UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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   (Address of principal executive offices)		24605-0989   (Zip Code)

(276) 326-9000

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).

þ 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 þ		Non-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; 17,917,824 shares outstanding as of August 5, 2011

 

 

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended June 30, 2011

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010			3
Condensed Consolidated Statements of Income for the Three- and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)			5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010 (Unaudited)			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3. Quantitative and Qualitative Disclosures about Market Risk			46
Item 4. Controls and Procedures			48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3. Defaults Upon Senior Securities			49
Item 4. Reserved			49
Item 5. Other Information			49
Item 6. Exhibits			49
SIGNATURES			52
EXHIBIT INDEX			53
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
		2011				2010
(Dollars in Thousands)		(Unaudited)
Assets
Cash and due from banks		$	31,451			$	28,816
Federal funds sold			162,629				81,526
Interest-bearing balances with banks			36,539				1,847
Total cash and cash equivalents			230,619				112,189
Securities available-for-sale			349,976				480,064
Securities held-to-maturity			4,106				4,637
Loans held for sale			920				4,694
Loans held for investment, net of unearned income			1,373,944				1,386,206
Less allowance for loan losses			26,482				26,482
Net loans held for investment			1,347,462				1,359,724
Premises and equipment, net			55,808				56,244
Other real estate owned			5,585				4,910
Interest receivable			6,202				7,675
Goodwill			85,132				84,914
Other intangible assets			5,205				5,725
Other assets			115,385				123,462
Total assets		$	2,206,400			$	2,244,238
Liabilities
Deposits:
Noninterest-bearing		$	219,488			$	205,151
Interest-bearing			1,360,188				1,415,804
Total deposits			1,579,676				1,620,955
Interest, taxes and other liabilities			20,563				21,318
Securities sold under agreements to repurchase			137,778				140,894
FHLB borrowings			150,000				175,000
Other indebtedness			16,179				16,193
Total liabilities			1,904,196				1,974,360
Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued or outstanding at June 30, 2011, or December 31, 2010			—				—
Series A preferred stock, $0.01 par value; 25,000 shares authorized; 18,921 shares issued at June 30, 2011, and no shares issued at December 31, 2010			18,921				—
Common stock, $1 par value; 50,000,000 shares authorized; 18,082,822 shares issued at June 30, 2011, and 18,082,822 issued at December 31, 2010, and 164,998 and 216,487 shares in treasury, respectively			18,083				18,083
Additional paid-in capital			188,278				189,239
Retained earnings			89,257				81,486
Treasury stock, at cost			(5,137	)			(6,740	)
Accumulated other comprehensive loss			(7,198	)			(12,190	)
Total stockholders’ equity			302,204				269,878
Total liabilities and stockholders’ equity		$	2,206,400			$	2,244,238

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars In Thousands, Except Share and Per Share Data)		2011				2010				2011				2010
Interest Income
Interest and fees on loans held for investment		$	20,094			$	20,997			$	40,549			$	42,351
Interest on securities — taxable			1,850				3,730				4,383				7,516
Interest on securities — nontaxable			1,291				1,394				2,824				2,820
Interest on deposits in banks			100				34				169				80
Total interest income			23,335				26,155				47,925				52,767
Interest Expense
Interest on deposits			3,273				5,106				7,153				10,608
Interest on borrowings			2,308				2,507				4,743				4,998
Total interest expense			5,581				7,613				11,896				15,606
Net interest income			17,754				18,542				36,029				37,161
Provision for loan losses			3,079				3,596				4,691				7,261
Net interest income after provision for loan losses			14,675				14,946				31,338				29,900
Noninterest Income
Wealth management income			930				1,012				1,824				1,897
Service charges on deposit accounts			3,353				3,347				6,384				6,339
Other service charges and fees			1,461				1,250				2,867				2,531
Insurance commissions			1,561				1,389				3,504				3,590
Total impairment losses on securities			—				(185	)			(527	)			(185	)
Portion of loss recognized in other comprehensive income			—				—				—				—
Net impairment losses recognized in earnings			—				(185	)			(527	)			(185	)
Net gains on sale of securities			3,224				1,201				5,060				1,451
Other operating income			834				890				1,750				1,859
Total noninterest income			11,363				8,904				20,862				17,482
Noninterest Expense
Salaries and employee benefits			8,685				8,487				17,814				16,456
Occupancy expense of bank premises			1,568				1,570				3,215				3,279
Furniture and equipment expense			909				918				1,824				1,822
Amortization of intangible assets			261				253				520				509
FDIC premiums and assessments			414				710				1,292				1,411
Prepayment penalties on FHLB advances			—				—				471				—
Other operating expense			5,901				4,660				10,665				9,193
Total noninterest expense			17,738				16,598				35,801				32,670
Income before income taxes			8,300				7,252				16,399				14,712
Income tax expense			2,572				2,121				4,920				4,303
Net income			5,728				5,131				11,479				10,409
Dividends on preferred stock			131				—				131				—
Net income available to common shareholders		$	5,597			$	5,131			$	11,348			$	10,409
Basic earnings per common share		$	0.31			$	0.29			$	0.63			$	0.59
Diluted earnings per common share		$	0.31			$	0.29			$	0.63			$	0.59
Cash dividends per common share		$	0.10			$	0.10			$	0.20			$	0.20
Weighted average basic shares outstanding			17,895,904				17,787,325				17,882,006				17,776,500
Weighted average diluted shares outstanding			18,534,489				17,805,393				18,200,184				17,792,535

