UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWASHINGTON,
      D.C. 20549FORM
      10-QQUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934For
      the quarter ended June
      30, 2010Commission
      file number 000-19297FIRST
      COMMUNITY BANCSHARES, INC.(Exact
      name of registrant as specified in its charter)Nevada
                    
                    55-0694814(State
      or other jurisdiction of
                      incorporation)
                    
                    (IRS
      Employer Identification No.)P.O.
      Box 989
                      Bluefield,
      Virginia
                    
                    24605-0989(Address
      of principal executive offices)
                    
                    (Zip
      Code)(276)
      326-9000(Registrant’s telephone number, including area code)Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.þ
                    Yes
                     ̈   NoIndicate
      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
                     ̈   NoIndicate
      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   NoIndicate
      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; 17,807,155 shares outstanding as of July
      30,
2010








FIRST
COMMUNITY BANCSHARES, INC.


FORM
10-Q


For the
quarter ended June 30, 2010





INDEX





PART
      I.
                                                                FINANCIAL
      INFORMATIONItem
      1.
                                                                Financial
      StatementsConsolidated
      Balance Sheets as of June 30, 2010 (Unaudited) and December 31,
      2009
                                                                3Consolidated
      Statements of Income for the Three- and Six-Month Periods Ended June 30,
      2010 and 2009 (Unaudited)
                                                                4Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
      (Unaudited)
                                                                5Consolidated
      Statements of Changes in Stockholders’ Equity for the Six Months Ended
      June 30, 2010 and 2009 (Unaudited)
                                                                6Notes
      to Consolidated Financial Statements
                                                                7Item
      2.
                                                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                26Item
      3.
                                                                Quantitative
      and Qualitative Disclosures about Market Risk
                                                                38Item
      4.
                                                                Controls
      and Procedures
                                                                41PART
      II.
                                                                OTHER
      INFORMATIONItem
      1.
                                                                Legal
      Proceedings
                                                                41Item 1A.
                                                                Risk
      Factors
                                                                41Item
      2.
                                                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                                42Item
      3.
                                                                Defaults
      Upon Senior Securities
                                                                42Item
      4.
                                                                Reserved
                                                                42Item
      5.
                                                                Other
      Information
                                                                42Item
      6.
                                                                Exhibits
                                                                43SIGNATURES
                                                                46EXHIBIT
      INDEX
                                                                47


-2-





PART
I. ITEM 1.   Financial Statements





FIRST
COMMUNITY BANCSHARES, INC.


CONSOLIDATED
BALANCE SHEETS





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(Dollars
      in Thousands, Except Per Share Data)
                  
                  (Unaudited)AssetsCash
      and due from banks
                  
                  $
                  35,174
                  
                  
                  $
                  36,265Federal
      funds sold
                  
                  
                  15,748
                  
                  
                  
                  61,376Interest-bearing
      balances with banks
                  
                  
                  25,609
                  
                  
                  
                  3,700Total
      cash and cash equivalents
                  
                  
                  76,531
                  
                  
                  
                  101,341Securities
      available-for-sale
                  
                  
                  502,866
                  
                  
                  
                  486,057Securities
      held-to-maturity
                  
                  
                  6,468
                  
                  
                  
                  7,454Loans
      held for sale
                  
                  
                  2,141
                  
                  
                  
                  11,576Loans
      held for investment, net of unearned income
                  
                  
                  1,399,885
                  
                  
                  
                  1,393,931Less
      allowance for loan losses
                  
                  
                  25,011
                  
                  
                  
                  24,277Net
      loans held for investment
                  
                  
                  1,374,874
                  
                  
                  
                  1,369,654Premises
      and equipment, net
                  
                  
                  56,407
                  
                  
                  
                  56,946Other
      real estate owned
                  
                  
                  7,108
                  
                  
                  
                  4,578Interest
      receivable
                  
                  
                  7,859
                  
                  
                  
                  8,610Goodwill
      and other intangible assets
                  
                  
                  90,757
                  
                  
                  
                  91,061Other
      assets
                  
                  
                  121,835
                  
                  
                  
                  136,006Total
      Assets
                  
                  $
                  2,246,846
                  
                  
                  $
                  2,273,283LiabilitiesDeposits:Noninterest-bearing
                  
                  $
                  205,731
                  
                  
                  $
                  208,244Interest-bearing
                  
                  
                  1,407,688
                  
                  
                  
                  1,437,716Total
      Deposits
                  
                  
                  1,613,419
                  
                  
                  
                  1,645,960Interest,
      taxes and other liabilities
                  
                  
                  21,865
                  
                  
                  
                  22,498Securities
      sold under agreements to repurchase
                  
                  
                  147,772
                  
                  
                  
                  153,634FHLB
      borrowings and other indebtedness
                  
                  
                  195,865
                  
                  
                  
                  198,924Total
      Liabilities
                  
                  
                  1,978,921
                  
                  
                  
                  2,021,016Stockholders'
      EquityCommon
      stock, $1 par value; 50,000,000 shares authorized; 18,082,822
      sharesissued
      at June 30, 2010, and 18,082,822 issued December 31, 2009,and
      275,667 and 317,658 shares in treasury, respectively
                  
                  
                  18,083
                  
                  
                  
                  18,083Additional
      paid-in capital
                  
                  
                  190,259
                  
                  
                  
                  190,967Retained
      earnings
                  
                  
                  73,613
                  
                  
                  
                  66,760Treasury
      stock, at cost
                  
                  
                  (8,583
                  )
                  
                  
                  (9,891
                  )Accumulated
      other comprehensive loss
                  
                  
                  (5,447
                  )
                  
                  
                  (13,652
                  )Total
      Stockholders' Equity
                  
                  
                  267,925
                  
                  
                  
                  252,267Total
      Liabilities and Stockholders' Equity
                  
                  $
                  2,246,846
                  
                  
                  $
                  2,273,283





See
Notes to Consolidated Financial Statements.


-3-





FIRST
      COMMUNITY BANCSHARES, INC.CONSOLIDATED
      STATEMENTS OF INCOME (Unaudited)





Three
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June
      30,(Dollars
      In Thousands, Except Per Share Data)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Interest
      IncomeInterest
      and fees on loans held for investment
                    
                    $
                    20,997
                    
                    
                    $
                    19,571
                    
                    
                    $
                    42,351
                    
                    
                    $
                    39,555Interest
      on securities — taxable
                    
                    
                    3,730
                    
                    
                    
                    5,177
                    
                    
                    
                    7,516
                    
                    
                    
                    10,341Interest
      on securities — nontaxable
                    
                    
                    1,394
                    
                    
                    
                    1,402
                    
                    
                    
                    2,820
                    
                    
                    
                    3,078Interest
      on federal funds sold and deposits in banks
                    
                    
                    34
                    
                    
                    
                    39
                    
                    
                    
                    80
                    
                    
                    
                    78Total
      interest income
                    
                    
                    26,155
                    
                    
                    
                    26,189
                    
                    
                    
                    52,767
                    
                    
                    
                    53,052Interest
      ExpenseInterest
      on deposits
                    
                    
                    5,106
                    
                    
                    
                    7,076
                    
                    
                    
                    10,608
                    
                    
                    
                    14,643Interest
      on borrowings
                    
                    
                    2,507
                    
                    
                    
                    2,792
                    
                    
                    
                    4,998
                    
                    
                    
                    5,655Total
      interest expense
                    
                    
                    7,613
                    
                    
                    
                    9,868
                    
                    
                    
                    15,606
                    
                    
                    
                    20,298Net
      interest income
                    
                    
                    18,542
                    
                    
                    
                    16,321
                    
                    
                    
                    37,161
                    
                    
                    
                    32,754Provision
      for loan losses
                    
                    
                    3,596
                    
                    
                    
                    2,552
                    
                    
                    
                    7,261
                    
                    
                    
                    4,700Net
      interest income after provision for loan losses
                    
                    
                    14,946
                    
                    
                    
                    13,769
                    
                    
                    
                    29,900
                    
                    
                    
                    28,054Noninterest
      IncomeWealth
      management income
                    
                    
                    1,012
                    
                    
                    
                    1,133
                    
                    
                    
                    1,897
                    
                    
                    
                    2,117Service
      charges on deposit accounts
                    
                    
                    3,347
                    
                    
                    
                    3,491
                    
                    
                    
                    6,339
                    
                    
                    
                    6,648Other
      service charges and fees
                    
                    
                    1,250
                    
                    
                    
                    1,133
                    
                    
                    
                    2,531
                    
                    
                    
                    2,311Insurance
      commissions
                    
                    
                    1,389
                    
                    
                    
                    1,639
                    
                    
                    
                    3,590
                    
                    
                    
                    3,956Total
      impairment losses on securities
                    
                    
                    (185
                    )
                    
                    
                    (25,169
                    )
                    
                    
                    (185
                    )
                    
                    
                    (25,378
                    )Portion
      of loss recognized in other comprehensive income
                    
                    
                    -
                    
                    
                    
                    21,393
                    
                    
                    
                    -
                    
                    
                    
                    21,393Net
      impairment losses recognized in earnings
                    
                    
                    (185
                    )
                    
                    
                    (3,776
                    )
                    
                    
                    (185
                    )
                    
                    
                    (3,985
                    )Net
      gains on sale of securities
                    
                    
                    1,201
                    
                    
                    
                    1,653
                    
                    
                    
                    1,451
                    
                    
                    
                    2,064Other
      operating income
                    
                    
                    890
                    
                    
                    
                    247
                    
                    
                    
                    1,859
                    
                    
                    
                    826Total
      noninterest income
                    
                    
                    8,904
                    
                    
                    
                    5,520
                    
                    
                    
                    17,482
                    
                    
                    
                    13,937Noninterest
      ExpenseSalaries
      and employee benefits
                    
                    
                    8,487
                    
                    
                    
                    7,405
                    
                    
                    
                    16,456
                    
                    
                    
                    15,271Occupancy
      expense of bank premises
                    
                    
                    1,570
                    
                    
                    
                    1,333
                    
                    
                    
                    3,279
                    
                    
                    
                    2,936Furniture
      and equipment expense
                    
                    
                    918
                    
                    
                    
                    892
                    
                    
                    
                    1,822
                    
                    
                    
                    1,830Amortization
      of intangible assets
                    
                    
                    253
                    
                    
                    
                    244
                    
                    
                    
                    509
                    
                    
                    
                    489Prepayment
      penalties on FHLB advances
                    
                    
                    -
                    
                    
                    
                    88
                    
                    
                    
                    -
                    
                    
                    
                    88FDIC
      premiums and assessments
                    
                    
                    710
                    
                    
                    
                    1,287
                    
                    
                    
                    1,411
                    
                    
                    
                    1,475Merger
      related expenses
                    
                    
                    -
                    
                    
                    
                    74
                    
                    
                    
                    -
                    
                    
                    
                    75Other
      operating expense
                    
                    
                    4,660
                    
                    
                    
                    4,718
                    
                    
                    
                    9,193
                    
                    
                    
                    9,064Total
      noninterest expense
                    
                    
                    16,598
                    
                    
                    
                    16,041
                    
                    
                    
                    32,670
                    
                    
                    
                    31,228Income
      before income taxes
                    
                    
                    7,252
                    
                    
                    
                    3,248
                    
                    
                    
                    14,712
                    
                    
                    
                    10,763Income
      tax expense
                    
                    
                    2,121
                    
                    
                    
                    843
                    
                    
                    
                    4,303
                    
                    
                    
                    3,166Net
      income
                    
                    
                    5,131
                    
                    
                    
                    2,405
                    
                    
                    
                    10,409
                    
                    
                    
                    7,597Dividends
      on preferred stock
                    
                    
                    -
                    
                    
                    
                    578
                    
                    
                    
                    -
                    
                    
                    
                    1,149Net
      income available to common shareholders
                    
                    $
                    5,131
                    
                    
                    $
                    1,827
                    
                    
                    $
                    10,409
                    
                    
                    $
                    6,448Basic
      earnings per common share
                    
                    $
                    0.29
                    
                    
                    $
                    0.14
                    
                    
                    $
                    0.59
                    
                    
                    $
                    0.53Diluted
      earnings per common share
                    
                    $
                    0.29
                    
                    
                    $
                    0.14
                    
                    
                    $
                    0.59
                    
                    
                    $
                    0.53Dividends
      declared per common share
                    
                    $
                    0.10
                    
                    
                    $
                    0.20
                    
                    
                    $
                    0.20
                    
                    
                    $
                    0.20Weighted
      average basic shares outstanding
                    
                    
                    17,787,325
                    
                    
                    
                    12,696,202
                    
                    
                    
                    17,776,500
                    
                    
                    
                    12,135,103Weighted
      average diluted shares outstanding
                    
                    
                    17,805,393
                    
                    
                    
                    12,741,080
                    
                    
                    
                    17,792,535
                    
                    
                    
                    12,181,843





See
Notes to Consolidated Financial Statements.




