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

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

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 the to such filing requirements for the past 90 days. þ Yes o No

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

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

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; 11,271,302 shares outstanding as of April 30, 2007

 

 

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended March 31, 2007

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2007 (Unaudited), and December 31, 2006			3
Consolidated Statements of Income for the Three-Month Periods Ended March 31, 2007 and 2006 (Unaudited)			4
Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2007 and 2006 (Unaudited)			5
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2007 and 2006 (Unaudited)			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			23
Item 4. Controls and Procedures			25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3. Defaults Upon Senior Securities			26
Item 4. Submission of Matters to a Vote of Security Holders			27
Item 5. Other Information			27
Item 6. Exhibits			28
SIGNATURES			30
EXHIBIT INDEX			31
EX-3(I)
EX-31.1
EX-31.2
EX-32

PART I. ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

		March 31,				December 31,
		2007				2006
(Amounts in thousands, except share and per share data)		(Unaudited)				(Note 1)
Assets
Cash and due from banks		$	42,394			$	47,909
Interest-bearing balances with banks			17,082				9,850
Total cash and cash equivalents			59,476				57,759
Securities available-for-sale (amortized cost of $612,340 at March 31, 2007; $508,423 at December 31, 2006)			612,977				508,370
Securities held-to-maturity (fair value of $19,530 at March 31, 2007; $20,350 at December 31, 2006)			19,266				20,019
Loans held for sale			1,068				781
Loans held for investment, net of unearned income			1,258,847				1,284,863
Less allowance for loan losses			14,510				14,549
Net loans held for investment			1,244,337				1,270,314
Premises and equipment			38,381				36,889
Other real estate owned			600				258
Interest receivable			11,835				12,141
Goodwill and other intangible assets			62,092				62,196
Other assets			65,763				64,971
Total Assets		$	2,115,795			$	2,033,698
Liabilities
Deposits:
Noninterest-bearing		$	242,254			$	244,771
Interest-bearing			1,177,330				1,150,000
Total Deposits			1,419,584				1,394,771
Interest, taxes and other liabilities			20,522				19,641
Federal funds purchased			45,000				7,700
Securities sold under agreements to repurchase			220,198				201,185
FHLB borrowings and other indebtedness			192,654				197,671
Total Liabilities			1,897,958				1,820,968
Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; none issued			—				—
Common stock, $1 par value; 25,000,000 shares authorized; 11,499,018 shares issued at March 31, 2007, and December 31, 2006, including 227,716 and 253,276 shares in treasury, respectively			11,499				11,499
Additional paid-in capital			108,769				108,806
Retained earnings			104,198				100,117
Treasury stock, at cost			(7,124	)			(7,924	)
Accumulated other comprehensive income			495				232
Total Stockholders’ Equity			217,837				212,730
Total Liabilities and Stockholders’ Equity		$	2,115,795			$	2,033,698

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

		Three Months Ended
		March 31,
(Amounts in thousands except share and per share data)		2007				2006
Interest Income
Interest and fees on loans held for investment		$	23,519			$	23,925
Interest on securities-taxable			4,981				2,877
Interest on securities-nontaxable			1,912				1,826
Interest on deposits in banks			274				295
Total interest income			30,686				28,923
Interest Expense
Interest on deposits			9,300				7,647
Interest on borrowings			4,371				3,211
Total interest expense			13,671				10,858
Net interest income			17,015				18,065
Provision for loan losses			—				408
Net interest income after provision for loan losses			17,015				17,657
Noninterest Income
Wealth management income			1,018				683
Service charges on deposit accounts			2,409				2,417
Other service charges, commissions and fees			870				740
Gain on sale of securities			129				160
Other operating income			789				1,148
Total noninterest income			5,215				5,148
Noninterest Expense
Salaries and employee benefits			6,411				7,901
Occupancy expense of bank premises			1,057				1,040
Furniture and equipment expense			823				850
Intangible amortization			103				90
Other operating expense			3,764				3,452
Total noninterest expense			12,158				13,333
Income before income taxes			10,072				9,472
Income tax expense			2,948				2,628
Net income		$	7,124			$	6,844
Basic earnings per common share		$	0.63			$	0.61
Diluted earnings per common share		$	0.63			$	0.61
Dividends declared per common share		$	0.27			$	0.26
Weighted average basic shares outstanding			11,259,375				11,233,005
Weighted average diluted shares outstanding			11,346,828				11,311,743

