Total
      trust preferred securities
                  
                  
                  57,312
                  
                  
                  
                  1,926
                  
                  
                  
                  (12,461
                  )
                  
                  
                  46,777
                  
                  
                  
                  -FDIC-backed
      securities
                  
                  
                  25,388
                  
                  
                  
                  -
                  
                  
                  
                  (71
                  )
                  
                  
                  25,317
                  
                  
                  
                  -Mortgage-backed
      securities:Agency
                  
                  
                  243,602
                  
                  
                  
                  6,962
                  
                  
                  
                  (616
                  )
                  
                  
                  249,948
                  
                  
                  
                  -Non-Agency
      prime residential
                  
                  
                  5,286
                  
                  
                  
                  -
                  
                  
                  
                  (447
                  )
                  
                  
                  4,839
                  
                  
                  
                  -Non-Agency
      Alt-A residential
                  
                  
                  20,770
                  
                  
                  
                  -
                  
                  
                  
                  (9,297
                  )
                  
                  
                  11,473
                  
                  
                  
                  (9,297
                  )Total
      mortgage-backed securities
                  
                  
                  269,658
                  
                  
                  
                  6,962
                  
                  
                  
                  (10,360
                  )
                  
                  
                  266,260
                  
                  
                  
                  (9,297
                  )Equities
                  
                  
                  1,611
                  
                  
                  
                  340
                  
                  
                  
                  (89
                  )
                  
                  
                  1,862
                  
                  
                  
                  -Total
                  
                  $
                  534,934
                  
                  
                  $
                  13,289
                  
                  
                  $
                  (23,926
                  )
                  
                  $
                  524,297
                  
                  
                  $
                  (9,297
                  )





December 31, 2009Amortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  OTTI
      inCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  AOCI(In
      Thousands)U.S.
      Government agency securities
                  
                  $
                  25,421
                  
                  
                  $
                  10
                  
                  
                  $
                  (155
                  )
                  
                  $
                  25,276
                  
                  
                  $
                  -States
      and political subdivisions
                  
                  
                  133,185
                  
                  
                  
                  3,309
                  
                  
                  
                  (893
                  )
                  
                  
                  135,601
                  
                  
                  
                  -Trust
      preferred securities:Single
      issue
                  
                  
                  55,624
                  
                  
                  
                  -
                  
                  
                  
                  (14,514
                  )
                  
                  
                  41,110
                  
                  
                  
                  -Pooled
                  
                  
                  1,648
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,648
                  
                  
                  
                  -Total
      trust preferred securities
                  
                  
                  57,272
                  
                  
                  
                  -
                  
                  
                  
                  (14,514
                  )
                  
                  
                  42,758
                  
                  
                  
                  -Mortgage-backed
      securities:Agency
                  
                  
                  260,220
                  
                  
                  
                  5,399
                  
                  
                  
                  (1,401
                  )
                  
                  
                  264,218
                  
                  
                  
                  -Non-Agency
      prime residential
                  
                  
                  5,743
                  
                  
                  
                  -
                  
                  
                  
                  (573
                  )
                  
                  
                  5,170
                  
                  
                  
                  -Non-Agency
      Alt-A residential
                  
                  
                  20,968
                  
                  
                  
                  -
                  
                  
                  
                  (9,667
                  )
                  
                  
                  11,301
                  
                  
                  
                  (9,667
                  )Total
      mortgage-backed securities
                  
                  
                  286,931
                  
                  
                  
                  5,399
                  
                  
                  
                  (11,641
                  )
                  
                  
                  280,689
                  
                  
                  
                  (9,667
                  )Equities
                  
                  
                  1,717
                  
                  
                  
                  207
                  
                  
                  
                  (191
                  )
                  
                  
                  1,733
                  
                  
                  
                  -Total
                  
                  $
                  504,526
                  
                  
                  $
                  8,925
                  
                  
                  $
                  (27,394
                  )
                  
                  $
                  486,057
                  
                  
                  $
                  (9,667
                  )




- 11
-


As of
March 31, 2010, and December 31, 2009, the amortized cost and estimated fair
value of held-to-maturity securities were as follows:





March 31, 2010Amortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                Value(In
      Thousands)States
      and political subdivisions
                
                $
                7,155
                
                
                $
                132
                
                
                $
                -
                
                
                $
                7,287Total
                
                $
                7,155
                
                
                $
                132
                
                
                $
                -
                
                
                $
                7,287





December 31, 2009Amortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                Value(In
      Thousands)States
      and political subdivisions
                
                $
                7,454
                
                
                $
                125
                
                
                $
                -
                
                
                $
                7,579Total
                
                $
                7,454
                
                
                $
                125
                
                
                $
                -
                
                
                $
                7,579





The
amortized cost and estimated fair value of available-for-sale securities by
contractual maturity at March 31, 2010, are shown below.  Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.





AmortizedCost
                
                
                Fair Value(In
      Thousands)Due
      within one year
                
                $
                72
                
                
                $
                74Due
      after one year but within five years
                
                
                54,140
                
                
                
                54,505Due
      after five years but within ten years
                
                
                71,647
                
                
                
                74,072Due
      after ten years
                
                
                137,806
                
                
                
                127,524263,665
                
                
                
                256,175Mortgage-backed
      securities
                
                
                269,658
                
                
                
                266,260Equity
      securities
                
                
                1,611
                
                
                
                1,862Total
                
                $
                534,934
                
                
                $
                524,297





The
amortized cost and estimated fair value of held-to-maturity securities by
contractual maturity at March 31, 2010, are shown below.  Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.





AmortizedCost
                
                
                Fair Value(In
      Thousands)Due
      within one year
                
                $
                905
                
                
                $
                913Due
      after one year but within five years
                
                
                4,113
                
                
                
                4,193Due
      after five years but within ten years
                
                
                2,137
                
                
                
                2,181Due
      after ten years
                
                
                -
                
                
                
                -Total
                
                $
                7,155
                
                
                $
                7,287





The
carrying value of securities pledged to secure public deposits and for other
purposes required by law was $335.44 million and $354.92 million at March 31,
2010, and December 31, 2009, respectively.





During
the three months ended March 31, 2010, net gains on the sale of securities were
$250 thousand.  Gross gains were $258 thousand while gross losses were
$8 thousand.  During the three months ended March 31, 2009, net gains
on the sale of securities were $411 thousand. Gross gains were $1.17 million
while gross losses were $761 thousand.


- 12
-


The
following tables reflect those investments, both available-for-sale and
held-to-maturity, in a continuous unrealized loss position for less than 12
months and for 12 months or longer at March 31, 2010 and December 31,
2009.





March 31, 2010Less than 12 Months
                
                
                12 Months or longer
                
                
                TotalFair
                
                
                Unrealized
                
                
                Fair
                
                
                Unrealized
                
                
                Fair
                
                
                UnrealizedValue
                
                
                Losses
                
                
                Value
                
                
                Losses
                
                
                Value
                
                
                Losses(In
      Thousands)U.S.
      Government agency securities
                
                $
                25,518
                
                
                $
                (97
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                25,518
                
                
                $
                (97
                )States
      and political subdivisions
                
                
                10,271
                
                
                
                (143
                )
                
                
                17,924
                
                
                
                (705
                )
                
                
                28,195
                
                
                
                (848
                )Single
      issue trust preferred securities
                
                
                -
                
                
                
                -
                
                
                
                43,204
                
                
                
                (12,461
                )
                
                
                43,204
                
                
                
                (12,461
                )FDIC-backed
      securities
                
                
                25,317
                
                
                
                (71
                )
                
                
                -
                
                
                
                -
                
                
                
                25,317
                
                
                
                (71
                )Mortgage-backed
      securities:Agency
                
                
                48,135
                
                
                
                (616
                )
                
                
                33
                
                
                
                -
                
                
                
                48,168
                
                
                
                (616
                )Prime
      residential
                
                
                -
                
                
                
                -
                
                
                
                4,839
                
                
                
                (447
                )
                
                
                4,839
                
                
                
                (447
                )Alt-A
      residential
                
                
                -
                
                
                
                -
                
                
                
                11,108
                
                
                
                (9,297
                )
                
                
                11,108
                
                
                
                (9,297
                )Total
      mortgage-backed securities
                
                
                48,135
                
                
                
                (616
                )
                
                
                15,980
                
                
                
                (9,744
                )
                
                
                64,115
                
                
                
                (10,360
                )Equity
      securities
                
                
                274
                
                
                
                (44
                )
                
                
                187
                
                
                
                (45
                )
                
                
                461
                
                
                
                (89
                )Total
                
                $
                109,515
                
                
                $
                (971
                )
                
                $
                77,295
                
                
                $
                (22,955
                )
                
                $
                186,810
                
                
                $
                (23,926
                )





December 31, 2009Less than 12 Months
                
                
                12 Months or longer
                
                
                TotalFair
                
                
                Unrealized
                
                
                Fair
                
                
                Unrealized
                
                
                Fair
                
                
                UnrealizedValue
                
                
                Losses
                
                
                Value
                
                
                Losses
                
                
                Value
                
                
                Losses(In
      Thousands)U.S.
      Government agency securities
                
                $
                23,271
                
                
                $
                (155
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                23,271
                
                
                $
                (155
                )States
      and political subdivisions
                
                
                13,864
                
                
                
                (270
                )
                
                
                16,285
                
                
                
                (623
                )
                
                
                30,149
                
                
                
                (893
                )Single
      issue trust preferred securities
                
                
                -
                
                
                
                -
                
                
                
                41,111
                
                
                
                (14,514
                )
                
                
                41,111
                
                
                
                (14,514
                )Mortgage-backed
      securities:Agency
                
                
                83,491
                
                
                
                (1,400
                )
                
                
                34
                
                
                
                (1
                )
                
                
                83,525
                
                
                
                (1,401
                )Prime
      residential
                
                
                -
                
                
                
                -
                
                
                
                5,169
                
                
                
                (573
                )
                
                
                5,169
                
                
                
                (573
                )Alt-A
      residential
                
                
                11,301
                
                
                
                (9,667
                )
                
                
                -
                
                
                
                -
                
                
                
                11,301
                
                
                
                (9,667
                )Total
      mortgage-backed securities
                
                
                94,792
                
                
                
                (11,067
                )
                
                
                5,203
                
                
                
                (574
                )
                
                
                99,995
                
                
                
                (11,641
                )Equity
      securities
                
                
                86
                
                
                
                (60
                )
                
                
                731
                
                
                
                (131
                )
                
                
                817
                
                
                
                (191
                )Total
                
                $
                132,013
                
                
                $
                (11,552
                )
                
                $
                63,330
                
                
                $
                (15,842
                )
                
                $
                195,343
                
                
                $
                (27,394
                )





At March
31, 2010, the combined depreciation in value of the 85 individual securities in
an unrealized loss position was approximately 4.56% of the combined reported
value of the aggregate securities portfolio.  At December 31, 2009,
the combined depreciation in value of the 89 individual securities in an
unrealized loss position was approximately 5.64% of the combined reported value
of the aggregate securities portfolio.





The
Company reviews its investment portfolio on a quarterly basis for indications of
other-than-temporary impairment (“OTTI”).  The analysis differs
depending upon the type of investment security being analyzed.  For
debt securities, the Company has determined that, except for pooled trust
preferred securities, it does not intend to sell securities that are impaired
and has asserted that it is not more likely than not that it will have to sell
impaired securities before recovery of the impairment occurs.  The
Company’s assertion is based upon its investment strategy for the particular
type of security and the Company’s cash flow needs, liquidity position, capital
adequacy and interest rate risk position.





For
non-beneficial interest debt securities, the Company analyzes several
qualitative factors such as the severity and duration of the impairment, adverse
conditions within the issuing industry, prospects for the issuer, performance of
the security, changes in rating by rating agencies and other qualitative factors
to determine if the impairment will be
recovered.    Non-beneficial interest debt securities
consist of U.S. government agency securities, states and political subdivisions,
single issue trust preferred securities, and FDIC-backed
securities.  If it is determined that there is evidence that the
impairment will not be recovered, the Company performs a present value
calculation to determine the amount of credit related impairment and record any
credit related OTTI through earnings and the non-credit related OTTI through
other comprehensive income (“OCI”).  During the three month periods
ended March 31, 2010 and 2009, respectively, the Company incurred no OTTI
charges related to non-beneficial interest debt securities.   The
temporary impairment on these securities is primarily related to changes in
interest rates, certain disruptions in the credit markets, and other current
economic factors.


- 13
-


For
beneficial interest debt securities, the Company reviews cash flow analyses on
each applicable security to determine if an adverse change in cash flows
expected to be collected has occurred.  Beneficial interest debt
securities consist of mortgage-backed securities and pooled trust preferred
securities.  An adverse change in cash flows expected to be collected
has occurred if the present value of cash flows previously projected is greater
than the present value of cash flows projected at the current reporting date and
less than the current book value.  If an adverse change in cash flows
is deemed to have occurred, then an OTTI has occurred.  The Company
then compares the present value of cash flows using the current yield for the
current reporting period to the reference amount, or current net book value, to
determine the credit-related OTTI.  The credit-related OTTI is then
recorded through earnings and the non-credit related OTTI is accounted for in
OCI.