-4-





FIRST
      COMMUNITY BANCSHARES, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS
(Unaudited)





Six Months EndedJune 30,(In
      Thousands)
                    
                    2010
                    
                    
                    2009Operating
      activities:Net
      income
                    
                    $
                    10,409
                    
                    
                    $
                    7,597Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
                    
                    
                    7,261
                    
                    
                    
                    4,700Depreciation
      and amortization of premises and equipment
                    
                    
                    2,036
                    
                    
                    
                    2,189Intangible
      amortization
                    
                    
                    509
                    
                    
                    
                    489Net
      investment amortization and accretion
                    
                    
                    7
                    
                    
                    
                    768Net
      gain on the sale of assets
                    
                    
                    (1,369
                    )
                    
                    
                    (2,154
                    )Mortgage
      loans originated for sale
                    
                    
                    (17,365
                    )
                    
                    
                    (18,422
                    )Proceeds
      from sales of mortgage loans
                    
                    
                    27,157
                    
                    
                    
                    18,685Gain
      on sales of loans
                    
                    
                    (357
                    )
                    
                    
                    (41
                    )Equity-based
      compensation expense
                    
                    
                    36
                    
                    
                    
                    72Deferred
      income tax benefit
                    
                    
                    (147
                    )
                    
                    
                    (611
                    )Decrease
      in interest receivable
                    
                    
                    751
                    
                    
                    
                    1,148Net
      impairment losses recognized in earnings
                    
                    
                    185
                    
                    
                    
                    3,985Other
      operating activities, net
                    
                    
                    10,116
                    
                    
                    
                    (97
                    )Net
      cash provided by operating activities
                    
                    
                    39,229
                    
                    
                    
                    18,308Investing
      activities:Proceeds
      from sales of securities available-for-sale
                    
                    
                    71,708
                    
                    
                    
                    89,827Proceeds
      from maturities and calls of securities available-for-sale
                    
                    
                    38,488
                    
                    
                    
                    28,051Proceeds
      from maturities and calls of securities held-to-maturity
                    
                    
                    998
                    
                    
                    
                    946Purchase
      of securities available-for-sale
                    
                    
                    (113,690
                    )
                    
                    
                    (125,496
                    )Net
      (increase) decrease in loans held for investment
                    
                    
                    (15,098
                    )
                    
                    
                    22,375Proceeds
      from the redemption of FHLB stock
                    
                    
                    -
                    
                    
                    
                    351Proceeds
      from sales of equipment
                    
                    
                    86
                    
                    
                    
                    188Purchase
      of premises and equipment
                    
                    
                    (1,552
                    )
                    
                    
                    (2,393
                    )Net
      cash (used in) provided by investing activities
                    
                    
                    (19,060
                    )
                    
                    
                    13,849Financing
      activities:Net
      increase in demand and savings deposits
                    
                    
                    33,908
                    
                    
                    
                    15,477Net
      (decrease) increase in time deposits
                    
                    
                    (66,449
                    )
                    
                    
                    28,123Net
      decrease in securities sold under agreement to repurchase
                    
                    
                    (5,862
                    )
                    
                    
                    (12,110
                    )Net
      decrease in FHLB and other borrowings
                    
                    
                    (3,059
                    )
                    
                    
                    (25,014
                    )FHLB
      debt prepayment fees
                    
                    
                    -
                    
                    
                    
                    (88
                    )Net
      proceeds from the issuance of common stock
                    
                    
                    -
                    
                    
                    
                    61,668Proceeds
      from the exercise of stock options
                    
                    
                    30
                    
                    
                    
                    -Excess
      tax benefit from stock-based compensation
                    
                    
                    9
                    
                    
                    
                    -Preferred
      dividends paid
                    
                    
                    -
                    
                    
                    
                    (1,043
                    )Common
      dividends paid
                    
                    
                    (3,556
                    )
                    
                    
                    (1,160
                    )Net
      cash (used in) provided by financing activities
                    
                    
                    (44,979
                    )
                    
                    
                    65,853(Decrease)
      increase in cash and cash equivalents
                    
                    
                    (24,810
                    )
                    
                    
                    98,010Cash
      and cash equivalents at beginning of period
                    
                    
                    101,341
                    
                    
                    
                    46,439Cash
      and cash equivalents at end of period
                    
                    $
                    76,531
                    
                    
                    $
                    144,449Supplemental
      information — Noncash itemsTransfer
      of loans to other real estate
                    
                    $
                    5,075
                    
                    
                    $
                    2,485Cumulative
      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.


-5-





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
                                      
                                      $
                                      40,419
                                      
                                      
                                      $
                                      12,051
                                      
                                      
                                      $
                                      128,526
                                      
                                      
                                      $
                                      106,104
                                      
                                      
                                      $
                                      (15,368
                                      )
                                      
                                      $
                                      (52,517
                                      )
                                      
                                      $
                                      219,215Cumulative
      effect of change inaccounting
      principle
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,131
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (6,131
                                      )
                                      
                                      
                                      -Comprehensive
      income:Net
      income
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      7,597
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      7,597Other
      comprehensive loss — See Note 10
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (2,903
                                      )
                                      
                                      
                                      (2,903
                                      )Comprehensive
      income (loss)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      13,728
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (9,034
                                      )
                                      
                                      
                                      4,694Preferred
      dividend, net
                                      
                                      
                                      106
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (37
                                      )
                                      
                                      
                                      (1,149
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,080
                                      )Common
      dividends declared
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (2,851
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (2,851
                                      )Issuance
      of vested shares
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (22
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      22
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Equity-based
      compensation expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      72
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      72Common
      stock issuance —5,290,000
      shares issued
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,290
                                      
                                      
                                      
                                      56,378
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      61,668Retirement
      plan contribution —51,443
      shares issued
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (962
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,634
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      672Balance
      June 30, 2009
                                      
                                      $
                                      40,525
                                      
                                      
                                      $
                                      17,341
                                      
                                      
                                      $
                                      183,955
                                      
                                      
                                      $
                                      115,832
                                      
                                      
                                      $
                                      (13,712
                                      )
                                      
                                      $
                                      (61,551
                                      )
                                      
                                      $
                                      282,390Balance
      January 1, 2010
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      18,083
                                      
                                      
                                      $
                                      190,967
                                      
                                      
                                      $
                                      66,760
                                      
                                      
                                      $
                                      (9,891
                                      )
                                      
                                      $
                                      (13,652
                                      )
                                      
                                      $
                                      252,267Comprehensive
      income:Net
      income
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      10,409
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      10,409Other
      comprehensive income — See Note 10
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      8,205
                                      
                                      
                                      
                                      8,205Comprehensive
      income
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      10,409
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      8,205
                                      
                                      
                                      
                                      18,614Common
      dividends paid
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3,556
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3,556
                                      )Issuance
      of vested shares
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (25
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      25
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Equity-based
      compensation expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      36
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      36Retirement
      plan contribution —38,560
      shares issued
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (667
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,201
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      534Option
      exercises — 2,631 shares
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (52
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      82
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      30Balance
      June 30, 2010
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      18,083
                                      
                                      
                                      $
                                      190,259
                                      
                                      
                                      $
                                      73,613
                                      
                                      
                                      $
                                      (8,583
                                      )
                                      
                                      $
                                      (5,447
                                      )
                                      
                                      $
                                      267,925





See
Notes to Consolidated Financial Statements.


-6-


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, as amended (the “2009 Form
10-K”).  Certain information and footnote disclosures normally
included in annual consolidated financial statements prepared in accordance with
GAAP have been omitted in accordance with standards for the preparation of
interim consolidated financial statements.  These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s 2009 Form
10-K.





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.  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 Months
                    
                    
                    For the Six Monthsended June 30,
                    
                    
                    ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Amounts
      in Thousands, Except Share and Per Share Data)Net
      income available to common shareholders
                    
                    $
                    5,131
                    
                    
                    $
                    1,827
                    
                    
                    $
                    10,409
                    
                    
                    $
                    6,448Weighted
      average shares outstanding
                    
                    
                    17,787,325
                    
                    
                    
                    12,696,202
                    
                    
                    
                    17,776,500
                    
                    
                    
                    12,135,103Dilutive
      shares for stock options
                    
                    
                    6,487
                    
                    
                    
                    2,411
                    
                    
                    
                    4,454
                    
                    
                    
                    4,273Contingently
      issuable shares
                    
                    
                    11,581
                    
                    
                    
                    42,467
                    
                    
                    
                    11,581
                    
                    
                    
                    42,467Weighted
      average dilutive shares outstanding
                    
                    
                    17,805,393
                    
                    
                    
                    12,741,080
                    
                    
                    
                    17,792,535
                    
                    
                    
                    12,181,843Basic
      earnings per share
                    
                    $
                    0.29
                    
                    
                    $
                    0.14
                    
                    
                    $
                    0.59
                    
                    
                    $
                    0.53Diluted
      earnings per share
                    
                    $
                    0.29
                    
                    
                    $
                    0.14
                    
                    
                    $
                    0.59
                    
                    
                    $
                    0.53





For the
three- and six-month periods ended June 30, 2010, options and warrants to
purchase 467,844 and 491,189 shares, respectively, 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 399,156 and 400,156 shares, respectively, of common
stock were excluded from the three- and six-month periods ended June 30, 2009
computations of diluted earnings per common share because their effect would be
anti-dilutive.




Reclassifications









-7-




Recent
Accounting Pronouncements





Financial Accounting Standards Board
(“FASB”) Accounting Standard Codification (“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 roll forward
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.  Other
than the additional disclosures, the adoption of the new guidance had no
significant impact on the Company’s 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 had no significant impact on the Company’s financial
statements.





FASB ASC Topic 310,
Receivables.  New authoritative accounting guidance under ASC
Topic 310 amends prior guidance to provide financial statement users with
greater transparency about an entity’s allowance for credit losses and the
credit quality of its financing receivables by providing additional information
to assist financial statement users in assessing an entity’s credit risk
exposures and evaluating the adequacy of its allowance for credit losses. The
new authoritative guidance is effective for interim and annual reporting periods
ending on or after December 15, 2010. The Company is in the process of
assessing the impact the new authoritative guidance will have on its financial
statements and related disclosures.




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.
 
 The
Company has filed with the Securities and Exchange Commission amendments to its
Form 10-Ks for each of the years ended December 31, 2009 and 2008 and its Form
10-Qs for each of the quarters ended March 31, 2009, June 30, 2009, September
30, 2009, and March 31, 2010, for the purpose of restating the financial
statements and other financial information in those reports to reflect the
correction of the computational error in its model.




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 0.5262
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.


-8-





Note
4.  Investment Securities





As of
June 30, 2010, and December 31, 2009, the amortized cost and estimated fair
value of available-for-sale securities were as follows:


June 30, 2010Amortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      OTTI inCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      Value
                      
                      
                      AOCI(In
      Thousands)U.S.
      Government agency securities
                      
                      $
                      54,134
                      
                      
                      $
                      719
                      
                      
                      $
                      -
                      
                      
                      $
                      54,853
                      
                      
                      $
                      -States
      and political subdivisions
                      
                      
                      132,103
                      
                      
                      
                      4,000
                      
                      
                      
                      (538
                      )
                      
                      
                      135,565
                      
                      
                      
                      -Trust
      preferred securities:Single
      issue
                      
                      
                      55,709
                      
                      
                      
                      -
                      
                      
                      
                      (13,026
                      )
                      
                      
                      42,683
                      
                      
                      
                      -Pooled
                      
                      
                      1,514
                      
                      
                      
                      1,898
                      
                      
                      
                      -
                      
                      
                      
                      3,412
                      
                      
                      
                      -Total
      trust preferred securities
                      
                      
                      57,223
                      
                      
                      
                      1,898
                      
                      
                      
                      (13,026
                      )
                      
                      
                      46,095
                      
                      
                      
                      -FDIC-backed
      securities
                      
                      
                      25,353
                      
                      
                      
                      308
                      
                      
                      
                      -
                      
                      
                      
                      25,661
                      
                      
                      
                      -Mortgage-backed
      securities:Agency
                      
                      
                      214,081
                      
                      
                      
                      9,225
                      
                      
                      
                      (60
                      )
                      
                      
                      223,246
                      
                      
                      
                      -Non-Agency
      prime residential
                      
                      
                      5,065
                      
                      
                      
                      -
                      
                      
                      
                      (400
                      )
                      
                      
                      4,665
                      
                      
                      
                      -Non-Agency
      Alt-A residential
                      
                      
                      20,446
                      
                      
                      
                      -
                      
                      
                      
                      (8,724
                      )
                      
                      
                      11,722
                      
                      
                      
                      (8,724
                      )Total
      mortgage-backed securities
                      
                      
                      239,592
                      
                      
                      
                      9,225
                      
                      
                      
                      (9,184
                      )
                      
                      
                      239,633
                      
                      
                      
                      (8,724
                      )Equities
                      
                      
                      824
                      
                      
                      
                      280
                      
                      
                      
                      (45
                      )
                      
                      
                      1,059
                      
                      
                      
                      -Total
                      
                      $
                      509,229
                      
                      
                      $
                      16,430
                      
                      
                      $
                      (22,793
                      )
                      
                      $
                      502,866
                      
                      
                      $
                      (8,724
                      )





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
                  )





-9-


As of
June 30, 2010, and December 31, 2009, the amortized cost and estimated fair
value of held-to-maturity securities were as follows:





June 30, 2010Amortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value(In
      Thousands)States
      and political subdivisions
                  
                  $
                  6,468
                  
                  
                  $
                  109
                  
                  
                  $
                  -
                  
                  
                  $
                  6,577Total
                  
                  $
                  6,468
                  
                  
                  $
                  109
                  
                  
                  $
                  -
                  
                  
                  $
                  6,577





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 June 30, 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
                      
                      $
                      71
                      
                      
                      $
                      73Due
      after one year but within five years
                      
                      
                      55,794
                      
                      
                      
                      56,775Due
      after five years but within ten years
                      
                      
                      82,039
                      
                      
                      
                      85,052Due
      after ten years
                      
                      
                      130,909
                      
                      
                      
                      120,274268,813
                      
                      
                      
                      262,174Mortgage-backed
      securities
                      
                      
                      239,592
                      
                      
                      
                      239,633Equity
      securities
                      
                      
                      824
                      
                      
                      
                      1,059Total
                      
                      $
                      509,229
                      
                      
                      $
                      502,866




The
amortized cost and estimated fair value of held-to-maturity securities by
contractual maturity at June 30, 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
                    
                    $
                    555
                    
                    
                    $
                    560Due
      after one year but within five years
                    
                    
                    4,334
                    
                    
                    
                    4,415Due
      after five years but within ten years
                    
                    
                    1,579
                    
                    
                    
                    1,602Due
      after ten years
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    6,468
                    
                    
                    $
                    6,577




The
carrying value of securities pledged to secure public deposits and for other
purposes required by law were $301.77 million and $354.92 million at June 30,
2010, and December 31, 2009, respectively.





