UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
quarter ended September 30,
2010





Commission
file number 000-19297





FIRST
      COMMUNITY BANCSHARES, INC.(Exact
      name of registrant as specified in its charter)





Nevada
              
              55-0694814(State
      or other jurisdiction of incorporation)
              
              (IRS
      Employer Identification No.)P.O.
      Box 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                                   o     No





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


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


o    Yes                                   o     No





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




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


(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).


o    Yes                                   þ     No





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





Class –
Common Stock, $1.00 Par Value; 17,834,601 shares outstanding as of October 22,
2010





FIRST
COMMUNITY BANCSHARES, INC.


FORM
10-Q


For the
quarter ended September 30, 2010





INDEX





PART
      I.
                                            FINANCIAL
      INFORMATIONItem
      1.
                                            Financial
      StatementsConsolidated
      Balance Sheets as of September 30, 2010 (Unaudited) and December 31,
      2009
                                            3Consolidated
      Statements of Income (Loss) for the Three- and Nine-Month Periods Ended
      September 30, 2010 and 2009 (Unaudited)
                                            4Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
      2009 (Unaudited)
                                            5Consolidated
      Statements of Changes in Stockholders’ Equity for the Nine Months Ended
      September 30, 2010 and 2009 (Unaudited)
                                            6Notes
      to Consolidated Financial Statements
                                            7Item
      2.
                                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                            25Item
      3.
                                            Quantitative
      and Qualitative Disclosures about Market Risk
                                            37Item
      4.
                                            Controls
      and Procedures
                                            40PART
      II.
                                            OTHER
      INFORMATIONItem
      1.
                                            Legal
      Proceedings
                                            40Item 1A.
                                            Risk
      Factors
                                            40Item
      2.
                                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                                            40Item
      3.
                                            Defaults
      Upon Senior Securities
                                            41Item
      4.
                                            Reserved
                                            41Item
      5.
                                            Other
      Information
                                            41Item
      6.
                                            Exhibits
                                            41SIGNATURES
                                            44EXHIBIT
      INDEX
                                            45


- 2
-





PART
I. ITEM 1.   Financial Statements





FIRST
      COMMUNITY BANCSHARES, INC.CONSOLIDATED
      BALANCE SHEETS


September 30,
                
                
                December 31,2010
                
                
                2009(Dollars
      in Thousands)
                
                (Unaudited)AssetsCash
      and due from banks
                
                $
                37,120
                
                
                $
                36,265Federal
      funds sold
                
                
                93,281
                
                
                
                61,376Interest-bearing
      balances with banks
                
                
                1,363
                
                
                
                3,700Total
      cash and cash equivalents
                
                
                131,764
                
                
                
                101,341Securities
      available-for-sale
                
                
                480,587
                
                
                
                486,057Securities
      held-to-maturity
                
                
                5,931
                
                
                
                7,454Loans
      held for sale
                
                
                3,386
                
                
                
                11,576Loans
      held for investment, net of unearned income
                
                
                1,398,251
                
                
                
                1,393,931Less
      allowance for loan losses
                
                
                26,420
                
                
                
                24,277Net
      loans held for investment
                
                
                1,371,831
                
                
                
                1,369,654Premises
      and equipment, net
                
                
                56,042
                
                
                
                56,946Other
      real estate owned
                
                
                5,501
                
                
                
                4,578Interest
      receivable
                
                
                7,899
                
                
                
                8,610Goodwill
      and other intangible assets
                
                
                91,165
                
                
                
                91,061Other
      assets
                
                
                143,319
                
                
                
                136,006Total
      Assets
                
                $
                2,297,425
                
                
                $
                2,273,283LiabilitiesDeposits:Noninterest-bearing
                
                $
                216,167
                
                
                $
                208,244Interest-bearing
                
                
                1,441,056
                
                
                
                1,437,716Total
      Deposits
                
                
                1,657,223
                
                
                
                1,645,960Interest,
      taxes and other liabilities
                
                
                21,377
                
                
                
                22,498Securities
      sold under agreements to repurchase
                
                
                153,413
                
                
                
                153,634FHLB
      borrowings and other indebtedness
                
                
                191,209
                
                
                
                198,924Total
      Liabilities
                
                
                2,023,222
                
                
                
                2,021,016Stockholders'
      EquityPreferred
      stock, par value undesignated; 1,000,000 shares authorized; 0 shares
      issued at September 30, 2010 and December 31, 2009
                
                
                -
                
                
                
                -Common
      stock, $1 par value; 50,000,000 shares authorized; 18,082,822 shares
      issued at September 30, 2010, and 18,082,822 issued at December 31, 2009,
      and 248,221 and 317,658 shares in treasury, respectively
                
                
                18,083
                
                
                
                18,083Additional
      paid-in capital
                
                
                189,811
                
                
                
                190,967Retained
      earnings
                
                
                78,385
                
                
                
                66,760Treasury
      stock, at cost
                
                
                (7,729
                )
                
                
                (9,891
                )Accumulated
      other comprehensive loss
                
                
                (4,347
                )
                
                
                (13,652
                )Total
      Stockholders' Equity
                
                
                274,203
                
                
                
                252,267Total
      Liabilities and Stockholders' Equity
                
                $
                2,297,425
                
                
                $
                2,273,283





See
Notes to Consolidated Financial Statements.


- 3
-





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


Three Months Ended
                
                
                Nine Months EndedSeptember30,
                
                
                September30,(Dollars
      In Thousands, Except Share and Per Share Data)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Interest
      IncomeInterest
      and fees on loans held for investment
                
                $
                21,440
                
                
                $
                21,064
                
                
                $
                63,791
                
                
                $
                60,619Interest
      on securities — taxable
                
                
                2,895
                
                
                
                4,562
                
                
                
                10,411
                
                
                
                14,903Interest
      on securities — nontaxable
                
                
                1,451
                
                
                
                1,449
                
                
                
                4,271
                
                
                
                4,527Interest
      on federal funds sold and deposits in banks
                
                
                54
                
                
                
                55
                
                
                
                134
                
                
                
                133Total
      interest income
                
                
                25,840
                
                
                
                27,130
                
                
                
                78,607
                
                
                
                80,182Interest
      ExpenseInterest
      on deposits
                
                
                4,872
                
                
                
                6,998
                
                
                
                15,480
                
                
                
                21,641Interest
      on borrowings
                
                
                2,371
                
                
                
                2,596
                
                
                
                7,369
                
                
                
                8,251Total
      interest expense
                
                
                7,243
                
                
                
                9,594
                
                
                
                22,849
                
                
                
                29,892Net
      interest income
                
                
                18,597
                
                
                
                17,536
                
                
                
                55,758
                
                
                
                50,290Provision
      for loan losses
                
                
                3,810
                
                
                
                3,819
                
                
                
                11,071
                
                
                
                8,519Net
      interest income after provision for loan losses
                
                
                14,787
                
                
                
                13,717
                
                
                
                44,687
                
                
                
                41,771Noninterest
      IncomeWealth
      management income
                
                
                909
                
                
                
                971
                
                
                
                2,806
                
                
                
                3,088Service
      charges on deposit accounts
                
                
                3,457
                
                
                
                3,659
                
                
                
                9,796
                
                
                
                10,307Other
      service charges and fees
                
                
                1,244
                
                
                
                1,156
                
                
                
                3,775
                
                
                
                3,467Insurance
      commissions
                
                
                1,663
                
                
                
                1,567
                
                
                
                5,253
                
                
                
                5,523Total
      impairment losses on securities
                
                
                -
                
                
                
                (26,405
                )
                
                
                (185
                )
                
                
                (63,180
                )Portion
      of loss recognized in other comprehensive income
                
                
                -
                
                
                
                (4,406
                )
                
                
                -
                
                
                
                28,384Net
      impairment losses recognized in earnings
                
                
                -
                
                
                
                (30,811
                )
                
                
                (185
                )
                
                
                (34,796
                )Net
      gains on sale of securities
                
                
                2,574
                
                
                
                866
                
                
                
                4,025
                
                
                
                2,930Gain
      on acquisition
                
                
                -
                
                
                
                4,493
                
                
                
                -
                
                
                
                4,493Other
      operating income
                
                
                1,091
                
                
                
                815
                
                
                
                2,950
                
                
                
                1,750Total
      noninterest income (loss)
                
                
                10,938
                
                
                
                (17,284
                )
                
                
                28,420
                
                
                
                (3,238
                )Noninterest
      ExpenseSalaries
      and employee benefits
                
                
                8,753
                
                
                
                7,860
                
                
                
                25,209
                
                
                
                23,131Occupancy
      expense of bank premises
                
                
                1,573
                
                
                
                1,266
                
                
                
                4,852
                
                
                
                4,202Furniture
      and equipment expense
                
                
                926
                
                
                
                928
                
                
                
                2,748
                
                
                
                2,758Amortization
      of intangible assets
                
                
                260
                
                
                
                262
                
                
                
                769
                
                
                
                751Prepayment
      penalties on FHLB advances
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                88FDIC
      premiums and assessments
                
                
                718
                
                
                
                1,109
                
                
                
                2,129
                
                
                
                2,584Merger
      related expenses
                
                
                -
                
                
                
                1,505
                
                
                
                -
                
                
                
                1,580Other
      operating expense
                
                
                5,199
                
                
                
                4,838
                
                
                
                14,392
                
                
                
                14,011Total
      noninterest expense
                
                
                17,429
                
                
                
                17,768
                
                
                
                50,099
                
                
                
                49,105Income
      (loss) before income taxes
                
                
                8,296
                
                
                
                (21,335
                )
                
                
                23,008
                
                
                
                (10,572
                )Income
      tax expense (benefit)
                
                
                1,743
                
                
                
                (9,783
                )
                
                
                6,046
                
                
                
                (6,617
                )Net
      income (loss)
                
                
                6,553
                
                
                
                (11,552
                )
                
                
                16,962
                
                
                
                (3,955
                )Dividends
      on preferred stock
                
                
                -
                
                
                
                1,011
                
                
                
                -
                
                
                
                2,160Net
      income (loss) available to common shareholders
                
                $
                6,553
                
                
                $
                (12,563
                )
                
                $
                16,962
                
                
                $
                (6,115
                )Basic
      earnings (loss) per common share
                
                $
                0.37
                
                
                $
                (0.72
                )
                
                $
                0.95
                
                
                $
                (0.44
                )Diluted
      earnings (loss) per common share
                
                $
                0.37
                
                
                $
                (0.72
                )
                
                $
                0.95
                
                
                $
                (0.44
                )Cash
      dividends per common share
                
                $
                0.10
                
                
                $
                0.10
                
                
                $
                0.30
                
                
                $
                0.30Weighted
      average basic shares outstanding
                
                
                17,808,348
                
                
                
                17,427,434
                
                
                
                17,787,233
                
                
                
                13,918,599Weighted
      average diluted shares outstanding
                
                
                17,832,882
                
                
                
                17,427,434
                
                
                
                17,812,895
                
                
                
                13,918,599





See
Notes to Consolidated Financial Statements.


- 4
-





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


Nine Months EndedSeptember30,(Dollars
      In Thousands)
                    
                    2010
                    
                    
                    2009Operating
      activities:Net
      income (loss)
                    
                    $
                    16,962
                    
                    
                    $
                    (3,955
                    )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
                    
                    
                    11,071
                    
                    
                    
                    8,519Depreciation
      and amortization of premises and equipment
                    
                    
                    3,050
                    
                    
                    
                    2,986Intangible
      amortization
                    
                    
                    769
                    
                    
                    
                    751Net
      investment amortization and accretion
                    
                    
                    542
                    
                    
                    
                    1,024Net
      gain on the sale of assets
                    
                    
                    (3,746
                    )
                    
                    
                    (3,008
                    )Net
      gain on acquisitions
                    
                    
                    -
                    
                    
                    
                    (4,493
                    )Mortgage
      loans originated for sale
                    
                    
                    (28,101
                    )
                    
                    
                    (26,147
                    )Proceeds
      from sales of mortgage loans
                    
                    
                    36,856
                    
                    
                    
                    25,538Gain
      on sales of loans
                    
                    
                    (565
                    )
                    
                    
                    (59
                    )Equity-based
      compensation expense
                    
                    
                    51
                    
                    
                    
                    105Deferred
      income tax benefit
                    
                    
                    (1,965
                    )
                    
                    
                    (17,925
                    )Decrease
      in interest receivable
                    
                    
                    711
                    
                    
                    
                    1,635Net
      impairment losses recognized in earnings
                    
                    
                    185
                    
                    
                    
                    34,796Other
      operating activities, net
                    
                    
                    12,912
                    
                    
                    
                    3,551Net
      cash provided by operating activities
                    
                    
                    48,732
                    
                    
                    
                    23,318Investing
      activities:Proceeds
      from sales of securities available-for-sale
                    
                    
                    142,998
                    
                    
                    
                    126,632Proceeds
      from maturities and calls of securities available-for-sale
                    
                    
                    66,227
                    
                    
                    
                    50,334Proceeds
      from maturities and calls of securities held-to-maturity
                    
                    
                    1,544
                    
                    
                    
                    1,238Purchase
      of securities available-for-sale
                    
                    
                    (208,720
                    )
                    
                    
                    (218,388
                    )Net
      (increase) decrease in loans held for investment
                    
                    
                    (14,401
                    )
                    
                    
                    19,559Proceeds
      from the (investment in) redemption of FHLB stock
                    
                    
                    (982
                    )
                    
                    
                    351Cash
      (invested in) provided by acquisitions, net
                    
                    
                    (667
                    )
                    