During
the three month periods ended March 31, 2010 2009, the Company incurred no
credit-related OTTI charges related to beneficial interest debt
securities.  For the beneficial interest debt securities not deemed to
have incurred OTTI, the Company has concluded that the primary difference in the
fair value of the securities and credit impairment evident in its cash flow
model is the significantly higher rate of return currently demanded by market
participants in this illiquid and inactive market as compared to the rate of
return that the Company received when it purchased the securities in a normally
functioning market.





As of
March 31, 2010, the Company cannot assert its intent to hold its remaining
pooled trust preferred securities to recovery or maturity and that it is more
likely than not it will sell the securities in order to convert deferred tax
assets to current tax receivables.  Accordingly, the Company carries
those securities at the lower of its adjusted cost basis or market value. 
The securities continue to remain categorized as available for
sale.





For the
non-Agency Alt-A residential MBS, the Company models cash flows using the
following assumptions: constant prepayment speed of 5, a customized constant
default rate scenario starting at 15 for the first six quarters ramping down
over the course of the next three-and-a-half years to 3 beginning with the
fourth year, and a loss severity of 45.  For the non-Agency prime
residential MBS, the Company models cash flows using the following assumptions:
constant prepayment speed of 5, a constant default rate of 5, and a loss
severity of 10.  The scenarios presented do not indicate OTTI for
either security.





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





Three
      Months EndedMarch 31, 2010(In
      Thousands)Estimated
      credit losses, beginning balance (1)
                
                $
                4,251Additions
      for credit losses on securities not previously recognized
                
                
                -Additions
      for credit losses on securities previously recognized
                
                
                -Reduction
      for increases in cash flows
                
                
                -Reduction
      for securities management no longer intends to hold to
      recovery
                
                
                -Reduction
      for securities sold/realized losses
                
                
                -Estimated
      credit losses as of March 31, 2010
                
                $
                4,251





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





For
equity securities, the Company reviews for OTTI based upon the prospects of the
underlying companies, analysts’ expectations, and certain other qualitative
factors to determine if impairment is recoverable over a foreseeable period of
time. During the three months ended March 31, 2010, the Company did not
recognize any OTTI charges on equity securities. For the three months ended
March 31, 2009, the Company recognized OTTI charges of $209 thousand on certain
of its equity positions.





As a
condition to membership in the Federal Home Loan Bank (“FHLB”) system, the
Company is required to subscribe to a minimum level of stock in the FHLB of
Atlanta (“FHLBA”).  The Company feels this ownership position provides
access to relatively inexpensive wholesale and overnight funding.  The
Company accounts for FHLBA and Federal Reserve Bank stock as a long-term
investment in other assets.  At March 31, 2010, and December 31, 2009,
the Company owned approximately $13.70 million in FHLBA stock, which is
classified as other assets.  The Company’s policy is to review for
impairment of such assets at the end of each reporting period.  During
the three months ended March 31, 2010, FHLBA paid quarterly
dividends.  At March 31, 2010, FHLBA was in compliance with all of its
regulatory capital requirements.  Based on its review, the Company
believes that, as of March 31, 2010, its FHLBA stock was not
impaired.


- 14
-


Note
5.  Loans





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





March 31, 2010
                
                
                December 31, 2009(Dollars
      in Thousands)
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentLoans
      held for investment:Commercial,
      financial, and agricultural
                
                $
                102,022
                
                
                
                7.34
                %
                
                $
                96,366
                
                
                
                6.91
                %Real
      estate — commercial
                
                
                461,542
                
                
                
                33.18
                %
                
                
                450,611
                
                
                
                32.33
                %Real
      estate — construction (1)
                
                
                113,139
                
                
                
                8.13
                %
                
                
                124,896
                
                
                
                8.96
                %Real
      estate — residential
                
                
                647,921
                
                
                
                46.59
                %
                
                
                657,367
                
                
                
                47.16
                %Consumer
                
                
                60,632
                
                
                
                4.36
                %
                
                
                60,090
                
                
                
                4.31
                %Other
                
                
                5,618
                
                
                
                0.40
                %
                
                
                4,601
                
                
                
                0.33
                %Total
                
                $
                1,390,874
                
                
                
                100.00
                %
                
                $
                1,393,931
                
                
                
                100.00
                %Loans
      held for sale
                
                $
                1,494
                
                
                
                
                
                
                $
                11,576





(1) Real
estate construction includes land and land development loans.





The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit, standby letters of credit and financial guarantees.  These
instruments involve, to varying degrees, elements of credit and interest rate
risk beyond the amount recognized on the balance sheet.  The
contractual amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.  The
Company’s exposure to credit loss in the event of non-performance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit and financial guarantees written is represented by the
contractual amount of those instruments.  The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.





Commitments
to extend credit are agreements to lend to a customer as long as there is not a
violation of any condition established in the
contract.  Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.  Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.  The Company evaluates each customer’s creditworthiness
on a case-by-case basis.  The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management’s
credit evaluation of the counterparties.  Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income producing commercial properties.





Standby
letters of credit and written financial guarantees are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party.  The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.  To the extent deemed necessary, collateral of varying
types and amounts is held to secure customer performance under certain of those
letters of credit outstanding.





Financial
instruments whose contract amounts represent credit risk are commitments to
extend credit (including availability of lines of credit) of $232.96 million and
standby letters of credit and financial guarantees written of $9.67 million at
March 31, 2010.  Additionally, the Company had gross notional amounts
of outstanding commitments to lend related to secondary market mortgage loans of
$2.97 million at March 31, 2010.





Note
6.  Allowance for Loan Losses





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


- 15
-


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





The
following table details the Company’s allowance for loan loss activity for the
three-month periods ended March 31, 2010 and 2009.





For
      the Three Months EndedMarch 31,2010
                
                
                2009(In
      Thousands)
                
                (Restated)
                
                
                (Restated)Beginning
      balance
                
                $
                24,277
                
                
                $
                17,782Provision
      for loan losses
                
                
                3,665
                
                
                
                2,148Charge-offs
                
                
                (3,732
                )
                
                
                (1,730
                )Recoveries
                
                
                298
                
                
                
                220Ending
      balance
                
                $
                24,508
                
                
                $
                18,420





The
following table presents the Company’s investment in loans considered to be
impaired and related information on those impaired loans for the periods ended
March 31, 2010, and December 31, 2009. Interest income realized on impaired
loans is recognized upon receipt if the impaired loan is on a non-accrual
basis.





March 31,
                      
                      
                      December 31,(In
      Thousands)
                      
                      2010
                      
                      
                      2009Recorded
      investment in loans considered to be impaired:Recorded
      investment in impaired loans with related allowance
                      
                      $
                      10,771
                      
                      
                      $
                      13,241Recorded
      investment in impaired loans with no related allowance
                      
                      
                      16,739
                      
                      
                      
                      13,371Total
      impaired loans
                      
                      
                      27,510
                      
                      
                      
                      26,612Loans
      considered to be impaired that were on a non-accrual basis
                      
                      
                      17,477
                      
                      
                      
                      17,014Allowance
      for loan losses related to loans considered to be impaired
                      
                      
                      2,113
                      
                      
                      
                      932Total
      interest income recognized on impaired loans, year-to-date
                      
                      
                      537
                      
                      
                      
                      663





Note
7.  Deposits





The
following is a summary of interest-bearing deposits by type as of March 31,
2010, and December 31, 2009.





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(In
      Thousands)Interest-bearing
      demand deposits
                  
                  $
                  246,513
                  
                  
                  $
                  231,907Savings
      and money market deposits
                  
                  
                  427,883
                  
                  
                  
                  381,381Certificates
      of deposit
                  
                  
                  775,405
                  
                  
                  
                  824,428Total
                  
                  $
                  1,449,801
                  
                  
                  $
                  1,437,716


- 16
-


Note
8.  Borrowings





The
following schedule details the Company’s FHLB borrowings and other indebtedness
at March 31, 2010, and December 31, 2009.





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(In
      Thousands)FHLB
      borrowings
                  
                  $
                  180,134
                  
                  
                  $
                  183,177Subordinated
      debt
                  
                  
                  15,464
                  
                  
                  
                  15,464Other
      long-term debt
                  
                  
                  275
                  
                  
                  
                  283Total
                  
                  $
                  195,873
                  
                  
                  $
                  198,924





FHLB
borrowings included $175.00 million in convertible and callable advances at
March 31, 2010, and December 31, 2009.  The weighted average interest
rate of all the advances was 2.41% at March 31, 2010, and December 31,
2009.





The
Company has entered into a derivative interest rate swap instrument where it
receives LIBOR-based variable interest payments and pays fixed interest
payments.  The notional amount of the derivative swap is $50.00
million and effectively fixes the interest rate of a portion of the FHLB
borrowings at approximately 4.34%.  After considering the effect of
the interest rate swap, the effective weighted average interest rate of all FHLB
borrowings was 3.61% at March 31, 2010.  The fair value of the
interest rate swap was a liability of $1.69 million at March 31, 2010. The
Company maintained a cash deposit with its counterparty to collateralize the
interest rate swap of $3.20 million at March 31, 2010, and December 31,
2009.





At March
31, 2010, the FHLB advances have approximate contractual maturities between four
months and eleven years.  The scheduled maturities of the advances are
as follows:





Amount(In
      Thousands)2010
                  
                  $
                  5,1342011
                  
                  
                  -2012
                  
                  
                  -2013
                  
                  
                  -2014
                  
                  
                  -2015
      and thereafter
                  
                  
                  175,000Total
                  
                  $
                  180,134





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





Also
included in other indebtedness is $15.46 million of junior subordinated
debentures (the “Debentures”) issued by the Company in October 2003 to an
unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”), with an
interest rate of three month LIBOR plus 2.95%.  The Trust was able to
purchase the Debentures through the issuance of trust preferred securities which
had substantially identical terms as the Debentures.  The Debentures
mature on October 8, 2033, and are currently callable.





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





In
addition to investment securities, at March 31, 2010, wholesale repurchase
agreements were collateralized by $9.27 million of interest bearing balances
with banks.


- 17
-


Note
9.  Net Periodic Benefit Cost-Defined Benefit Plans





The
following sets forth the components of the net periodic benefit cost of the
Company’s domestic non-contributory defined benefit plan for the three-month
periods ended March 31, 2010 and 2009.





Three
      Months EndedMarch 31,2010
                
                
                2009(In
      Thousands)Service
      cost
                
                $
                52
                
                
                $
                53Interest
      cost
                
                
                52
                
                
                
                47Net
      periodic cost
                
                $
                104
                
                
                $
                100





Note
10.  Comprehensive Income (Loss)





The
components of the Company’s comprehensive income (loss), net of income taxes,
for the three-month periods ended March 31, 2010 and 2009, are as
follows:





Three
      Months EndedMarch 31,2010
                    
                    
                    2009(In
      Thousands)
                    
                    
                    
                    
                    (Restated)Net
      income
                    
                    $
                    5,278
                    
                    
                    $
                    5,192Other
      comprehensive income (loss)Unrealized
      gain (loss) on securities available-for-sale without other-than-temporary
      impairment
                    
                    
                    8,050
                    
                    
                    
                    (12,703
                    )Reclassification
      adjustment for gains realized in net income
                    
                    
                    (250
                    )
                    
                    
                    (411
                    )Reclassification
      adjustment for credit related other-than-temporary impairments recognized
      in earnings
                    
                    
                    -
                    
                    
                    
                    209Unrealized
      gain on derivative contract
                    
                    
                    424
                    
                    
                    
                    243Income
      tax effect
                    
                    
                    (3,063
                    )
                    
                    
                    4,938Total
      other comprehensive income (loss)
                    
                    
                    5,161
                    
                    
                    
                    (7,724
                    )Comprehensive
      income (loss)
                    
                    $
                    10,439
                    
                    
                    $
                    (2,532
                    )





Note
11.  Commitments and Contingencies





In the
normal course of business, the Company is a defendant in various legal actions
and asserted claims.  While the Company and its legal counsel are
unable to assess the ultimate outcome of each of these matters with certainty,
the Company does not believe the resolution of these actions, singly or in the
aggregate, should not have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.


- 18
-


Note
12.  Segment Information





The
Company operates within two business segments, Community Banking and Insurance
Services.  The Community Banking segment includes both commercial and
consumer lending and deposit services.  This segment provides
customers with such products as commercial loans, real estate loans, business
financing and consumer loans.  This segment also provides customers
with several choices of deposit products including demand deposit accounts,
savings accounts and certificates of deposit.  In addition, the
Community Banking segment provides wealth management services to a broad range
of customers.  The Insurance Services segment is a full-service
insurance agency providing commercial and personal lines of
insurance.





The
following table sets forth information about the reportable operating segments
and reconciliation of this information to the consolidated financial statements
at and for the three-month periods ended March 31, 2010 and
2009.