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

		Three Months Ended
		March 31,
(Amounts in thousands)		2007				2006
Operating activities:
Net Income		$	7,124			$	6,844
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			—				408
Depreciation and amortization of premises and equipment			800				853
Intangible amortization			103				90
Net investment amortization and accretion			145				245
Net gain on the sale of assets			(122	)			(200	)
Mortgage loans originated for sale			(9,212	)			(6,400	)
Proceeds from sales of mortgage loans			8,993				6,857
Gain on sales of loans			(68	)			(31	)
Deferred income tax expense			122				412
Decrease (increase) in interest receivable			306				(432	)
Other operating activities, net			(309	)			1,672
Net cash provided by operating activities			7,882				10,318
Investing activities:
Proceeds from sales of securities available-for-sale			769				756
Proceeds from maturities and calls of securities available-for-sale			6,414				5,976
Proceeds from maturities and calls of securities held-to-maturity			755				1,418
Purchase of securities available-for-sale			(111,116	)			(259	)
Net decrease in loans held for investment			25,627				1,618
Purchase of premises and equipment			(2,296	)			(1,639	)
Proceeds from sale of equipment			—				104
Net cash (used in) provided by investing activities			(79,847	)			7,974
Financing activities:
Net increase in demand and savings deposits			13,416				28,198
Net increase in time deposits			11,397				7,948
Net increase (decrease) in federal funds purchased			37,300				(82,500	)
Net increase in securities sold under agreement to repurchase			19,013				6,855
Net repayments of and proceeds from FHLB and other borrowings			(5,017	)			74,961
Proceeds from the exercise of stock options			488				136
Excess tax benefit from stock-based compensation			128				42
Acquisition of treasury stock			—				(2,596	)
Dividends paid			(3,043	)			(2,917	)
Net cash provided by financing activities			73,682				30,127
Increase in cash and cash equivalents			1,717				48,419
Cash and cash equivalents at beginning of period			57,759				57,539
Cash and cash equivalents at end of period		$	59,476			$	105,958
Supplemental information — Noncash items
Transfer of loans to other real estate		$	590			$	173

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

																		Accumulated
						Additional												Other
		Common				Paid-in				Retained				Treasury				Comprehensive
(Amounts in thousands, except share and per share data)		Stock				Capital				Earnings				Stock				Income (Loss)				Total
Balance January 1, 2006		$	11,496			$	108,573			$	82,828			$	(7,625	)		$	(771	)		$	194,501
Comprehensive income:
Net income			—				—				6,844				—				—				6,844
Other comprehensive income, net of tax:
Unrealized loss on securities available for sale			—				—				—				—				(1,479	)			(1,479	)
Less reclassification adjustment for gains realized in net income																			(96	)			(96	)
Unrealized gain on derivative securities			—				—				—				—				497				497
Comprehensive income			—				—				6,844				—				(1,078	)			5,766
Common dividends declared			—				—				(2,917	)			—				—				(2,917	)
Net acquisition of 81,061 treasury shares			—				—				—				(2,596	)			—				(2,596	)
Acquisition of Stone Capital 2,706 shares issued			3				85				—				—				—				88
Stock awards 4,832 shares issued			—				(41	)			—				152				—				111
ESOP allocation 27,733 shares			—				16				—				867				—				883
Equity-based compensation expense			—				71				—				—				—				71
Tax benefit from exercise of non-qualified stock options			—				58				—				—				—				58
Option exercise 8,571 shares			—				(133	)			—				268				—				135
Balance March 31, 2006		$	11,499			$	108,629			$	86,755			$	(8,934	)		$	(1,849	)		$	196,100
Balance January 1, 2007		$	11,499			$	108,806			$	100,117			$	(7,924	)		$	232			$	212,730
Comprehensive income:
Net income			—				—				7,124				—				—				7,124
Other comprehensive income, net of tax:
Unrealized gain on securities available-for-sale			—				—				—				—				471				471
Less reclassification adjustment for gains realized in net income			—				—				—				—				(56	)			(56	)
Unrealized loss on derivative securities			—				—				—				—				(152	)			(152	)
Comprehensive income			—				—				7,124				—				263				7,387
Common dividends declared			—				—				(3,043	)			—				—				(3,043	)
Equity-based compensation expense			—				10				—				86				—				96
Tax benefit from exercise stock options			—				179				—				—				—				179
Option exercises 22,810 shares			—				(226	)			—				714				—				488
Balance March 31, 2007		$	11,499			$	108,769			$	104,198			$	(7,124	)		$	495			$	217,837