                    
                    21,299Proceeds
      from sales of equipment
                    
                    
                    37
                    
                    
                    
                    218Purchase
      of premises and equipment
                    
                    
                    (2,374
                    )
                    
                    
                    (3,909
                    )Net
      cash used in investing activities
                    
                    
                    (16,338
                    )
                    
                    
                    (2,666
                    )Financing
      activities:Net
      increase in demand and savings deposits
                    
                    
                    91,223
                    
                    
                    
                    15,645Net
      (decrease) increase in time deposits
                    
                    
                    (79,960
                    )
                    
                    
                    357Net
      decrease in securities sold under agreement to repurchase
                    
                    
                    (221
                    )
                    
                    
                    (18,872
                    )Net
      decrease in FHLB and other borrowings
                    
                    
                    (7,715
                    )
                    
                    
                    (25,122
                    )FHLB
      debt prepayment fees
                    
                    
                    -
                    
                    
                    
                    (88
                    )Net
      proceeds from the issuance of common stock
                    
                    
                    -
                    
                    
                    
                    61,668Redemption
      of preferred stock
                    
                    
                    -
                    
                    
                    
                    (41,500
                    )Proceeds
      from the exercise of stock options
                    
                    
                    30
                    
                    
                    
                    20Excess
      tax benefit from stock-based compensation
                    
                    
                    9
                    
                    
                    
                    2Acquisition
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    (13
                    )Preferred
      dividends paid
                    
                    
                    -
                    
                    
                    
                    (1,079
                    )Common
      dividends paid
                    
                    
                    (5,337
                    )
                    
                    
                    (2,852
                    )Net
      cash used in financing activities
                    
                    
                    (1,971
                    )
                    
                    
                    (11,834
                    )Increase
      in cash and cash equivalents
                    
                    
                    30,423
                    
                    
                    
                    8,818Cash
      and cash equivalents at beginning of period
                    
                    
                    101,341
                    
                    
                    
                    46,439Cash
      and cash equivalents at end of period
                    
                    $
                    131,764
                    
                    
                    $
                    55,257Supplemental
      information — noncash itemsTransfer
      of loans to other real estate
                    
                    $
                    5,807
                    
                    
                    $
                    5,404Cumulative
      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 in  accounting principle
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,131
                      
                      
                      
                      -
                      
                      
                      
                      (6,131
                      )
                      
                      
                      -Comprehensive
      income:Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,955
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,955
                      )Other
      comprehensive income — see note 9
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      23,150
                      
                      
                      
                      23,150Comprehensive
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,176
                      
                      
                      
                      -
                      
                      
                      
                      17,019
                      
                      
                      
                      19,195Preferred
      dividend, net
                      
                      
                      1,081
                      
                      
                      
                      -
                      
                      
                      
                      (37
                      )
                      
                      
                      (2,160
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,116
                      )Common
      dividends declared
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (4,616
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (4,616
                      )Redemption
      of preferred stock
                      
                      
                      (41,500
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (41,500
                      )Acquisition
      of treasury shares — 1,000 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (13
                      )
                      
                      
                      -
                      
                      
                      
                      (13
                      )Acquisition
      of TriStone Community Bank — 741,588 shares issued
                      
                      
                      -
                      
                      
                      
                      742
                      
                      
                      
                      9,386
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      10,128Issuance
      of vested shares — 700 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (22
                      )
                      
                      
                      -
                      
                      
                      
                      22
                      
                      
                      
                      -
                      
                      
                      
                      -Equity-based
      compensation expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      105
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      105Common
      stock issuance — 5,290,000 shares issued
                      
                      
                      -
                      
                      
                      
                      5,290
                      
                      
                      
                      56,378
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      61,668Retirement
      plan contribution — 79,591 shares issued
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,495
                      )
                      
                      
                      -
                      
                      
                      
                      2,527
                      
                      
                      
                      -
                      
                      
                      
                      1,032Option
      exercises — 2,000 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (42
                      )
                      
                      
                      -
                      
                      
                      
                      64
                      
                      
                      
                      -
                      
                      
                      
                      22Balance
      September 30, 2009
                      
                      $
                      -
                      
                      
                      $
                      18,083
                      
                      
                      $
                      192,799
                      
                      
                      $
                      101,504
                      
                      
                      $
                      (12,768
                      )
                      
                      $
                      (35,498
                      )
                      
                      $
                      264,120Balance
      January 1, 2010
                      
                      $
                      -
                      
                      
                      $
                      18,083
                      
                      
                      $
                      190,967
                      
                      
                      $
                      66,760
                      
                      
                      $
                      (9,891
                      )
                      
                      $
                      (13,652
                      )
                      
                      $
                      252,267Comprehensive
      income:Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      16,962
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      16,962Other
      comprehensive income — see note 9
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,305
                      
                      
                      
                      9,305Comprehensive
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      16,962
                      
                      
                      
                      -
                      
                      
                      
                      9,305
                      
                      
                      
                      26,267Common
      dividends declared and paid
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,337
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,337
                      )Issuance
      of vested shares — 800 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (25
                      )
                      
                      
                      -
                      
                      
                      
                      25
                      
                      
                      
                      -
                      
                      
                      
                      -Equity-based
      compensation expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      51
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      51Retirement
      plan contribution — 66,006 shares issued
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,130
                      )
                      
                      
                      -
                      
                      
                      
                      2,055
                      
                      
                      
                      -
                      
                      
                      
                      925Option
      exercises — 2,631 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (52
                      )
                      
                      
                      -
                      
                      
                      
                      82
                      
                      
                      
                      -
                      
                      
                      
                      30Balance
      September 30, 2010
                      
                      $
                      -
                      
                      
                      $
                      18,083
                      
                      
                      $
                      189,811
                      
                      
                      $
                      78,385
                      
                      
                      $
                      (7,729
                      )
                      
                      $
                      (4,347
                      )
                      
                      $
                      274,203





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
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 Note 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 Nine MonthsendedSeptember30,
                  
                  
                  endedSeptember30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(In
      Thousands, Except Share and Per Share Data)Net
      income (loss) available to common shareholders
                  
                  $
                  6,553
                  
                  
                  $
                  (12,563
                  )
                  
                  $
                  16,962
                  
                  
                  $
                  (6,115
                  )Weighted
      average shares outstanding
                  
                  
                  17,808,348
                  
                  
                  
                  17,427,434
                  
                  
                  
                  17,787,233
                  
                  
                  
                  13,918,599Dilutive
      shares for stock options
                  
                  
                  11,630
                  
                  
                  
                  -
                  
                  
                  
                  12,758
                  
                  
                  
                  -Contingently
      issuable shares
                  
                  
                  12,904
                  
                  
                  
                  -
                  
                  
                  
                  12,904
                  
                  
                  
                  -Weighted
      average dilutive shares outstanding
                  
                  
                  17,832,882
                  
                  
                  
                  17,427,434
                  
                  
                  
                  17,812,895
                  
                  
                  
                  13,918,599Basic
      earnings (loss) per share
                  
                  $
                  0.37
                  
                  
                  $
                  (0.72
                  )
                  
                  $
                  0.95
                  
                  
                  $
                  (0.44
                  )Diluted
      earnings (loss) per share
                  
                  $
                  0.37
                  
                  
                  $
                  (0.72
                  )
                  
                  $
                  0.95
                  
                  
                  $
                  (0.44
                  )





For the
three- and nine-month periods ended September 30, 2010, options and warrants to
purchase 491,189 shares of common stock were outstanding but were not included
in the computation of diluted earnings per common share because they would have
an anti-dilutive effect. Likewise, options and warrants to purchase 562,337 and
541,292 shares, respectively, of common stock were excluded from the three- and
nine-month periods ended September 30, 2009, computations of diluted earnings
per common share because their effect would be anti-dilutive.


- 7
-


Recent
Accounting Pronouncements





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 12 — 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 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, for public entities. 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.  Mergers, Acquisitions, and Branching Activity





In July 2010, GreenPoint Insurance
Group, Inc. (“GreenPoint”), the Company’s wholly-owned insurance
subsidiary, acquired Murphy Insurance Agency, based in Princeton, West Virginia,
issuing cash consideration of approximately $190
thousand.  Acquisition terms call for additional cash consideration if
certain operating performance targets are met.  The Company has
recorded the fair value of the expected additional cash consideration as $477
thousand in long-term debt.  If those targets are not met, the value
of the consideration ultimately paid will decrease the liability and will be
recognized as a gain in the period in which the targets are not
met.  Goodwill and other intangibles associated with the acquisition
total approximately $667 thousand.





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
3.  Investment Securities





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




September 30, 2010Amortized
                            
                            
                            Unrealized
                            
                            
                            Unrealized
                            
                            
                            Fair
                            
                            
                            OTTI
      inCost
                            
                            
                            Gains
                            
                            
                            Losses
                            
                            
                            Value
                            
                            
                            AOCI*(In
      Thousands)U.S.
      Government agency securities
                            
                            $
                            10,000
                            
                            
                            $
                            38
                            
                            
                            $
                            -
                            
                            
                            $
                            10,038
                            
                            
                            $
                            -States
      and political subdivisions
                            
                            
                            152,249
                            
                            
                            
                            6,272
                            
                            
                            
                            (741
                            )
                            
                            
                            157,780
                            
                            
                            
                            -Trust
      preferred securities:Single
      issue
                            
                            
                            52,924
                            
                            
                            
                            -
                            
                            
                            
                            (11,469
                            )
                            
                            
                            41,455
                            
                            
                            
                            -Pooled
                            
                            
                            1,514
                            
                            
                            
                            4,023
                            
                            
                            
                            -
                            
                            
                            
                            5,537
                            
                            
                            
                            -Total
      trust preferred securities
                            
                            
                            54,438
                            
                            
                            
                            4,023
                            
                            
                            
                            (11,469
                            )
                            
                            
                            46,992
                            
                            
                            
                            -FDIC-backed
      securities
                            
                            
                            25,318
                            
                            
                            
                            465
                            
                            
                            
                            -
                            
                            
                            
                            25,783
                            
                            
                            
                            -Mortgage-backed
      securities:Agency
                            
                            
                            220,422
                            
                            
                            
                            7,813
                            
                            
                            
                            (223
                            )
                            
                            
                            228,012
                            
                            
                            
                            -Non-Agency
      Alt-A residential
                            
                            
                            19,688
                            
                            
                            
                            -
                            
                            
                            
                            (8,637
                            )
                            
                            
                            11,051
                            
                            
                            
                            (8,637
                            )Total
      mortgage-backed securities
                            
                            
                            240,110
                            
                            
                            
                            7,813
                            
                            
                            
                            (8,860
                            )
                            
                            
                            239,063
                            
                            
                            
                            (8,637
                            )Equities
                            
                            
                            825
                            
                            
                            
                            235
                            
                            
                            
                            (129
                            )
                            
                            
                            931
                            
                            
                            
                            -Total
                            
                            $
                            482,940
                            
                            
                            $
                            18,846
                            
                            
                            $
                            (21,199
                            )
                            
                            $
                            480,587
                            
                            
                            $
                            (8,637
                            )





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
                  )





*
Other-than-temporary impairment in accumulated other comprehensive
income


- 9
-


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





September30,2010Amortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value(In
      Thousands)States
      and political subdivisions
                  
                  $
                  5,931
                  
                  
                  $
                  110
                  
                  
                  $
                  -
                  
                  
                  $
                  6,041Total
                  
                  $
                  5,931
                  
                  
                  $
                  110
                  
                  
                  $
                  -
                  
                  
                  $
                  6,041





December31,2009Amortized
                  
                  
                  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 September 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
                
                
                FairValue(In
      Thousands)Due
      within one year
                
                $
                71
                
                
                $
                72Due
      after one year but within five years
                
                
                39,877
                
                
                
                41,017Due
      after five years but within ten years
                
                
                55,761
                
                
                
                59,002Due
      after ten years
                
                
                146,296
                
                
                
                140,502242,005
                
                
                
                240,593Mortgage-backed
      securities
                
                
                240,110
                
                
                
                239,063Equity
      securities
                
                
                825
                
                
                
                931Total
                
                $
                482,940
                
                
                $
                480,587





The
amortized cost and estimated fair value of held-to-maturity securities by
contractual maturity at September 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
                
                
                FairValue(In
      Thousands)Due
      within one year
                
                $
                1,219
                
                
                $
                1,241Due
      after one year but within five years
                
                
                3,926
                
                
                
                3,997Due
      after five years but within ten years
                
                
                786
                
                
                
                803Due
      after ten years
                
                
                -
                
                
                
                -Total
                
                $
                5,931
                
                
                $
                6,041





The
carrying value of securities pledged to secure public deposits as required by
law and for other purposes were $291.59 million and $354.92 million at September
30, 2010, and December 31, 2009, respectively.





During
the three months ended September 30, 2010, gross gains on the sale of securities
were $3.03 million while gross losses were $458 thousand.  During the
nine months ended September 30, 2010, gross gains on the sale of securities were
$4.52 million while gross losses were $492 thousand.  During the three
months ended September 30, 2009, gross gains on the sale of securities were
$1.01 million while gross losses were $144 thousand.  During the nine
months ended September 30, 2009, gross gains on the sale of securities were
$3.85 million while gross losses were $924 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 September 30, 2010, and December 31,
2009.