For
      the Three MonthsEnded March 31, 2010Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                18,678
                
                
                $
                (33
                )
                
                $
                (26
                )
                
                $
                18,619Provision
      for loan losses
                
                
                3,665
                
                
                
                -
                
                
                
                -
                
                
                
                3,665Noninterest
      income (loss)
                
                
                6,609
                
                
                
                2,219
                
                
                
                (250
                )
                
                
                8,578Noninterest
      expense (income)
                
                
                15,021
                
                
                
                1,479
                
                
                
                (428
                )
                
                
                16,072Income
      before income taxes
                
                
                6,601
                
                
                
                707
                
                
                
                152
                
                
                
                7,460Provision
      for income taxes
                
                
                1,869
                
                
                
                291
                
                
                
                22
                
                
                
                2,182Net
      income
                
                $
                4,732
                
                
                $
                416
                
                
                $
                130
                
                
                $
                5,278End
      of period goodwill and other intangibles
                
                $
                79,237
                
                
                $
                11,568
                
                
                $
                -
                
                
                $
                90,805End
      of period assets (restated)
                
                $
                2,252,443
                
                
                $
                12,465
                
                
                $
                14,031
                
                
                $
                2,278,939





For
      the Three MonthsEnded March 31, 2009Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)
                
                (Restated)
                
                
                
                
                
                
                
                
                (Restated)Net
      interest income (loss)
                
                $
                16,492
                
                
                $
                (18
                )
                
                $
                (41
                )
                
                $
                16,433Provision
      for loan losses
                
                
                2,148
                
                
                
                -
                
                
                
                -
                
                
                
                2,148Noninterest
      income (loss)
                
                
                6,124
                
                
                
                2,344
                
                
                
                (44
                )
                
                
                8,424Noninterest
      expense (income)
                
                
                13,582
                
                
                
                1,638
                
                
                
                (26
                )
                
                
                15,194(Loss)
      income before income taxes
                
                
                6,886
                
                
                
                688
                
                
                
                (59
                )
                
                
                7,515Provision
      for income taxes
                
                
                1,909
                
                
                
                203
                
                
                
                211
                
                
                
                2,323Net
      income (loss)
                
                $
                4,977
                
                
                $
                485
                
                
                $
                (270
                )
                
                $
                5,192End
      of period goodwill and other intangibles
                
                $
                78,657
                
                
                $
                10,681
                
                
                $
                -
                
                
                $
                89,338End
      of period assets
                
                $
                2,169,529
                
                
                $
                11,698
                
                
                $
                16,749
                
                
                $
                2,197,976





Note
13.  Fair Value





Under ASC
Topic 820, “Fair Value Measurements and Disclosures,” fair value is defined as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants.  A
fair value measurement assumes that the transaction to sell the asset or
transfer the liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the
asset or liability.  The price in the principal, or most advantageous,
market used to measure the fair value of the asset or liability shall not be
adjusted for transaction costs.  An orderly transaction is a
transaction that assumes exposure to the market for a period prior to the
measurement date to allow for marketing activities that are usual and customary
for transactions involving such assets and liabilities; it is not a forced
transaction.  Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to
transact, and (iv) willing to transact.


- 19
-


The fair
value hierarchy under ASC Topic 820 is as follows:





Level
      1 Inputs –
              Unadjusted
      quoted prices in active markets for identical assets or liabilities that
      the reporting entity has the ability to access at the measurement
      date.





Level
      2 Inputs –
              Inputs
      other than quoted prices included in Level 1 that are observable for the
      asset or liability, either directly or indirectly. These might include
      quoted prices for similar assets or liabilities in active markets, quoted
      prices for identical or similar assets or liabilities in markets that are
      not active, inputs other than quoted prices that are observable for the
      asset or liability, such as interest rates, volatilities, prepayment
      speeds, and credit risks, or inputs that are derived principally from or
      corroborated by market data by correlation or other
  means.





Level
      3 Inputs –
              Unobservable
      inputs for determining the fair values of assets or liabilities that
      reflect an entity’s own assumptions about the assumptions that market
      participants would use in pricing the assets or
    liabilities.





A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.  These valuation
methodologies were applied to all of the Company’s assets and liabilities
carried at fair value.  In general, fair value is based upon quoted
market prices, where available.  If such quoted market prices are not
available, fair value is based upon third party models that primarily use, as
inputs, observable market-based parameters.  Valuation adjustments may
be made to ensure that financial instruments are recorded at fair
value.  These adjustments may include amounts to reflect counterparty
credit quality, the Company’s creditworthiness, among other things, as well as
unobservable parameters. Any such valuation adjustments are applied consistently
over time.  The Company’s valuation methodologies may produce a fair
value calculation that may not be indicative of net realizable value or
reflective of future fair values.  While management believes the
Company’s valuation methodologies are appropriate and consistent with other
market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.





Securities
Available-for-Sale: Securities classified as available-for-sale are
reported at fair value utilizing Level 1, Level 2, and Level 3
inputs.  Securities are classified as Level 1 within the valuation
hierarchy when quoted prices are available in an active market.  This
includes securities whose value is based on quoted market prices in active
markets for identical assets. The Company also uses Level 1 inputs for the
valuation of equity securities traded in active markets.





Securities
are classified as Level 2 within the valuation hierarchy when the Company
obtains fair value measurements from an independent pricing
service.  The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information, and the bond’s terms and conditions, among other
things. Level 2 inputs are used to value U.S. Agency securities, mortgage-backed
securities, municipal securities, single issue trust preferred
securities, pooled trust preferred securities, and certain equity
securities that are not actively traded.


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


- 20
-


Other Assets and Associated
Liabilities: Securities held for trading purposes are recorded at fair
value and included in “other assets” on the consolidated balance
sheets.  Securities held for trading purposes include assets related
to employee deferred compensation plans.  The assets associated with
these plans are generally invested in equities and classified as Level
1.  Deferred compensation liabilities, also classified as Level 1, are
carried at the fair value of the obligation to the employee, which corresponds
to the fair value of the invested assets.





Derivatives: Derivatives are
reported at fair value utilizing Level 2 inputs.  The Company obtains
dealer quotations based on observable data to value its
derivatives.





Impaired Loans: Certain
impaired loans are reported at the fair value of the underlying collateral if
repayment is expected solely from the collateral.  Collateral values
are estimated using Level 3 inputs based on appraisals adjusted for customized
discounting criteria.





The
Company maintains an active and robust problem credit identification
system.  When a credit is identified as exhibiting characteristics of
weakening, the Company will assess the credit for potential
impairment.  Examples of weakening include delinquency and
deterioration of the borrower’s capacity to repay as determined by the Company’s
regular credit review function. As part of the impairment review, the Company
will evaluate the current collateral value.  It is the Company’s
standard practice to obtain updated third party collateral valuations to assist
management in measuring potential impairment of a credit and the amount of the
impairment to be recorded.





Internal
collateral valuations are generally performed within two to four weeks of the
original identification of potential impairment and receipt of the third party
valuation.  The internal valuation is performed by comparing the
original appraisal to current local real estate market conditions and experience
and considers liquidation costs.  The result of the internal valuation
is compared to the outstanding loan balance, and, if warranted, a specific
impairment reserve will be established at the completion of the internal
evaluation.





A third
party evaluation is typically received within thirty to forty-five days of the
completion of the internal evaluation.  Once received, the third party
evaluation is reviewed by Special Assets staff and/or Credit Appraisal staff for
reasonableness.  Once the evaluation is reviewed and accepted,
discounts to fair market value are applied based upon such factors as the bank’s
historical liquidation experience of like collateral, and an estimated net
realizable value is established.  That estimated net realizable value
is then compared to the outstanding loan balance to determine the amount of
specific impairment reserve.  The specific impairment reserve, if
necessary, is adjusted to reflect the results of the updated
evaluation.  A specific impairment reserve is generally maintained on
impaired loans during the time period while awaiting receipt of the third party
evaluation as well as on impaired loans that continue to make some form of
payment and liquidation is not imminent.  Impaired loans not meeting
the aforementioned criteria and that do not have a specific impairment reserve
have usually been previously written down through a partial charge-off, to their
net realizable value.





The
Company’s Special Assets staff assumes the management and monitoring of all
loans determined to be impaired.  While awaiting the completion of the
third party appraisal, the Company generally begins to complete the tasks
necessary to gain control of the collateral and prepare for liquidation,
including, but not limited to engagement of counsel, inspection of collateral,
and continued communication with the borrower, if
appropriate.  Special Assets staff also regularly reviews the
relationship to identify any potential adverse developments during this
time.





Generally,
the only difference between current appraised value, adjusted for liquidation
costs, and the carrying amount of the loan less the specific reserve is any
downward adjustment to the appraised value that the Company’s Special Assets
staff determines appropriate.  These differences generally consist of
costs to sell the property, as well as a deflator for the devaluation of
property seen when banks are the sellers, and the Company deemed these
adjustments as fair value adjustments.





In the
Company’s experience, it rarely returns loans to performing status after they
have been partially charged off.  Generally, credits identified as
impaired move quickly through the process towards ultimate resolution of the
problem credit.





Other Real Estate
Owned.  The fair value of the Company’s other real estate owned
is determined using current and prior appraisals, estimates of costs to sell,
and proprietary qualitative adjustments.  Accordingly, other real
estate owned is stated at a Level 3 fair value.


- 21
-


The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of March 31, 2010, and December 31, 2009,
segregated by the level of the valuation inputs within the fair value hierarchy
utilized to measure fair value:





March 31, 2010Fair Value Measurements
    Using
                    
                    
                    Total(In
      Thousands)
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    Fair ValueAvailable-for-sale
      securities:Agency
      securities
                    
                    $
                    -
                    
                    
                    $
                    50,274
                    
                    
                    $
                    -
                    
                    
                    $
                    50,274Agency
      mortgage-backed securities
                    
                    
                    -
                    
                    
                    
                    249,948
                    
                    
                    
                    -
                    
                    
                    
                    249,948Non-Agency
      prime residential MBS
                    
                    
                    -
                    
                    
                    
                    4,839
                    
                    
                    
                    -
                    
                    
                    
                    4,839Non-Agency
      Alt-A residential MBS
                    
                    
                    -
                    
                    
                    
                    11,473
                    
                    
                    
                    -
                    
                    
                    
                    11,473Municipal
      securities
                    
                    
                    -
                    
                    
                    
                    133,807
                    
                    
                    
                    -
                    
                    
                    
                    133,807FDIC-backed
      securities
                    
                    
                    -
                    
                    
                    
                    25,317
                    
                    
                    
                    -
                    
                    
                    
                    25,317Single
      issue trust preferred securities
                    
                    
                    -
                    
                    
                    
                    43,203
                    
                    
                    
                    -
                    
                    
                    
                    43,203Pooled
      trust preferred securities
                    
                    
                    -
                    
                    
                    
                    3,574
                    
                    
                    
                    -
                    
                    
                    
                    3,574Equity
      securities
                    
                    
                    1,842
                    
                    
                    
                    20
                    
                    
                    
                    -
                    
                    
                    
                    1,862Total
      available-for-sale securities
                    
                    
                    1,842
                    
                    
                    
                    522,455
                    
                    
                    
                    -
                    
                    
                    
                    524,297Deferred
      compensation assets
                    
                    
                    2,924
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,924Deferred
      compensation liabilities
                    
                    
                    2,924
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,924Derivative
      liabilitiesInterest
      rate swap
                    
                    
                    -
                    
                    
                    
                    1,691
                    
                    
                    
                    -
                    
                    
                    
                    1,691Interest
      rate lock commitments
                    
                    
                    -
                    
                    
                    
                    49
                    
                    
                    
                    -
                    
                    
                    
                    49Total
      derivative liabilities
                    
                    
                    -
                    
                    
                    
                    1,740
                    
                    
                    
                    -
                    
                    
                    
                    1,740Total
                    
                    $
                    7,690
                    
                    
                    $
                    524,195
                    
                    
                    $
                    -
                    
                    
                    $
                    531,885




December 31, 2009Fair Value Measurements
    Using
                      
                      
                      TotalLevel 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      Fair Value(In
      Thousands)Available-for-sale
      securities:Agency
      securities
                      
                      $
                      -
                      
                      
                      $
                      25,276
                      
                      
                      $
                      -
                      
                      
                      $
                      25,276Agency
      mortgage-backed securities
                      
                      
                      -
                      
                      
                      
                      264,218
                      
                      
                      
                      -
                      
                      
                      
                      264,218Non-Agency
      prime residential MBS
                      
                      
                      -
                      
                      
                      
                      5,170
                      
                      
                      
                      -
                      
                      
                      
                      5,170Non-Agency
      Alt-A residential MBS
                      
                      
                      -
                      
                      
                      
                      11,301
                      
                      
                      
                      -
                      
                      
                      
                      11,301Municipal
      securities
                      
                      
                      -
                      
                      
                      
                      135,601
                      
                      
                      
                      -
                      
                      
                      
                      135,601Single
      issue trust preferred securities
                      
                      
                      -
                      
                      
                      
                      41,110
                      
                      
                      
                      -
                      
                      
                      
                      41,110Pooled
      trust preferred securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,648
                      
                      
                      
                      1,648Equity
      securities
                      
                      
                      1,713
                      
                      
                      
                      20
                      
                      
                      
                      -
                      
                      
                      
                      1,733Total
      available-for-sale securities
                      
                      
                      1,713
                      
                      
                      
                      482,696
                      
                      
                      
                      1,648
                      
                      
                      
                      486,057Deferred
      compensation assets
                      
                      
                      2,872
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,872Derivative
      assetsInterest
      rate lock commitments
                      
                      
                      -
                      
                      
                      
                      2
                      
                      
                      
                      -
                      
                      
                      