During
the three months ended June 30, 2010, gross gains on the sale of securities were
$1.23 million while gross losses were $26 thousand.  During the six
months ended June 30, 2010, gross gains on the sale of securities were $1.49
million while gross losses were $34 thousand.  During the three months
ended June 30, 2009, gross gains on the sale of securities were $1.67
million while gross losses were $19 thousand.  During the six months
ended June 30, 2009 gross gains on the sale of securities were $2.84 million
while gross losses were $779 thousand.




-10-




The
following tables reflect those investments, both available-for-sale and
held-to-maturity, in a continuous unrealized loss position for less than 12
months and for 12 months or longer at June 30, 2010, and December 31,
2009.





June 30, 2010Less than 12 Months
                
                
                12 Months or longer
                
                
                TotalFair
                
                
                Unrealized
                
                
                Fair
                
                
                Unrealized
                
                
                Fair
                
                
                UnrealizedValue
                
                
                Losses
                
                
                Value
                
                
                Losses
                
                
                Value
                
                
                Losses(In
      Thousands)States
      and political subdivisions
                
                $
                8,635
                
                
                $
                (176
                )
                
                $
                16,688
                
                
                $
                (362
                )
                
                $
                25,323
                
                
                $
                (538
                )Single
      issue trust preferred securities
                
                
                3,303
                
                
                
                (319
                )
                
                
                39,380
                
                
                
                (12,707
                )
                
                
                42,683
                
                
                
                (13,026
                )Mortgage-backed
      securities:Agency
                
                
                11,669
                
                
                
                (60
                )
                
                
                21
                
                
                
                -
                
                
                
                11,690
                
                
                
                (60
                )Prime
      residential
                
                
                -
                
                
                
                -
                
                
                
                4,665
                
                
                
                (400
                )
                
                
                4,665
                
                
                
                (400
                )Alt-A
      residential
                
                
                -
                
                
                
                -
                
                
                
                10,732
                
                
                
                (8,724
                )
                
                
                10,732
                
                
                
                (8,724
                )Total
      mortgage-backed securities
                
                
                11,669
                
                
                
                (60
                )
                
                
                15,418
                
                
                
                (9,124
                )
                
                
                27,087
                
                
                
                (9,184
                )Equity
      securities
                
                
                318
                
                
                
                (45
                )
                
                
                -
                
                
                
                -
                
                
                
                318
                
                
                
                (45
                )Total
                
                $
                23,925
                
                
                $
                (600
                )
                
                $
                71,486
                
                
                $
                (22,193
                )
                
                $
                95,411
                
                
                $
                (22,793
                )





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 June
30, 2010, the combined depreciation in value of the 75 individual securities in
an unrealized loss position was approximately 4.53% 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- and six-month
periods ended June 30, 2010, the Company incurred no other 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.





-11-




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.  At June 30, 2010, the Company recognized OTTI charges of $134
thousand on two of its remaining pooled trust preferred security
holdings.  This charge brought the carrying amount of those two
securities to zero.





During
the three- and six-month periods ended June 30, 2010, the Company incurred
credit-related OTTI charges related to beneficial interest debt securities of
$134 thousand. These charges were related to two pooled trust preferred security
holdings and brought the carrying value of those securities to
zero.  During the three- and six-month periods ended June 30, 2009,
the Company recognized credit-related OTTI charges related to beneficial
interest debt securities of $3.37 million. 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
June 30, 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 and 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.





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





For the Three Months
                
                
                For the Six MonthsEnded June 30, 2010
                
                
                Ended June 30, 2010(In
      Thousands)Estimated
      credit losses, beginning balance (1)
                
                $
                4,251
                
                
                $
                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 realized losses
                
                
                -
                
                
                
                -Estimated
      credit losses as of June 30, 2010
                
                $
                4,251
                
                
                $
                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- and six-month periods ended June 30, 2010, the Company
recognized OTTI charges on certain of its equity securities of $51 thousand. For
the three- and six-month periods ended June 30, 2009, the Company recognized
OTTI charges of $406 and $615 thousand, respectively, 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 June 30, 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 six months ended June 30, 2010, FHLBA announced the repurchase of excess
activity-based stock and paid quarterly dividends.  At June 30, 2010,
FHLBA was in compliance with all of its regulatory capital
requirements.  Based on its review, the Company believes that, as of
June 30, 2010, its FHLBA stock was not impaired.




-12-




Note
5.  Loans





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





June 30, 2010
                  
                  
                  December 31, 2009(Dollars in Thousands)
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentLoans
      held for investment:Commercial,
      financial, and agricultural
                  
                  $
                  103,026
                  
                  
                  
                  7.36
                  %
                  
                  $
                  96,366
                  
                  
                  
                  6.91
                  %Real
      estate — commercial
                  
                  
                  462,745
                  
                  
                  
                  33.06
                  %
                  
                  
                  450,611
                  
                  
                  
                  32.33
                  %Real
      estate — construction (1)
                  
                  
                  114,207
                  
                  
                  
                  8.16
                  %
                  
                  
                  124,896
                  
                  
                  
                  8.96
                  %Real
      estate — residential
                  
                  
                  649,576
                  
                  
                  
                  46.40
                  %
                  
                  
                  657,367
                  
                  
                  
                  47.16
                  %Consumer
                  
                  
                  62,659
                  
                  
                  
                  4.47
                  %
                  
                  
                  60,090
                  
                  
                  
                  4.31
                  %Other
                  
                  
                  7,672
                  
                  
                  
                  0.55
                  %
                  
                  
                  4,601
                  
                  
                  
                  0.33
                  %Total
                  
                  $
                  1,399,885
                  
                  
                  
                  100.00
                  %
                  
                  $
                  1,393,931
                  
                  
                  
                  100.00
                  %Loans
      held for sale
                  
                  $
                  2,141
                  
                  
                  
                  
                  
                  
                  $
                  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 $235.25 million and
standby letters of credit and financial guarantees written of $9.67 million at
June 30, 2010.  Additionally, the Company had gross notional amounts
of outstanding commitments to lend related to secondary market mortgage loans of
$6.82 million at June 30, 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.





-13-




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- and six-month periods ended June 30, 2010 and 2009.





For the Three Months
                
                
                For the Six MonthsEnded June 30,
                
                
                Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009(In
      Thousands)Beginning
      balance
                
                $
                24,508
                
                
                $
                18,420
                
                
                $
                24,277
                
                
                $
                17,782Provision
      for loan losses
                
                
                3,596
                
                
                
                2,552
                
                
                
                7,261
                
                
                
                4,700Charge-offs
                
                
                (3,373
                )
                
                
                (2,681
                )
                
                
                (7,105
                )
                
                
                (4,411
                )Recoveries
                
                
                280
                
                
                
                252
                
                
                
                578
                
                
                
                472Ending
      balance
                
                $
                25,011
                
                
                $
                18,543
                
                
                $
                25,011
                
                
                $
                18,543





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
June 30, 2010, and December 31, 2009. Interest income realized on impaired loans
is recognized upon receipt if the impaired loan is non-accrual.





June 30,
                
                
                December 31,(In
      Thousands)
                
                2010
                
                
                2009Recorded
      investment in loans considered to be impaired:Recorded
      investment in impaired loans with related allowance
                
                $
                11,604
                
                
                $
                13,241Recorded
      investment in impaired loans with no related allowance
                
                
                23,692
                
                
                
                13,371Total
      impaired loans
                
                
                35,296
                
                
                
                26,612Loans
      considered to be impaired that were on a non-accrual basis
                
                
                17,668
                
                
                
                17,014Allowance
      for loan losses related to loans considered to be impaired
                
                
                2,604
                
                
                
                932Total
      interest income recognized on impaired loans, year-to-date
                
                
                1,176
                
                
                
                663





Note
7.  Deposits





The
following is a summary of interest-bearing deposits by type as of June 30, 2010,
and December 31, 2009.





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(In
      Thousands)Interest-bearing
      demand deposits
                  
                  $
                  244,889
                  
                  
                  $
                  231,907Savings
      and money market deposits
                  
                  
                  404,820
                  
                  
                  
                  381,381Certificates
      of deposit
                  
                  
                  757,979
                  
                  
                  
                  824,428Total
                  
                  $
                  1,407,688
                  
                  
                  $
                  1,437,716


-14-




Note
8.  Borrowings





The
following schedule details the Company’s FHLB borrowings and other indebtedness
at June 30, 2010, and December 31, 2009.





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(In
      Thousands)FHLB
      borrowings
                  
                  $
                  180,134
                  
                  
                  $
                  183,177Subordinated
      debt
                  
                  
                  15,464
                  
                  
                  
                  15,464Other
      long-term debt
                  
                  
                  267
                  
                  
                  
                  283Total
                  
                  $
                  195,865
                  
                  
                  $
                  198,924





FHLB
borrowings included $175.00 million in convertible and callable advances at June
30, 2010, and December 31, 2009.  The weighted average interest rate
of all the advances was 2.41% at June 30, 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 June 30, 2010.  The fair value of the interest
rate swap was a liability of $1.09 million at June 30, 2010. The Company
maintained a cash deposit with its counterparty to collateralize the interest
rate swap of $3.20 million at June 30, 2010, and $3.20 million at December 31,
2009.





At June
30, 2010, the FHLB advances have approximate contractual maturities between one
month 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.





-15-




In
addition to investment securities, at June 30, 2010, wholesale repurchase
agreements were collateralized by $22.09 million of interest-bearing balances
with banks.




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, non-qualified defined benefit plan for the
three- and six-month periods ended June 30, 2010.





For the Three Months
                  
                  
                  For the Six MonthsEnded June 30,
                  
                  
                  Ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(In
      Thousands)Service
      cost
                  
                  $
                  53
                  
                  
                  $
                  53
                  
                  
                  $
                  105
                  
                  
                  $
                  106Interest
      cost
                  
                  
                  53
                  
                  
                  
                  47
                  
                  
                  
                  105
                  
                  
                  
                  94Net
      periodic cost
                  
                  $
                  106
                  
                  
                  $
                  100
                  
                  
                  $
                  210
                  
                  
                  $
                  200





Note
      10.
            Comprehensive
      Income





The
components of the Company’s comprehensive income, net of income taxes, for the
three- and six-month periods ended June 30, 2010 and 2009, are as
follows:





For the Three Months
                          
                          
                          For the Six MonthsEnded June 30,
                          
                          
                          Ended June 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009(In
      Thousands)Net
      income
                          
                          $
                          5,131
                          
                          
                          $
                          2,405
                          
                          
                          $
                          10,409
                          
                          
                          $
                          7,597Other
      comprehensive incomeUnrealized
      gain (loss) on securities available-for-salewith
      other-than-temporary impairment
                          
                          
                          (164
                          )
                          
                          
                          137
                          
                          
                          
                          3
                          
                          
                          
                          (1,906
                          )Unrealized
      gain on securities available-for-salewithout
      other-than-temporary impairment
                          
                          
                          5,435
                          
                          
                          
                          24,968
                          
                          
                          
                          13,319
                          
                          
                          
                          4,627Reclassification
      adjustment for gainsrealized
      in net income
                          
                          
                          (1,201
                          )
                          
                          
                          (1,653
                          )
                          
                          
                          (1,451
                          )
                          
                          
                          (2,064
                          )Reclassification
      adjustment for credit relatedother-than-temporary
      impairments recognizedin
      earnings
                          
                          
                          185
                          
                          
                          
                          3,776
                          
                          
                          
                          185
                          
                          
                          
                          3,985Cumulative
      effect of change in accounting principle
                          
                          
                          -
                          
                          
                          
                          (9,889
                          )
                          
                          
                          -
                          
                          
                          
                          (9,889
                          )Unrealized
      gain on derivative contract
                          
                          
                          596
                          
                          
                          
                          326
                          
                          
                          
                          1,020
                          
                          
                          
                          565Income
      tax effect
                          
                          
                          (1,807
                          )
                          
                          
                          (6,713
                          )
                          
                          
                          (4,871
                          )
                          
                          
                          1,779Total
      other comprehensive income (loss)
                          
                          
                          3,044
                          
                          
                          
                          10,952
                          
                          
                          
                          8,205
                          
                          
                          
                          (2,903
                          )Comprehensive
      income
                          
                          $
                          8,175
                          
                          
                          $
                          13,357
                          
                          
                          $
                          18,614
                          
                          
                          $
                          4,694





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 believes the resolution of these actions, singly or in the
aggregate, should not have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.





Note
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.


-16-


The
following table sets forth information about the reportable operating segments
and reconciliation of this information to the consolidated financial statements
at and for the three- and six-month periods ended June 30, 2010 and
2009.