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

		Six Months Ended
		June 30,
(Dollars In Thousands)		2011				2010
Operating activities:
Net income		$	11,479			$	10,409
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			4,691				7,261
Depreciation and amortization of premises and equipment			2,034				2,036
Intangible amortization			520				509
Net investment amortization and accretion			162				7
Net loss on the sale of property, plant, and equipment			42				56
Net gain on the sale of securities			(5,060	)			(1,425	)
Mortgage loans originated for sale			(19,704	)			(17,365	)
Proceeds from sales of mortgage loans			23,884				27,157
Gain on sales of loans			(406	)			(357	)
Equity-based compensation expense			21				36
Deferred income tax expense (benefit)			2,618				(147	)
Decrease in interest receivable			1,473				751
FHLB debt prepayment fees			471				—
Net impairment losses recognized in earnings			527				185
Other operating activities, net			1,638				10,116
Net cash provided by operating activities			24,390				39,229
Investing activities:
Proceeds from sales of securities available-for-sale			182,167				71,708
Proceeds from maturities and calls of securities available-for-sale			19,317				38,488
Proceeds from maturities and calls of securities held-to-maturity			535				998
Purchase of securities available-for-sale			(59,334	)			(113,690	)
Proceeds from (originations of) loans and leases			6,822				(15,098	)
Proceeds from the redemption of FHLB stock			736				—
Purchase of property, plant, and equipment			(1,799	)			(1,552	)
Proceeds from sales of property, plant, and equipment			175				86
Net cash provided by (used in) investing activities			148,619				(19,060	)
Financing activities:
Net increase (decrease) in noninterest-bearing deposits			14,337				(2,513	)
Net decrease in interest-bearing deposits			(55,616	)			(30,028	)
Net decrease in FHLB and other borrowings			(25,014	)			(3,059	)
FHLB debt prepayment fees			(471	)			—
Net decrease in securities sold under agreement to repurchase			(3,116	)			(5,862	)
Proceeds from the exercise of stock options			32				30
Net proceeds from the issuance of preferred stock			18,841				—
Excess tax benefit from stock-based compensation			5				9
Common dividends paid			(3,577	)			(3,556	)
Net cash used in financing activities			(54,579	)			(44,979	)
Increase (decrease) in cash and cash equivalents			118,430				(24,810	)
Cash and cash equivalents at beginning of period			112,189				101,341
Cash and cash equivalents at end of period		$	230,619			$	76,531
Supplemental information — noncash items		$	5,065			$	5,075
Transfer of loans to other real estate