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

Unaudited Consolidated Financial Statements

The accompanying unaudited condensed 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 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, 2006, has been derived from the audited financial statements included in the Company’s 2006 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States 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 2006 Annual Report on Form 10-K.

A more complete and detailed description of First Community’s significant accounting policies is included within Footnote 1 to the Company’s Annual Report on Form 10-K for December 31, 2006. 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 one business segment, community banking.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company adopted FIN 48 on January 1, 2007, and the adoption did not have an effect on its consolidated financial statements.

The Company includes interest and penalties related to income tax liabilities in income tax expense. The Company and its subsidiaries’ tax filings for the years ended December 31, 2003 through 2006 are currently open to audit under statutes of limitation by the Internal Revenue Service and various state tax departments.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.” SFAS 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value and permits (but does not require) subsequent measurement of servicing assets and liabilities at fair value. This statement is effective for fiscal years beginning after September 15, 2006. The adoption of this standard did not have a material effect on the financial condition, the results of operations, or liquidity of the Company.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company must adopt these new requirements no later than the first quarter of 2008. The Company has not yet determined the effect of adopting SFAS 157 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 123(R).” SFAS 158 requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the

employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company has not yet determined the impact, if any, of adopting EITF 06-4 on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-5 “Accounting for Purchases of Life Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” The scope of EITF 06-5 is limited to the determination of net cash surrender value of a life insurance contract in accordance with Technical Bulletin 85-4. This EITF outlines when contractual limitations of the policy should be considered when determining the net realizable value of the contract. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted. The adoption of EITF 06-5 did not have a material effect on the condition, results of operations, or liquidity of the Company.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. The Company did not elect early adoption as provided for in the Statement, and is currently evaluating the impact, if any, of adopting this Statement on the consolidated financial statements.

Note 2. Mergers, Acquisitions and Branching Activity

In December 2006, the Company completed the sale of its Rowlesburg, West Virginia, branch location. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $10.6 million and loans of approximately $2.2 million. The transaction resulted in a pre-tax gain of approximately $333 thousand.

In November 2006, the Company completed the acquisition of Investment Planning Consultants, Inc. (“IPC”), a registered investment advisory firm. In connection with the initial payment of approximately $1.47 million, the Company issued 39,874 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of IPC are entitled to additional consideration aggregating up to $1.43 million in the form of the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition.

In June 2006, the Company sold its Drakes Branch, Virginia, location. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $16.4 million and loans of approximately $1.9 million. The transaction resulted in a pre-tax gain of approximately $702 thousand.

Note 3. Investment Securities

As of March 31, 2007, and December 31, 2006, the amortized cost and estimated fair value of available-for-sale securities are as follows:

		March 31, 2007
		Amortized				Unrealized				Unrealized				Fair
(Amounts in thousands)		Cost				Gains				Losses				Value
U.S. Government agency securities		$	137,781			$	102			$	(1,208	)		$	136,675
States and political subdivisions			188,476				2,265				(1,189	)			189,552
Corporate notes			85,031				559				(186	)			85,404
Mortgage-backed securities			193,472				339				(1,730	)			192,081
Equities			7,580				1,831				(146	)			9,265
Total		$	612,340			$	5,096			$	(4,459	)		$	612,977