For the Three MonthsEnded June 30, 2010Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                18,581
                
                
                $
                (24
                )
                
                $
                (15
                )
                
                $
                18,542Provision
      for loan losses
                
                
                3,596
                
                
                
                -
                
                
                
                -
                
                
                
                3,596Noninterest
      income
                
                
                7,431
                
                
                
                1,408
                
                
                
                65
                
                
                
                8,904Noninterest
      expense (income)
                
                
                15,362
                
                
                
                1,402
                
                
                
                (166
                )
                
                
                16,598Income
      before income taxes
                
                
                7,054
                
                
                
                (18
                )
                
                
                216
                
                
                
                7,252Provision
      for income taxes
                
                
                2,014
                
                
                
                (19
                )
                
                
                126
                
                
                
                2,121Net
      income
                
                $
                5,040
                
                
                $
                1
                
                
                $
                90
                
                
                $
                5,131End
      of period goodwill and other intangibles
                
                $
                79,057
                
                
                $
                11,700
                
                
                $
                -
                
                
                $
                90,757End
      of period assets
                
                $
                2,227,198
                
                
                $
                12,163
                
                
                $
                7,485
                
                
                $
                2,246,846





For the Six MonthsEnded June 30, 2010Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                37,259
                
                
                $
                (57
                )
                
                $
                (41
                )
                
                $
                37,161Provision
      for loan losses
                
                
                7,261
                
                
                
                -
                
                
                
                -
                
                
                
                7,261Noninterest
      income (loss)
                
                
                14,040
                
                
                
                3,627
                
                
                
                (185
                )
                
                
                17,482Noninterest
      expense (income)
                
                
                30,383
                
                
                
                2,881
                
                
                
                (594
                )
                
                
                32,670Iincome
      before income taxes
                
                
                13,655
                
                
                
                689
                
                
                
                368
                
                
                
                14,712Provision
      for income taxes
                
                
                3,883
                
                
                
                272
                
                
                
                148
                
                
                
                4,303Net
      income
                
                $
                9,772
                
                
                $
                417
                
                
                $
                220
                
                
                $
                10,409End
      of period goodwill and other intangibles
                
                $
                79,057
                
                
                $
                11,700
                
                
                $
                -
                
                
                $
                90,757End
      of period assets
                
                $
                2,227,198
                
                
                $
                12,163
                
                
                $
                7,485
                
                
                $
                2,246,846





For the Three MonthsEnded June 30, 2009Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                16,343
                
                
                $
                (16
                )
                
                $
                (6
                )
                
                $
                16,321Provision
      for loan losses
                
                
                2,552
                
                
                
                -
                
                
                
                -
                
                
                
                2,552Noninterest
      income (loss)
                
                
                6,511
                
                
                
                1,665
                
                
                
                (2,656
                )
                
                
                5,520Noninterest
      expense (income)
                
                
                17,493
                
                
                
                1,474
                
                
                
                (2,926
                )
                
                
                16,041Income
      before income taxes
                
                
                2,809
                
                
                
                175
                
                
                
                264
                
                
                
                3,248Provision
      for income taxes
                
                
                429
                
                
                
                51
                
                
                
                363
                
                
                
                843Net
      income (loss)
                
                $
                2,380
                
                
                $
                124
                
                
                $
                (99
                )
                
                $
                2,405End
      of period goodwill and other intangibles
                
                $
                78,506
                
                
                $
                11,028
                
                
                $
                -
                
                
                $
                89,534End
      of period assets
                
                $
                2,174,946
                
                
                $
                11,252
                
                
                $
                15,847
                
                
                $
                2,202,045


-17-


For the Six MonthsEnded June 30, 2009Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                32,835
                
                
                $
                (34
                )
                
                $
                (47
                )
                
                $
                32,754Provision
      for loan losses
                
                
                4,700
                
                
                
                -
                
                
                
                -
                
                
                
                4,700Noninterest
      income (loss)
                
                
                10,343
                
                
                
                4,009
                
                
                
                (415
                )
                
                
                13,937Noninterest
      expense (income)
                
                
                28,783
                
                
                
                3,112
                
                
                
                (667
                )
                
                
                31,228Income
      before income taxes
                
                
                9,695
                
                
                
                863
                
                
                
                205
                
                
                
                10,763Provision
      for income taxes
                
                
                2,338
                
                
                
                254
                
                
                
                574
                
                
                
                3,166Net
      income (loss)
                
                $
                7,357
                
                
                $
                609
                
                
                $
                (369
                )
                
                $
                7,597End
      of period goodwill and other intangibles
                
                $
                78,506
                
                
                $
                11,028
                
                
                $
                -
                
                
                $
                89,534End
      of period assets
                
                $
                2,174,046
                
                
                $
                11,252
                
                
                $
                15,847
                
                
                $
                2,202,045





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.





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.





-18-




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





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





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





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





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





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





Internal
collateral valuations are generally performed within two to four weeks of the
original identification of potential impairment and receipt of the third party
valuation.  The internal valuation is performed by comparing the
original appraisal to current local real estate market conditions and experience
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.





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 deems these
adjustments as fair value adjustments.





-19-




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 credits.





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.





The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of June 30, 2010, and December 31, 2009,
segregated by the level of the valuation inputs within the fair value hierarchy
utilized to measure fair value:





June 30, 2010Fair Value Measurements Using
                    
                    
                    Total(In Thousands)
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    Fair ValueAvailable-for-sale securities:Agency
      securities
                    
                    $
                    -
                    
                    
                    $
                    54,853
                    
                    
                    $
                    -
                    
                    
                    $
                    54,853Agency
      mortgage-backed securities
                    
                    
                    -
                    
                    
                    
                    223,246
                    
                    
                    
                    -
                    
                    
                    
                    223,246Non-Agency
      prime residential MBS
                    
                    
                    -
                    
                    
                    
                    4,665
                    
                    
                    
                    -
                    
                    
                    
                    4,665Non-Agency
      Alt-A residential MBS
                    
                    
                    -
                    
                    
                    
                    11,722
                    
                    
                    
                    -
                    
                    
                    
                    11,722Municipal
      securities
                    
                    
                    -
                    
                    
                    
                    135,565
                    
                    
                    
                    -
                    
                    
                    
                    135,565FDIC-backed
      securities
                    
                    
                    -
                    
                    
                    
                    25,661
                    
                    
                    
                    -
                    
                    
                    
                    25,661Single
      issue trust preferred securities
                    
                    
                    -
                    
                    
                    
                    42,683
                    
                    
                    
                    -
                    
                    
                    
                    42,683Pooled
      trust preferred securities
                    
                    
                    -
                    
                    
                    
                    3,412
                    
                    
                    
                    -
                    
                    
                    
                    3,412Equity
      securities
                    
                    
                    1,039
                    
                    
                    
                    20
                    
                    
                    
                    -
                    
                    
                    
                    1,059Total
      available-for-sale securities
                    
                    
                    1,039
                    
                    
                    
                    501,827
                    
                    
                    
                    -
                    
                    
                    
                    502,866Deferred
      compensation assets
                    
                    
                    2,928
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,928Derivative
      assetsInterest
      rate lock commitments
                    
                    
                    
                    
                    
                    
                    52
                    
                    
                    
                    -
                    
                    
                    
                    52Total
      derivative assets
                    
                    
                    -
                    
                    
                    
                    52
                    
                    
                    
                    -
                    
                    
                    
                    52Deferred
      compensation liabilities
                    
                    
                    2,928
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,928Derivative
      liabilitiesInterest
      rate swap
                    
                    
                    -
                    
                    
                    
                    1,093
                    
                    
                    
                    -
                    
                    
                    
                    1,093Interest
      rate lock commitments
                    
                    
                    -
                    
                    
                    
                    22
                    
                    
                    
                    -
                    
                    
                    
                    22Total
      derivative liabilities
                    
                    
                    -
                    
                    
                    
                    1,115
                    
                    
                    
                    -
                    
                    
                    
                    1,115Total
                    
                    $
                    6,895
                    
                    
                    $
                    502,994
                    
                    
                    $
                    -
                    
                    
                    $
                    509,889


-20-


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





The
following table presents additional information about financial assets and
liabilities measured at fair value for the three- and six-month periods ended
June 30, 2010, on a recurring basis and for which Level 3 inputs are utilized to
determine fair value:





Fair Value MeasurementsUsing SignificantUnobservable InputsAvailable-for-Sale SecuritiesPooled Trust Preferred SecuritiesFor the Three Months
                    
                    
                    For the Six Months(In Thousands)
                    
                    Ended June 30, 2010
                    
                    
                    Ended June 30, 2010Beginning
      Balance
                    
                    $
                    -
                    
                    
                    $
                    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,
      June 30, 2010
                    
                    $
                    -
                    
                    
                    $
                    -





The
Company transferred $3.57 million out of Level 3 for the six-month period ended
June 30, 2010. During the first quarter of 2010, 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 quotes from
qualified market participants, and although the market for these securities is
increasing, it still remains inactive.


-21-
  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 June 30, 2010, and December 31, 2009, are
as follows:


June 30, 2010Fair Value Measurements Using
                
                
                TotalLevel 1
                
                
                Level 2
                
                
                Level 3
                
                
                Fair Value(In
      Thousands)Impaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                10,552
                
                
                $
                10,552Other
      real estate owned
                
                
                -
                
                
                
                -
                
                
                
                7,108
                
                
                
                7,108





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





Fair
Value of Financial Instruments





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





June 30, 2010
                
                
                December 31, 2009Carrying
                
                
                
                
                
                CarryingAmount
                
                
                Fair Value
                
                
                Amount
                
                
                Fair Value(In
      Thousands)AssetsCash
      and cash equivalents
                
                $
                76,531
                
                
                $
                76,531
                
                
                $
                101,341
                
                
                $
                101,341Investment
      securities
                
                
                509,334
                
                
                
                509,443
                
                
                
                493,511
                
                
                
                493,636Loans
      held for sale
                
                
                2,141
                
                
                
                2,172
                
                
                
                11,576
                
                
                
                11,580Loans
      held for investment
                
                
                1,374,874
                
                
                
                1,367,513
                
                
                
                1,369,654
                
                
                
                1,362,814Accrued
      interest receivable
                
                
                7,859
                
                
                
                7,859
                
                
                
                8,610
                
                
                
                8,610Bank
      owned life insurance
                
                
                41,541
                
                
                
                41,541
                
                
                
                40,972
                
                
                
                40,972Derivative
      financial assets
                
                
                52
                
                
                
                52
                
                
                
                2
                
                
                
                2Deferred
      compensation assets
                
                
                2,928
                
                
                
                2,928
                
                
                
                2,872
                
                
                
                2,872LiabilitiesDemand
      deposits
                
                $
                205,731
                
                
                $
                205,731
                
                
                $
                208,244
                
                
                $
                208,244Interest-bearing
      demand deposits
                
                
                244,889
                
                
                
                244,889
                
                
                
                231,907
                
                
                
                231,907Savings
      deposits
                
                
                404,820
                
                
                
                404,820
                
                
                
                381,381
                
                
                
                381,381Time
      deposits
                
                
                757,979
                
                
                
                769,502
                
                
                
                824,428
                
                
                
                834,546Securities
      sold under agreements to repurchase
                
                
                147,772
                
                
                
                156,508
                
                
                
                153,634
                
                
                
                156,653Accrued
      interest payable
                
                
                3,520
                
                
                
                3,520
                
                
                
                4,130
                
                
                
                4,130FHLB
      and other indebtedness
                
                
                195,865
                
                
                
                209,094
                
                
                
                198,924
                
                
                
                208,334Derivative
      financial liabilities
                
                
                1,115
                
                
                
                1,115
                
                
                
                2,191
                
                
                
                2,191Deferred
      compensation liabilities
                
                
                2,928
                
                
                
                2,928
                
                
                
                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.


-22-




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.





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:





June 30, 2010
                
                
                December 31, 2009
                
                
                June 30, 2009(In
      Thousands)Interest
      rate swap
                
                $
                50,000
                
                
                $
                50,000
                
                
                $
                50,000IRLC's
                
                
                6,823
                
                
                
                4,636
                
                
                
                7,314





-23-




As of
June 30, 2010, December 31, 2009, and June 30, 2009, the fair values of the
Company’s derivatives were as follows:





Asset DerivativesJune 30, 2010
                  
                  December 31, 2009
                  
                  June 30, 2009Balance Sheet
                  
                  Fair
                  
                  Balance Sheet
                  
                  Fair
                  
                  Balance Sheet
                  
                  FairLocation
                  
                  Value
                  
                  Location
                  
                  Value
                  
                  Location
                  
                  Value(In
      Thousands)Derivatives
      not designated as hedgesIRLC's
                  
                  Other
      assets
                  
                  $
                  52
                  
                  Other
      assets
                  
                  $
                  2
                  
                  Other
      assets
                  
                  $
                  23Total
                  
                  
                  
                  $
                  52
                  
                  
                  
                  $
                  2
                  
                  
                  
                  $
                  23





Liability DerivativesJune 30, 2010
                      
                      December 31, 2009
                      
                      June 30, 2009Balance Sheet
                      
                      Fair
                      
                      Balance Sheet
                      
                      Fair
                      
                      Balance Sheet
                      
                      FairLocation
                      
                      Value
                      
                      Location
                      
                      Value
                      
                      Location
                      
                      Value(In
      Thousands)Derivatives
      designated as hedgesInterest
      rate swap
                      
                      Other
      liabilities
                      
                      $
                      1,093
                      
                      Other
      liabilities
                      
                      $
                      2,117
                      
                      Other
      liabilities
                      
                      $
                      2,745Total
                      
                      
                      
                      $
                      1,093
                      
                      
                      
                      $
                      2,117
                      
                      
                      
                      $
                      2,745Derivatives
      not designated as hedgesIRLC's
                      
                      Other
      liabilities
                      
                      $
                      22
                      
                      Other
      liabilities
                      
                      $
                      74
                      
                      Other
      liabilities
                      
                      $
                      47Total
                      
                      
                      
                      $
                      22
                      
                      
                      
                      $
                      74
                      
                      
                      
                      $
                      47Total
      derivatives
                      
                      
                      
                      $
                      1,115
                      
                      
                      
                      $
                      2,191
                      
                      
                      
                      $
                      2,792





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 declines when interest rates increase and rises
when interest rates decrease.