                      2Total
      derivative assets
                      
                      
                      -
                      
                      
                      
                      2
                      
                      
                      
                      -
                      
                      
                      
                      2Deferred
      compensation liabilities
                      
                      
                      2,872
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,872Derivative
      liabilitiesInterest
      rate swap
                      
                      
                      -
                      
                      
                      
                      2,117
                      
                      
                      
                      -
                      
                      
                      
                      2,117Interest
      rate lock commitments
                      
                      
                      -
                      
                      
                      
                      74
                      
                      
                      
                      -
                      
                      
                      
                      74Total
      derivative liabilities
                      
                      
                      -
                      
                      
                      
                      2,191
                      
                      
                      
                      -
                      
                      
                      
                      2,191Total
                      
                      $
                      7,457
                      
                      
                      $
                      484,889
                      
                      
                      $
                      1,648
                      
                      
                      $
                      493,994


- 22
-


The
following table presents additional information about financial assets and
liabilities measured at fair value for the three months ended March 31, 2010, on
a recurring basis and for which Level 3 inputs are utilized to determine fair
value:





FairValueMeasurements
                      UsingSignificant
                      UnobservableInputsAvailable-for-SaleSecuritiesPooledTrustPreferredSecurities(In
      Thousands)Balance,
      January 1, 2010
                    
                    $
                    1,648Transfers
      into Level 3
                    
                    
                    -Transfers
      out of Level 3
                    
                    
                    (3,574
                    )Total
      gains or lossesIncluded
      in earnings (or changes in net assets)
                    
                    
                    -Included
      in other comprehensive income
                    
                    
                    1,926Purchases,
      issuances, sales, and settlementsPurchases
                    
                    
                    -Issuances
                    
                    
                    -Sales
                    
                    
                    -Settlements
                    
                    
                    -Balance,
      March 31, 2010
                    
                    $
                    -




The
Company transferred $3.57 million out of Level 3 for the three month period
ended March 31, 2010. During this period, the Company changed the fair value of
pooled trust preferred securities from Level 3 to Level 2
pricing.  The Company has been successful in obtaining a quote from a
qualified market participant, and although the market for these securities is
increasing, it still remains inactive.





Certain
financial and non-financial assets are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value on an ongoing
basis but are subject to fair value adjustments in certain circumstances, for
example, when there is evidence of impairment.  Items subjected to
nonrecurring fair value adjustments at March 31, 2010, and December 31, 2009,
are as follows:





March31,2010FairValueMeasurementsUsing
                
                
                TotalLevel1
                
                
                Level2
                
                
                Level3
                
                
                FairValue(In
      Thousands)Impaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                10,207
                
                
                $
                10,207Other
      real estate owned
                
                
                -
                
                
                
                -
                
                
                
                4,740
                
                
                
                4,740





December 31, 2009Fair Value Measurements
    Using
                
                
                TotalLevel 1
                
                
                Level 2
                
                
                Level 3
                
                
                Fair Value(In
      Thousands)Impaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                11,702
                
                
                $
                11,702Other
      real estate owned
                
                
                -
                
                
                
                -
                
                
                
                4,578
                
                
                
                4,578




- 23
-


Fair
Value of Financial Instruments





Fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practical to estimate the value is based upon the
characteristics of the instruments and relevant market
information.  Financial instruments include cash, evidence of
ownership in an entity, or contracts that convey or impose on an entity that
contractual right or obligation to either receive or deliver cash for another
financial instrument.  Fair value is the amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation, and is best evidenced by a quoted
market price if one exists.





March 31, 2010
                
                
                December 31, 2009Carrying
                
                
                
                
                
                CarryingAmount
                
                
                Fair Value
                
                
                Amount
                
                
                Fair Value(In
      Thousands)AssetsCash
      and cash equivalents
                
                $
                87,706
                
                
                $
                87,706
                
                
                $
                101,341
                
                
                $
                101,341Investment
      securities
                
                
                531,452
                
                
                
                531,584
                
                
                
                493,511
                
                
                
                493,636Loans
      held for sale
                
                
                1,494
                
                
                
                1,495
                
                
                
                11,576
                
                
                
                11,580Loans
      held for investment (restated)
                
                
                1,366,366
                
                
                
                1,357,542
                
                
                
                1,369,654
                
                
                
                1,362,814Accrued
      interest receivable
                
                
                8,630
                
                
                
                8,630
                
                
                
                8,610
                
                
                
                8,610Bank
      owned life insurance
                
                
                41,213
                
                
                
                41,213
                
                
                
                40,972
                
                
                
                40,972Derivative
      financial assets
                
                
                -
                
                
                
                -
                
                
                
                2
                
                
                
                2Deferred
      compensation assets
                
                
                2,924
                
                
                
                2,924
                
                
                
                2,872
                
                
                
                2,872LiabilitiesDemand
      deposits
                
                $
                205,810
                
                
                $
                205,810
                
                
                
                208,244
                
                
                
                208,244Interest-bearing
      demand deposits
                
                
                246,513
                
                
                
                246,513
                
                
                
                231,907
                
                
                
                231,907Savings
      deposits
                
                
                427,883
                
                
                
                427,883
                
                
                
                381,381
                
                
                
                381,381Time
      deposits
                
                
                775,405
                
                
                
                784,244
                
                
                
                824,428
                
                
                
                834,546Securities
      sold under agreements to repurchase
                
                
                144,381
                
                
                
                153,152
                
                
                
                153,634
                
                
                
                156,653Accrued
      interest payable
                
                
                3,671
                
                
                
                3,671
                
                
                
                4,130
                
                
                
                4,130FHLB
      and other indebtedness
                
                
                195,873
                
                
                
                205,748
                
                
                
                198,924
                
                
                
                208,334Derivative
      financial liabilities
                
                
                1,740
                
                
                
                1,740
                
                
                
                2,191
                
                
                
                2,191Deferred
      compensation liabilities
                
                
                2,924
                
                
                
                2,924
                
                
                
                2,872
                
                
                
                2,872





The
following summary presents the methodologies and assumptions used to estimate
the fair value of the Company’s financial instruments presented
below.  The information used to determine fair value is highly
subjective and judgmental in nature and, therefore, the results may not be
precise.  Subjective factors include, among other things, estimates of
cash flows, risk characteristics, credit quality, and interest rates, all of
which are subject to change.  Since the fair value is estimated as of
the balance sheet date, the amounts that will actually be realized or paid upon
settlement or maturity on these various instruments could be significantly
different.





Cash and Cash Equivalents:
The book values of cash and due from banks and federal funds sold and purchased
are considered to be equal to fair value as a result of the short-term nature of
these items.





Investment Securities and Deferred
Compensation Assets and Liabilities: Fair values are determined in the
same manner as described above under ASC Topic 820.





Loans: The estimated fair
value of loans held for investment is measured based upon discounted future cash
flows using current rates for similar loans.  Loans held for sale are
recorded at lower of cost or estimated fair value.  The fair value of
loans held for sale is determined based upon the market sales price of similar
loans.





Accrued Interest Receivable and
Payable:The book value is considered to be equal to the fair value due
to the short-term nature of the instrument.





Bank-owned Life Insurance:The fair value is determined by stated contract values.


- 24
-


Derivative Financial
Instruments: The estimated fair value of derivative financial instruments
is based upon the current market price for similar instruments.





Deposits and Securities Sold Under
Agreements to Repurchase: Deposits without a stated maturity, including
demand, interest bearing demand, and savings accounts, are reported at their
carrying value.  No value has been assigned to the franchise value of
these deposits.  For other types of deposits and repurchase agreements
with fixed maturities and rates, fair value has been estimated by discounting
future cash flows based on interest rates currently being offered on instruments
with similar characteristics and maturities.





FHLB and Other Indebtedness:
Fair value has been estimated based on interest rates currently available to the
Company for borrowings with similar characteristics and
maturities.  The fair value for trust preferred obligations has been
estimated based on credit spreads seen in the marketplace for like
issues.





Commitments to Extend Credit,
Standby Letters of Credit, and Financial Guarantees: The amount of
off-balance sheet commitments to extend credit, standby letters of credit, and
financial guarantees is considered equal to fair value.  Because of
the uncertainty involved in attempting to assess the likelihood and timing of
commitments being drawn upon, coupled with the lack of an established market and
the wide diversity of fee structures, the Company does not believe it is
meaningful to provide an estimate of fair value that differs from the given
value of the commitment.





Note
14.  Derivatives and Hedging Activities





The
Company, through its mortgage banking and risk management operations, is party
to various derivative instruments that are used for asset and liability
management and customers’ financing needs.  Derivative assets and
liabilities are recorded at fair value on the balance sheet.





The
primary derivatives that the Company uses are interest rate swaps and interest
rate lock commitments (“IRLC’s”).  Generally, these instruments help
the Company manage exposure to market risk and meet customer financing
needs.  Market risk represents the possibility that economic value or
net interest income will be adversely affected by fluctuations in external
factors, such as interest rates, market-driven loan rates and prices or other
economic factors.





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





March31,2010
                
                
                December31,2009
                
                
                March31,2009(In
      Thousands)Interest
      rate swap
                
                $
                50,000
                
                
                $
                50,000
                
                
                $
                50,000IRLC's
                
                
                2,966
                
                
                
                4,636
                
                
                
                11,300





As of
March 31, 2010, December 31, 2009, and March 31, 2009, the fair values of the
Company’s derivatives were as follows:





AssetDerivativesMarch31,2010
                
                December31,2009
                
                March31,2009Balance Sheet
                
                Fair
                
                Balance Sheet
                
                Fair
                
                Balance Sheet
                
                FairLocation
                
                Value
                
                Location
                
                Value
                
                Location
                
                Value(In
      Thousands)Derivatives
      not designated as hedgesIRLC's
                Other
      assets
                
                $
                -
                
                Other
      assets
                
                $
                2
                
                Other
      assets
                
                $
                57Total
                
                
                $
                -
                
                
                
                $
                2
                
                
                
                $
                57




- 25
-





LiabilityDerivativesMarch31,2010
                
                December31,2009
                
                March31,2009Balance Sheet
                
                Fair
                
                Balance Sheet
                
                Fair
                
                Balance Sheet
                
                FairLocation
                
                Value
                
                Location
                
                Value
                
                Location
                
                Value(In
      Thousands)Derivatives
      designated as hedges Interest rate swap
                Other
      liabilities
                
                $
                1,691
                
                Other
      liabilities
                
                $
                2,117
                
                Other
      liabilities
                
                $
                3,081Total
                
                
                $
                1,691
                
                
                
                $
                2,117
                
                
                
                $
                3,081Derivatives
      not designated as hedges IRLC's
                Other
      liabilities
                
                $
                49
                
                Other
      liabilities
                
                $
                74
                
                Other
      liabilities
                
                $
                4Total
                
                
                $
                49
                
                
                
                $
                74
                
                
                
                $
                4Total
      derivatives
                
                
                $
                1,740
                
                
                
                $
                2,191
                
                
                
                $
                3,085





Interest Rate
Swaps.  The Company uses interest rate swap contracts to modify
its exposure to interest rate risk.  The Company currently employs a
cash flow hedging strategy to effectively convert certain floating-rate
liabilities into fixed-rate instruments.  The interest rate swap is
accounted for under the “short-cut” method as required by the Derivatives and
Hedging Topic 815 of the ASC.  Changes in fair value of the interest
rate swap are reported as a component of other comprehensive
income.  The Company does not currently employ fair value hedging
strategies.





Interest Rate Lock
Commitments.  In the normal course of business, the Company
sells originated mortgage loans into the secondary mortgage loan
market.  During the period of loan origination and prior to the sale
of the loans in the secondary market, the Company has exposure to movements in
interest rates associated with mortgage loans that are in the “mortgage
pipeline.”  A pipeline loan is one on which the potential borrower has
set the interest rate for the loan by entering into an IRLC.  Once a
mortgage loan is closed and funded, it is included within loans held for sale
and awaits sale and delivery into the secondary market.  During the
term of an IRLC, the Company has the risk that interest rates will change from
the rate quoted to the borrower.





The
Company’s balance of mortgage loans held for sale is subject to changes in fair
value, due to fluctuations in interest rates from the loan closing date through
the date of sale of the loan into the secondary market.  Typically,
the fair value of these loans decline when interest rates increase and rise when
interest rates decrease.





Effect
of Derivatives and Hedging Activities on the Income Statement





For the
quarters ended March 31, 2010 and 2009, the Company has determined there was no
amount of ineffectiveness on cash flow hedges.  The following table
details gains and losses recognized in income on non-designated hedging
instruments for the three-month periods ended March 31, 2010 and
2009.





(In Thousands)
                    
                    
                    
                    Amount of Gain/(Loss)Derivatives Not
                    
                    Location of Gain/(Loss)
                    
                    RecognizedinIncomeonDerivativeDesignated as Hedging
                    
                    Recognized in Income on
                    
                    ThreeMonthsEndedMarch31,Instruments
                    
                    Derivative
                    
                    2010
                    
                    
                    2009IRLC's
                    
                    Other
      income
                    
                    $
                    23
                    
                    
                    $
                    30Total
                    
                    
                    
                    $
                    23
                    
                    
                    $
                    30





Counterparty Credit
Risk.   Like other financial instruments, derivatives
contain an element of “credit risk.”  Credit risk is the possibility
that the Company will incur a loss because a counterparty, which may be a bank,
a broker-dealer or a customer, fails to meet its contractual
obligations.  This risk is measured as the expected positive
replacement value of contracts.  All derivative contracts may be
executed only with exchanges or counterparties approved by the Company’s
Asset/Liability Management Committee.  The Company reviews its
counterparty risk regularly and has determined that, as of March 31, 2010, there
is no significant counterparty credit risk.