		December 31, 2006
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Government agency securities		$	117,777			$	—			$	(1,716	)		$	116,061
States and political subdivisions			152,189				2,379				(521	)			154,047
Corporate notes			85,080				350				(397	)			85,033
Mortgage-backed securities			146,444				206				(1,896	)			144,754
Equities			6,933				1,615				(73	)			8,475
Total		$	508,423			$	4,550			$	(4,603	)		$	508,370

As of March 31, 2007, and December 31, 2006, the amortized cost and estimated fair value of held-to-maturity securities are as follows:

		March 31, 2007
		Amortized				Unrealized				Unrealized				Fair
(Amounts in thousands)		Cost				Gains				Losses				Value
States and political subdivisions		$	18,887			$	267			$	(2	)		$	19,152
Mortgage-backed securities			4				—				—				4
Other securities			375				—				(1	)			374
Total		$	19,266			$	267			$	(3	)		$	19,530

		December 31, 2006
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
States and political subdivisions		$	19,638			$	334			$	(2	)		$	19,970
Mortgage-backed securities			6				—				—				6
Other securities			375				—				(1	)			374
Total		$	20,019			$	334			$	(3	)		$	20,350

The following table reflects those investments in an unrealized loss position at March 31, 2007, and December 31, 2006. There were no securities in a continuous unrealized loss position for 12 or more months which the Company does not have the ability to hold until the security matures or recovers in value.

		March 31, 2007
		Less than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Amounts in thousands)		Value				Losses				Value				Losses				Value				Losses
Description of Securities
U. S. Government agency securities		$	58,110			$	(390	)		$	56,030			$	(818	)		$	114,140			$	(1,208	)
States and political subdivisions			48,118				(775	)			34,679				(416	)			82,797				(1,191	)
Other securities			33,235				(151	)			13,065				(36	)			46,300				(187	)
Mortgage-backed securities			91,495				(465	)			64,402				(1,265	)			155,897				(1,730	)
Equity securities			2,224				(101	)			1,631				(45	)			3,855				(146	)
Total		$	233,182			$	(1,882	)		$	169,807			$	(2,580	)		$	402,989			$	(4,462	)

		December 31, 2006
		Less than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Description of Securities
U. S. Government agency securities		$	60,416			$	(517	)		$	55,645			$	(1,199	)		$	116,061			$	(1,716	)
States and political subdivisions			10,732				(34	)			36,797				(489	)			47,529				(523	)
Other securities			28,339				(213	)			27,698				(185	)			56,037				(398	)
Mortgage-backed securities			50,093				(223	)			66,620				(1,673	)			116,713				(1,896	)
Equity securities			2,186				(70	)			32				(3	)			2,218				(73	)
Total		$	151,766			$	(1,057	)		$	186,792			$	(3,549	)		$	338,558			$	(4,606	)

At March 31, 2007, the combined depreciation in value of the 215 individual security holdings in an unrealized loss position was 0.73% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of March 31, 2007, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the declines in value are attributable to changes in market interest rates and not the credit quality of the issuer.

Note 4. Loans

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

		March 31, 2007								December 31, 2006
(Dollars in thousands)		Amount				Percent				Amount				Percent
Loans held for investment:
Commercial and agricultural		$	99,960				7.94	%		$	106,645				8.30	%
Commercial real estate			414,696				32.94	%			421,067				32.77	%
Residential real estate			499,621				39.69	%			506,370				39.41	%
Construction			154,440				12.27	%			158,566				12.34	%
Consumer			86,506				6.87	%			88,666				6.90	%
Other			3,624				0.29	%			3,549				0.28	%
Total		$	1,258,847				100.00	%		$	1,284,863				100.00	%
Loans held for sale		$	1,068							$	781

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 at March 31, 2007, are commitments to extend credit (including availability of lines of credit) of $196.79 million and standby letters of credit and financial guarantees written of $6.66 million.

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.

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

The following table details the Company’s allowance for loan loss activity for the three-month periods ended March 31, 2007 and 2006.

		For the Three Months Ended
		March 31,
(Amounts in thousands)		2007				2006
Beginning balance		$	14,549			$	14,736
Provision for loan losses			—				408
Charge-offs			(893	)			(715	)
Recoveries			854				368
Ending balance		$	14,510			$	14,797

Note 6. Deposits

The following is a summary of interest-bearing deposits by type as of March 31, 2007, and December 31, 2006.