-24-




Effect
of Derivatives and Hedging Activities on the Income Statement





For the
quarters ended June 30, 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- and six-month periods ended June 30, 2010 and
2009.





(In Thousands)
                    
                    
                    
                    Amount of Gain (Loss)Derivatives Not
                    
                    Location of Gain (Loss)
                    
                    Recognized in Income on DerivativeDesignated as Hedging
                    
                    Recognized in Income on
                    
                    Three Months Ended June 30,
                    
                    Six Months Ended June 30,Instruments
                    
                    Derivative
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009IRLC's
                    
                    Other
      income
                    
                    $
                    79
                    
                    
                    $
                    (77
                    )
                    
                    $
                    102
                    
                    
                    $
                    (48
                    )Total
                    
                    
                    
                    $
                    79
                    
                    
                    $
                    (77
                    )
                    
                    $
                    102
                    
                    
                    $
                    (48
                    )





Counterparty Credit
Risk.   Like other financial instruments, derivatives
contain an element of “credit risk.”  Credit risk is the possibility
that the Company will incur a loss because a counterparty, which may be a bank,
a broker-dealer or a customer, fails to meet its contractual
obligations.  This risk is measured as the expected positive
replacement value of contracts.  All derivative contracts may be
executed only with exchanges or counterparties approved by the Company’s
Asset/Liability Management Committee.  The Company reviews its
counterparty risk regularly and has determined that, as of June 30, 2010, there
is no significant counterparty credit risk.


-25-


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, as amended (“2009 Form 10-K”), and the other financial
information included in this report.





The
Company is a multi-state financial holding company headquartered in Bluefield,
Virginia, with total assets of $2.25 billion at June 30,
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 58 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”.





FORWARD-LOOKING
STATEMENTS





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





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





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


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


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


•
            Inflation,
      interest rate, market and monetary
fluctuations;


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


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


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


•
            Technological
      changes;


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


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


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


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


•
            Possible
      other-than-temporary impairments of securities held by
  us;


•
            The
      impact of current governmental efforts to restructure the U.S. financial
      regulatory system, including the recent enactment of the Dodd-Frank Wall
      Street Reform and Consumer Protection
Act;











-26-




•
            Changes
      in consumer spending and savings habits;
and •
              Unanticipated
      regulatory or judicial
proceedings.




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





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





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.





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 $2.25 billion at June 30, 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 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 $806 million as of June 30,
2010.  These assets are not assets of the Company, but are managed
under various fee-based arrangements as fiduciary or agent.





-27-




RECENT
LEGISLATION





On June
28, 2010, the board of directors of the FDIC adopted a final ruling extending
the Transaction Account Guarantee (“TAG”) program to December 31, 2010, as well
as to allow the FDIC’s board of directors to use its discretion to extend the
program for a period of time not to exceed December 31, 2011 without additional
rulemaking if economic conditions warrant such an
extension.   Among other things, the TAG program provides full
coverage for non-interest bearing transaction deposit accounts and certain
Negotiable Order of Withdrawal accounts.





On
July 21 2010, sweeping financial regulatory reform legislation entitled the
“Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank
Act”) was signed into law by President Obama. The Dodd-Frank Act implements
far-reaching changes across the financial regulatory landscape, including
provisions that, among other things, will:





·
            Centralize
      responsibility for consumer financial protection by creating a new agency,
      the Consumer Financial Protection Bureau, responsible for implementing,
      examining and enforcing compliance with federal consumer financial
      laws.


·
            Limit
      the preemption of state law by federal law and disallow subsidiaries and
      affiliates of national banks, such as the Bank, from availing themselves
      of such preemption.


·
            Require
      the Office of the Comptroller of the Currency (the “OCC”) to seek to make
      its capital requirements for national banks, such as the Bank,
      countercyclical so that capital requirements increase in times of economic
      expansion and decrease in times of economic
  contraction.


·
            Require
      financial holding companies, such as First Community, to be
      well-capitalized and well-managed as of July 21, 2011. Bank holding
      companies and banks must also be both well-capitalized and well-managed in
      order to engage in interstate bank
acquisitions.


·
            Impose
      comprehensive regulation of the over-the-counter derivatives market, which
      would include certain provisions that would effectively prohibit insured
      depository institutions from conducting certain derivatives businesses in
      the institution itself.


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


·
            Make
      permanent the $250,000 limit for federal deposit insurance and increase
      the cash limit of Securities Investor Protection Corporation protection
      from $100,000 to $250,000 and provide unlimited federal deposit insurance
      until January 1, 2013 for non-interest bearing demand transaction
      accounts at all insured depository
institutions.


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


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


·
            Increase
      the authority of the Federal Reserve to examine bank holding companies,
      such as First Community, and their non-bank
  subsidiaries.





Many
aspects of the Dodd-Frank Act are subject to rulemaking and will take effect
over several years, making it difficult to anticipate the overall financial
impact on the Company, its customers or the financial industry
generally.  Provisions in the legislation that affect deposit
insurance assessments, payment of interest on demand deposits and interchange
fees could increase the costs associated with deposits as well as place
limitations on certain revenues those deposits may generate.





RESULTS
OF OPERATIONS





Overview





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





·
            For
      the second quarter of 2010, net income increased $2.73 million from the
      comparable period in 2009.


·
            Net
      interest margin, on a tax-equivalent basis, increased 30 basis points to
      3.92% for the three months ended June 30, 2010, as compared to the
      three-month period ended June 30,
2009.


·
            Net
      interest income increased $2.22 million, or 13.10%, from the second
      quarter of 2009.


·
            Tangible
      book value per common share increased to $9.95, up $0.88 from December 31,
      2009.










-28-




·
            The
      allowance for loan losses as a percentage of total loans increased to
      1.79% at June 30, 2010, as compared to 1.74% at December 31,
      2009.




Net
income available to common shareholders for the three months ended June 30,
2010, was $5.13 million, or $0.29 per diluted common share, compared with net
income available to common shareholders of $1.83 million, or $0.14 per diluted
common share, for the three months ended June 30, 2009, an increase of $3.30
million.  Net income available to common shareholders for the
three-month period ended June 30, 2009, was impacted by the required payment of
dividends on preferred stock totaling $578 thousand. Increases in net income
were primarily due to the reduction in net impairment losses on securities and
decrease in interest on deposit accounts partially offset by increases in
salaries and employee benefits expense and the provision for loan
losses.





Net
income available to common shareholders for the six months ended June 30, 2010,
was $10.41 million, or $0.59 per diluted common share, compared with net income
available to common shareholders of $6.45 million, or $0.53 per diluted common
share, for the six months ended June 30, 2009, an increase of $3.96
million.  Net income available to common shareholders for the
six-month period ended June 30, 2009 was impacted by the required payment of
dividends on preferred stock totaling $1.15 million. Increases in net income
were primarily due to the $3.80 million reduction in net impairment losses on
securities, a $4.04 million decrease in interest on deposit accounts partially
offset by increases in salaries and employee benefits expense, and a $2.56
million increase in the provision for loan losses.





On July
8, 2009, the Company repurchased and retired the $41.50 million of Series A
perpetual preferred stock from the U.S. Treasury following a $63 million
qualified equity offering.





Net
Interest Income — Quarterly Comparison (See Table I)





Net
interest income, the largest contributor to earnings, was $18.54 million for the
three months ended June 30, 2010, compared with $16.32 million for the
corresponding period in 2009, an increase of $2.22 million, or
13.61%.  Tax-equivalent net interest income totaled $19.33 million for
the three months ended June 30, 2010, an increase of $2.24 million, or 13.10%,
from $17.09 million for the second 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 time
deposit and borrowing costs as a result of repricing opportunities throughout a
sustained low rate environment.





Compared
with the second quarter of 2009, average earning assets increased $83.72 million
while interest-bearing liabilities increased $51.44 million.  The
changes include the impact of the July 2009 TriStone acquisition.  The
yield on average earning assets decreased 24 basis points to 5.47% from 5.71%
between the three months ended June 30, 2010 and 2009,
respectively.  Total cost of interest-bearing liabilities decreased 58
basis points between the second quarters of 2010 and 2009, which resulted in a
net interest rate spread that was 33 basis points higher, at 3.75%, for the
second quarter of 2010 compared with 3.42% for the same period last
year.  The Company’s tax-equivalent net interest margin of 3.92% for
the three months ended June 30, 2010 increased 30 basis points from 3.62% for
the same period of 2009.





The yield
on loans decreased 15 basis points to 6.04% from 6.19% for the three months
ended June 30, 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 $1.45 million, or
7.40%, in tax-equivalent loan interest income for the second quarter of 2010
compared with the second quarter of 2009.





During
the three months ended June 30, 2010, the tax-equivalent yield on
available-for-sale securities decreased 55 basis points to 4.61%, while the
average balance decreased by $58.23 million, or 10.45%, compared with the same
period in 2009.  The decline in average balance was due largely to
securities sold or written off during the last half of 2009.  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 $72.78 million during the second
quarter of 2010, and the yield was 0.19%.  Interest-bearing balances
with banks are comprised largely of excess liquidity bearing overnight market
rates.  The Company maintained a strong liquidity position during the
first six months of 2010.





Compared
with the same period in 2009, the average balances of interest-bearing demand
deposits increased $50.80 million, or 25.70%, while the average rate paid during
the second quarter of 2010 increased by 24 basis points.  During the
three months ended June 30, 2010, the average balances of savings deposits
increased $103.97 million, or 32.73%, while the average rate paid increased six
basis points compared to the same period in 2009.  Average time
deposits decreased $83.70 million, or 9.89%, while the average rate paid on time
deposits decreased 92 basis points from 3.06% in the second quarter of 2009 to
2.14% in the second quarter of 2010.  The level of average
noninterest-bearing demand deposits increased $5.72 million, or 2.84%, to
$207.39 million during the quarter ended June 30, 2010, compared with the
corresponding period of the prior year.  The overall increase in the
level of average deposits reflects the addition of TriStone in July
2009.





-29-




Retail
repurchase agreements, which consist of collateralized retail deposits and
commercial treasury accounts, decreased $7.33 million, or 7.22%, to $94.20
million for the second quarter of 2010, while the rate decreased 25 basis points
to 1.07% during the same period.  The decrease in average balance can
be largely attributed to customers converting retail repurchase agreements to
certificates of deposit and lower business balances in the slow
economy.  There were no federal funds purchased on average during the
second quarters of 2010 and 2009. Wholesale repurchase agreements remained
unchanged at $50.00 million, while the rate increased two 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 $12.30 million,
or 5.91%, in the second quarter of 2010 to $195.80 million, while the rate paid
on those borrowings decreased 18 basis points.





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





Net
interest income was $37.16 million for the six months ended June 30, 2010,
compared with $32.75 million for the corresponding period in 2009, an increase
of $4.41 million, or 13.45%.  Tax-equivalent net interest income
totaled $38.76 million for the six months ended June 30, 2010, an increase of
$4.32 million, or 12.55%, from $34.44 million for the first half 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 time deposit and borrowing costs as a result of
repricing opportunities throughout a sustained low rate
environment.





Compared
with the first half of 2009, average earning assets increased $78.79 million
while interest-bearing liabilities increased $50.65 million.  The
changes include the impact of the July 2009 TriStone acquisition.  The
yield on average earning assets decreased 27 basis points to 5.57% from 5.84%
between the six months ended June 30, 2010 and 2009,
respectively.  Total cost of interest-bearing liabilities decreased 60
basis points between the first halves of 2010 and 2009, which resulted in a net
interest rate spread that was 33 basis points higher, at 3.80%, for the first
half of 2010 compared with 3.47% for the same period last year.  The
Company’s tax-equivalent net interest margin of 3.97% for the six months ended
June 30, 2010, increased 29 basis points from 3.68% for the same period of
2009.





The yield
on loans decreased 10 basis points to 6.13% from 6.23% for the six months ended
June 30, 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 $2.85 million, or 7.20%, in
tax-equivalent loan interest income for the first half of 2010 compared with the
first half of 2009.





During
the six months ended June 30, 2010, the tax-equivalent yield on
available-for-sale securities decreased 79 basis points to 4.76%, while the
average balance decreased by $45.26 million, or 8.46%, compared with the same
period in 2009.  The decline in average balance was due largely to
securities sold or written off during the last half of 2009.  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 $74.68 million during the first half
of 2010, and the yield was 0.22%.  Interest-bearing balances with
banks are comprised largely of excess liquidity bearing overnight market
rates.  The Company maintained a strong liquidity position in the
second quarter.





Compared
with the same period in 2009, the average balances of interest-bearing demand
deposits increased $48.55 million, or 25.03%, while the average rate paid during
the first half of 2010 increased by 20 basis points.  During the six
months ended June 30, 2010, the average balances of savings deposits increased
$102.23 million, or 32.44%, while the average rate paid increased one basis
point compared to the same period in 2009.  Average time deposits
decreased $74.99 million, or 8.80%, while the average rate paid on time deposits
decreased 92 basis points from 3.14% in the first half of 2009 to 2.22% in the
first half of 2010.  The level of average noninterest-bearing demand
deposits increased $2.76 million, or 1.37%, to $203.25 million for the six
months ended June 30, 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 $10.89 million, or 10.47%, to $93.09
million for the first half of 2010, while the rate decreased 26 basis points to
1.14% during the same period.  The decrease in average balance can be
largely attributed to 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 half of 2010 and 2009. Wholesale repurchase agreements remained unchanged
at $50.00 million, while the rate decreased 18 basis points between the two
periods due to changes in the structure within those borrowings.  The
average balance of FHLB borrowings and other long-term debt decreased by $14.25
million, or 6.73%, in the first half of 2010 to $197.27 million, while the rate
paid on those borrowings decreased 15 basis points.