- 26
-


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





Unless
the context suggests otherwise, the terms “First Community”, “Company”, “we”,
“our”, and “us” refer to First Community Bancshares, Inc. and its subsidiaries
as a consolidated entity.





The
following discussion and analysis is provided to address information about the
Company’s financial condition and results of operations.  This
discussion and analysis should be read in conjunction with the Company’s 2009
Form 10-K/A and the other financial information included in this report. The
following information has been adjusted to reflect the restatement of the our
financial results for the year ended December 31, 2009, and the three month
periods ended March 31, 2010 and 2009, which is more fully described in the
“Explanatory Note” immediately preceding Part I, Item 1 and in
Note 2. Restatement of Consolidated Financial Statements of the Notes to
Consolidated Financial Statements of this Quarterly Report on Form
10-Q/A.





The
Company is a multi-state financial holding company headquartered in Bluefield,
Virginia, with total assets of $2.28 billion at March 31,
2010.  Through its community bank subsidiary, First Community Bank, N.
A. (the “Bank”), the Company provides financial, trust and investment advisory
services to individuals and commercial customers through more than sixty
locations in Virginia, West Virginia, North Carolina, South Carolina, and
Tennessee.  The Company is also the parent of GreenPoint Insurance
Group, Inc. (“GreenPoint”), a North Carolina-based full-service insurance agency
offering commercial and personal lines.  The Bank is the parent of
Investment Planning Consultants, Inc. (“IPC”), a registered investment advisory
firm that offers wealth management and investment advice.  The
Company’s common stock is traded on the NASDAQ Global Select Market under the
symbol, “FCBC”.




Restatement
 
 As a
result of a routine internal audit, the Company determined there was a
computational error in the model that it uses to calculate the quantitative
basis for its allowance for loan losses.  In connection with its
determination of the appropriate loan loss reserve at December 31, 2008, the
Company made certain modifications to its loan loss reserve model with respect
to a $130.76 million pool of loans.  However, in calculating the loan
loss reserves for this pool of loans, the historical quarterly net charge-off
rates were not annualized as was the case with all other quarterly loss rates in
the model.  The Company has corrected the computational error in its
model for calculating the allowance for loan losses.  The financial
information for the quarter ended March 31, 2010 provided in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations has
been restated to reflect the correction of the computational
error.  For additional information, see the Explanatory Note
immediately preceding Part I, Item 1 and Note 2. - Restatement of
Consolidated Financial Statements of the Notes to Consolidated Financial
Statements of this Quarterly Report on
Form 10-Q/A.




FORWARD-LOOKING
STATEMENTS





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





These
forward-looking statements include, among others, statements with respect to the
Company’s beliefs, plans, objectives, goals, guidelines, expectations,
anticipations, estimates and intentions that are subject to significant risks
and uncertainties and are subject to change based on various factors (many of
which are beyond the Company’s control). The words “may,” “could,” “should,”
“would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and
similar expressions are intended to identify forward-looking
statements.  We caution that the forward-looking statements are based
largely on our expectations and are subject to a number of known and unknown
risks and uncertainties that are subject to change based on factors which are,
in many instances, beyond our control.  Actual results, performance or
achievements could differ materially from those contemplated, expressed, or
implied by the forward-looking statements.  The following factors,
among others, could cause our financial performance to differ materially from
that expressed in such forward-looking statements:





•
            The
      strength of the United States economy in general and the strength of the
      local economies in which we conduct
operations;


•
            Geopolitical
      conditions, including acts or threats of terrorism, actions taken by the
      United States or other governments in response to acts or threats of
      terrorism and/or military conflicts, which could impact business and
      economic conditions in the United States and
  abroad;


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


•
            Inflation,
      interest rate, market and monetary
fluctuations;


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


•
            The
      willingness of users to substitute competitors’ products and services for
      our products and services;


•
            The
      impact of changes in financial services policies, laws and regulations,
      including laws, regulations and policies concerning taxes, banking,
      securities and insurance, and the application thereof by regulatory
      bodies;


•
            Technological
      changes;


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


•
            The
      growth and profitability of noninterest or fee income being less than
      expected;


•
            Changes
      in the level of our non-performing assets and
  charge-offs;


•
            The
      effect of changes in accounting policies and practices, as may be adopted
      from time-to-time by bank regulatory agencies, the SEC, the Public Company
      Accounting Oversight Board, the 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


- 27
-


•
            Unanticipated
      regulatory or judicial proceedings.





If one or
more of the factors affecting our forward-looking information and statements
proves incorrect, then our actual results, performance or achievements could
differ materially from those expressed in, or implied by, forward-looking
information and statements contained in this Quarterly Report on Form 10-Q/A and
other reports filed by us with the SEC.  Therefore, we caution you not
to place undue reliance on our forward-looking information and
statements.





The
Company cautions that the foregoing list of important factors is not exclusive.
The Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.  These factors and other risks and uncertainties are
discussed in Item 1A., “Risk Factors,” in Part II of this Quarterly Report on
Form 10-Q/A and the Company’s 2009 Form 10-K/A.





APPLICATION
OF CRITICAL ACCOUNTING POLICIES





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





Estimates,
assumptions, and judgments are necessary principally when assets and liabilities
are required to be recorded at estimated fair value, when a decline in the value
of an asset carried on the financial statements at fair value warrants an
impairment write-down or valuation reserve to be established, or when an asset
or liability needs to be recorded based upon the probability of occurrence of a
future event.  Carrying assets and liabilities at fair value
inherently results in more financial statement volatility.  The fair
values and the information used to record valuation adjustments for certain
assets and liabilities are based either on quoted market prices or are provided
by third party sources, when available. When third party information is not
available, valuation adjustments are estimated by management primarily through
the use of internal modeling techniques and appraisal estimates.





The
Company’s accounting policies are fundamental to understanding Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.  The disclosures presented in the Notes to the Consolidated
Financial Statements and in Management’s Discussion and Analysis provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.  Based on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions, and estimates underlying those amounts, management
has identified the accounting for and valuation of investment securities, the
determination of the allowance for loan losses, accounting for acquisitions and
intangible assets, and accounting for income taxes as the four accounting areas
that require the most subjective or complex judgments.  The identified
critical accounting policies are described in detail in the Company’s
2009 Form 10-K/A.





COMPANY OVERVIEW





The
Company is a financial holding company which operates within the five-state
region of Virginia, West Virginia, North Carolina, South Carolina, and
Tennessee.  The Company operates through the Bank, IPC, and GreenPoint
to offer a wide range of financial services.  The Company reported
total assets of $2.28 billion at March 31, 2010.





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





The
Company also conducts asset management activities through the Bank’s Trust and
Financial Services Division (“Trust Division”) and its registered investment
advisory firm, IPC.  The Bank’s Trust Division and IPC manage assets
with an aggregate market value of $831 million as of March 31,
2010.  These assets are not assets of the Company, but are managed
under various fee-based arrangements as fiduciary or agent.


- 28
-


RECENT
MARKET DEVELOPMENTS





The
global and U.S. economies have experienced significantly reduced business
activity as a result of recessionary economic conditions and disruptions in the
financial system.  Dramatic declines in home prices and increasing
foreclosures and unemployment have resulted in significant write-downs of asset
values by financial institutions, including government-sponsored entities and
major commercial and investment banks.  These write-downs, initially
of mortgage-backed securities but spreading to credit default swaps, other
derivative securities, and to loan portfolios, have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail.  In recent months, positive
economic developments have been reported; however, further adverse effects could
have an adverse impact on the Company and its business.





MERGERS,
ACQUISITIONS AND BRANCHING ACTIVITY





In July
2009, the Company acquired TriStone Community Bank (“TriStone”), based in
Winston-Salem, North Carolina.  TriStone had two full service
locations in Winston-Salem.  At acquisition, TriStone had total assets
of $166.82 million, total loans of $132.23 million and total deposits of $142.27
million. Each outstanding common share of TriStone was exchanged for .5262
shares of the Company’s common stock and the overall acquisition cost was
approximately $10.78 million. The acquisition of TriStone significantly
augmented the Company’s market presence and human resources in the
Winston-Salem, North Carolina market.





RESULTS
OF OPERATIONS





Overview





The
Company experienced the following developments in the first quarter of
2010:





·
            For
      the first quarter of 2010, net income increased $657 thousand from the
      comparable period in 2009.


·
            Net
      interest margin, on a tax-equivalent basis, increased 29 basis points to
      4.02% for the three months ended March 31, 2010, as compared to the three
      month period ended March 31, 2009.


·
            Net
      interest income increased $2.19 million, or 13.30%, from the first quarter
      of 2009.


·
            Tangible
      book value per common share increased to $9.58, up $0.51 from the quarter
      ended December 31, 2009.


·
            The
      allowance for loan losses as a percentage of total loans increased to
      1.76% in the first quarter of 2010, as compared to 1.44% in the first
      quarter of 2009.


·
            Average
      shareholders’ equity increased $38.89 million, or 17.80%, from first
      quarter 2009, primarily due to the sale of 5.29 million shares of common
      stock in June 2009, which generated net proceeds of approximately $61.67
      million.





Net
income for the three months ended March 31, 2010, was $5.28 million, or $0.30
per diluted common share, compared with net income of $4.62 million, or $0.40
per diluted common share, for the three months ended March 31, 2009, an increase
of $657 thousand.  Net income available to common stockholders for the
three month period ended March 31, 2009 was impacted by the required payment of
dividends on preferred stock totaling $571 thousand. On July 8, 2009, the
Company repurchased and retired the $41.5 million of Series A perpetual
preferred stock from the Treasury.





Net
Interest Income — Quarterly Comparison (See Table I)





Net
interest income, the largest contributor to earnings, was $18.62 million for the
three months ended March 31, 2010, compared with $16.43 million for the
corresponding period in 2009, an increase of $2.19 million, or
13.30%.  Tax-equivalent net interest income totaled $19.43 million for
the three months ended March 31, 2010, an increase of $2.08 million, or 12.01%,
from $17.35 million for the first quarter of 2009.  The increase in
tax-equivalent net interest income was due primarily to increases in total
earning assets, largely from the TriStone acquisition, and decreases in deposit
and borrowing costs.





Compared
with the first quarter of 2009, average earning assets increased $72.93 million
while interest-bearing liabilities increased $49.00 million.  The
changes include the impact of the July 2009 TriStone acquisition.  The
yield on average earning assets decreased 30 basis points to 5.67% from 5.97%
between the three months ended March 31, 2010 and 2009,
respectively.  Total cost of interest-bearing liabilities decreased 62
basis points between the first quarters of 2009 and 2010, which resulted in a
net interest rate spread that was 32 basis points higher, at 3.85%, for the
first quarter of 2010 compared with 3.53% for the same period last
year.  The Company’s tax-equivalent net interest margin of 4.02% for
the three months ended March 31, 2010 increased 29 basis points from 3.73% for
the same period of 2009.


- 29
-


The yield
on loans decreased 6 basis points to 6.22% from 6.28% for the three months ended
March 31, 2010 and 2009, respectively.  The effect of the extended low
interest rate environment in the United States was offset by the addition of
TriStone, which resulted in a net increase of $1.40 million, or 7.00%, in
tax-equivalent loan interest income for the first quarter of 2010 compared with
the first quarter of 2009.





During
the three months ended March 31, 2010, the tax-equivalent yield on
available-for-sale securities decreased 106 basis points to 4.92%, while the
average balance decreased by $32.18 million, or 6.27%, compared with the same
period in 2009.  The decline in average balance was due largely to
declines in the fair value of available-for-sale securities.  The
average balance of the held-to-maturity securities portfolio continued to
decline as securities matured or were called and were not replaced.





Average
interest-bearing balances with banks were $76.59 million during the first
quarter of 2010, and the yield was 0.24%.  Interest-bearing balances
with banks are comprised largely of excess liquidity bearing overnight market
rates.  The Company maintained a strong liquidity position in the
first quarter.





Compared
with the same period in 2009, the average balances of interest-bearing demand
deposits increased $46.27 million, or 24.32%, while the average rate paid during
the first quarter of 2010 increased by 17 basis points.  During the
three months ended March 31, 2010, the average balances of savings deposits
increased $100.47 million, or 32.15%, while the average rate paid decreased
three basis points compared to the same period in 2009.  Average time
deposits decreased $66.18 million, or 7.71%, while the average rate paid on time
deposits decreased 94 basis points from 3.23% in the first quarter of 2009 to
2.29% in the first quarter of 2010.  The level of average
noninterest-bearing demand deposits decreased $246 thousand, or 0.12%, to
$199.07 million during the quarter ended March 31, 2010, compared with the
corresponding period of the prior year.  The overall increase in the
level of average deposits reflects the addition of TriStone.