September30,2010Lessthan12Months
                          
                          
                          12Monthsorlonger
                          
                          
                          TotalFair
                          
                          
                          Unrealized
                          
                          
                          Fair
                          
                          
                          Unrealized
                          
                          
                          Fair
                          
                          
                          UnrealizedValue
                          
                          
                          Losses
                          
                          
                          Value
                          
                          
                          Losses
                          
                          
                          Value
                          
                          
                          Losses(In
      Thousands)States
      and political subdivisions
                          
                          $
                          19,460
                          
                          
                          $
                          (730
                          )
                          
                          $
                          517
                          
                          
                          $
                          (11
                          )
                          
                          $
                          19,977
                          
                          
                          $
                          (741
                          )Single
      issue trust preferred securities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          41,455
                          
                          
                          
                          (11,469
                          )
                          
                          
                          41,455
                          
                          
                          
                          (11,469
                          )Mortgage-backed
      securities:Agency
                          
                          
                          33,674
                          
                          
                          
                          (223
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          33,674
                          
                          
                          
                          (223
                          )Alt-A
      residential
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          11,051
                          
                          
                          
                          (8,637
                          )
                          
                          
                          11,051
                          
                          
                          
                          (8,637
                          )Total
      mortgage-backed securities
                          
                          
                          33,674
                          
                          
                          
                          (223
                          )
                          
                          
                          11,051
                          
                          
                          
                          (8,637
                          )
                          
                          
                          44,725
                          
                          
                          
                          (8,860
                          )Equity
      securities
                          
                          
                          275
                          
                          
                          
                          (126
                          )
                          
                          
                          101
                          
                          
                          
                          (3
                          )
                          
                          
                          376
                          
                          
                          
                          (129
                          )Total
                          
                          $
                          53,409
                          
                          
                          $
                          (1,079
                          )
                          
                          $
                          53,124
                          
                          
                          $
                          (20,120
                          )
                          
                          $
                          106,533
                          
                          
                          $
                          (21,199
                          )





December31,2009Lessthan12Months
                
                
                12Monthsorlonger
                
                
                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
September 30, 2010, the combined depreciation in value of the 79 individual
securities in an unrealized loss position was approximately 4.41% 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 records any
credit related OTTI through earnings and the non-credit related OTTI through
other comprehensive income (“OCI”).  During the three- and nine-month
periods ended September 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.





During
the three-month period ended September 30, 2010, the Company incurred no
credit-related OTTI charges related to beneficial interest debt securities.
During the nine-month period ended September 30, 2010, the Company incurred
credit-related OTTI charges related to beneficial interest debt securities of
$134 thousand on two pooled trust preferred security holdings.  During
the three- and nine-month periods ended September 30, 2009, the Company
recognized credit-related OTTI charges related to beneficial interest debt
securities of $30.53 million and $33.90 million, respectively. 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
September 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, among other reasons,
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: voluntary constant prepayment speed of 5, a customized
constant default rate scenario that assumes approximately 23% of the remaining
underlying mortgages will default, and a loss severity of 60.





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 Nine MonthsEnded September 30, 2010
                
                
                Ended September 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, ending balance
                
                $
                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-month period ended September 30, 2010, the Company did
not recognize any OTTI charges on equity securities. During the nine months
ended September 30, 2010, the Company recognized OTTI charges on certain of its
equity securities of $51 thousand. For the three- and nine-month periods ended
September 30, 2009, the Company recognized OTTI charges of $284 and $899
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 September 30, 2010, and December 31,
2009, the Company owned approximately $12.72 and $13.70 million, respectively,
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 nine months ended September 30, 2010, FHLBA
repurchased excess activity-based stock and paid quarterly
dividends.  At September 30, 2010, FHLBA was in compliance with all of
its regulatory capital requirements.  Based on its review, the Company
believes that as of September 30, 2010, its FHLBA stock was not
impaired.


- 12
-


Note
4.  Loans





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





September30,2010
                
                
                December31,2009(Dollars in Thousands)
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentLoans
      held for investment:Commercial,
      financial, and agricultural
                
                $
                104,411
                
                
                
                7.47
                %
                
                $
                96,366
                
                
                
                6.91
                %Real
      estate — commercial
                
                
                460,188
                
                
                
                32.91
                %
                
                
                450,611
                
                
                
                32.33
                %Real
      estate — residential
                
                
                647,885
                
                
                
                46.33
                %
                
                
                657,367
                
                
                
                47.16
                %Real
      estate — construction (1)
                
                
                115,029
                
                
                
                8.23
                %
                
                
                124,896
                
                
                
                8.96
                %Consumer
                
                
                63,186
                
                
                
                4.52
                %
                
                
                60,090
                
                
                
                4.31
                %Other
                
                
                7,552
                
                
                
                0.54
                %
                
                
                4,601
                
                
                
                0.33
                %Total
                
                $
                1,398,251
                
                
                
                100.00
                %
                
                $
                1,393,931
                
                
                
                100.00
                %Loans
      held for sale
                
                $
                3,386
                
                
                
                
                
                
                $
                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 $219.39 million and
standby letters of credit and financial guarantees written of $11.96 million at
September 30, 2010.  Additionally, the Company had gross notional
amounts of outstanding commitments to lend related to secondary market mortgage
loans of $17.53 million at September 30, 2010.





Note
5.  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 nine-month periods ended September 30, 2010 and 2009.





For the Three Months
                
                
                For the Nine MonthsEnded September 30,
                
                
                Ended September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009(In
      Thousands)Beginning
      balance
                
                $
                25,011
                
                
                $
                18,543
                
                
                $
                24,277
                
                
                $
                17,782Provision
      for loan losses
                
                
                3,810
                
                
                
                3,819
                
                
                
                11,071
                
                
                
                8,519Charge-offs
                
                
                (2,651
                )
                
                
                (2,993
                )
                
                
                (9,756
                )
                
                
                (7,404
                )Recoveries
                
                
                250
                
                
                
                341
                
                
                
                828
                
                
                
                813Ending
      balance
                
                $
                26,420
                
                
                $
                19,710
                
                
                $
                26,420
                
                
                $
                19,710





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





September 30,
                  
                  
                  December 31,(In Thousands)
                  
                  2010
                  
                  
                  2009Recorded
      investment in loans considered to be impaired:Recorded
      investment in impaired loans with a related allowance
                  
                  $
                  16,426
                  
                  
                  $
                  13,241Recorded
      investment in impaired loans with no related allowance
                  
                  
                  17,750
                  
                  
                  
                  13,371Total
      impaired loans
                  
                  
                  34,176
                  
                  
                  
                  26,612Loans
      considered to be impaired that were on a non-accrual basis
                  
                  
                  16,645
                  
                  
                  
                  17,014Allowance
      for loan losses related to loans considered to be impaired
                  
                  
                  2,861
                  
                  
                  
                  2,932Total
      interest income recognized on impaired loans, year-to-date
                  
                  
                  522
                  
                  
                  
                  663





Note
6.  Deposits





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





September
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009(In
      Thousands)Interest-bearing
      demand deposits
                  
                  $
                  270,927
                  
                  
                  $
                  231,907Savings
      and money market deposits
                  
                  
                  425,661
                  
                  
                  
                  381,381Certificates
      of deposit
                  
                  
                  744,468
                  
                  
                  
                  824,428Total
                  
                  $
                  1,441,056
                  
                  
                  $
                  1,437,716


- 14
-




Note
7.  Borrowings





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





September 30,
                
                
                December 31,2010
                
                
                2009(In
      Thousands)FHLB
      borrowings
                
                $
                175,000
                
                
                $
                183,177Subordinated
      debt
                
                
                15,464
                
                
                
                15,464Other
      long-term debt
                
                
                745
                
                
                
                283Total
                
                $
                191,209
                
                
                $
                198,924





FHLB
borrowings included $175.00 million in convertible and callable advances at
September 30, 2010, and December 31, 2009.  The weighted average
interest rate of all the advances was 2.42% at September 30, 2010, and 2.41% at
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 3.64% at September 30, 2010.  The fair value of the
interest rate swap was a liability of $601 thousand at September 30, 2010. The
Company maintained a cash deposit with its counterparty to collateralize the
interest rate swap of $1.07 million at September 30, 2010, and $3.20 million at
December 31, 2009. For a more detailed discussion of activities regarding
derivatives, please see Note 13 to the Consolidated Financial
Statements.





At
September 30, 2010, the FHLB advances have approximate contractual maturities
between six and eleven years.  The scheduled maturities of the
advances are as follows:





Amount(In
      Thousands)2010
                
                $
                -2011
                
                
                -2012
                
                
                -2013
                
                
                -2014
                
                
                -2015
      and thereafter
                
                
                175,000Total
                
                $
                175,000





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


Note
8.  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 nine-month periods ended September 30, 2010.





For the Three Months
                
                
                For the Nine MonthsEndedSeptember30,
                
                
                EndedSeptember30,2010
                
                
                2009
                
                
                2010
                
                
                2009(In
      Thousands)Service
      cost
                
                $
                54
                
                
                $
                53
                
                
                $
                159
                
                
                $
                159Interest
      cost
                
                
                53
                
                
                
                47
                
                
                
                158
                
                
                
                141Net
      periodic cost
                
                $
                107
                
                
                $
                100
                
                
                $
                317
                
                
                $
                300





Note
9.   Comprehensive Income





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





For the Three Months
                    
                    
                    For the Nine MonthsEnded September 30,
                    
                    
                    Ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(In
      Thousands)Net
      income (loss)
                    
                    $
                    6,553
                    
                    
                    $
                    (11,552
                    )
                    
                    $
                    16,962
                    
                    
                    $
                    (3,955
                    )Other
      comprehensive incomeUnrealized
      gain (loss) on securities available-for-sale with other-than-temporary
      impairment
                    
                    
                    937
                    
                    
                    
                    (1,652
                    )
                    
                    
                    940
                    
                    
                    
                    (5,683
                    )Unrealized
      gain on securities available-for-sale without other-than-temporary
      impairment
                    
                    
                    2,900
                    
                    
                    
                    13,050
                    
                    
                    
                    16,220
                    
                    
                    
                    9,974Reclassification
      adjustment for gains realized in net income
                    
                    
                    (2,574
                    )
                    
                    
                    (866
                    )
                    
                    
                    (4,025
                    )
                    
                    
                    (2,930
                    )Reclassification
      adjustment for credit related other-than-temporary impairments recognized
      in earnings
                    
                    
                    -
                    
                    
                    
                    30,811
                    
                    
                    
                    185
                    
                    
                    
                    34,796Unrealized
      gain on derivative contract
                    
                    
                    489
                    
                    
                    
                    177
                    
                    
                    
                    1,509
                    
                    
                    
                    735Income
      tax effect
                    
                    
                    (653
                    )
                    
                    
                    (15,466
                    )
                    
                    
                    (5,524
                    )
                    
                    
                    (13,742
                    )Total
      other comprehensive income
                    
                    
                    1,100
                    
                    
                    
                    26,054
                    
                    
                    
                    9,305
                    
                    
                    
                    23,150Comprehensive
      income
                    
                    $
                    7,653
                    
                    
                    $
                    14,502
                    
                    
                    $
                    26,267
                    
                    
                    $
                    19,195





Note
10.  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
11.  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 nine-month periods ended September 30, 2010 and
2009.





For the Three MonthsEnded September 30, 2010Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                18,657
                
                
                $
                (34
                )
                
                $
                (26
                )
                
                $
                18,597Provision
      for loan losses
                
                
                3,810
                
                
                
                -
                
                
                
                -
                
                
                
                3,810Noninterest
      income (loss)
                
                
                9,340
                
                
                
                1,683
                
                
                
                (85
                )
                
                
                10,938Noninterest
      expense (income)
                
                
                16,085
                
                
                
                1,483
                
                
                
                (139
                )
                
                
                17,429Income
      before income taxes
                
                
                8,102
                
                
                
                166
                
                
                
                28
                
                
                
                8,296Provision
      for income taxes
                
                
                1,663
                
                
                
                66
                
                
                
                14
                
                
                
                1,743Net
      income
                
                $
                6,439
                
                
                $
                100
                
                
                $
                14
                
                
                $
                6,553End
      of period goodwill and other intangibles
                
                $
                78,877
                
                
                $
                12,288
                
                
                $
                -
                
                
                $
                91,165End
      of period assets
                
                $
                2,278,972
                
                
                $
                13,190
                
                
                $
                5,263
                
                
                $
                2,297,425





For the Nine MonthsEndedSeptember30,2010Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                55,916
                
                
                $
                (91
                )
                
                $
                (67
                )
                
                $
                55,758Provision
      for loan losses
                
                
                11,071
                
                
                
                -
                
                
                
                -
                
                
                
                11,071Noninterest
      income (loss)
                
                
                23,380
                
                
                
                5,310
                
                
                
                (270
                )
                
                
                28,420Noninterest
      expense (income)
                
                
                46,468
                
                
                
                4,364
                
                
                
                (733
                )
                
                
                50,099Income
      before income taxes
                
                
                21,757
                
                
                
                855
                
                
                
                396
                
                
                
                23,008Provision
      for income taxes
                
                
                5,546
                
                
                
                338
                
                
                
                162
                
                
                
                6,046Net
      income
                
                $
                16,211
                
                
                $
                517
                
                
                $
                234
                
                
                $
                16,962





For the Three MonthsEndedSeptember30,2009Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                17,538
                
                
                $
                (12
                )
                
                $
                10
                
                
                $
                17,536Provision
      for loan losses
                
                
                3,819
                
                
                
                -
                
                
                
                -
                
                
                
                3,819Noninterest
      income (loss)
                
                
                (17,352
                )
                
                
                1,596
                
                
                