-30-


Table
      IAVERAGE
      BALANCE SHEETS AND NET INTEREST INCOME
ANALYSIS





Three
      Months Ended
                          
                          
                          Three
      Months EndedJune
      30, 2010
                          
                          
                          June
      30, 2009Average
                          
                          
                          
                          
                          
                          Yield/
                          
                          
                          Average
                          
                          
                          
                          
                          
                          Yield/(Dollars
      in Thousands)
                          
                          Balance
                          
                          
                          Interest
      (1)
                          
                          
                          Rate
      (1)
                          
                          
                          Balance
                          
                          
                          Interest
      (1)
                          
                          
                          Rate
      (1)ASSETSEarning
      assetsLoans
      (2)
                          
                          $
                          1,397,528
                          
                          
                          $
                          21,039
                          
                          
                          
                          6.04
                          %
                          
                          $
                          1,269,584
                          
                          
                          $
                          19,589
                          
                          
                          
                          6.19
                          %Securities
      available-for-sale
                          
                          
                          498,880
                          
                          
                          
                          5,728
                          
                          
                          
                          4.61
                          %
                          
                          
                          557,110
                          
                          
                          
                          7,169
                          
                          
                          
                          5.16
                          %Securities
      held-to-maturity
                          
                          
                          6,928
                          
                          
                          
                          145
                          
                          
                          
                          8.39
                          %
                          
                          
                          7,824
                          
                          
                          
                          164
                          
                          
                          
                          8.41
                          %Interest-bearing
      deposits
                          
                          
                          72,782
                          
                          
                          
                          34
                          
                          
                          
                          0.19
                          %
                          
                          
                          57,885
                          
                          
                          
                          39
                          
                          
                          
                          0.27
                          %Total
      earning assets
                          
                          
                          1,976,118
                          
                          
                          
                          26,946
                          
                          
                          
                          5.47
                          %
                          
                          
                          1,892,403
                          
                          
                          
                          26,961
                          
                          
                          
                          5.71
                          %Other
      assets
                          
                          
                          281,473
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          287,211TOTAL
      ASSETS
                          
                          $
                          2,257,591
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          2,179,614LIABILITIESInterest-bearing
      depositsDemand
      deposits
                          
                          $
                          248,512
                          
                          
                          $
                          250
                          
                          
                          
                          0.40
                          %
                          
                          $
                          197,710
                          
                          
                          $
                          81
                          
                          
                          
                          0.16
                          %Savings
      deposits
                          
                          
                          421,669
                          
                          
                          
                          781
                          
                          
                          
                          0.74
                          %
                          
                          
                          317,700
                          
                          
                          
                          540
                          
                          
                          
                          0.68
                          %Time
      deposits
                          
                          
                          762,858
                          
                          
                          
                          4,075
                          
                          
                          
                          2.14
                          %
                          
                          
                          846,560
                          
                          
                          
                          6,455
                          
                          
                          
                          3.06
                          %Total
      interest-bearing deposits
                          
                          
                          1,433,039
                          
                          
                          
                          5,106
                          
                          
                          
                          1.43
                          %
                          
                          
                          1,361,970
                          
                          
                          
                          7,076
                          
                          
                          
                          2.08
                          %BorrowingsRetail
      repurchase agreements
                          
                          
                          94,197
                          
                          
                          
                          252
                          
                          
                          
                          1.07
                          %
                          
                          
                          101,525
                          
                          
                          
                          333
                          
                          
                          
                          1.32
                          %Wholesale
      repurchase agreements
                          
                          
                          50,000
                          
                          
                          
                          468
                          
                          
                          
                          3.75
                          %
                          
                          
                          50,000
                          
                          
                          
                          465
                          
                          
                          
                          3.73
                          %FHLB
      borrowings and other indebtedness
                          
                          
                          195,804
                          
                          
                          
                          1,787
                          
                          
                          
                          3.66
                          %
                          
                          
                          208,102
                          
                          
                          
                          1,994
                          
                          
                          
                          3.84
                          %Total
      borrowings
                          
                          
                          340,001
                          
                          
                          
                          2,507
                          
                          
                          
                          2.96
                          %
                          
                          
                          359,627
                          
                          
                          
                          2,792
                          
                          
                          
                          3.11
                          %Total
      interest-bearing liabilities
                          
                          
                          1,773,040
                          
                          
                          
                          7,613
                          
                          
                          
                          1.72
                          %
                          
                          
                          1,721,597
                          
                          
                          
                          9,868
                          
                          
                          
                          2.30
                          %Noninterest-bearing
      demand deposits
                          
                          
                          207,393
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          201,670Other
      liabilities
                          
                          
                          10,940
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          24,419Stockholders'
      equity
                          
                          
                          266,218
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          231,928TOTAL
      LIABILITIES ANDSTOCKHOLDERS'
      EQUITY
                          
                          $
                          2,257,591
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          2,179,614Net
      interest income, tax-equivalent
                          
                          
                          
                          
                          
                          $
                          19,333
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          17,093Net
      interest rate spread (3)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.75
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.42
                          %Net
      interest margin (4)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.92
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.62
                          %





(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 earning
      assets.




-31-




Table
      IIAVERAGE
      BALANCE SHEETS AND NET INTEREST INCOME
ANALYSIS





Six
      Months Ended
                        
                        
                        Six
      Months EndedJune
      30, 2010
                        
                        
                        June
      30, 2009Average
                        
                        
                        
                        
                        
                        Yield/
                        
                        
                        Average
                        
                        
                        
                        
                        
                        Yield/(Dollars
      in Thousands)
                        
                        Balance
                        
                        
                        Interest
      (1)
                        
                        
                        Rate
      (1)
                        
                        
                        Balance
                        
                        
                        Interest
      (1)
                        
                        
                        Rate
      (1)ASSETSEarning
      assetsLoans
      (2)
                        
                        $
                        1,396,603
                        
                        
                        $
                        42,436
                        
                        
                        
                        6.13
                        %
                        
                        $
                        1,280,394
                        
                        
                        $
                        39,585
                        
                        
                        
                        6.23
                        %Securities
      available-for-sale
                        
                        
                        490,062
                        
                        
                        
                        11,561
                        
                        
                        
                        4.76
                        %
                        
                        
                        535,326
                        
                        
                        
                        14,741
                        
                        
                        
                        5.55
                        %Securities
      held-to-maturity
                        
                        
                        7,033
                        
                        
                        
                        293
                        
                        
                        
                        8.40
                        %
                        
                        
                        8,147
                        
                        
                        
                        336
                        
                        
                        
                        8.32
                        %Interest-bearing
      deposits
                        
                        
                        74,675
                        
                        
                        
                        80
                        
                        
                        
                        0.22
                        %
                        
                        
                        65,713
                        
                        
                        
                        78
                        
                        
                        
                        0.24
                        %Total
      earning assets
                        
                        
                        1,968,373
                        
                        
                        
                        54,370
                        
                        
                        
                        5.57
                        %
                        
                        
                        1,889,580
                        
                        
                        
                        54,740
                        
                        
                        
                        5.84
                        %Other
      assets
                        
                        
                        282,363
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        288,115TOTAL
      ASSETS
                        
                        $
                        2,250,736
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,177,695LIABILITIESInterest-bearing
      depositsDemand
      deposits
                        
                        $
                        242,531
                        
                        
                        $
                        450
                        
                        
                        
                        0.37
                        %
                        
                        $
                        193,983
                        
                        
                        $
                        160
                        
                        
                        
                        0.17
                        %Savings
      deposits
                        
                        
                        417,377
                        
                        
                        
                        1,612
                        
                        
                        
                        0.78
                        %
                        
                        
                        315,146
                        
                        
                        
                        1,196
                        
                        
                        
                        0.77
                        %Time
      deposits
                        
                        
                        777,268
                        
                        
                        
                        8,546
                        
                        
                        
                        2.22
                        %
                        
                        
                        852,258
                        
                        
                        
                        13,287
                        
                        
                        
                        3.14
                        %Total
      interest-bearing deposits
                        
                        
                        1,437,176
                        
                        
                        
                        10,608
                        
                        
                        
                        1.49
                        %
                        
                        
                        1,361,387
                        
                        
                        
                        14,643
                        
                        
                        
                        2.17
                        %BorrowingsRetail
      repurchase agreements
                        
                        
                        93,093
                        
                        
                        
                        528
                        
                        
                        
                        1.14
                        %
                        
                        
                        103,984
                        
                        
                        
                        723
                        
                        
                        
                        1.40
                        %Wholesale
      repurchase agreements
                        
                        
                        50,000
                        
                        
                        
                        931
                        
                        
                        
                        3.75
                        %
                        
                        
                        50,000
                        
                        
                        
                        975
                        
                        
                        
                        3.93
                        %FHLB
      borrowings and other indebtedness
                        
                        
                        197,266
                        
                        
                        
                        3,539
                        
                        
                        
                        3.62
                        %
                        
                        
                        211,511
                        
                        
                        
                        3,957
                        
                        
                        
                        3.77
                        %Total
      borrowings
                        
                        
                        340,359
                        
                        
                        
                        4,998
                        
                        
                        
                        2.96
                        %
                        
                        
                        365,495
                        
                        
                        
                        5,655
                        
                        
                        
                        3.12
                        %Total
      interest-bearing liabilities
                        
                        
                        1,777,535
                        
                        
                        
                        15,606
                        
                        
                        
                        1.77
                        %
                        
                        
                        1,726,882
                        
                        
                        
                        20,298
                        
                        
                        
                        2.37
                        %Noninterest-bearing
      demand deposits
                        
                        
                        203,252
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        200,497Other
      liabilities
                        
                        
                        8,097
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        25,064Stockholders'
      equity
                        
                        
                        261,852
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        225,252TOTAL
      LIABILITIES ANDSTOCKHOLDERS'
      EQUITY
                        
                        $
                        2,250,736
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,177,695Net
      interest income, tax-equivalent
                        
                        
                        
                        
                        
                        $
                        38,764
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        34,442Net
      interest rate spread (3)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.80
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.47
                        %Net
      interest margin (4)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.97
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.68
                        %





(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 earning
      assets.


-32-





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





Three
      Months Ended
                                    
                                    
                                    Six
      Months EndedJune
      30, 2010, Compared to 2009
                                    
                                    
                                    June
      30, 2010, Compared to 2009$ Increase
      (Decrease) due to
                                    
                                    
                                    $ Increase
      (Decrease) due toRate/
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    Rate/(In
      Thousands)
                                    
                                    Volume
                                    
                                    
                                    Rate
                                    
                                    
                                    Volume
                                    
                                    
                                    Total
                                    
                                    
                                    Volume
                                    
                                    
                                    Rate
                                    
                                    
                                    Volume
                                    
                                    
                                    TotalInterest
      Earned On:Loans
      (1)
                                    
                                    $
                                    1,974
                                    
                                    
                                    $
                                    (476
                                    )
                                    
                                    $
                                    (48
                                    )
                                    
                                    $
                                    1,450
                                    
                                    
                                    $
                                    3,592
                                    
                                    
                                    $
                                    (680
                                    )
                                    
                                    $
                                    (61
                                    )
                                    
                                    $
                                    2,851Securities
      available-for-sale (1)
                                    
                                    
                                    (749
                                    )
                                    
                                    
                                    (772
                                    )
                                    
                                    
                                    80
                                    
                                    
                                    
                                    (1,441
                                    )
                                    
                                    
                                    (1,246
                                    )
                                    
                                    
                                    (2,113
                                    )
                                    
                                    $
                                    179
                                    
                                    
                                    
                                    (3,180
                                    )Securities
      held-to-maturity (1)
                                    
                                    
                                    (19
                                    )
                                    
                                    
                                    (0
                                    )
                                    
                                    
                                    0
                                    
                                    
                                    
                                    (19
                                    )
                                    
                                    
                                    (46
                                    )
                                    
                                    
                                    3
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    
                                    (43
                                    )Interest-bearing
      depositswith
      other banks
                                    
                                    
                                    10
                                    
                                    
                                    
                                    (13
                                    )
                                    
                                    
                                    (2
                                    )
                                    
                                    
                                    (5
                                    )
                                    
                                    
                                    11
                                    
                                    
                                    
                                    (8
                                    )
                                    
                                    $
                                    (1
                                    )
                                    
                                    
                                    2Total
      interest earning  assets
                                    
                                    
                                    1,216
                                    
                                    
                                    
                                    (1,261
                                    )
                                    
                                    
                                    30
                                    
                                    
                                    
                                    (15
                                    )
                                    
                                    
                                    2,311
                                    
                                    
                                    
                                    (2,798
                                    )
                                    
                                    
                                    117
                                    
                                    
                                    
                                    (370
                                    )Interest
      Paid On:Demand
      deposits
                                    
                                    
                                    21
                                    
                                    
                                    
                                    118
                                    
                                    
                                    
                                    31
                                    
                                    
                                    
                                    169
                                    
                                    
                                    
                                    40
                                    
                                    
                                    
                                    200
                                    
                                    
                                    
                                    50
                                    
                                    
                                    
                                    290Savings
      deposits
                                    
                                    
                                    177
                                    
                                    
                                    
                                    48
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    241
                                    
                                    
                                    
                                    388
                                    
                                    
                                    
                                    21
                                    
                                    
                                    
                                    7
                                    
                                    
                                    