Retail
repurchase agreements, which consist of collateralized retail deposits and
commercial treasury accounts, decreased $14.49 million, or 13.61%, to $91.98
million for the first quarter of 2010, while the rate decreased 27 basis points
to 1.22% during the same period.  The decrease in average balance can
be largely attributed to the customers converting retail repurchase agreements
to certificates of deposit and businesses using cash during more difficult
economic times.  There were no federal funds purchased on average
during the first quarters of 2010 and 2009. Wholesale repurchase agreements
remained unchanged at $50.00 million, while the rate decreased 38 basis points
between the two periods due to structure within those borrowings.  The
average balance of FHLB borrowings and other long-term debt decreased by $17.07
million, or 7.91%, in the first quarter of 2010 to $198.74 million, while the
rate paid on those borrowings decreased 11 basis points.


- 30
-


Table
I





AVERAGE
BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS





Three
      Months Ended
                        
                        
                        Three
      Months EndedMarch
      31, 2010
                        
                        
                        March
      31, 2009Average
                        
                        
                        
                        
                        
                        Yield/
                        
                        
                        Average
                        
                        
                        
                        
                        
                        Yield/(Dollars
      in Thousands)
                        
                        Balance
                        
                        
                        Interest
      (1)
                        
                        
                        Rate
      (1)
                        
                        
                        Balance
                        
                        
                        Interest
      (1)
                        
                        
                        Rate
      (1)(Restated)
                        
                        
                        
                        
                        
                        
                        
                        
                        (Restated)ASSETSEarning
      assetsLoans
      (2)
                        
                        $
                        1,395,669
                        
                        
                        $
                        21,398
                        
                        
                        
                        6.22
                        %
                        
                        $
                        1,292,179
                        
                        
                        $
                        19,997
                        
                        
                        
                        6.28
                        %Securities
      available-for- sale
                        
                        
                        481,116
                        
                        
                        
                        5,833
                        
                        
                        
                        4.92
                        %
                        
                        
                        513,300
                        
                        
                        
                        7,571
                        
                        
                        
                        5.98
                        %Securities
      held-to-maturity
                        
                        
                        7,139
                        
                        
                        
                        148
                        
                        
                        
                        8.41
                        %
                        
                        
                        8,473
                        
                        
                        
                        172
                        
                        
                        
                        8.23
                        %Interest
      bearing deposits
                        
                        
                        76,587
                        
                        
                        
                        46
                        
                        
                        
                        0.24
                        %
                        
                        
                        73,628
                        
                        
                        
                        39
                        
                        
                        
                        0.21
                        %Total
      earning assets
                        
                        
                        1,960,511
                        
                        
                        
                        27,425
                        
                        
                        
                        5.67
                        %
                        
                        
                        1,887,580
                        
                        
                        
                        27,779
                        
                        
                        
                        5.97
                        %Other
      assets
                        
                        
                        283,275
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        289,055TOTAL
      ASSETS
                        
                        $
                        2,243,786
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,176,635LIABILITIESInterest-bearing  depositsDemand
      deposits
                        
                        $
                        236,484
                        
                        
                        $
                        200
                        
                        
                        
                        0.34
                        %
                        
                        $
                        190,215
                        
                        
                        $
                        79
                        
                        
                        
                        0.17
                        %Savings
      deposits
                        
                        
                        413,037
                        
                        
                        
                        831
                        
                        
                        
                        0.82
                        %
                        
                        
                        312,563
                        
                        
                        
                        656
                        
                        
                        
                        0.85
                        %Time
      deposits
                        
                        
                        791,838
                        
                        
                        
                        4,471
                        
                        
                        
                        2.29
                        %
                        
                        
                        858,020
                        
                        
                        
                        6,832
                        
                        
                        
                        3.23
                        %Total
      interest bearing deposits
                        
                        
                        1,441,359
                        
                        
                        
                        5,502
                        
                        
                        
                        1.55
                        %
                        
                        
                        1,360,798
                        
                        
                        
                        7,567
                        
                        
                        
                        2.26
                        %BorrowingsRetail
      repurchase agreements
                        
                        
                        91,976
                        
                        
                        
                        276
                        
                        
                        
                        1.22
                        %
                        
                        
                        106,469
                        
                        
                        
                        390
                        
                        
                        
                        1.49
                        %Wholesale
      repurchase agreements
                        
                        
                        50,000
                        
                        
                        
                        463
                        
                        
                        
                        3.76
                        %
                        
                        
                        50,000
                        
                        
                        
                        510
                        
                        
                        
                        4.14
                        %FHLB
      borrowings and other indebtedness
                        
                        
                        198,744
                        
                        
                        
                        1,752
                        
                        
                        
                        3.58
                        %
                        
                        
                        215,813
                        
                        
                        
                        1,963
                        
                        
                        
                        3.69
                        %Total
      borrowings
                        
                        
                        340,720
                        
                        
                        
                        2,491
                        
                        
                        
                        2.97
                        %
                        
                        
                        372,282
                        
                        
                        
                        2,863
                        
                        
                        
                        3.12
                        %Total
      interest bearing liabilities
                        
                        
                        1,782,079
                        
                        
                        
                        7,993
                        
                        
                        
                        1.82
                        %
                        
                        
                        1,733,080
                        
                        
                        
                        10,430
                        
                        
                        
                        2.44
                        %Noninterest
      bearing demand deposits
                        
                        
                        199,065
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        199,311Other
      liabilities
                        
                        
                        5,223
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        25,718Stockholders'
      equity
                        
                        
                        257,419
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        218,526TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        2,243,786
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,176,635Net
      interest income, tax equivalent
                        
                        
                        
                        
                        
                        $
                        19,432
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        17,349Net
      interest rate spread (3)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.85
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.53
                        %Net
      interest margin (4)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        4.02
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.73
                        %





(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.




- 31
-


The
following table summarizes the changes in tax-equivalent interest earned and
paid detailing the amounts attributable to (i) changes in volume (change in the
average volume times the prior year’s average rate), (ii) changes in rate
(changes in the average rate times the prior year’s average volume), and (iii)
changes in rate/volume (change in the average column times the change in average
rate)


Three Months EndedMarch 31, 2010 Compared to 2009$Increase/(Decrease)duetoRate/(In
      Thousands)
                    
                    Volume
                    
                    
                    Rate
                    
                    
                    Volume
                    
                    
                    TotalInterest
      Earned On:Loans
      (1)
                    
                    $
                    1,602
                    
                    
                    $
                    (186
                    )
                    
                    $
                    (15
                    )
                    
                    $
                    1,401Securities
      available-for-sale (1)
                    
                    
                    (475
                    )
                    
                    
                    (1,348
                    )
                    
                    
                    85
                    
                    
                    
                    (1,738
                    )Securities
      held-to-maturity (1)
                    
                    
                    (27
                    )
                    
                    
                    4
                    
                    
                    
                    (1
                    )
                    
                    
                    (24
                    )Interest
      bearing deposits with other banks
                    
                    
                    2
                    
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    7Total
      interest earning  assets
                    
                    
                    1,102
                    
                    
                    
                    (1,525
                    )
                    
                    
                    69
                    
                    
                    
                    (354
                    )Interest
      Paid On:Demand
      deposits
                    
                    
                    19
                    
                    
                    
                    82
                    
                    
                    
                    20
                    
                    
                    
                    121Savings
      deposits
                    
                    
                    211
                    
                    
                    
                    (27
                    )
                    
                    
                    (9
                    )
                    
                    
                    175Time
      deposits
                    
                    
                    (527
                    )
                    
                    
                    (1,987
                    )
                    
                    
                    153
                    
                    
                    
                    (2,361
                    )Retail
      repurchase agreements
                    
                    
                    (53
                    )
                    
                    
                    (71
                    )
                    
                    
                    10
                    
                    
                    
                    (114
                    )Wholesale
      repurchase agreement
                    
                    
                    -
                    
                    
                    
                    (47
                    )
                    
                    
                    0
                    
                    
                    
                    (47
                    )FHLB
      borrowings and other long-term debt
                    
                    
                    (155
                    )
                    
                    
                    (61
                    )
                    
                    
                    5
                    
                    
                    
                    (211
                    )Total
      interest bearing liabilities
                    
                    
                    (505
                    )
                    
                    
                    (2,111
                    )
                    
                    
                    179
                    
                    
                    
                    (2,437
                    )Change
      in net interest income, tax-equivalent
                    
                    $
                    1,607
                    
                    
                    $
                    586
                    
                    
                    $
                    (110
                    )
                    
                    $
                    2,083





(1)
            Fully
      taxable equivalent using a rate of
35%.





Provision
and Allowance for Loan Losses





During
the last three years, there has been significant turmoil in the commercial and
residential real estate markets, resulting in significant declines in valuations
in the real estate markets.  Decreases in real estate values adversely
affect the value of property used as collateral for loans, including loans
originated by the Company.  In addition, adverse changes in the
economy, particularly continued high rates of unemployment may have a negative
effect on the ability of the Company’s borrowers to make timely loan payments,
which would have an adverse impact on the Company’s earnings.  A
further increase in loan delinquencies could adversely impact loan loss
experience, causing potential increases in the provision and allowance for loan
losses.





The
Company’s allowance for loan losses was $24.51 million at March 31, 2010, $24.28
million at December 31, 2009 and $18.42 million at March 31,
2009.  The Company’s allowance for loan loss activity for the
three-month periods ended March 31, 2010 and 2009 is as
follows:


- 32
-





For
      the Three Months EndedMarch 31,(In
      Thousands)
                      
                      2010
                      
                      
                      2009(Restated)
                      
                      
                      (Restated)Allowance
      for loan lossesBeginning
      balance
                      
                      $
                      24,277
                      
                      
                      $
                      17,782Provision
      for loan losses
                      
                      
                      3,665
                      
                      
                      
                      2,148Charge-offs
                      
                      
                      (3,732
                      )
                      
                      
                      (1,730
                      )Recoveries
                      
                      
                      298
                      
                      
                      
                      220Net
      charge-offs
                      
                      
                      (3,434
                      )
                      
                      
                      (1,510
                      )Ending
      balance
                      
                      $
                      24,508
                      
                      
                      $
                      18,420





The
total allowance for loan losses to loans held for investment ratio was 1.76% at
March 31, 2010, compared with 1.74% at December 31, 2009, and 1.44% at March 31,
2009.    Management considers the allowance to be adequate
based upon its analysis of the portfolio as of March 31,
2010.  Management believes that it uses relevant information available
to make determinations about the allowance.  If circumstances differ
substantially from the assumptions used in making determinations, adjustments to
the allowance may be necessary and results of operations could be
affected.  Because events affecting borrowers and collateral
charge-offs cannot be predicted with certainty, there can be no assurance that
increases to the allowance will not be necessary should the quality of any loans
deteriorate.





During
the first quarter of 2010, the Company incurred net charge-offs of $3.43 million
compared with $1.51 million in the respective period of
2009.  Annualized net charge-offs for the first quarter were 1.00% of
average loan balances.  The Company made provisions for loan losses of
$3.67 million for the first quarter compared to $2.15 million in the respective
period of 2009.  Provisions for loan losses covered 106.73% of net
charge-offs for the three month period ended March 31, 2010.  The
increase in loan loss provision is primarily attributable to rising loss factors
as net charge-offs were higher than in 2009, reflective of increases in
unemployment and the general impact of recessionary conditions and stress in the
residential real estate market.  Qualitative risk factors were also
higher, reflective of the higher risk of inherent loan losses due to rising
unemployment, recessionary pressures, and devaluation of various categories of
collateral, including residential and commercial real estate.





Total
delinquent loans as of March 31, 2010, measured 2.35% of total loans and were
comprised of loans 30-89 days delinquent of 1.09% of total loans and loans in
non-accrual status of 1.26% of total loans.  Total delinquency has
remained relatively steady since December 31, 2009.  Non-performing
loans, comprised entirely of non-accrual loans as the Company does not have any
loans that are 90 days past due and still accruing, as a percentage of total
loans remained in a fairly tight range as they have measured 1.26%, 1.26%, and
0.88% of total loans as of March 31, 2010, December 31, 2009 and September 30,
2009, respectively.





The
primary composition of non-performing loans is 32.20% residential real estate;
22.66% construction, land development, and vacant land; and 20.43% owner
occupied commercial real estate.  Approximately $4.87 million, or
27.85%, of non-performing loans is attributed to the TriStone loan portfolio
that was acquired during the third quarter of 2009.





Noninterest
Income





Noninterest
income consists of all revenues that are not included in interest and fee income
related to earning assets.  Total noninterest income for the first
quarter of 2010 was $8.58 million compared with noninterest income of $8.42
million in the same period of 2009, an increase of $161
thousand.  Exclusive of the impact of other-than-temporary impairment
(“OTTI”) charges and gains on the sale of securities, noninterest income for the
quarter ended March 31, 2010, increased $113 thousand, or 1.38%, compared to the
same period in 2009.  Wealth management revenues decreased $99
thousand, or 10.06%, to $885 thousand for the three months ended March 31, 2010,
compared with the same period in 2009.  Service charges on deposit
accounts decreased $165 thousand, or 5.23%, to $2.99 million for the three
months ended March 31, 2010, compared with the same period in
2009.  Management attributes the decrease to be due to lower overall
consumer spending, leading to lower levels of certain activity
charges.  Other service charges and fees increased $103 thousand, or
8.74%, to $1.28 million for the three months ended March 31, 2010, compared with
the same period in 2009.  Insurance commissions for the first quarter
of 2010 were $2.20 million, a decrease of $116 thousand, or 5.01%, from
2009.  Other operating income was $969 thousand for the three months
ended March 31, 2010, an increase of $390 thousand, or 67.36%, compared with the
same period in 2009.  The increase is primarily attributed to the
higher volumes of loans sold in the secondary mortgage market and a small
litigation settlement.   At March 31, 2010, the Company
recognized no other-than-temporary impairments on securities compared to $209
thousand in 2009.  During the first quarter of 2010, securities gains
of $250 thousand were realized compared with a gain of $411 thousand in the
comparable period in 2009.