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

																						Accumulated
										Additional												Other
		Preferred				Common				Paid-in				Retained				Treasury				Comprehensive
(Dollars in Thousands)		Stock				Stock				Capital				Earnings				Stock				Income (Loss)				Total
Balance January 1, 2010		$	—			$	18,083			$	190,967			$	66,760			$	(9,891	)		$	(13,652	)		$	252,267
Comprehensive income:
Net income			—				—				—				10,409				—				—				10,409
Other comprehensive income — see note 9			—				—				—				—				—				8,205				8,205
Comprehensive income			—				—				—				10,409				—				8,205				18,614
Common dividends declared and paid			—				—				—				(3,556	)			—				—				(3,556	)
Issuance of vested shares			—				—				(25	)			—				25				—				—
Equity-based compensation expense			—				—				36				—				—				—				36
Retirement plan contribution — 38,560 shares issued			—				—				(667	)			—				1,201				—				534
Option exercises — 2,631 shares			—				—				(52	)			—				82				—				30
Balance June 30, 2010		$	—			$	18,083			$	190,259			$	73,613			$	(8,583	)		$	(5,447	)		$	267,925
Balance January 1, 2011		$	—			$	18,083			$	189,239			$	81,486			$	(6,740	)		$	(12,190	)		$	269,878
Comprehensive income:
Net income			—				—				—				11,479				—				—				11,479
Other comprehensive income — see note 9			—				—				—				—				—				4,992				4,992
Comprehensive income			—				—				—				11,479				—				4,992				16,471
Common dividends declared and paid			—				—				—				(3,577	)			—				—				(3,577	)
Preferred dividends declared			—				—				—				(131	)			—				—				(131	)
Issuance of preferred stock			18,921				—				(80	)			—				—				—				18,841
Issuance of vested shares			—				—				(22	)			—				22				—				—
Equity-based compensation expense			—				—				13				—				8				—				21
Retirement plan contribution — 47,570 shares issued			—				—				(812	)			—				1,481				—				669
Option exercises — 2,969 shares			—				—				(60	)			—				92				—				32
Balance June 30, 2011		$	18,921			$	18,083			$	188,278			$	89,257			$	(5,137	)		$	(7,198	)		$	302,204

See Notes to Consolidated Financial Statements.

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. All significant intercompany balances and transactions have been eliminated in consolidation. 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, 2010, has been derived from the audited consolidated financial statements included in the Company’s 2010 Annual Report on Form 10-K (the “2010 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 2010 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 2010 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 Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.

The Company operates within two business segments-community banking and insurance services. Insurance services are comprised of agencies that 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 are determined by dividing net income available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per share are determined by dividing net income by the weighted average shares outstanding, which includes the dilutive effect of stock options, warrants, contingently issuable shares, and convertible preferred shares. Basic and diluted net income per common share calculations follow:

		For the Three Months								For the Six Months
		ended June 30,								ended June 30,
(In Thousands, Except Share and Per Share Data)		2011				2010				2011				2010
Net income		$	5,728			$	5,131			$	11,479			$	10,409
Dividends on preferred stock			131				—				131				—
Net income available to common shareholders		$	5,597			$	5,131			$	11,348			$	10,409
Weighted average shares outstanding			17,895,904				17,787,325				17,882,006				17,776,500
Diluted shares for stock options			27,497				6,487				6,706				4,454
Contingently issuable shares			8,527				11,581				8,527				11,581
Convertible preferred shares			602,561				—				302,945				—
Weighted average dilutive shares outstanding			18,534,489				17,805,393				18,200,184				17,792,535
Basic earnings per share		$	0.31			$	0.29			$	0.63			$	0.59
Diluted earnings per share		$	0.31			$	0.29			$	0.63			$	0.59

For the three- and six-month periods ended June 30, 2011, options and warrants to purchase 457,045 and 480,396 shares, respectively, of common stock were outstanding but were not included in the computation of diluted earnings per common

share because they would have an anti-dilutive effect. Likewise, options and warrants to purchase 576,962 and 699,156 shares, respectively, of common stock were excluded from the three- and six-month periods ended June 30, 2010, computation of diluted earnings per common share because their effect would be anti-dilutive.

Series A Preferred Stock

On May 20, 2011, the Company completed a private placement of 18,921 shares of its Series A Preferred Stock. The shares carry a 6% dividend rate and are non-cumulative. Each share is convertible into 69 shares of the Company’s common stock at any time and mandatorily convert after five years. The Company may redeem the shares at face value after the third anniversary.

Recent Accounting Pronouncements

Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“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 Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 310 during the fourth quarter of 2010. Other than the additional disclosures, the adoption of the new guidance had no significant impact on the Company’s financial statements.

In April 2011, FASB issued Accounting Standard Update (“ASU”) 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and is applied retrospectively to restructurings at the beginning of the year of adoption. The guidance on measuring the impairment of a receivable restructured in a troubled restructuring is effective on a prospective basis. The Company is currently assessing the impact on its financial statements.

In April 2011, FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements,” which simplifies the accounting for financial assets transferred under repurchase agreements and similar arrangements by eliminating the transferor’s ability criteria from the assessment of effective control over those assets as well as the related implementation guidance. The guidance is effective for interim and annual periods beginning on or after December 15, 2011, and is applied on a prospective basis. The Company is currently assessing the impact on its financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requires in the U.S. GAAP and IFRSs,” which was issued primarily to provide largely identical guidance about fair value measurement and disclosure requirements for International Financial Reporting Standards (“IFRS”) and U.S. GAAP. The new standards do not extend the use of fair value but rather provide guidance about how fair value should be determined where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. Public companies are required to apply the standard prospectively for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the impact on its financial statements.