                (1,528
                )
                
                
                (17,284
                )Noninterest
      expense (income)
                
                
                18,129
                
                
                
                1,528
                
                
                
                (1,889
                )
                
                
                17,768Income
      (loss) before income taxes
                
                
                (21,762
                )
                
                
                56
                
                
                
                371
                
                
                
                (21,335
                )Provision
      for income taxes
                
                
                (10,987
                )
                
                
                165
                
                
                
                1,039
                
                
                
                (9,783
                )Net
      income (loss)
                
                $
                (10,775
                )
                
                $
                (109
                )
                
                $
                (668
                )
                
                $
                (11,552
                )End
      of period goodwill and other intangibles
                
                $
                79,127
                
                
                $
                11,007
                
                
                $
                -
                
                
                $
                90,134End
      of period assets
                
                $
                2,271,919
                
                
                $
                11,188
                
                
                $
                13,818
                
                
                $
                2,296,925


- 17
-





For the Nine MonthsEnded September 30, 2009Community
                
                
                Insurance
                
                
                Parent/Banking
                
                
                Services
                
                
                Elimination
                
                
                Total(In
      Thousands)Net
      interest income (loss)
                
                $
                50,373
                
                
                $
                (46
                )
                
                $
                (37
                )
                
                $
                50,290Provision
      for loan losses
                
                
                8,519
                
                
                
                -
                
                
                
                -
                
                
                
                8,519Noninterest
      income (loss)
                
                
                (8,600
                )
                
                
                5,605
                
                
                
                (243
                )
                
                
                (3,238
                )Noninterest
      expense (income)
                
                
                45,321
                
                
                
                4,640
                
                
                
                (856
                )
                
                
                49,105Income
      (loss) before income taxes
                
                
                (12,067
                )
                
                
                919
                
                
                
                576
                
                
                
                (10,572
                )Provision
      for income taxes
                
                
                (8,649
                )
                
                
                419
                
                
                
                1,613
                
                
                
                (6,617
                )Net
      income (loss)
                
                $
                (3,418
                )
                
                $
                500
                
                
                $
                (1,037
                )
                
                $
                (3,955
                )





Note
12.  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.





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.


- 18
-




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.





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.




- 19
-




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





September30,2010FairValueMeasurementsUsing
                          
                          
                          Total(In Thousands)
                          
                          Level1
                          
                          
                          Level2
                          
                          
                          Level3
                          
                          
                          FairValueAvailable-for-sale
      securities:Agency
      securities
                          
                          $
                          -
                          
                          
                          $
                          10,038
                          
                          
                          $
                          -
                          
                          
                          $
                          10,038Agency
      mortgage-backed securities
                          
                          
                          -
                          
                          
                          
                          228,012
                          
                          
                          
                          -
                          
                          
                          
                          228,012Non-Agency
      Alt-A residential MBS
                          
                          
                          -
                          
                          
                          
                          11,051
                          
                          
                          
                          -
                          
                          
                          
                          11,051Municipal
      securities
                          
                          
                          -
                          
                          
                          
                          157,780
                          
                          
                          
                          -
                          
                          
                          
                          157,780FDIC-backed
      securities
                          
                          
                          -
                          
                          
                          
                          25,783
                          
                          
                          
                          -
                          
                          
                          
                          25,783Single
      issue trust preferred securities
                          
                          
                          -
                          
                          
                          
                          41,455
                          
                          
                          
                          -
                          
                          
                          
                          41,455Pooled
      trust preferred securities
                          
                          
                          -
                          
                          
                          
                          5,537
                          
                          
                          
                          -
                          
                          
                          
                          5,537Equity
      securities
                          
                          
                          911
                          
                          
                          
                          20
                          
                          
                          
                          -
                          
                          
                          
                          931Total
      available-for-sale securities
                          
                          $
                          911
                          
                          
                          $
                          479,676
                          
                          
                          $
                          -
                          
                          
                          $
                          480,587Deferred
      compensation assets
                          
                          $
                          3,082
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          3,082Derivative
      assetsInterest
      rate lock commitments
                          
                          
                          -
                          
                          
                          
                          130
                          
                          
                          
                          -
                          
                          
                          
                          130Total
      derivative assets
                          
                          $
                          -
                          
                          
                          $
                          130
                          
                          
                          $
                          -
                          
                          
                          $
                          130Deferred
      compensation liabilities
                          
                          $
                          3,082
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          3,082Derivative
      liabilitiesInterest
      rate swap
                          
                          
                          -
                          
                          
                          
                          601
                          
                          
                          
                          -
                          
                          
                          
                          601Interest
      rate lock commitments
                          
                          
                          -
                          
                          
                          
                          50
                          
                          
                          
                          -
                          
                          
                          
                          50Total
      derivative liabilities
                          
                          $
                          -
                          
                          
                          $
                          651
                          
                          
                          $
                          -
                          
                          
                          $
                          651





December31,2009FairValueMeasurementsUsing
                  
                  
                  TotalLevel1
                  
                  
                  Level2
                  
                  
                  Level3
                  
                  
                  FairValue(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
                  
                  
                  $
                  -
                  
                  
                  $
                  2,191


- 20
-


The
following table presents additional information about financial assets and
liabilities measured at fair value for the three- and nine-month periods ended
September 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 Nine Months(In
      Thousands)
                
                Ended September 30, 2010
                
                
                Ended September 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
                
                
                -
                
                
                
                -Ending
      balance
                
                $
                -
                
                
                $
                -





The
Company transferred $3.57 million out of Level 3 for the nine-month period ended
September 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.





Certain
financial and non-financial assets are measured at fair value on a nonrecurring
basis; thus, the instruments are not measured at fair value on an ongoing basis
but are subject to fair value adjustments in certain circumstances, such as,
when there is evidence of impairment.  Items subject to nonrecurring
fair value adjustments at September 30, 2010, and December 31, 2009, are as
follows:





September30,2010FairValueMeasurementsUsing
                
                
                TotalLevel1
                
                
                Level2
                
                
                Level3
                
                
                FairValue(In
      Thousands)Impaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                9,718
                
                
                $
                9,718Troubled
      debt restructurings
                
                
                -
                
                
                
                -
                
                
                
                5,387
                
                
                
                5,387Other
      real estate owned
                
                
                -
                
                
                
                -
                
                
                
                5,501
                
                
                
                5,501





December31,2009FairValueMeasurementsUsing
                
                
                TotalLevel1
                
                
                Level2
                
                
                Level3
                
                
                FairValue(In
      Thousands)Impaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                11,702
                
                
                $
                11,702Other
      real estate owned
                
                
                -
                
                
                
                -
                
                
                
                4,578
                
                
                
                4,578


- 21
-


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.





September30,2010
                
                
                December31,2009Carrying
                
                
                
                
                
                CarryingAmount
                
                
                FairValue
                
                
                Amount
                
                
                FairValue(In
      Thousands)AssetsCash
      and cash equivalents
                
                $
                131,764
                
                
                $
                131,764
                
                
                $
                101,341
                
                
                $
                101,341Investment
      securities
                
                
                486,518
                
                
                
                486,628
                
                
                
                493,511
                
                
                
                493,636Loans
      held for sale
                
                
                3,386
                
                
                
                3,392
                
                
                
                11,576
                
                
                
                11,580Loans
      held for investment
                
                
                1,371,831
                
                
                
                1,385,691
                
                
                
                1,369,654
                
                
                
                1,362,814Accrued
      interest receivable
                
                
                7,899
                
                
                
                7,899
                
                
                
                8,610
                
                
                
                8,610Bank
      owned life insurance
                
                
                41,837
                
                
                
                41,837
                
                
                
                40,972
                
                
                
                40,972Derivative
      financial assets
                
                
                130
                
                
                
                130
                
                
                
                2
                
                
                
                2Deferred
      compensation assets
                
                
                3,082
                
                
                
                3,082
                
                
                
                2,872
                
                
                
                2,872LiabilitiesDemand
      deposits
                
                $
                216,167
                
                
                $
                216,167
                
                
                $
                208,244
                
                
                $
                208,244Interest-bearing
      demand deposits
                
                
                270,927
                
                
                
                270,927
                
                
                
                231,907
                
                
                
                231,907Savings
      deposits
                
                
                425,661
                
                
                
                425,661
                
                
                
                381,381
                
                
                
                381,381Time
      deposits
                
                
                744,468
                
                
                
                758,193
                
                
                
                824,428
                
                
                
                834,546Securities
      sold under agreements to repurchase
                
                
                153,413
                
                
                
                163,722
                
                
                
                153,634
                
                
                
                156,653Accrued
      interest payable
                
                
                3,474
                
                
                
                3,474
                
                
                
                4,130
                
                
                
                4,130FHLB
      and other indebtedness
                
                
                191,209
                
                
                
                210,623
                
                
                
                198,924
                
                
                
                208,334Derivative
      financial liabilities
                
                
                651
                
                
                
                651
                
                
                
                2,191
                
                
                
                2,191Deferred
      compensation liabilities
                
                
                3,082
                
                
                
                3,082
                
                
                
                2,872
                
                
                
                2,872





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





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





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





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





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





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





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


- 22
-


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
13.  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:





September 30, 2010
                
                
                December 31, 2009
                
                
                September 30, 2009(In
      Thousands)Interest
      rate swap
                
                $
                50,000
                
                
                $
                50,000
                
                
                $
                50,000IRLC's
                
                
                17,530
                
                
                
                4,636
                
                
                
                9,529





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





Asset DerivativesSeptember 30, 2010
                                                    
                                                    December 31, 2009
                                                    
                                                    September 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
                                                    
                                                    $
                                                    130
                                                    
                                                    Other
      assets
                                                    
                                                    $
                                                    2
                                                    
                                                    Other
      assets
                                                    
                                                    $
                                                    46Total
                                                    
                                                    
                                                    $
                                                    130
                                                    
                                                    
                                                    
                                                    $
                                                    2
                                                    
                                                    
                                                    
                                                    $
                                                    46


- 23
-





LiabilityDerivativesSeptember30,2010
                        
                        December31,2009
                        
                        September30,2009Balance Sheet
                        
                        Fair
                        
                        Balance Sheet
                        
                        Fair
                        
                        Balance Sheet
                        
                        FairLocation
                        
                        Value
                        
                        Location
                        
                        Value
                        
                        Location
                        
                        Value(In
      Thousands)Derivatives
      designated as hedgesInterest
      rate swap
                        Other
      liabilities
                        
                        $
                        601
                        
                        Other
      liabilities
                        
                        $
                        2,117
                        
                        Other
      liabilities
                        
                        $
                        2,558Total
                        
                        
                        $
                        601
                        
                        
                        
                        $
                        2,117
                        
                        
                        
                        $
                        2,558Derivatives
      not designated as hedgesIRLC's
                        Other
      liabilities
                        
                        $
                        50
                        
                        Other
      liabilities
                        
                        $
                        74
                        
                        Other
      liabilities
                        
                        $
                        24Total
                        
                        
                        $
                        50
                        
                        
                        
                        $
                        74
                        
                        
                        
                        $
                        24Total
      derivatives
                        
                        
                        $
                        651
                        
                        
                        
                        $
                        2,191
                        
                        
                        
                        $
                        2,582





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.





Effect
of Derivatives and Hedging Activities on the Income Statement





For the
quarters ended September 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 nine-month periods ended September 30, 2010 and
2009.





Amount of Gain (Loss)Derivatives Not
                    
                    Location of Gain (Loss)
                    
                    Recognized in Income on DerivativeDesignated as Hedging
                    
                    Recognized in Income on
                    
                    Three Months Ended September 30,
                    
                    Nine Months Ended September 30,Instruments
                    
                    Derivative
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(In
      Thousands)IRLC's
                    
                    Other
      income
                    
                    $
                    50
                    
                    
                    $
                    46
                    
                    
                    $
                    152
                    
                    
                    $
                    (2
                    )Total
                    
                    
                    
                    $
                    50
                    
                    
                    $
                    46
                    
                    
                    $
                    152
                    
                    
                    $
                    (2
                    )





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 September 30, 2010,
there is no significant counterparty credit risk.


- 24
-


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 $2.30 billion at September 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;


- 25
-




•
            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 $2.30 billion at September 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 $836 million as of September 30, 2010.  These
assets are not assets of the Company, but are managed under various fee-based
arrangements as fiduciary or agent.




- 26
-




RECENT
LEGISLATION





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 third quarter and first
nine months of 2010:





·
            For
      the third quarter of 2010, net income increased $18.11 million from the
      comparable period in 2009.


·
            Net
      interest margin, on a tax-equivalent basis, increased 19 basis points to
      3.87% for the three months ended September 30, 2010, as compared to the
      three-month period ended September 30,
2009.


·
            Tax-equivalent
      net interest income increased $1.09 million, or 5.93%, from the third
      quarter of 2009.


·
            Tangible
      book value per common share increased to $10.26, up $1.19 from December
      31, 2009.


·
            The
      allowance for loan losses as a percentage of total loans increased to
      1.89% at September 30, 2010, as compared to 1.74% at December 31,
      2009.





Net
income available to common shareholders for the three months ended September 30,
2010, was $6.55 million, or $0.37 per diluted common share, compared with a net
loss to common shareholders of $12.56 million, or $0.72 per diluted common
share, for the three months ended September 30, 2009, an increase of $19.12
million.  The net loss to common shareholders for the three-month period
ended September 30, 2009, was impacted by net impairment losses of $30.81
million and the required payment of dividends on preferred stock, discussed
below, totaling $1.01 million. Increases in net income were primarily due to the
$30.81 million reduction in net impairment losses on securities, which were
partially offset by an $11.53 million increase in income taxes.