		March 31				December 31,
(Amounts in thousands)		2007				2006
Interest-bearing demand deposits		$	148,735			$	140,578
Savings deposits			325,454				317,678
Certificates of deposit			703,141				691,744
Total		$	1,177,330			$	1,150,000

Note 7. Borrowings

The following schedule details the Company’s Federal Home Loan Bank (“FHLB”) borrowings and other indebtedness at March 31, 2007, and December 31, 2006.

		March 31,				December 31,
(Amounts in thousands)		2007				2006
FHLB borrowings		$	177,190			$	182,207
Subordinated debt			15,464				15,464
Total		$	192,654			$	197,671

FHLB borrowings include $175.00 million in convertible and callable advances and $2.19 million of noncallable term advances from the FHLB of Atlanta at March 31, 2007. The weighted average interest rates of advances are 4.61% and 4.64% at March 31, 2007, and December 31, 2006, respectively.

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 million and effectively fixes 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 the FHLB borrowings is 4.45% at March 31, 2007. The fair value of the interest rate swap was $189 thousand at March 31, 2007.

At March 31, 2007, the FHLB advances have maturities between two months and 14 years. The scheduled maturities of the advances are as follows:

		Amount
		(in thousands)
2007		$	1,250
2008			—
2009			—
2010			25,000
2011			—
2012 and thereafter			150,940
Total		$	177,190

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

Also included in borrowings is $15.5 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 callable beginning October 8, 2008. The net proceeds from the offering were contributed as capital to the Company’s subsidiary bank to support further growth.

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.

Note 8. Comprehensive Income

Comprehensive income is the total of net income and other comprehensive income. The following table summarizes the components of comprehensive income.

		For the Three Months Ended
		March 31,
(Amounts in thousands)		2007				2006
Net income		$	7,124			$	6,844
Other comprehensive income
Unrealized gain (loss) on securities available-for-sale			785				(2,465	)
Reclassification adjustment for gains realized in net income			(93	)			(160	)
Unrealized loss on derivative securities			(252	)			828
Income tax effect			(177	)			719
Total other comprehensive income (loss)			263				(1,078	)
Comprehensive income		$	7,387			$	5,766

Note 9. 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 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.

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

The following discussion and analysis is provided to address information about First Community Bancshares, Inc.’s (the “Company”) financial condition and results of operations. This discussion and analysis should be read in conjunction with the Company’s 2006 Annual Report on Form 10-K and the other financial information included in this report.

The Company is a multi-state bank holding company headquartered in Bluefield, Virginia, with total assets of $2.12 billion at March 31, 2007. 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 fifty-six locations and four wealth management offices located in the four states of Virginia, West Virginia, North Carolina and Tennessee. The Bank is the parent of Investment Planning Consultants, Inc., a SEC-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 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. The following factors, among others, could cause the Company’s 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 the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of competitive new products and services of the Company and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions; the growth and profitability of the Company’s non-interest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“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 determination of the allowance for loan losses, accounting for acquisitions and intangible assets, and accounting for income taxes as the accounting areas that require the most subjective or complex judgments. The identified critical accounting policies are described in detail in the Company’s 2006 Annual Report on Form 10-K. There have been no material changes in the Company’s critical accounting policies since December 31, 2006.

COMPANY OVERVIEW

The Company is a full service commercial bank holding company which operates within the four-state region of Virginia, West Virginia, North Carolina, and Tennessee. The Company operates through the Bank, and offers a wide range of financial services. The Company reported total assets of $2.12 billion at March 31, 2007, and operates through fifty-six offices and four wealth management offices.

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 also invests a portion of its funds in various debt securities, including those of United States agencies, state and political subdivisions, and certain corporate notes and debt instruments. The Company also maintains overnight interest-bearing balances with the FHLB and correspondent banks. The difference between interest earned on assets and interest paid on liabilities is the Company’s primary source of earnings.

MERGERS, ACQUISITIONS AND BRANCHING ACTIVITY

In December 2006, the Company completed the sale of its Rowlesburg, West Virginia, branch location. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $10.6 million and loans of approximately $2.2 million. The transaction resulted in a pre-tax gain of approximately $333 thousand.