In June 2011, FASB issued ASU 2011-05, “Presentation of Comprehensive Income”, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 22 and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income. The amendments of ASU 2011-05 are effective for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company is currently assessing the impact on its financial statements.

Conversion to State Charter

Effective with the close of business June 28, 2011, the Company’s wholly-owned banking subsidiary, First Community Bank, converted its charter from a national association to a Virginia state-chartered banking institution. First Community Bank will continue operating under the name First Community Bank. The charter conversion does not affect insurance coverage of First Community Bank’s deposits, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum amounts permitted by law, and does not affect the financial services or products provided by First Community Bank. As a Virginia state-chartered bank, First Community Bank is supervised and regulated by the Virginia Bureau of Financial Institutions and its primary federal regulator is the Federal Reserve Bank of Richmond, both of which are based in the Company’s home state of Virginia. As a financial holding company, the Company will continue to be supervised and regulated by the Board of Governors of the Federal Reserve System.

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.

Note 3. Investment Securities

As of June 30, 2011, and December 31, 2010, the amortized cost and estimated fair value of available-for-sale securities were as follows:

		June 30, 2011
		Amortized				Unrealized				Unrealized				Fair				OTTI in
(In Thousands)		Cost				Gains				Losses				Value				AOCI*
States and political subdivisions		$	124,579			$	2,653			$	(452	)		$	126,780			$	—
Single issue trust preferred securities			55,618				—				(9,021	)			46,597				—
Corporate FDIC insured			13,830				—				(28	)			13,802				—
Mortgage-backed securities:
Agency			147,304				3,748				(126	)			150,926				—
Non-Agency Alt-A residential			18,191				—				(6,935	)			11,256				(6,935	)
Total mortgage-backed securities			165,495				3,748				(7,061	)			162,182				(6,935	)
Equity securities			440				218				(43	)			615				—
Total		$	359,962			$	6,619			$	(16,605	)		$	349,976			$	(6,935	)

		December 31, 2010
		Amortized				Unrealized				Unrealized				Fair				OTTI in
(In Thousands)		Cost				Gains				Losses				Value				AOCI*
U.S. Government agency securities		$	10,000			$	—			$	(168	)		$	9,832			$	—
States and political subdivisions			178,149				2,649				(4,660	)			176,138				—
Trust preferred securities:
Single issue			55,594				—				(14,350	)			41,244				—
Pooled			23				241				—				264				—
Total trust preferred securities			55,617				241				(14,350	)			41,508				—
Corporate FDIC insured			25,282				378				—				25,660				—
Mortgage-backed securities:
Agency			209,281				7,039				(1,307	)			215,013				—
Non-Agency Alt-A residential			19,181				—				(7,904	)			11,277				(7,904	)
Total mortgage-backed securities			228,462				7,039				(9,211	)			226,290				(7,904	)
Equity securities			495				206				(65	)			636				—
Total		$	498,005			$	10,513			$	(28,454	)		$	480,064			$	(7,904	)

As of June 30, 2011, and December 31, 2010, the amortized cost and estimated fair value of held-to-maturity securities were as follows:

		June 30, 2011
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
States and political subdivisions		$	4,106			$	51			$	—			$	4,157
Total		$	4,106			$	51			$	—			$	4,157

		December 31, 2010
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
States and political subdivisions		$	4,637			$	67			$	—			$	4,704
Total		$	4,637			$	67			$	—			$	4,704

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 2011, 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.

		Amortized
(In Thousands)		Cost				Fair Value
Due within one year		$	116			$	118
Due after one year but within five years			27,147				27,545
Due after five years but within ten years			24,073				25,072
Due after ten years			142,691				134,444
			194,027				187,179
Mortgage-backed securities			165,495				162,182
Equity securities			440				615
Total		$	359,962			$	349,976

The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2011, 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.

		Amortized
(In Thousands)		Cost				Fair Value
Due within one year		$	1,426			$	1,441
Due after one year but within five years			2,310				2,340
Due after five years but within ten years			370				376
Due after ten years			—				—
Total		$	4,106			$	4,157

The carrying value of securities pledged to secure public deposits as required by law and for other purposes was $246.86 million and $302.67 million at June 30, 2011, and December 31, 2010, respectively.