- 27
-


Net
income available to common shareholders for the nine months ended September 30,
2010, was $16.96 million, or $0.95 per diluted common share, compared with a net
loss to common shareholders of $6.12 million, or $0.44 per diluted common share,
for the nine months ended September 30, 2009, an increase of $23.08
million.  The net loss to common shareholders for the nine-month period
ended September 30, 2009, was impacted by net impairment losses of $34.80
million and the required payment of dividends on preferred stock, discussed
below, totaling $2.16 million. Increases in net income were primarily due to the
$34.61 million reduction in net impairment losses on securities, which were
partially offset by a $12.66 million increase in income taxes.





On July
8, 2009, the Company repurchased and retired the $41.50 million of Series A
perpetual preferred stock that had been issued by the Company to the U.S.
Treasury following a $66.13 million qualified equity offering.





Net
Interest Income — Quarterly Comparison (See Table I)





Net
interest income, the largest contributor to earnings, was $18.60 million for the
three months ended September 30, 2010, compared with $17.54 million for the
corresponding period in 2009, an increase of $1.06 million, or 6.05%. 
Tax-equivalent net interest income totaled $19.42 million for the three months
ended September 30, 2010, an increase of $1.09 million, or 5.93%, from $18.33
million for the third quarter of 2009.  The increase in tax-equivalent net
interest income was due primarily to decreases in time deposits and borrowing
costs as a result of repricing opportunities throughout a sustained low rate
environment and customers shifting from time accounts to money market and
savings products.





Average
earning assets increased $12.33 million while average interest-bearing
liabilities decreased $8.79 million during the third quarter of 2010 compared
with the same period of 2009.  The changes include the impact of the July
2009 TriStone acquisition.  The yield on average earning assets decreased
29 basis points to 5.31% from 5.60% between the three months ended September 30,
2010 and 2009, respectively.  Total cost of interest-bearing liabilities
decreased 51 basis points between the third quarters of 2010 and 2009, which
resulted in a net interest rate spread that was 22 basis points higher, at
3.69%, for the third quarter of 2010 compared with 3.47% for the same period
last year.  The Company’s tax-equivalent net interest margin of 3.87% for
the three months ended September 30, 2010, increased 19 basis points from 3.68%
for the same period of 2009.





The yield
on loans decreased 7 basis points to 6.07% from 6.14% for the three months ended
September 30, 2010 and 2009, respectively.  The effect of the extended low
interest rate environment in the United States was partially offset by the
addition of TriStone, which resulted in a net increase of $400 thousand, or
1.90%, in tax-equivalent loan interest income for the third quarter of 2010
compared with the third quarter of 2009.





The
tax-equivalent yield on available-for-sale securities decreased 92 basis points
to 3.99% during the three months ended September 30, 2010, while the average
balance decreased by $38.88 million, or 7.25%, compared with the same period in
2009.  The decline in the 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 $82.52 million during the third
quarter of 2010, and the yield was 0.26%.  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
nine months of 2010.





The
average balances of interest-bearing demand deposits increased $47.99 million,
or 22.90%, while the average rate paid during the third quarter of 2010
increased 21 basis points when compared with the same period in 2009. 
During the three months ended September 30, 2010, the average balances of
savings deposits increased $84.23 million, or 24.80%, while the average rate
paid decreased 12 basis points compared to the same period in 2009. 
Average time deposits decreased $136.21 million, or 15.33%, while the average
rate paid on time deposits decreased 72 basis points from 2.79% in the third
quarter of 2009 to 2.07% in the third quarter of 2010.  The level of
average noninterest-bearing demand deposits increased $8.59 million, or 4.32%,
to $207.57 million during the quarter ended September 30, 2010, compared with
the corresponding period of the prior year.  During the quarter ended
September 30, 2010, customers shifted from time accounts into money market and
savings products.





- 28
-


The
average balance of retail repurchase agreements, which consist of collateralized
retail deposits and commercial treasury accounts, decreased $848 thousand, or
0.84%, to $100.22 million for the third quarter of 2010, while the rate
decreased 34 basis points to 0.97% during the same period.  The decrease in
average balance is 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 third
quarters of 2010 and 2009. Wholesale repurchase agreements remained unchanged at
$50.00 million, while the rate decreased two basis points between the periods
due to structure within those borrowings.  The average balance of FHLB
borrowings and other long-term debt decreased by $3.95 million, or 2.01%, in the
third quarter of 2010 to $192.28 million, while the rate paid on those
borrowings decreased 21 basis points.





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





Net
interest income was $55.76 million for the nine months ended September 30, 2010,
compared with $50.29 million for the corresponding period in 2009, an increase
of $5.47 million, or 10.87%.  Tax-equivalent net interest income totaled
$58.18 million for the nine months ended September 30, 2010, an increase of
$5.41 million, or 10.25%, from $52.77 million for the first nine months of
2009.  The increase in tax-equivalent net interest income was due primarily
to decreases in time deposits and borrowing costs as a result of repricing
opportunities throughout a sustained low rate environment.





Average
earning assets increased $56.12 million while average interest-bearing
liabilities increased $30.34 million during the first nine months of 2010
compared with the same period of 2009.  The changes include the impact of
the July 2009 TriStone acquisition.  The yield on average earning assets
decreased 28 basis points to 5.48% from 5.76% between the nine months ended
September 30, 2010 and 2009, respectively.  Total cost of interest-bearing
liabilities decreased 57 basis points between the first nine months of 2010 and
2009, which resulted in a net interest rate spread that was 29 basis points
higher, at 3.76%, for the first nine months of 2010 compared with 3.47% for the
same period last year.  The Company’s tax-equivalent net interest margin of
3.94% for the nine months ended September 30, 2010, increased 26 basis points
from 3.68% for the same period of 2009.





The yield
on loans decreased 9 basis points to 6.11% from 6.20% for the nine months ended
September 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 $3.25 million, or 5.36%, in
tax-equivalent loan interest income for the first nine months of 2010 compared
with the first nine months of 2009.





The
tax-equivalent yield on available-for-sale securities decreased 85 basis points
to 4.49% during the nine months ended September 30, 2010, while the average
balance decreased by $43.11 million, or 8.05%, compared with the same period in
2009.  The decline in the 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 $77.32 million during the first nine
months of 2010, and the yield was 0.23%.  Interest-bearing balances with
banks are comprised largely of excess liquidity bearing overnight market
rates.  The Company maintained a strong liquidity position through the
third quarter of 2010.





The
average balances of interest-bearing demand deposits increased $48.36 million,
or 24.27%, while the average rate paid during the first nine months of 2010
increased 21 basis points when compared with the same period in 2009. 
During the nine months ended September 30, 2010, the average balances of savings
deposits increased $96.16 million, or 29.74%, while the average rate paid
decreased three basis points compared to the same period in 2009.  Average
time deposits decreased $95.62 million, or 11.06%, while the average rate paid
on time deposits decreased 85 basis points from 3.02% in the first nine months
of 2009 to 2.17% in the first nine months of 2010.  The level of average
noninterest-bearing demand deposits increased $4.72 million, or 2.36%, to
$204.71 million for the nine months ended September 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.





The
average balance of retail repurchase agreements, which consist of collateralized
retail deposits and commercial treasury accounts, decreased $7.51 million, or
7.29%, to $95.49 million for the first nine months of 2010, while the rate
decreased 29 basis points to 1.08% during the same period.  The decrease in
average balance is largely attributed to customers converting retail repurchase
agreements to certificates of deposit and businesses using less cash during the
slower economic period.  There were no federal funds purchased on average
during the first nine months of 2010 and 2009. Wholesale repurchase agreements
remained unchanged at $50.00 million, while the rate decreased 12 basis points
between the periods due to changes in the structure within those
borrowings.  The average balance of FHLB borrowings and other long-term
debt decreased by $11.06 million, or 5.35%, in the first nine months of 2010 to
$195.59 million, while the rate paid on those borrowings decreased 17 basis
points.




- 29
-




Table
I
  AVERAGE
BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
  Three Months Ended
                        
                        
                        Three Months EndedSeptember 30, 2010
                        
                        
                        September 30, 2009Average
                        
                        
                        
                        
                        
                        Yield/
                        
                        
                        Average
                        
                        
                        
                        
                        
                        Yield/(Dollars in Thousands)
                        
                        Balance
                        
                        
                        Interest (1)
                        
                        
                        Rate (1)
                        
                        
                        Balance
                        
                        
                        Interest (1)
                        
                        
                        Rate (1)AssetsEarning
      assetsLoans
      (2)
                        
                        $
                        1,404,746
                        
                        
                        $
                        21,478
                        
                        
                        
                        6.07
                        %
                        
                        $
                        1,362,603
                        
                        
                        $
                        21,078
                        
                        
                        
                        6.14
                        %Securities
      available-for-sale
                        
                        
                        497,602
                        
                        
                        
                        4,999
                        
                        
                        
                        3.99
                        %
                        
                        
                        536,485
                        
                        
                        
                        6,636
                        
                        
                        
                        4.91
                        %Securities
      held-to-maturity
                        
                        
                        6,084
                        
                        
                        
                        128
                        
                        
                        
                        8.35
                        %
                        
                        
                        7,575
                        
                        
                        
                        154
                        
                        
                        
                        8.07
                        %Interest-bearing
      deposits
                        
                        
                        82,521
                        
                        
                        
                        54
                        
                        
                        
                        0.26
                        %
                        
                        
                        71,963
                        
                        
                        
                        55
                        
                        
                        
                        0.30
                        %Total
      earning assets
                        
                        
                        1,990,953
                        
                        
                        
                        26,659
                        
                        
                        
                        5.31
                        %
                        
                        
                        1,978,626
                        
                        
                        
                        27,923
                        
                        
                        
                        5.60
                        %Other
      assets
                        
                        
                        280,031
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        290,801Total
      Assets
                        
                        $
                        2,270,984
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,269,427LiabilitiesInterest-bearing
      depositsDemand
      deposits
                        
                        $
                        257,560
                        
                        
                        $
                        274
                        
                        
                        
                        0.42
                        %
                        
                        $
                        209,569
                        
                        
                        $
                        110
                        
                        
                        
                        0.21
                        %Savings
      deposits
                        
                        
                        423,827
                        
                        
                        
                        672
                        
                        
                        
                        0.63
                        %
                        
                        
                        339,601
                        
                        
                        
                        639
                        
                        
                        
                        0.75
                        %Time
      deposits
                        
                        
                        752,383
                        
                        
                        
                        3,926
                        
                        
                        
                        2.07
                        %
                        
                        
                        888,593
                        
                        
                        
                        6,249
                        
                        
                        
                        2.79
                        %Total
      interest-bearing deposits
                        
                        
                        1,433,770
                        
                        
                        
                        4,872
                        
                        
                        
                        1.35
                        %
                        
                        
                        1,437,763
                        
                        
                        
                        6,998
                        
                        
                        
                        1.93
                        %BorrowingsRetail
      repurchase agreements
                        
                        
                        100,217
                        
                        
                        
                        245
                        
                        
                        
                        0.97
                        %
                        
                        
                        101,065
                        
                        
                        
                        333
                        
                        
                        
                        1.31
                        %Wholesale
      repurchase agreements
                        
                        
                        50,000
                        
                        
                        
                        471
                        
                        
                        
                        3.74
                        %
                        
                        
                        50,000
                        
                        
                        
                        474
                        
                        
                        
                        3.76
                        %FHLB
      borrowings and other indebtedness
                        
                        
                        192,280
                        
                        
                        
                        1,655
                        
                        
                        
                        3.41
                        %
                        
                        
                        196,227
                        
                        
                        
                        1,789
                        
                        
                        
                        3.62
                        %Total
      borrowings
                        
                        
                        342,497
                        
                        
                        
                        2,371
                        
                        
                        
                        2.75
                        %
                        
                        
                        347,292
                        
                        
                        
                        2,596
                        
                        
                        
                        2.97
                        %Total
      interest-bearing liabilities
                        
                        
                        1,776,267
                        
                        
                        
                        7,243
                        
                        
                        
                        1.62
                        %
                        
                        
                        1,785,055
                        
                        
                        
                        9,594
                        
                        
                        
                        2.13
                        %Noninterest-bearing
      demand deposits
                        
                        
                        207,569
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        198,981Other
      liabilities
                        
                        
                        13,147
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        26,430Stockholders'
      equity
                        
                        
                        274,001
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        258,961Total
      Liabilities andStockholders'
      Equity
                        
                        $
                        2,270,984
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,269,427Net
      interest income, tax-equivalent
                        
                        
                        
                        
                        
                        $
                        19,416
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        18,329Net
      interest rate spread (3)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.69
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.47
                        %Net
      interest margin (4)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.87
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.68
                        %
  (1)
              Fully
      taxable equivalent at the rate of 35% ("FTE").  The FTE basis adjusts
      for the tax benefits of income on certain tax-exempt loans and investments
      using the federal statutory rate of 35% for each period presented. 
      The Company believes this measure to be the preferred industry measurement
      of net interest income and provides relevant comparison between taxable
      and 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.
  - 30
-
 Table II
  AVERAGE
BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
  Nine Months Ended
                        
                        
                        Nine Months EndedSeptember 30, 2010
                        
                        
                        September 30, 2009Average
                        
                        
                        
                        
                        
                        Yield/
                        
                        
                        Average
                        
                        
                        