- 33
-


Noninterest
Expense





Noninterest
expense totaled $16.07 million for the quarter ended March 31, 2010, an increase
of $885 thousand, or 5.83%, from the same period in 2009.  Salaries
and employee benefits for the first quarter of 2010 increased $103 thousand, or
1.31%, compared to the same period in 2009.  TriStone branches
accounted for an increase in salaries and employee benefits of $326
thousand.  The remainder of the Company showed an overall decrease in
salaries and benefits of $223 thousand.  Occupancy and furniture and
equipment expenses increased $106 thousand between the comparable
periods.  Other operating expense totaled $4.53 million for the first
quarter of 2010, an increase of $187 thousand, or 4.30%, from $4.35 million for
the first quarter of 2009.





During
2009, the FDIC announced increases in deposit insurance premiums, levied special
assessments, and shifted to a three-year prepaid collection versus payment in
arrears. Deposit insurance premiums and assessments were $701 thousand for the
three-month period ended March 31, 2010. The Company expects the remainder of
the quarterly premium accruals for 2010 to approximate $2.25
million.





Income
Tax Expense





Income
tax expense is comprised of federal and state current and deferred income taxes
on pre-tax earnings of the Company.  Income taxes as a percentage of
pre-tax income may vary significantly from statutory rates due to items of
income and expense which are excluded, by law, from the calculation of taxable
income.  These items are commonly referred to as permanent
differences.  The most significant permanent differences for the
Company include income on state and municipal securities which are exempt from
federal income tax, certain dividend payments which are deductible by the
Company, and the increases in the cash surrender values of life insurance
policies.





For
the first quarter of 2010, income taxes were $2.18 million compared with $2.32
million for the first quarter of 2009.  For the quarters ended March
31, 2010 and 2009, the effective tax expense rates were 29.25% and 30.91%,
respectively.





FINANCIAL
CONDITION





Total
assets at March 31, 2010, increased slightly by $5.66 million, or 0.25%, to
$2.28 billion from December 31, 2009.  Deposits grew by $9.65 million
which was offset by a $9.25 million drop in repurchase agreements. An $8.90
million increase in equity led by retained earnings and OCI on securities
valuation led to the increase in total assets for the quarter.





Securities





Available-for-sale
securities were $524.30 million at March 31, 2010, compared with $486.06 million
at December 31, 2009, an increase of $38.24 million, or 7.87%.  The
market value of securities available-for-sale as a percentage of amortized cost
improved from 96.34% at December 31, 2009, to 98.01% at March 31, 2010,
reflecting improved pricing on certain issues.  Held-to-maturity
securities declined to $7.16 million at March 31, 2010, compared with $7.45
million at December 31, 2009.





For a
more detailed discussion of activities regarding investment securities, please
see Note 4 to the Consolidated Financial Statements.





Loan
Portfolio





Loans
Held for Sale





The $1.49
million balance of loans held for sale at March 31, 2010, represents mortgage
loans that are sold to investors on a best efforts
basis.  Accordingly, the Company does not retain the interest rate
risk involved in the commitment.  The gross notional amount of
outstanding commitments to originate mortgage loans for customers at March 31,
2010, was $2.97 million on 25 loans.


- 34
-


Loans Held for
Investment





Total
loans held for investment were $1.39 billion at March 31, 2010, representing a
decrease of $3.06 million from December 31, 2009 and an increase of $114.08
million from March 31, 2009.  The increase over the comparable quarter
of 2009 is due primarily to the acquisition of TriStone in the third quarter of
2009.  The average loan to deposit ratio was 85.08% for the first
quarter of 2010, compared with 85.13% for the fourth quarter of 2009 and 82.83%
for the first quarter of 2009.  Year-to-date average loans of $1.40
billion increased $103.49 million when compared to 2009 average loans of $1.29
billion.





The held
for investment loan portfolio continues to be diversified among loan types and
industry segments.   The following table presents the various
loan categories and changes in composition as of March 31, 2010, December 31,
2009, and March 31, 2009.





March 31, 2010
                  
                  
                  December 31, 2009
                  
                  
                  March 31, 2009(Dollars
      in Thousands)
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentLoans
      Held for InvestmentCommercial,
      financial and agricultural
                  
                  $
                  102,022
                  
                  
                  
                  7.34
                  %
                  
                  $
                  96,366
                  
                  
                  
                  6.91
                  %
                  
                  $
                  81,880
                  
                  
                  
                  6.41
                  %Real
      estate — commercial
                  
                  
                  461,542
                  
                  
                  
                  33.18
                  %
                  
                  
                  450,611
                  
                  
                  
                  32.33
                  %
                  
                  
                  405,549
                  
                  
                  
                  31.76
                  %Real
      estate — residential
                  
                  
                  647,921
                  
                  
                  
                  46.59
                  %
                  
                  
                  657,367
                  
                  
                  
                  47.16
                  %
                  
                  
                  597,372
                  
                  
                  
                  46.79
                  %Real
      estate — construction (1)
                  
                  
                  113,139
                  
                  
                  
                  8.13
                  %
                  
                  
                  124,896
                  
                  
                  
                  8.96
                  %
                  
                  
                  124,320
                  
                  
                  
                  9.74
                  %Consumer
                  
                  
                  60,632
                  
                  
                  
                  4.36
                  %
                  
                  
                  60,090
                  
                  
                  
                  4.31
                  %
                  
                  
                  62,353
                  
                  
                  
                  4.88
                  %Other
                  
                  
                  5,618
                  
                  
                  
                  0.40
                  %
                  
                  
                  4,601
                  
                  
                  
                  0.33
                  %
                  
                  
                  5,316
                  
                  
                  
                  0.42
                  %Total
                  
                  $
                  1,390,874
                  
                  
                  
                  100.00
                  %
                  
                  $
                  1,393,931
                  
                  
                  
                  100.00
                  %
                  
                  $
                  1,276,790
                  
                  
                  
                  100.00
                  %Loans
      Held for Sale
                  
                  $
                  1,494
                  
                  
                  
                  
                  
                  
                  $
                  11,576
                  
                  
                  
                  
                  
                  
                  $
                  1,445





(1)
            Real
      estate construction includes land and land development
    loans.





Non-Performing
Assets





Non-performing
assets include loans on non-accrual status, loans contractually past due 90 days
or more and still accruing interest, and other real estate owned
(“OREO”).  Non-performing assets were $22.22 million at March 31,
2010, $22.11 million at December 31, 2009, and $13.74 million at March 31,
2009.  The percentage of non-performing assets to total loans and OREO
was 1.59% at March 31, 2010, 1.58% at December 31, 2009, and 1.09% at March 31,
2009.


- 35
-




The
following schedule details non-performing assets by category at the close of
each of the quarters ended March 31, 2010 and 2009, and December 31,
2009.


March31,2010
                    
                    
                    December31,2009
                    
                    
                    March31,2009(Dollars
      in Thousands)Non-accrual
      loans
                    
                    $
                    17,477
                    
                    
                    $
                    17,527
                    
                    
                    $
                    10,628Loans
      90 days or more past due and still accruing interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      non-performing loans
                    
                    
                    17,477
                    
                    
                    
                    17,527
                    
                    
                    
                    10,628Other
      real estate owned
                    
                    
                    4,740
                    
                    
                    
                    4,578
                    
                    
                    
                    3,114Total
      non-performing assets
                    
                    $
                    22,217
                    
                    
                    $
                    22,105
                    
                    
                    $
                    13,742Non-performing
      loans as a percentage of total loans
                    
                    
                    1.26
                    %
                    
                    
                    1.26
                    %
                    
                    
                    0.84
                    %Non-performing
      assets as a percentage of total loans and other real estate
      owned
                    
                    
                    1.59
                    %
                    
                    
                    1.58
                    %
                    
                    
                    1.09
                    %Allowance
      for loan losses as a percentage of non-performing loans
      (restated)
                    
                    
                    140.2
                    %
                    
                    
                    138.5
                    %
                    
                    
                    173.3
                    %Restructured
      loans performing in accordance with modified terms
                    
                    $
                    3,091
                    
                    
                    $
                    3,565
                    
                    
                    $
                    614





Ongoing
activity within the classification and categories of non-performing loans
includes collections on delinquencies, foreclosures and movements into or out of
the non-performing classification as a result of changing customer business
conditions. There were no loans 90 days past due and still accruing at March 31,
2010, December 31, 2009, and March 31, 2009. OREO was $4.74 million at March 31,
2010, an increase of $162 thousand from December 31, 2009, and is carried at the
lesser of estimated net realizable value or cost.  OREO increased from
December 31, 2009, as non-performing loans were converted to foreclosed real
estate. At March 31, 2010, OREO consisted of 53 properties with an average value
of $146 thousand and an average age of 7 months.  During the three
months ended March 31, 2010, net losses on the sale of OREO totaled $268
thousand.





Deposits
and Other Borrowings





Total
deposits increased by $9.65 million, or 0.59%, during the first three months of
2010.  Noninterest-bearing demand deposits decreased $2.43 million to
$205.81 million at March 31, 2010, compared with $208.24 million at December 31,
2009.  Interest-bearing demand deposits increased $14.61 million to
$246.51 million at March 31, 2010 from December 31, 2009.  Savings
increased $46.50 million, or 12.19%, and time deposits decreased $49.02 million,
or 5.95%, during the first three months of 2010.





Securities
sold under repurchase agreements decreased $9.25 million, or 6.02%, in the first
three months of 2010 to $144.38 million.  There were no federal funds
purchased outstanding at March 31, 2010, as the Company maintained strong
liquidity and overnight funds sold throughout the first quarter of
2010.





Stockholders’
Equity





Total
stockholders’ equity increased $8.90 million, or 3.53%, from $252.27 million at
December 31, 2009, to $261.16 million at March 31, 2010. Changes in equity were
the result of net income of $5.28 million, common dividends paid of $1.78
million, and other comprehensive income of $10.44 million.





Risk-Based
Capital





Risk-based
capital guidelines promulgated by federal banking agencies weight balance sheet
assets and off-balance sheet commitments based on inherent risks associated with
the respective asset types.  At March 31, 2010, the Company’s total
capital to risk-weighted assets ratio was 13.94% compared with 13.81% at
December 31, 2009.  The Company’s Tier 1 capital to risk-weighted
assets ratio was 12.68% at March 31, 2010, compared with 12.56% at December 31,
2009.  The Company’s Tier 1 capital to average assets (leverage) ratio
at March 31, 2010, was 8.92% compared with 8.51% at December 31,
2009.  All of the Company’s regulatory capital ratios exceed the
current “well-capitalized” levels.


- 36
-


PART
I. ITEM 3.  Quantitative and Qualitative Disclosures about Market
Risk





Liquidity
and Capital Resources





At March
31, 2010, the Company maintained liquidity in the form of cash and cash
equivalent balances of $87.71 million, unpledged securities available-for-sale
of $188.86 million, and total FHLB credit availability of approximately $220.27
million.  Cash and cash equivalents as well as advances from the FHLB
are immediately available for satisfaction of deposit withdrawals, customer
credit needs and operations of the Company.  Investment securities
available-for-sale represent a secondary level of liquidity available for
conversion to liquid funds in the event of extraordinary needs.  The
Company also maintains approved lines of credit with correspondent banks as
backup liquidity sources.





The
Company is a holding company, which is a separate legal entity from the Bank,
and at March 31, 2010, maintained cash balances of $8.93 million.  As
a result of investment securities impairments recognized in 2008 and 2009, the
Bank is currently restricted from paying dividends to the Parent
Company.  The Company believes the cash reserves and investments it
holds provide adequate working capital to meet its obligations for the next 12
months and through the projected period of dividend
restrictions.





The
Company maintains a liquidity policy as a means to manage liquidity and the
associated risk.  The policy includes a Liquidity Contingency Plan
(the “Liquidity Plan”) that is designed as a tool for the Company to detect
liquidity issues promptly in order to protect depositors, creditors and
shareholders. The Liquidity Plan includes monitoring various internal and
external indicators such as changes in core deposits and changes in market
conditions. It provides for timely responses to a wide variety of funding
scenarios ranging from changes in loan demand to a decline in the Company’s
quarterly earnings to a decline in the market price of the Company’s
stock.  The Liquidity Plan calls for specific responses designed to
meet a wide range of liquidity needs based upon assessments on a recurring basis
by the Company and its Board of Directors.