During the three months ended June 30, 2011, gross gains on the sale of securities were $4.33 million while gross losses were $1.10 million. During the six months ended June 30, 2011, gross gains on the sale of securities were $6.68 million while gross losses were $1.62 million. During the three months ended June 30, 2010, gross gains on the sale of securities were $1.23 million while gross losses were $26 thousand. During the six months ended June 30, 2010, gross gains on the sale of securities were $1.49 million while gross losses were $34 thousand.

The following tables reflect those investments, both available-for-sale and held-to-maturity, in a continuous unrealized loss position for less than 12 months and for 12 months or longer at June 30, 2011, and December 31, 2010.

		June 30, 2011
		Less than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In Thousands)		Value				Losses				Value				Losses				Value				Losses
States and political subdivisions		$	27,090			$	(452	)		$	—			$	—			$	27,090			$	(452	)
Single issue trust preferred securities			—				—				46,597				(9,021	)			46,597				(9,021	)
FDIC-backed securities			13,802				(28	)			—				—				13,802				(28	)
Mortgage-backed securities:
Agency			29,319				(119	)			4,924				(7	)			34,243				(126	)
Alt-A residential			—				—				11,256				(6,935	)			11,256				(6,935	)
Total mortgage-backed securities			29,319				(119	)			16,180				(6,942	)			45,499				(7,061	)
Equity securities			127				(23	)			116				(20	)			243				(43	)
Total		$	70,338			$	(622	)		$	62,893			$	(15,983	)		$	133,231			$	(16,605	)

		December 31, 2010
		Less than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In Thousands)		Value				Losses				Value				Losses				Value				Losses
U.S. Government agency securities		$	9,832			$	(168	)		$	—			$	—			$	9,832			$	(168	)
States and political subdivisions			80,420				(4,660	)			—				—				80,420				(4,660	)
Single issue trust preferred securities			—				—				41,244				(14,350	)			41,244				(14,350	)
Mortgage-backed securities:
Agency			71,613				(1,307	)			18				—				71,631				(1,307	)
Alt-A residential			—				—				11,277				(7,904	)			11,277				(7,904	)
Total mortgage-backed securities			71,613				(1,307	)			11,295				(7,904	)			82,908				(9,211	)
Equity securities			155				(55	)			93				(10	)			248				(65	)
Total		$	162,020			$	(6,190	)		$	52,632			$	(22,264	)		$	214,652			$	(28,454	)

At June 30, 2011, the combined depreciation in value of the 90 individual securities in an unrealized loss position was approximately 4.74% of the combined reported value of the aggregate securities portfolio. At December 31, 2010, the combined depreciation in value of the 214 individual securities in an unrealized loss position was approximately 5.93% 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 it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that the Company will have to sell impaired securities before recovery of the impairment occurs. This determination is based upon the Company’s investment strategy for the particular type of security and its 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, and single issue trust preferred 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 six-month periods ended June 30, 2011, the Company incurred no OTTI charges related to non-beneficial interest debt securities. The temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, and other current economic factors.

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 June 30, 2011, the Company incurred no credit-related OTTI charges related to beneficial interest debt securities. During the six-month period ended June 30, 2011, the Company incurred credit-related OTTI charges related to beneficial interest debt securities of $527 thousand. These charges were related to a non-Agency mortgage-backed security (“MBS”). During the three- and six-month periods ended June 30, 2010, the Company incurred credit-related OTTI charges on beneficial interest debt securities of $134 thousand. These charges were related to two pooled trust preferred security holdings and brought the carrying value of those securities to zero.

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 22% 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 Six Months
(In Thousands)		Ended June 30, 2011				Ended June 30, 2011
Estimated credit losses, beginning balance (1)		$	4,778			$	4,251
Additions for credit losses on securities not previously OTTI			—				—
Additions for credit losses on securities previously OTTI			—				527
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		$	4,778			$	4,778

For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During the three- and six-month periods ended June 30, 2011, the Company did not recognize any OTTI charges on equity securities. For the three- and six-month periods ended June 30, 2010, the Company recognized OTTI charges on certain of its equity securities of $51 thousand.

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 believes this ownership position provides access to relatively inexpensive wholesale and overnight funding. The Company accounts for FHLBA and Federal Reserve Bank stock as a long-term investment in other assets. At June 30, 2011, and December 31, 2010, the Company owned approximately $11.50 million and $12.24 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. Based on the Company’s review of publicly available information about the FHLBA and its own internal analysis, the Company believes that its FHLBA stock was not impaired as of June 30, 2011.