                                    416Time
      deposits
                                    
                                    
                                    (638
                                    )
                                    
                                    
                                    (1,933
                                    )
                                    
                                    
                                    191
                                    
                                    
                                    
                                    (2,380
                                    )
                                    
                                    
                                    (1,169
                                    )
                                    
                                    
                                    (3,916
                                    )
                                    
                                    
                                    344
                                    
                                    
                                    
                                    (4,741
                                    )Retail
      repurchase agreements
                                    
                                    
                                    (24
                                    )
                                    
                                    
                                    (61
                                    )
                                    
                                    
                                    4
                                    
                                    
                                    
                                    (81
                                    )
                                    
                                    
                                    (76
                                    )
                                    
                                    
                                    (133
                                    )
                                    
                                    
                                    14
                                    
                                    
                                    
                                    (195
                                    )Wholesale
      repurchaseagreement
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3
                                    
                                    
                                    
                                    0
                                    
                                    
                                    
                                    3
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (44
                                    )
                                    
                                    
                                    (0
                                    )
                                    
                                    
                                    (44
                                    )FHLB
      borrowings and otherlong-term debt
                                    
                                    
                                    (118
                                    )
                                    
                                    
                                    (95
                                    )
                                    
                                    
                                    6
                                    
                                    
                                    
                                    (207
                                    )
                                    
                                    
                                    (267
                                    )
                                    
                                    
                                    (164
                                    )
                                    
                                    
                                    13
                                    
                                    
                                    
                                    (418
                                    )Total
      interest-bearing liabilities
                                    
                                    
                                    (583
                                    )
                                    
                                    
                                    (1,920
                                    )
                                    
                                    
                                    248
                                    
                                    
                                    
                                    (2,255
                                    )
                                    
                                    
                                    (1,084
                                    )
                                    
                                    
                                    (4,036
                                    )
                                    
                                    
                                    428
                                    
                                    
                                    
                                    (4,692
                                    )Change
      in net interest income,tax-equivalent
                                    
                                    $
                                    1,799
                                    
                                    
                                    $
                                    659
                                    
                                    
                                    $
                                    (218
                                    )
                                    
                                    $
                                    2,240
                                    
                                    
                                    $
                                    3,395
                                    
                                    
                                    $
                                    1,238
                                    
                                    
                                    $
                                    (311
                                    )
                                    
                                    $
                                    4,322





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





Provision
and Allowance for Loan Losses





During
the last three years, there has been significant stress in both 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.





-33-




The
Company’s allowance for loan losses was $25.01 million at June 30, 2010, $24.28
million at December 31, 2009, and $18.54 million at June 30,
2009.  The Company’s allowance for loan loss activity for the three-
and six-month periods ended June 30, 2010 and 2009 is as follows:





For the Three Months
                  
                  
                  For the Six MonthsEnded June 30,
                  
                  
                  Ended June 30,(In
      Thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Allowance
      for loan lossesBeginning
      balance
                  
                  $
                  24,508
                  
                  
                  $
                  18,420
                  
                  
                  $
                  24,277
                  
                  
                  $
                  17,782Provision
      for loan losses
                  
                  
                  3,596
                  
                  
                  
                  2,552
                  
                  
                  
                  7,261
                  
                  
                  
                  4,700Charge-offs
                  
                  
                  (3,373
                  )
                  
                  
                  (2,681
                  )
                  
                  
                  (7,105
                  )
                  
                  
                  (4,411
                  )Recoveries
                  
                  
                  280
                  
                  
                  
                  252
                  
                  
                  
                  578
                  
                  
                  
                  472Net
      charge-offs
                  
                  
                  (3,093
                  )
                  
                  
                  (2,429
                  )
                  
                  
                  (6,527
                  )
                  
                  
                  (3,939
                  )Ending
      balance
                  
                  $
                  25,011
                  
                  
                  $
                  18,543
                  
                  
                  $
                  25,011
                  
                  
                  $
                  18,543





The total
allowance for loan losses to loans held for investment ratio was 1.79% at June
30, 2010, compared with 1.74% at December 31, 2009, and 1.46% at June 30,
2009.    Management considers the allowance to be adequate
based upon its analysis of the portfolio as of June 30,
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 second quarter and first half of 2010, the Company incurred net charge-offs
of $3.09 million and $6.53 million, respectively, compared with $2.43 million
and $3.94 million in the respective periods of 2009.  Annualized net
charge-offs for the second quarter of 2010 were 0.89% of the average loan
balance.  The Company made provisions for loan losses of $3.60 million
and $7.26 million, respectively, for the three- and six-month periods ended June
30, 2010, compared to $2.55 million and $4.70 million, respectively, in the same
periods of 2009.  Provisions for loan losses covered 116.26% and
111.25%, respectively, of net charge-offs for the three- and six-month periods
ended June 30, 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 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 June 30, 2010, measured 1.70% of total loans and were
comprised of loans 30-89 days delinquent of 0.44% of total loans and loans in
non-accrual status of 1.26% of total loans.  Total delinquency has
decreased approximately $8.59 million 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 stable at 1.26% of total loans
as of June 30, 2010, March 31, 2010, and December 31, 2009.





The
primary composition of non-performing loans is 38.42% residential real estate;
17.61% non-owner occupied commercial real estate; and 14.55% owner occupied
commercial real estate.  Approximately $4.27 million, or 24.16%, 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 second
quarter of 2010 was $8.90 million compared with noninterest income of $5.52
million in the same period of 2009, an increase of $3.38
million.  Exclusive of the impact of other-than-temporary impairment
(“OTTI”) charges and gains on the sale of securities, noninterest income for the
quarter ended June 30, 2010, increased $245 thousand, or 3.21%, compared to the
same period in 2009.  Wealth management revenues decreased $121
thousand, or 10.68%, to $1.01 million for the three months ended June 30, 2010,
compared with the same period in 2009.  Service charges on deposit
accounts decreased $144 thousand, or 4.12%, to $3.35 million for the three
months ended June 30, 2010, compared with the same period in
2009.  Other service charges and fees increased $117 thousand, or
10.33%, to $1.25 million for the three months ended June 30, 2010, compared with
the same period in 2009.  Insurance commissions for the second quarter
of 2010 were $1.39 million, a decrease of $250 thousand, or 15.25%, from the
comparable period in 2009.  Other operating income totaled $890
thousand for the three months ended June 30, 2010, an increase of $643 thousand,
or 260.32%, compared with the same period in 2009.  The increase is
primarily attributed to higher volumes of loans sold in the secondary mortgage
market and increased bank owned life insurance income.   For the
quarter ended June 30, 2010, the Company recognized $185 thousand of OTTI on two
pooled trust preferred securities and several small equity holdings, compared to
$3.78 million of OTTI on three pooled trust preferred securities and several
small equity holdings in 2009.  During the second quarter of 2010, net
securities gains of $1.20 million were realized compared with net gains of $1.65
million in the comparable period in 2009.





-34-




Noninterest
income for the first half of 2010 was $17.48 million compared with noninterest
income of $13.94 million in the same period of 2009, an increase of $3.55
million.  Exclusive of the impact of OTTI charges and gains on the
sale of securities, noninterest income for the six months ended June 30, 2010,
increased $358 thousand, or 2.26%, compared to the same period in
2009.  Wealth management revenues decreased $220 thousand, or 10.39%,
to $1.90 million for the first half of 2010, compared with the same period in
2009.  Service charges on deposit accounts decreased $309 thousand, or
4.65%, to $6.34 million for the six months ended June 30, 2010, compared with
the same period in 2009.  Management attributes the decrease to lower
overall consumer spending, leading to lower levels of certain activity
charges.  Other service charges and fees increased $220 thousand, or
9.52%, to $2.53 million for the six months ended June 30, 2010, compared with
the same period in 2009.  Insurance commissions for the first half of
2010 were $3.59 million, a decrease of $366 thousand, or 9.25%, from the
comparable period in 2009.  Other operating income totaled $1.86
million for the six months ended June 30, 2010, an increase of $1.03 million, or
125.06%, compared with the same period in 2009.  The increase is
primarily attributed to higher volumes of loans sold in the secondary mortgage
market and a small litigation settlement.   For the six months
ended June 30, 2010, the Company recognized $185 thousand of OTTI on two pooled
trust preferred securities and several smaller equity holdings, compared to
$3.99 million on three pooled trust preferred securities and several smaller
equity holdings in 2009.  During the first half of 2010, net
securities gains of $1.45 million were realized compared with net gains of $2.06
million in the comparable period in 2009.





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





Noninterest
Expense





Noninterest
expense totaled $16.60 million for the quarter ended June 30, 2010, an increase
of $557 thousand, or 3.47%, from the same period in 2009.  Salaries
and employee benefits for the second quarter of 2010 increased $1.08 million, or
14.61%, compared to the same period in 2009.  TriStone branches
accounted for an increase in salaries and employee benefits of $359 thousand
during the quarter.  The remainder of the Company showed an overall
increase in salaries and benefits of $723 thousand.  Occupancy and
furniture and equipment expenses increased $263 thousand, or 23.15%, between the
comparable periods, due mainly to the addition of the TriStone
branches.  Other operating expense totaled $4.66 million for the
second quarter of 2010, a decrease of $58 thousand, or 1.23%, from $4.72 million
for the second 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 $710 thousand and $1.41
million, respectively, for the three- and six-month periods ended June 30, 2010.
The Company expects the remainder of the quarterly premium accruals for 2010 to
approximate $1.45 million.





Noninterest
expense totaled $32.67 million for the six months ended June 30, 2010, an
increase of $1.44 million, or 4.62%, from the same period in
2009.  Salaries and employee benefits for the first half of 2010
increased $1.19 million, or 7.76%, compared to the same period in
2009.  TriStone branches accounted for an increase in salaries and
employee benefits of $685 thousand during the first half of 2010.  The
remainder of the Company showed an overall increase in salaries and benefits of
$500 thousand.  Occupancy and furniture and equipment expenses
increased $335 thousand, or 7.03%, between the comparable periods, due mainly to
the addition of the TriStone branches.  Other operating expense
totaled $9.19 million for the first half of 2010, an increase of $129 thousand,
or 1.42%, from $9.06 million for the first half of 2009.





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 and the increases in the cash surrender values of life
insurance policies.





-35-




For the
second quarter of 2010, income taxes were $2.12 million compared with $843
thousand for the second quarter of 2009.  For the quarters ended June
30, 2010 and 2009, the effective tax expense rates were 29.25% and 25.95%,
respectively.  For the six months ended June 30, 2010, income taxes
were $4.30 million compared with $3.17 million for the same period of
2009.  For the six months ended June 30, 2010 and 2009, the effective
tax expense rates were 29.25% and 29.42%, respectively.





FINANCIAL
CONDITION





Total
assets at June 30, 2010, decreased $26.44 million, or 1.16%, to $2.25 billion
from December 31, 2009. Cash and cash equivalents decreased $24.81 million since
year end 2009. Total liabilities at June 30, 2010, decreased $42.10 million, or
2.08%, to $1.98 billion from December 31, 2009. Deposits decreased by $32.54
million, securities sold under agreements to repurchase decreased $5.86 million,
and short term borrowings decreased $3.06 million.





Securities





Available-for-sale
securities were $502.87 million at June 30, 2010, compared with $486.06 million
at December 31, 2009, an increase of $16.81 million, or 3.46%.  The
market value of securities available-for-sale as a percentage of amortized cost
improved from 96.34% at December 31, 2009, to 98.75% at June 30, 2010,
reflecting improved pricing on certain issues.  Held-to-maturity
securities declined to $6.47 million at June 30, 2010, compared with $7.45
million at December 31, 2009.





During
the second quarter, the Company recognized OTTI charges in earnings related to
two pooled trust preferred securities of $134 thousand. During the three- and
six-month periods ended June 30, 2010, the Company recognized impairment charges
on equity securities of $51 thousand.





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 $2.14
million balance of loans held for sale at June 30, 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 June 30,
2010, was $6.82 million on 52 loans.





Loans Held for
Investment





Total
loans held for investment were $1.40 billion at June 30, 2010, representing an
increase of $5.95 million from December 31, 2009 and an increase of $130.44
million from June 30, 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 85.19% for the second
quarter of 2010, compared with 85.13% for the fourth quarter of 2009, and 81.19%
for the second quarter of 2009.  Year-to-date average loans of $1.40
billion increased $116.21 million when compared to year-to-date average loans of
$1.28 billion in 2009.





-36-




The held
for investment loan portfolio continues to be diversified among loan types and
industry segments.   The following table presents the various
loan categories and changes in composition as of June 30, 2010, December 31,
2009, and June 30, 2009.