In November 2006, the Company completed the acquisition of Investment Planning Consultants, Inc. (“IPC”), a registered investment advisory firm. In connection with the initial payment of approximately $1.47 million, the Company issued 39,874 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of IPC are entitled to additional consideration aggregating up to $1.43 million in the form of the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition.

In June 2006, the Company sold its Drakes Branch, Virginia, branch office. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $16.4 million and loans of approximately $1.9 million. The transaction resulted in a gain of approximately $702 thousand.

In March 2007, the Company opened two new branch locations in the Winston-Salem, North Carolina. The Company currently has plans to open five more branch offices during 2007. In the Richmond, Virginia, area locations are planned for the Chesterfield Towne Center and Mechanicsville. In West Virginia, locations are planned for Daniels, Summersville, and Princeton. These locations are all in various stages of construction, and are anticipated to be open by the third quarter of 2007.

RESULTS OF OPERATIONS

Overview

Net income for the three months ended March 31, 2007, was $7.12 million or $0.63 per basic and diluted share, compared with $6.84 million or $0.61 per basic and diluted share for the three months ended March 31, 2006. Return on average equity for the three months ended March 31, 2007, was 13.33% compared to 14.09% for the three months ended March 31, 2006. Return on average assets was 1.42% for the three months ended March 31, 2007 and 2006.

Net Interest Income (See Table I)

Interest income, the largest contributor to earnings, was $30.69 million for the three months ended March 31, 2007, compared to $28.92 million for the corresponding period in 2006. Tax-equivalent net interest income totaled $18.06 million for the three months ended March 31, 2007, a decrease of $1.00 million from $19.06 million for the first quarter of 2006. The net decrease was due mostly to increases in rates paid on interest-bearing liabilities which outpaced increases in the rates earned on loans and securities.

Compared to the first quarter of 2006, average earning assets increased $50.37 million while interest-bearing liabilities increased $58.34 million. The yield on average earning assets increased 22 basis points to 6.99% from 6.77%. Total cost of interest-bearing liabilities increased 62 basis points during the first quarter of 2007, which resulted in a net interest rate spread that was 40 basis points lower at 3.46% compared to 3.86% for the same period last year. The Company’s tax-equivalent net interest margin of 3.98% for the three months ended March 31, 2007, decreased 34 basis points from 4.32% for the same period of 2006.

The rate earned on loans increased to 7.54% from 7.27%, which is attributable to the general rise in market rates of interest since the beginning of 2006. Declines in the average portfolio balances resulted in a net $406 thousand decrease in tax-equivalent interest income compared to the first quarter of 2006.

The largest contributors to the increase in the tax-equivalent interest income in 2007 were the increases in both average balance and rate earned on the securities portfolio. During the three months ended March 31, 2007, the tax-equivalent yield on available-for-sale securities increased 48 basis points to 5.74%, while the average balance increased by $128.95 million. The average tax-equivalent yield increased due to the addition of higher rate securities and the reduction of lower rate securities. As net payoffs in the loan portfolio are realized, the Company has been reinvesting those liquid funds in securities. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured and called and were not replaced.

Compared to the first quarter of 2006, average interest-bearing balances with banks decreased to $23.22 million during the first quarter of 2007, as the yield increased 63 basis points to 4.78%. Interest-bearing balances with banks include excess liquidity bearing market rates. The rate earned on those balances has risen along with increases in short-term benchmark interest rates.

Compared to the same period in 2006, the average balances of interest-bearing demand and savings deposits decreased $507 thousand and $40.14 million, respectively, for the three months ended March 31, 2007. The average rate paid on interest-bearing demand deposits increased by 2 basis points, while the average rate paid on savings increased 28 basis points. Average time deposits increased $20.89 million while the average rate paid increased 83 basis points from 3.54% in 2006 to 4.37% in 2007. The level of average non-interest-bearing demand deposits decreased slightly to $229.57 million during the quarter ended March 31, 2007, compared to the corresponding period of the prior year.