                        
                        
                        Yield/(Dollars in Thousands)
                        
                        Balance
                        
                        
                        Interest (1)
                        
                        
                        Rate (1)
                        
                        
                        Balance
                        
                        
                        Interest (1)
                        
                        
                        Rate (1)AssetsEarning
      assetsLoans
      (2)
                        
                        $
                        1,399,347
                        
                        
                        $
                        63,913
                        
                        
                        
                        6.11
                        %
                        
                        $
                        1,308,380
                        
                        
                        $
                        60,663
                        
                        
                        
                        6.20
                        %Securities
      available-for-sale
                        
                        
                        492,603
                        
                        
                        
                        16,561
                        
                        
                        
                        4.49
                        %
                        
                        
                        535,710
                        
                        
                        
                        21,378
                        
                        
                        
                        5.34
                        %Securities
      held-to-maturity
                        
                        
                        6,713
                        
                        
                        
                        421
                        
                        
                        
                        8.38
                        %
                        
                        
                        7,954
                        
                        
                        
                        490
                        
                        
                        
                        8.24
                        %Interest-bearing
      deposits
                        
                        
                        77,319
                        
                        
                        
                        134
                        
                        
                        
                        0.23
                        %
                        
                        
                        67,819
                        
                        
                        
                        133
                        
                        
                        
                        0.26
                        %Total
      earning assets
                        
                        
                        1,975,982
                        
                        
                        
                        81,029
                        
                        
                        
                        5.48
                        %
                        
                        
                        1,919,863
                        
                        
                        
                        82,664
                        
                        
                        
                        5.76
                        %Other
      assets
                        
                        
                        282,628
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        289,013Total
      Assets
                        
                        $
                        2,258,610
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,208,876LiabilitiesInterest-bearing
      depositsDemand
      deposits
                        
                        $
                        247,596
                        
                        
                        $
                        724
                        
                        
                        
                        0.39
                        %
                        
                        $
                        199,235
                        
                        
                        $
                        270
                        
                        
                        
                        0.18
                        %Savings
      deposits
                        
                        
                        419,550
                        
                        
                        
                        2,284
                        
                        
                        
                        0.73
                        %
                        
                        
                        323,387
                        
                        
                        
                        1,836
                        
                        
                        
                        0.76
                        %Time
      deposits
                        
                        
                        768,882
                        
                        
                        
                        12,472
                        
                        
                        
                        2.17
                        %
                        
                        
                        864,503
                        
                        
                        
                        19,535
                        
                        
                        
                        3.02
                        %Total
      interest-bearing deposits
                        
                        
                        1,436,028
                        
                        
                        
                        15,480
                        
                        
                        
                        1.44
                        %
                        
                        
                        1,387,125
                        
                        
                        
                        21,641
                        
                        
                        
                        2.09
                        %BorrowingsRetail
      repurchase agreements
                        
                        
                        95,494
                        
                        
                        
                        773
                        
                        
                        
                        1.08
                        %
                        
                        
                        103,000
                        
                        
                        
                        1,057
                        
                        
                        
                        1.37
                        %Wholesale
      repurchase agreements
                        
                        
                        50,000
                        
                        
                        
                        1,402
                        
                        
                        
                        3.75
                        %
                        
                        
                        50,000
                        
                        
                        
                        1,449
                        
                        
                        
                        3.87
                        %FHLB
      borrowings and other indebtedness
                        
                        
                        195,586
                        
                        
                        
                        5,194
                        
                        
                        
                        3.55
                        %
                        
                        
                        206,643
                        
                        
                        
                        5,745
                        
                        
                        
                        3.72
                        %Total
      borrowings
                        
                        
                        341,080
                        
                        
                        
                        7,369
                        
                        
                        
                        2.89
                        %
                        
                        
                        359,643
                        
                        
                        
                        8,251
                        
                        
                        
                        3.07
                        %Total
      interest-bearing liabilities
                        
                        
                        1,777,108
                        
                        
                        
                        22,849
                        
                        
                        
                        1.72
                        %
                        
                        
                        1,746,768
                        
                        
                        
                        29,892
                        
                        
                        
                        2.29
                        %Noninterest-bearing
      demand deposits
                        
                        
                        204,706
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        199,986Other
      liabilities
                        
                        
                        9,799
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        25,517Stockholders'
      equity
                        
                        
                        266,997
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        236,605Total
      Liabilities andStockholders'
      Equity
                        
                        $
                        2,258,610
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,208,876Net
      interest income, tax-equivalent
                        
                        
                        
                        
                        
                        $
                        58,180
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        52,772Net
      interest rate spread (3)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.76
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.47
                        %Net
      interest margin (4)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.94
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.68
                        %
 
 (1)
              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
-
 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
                                      
                                      
                                      Nine Months EndedSeptember 30, 2010, Compared to 2009
                                      
                                      
                                      September 30, 2010, Compared to 2009Dollar Increase (Decrease) due to
                                      
                                      
                                      Dollar Increase (Decrease) due toRate/
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      Rate/(In Thousands)
                                      
                                      Volume
                                      
                                      
                                      Rate
                                      
                                      
                                      Volume
                                      
                                      
                                      Total
                                      
                                      
                                      Volume
                                      
                                      
                                      Rate
                                      
                                      
                                      Volume
                                      
                                      
                                      TotalInterest
      Earned On:Loans
      (FTE)
                                      
                                      $
                                      652
                                      
                                      
                                      $
                                      (244
                                      )
                                      
                                      
                                      (8
                                      )
                                      
                                      $
                                      400
                                      
                                      
                                      $
                                      4,218
                                      
                                      
                                      $
                                      (905
                                      )
                                      
                                      $
                                      (63
                                      )
                                      
                                      $
                                      3,250Securities
      available-for-sale (FTE)
                                      
                                      
                                      (481
                                      )
                                      
                                      
                                      (1,246
                                      )
                                      
                                      
                                      90
                                      
                                      
                                      
                                      (1,637
                                      )
                                      
                                      
                                      (1,720
                                      )
                                      
                                      
                                      (3,368
                                      )
                                      
                                      
                                      271
                                      
                                      
                                      
                                      (4,817
                                      )Securities
      held-to-maturity (FTE)
                                      
                                      
                                      (30
                                      )
                                      
                                      
                                      5
                                      
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      (26
                                      )
                                      
                                      
                                      (77
                                      )
                                      
                                      
                                      9
                                      
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      (69
                                      )Interest-bearing
      depositswith
      other banks
                                      
                                      
                                      8
                                      
                                      
                                      
                                      (8
                                      )
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      18
                                      
                                      
                                      
                                      (15
                                      )
                                      
                                      
                                      (2
                                      )
                                      
                                      
                                      1Total
      interest earning  assets
                                      
                                      
                                      149
                                      
                                      
                                      
                                      (1,493
                                      )
                                      
                                      
                                      80
                                      
                                      
                                      
                                      (1,264
                                      )
                                      
                                      
                                      2,439
                                      
                                      
                                      
                                      (4,279
                                      )
                                      
                                      
                                      205
                                      
                                      
                                      
                                      (1,635
                                      )Interest
      Paid On:Demand
      deposits
                                      
                                      
                                      25
                                      
                                      
                                      
                                      113
                                      
                                      
                                      
                                      26
                                      
                                      
                                      
                                      164
                                      
                                      
                                      
                                      65
                                      
                                      
                                      
                                      313
                                      
                                      
                                      
                                      76
                                      
                                      
                                      
                                      454Savings
      deposits
                                      
                                      
                                      159
                                      
                                      
                                      
                                      (101
                                      )
                                      
                                      
                                      (25
                                      )
                                      
                                      
                                      33
                                      
                                      
                                      
                                      546
                                      
                                      
                                      
                                      (76
                                      )
                                      
                                      
                                      (22
                                      )
                                      
                                      
                                      448Time
      deposits
                                      
                                      
                                      (958
                                      )
                                      
                                      
                                      (1,612
                                      )
                                      
                                      
                                      247
                                      
                                      
                                      
                                      (2,323
                                      )
                                      
                                      
                                      (2,161
                                      )
                                      
                                      
                                      (5,512
                                      )
                                      
                                      
                                      610
                                      
                                      
                                      
                                      (7,063
                                      )Retail
      repurchase agreements
                                      
                                      
                                      (3
                                      )
                                      
                                      
                                      (86
                                      )
                                      
                                      
                                      1
                                      
                                      
                                      
                                      (88
                                      )
                                      
                                      
                                      (77
                                      )
                                      
                                      
                                      (223
                                      )
                                      
                                      
                                      16
                                      
                                      
                                      
                                      (284
                                      )Wholesale
      repurchaseagreement
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3
                                      )
                                      
                                      
                                      0
                                      
                                      
                                      
                                      (3
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (47
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (47
                                      )FHLB
      borrowings and otherlong-term
      debt
                                      
                                      
                                      (36
                                      )
                                      
                                      
                                      (100
                                      )
                                      
                                      
                                      2
                                      
                                      
                                      
                                      (134
                                      )
                                      
                                      
                                      (307
                                      )
                                      
                                      
                                      (257
                                      )
                                      
                                      
                                      13
                                      
                                      
                                      
                                      (551
                                      )Total
      interest-bearing liabilities
                                      
                                      
                                      (813
                                      )
                                      
                                      
                                      (1,789
                                      )
                                      
                                      
                                      251
                                      
                                      
                                      
                                      (2,351
                                      )
                                      
                                      
                                      (1,934
                                      )
                                      
                                      
                                      (5,802
                                      )
                                      
                                      
                                      693
                                      
                                      
                                      
                                      (7,043
                                      )Change
      in net interest income,tax-equivalent
                                      
                                      $
                                      962
                                      
                                      
                                      $
                                      296
                                      
                                      
                                      $
                                      (171
                                      )
                                      
                                      $
                                      1,087
                                      
                                      
                                      $
                                      4,373
                                      
                                      
                                      $
                                      1,523
                                      
                                      
                                      $
                                      (488
                                      )
                                      
                                      $
                                      5,408
 
 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.
 
 The
Company’s allowance for loan losses was $26.42 million at September 30, 2010,
$24.28 million at December 31, 2009, and $19.71 million at September 30,
2009.  The Company’s allowance for loan loss activity for the three- and
nine-month periods ended September 30, 2010 and 2009 is as follows:
 
 For the Three Months
                    
                    
                    For the Nine MonthsEnded September 30,
                    
                    
                    Ended September 30,(In Thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Allowance
      for loan lossesBeginning
      balance
                    
                    $
                    25,011
                    
                    
                    $
                    18,543
                    
                    
                    $
                    24,277
                    
                    
                    $
                    17,782Provision
      for loan losses
                    
                    
                    3,810
                    
                    
                    
                    3,819
                    
                    
                    
                    11,071
                    
                    
                    
                    8,519Charge-offs
                    
                    
                    (2,651
                    )
                    
                    
                    (2,993
                    )
                    
                    
                    (9,756
                    )
                    
                    
                    (7,404
                    )Recoveries
                    
                    
                    250
                    
                    
                    
                    341
                    
                    
                    
                    828
                    
                    
                    
                    813Net
      charge-offs
                    
                    
                    (2,401
                    )
                    
                    
                    (2,652
                    )
                    
                    
                    (8,928
                    )
                    
                    
                    (6,591
                    )Ending
      balance
                    
                    $
                    26,420
                    
                    
                    $
                    19,710
                    
                    
                    $
                    26,420
                    
                    
                    $
                    19,710
 
 - 32
-
 The total
allowance for loan losses to loans held for investment ratio was 1.89% at
September 30, 2010, compared with 1.74% at December 31, 2009, and 1.41% at
September 30, 2009.    Management considers the allowance to be
adequate based upon its analysis of the portfolio as of September 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 loan collateral,
charge-offs cannot be predicted with certainty. Accordingly, there can be no
assurance that increases to the allowance will not be necessary should the
quality of any loans deteriorate.
 
 During
the third quarter and first nine months of 2010, the Company incurred net
charge-offs of $2.40 million and $8.93 million, respectively, compared with
$2.65 million and $6.59 million in the respective periods of 2009. 
Annualized net charge-offs for the third quarter of 2010 were 0.68% of the
average loan balance.  The Company made provisions for loan losses of $3.81
million and $11.07 million, respectively, for the three- and nine-month periods
ended September 30, 2010, compared to $3.82 million and $8.52 million,
respectively, in the same periods of 2009.  Provisions for loan losses
covered 158.68% and 124.00%, respectively, of net charge-offs for the three- and
nine-month periods ended September 30, 2010.  The increase in loan loss
provision for the nine months ended September 30, 2010, over the comparable
period 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 September 30, 2010, measured 1.76% of total loans and
were comprised of loans 30-89 days delinquent of 0.57% of total loans and loans
in non-accrual status of 1.19% of total loans.  Total delinquency has
decreased approximately $7.92 million since December 31, 2009. 
Non-performing loans, comprised of non-accrual loans and troubled debt
restructurings (“TDRs”) (as the Company does not have any loans that are 90 days
past due and still accruing), as a percentage of total loans were 1.76% at
September 30, 2010, 1.35% at June 30, 2010, and 1.33% at March 31,
2010.
 