June 30, 2010
                  
                  
                  December 31, 2009
                  
                  
                  June 30, 2009(Dollars in Thousands)
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentLoans
      Held for InvestmentCommercial,
      financial and agricultural
                  
                  $
                  103,026
                  
                  
                  
                  7.36
                  %
                  
                  $
                  96,366
                  
                  
                  
                  6.91
                  %
                  
                  $
                  83,873
                  
                  
                  
                  6.61
                  %Real
      estate — commercial
                  
                  
                  462,745
                  
                  
                  
                  33.06
                  %
                  
                  
                  450,611
                  
                  
                  
                  32.33
                  %
                  
                  
                  410,473
                  
                  
                  
                  32.33
                  %Real
      estate — residential
                  
                  
                  649,576
                  
                  
                  
                  46.40
                  %
                  
                  
                  657,367
                  
                  
                  
                  47.16
                  %
                  
                  
                  594,645
                  
                  
                  
                  46.85
                  %Real
      estate — construction (1)
                  
                  
                  114,207
                  
                  
                  
                  8.16
                  %
                  
                  
                  124,896
                  
                  
                  
                  8.96
                  %
                  
                  
                  112,361
                  
                  
                  
                  8.85
                  %Consumer
                  
                  
                  62,659
                  
                  
                  
                  4.47
                  %
                  
                  
                  60,090
                  
                  
                  
                  4.31
                  %
                  
                  
                  62,077
                  
                  
                  
                  4.89
                  %Other
                  
                  
                  7,672
                  
                  
                  
                  0.55
                  %
                  
                  
                  4,601
                  
                  
                  
                  0.33
                  %
                  
                  
                  6,014
                  
                  
                  
                  0.47
                  %Total
                  
                  $
                  1,399,885
                  
                  
                  
                  100.00
                  %
                  
                  $
                  1,393,931
                  
                  
                  
                  100.00
                  %
                  
                  $
                  1,269,443
                  
                  
                  
                  100.00
                  %Loans
      Held for Sale
                  
                  $
                  2,141
                  
                  
                  
                  
                  
                  
                  $
                  11,576
                  
                  
                  
                  
                  
                  
                  $
                  802





(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 $24.78 million at June 30, 2010,
$22.11 million at December 31, 2009, and $15.26 million at June 30,
2009.  The percentage of non-performing assets to total assets was
1.10% at June 30, 2010, 0.97% at December 31, 2009, and 0.69% at June 30,
2009.





The
following schedule details non-performing assets by category at the close of
each of the quarters ended June 30, 2010 and 2009, and December 31,
2009.





June 30, 2010
                                                
                                                
                                                December 31, 2009
                                                
                                                
                                                June 30, 2009(Dollars
      in Thousands)Non-accrual
      loans
                                                
                                                $
                                                17,668
                                                
                                                
                                                $
                                                17,527
                                                
                                                
                                                $
                                                11,645Loans
      90 days or more past due and stillaccruing
      interest
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Total
      non-performing loans
                                                
                                                
                                                17,668
                                                
                                                
                                                
                                                17,527
                                                
                                                
                                                
                                                11,645Other
      real estate owned
                                                
                                                
                                                7,108
                                                
                                                
                                                
                                                4,578
                                                
                                                
                                                
                                                3,615Total
      non-performing assets
                                                
                                                $
                                                24,776
                                                
                                                
                                                $
                                                22,105
                                                
                                                
                                                $
                                                15,260Non-performing
      loans as a percentage of total loans
                                                
                                                
                                                1.26
                                                %
                                                
                                                
                                                1.26
                                                %
                                                
                                                
                                                0.92
                                                %Non-performing
      assets as a percentage of total assets
                                                
                                                
                                                1.10
                                                %
                                                
                                                
                                                0.97
                                                %
                                                
                                                
                                                0.69
                                                %Non-performing
      assets as a percentage of total loansand
      other real estate owned
                                                
                                                
                                                1.76
                                                %
                                                
                                                
                                                1.58
                                                %
                                                
                                                
                                                1.20
                                                %Allowance
      for loan losses as a percentage ofnon-performing
      loans
                                                
                                                
                                                141.6
                                                %
                                                
                                                
                                                138.5
                                                %
                                                
                                                
                                                159.2
                                                %Restructured
      loans performing in accordance withmodified
      terms
                                                
                                                $
                                                2,763
                                                
                                                
                                                $
                                                3,565
                                                
                                                
                                                $
                                                2,050





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 June 30,
2010, December 31, 2009, and June 30, 2009. OREO was $7.11 million at June 30,
2010, an increase of $2.53 million 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 June 30, 2010, OREO consisted of 62 properties with an average value
of $197 thousand and an average age of 7 months.  During the three-
and six-month periods ended June 30, 2010, net losses on the sale of OREO
totaled $189 thousand and $457 thousand, respectively.


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.


-37-




Deposits
and Other Borrowings





Total
deposits decreased by $32.54 million, or 1.98%, during the first six months of
2010.  Noninterest-bearing demand deposits decreased $2.51 million to
$205.73 million at June 30, 2010, compared with $208.24 million at December 31,
2009.  Interest-bearing demand deposits increased $12.98 million to
$244.89 million at June 30, 2010 from December 31, 2009.  Savings
increased $23.44 million, or 6.15%, and time deposits decreased $66.45 million,
or 8.06%, during the first half of 2010.





Securities
sold under repurchase agreements decreased $5.86 million, or 3.82%, in the first
six months of 2010 to $147.77 million.  There were no federal funds
purchased outstanding at June 30, 2010, as the Company maintained a strong
liquidity position sold throughout the first half of 2010.





Stockholders’
Equity





Total
stockholders’ equity increased $15.66 million, or 6.21%, from $252.27 million at
December 31, 2009, to $267.93 million at June 30, 2010. Changes in equity were
primarily from the result of net income of $10.41 million, other comprehensive
income of $8.21 million, and common dividends paid of $3.56
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 June 30, 2010, the Company’s total
risk-based capital ratio was 13.61% compared with 13.81% at December 31,
2009.  The Company’s Tier 1 risk-based capital ratio was 12.34% at
June 30, 2010, compared with 12.56% at December 31, 2009.  The
Company’s Tier 1leverage ratio at June 30, 2010, was 8.64% compared with 8.51%
at December 31, 2009.  All of the Company’s regulatory capital ratios
exceed the current “well-capitalized” levels.





During
the second quarter of 2010, the Company was notified by the OCC that it had
issued an Individual Minimum Capital Ratio directive (“IMCR”) to the Bank. The
IMCR requires the Bank to maintain a total risk-based capital ratio of 11.50%, a
Tier 1 risk-based capital ratio of 10.00%, and a Tier 1 leverage ratio of 7.50%.
The Bank’s total risk-based capital, Tier 1 risk-based capital, and Tier 1
leverage ratios were 12.11%, 10.86%, and 7.61%, respectively, at June 30,
2010.





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





Liquidity
and Capital Resources





At June
30, 2010, the Company maintained liquidity in the form of cash and cash
equivalent balances of $76.53 million, unpledged securities available-for-sale
of $201.09 million, and total FHLB credit availability of approximately $202.41
million.  Cash and cash equivalents as well as advances from the FHLB
are immediately available for satisfaction of deposit withdrawals, customer
credit needs and operations of the Company.  Investment securities
available-for-sale represent a secondary level of liquidity available for
conversion to liquid funds in the event of extraordinary needs.  The
Company also maintains approved lines of credit with correspondent banks as
backup liquidity sources.





The
Company is a holding company, which is a separate legal entity from the Bank,
and at June 30, 2010, maintained cash balances of $14.24 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.





-38-




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.





Specific
strategies for management of interest rate risk have included shortening the
amortized maturity of new fixed-rate loans, increasing the volume of
adjustable-rate loans to reduce the average maturity of the Company’s
interest-earning assets, and monitoring the term and structure of liabilities to
maintain a balanced mix of maturity and repricing structures to mitigate
potential exposure.  At June 30, 2010, net interest income modeling
shows the Company to be in a relatively neutral 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 June 30, 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 June
30, 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%.




-39-




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 AnalysisJune 30, 2010(Dollars in Thousands)
                                                      
                                                      Change in
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Change inIncrease (Decrease) in
                                                      
                                                      Net Interest
                                                      
                                                      
                                                      %
                                                      
                                                      
                                                      Econcomic Value
                                                      
                                                      
                                                      %Interest Rates (Basis Points)
                                                      
                                                      Income
                                                      
                                                      
                                                      Change
                                                      
                                                      
                                                      of Equity
                                                      
                                                      
                                                      Change200
                                                      
                                                      $
                                                      (231
                                                      )
                                                      
                                                      
                                                      (0.3
                                                      )
                                                      
                                                      $
                                                      4,284
                                                      
                                                      
                                                      
                                                      1.6100
                                                      
                                                      
                                                      (143
                                                      )
                                                      
                                                      
                                                      (0.2
                                                      )
                                                      
                                                      
                                                      6,175
                                                      
                                                      
                                                      
                                                      2.4(100)
                                                      
                                                      
                                                      1,463
                                                      
                                                      
                                                      
                                                      2.0
                                                      
                                                      
                                                      
                                                      (21,117
                                                      )
                                                      
                                                      
                                                      (8.0
                                                      )





December 31, 2009(Dollars in Thousands)
                                  
                                  Change in
                                  
                                  
                                  
                                  
                                  
                                  Change inIncrease (Decrease) in
                                  
                                  Net Interest
                                  
                                  
                                  %
                                  
                                  
                                  Econcomic 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


-40-





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 the
Consolidated Financial Statements of this Quarterly Report





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
June 30, 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





The
following risk factor is in addition to those risk factors previously disclosed
under Item 1A. of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009, as amended, previously filed with the SEC.





Recent
enactment of broad financial reform legislation provides for new regulations
affecting many aspects of our operations and, depending on the final regulations
promulgated under this new law, may adversely impact our profitability and
operations.





The
U.S. Congress recently approved the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law by
President Obama on July 21, 2010.  The Dodd-Frank Act provides
for expansive reforms of the financial services industry and affects,
among other things, the lending, deposit, investment, trading and operating
activities of financial institutions and their holding companies, such as First
Community.  The Dodd-Frank Act requires various federal agencies to
adopt a broad range of new implementing rules and regulations, and to prepare
numerous studies and reports for the U.S. Congress, which may result
in additional legislative or regulatory action.  The federal agencies
are given significant discretion in drafting the implementing rules and
regulations, and consequently, many of the details and much of the impact of the
Dodd-Frank Act may not be known for many months or years.





-41-




Certain
provisions of the Dodd-Frank Act are expected to have a near term impact on the
Company.  For example, the Dodd-Frank Act repealed the federal
prohibitions on the payment of interest on demand deposits, thereby permitting
depository institutions to pay interest on business transaction and other
accounts beginning July 21, 2011.  Although the ultimate impact
of this legislation on the Company has not yet been determined, the interest
costs associated with demand deposits may increase.  In addition, the
Dodd-Frank Act requires the Federal Reserve to issue regulations to ensure
that fees charged to merchants for debit card transactions are reasonable and
proportional to the cost of processing those transactions. Although institutions
with less than $10 billion in assets are exempt from these regulations, the
effect of this rule could have an adverse impact on fee income for other
financial institutions as well.





Among the
Dodd-Frank Act’s significant regulatory reforms is the creation of a new
financial consumer protection agency, known as the Bureau of Consumer Financial
Protection (the “Bureau”), which will have broad rulemaking, supervisory and
enforcement authority over consumer financial products and
services.  Although the ultimate impact of the Bureau has
not yet been determined, the costs associated with regulatory compliance may
increase.  The Dodd-Frank Act also limits the federal preemption rules
that have been applicable for national banks, such as the Bank, and gives state
attorneys general the ability to enforce federal consumer protection laws, which
may subject the Bank to additional state regulation.





The
changes resulting from the Dodd-Frank Act, as well as the regulations
promulgated by federal agencies, may impact the profitability of our business
activities, require changes to certain of its business practices or otherwise
adversely affect our business.





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 second 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
                    
                    
                    per Share
                    
                    
                    Announced Plan
                    
                    
                    Under the Plan (1)April
      1-30, 2010
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    
                    803,400May
      1-31, 2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    803,400June
      1-30, 2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    824,333Total
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -





(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 275,667 shares in treasury
at June 30, 2010.





ITEM
3.  Defaults Upon Senior Securities





Not
Applicable





ITEM
4.  Reserved


-42-





ITEM
      5.
            Other
      Information





Not
Applicable





ITEM
      6.
            Exhibits





(a)
            Exhibits





Exhibit
                                          No.
                                        
                                        Exhibit3(i)*
                                        
                                        Articles
      of Incorporation of First Community Bancshares, Inc.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 88,273 shares of Common Stock of First Community Bancshares,
      Inc. (29)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)




-43-




10.23**
                  
                  Employment
      Agreement dated December 16, 2008, between First Community Bank, N. A. and
      Martyn A. Pell. (26)10.24**
                  
                  Employment
      Agreement dated December 16, 2008, between First Community Bank, N. A. and
      Robert. L. Schumacher. (26)10.25**
                  
                  Employment
      Agreement dated July 31, 2009, between First Community Bank, N. A. and
      Simpson O. Brown. (25)10.25**
                  
                  Employment
      Agreement dated July 31, 2009, between First Community Bank, N. A. and
      Mark R. Evans. (25)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)
                                
                                Reserved.(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.




-44-




(20)
            
            Incorporated
      by reference from the Annual Report on Form 10-K for the period ended
      December 31, 2007, filed on March 13, 2008.(21)
            
            Reserved.(22)
            
            Incorporated
      by reference from the Current Report on Form 8-K dated November 21, 2008,
      and filed November 24, 2008.(23)
            
            Incorporated
      by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and
      filed December 16, 2008.(24)
            
            Incorporated
      by reference from Exhibit 10.1 of the Current Report on Form 8-K dated
      December 30, 2008, and filed January 5, 2009.(25)
            
            Incorporated
      by reference from Exhibit 2.2 of the Current Report on Form 8-K dated
      April 2, 2009 and filed April 3, 2009.(26)
            
            Incorporated
      by reference from the Current Report on Form 8-K dated and filed July 6,
      2009.(27)
            
            Incorporated
      by reference from Exhibit 4.4 of 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.(29)
            
            Incorporated
      by reference from Exhibit 99.3 of the Current Report on Form 8-K dated and
      filed July 27, 2010.




-45-


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)


-46-





EXHIBIT
INDEX





Exhibit
      No.
            
            Exhibit3(i)
            
            Articles
      of Incorporation of First Community Bancshares, Inc.31.1
            
            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.


-47-