Note 4. Loans

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

		June 30, 2011								December 31, 2010
(Dollars in Thousands)		Amount				Percent				Amount				Percent
Commercial loans
Construction — commercial		$	34,966				2.55	%		$	42,694				3.08	%
Land development			4,694				0.34	%			16,650				1.20	%
Other land loans			23,354				1.70	%			24,468				1.77	%
Commercial and industrial			92,891				6.76	%			94,123				6.79	%
Multi-family residential			78,163				5.69	%			67,824				4.89	%
Non-farm, non-residential			333,475				24.27	%			351,904				25.39	%
Agricultural			1,677				0.12	%			1,342				0.10	%
Farmland			37,227				2.71	%			36,954				2.67	%
Total commercial loans			606,447				44.14	%			635,959				45.89	%
Consumer real estate loans
Home equity lines			111,995				8.15	%			111,620				8.05	%
Single family residential mortgage			560,527				40.80	%			549,157				39.61	%
Owner-occupied construction			18,062				1.31	%			18,349				1.32	%
Total consumer real estate loans			690,584				50.26	%			679,126				48.98	%
Consumer and other loans
Consumer loans			64,692				4.71	%			63,475				4.58	%
Other			12,221				0.89	%			7,646				0.55	%
Total consumer and other loans			76,913				5.60	%			71,121				5.13	%
Total loans		$	1,373,944				100.00	%		$	1,386,206				100.00	%
Loans held for sale		$	920							$	4,694

Acquired, Impaired Loans

Loans acquired in a business combination are recorded at estimated fair value on their purchase date. Under applicable accounting standards, it is not appropriate to carryover a valuation for the allowance for loan losses at the time of acquisition when the acquired loans have evidence of credit deterioration. Evidence of credit quality deterioration as of the purchase date may include measures such as credit scores, decline in collateral value, past due and non-accrual status. For acquired, impaired loans the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Acquired performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

The following table presents information regarding acquired, impaired loans for the three- and six-month periods ended June 30, 2011 and 2010. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest.

		Acquired, Impaired Loans
		2011												2010
		TriStone				Other				Total				TriStone				Other				Total
(In thousands)
Balance, January 1		$	2,814			$	407			$	3,221			$	3,838			$	4,196			$	8,034
Principal payments received			(173	)			—				(173	)			(961	)			(224	)			(1,185	)
Accretion			13				—				13				30				—				30
Other			60				—				60				426				—				426
Charge-offs			—				—				—				(499	)			—				(499	)
Balance, June 30		$	2,714			$	407			$	3,121			$	2,834			$	3,972			$	6,806
Balance, March 31		$	2,884			$	407			$	3,291			$	3,323			$	3,972			$	7,295
Principal payments received			(138	)			—				(138	)			(94	)			—				(94	)
Accretion			6				—				6				15				—				15
Other			(38	)			—				(38	)			10				—				10
Charge-offs			—				—				—				(420	)			—				(420	)
Balance, June 30		$	2,714			$	407			$	3,121			$	2,834			$	3,972			$	6,806

The remaining balance of the accretable difference at June 30, 2011, and December 31, 2010, was $931 thousand and $944 thousand, respectively

Off-Balance Sheet Financial Instruments

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 $210.53 million and standby letters of credit and financial guarantees written of $2.93 million at June 30, 2011. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $3.50 million at June 30, 2011.

Note 5. Allowance for Loan Losses and Credit Quality

The allowance for loan losses is maintained at a level that the Company believes is 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. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Management performs quarterly assessments to determine the appropriate level of allowance for loan losses. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the allowance based upon current measurement criteria. Commercial, consumer real estate, and non-real estate consumer 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 that have been deemed impaired. Management’s general reserve 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. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. 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 tables detail the Company’s allowance for loan loss activity, by portfolio segment, for the three- and six-month periods ended June 30, 2011 and 2010.

		For the Three Months Ended June 30, 2011
						Consumer Real				Consumer and
(In Thousands)		Commercial				Estate				Other				Total
Allowance for credit losses:
Beginning balance		$	12,300			$	12,641			$	1,541			$	26,482
Provision for loan losses			2,504				408				167				3,079
Loans charged off			(2,727	)			(457	)			(272	)			(3,456	)
Recoveries credited to allowance			223				49				105				377
Net charge-offs			(2,504	)			(408	)			(167	)			(3,079	)
Ending balance		$	12,300			$	12,641			$	1,541			$	26,482