 The
primary composition of non-accrual loans is 33.31% residential real estate;
18.22% owner occupied commercial real estate; and 13.35% non-owner occupied
commercial real estate.  Approximately $4.21 million, or 25.26%, 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 third quarter
of 2010 was $10.94 million compared with a noninterest loss of $17.28 million in
the same period of 2009, an increase of $28.22 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 September 30, 2010,
decreased $4.30 million, or 33.94%, compared to the same period in 2009. 
Wealth management revenues decreased $62 thousand, or 6.39%, to $909 thousand
for the three months ended September 30, 2010, compared with the same period in
2009.  Service charges on deposit accounts decreased $202 thousand, or
5.52%, to $3.46 million for the three months ended September 30, 2010, compared
with the same period in 2009.  Other service charges and fees increased $88
thousand, or 7.61%, to $1.24 million for the three months ended September 30,
2010, compared with the same period in 2009.  Insurance commissions for the
third quarter of 2010 were $1.66 million, an increase of $96 thousand, or 6.13%,
from the comparable period in 2009.  Other operating income totaled $1.09
million for the three months ended September 30, 2010, an increase of $276
thousand, or 33.87%, compared with the same period in 2009.  The increase
in this category is primarily attributed to higher volumes of loans sold in the
secondary mortgage market, gains on other real estate owned, and gains on the
sale of property.   For the quarter ended September 30, 2010, the
Company recognized no impairment losses on securities, compared to $30.81
million of OTTI on eight pooled trust preferred securities and several small
equity holdings in 2009.  During the third quarter of 2010, net securities
gains of $2.57 million were realized compared with net gains of $866 thousand in
the comparable period in 2009.
 
 Noninterest
income for the first nine months of 2010 was $28.42 million compared with a
noninterest loss of $3.24 million in the same period of 2009, an increase of
$31.76 million.  Exclusive of the impact of OTTI charges and gains on the
sale of securities, noninterest income for the nine months ended September 30,
2010, decreased $4.05 million, or 14.14%, compared to the same period in
2009.  Wealth management revenues decreased $282 thousand, or 9.13%, to
$2.81 million for the first nine months of 2010, compared with the same period
in 2009.  Service charges on deposit accounts decreased $511 thousand, or
4.96%, to $9.80 million for the nine months ended September 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 $308 thousand, or 8.88%,
to $3.78 million for the nine months ended September 30, 2010, compared with the
same period in 2009.  Insurance commissions for the first nine months of
2010 were $5.25 million, a decrease of $270 thousand, or 4.89%, from the
comparable period in 2009.  Other operating income totaled $2.95 million
for the nine months ended September 30, 2010, an increase of $1.30 million, or
79.00%, compared with the same period in 2009.  The increase is primarily
attributed to higher volumes of loans sold in the secondary mortgage market, a
small litigation settlement, and gains on the sale of property.   For
the nine months ended September 30, 2010, the Company recognized $185 thousand
of OTTI on two pooled trust preferred securities and several smaller equity
holdings, compared to $34.80 million on eight pooled trust preferred securities
and several smaller equity holdings in 2009.  During the first nine months
of 2010, net securities gains of $4.03 million were realized compared with net
gains of $2.93 million in the comparable period in 2009.
 
 - 33
-
 For a
more detailed discussion of activities regarding investment securities and
impairment charges, please see Note 3 to the Consolidated Financial Statements
included in Part I.
 
 Noninterest
Expense
 
 Noninterest
expense totaled $17.43 million for the quarter ended September 30, 2010, a
decrease of $339 thousand, or 1.91%, from the same period in 2009. 
Salaries and employee benefits for the third quarter of 2010 increased $893
thousand, or 11.36%, compared to the same period in 2009.  TriStone
branches accounted for an increase in salaries and employee benefits of $222
thousand during the quarter.  The remainder of the Company showed an
overall increase in salaries and benefits of $671 thousand.  Occupancy and
furniture and equipment expenses increased $305 thousand, or 13.90%, between the
comparable periods.  Other operating expense totaled $5.20 million for the
third quarter of 2010, an increase of $361 thousand, or 7.46%, from $4.84
million for the third 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 $718 thousand and $2.13
million, respectively, for the three- and nine-month periods ended September 30,
2010.
 
 Noninterest
expense totaled $50.10 million for the nine months ended September 30, 2010, an
increase of $994 thousand, or 2.02%, from the same period in 2009. 
Salaries and employee benefits for the first nine months of 2010 increased $2.08
million, or 8.98%, compared to the same period in 2009.  TriStone branches
accounted for an increase in salaries and employee benefits of $907 thousand
during the first nine months of 2010.  The remainder of the Company showed
an overall increase in salaries and benefits of $1.17 million.  Occupancy
and furniture and equipment expenses increased $640 thousand, or 9.20%, between
the comparable periods, due mainly to the addition of the TriStone
branches.  Other operating expense totaled $14.39 million for the first
nine months of 2010, an increase of $381 thousand, or 2.72%, from $14.01 million
for the first nine months 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 municipal securities which are exempt from federal income tax
and the increases in the cash surrender values of life insurance
policies.
 
 For the
third quarter of 2010, income taxes were $1.74 million compared with an income
tax benefit of $9.78 million for the third quarter of 2009.  For the
quarters ended September 30, 2010 and 2009, the effective tax expense (benefit)
rates were 21.01% and (45.85%), respectively.  For the nine months ended
September 30, 2010, income taxes were $6.05 million compared with an income tax
benefit of $6.62 million for the same period of 2009.  For the nine months
ended September 30, 2010 and 2009, the effective tax expense (benefit) rates
were 26.28% and (62.59%), respectively.
 
 FINANCIAL
CONDITION
 
 Total
assets at September 30, 2010, increased $24.14 million, or 1.06%, to $2.30
billion from December 31, 2009. Cash and cash equivalents increased $30.42
million since year end 2009. Total liabilities at September 30, 2010, increased
$2.21 million, or 0.11%, to $2.02 billion from December 31, 2009. Deposits
increased $11.26 million, securities sold under agreements to repurchase
decreased $221 thousand, and short term borrowings decreased $7.72
million.
 
 Securities
 
 Available-for-sale
securities were $480.59 million at September 30, 2010, compared with $486.06
million at December 31, 2009, a decrease of $5.47 million, or 1.13%.  The
market value of securities available-for-sale as a percentage of amortized cost
improved from 96.34% at December 31, 2009, to 99.51% at September 30, 2010,
reflecting improved pricing on certain issues.  Held-to-maturity securities
declined to $5.93 million at September 30, 2010, compared with $7.45 million at
December 31, 2009.
  - 34
-
  During
the third quarter, the Company did not recognize in earnings any OTTI charges
related to securities. During the nine months ended September 30, 2010, the
Company recognized OTTI charges on two pooled trust preferred securities of $134
thousand and impairment charges on certain equity securities of $51
thousand.
 
 For a
more detailed discussion of activities regarding investment securities, please
see Note 3 to the Consolidated Financial Statements included in Part
I.
 
 Loan
Portfolio
 
 Loans
Held for Sale
 
 The $3.39
million balance of loans held for sale at September 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 September 30, 2010, was $17.53 million
on 117 loans.
 
 Loans Held for
Investment
 
 Total
loans held for investment were $1.40 billion at September 30, 2010, representing
an increase of $4.32 million from December 31, 2009, and an increase of $1.63
million from September 30, 2009.  The average loan to deposit ratio was
85.59% for the third quarter of 2010, compared with 85.13% for the fourth
quarter of 2009, and 83.25% for the third quarter of 2009.  Year-to-date
average loans of $1.40 billion increased $90.97 million when compared to
year-to-date average loans of $1.31 billion in 2009.
 
 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 September 30, 2010, December 31,
2009, and September 30, 2009.
 
 September 30, 2010
                      
                      
                      December 31, 2009
                      
                      
                      September 30, 2009(Dollars in Thousands)
                      
                      Amount
                      
                      
                      Percent
                      
                      
                      Amount
                      
                      
                      Percent
                      
                      
                      Amount
                      
                      
                      PercentLoans
      Held for InvestmentCommercial,
      financial and agricultural
                      
                      $
                      104,411
                      
                      
                      
                      7.47
                      %
                      
                      $
                      96,366
                      
                      
                      
                      6.91
                      %
                      
                      $
                      86,068
                      
                      
                      
                      6.16
                      %Real
      estate — commercial
                      
                      
                      460,188
                      
                      
                      
                      32.91
                      %
                      
                      
                      450,611
                      
                      
                      
                      32.33
                      %
                      
                      
                      452,670
                      
                      
                      
                      32.41
                      %Real
      estate — residential
                      
                      
                      647,885
                      
                      
                      
                      46.33
                      %
                      
                      
                      657,367
                      
                      
                      
                      47.16
                      %
                      
                      
                      652,155
                      
                      
                      
                      46.70
                      %Real
      estate — construction (1)
                      
                      
                      115,029
                      
                      
                      
                      8.23
                      %
                      
                      
                      124,896
                      
                      
                      
                      8.96
                      %
                      
                      
                      137,750
                      
                      
                      
                      9.86
                      %Consumer
                      
                      
                      63,186
                      
                      
                      
                      4.52
                      %
                      
                      
                      60,090
                      
                      
                      
                      4.31
                      %
                      
                      
                      62,995
                      
                      
                      
                      4.51
                      %Other
                      
                      
                      7,552
                      
                      
                      
                      0.54
                      %
                      
                      
                      4,601
                      
                      
                      
                      0.33
                      %
                      
                      
                      4,979
                      
                      
                      
                      0.36
                      %Total
                      
                      $
                      1,398,251
                      
                      
                      
                      100.00
                      %
                      
                      $
                      1,393,931
                      
                      
                      
                      100.00
                      %
                      
                      $
                      1,396,617
                      
                      
                      
                      100.00
                      %Loans
      Held for Sale
                      
                      $
                      3,386
                      
                      
                      
                      
                      
                      
                      $
                      11,576
                      
                      
                      
                      
                      
                      
                      $
                      4,376
 
 (1) Real
estate construction includes land and land development loans.
 
 Non-Performing
Assets
 
 Non-performing
assets include loans on non-accrual status, TDRs, loans contractually past due
90 days or more and still accruing interest, and other real estate owned
(“OREO”).  Non-performing assets were $30.05 million at September 30, 2010,
$23.50 million at December 31, 2009, and $18.55 million at September 30,
2009.  The percentage of non-performing assets to total assets was 1.31% at
September 30, 2010, 1.03% at December 31, 2009, and 0.81% at September 30, 2009.
During the third quarter of 2010, the Company was more active in restructuring
loan terms for creditworthy customers resulting in the increase in
TDRs.
 
 - 35
-
 The
following schedule details non-performing assets by category at the close of
each of the quarters ended September 30, 2010 and 2009, and December 31,
2009.
 
 September 30, 2010
                              
                              
                              December 31, 2009
                              
                              
                              September 30, 2009(Dollars
      in Thousands)Non-accrual
      loans
                              
                              $
                              16,645
                              
                              
                              $
                              17,527
                              
                              
                              $
                              12,278Troubled
      debt restructurings
                              
                              
                              7,904
                              
                              
                              
                              1,390
                              
                              
                              
                              2,319Loans
      90 days or more past due and stillaccruing
      interest
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      non-performing loans
                              
                              
                              24,549
                              
                              
                              
                              18,917
                              
                              
                              
                              14,597Other
      real estate owned
                              
                              
                              5,501
                              
                              
                              
                              4,578
                              
                              
                              
                              3,955Total
      non-performing assets
                              
                              $
                              30,050
                              
                              
                              $
                              23,495
                              
                              
                              $
                              18,552Non-performing
      loans as a percentage of total loans
                              
                              
                              1.76
                              %
                              
                              
                              1.36
                              %
                              
                              
                              1.05
                              %Non-performing
      assets as a percentage of total assets
                              
                              
                              1.31
                              %
                              
                              
                              1.03
                              %
                              
                              
                              0.81
                              %Non-performing
      assets as a percentage of total loansand
      other real estate owned
                              
                              
                              2.14
                              %
                              
                              
                              1.68
                              %
                              
                              
                              1.32
                              %Allowance
      for loan losses as a percentage ofnon-performing
      loans
                              
                              
                              107.6
                              %
                              
                              
                              128.3
                              %
                              
                              
                              135.0
                              %Restructured
      loans performing in accordance withmodified
      terms
                              
                              $
                              849
                              
                              
                              $
                              2,062
                              
                              
                              $
                              570
 
 Ongoing
activity within the classification and categories of non-performing loans
include collections on delinquencies, foreclosures, loan restructurings, and
movements into or out of the non-performing classification as a result of
changing economic conditions, borrower financial capacity, and resolution
efforts on the part of the Company. There were no loans 90 days past due and
still accruing at September 30, 2010, December 31, 2009, and September 30, 2009.
OREO was $5.50 million at September 30, 2010, an increase of $923 thousand from
December 31, 2009, and is carried at the lesser of estimated net realizable
value or cost.  OREO increased from December 31, 2009, as a result of
escalation in asset resolution and foreclosure activity. At September 30, 2010,
OREO consisted of 33 properties with an average value of $299 thousand and an
average age of 9 months.  During the three- and nine-month periods ended
September 30, 2010, net losses on the sale of OREO totaled $79 thousand and $536
thousand, respectively.
 
 The
Company’s Special Assets staff assumes the management and monitoring of all
loans determined to be seriously delinquent or impaired.  When resolution
through secondary repayment sources becomes evident, updated appraisals are
ordered and 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 and continues to seek out alternative resolution
processes, where possible.
 