Interest
Rate Risk and Asset/Liability Management





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





The
Company’s primary component of operational revenue, net interest income, is
subject to variation as a result of changes in interest rate environments in
conjunction with unbalanced repricing opportunities on earning assets and
interest-bearing liabilities. Interest rate risk has four primary components:
repricing risk, basis risk, yield curve risk and option
risk.  Repricing risk occurs when earning assets and paying
liabilities reprice at differing times as interest rates
change.  Basis risk occurs when the underlying rates on the assets and
liabilities the institution holds change at different levels or in varying
degrees.  Yield curve risk is the risk of adverse consequences as a
result of unequal changes in the spread between two or more rates for different
maturities for the same instrument.  Lastly, option risk is due to
embedded options, often put or call options, given or sold to holders of
financial instruments.





In order
to mitigate the effect of changes in the general level of interest rates, the
Company manages repricing opportunities and thus, its interest rate
sensitivity.  The Company seeks to control its interest rate risk
exposure to insulate net interest income and net earnings from fluctuations in
the general level of interest rates.  To measure its exposure to
interest rate risk, quarterly simulations of net interest income are performed
using financial models that project net interest income through a range of
possible interest rate environments including rising, declining, most likely and
flat rate scenarios.  The simulation model used by the Company
captures all earning assets, interest-bearing liabilities and off-balance sheet
financial instruments and combines the various factors affecting rate
sensitivity into an earnings outlook.  The results of these
simulations indicate the existence and severity of interest rate risk in each of
those rate environments based upon the current balance sheet position,
assumptions as to changes in the volume and mix of interest-earning assets and
interest-paying liabilities and the Company’s estimate of yields to be attained
in those future rate environments and rates that will be paid on various deposit
instruments and borrowings.  These assumptions are inherently
uncertain and, as a result, the model cannot precisely predict the impact of
fluctuations in interest rates on net interest income.  Actual results
will differ from simulated results due to timing, magnitude, and frequency of
interest rate changes, as well as changes in market conditions and the Company’s
strategies.  However, the earnings simulation model is currently the
best tool available to the Company for managing interest rate
risk.


- 37
-


Specific
strategies for management of interest rate risk have included shortening the
amortized maturity of new fixed-rate loans, increasing the volume of
adjustable-rate loans to reduce the average maturity of the Company’s
interest-earning assets, and monitoring the term and structure of liabilities to
maintain a balanced mix of maturity and repricing structures to mitigate
potential exposure.  At March 31, 2010, net interest income modeling
shows the Company to be in a slightly liability sensitive position.





The
Company has established policy limits for tolerance of interest rate risk that
allow for no more than a 10% reduction in projected net interest income for the
next twelve months based on a comparison of net interest income simulations in
various interest rate scenarios.  In addition, the policy addresses
exposure limits to changes in the economic value of equity according to
predefined policy guidelines.  The most recent simulation indicates
that current exposure to interest rate risk is within the Company’s defined
policy limits.





The
following table summarizes the projected impact on the next twelve months’ net
interest income and the economic value of equity as of March 31, 2010, and
December 31, 2009, of immediate and sustained rate shocks in the interest rate
environments of plus and minus 100 and 200 basis points from the base
simulation, assuming no remedial measures are affected.  As of March
31, 2010, the Federal Open Market Committee maintains a target range for federal
funds of 0 to 25 basis points, rendering a complete downward shock of 200 basis
points unrealistic and not meaningful.  In the downward rate shocks
presented, benchmark interest rates are dropped with floors near
0%.





The
economic value of equity is a measure which reflects the impact of changing
rates on the underlying values of the Company’s assets and liabilities in
various rate scenarios.  The scenarios illustrate the potential
estimated impact of instantaneous rate shocks on the underlying value of
equity.  The economic value of equity is based on the present value of
all the future cash flows under the different rate scenarios.





Rate Sensitivity Analysis








March31,2010(Dollars in Thousands)
                
                Change in
                
                
                
                
                
                Change inIncrease (Decrease) in
                
                Net Interest
                
                
                %
                
                
                Economic Value
                
                
                %InterestRates(BasisPoints)
                
                Income
                
                
                Change
                
                
                ofEquity
                
                
                Change200
                
                $
                (632
                )
                
                
                (0.9
                )
                
                $
                (9,561
                )
                
                
                (3.4
                )100
                
                
                (468
                )
                
                
                (0.6
                )
                
                
                (2,351
                )
                
                
                (0.8
                )(100)
                
                
                1,951
                
                
                
                2.6
                
                
                
                (16,067
                )
                
                
                (5.7
                )





December 31, 2009(Dollars
      in Thousands)
                  
                  Change
      in
                  
                  
                  
                  
                  
                  Change
      inIncrease
      (Decrease) in
                  
                  Net Interest
                  
                  
                  %
                  
                  
                  Economic
      Value
                  
                  
                  %Interest Rates (Basis
    Points)
                  
                  Income
                  
                  
                  Change
                  
                  
                  of Equity
                  
                  
                  Change200
                  
                  $
                  (1,405
                  )
                  
                  
                  (1.9
                  )
                  
                  $
                  (18,634
                  )
                  
                  
                  (6.9
                  )100
                  
                  
                  (866
                  )
                  
                  
                  (1.2
                  )
                  
                  
                  (7,715
                  )
                  
                  
                  (2.9
                  )(100)
                  
                  
                  2,117
                  
                  
                  
                  2.9
                  
                  
                  
                  16,087
                  
                  
                  
                  5.9





PART
I. ITEM 4.  Controls and Procedures





Disclosure
Controls and Procedures





As of
the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”) along with
the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the
Company’s disclosure controls and procedures pursuant to the Securities Exchange
Act of 1934 (“Exchange Act”) Rule 13a-15(b). As a
result of the restatement described in Note 2. Restatement of Consolidated
Financial Statements of the Notes to Consolidated Financial Statements of this
Quarterly Report on Form 10-Q/A, management concluded that, as
of March 31, 2010, the Company did not maintain effective controls to
ensure the appropriate calculation of its allowance for loan
losses.  Specifically, during a process enhancement to the model that
calculates the allowance for loan losses, the quarterly average loss rate was
not annualized.  Control procedures in place for reviewing the
quantitative model for calculating the allowance for loan losses did not timely
identify this error.  Solely because of this material weakness,
management has concluded that the Company’s disclosure controls and procedures
were not effective as of March 31, 2010.  As of July 27,
2010, Company has corrected the computational error in its model for
calculating the allowance for loan losses.


- 38
-


The
Company’s management, including the CEO and CFO, does not expect that the
Company’s disclosure controls and internal controls will prevent all errors and
all fraud.  A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected.  These inherent limitations
include the realities that judgments in decision making can be faulty, and that
breakdowns can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls.





Changes
in Internal Control Over Financial Reporting





The
Company assesses the adequacy of its internal control over financial reporting
quarterly and enhances its controls in response to internal control assessments
and internal and external audit and regulatory recommendations. Except for the
foregoing, there were no changes in the Company’s internal control over
financial reporting during the quarter ended March 31, 2010, that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.


PART
II.  OTHER INFORMATION





ITEM
1.  Legal Proceedings





The
Company is currently a defendant in various legal actions and asserted claims in
the normal course of business.  Although the Company and legal counsel
are unable to assess the ultimate outcome of each of these matters with
certainty, they are of the belief that the resolution of these actions should
not have a material adverse affect on the financial position, results of
operations, or cash flows of the Company.





ITEM
1A.  Risk Factors





There
were no material changes to the risk factors as presented in the Company’s
Annual Report on Form 10-K/A for the year ended December 31,
2009.





ITEM
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





(a)
            Not
      Applicable





(b)
            Not
      Applicable





(c)
            Issuer
      Purchases of Equity Securities





The
following table provides information with respect to purchases made by or on
behalf of the Company or any “affiliated purchaser” (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934) of the Company’s Common
Stock during the first quarter of 2010.





Total Number
                    
                    
                    MaximumTotal
                    
                    
                    
                    
                    
                    of Shares
                    
                    
                    Number ofNumber of
                    
                    
                    Average
                    
                    
                    Purchased as
                    
                    
                    Shares That MayShares
                    
                    
                    Price Paid
                    
                    
                    Part of a Publicly
                    
                    
                    Yet be PurchasedPurchased
                    
                    
                    perShare
                    
                    
                    AnnouncedPlan
                    
                    
                    UnderthePlan(1)January
      1-31, 2010
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    
                    782,342February
      1-28, 2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    782,342March
      1-31, 2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    799,969Total
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -





(1) The
Company’s stock repurchase plan, as amended, allows the purchase and retention
of up to 1,100,000 shares.  The plan has no expiration date, remains
open and no plans have expired during the reporting period covered by this
table.  No determination has been made to terminate the plan or to
cease making purchases.  The Company held 300,031 shares in treasury
at March 31, 2010.





ITEM
3.  Defaults Upon Senior Securities





Not
Applicable


- 39
-


ITEM
4.  Reserved





ITEM
5.  Other Information





Not
Applicable





ITEM
6.   Exhibits





(a)
            Exhibits


- 40
-





ExhibitNo.
                        
                        Exhibit3(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
                        
                        Reserved.4.6
                        
                        Warrant
      to purchase shares of Common Stock of First Community Bancshares, Inc.
      (22)4.7
                        
                        Form
      of Indenture for Senior Debt Securities (27)4.8
                        
                        Form
      of Indenture for Subordinated Debt Securities (28)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)10.7**
                        
                        First
      Community Bancshares, Inc. Wrap Plan. (7)10.8
                        
                        Reserved.10.9**
                        
                        Form
      of Indemnification Agreement between First Community Bancshares, Inc., its
      Directors and Certain Executive Officers. (9)10.10**
                        
                        Form
      of Indemnification Agreement between First Community Bank, N. A, its
      Directors and Certain Executive Officers. (9)10.11
                        
                        Reserved.10.12**
                        
                        First
      Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and 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)


- 41
-





10.26**
                      
                      Employment
      Agreement dated July 31, 2009, between First Community Bank, N. A. and
      Mark R. Evans. (25)11
                      
                      Statement
      regarding computation of earnings per share. (16)31.1*
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.31.2*
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.32*
                      
                      Certification
      of Chief Executive Officer and Chief Financial Officer Section
      1350.





*
            Furnished
      herewith.


**
            Indicates
      a management contract or compensation
plan.





(1)
            Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      June 30, 2005, filed on August 5, 2005, and as amended on Form 8-K filed
      on April 27, 2010.


(2)
            Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      June 30, 2002, filed on August 14,
2002.


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


(4)
            Incorporated
      by reference from the Annual Report on Form 10-K for the period ended
      December 31, 1999, filed on March 30, 2000, as amended April 13,
      2000.


(5)
            The
      option agreements entered into pursuant to the 1999 Stock Option Plan and
      the 2001 Non-Qualified Directors Stock Option Plan are incorporated by
      reference from the Quarterly Report on Form 10-Q for the period ended June
      30, 2002, filed on August 14, 2002.


(6)
            Incorporated
      by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and
      filed December 16, 2008.  The Registrant has entered into
      substantially identical agreements with Robert L. Buzzo and E. Stephen
      Lilly, with the only differences being with respect to title and
      salary.


(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 by reference from the Annual Report on Form
      10-K for the period ended December 31, 2003, filed on March 15, 2004, and
      amended on May 19, 2004.


(10)
            Incorporated
      by reference from the 2004 First Community Bancshares, Inc. Definitive
      Proxy filed on March 15, 2004.


(11)
            Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      September 30, 2003, filed on November 10,
2003.


(12)
            Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      March 31, 2004, filed on May 7,
2004.


(13)
            Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      June 30, 2004, filed on August 6,
2004.


(14)
            Incorporated
      by reference from the Annual Report on Form 10-K for the period ended
      December 31, 2004, and filed on March 16, 2005.  Amendments in
      substantially similar form were executed for Directors Clark, Kantor,
      Hamner, Modena, Perkinson, Stafford, and Stafford
  II.


(15)
            Incorporated
      by reference from the Current Report on Form 8-K dated October 24, 2006,
      and filed October 25, 2006.


(16)
            Incorporated
      by reference from Note 1 of the Notes to Consolidated Financial Statements
      included herein.


(17)
            Incorporated
      by reference from Exhibit 3.1 of the Current Report on Form 8-K dated
      February 14, 2008, filed on February 20,
2008.


(18)
            Reserved


(19)
            Incorporated
      by reference from Exhibit 2.1 of the Form S-3 registration statement, File
      No. 333-142558, 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.


- 42
-


(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.


(27)
            Incorporated
      by reference from Exhibit 4.4 of the Form S-3 registration statement, File
      No. 333-165965, filed April 8,
2010.


(28)
            Incorporated
      by reference from Exhibit 4.5 of the Form S-3 registration statement, File
      No. 333-165965, filed April 8,
2010.


- 43
-


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





First
      Community Bancshares, Inc.DATE:  August
      16, 2010/s/ John M. MendezJohn
      M. MendezPresident
      & Chief Executive Officer(Principal
      Executive Officer)/s/ David D. BrownDavid
      D. BrownChief
      Financial Officer(Principal
      Accounting Officer)




- 44
-


EXHIBIT
INDEX





Exhibit No.
                  
                  Exhibit31.1
                  
                  Certification
      as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by
      Chief Executive Officer.31.2
                  
                  Certification
      as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by
      Chief Financial Officer.32
                  
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief
      Financial
Officer.




- 45
-