 At
September 30, 2010, the allowance for loan losses related to TDRs totaled $578
thousand. Total interest income recognized on TDRs for the nine months ended
September 30, 2010, totaled $208 thousand. When restructuring loans for troubled
borrowers, the Company generally only makes concessions in interest rates and
amortization terms.
  Deposits
and Other Borrowings
 
 Total
deposits increased by $11.26 million, or 0.68%, during the first nine months of
2010.  Noninterest-bearing demand deposits increased $7.92 million to
$216.17 million at September 30, 2010, compared with $208.24 million at December
31, 2009.  Interest-bearing demand deposits increased $39.02 million to
$270.93 million at September 30, 2010, from December 31, 2009.  Savings
increased $44.28 million, or 11.61%, and time deposits decreased $79.96 million,
or 9.70%, during the first nine months of 2010.
 
 Securities
sold under repurchase agreements decreased $221 thousand, or 0.14%, in the first
nine months of 2010 to $153.41 million.  There were no federal funds
purchased outstanding at September 30, 2010, as the Company maintained a strong
liquidity position sold throughout the first nine months of 2010.
 - 36
-
 
 Stockholders’
Equity
 
 Total
stockholders’ equity increased $21.94 million, or 8.70%, from $252.27 million at
December 31, 2009, to $274.20 million at September 30, 2010. Changes in equity
were primarily the result of net income of $16.96 million, an increase in
accumulated other comprehensive income of $9.31 million, and common dividends
paid of $5.34 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 September 30, 2010, the Company’s total
risk-based capital ratio was 14.23% compared with 13.81% at December 31,
2009.  The Company’s Tier 1 risk-based capital ratio was 12.97% at
September 30, 2010, compared with 12.56% at December 31, 2009.  The
Company’s Tier 1 leverage ratio at September 30, 2010, was 8.89% compared with
8.51% at December 31, 2009.  All of the Company’s regulatory capital ratios
exceed the current “well-capitalized” levels.
 
 The OCC
has issued an Individual Minimum Capital Ratio directive to the Bank which
requires it 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 12.86%, 11.61%, and 7.97%, respectively, at September 30,
2010.
 
 PART
I. ITEM 3.  Quantitative and Qualitative Disclosures about Market
Risk
 
 Liquidity
and Capital Resources
 
 At
September 30, 2010, the Company maintained liquidity in the form of cash and
cash equivalent balances of $131.76 million, unpledged securities
available-for-sale of $189.00 million, and total FHLB credit availability of
approximately $145.85 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 September 30, 2010, maintained cash balances of $13.22 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 twelve months and through
the projected period of dividend restrictions.
 
 The
Company maintains a liquidity policy as a means to manage liquidity and the
associated risk.  The policy includes a Liquidity Contingency Plan (the
“Liquidity Plan”) that is designed as a tool for the Company to detect liquidity
issues promptly in order to protect depositors, creditors and shareholders. The
Liquidity Plan includes monitoring various internal and external indicators such
as changes in core deposits and changes in market conditions. It provides for
timely responses to a wide variety of funding scenarios ranging from changes in
loan demand to a decline in the Company’s quarterly earnings to a decline in the
market price of the Company’s stock.  The Liquidity Plan calls for specific
responses designed to meet a wide range of liquidity needs based upon
assessments on a recurring basis by the Company and its Board of
Directors.
 
 Interest
Rate Risk and Asset/Liability Management
 
 The
Company’s profitability is dependent to a large extent upon its net interest
income, which is the difference between its interest income on interest-earning
assets, such as loans and securities, and its interest expense on
interest-bearing liabilities, such as deposits and borrowings.  The
Company, like other financial institutions, is subject to interest rate risk to
the degree that interest-earning assets reprice differently than
interest-bearing liabilities.  The Company manages its mix of assets and
liabilities with the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds
while maintaining an acceptable level of net interest income given the current
interest rate environment.
 
 - 37
-




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 September 30, 2010, net interest income modeling
shows the Company to be in a neutral position with respect to senstivity to
interest rate risk.
 
 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.
 - 38
-
 The
following table summarizes the projected impact on the next twelve months’ net
interest income and the economic value of equity as of September 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.  At September 30,
2010, the Federal Open Market Committee maintained a target range for federal
funds of 0 to 25 basis points, rendering a complete downward shock of 200 basis
points unrealistic and not meaningful.  In the downward rate shocks
presented, benchmark interest rates are dropped with floors near
0%.
 
 Rate Sensitivity AnalysisSeptember 30, 2010(Dollars in Thousands)
                            
                            Change in
                            
                            
                            
                            
                            
                            Change inIncrease (Decrease) in
                            
                            Net Interest
                            
                            
                            Percent
                            
                            
                            Economic Value
                            
                            
                            PercentInterest Rates (Basis
      Points)
                            
                            Income
                            
                            
                            Change
                            
                            
                            of Equity
                            
                            
                            Change200
                            
                            $
                            81
                            
                            
                            
                            0.1
                            
                            
                            $
                            9,229
                            
                            
                            
                            3.5100
                            
                            
                            101
                            
                            
                            
                            0.1
                            
                            
                            
                            11,279
                            
                            
                            
                            4.2(100)
                            
                            
                            740
                            
                            
                            
                            1.0
                            
                            
                            
                            (26,165
                            )
                            
                            
                            (9.4
                            )December
      31, 2009(Dollars
      in Thousands)
                            
                            Change
      in
                            
                            
                            
                            
                            
                            
                            Change
      inIncrease
      (Decrease) in
                            
                            Net
      Interest
                            
                            
                            Percent
                            
                            
                            Economic
      Value
                            
                            
                            PercentInterest
      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
  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.
 - 39
-
 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). Based on that evaluation, the Company’s
CEO along with the Company’s CFO concluded that the Company’s disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company’s periodic SEC filings.
 
 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 following, there were no changes in the Company’s internal control over
financial reporting during the quarter ended September 30, 2010, that have
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
 
 During
the quarter ended September 30, 2010, the Company instituted a program of
controls over spreadsheets used directly in the preparation of critical
estimates in the consolidated financial statements.
 
 PART
II.  OTHER INFORMATION
 
 ITEM
1.  Legal Proceedings
 
 The
Company is currently a defendant in various legal actions and asserted claims in
the normal course of business.  Although the Company and legal counsel are
unable to assess the ultimate outcome of each of these matters with certainty,
they are of the belief that the resolution of these actions should not have a
material adverse affect on the financial position, results of operations, or
cash flows of the Company.
 
 ITEM
1A.  Risk Factors
 
 There
were no material changes to the risk factors as previously disclosed under Item
1A. of the Company’s Annual Report on Form 10-K for the year ended December 31,
2009, as amended, and the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010.
 
 ITEM
2.  Unregistered Sales of Equity Securities and Use of
Proceeds
 
 (a)
              Not
      Applicable
 
 (b)
              Not
      Applicable
 
 (c)
              Issuer
      Purchases of Equity Securities
 
 - 40
-
 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 third 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)July
      1-31, 2010
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      
                      824,333August
      1-31, 2010
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      824,333September
      1-30, 2010
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      851,779Total
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
  (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 248,221 shares in treasury at September
30, 2010.
 
 ITEM
3.  Defaults Upon Senior Securities
 
 Not
Applicable
 
 ITEM
4.  Reserved
 
 ITEM
5.  Other Information
 
 Not
Applicable
 
 ITEM
6.  Exhibits
 
 (a)
              Exhibits
  Exhibit
                      No.
                    
                    Exhibit3(i)
                    
                    Articles
      of Incorporation of First Community Bancshares, Inc.
  (30)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)
  - 41
-
  10.8
                
                Reserved.10.9
                
                Form
      of Indemnification Agreement between First Community Bancshares, Inc., its
      Directors and Certain Executive Officers. (9)10.10
                
                Form
      of Indemnification Agreement between First Community Bank, N. A, its
      Directors and Certain Executive Officers. (9)10.11
                
                Reserved.10.12**
                
                First
      Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Award
      Agreement. (13)10.13
                
                Reserved.10.14**
                
                First
      Community Bancshares, Inc. Directors Deferred Compensation Plan.
      (7)10.15**
                
                First
      Community Bancshares, Inc. Deferred Compensation and Supplemental Bonus
      Plan For Key Employees. (15)10.16**
                
                Employment
      Agreement dated November 30, 2006, between First Community Bank, N. A. and
      Ronald L. Campbell. (19)10.17**
                
                Employment
      Agreement dated September 28, 2007, between GreenPoint Insurance Group,
      Inc. and Shawn C. Cummings. (20)10.18
                
                Securities
      Purchase Agreement by and between the United States Department of the
      Treasury and First Community Bancshares, Inc. dated November 21, 2008.
      (22)10.19**
                
                Employment
      Agreement dated December 16, 2008, between First Community Bancshares,
      Inc. and David D. Brown. (23)10.20**
                
                Employment
      Agreement dated December 16, 2008, between First Community Bancshares,
      Inc. and Robert L. Buzzo. (26)10.21**
                
                Employment
      Agreement dated December 16, 2008, between First Community Bancshares,
      Inc. and E. Stephen Lilly. (26)10.22**
                
                Employment
      Agreement dated December 16, 2008, between First Community Bank, N. A. and
      Gary R. Mills. (26)10.23**
                
                Employment
      Agreement dated December 16, 2008, between First Community Bank, N. A. and
      Martyn A. Pell. (26)10.24**
                
                Employment
      Agreement dated December 16, 2008, between First Community Bank, N. A. and
      Robert. L. Schumacher. (26)10.25**
                
                Employment
      Agreement dated July 31, 2009, between First Community Bank, N. A. and
      Simpson O. Brown. (25)10.25**
                
                Employment
      Agreement dated July 31, 2009, between First Community Bank, N. A. and
      Mark R. Evans. (25)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 pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 
 *
              
              Furnished
      herewith.**
              
              Indicates
      a management contract or compensation plan.(1)
              
              Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      June 30, 2010, filed on August 16, 2010.(2)
              
              Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      June 30, 2002, filed on August 14, 2002.(3)
              
              Incorporated
      by reference from the Annual Report on Form 10-K for the period ended
      December 31, 2002, filed on March 25, 2003, as amended on March 31,
      2003.(4)
              
              Incorporated
      by reference from the Annual Report on Form 10-K for the period ended
      December 31, 1999, filed on March 30, 2000, as amended April 13,
      2000.(5)
              
              The
      option agreements entered into pursuant to the 1999 Stock Option Plan and
      the 2001 Non-Qualified Directors Stock Option Plan are incorporated by
      reference from the Quarterly Report on Form 10-Q for the period ended June
      30, 2002, filed on August 14, 2002.(6)
              
              Incorporated
      by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and
      filed December 16, 2008.  The Registrant has entered into
      substantially identical agreements with Robert L. Buzzo and E. Stephen
      Lilly, with the only differences being with respect to title and
      salary.(7)
              
              Incorporated
      by reference from the Current Report on Form 8-K dated August 22, 2006,
      and filed August 23, 2006.(8)
              
              Reserved.
  - 42
-
  (9)
              
              Form
      of indemnification agreement entered into by the Company and by First
      Community Bank, N. A. with their respective directors and certain officers
      of each including, for the Registrant and Bank: John M. Mendez, Robert L.
      Schumacher, Robert L. Buzzo, E. Stephen Lilly, David D. Brown, and Gary R.
      Mills.  Incorporated by reference from the Annual Report on Form 10-K
      for the period ended December 31, 2003, filed on March 15, 2004, and
      amended on May 19, 2004.(10)
              
              Incorporated
      by reference from the 2004 First Community Bancshares, Inc. Definitive
      Proxy filed on March 15, 2004.(11)
              
              Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      September 30, 2003, filed on November 10, 2003.(12)
              
              Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      March 31, 2004, filed on May 7, 2004.(13)
              
              Incorporated
      by reference from the Quarterly Report on Form 10-Q for the period ended
      June 30, 2004, filed on August 6, 2004.(14)
              
              Incorporated
      by reference from the Annual Report on Form 10-K for the period ended
      December 31, 2004, and filed on March 16, 2005.  Amendments in
      substantially similar form were executed for Directors Clark, Kantor,
      Hamner, Modena, Perkinson, Stafford, and Stafford II.(15)
              
              Incorporated
      by reference from the Current Report on Form 8-K dated October 24, 2006,
      and filed October 25, 2006.(16)
              
              Incorporated
      by reference from Note 1 of the Notes to Consolidated Financial Statements
      included herein.(17)
              
              Incorporated
      by reference from Exhibit 3.1 of the Current Report on Form 8-K dated
      February 14, 2008, filed on February 20, 2008.(18)
              
              Reserved(19)
              
              Incorporated
      by reference from Exhibit 2.1 of the Form S-3 registration statement, File
      No. 333-142558, filed May 2, 2007.(20)
              
              Incorporated
      by reference from the Annual Report on Form 10-K for the period ended
      December 31, 2007, filed on March 13, 2008.(21)
              
              Reserved.(22)
              
              Incorporated
      by reference from the Current Report on Form 8-K dated November 21, 2008,
      and filed November 24, 2008.(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.(30)
              
              Incorporated
      by reference from Exhibit 3(i) of the Quarterly Report on Form 10-Q for
      the period dated June 30, 2010, and filed August 16,
  2010.
 
 - 43
-
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 First
Community Bancshares, Inc.
 
 DATE: 
November 2, 2010
 
 /s/
      John M. Mendez
 John M.
Mendez
 President
& Chief Executive Officer
 (Principal
Executive Officer)
 
 /s/
      David D. Brown
 David D.
Brown
 Chief
Financial Officer
 (Principal
Accounting Officer)
 
 - 44
-
 
 EXHIBIT
      INDEXExhibit
      No.
                
                Exhibit31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.32
                
                Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 - 45
-