The changes in average deposits between the two quarters include the effect of the previously disclosed sale of the Company’s Drakes Branch, Virginia, and Rowlesburg, West Virginia, branch offices. The average deposit balances held by those two branches in the first quarter of 2006 totaled $26.73 million.

Compared to the same period in 2006, average federal funds purchased and repurchase agreements increased $83.88 million to $214.46 million during the first quarter of 2007, while the average rate increased 87 basis points. The Company added approximately $50.00 million of wholesale repurchase agreement funding in the latter part of 2006. The average balance of FHLB borrowings and other long-term debt decreased by $5.77 million in 2007 to $194.27 million, while the rate paid on those borrowings increased 32 basis points.

Table I

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

		Three Months Ended												Three Months Ended
		March 31, 2007												March 31, 2006
		Average								Yield/				Average								Yield/
		Balance				Interest (1)				Rate (1)				Balance				Interest (1)				Rate (1)
		(Dollars in thousands)
ASSETS
Earning Assets:
Loans: (2)
Taxable		$	1,263,816			$	23,497				7.54	%		$	1,333,508			$	23,905				7.27	%
Tax-exempt			1,812				33				7.39	%			1,572				31				8.00	%
Total			1,265,628				23,530				7.54	%			1,335,080				23,936				7.27	%
Securities available for sale:
Taxable			370,897				4,976				5.44	%			251,530				2,873				4.63	%
Tax-exempt			161,721				2,561				6.42	%			152,136				2,359				6.29	%
Total			532,618				7,537				5.74	%			403,666				5,232				5.26	%
Securities held to maturity:
Taxable			382				5				5.31	%			390				5				5.20	%
Tax-exempt			19,383				382				7.99	%			22,897				449				7.95	%
Total			19,765				387				7.94	%			23,287				454				7.91	%
Interest-bearing deposits			23,224				274				4.78	%			28,837				295				4.15	%
Total Earning Assets			1,841,235				31,728				6.99	%			1,790,870				29,917				6.77	%
Other assets			195,771												168,730
TOTAL ASSETS		$	2,037,006											$	1,959,600
LIABILITIES
Interest-bearing liabilities:
Demand deposits		$	145,960			$	112				0.31	%		$	146,467			$	106				0.29	%
Savings deposits			319,660				1,674				2.12	%			359,804				1,632				1.84	%
Time deposits			697,115				7,514				4.37	%			676,229				5,910				3.54	%
Total interest-bearing deposits			1,162,735				9,300				3.24	%			1,182,500				7,648				2.62	%
Federal funds purchased and repurchase agreements			214,455				2,034				3.85	%			130,579				961				2.98	%
FHLB borrowings and other long-term debt			194,271				2,337				4.88	%			200,042				2,249				4.56	%
Total interest-bearing liabilities			1,571,461				13,671				3.53	%			1,513,121				10,858				2.91	%
Non-interestbearing demand deposits			229,574												231,630
Other liabilities			19,164												17,851
Stockholders’ Equity			216,807												196,998
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,037,006											$	1,959,600
Net Interest Income, Tax Equivalent						$	18,057											$	19,059
Net Interest Rate Spread (3)											3.46	%											3.86	%
Net Interest Margin (4)											3.98	%											4.32	%

The following table summarizes the changes in tax-equivalent interest earned and paid resulting from changes in the volume of earning assets and paying liabilities and changes in their interest rates. The changes in interest due to both rate and volume have been allocated to the volume and rate columns in proportion to absolute dollar amounts.

		Three Months Ended
		March 31, 2007,
		Compared to 2006
		$ Increase/(Decrease) due to
(Amounts in thousands)		Volume				Rate				Total
Interest Earned On:
Loans (1)		$	(1,272	)		$	866			$	(406	)
Securities available for sale (1)			1,688				617				2,305
Securities held to maturity (1)			(69	)			2				(67	)
Interest-bearing deposits with other banks			(62	)			41				(21	)
Total interest-earning assets			285				1,526				1,811
Interest Paid On:
Demand deposits			—				6				6
Savings deposits			(194	)			236				42
Time deposits			188				1,416				1,604
Fed funds purchased and repurchase agreements			740				333				1,073
FHLB borrowings and other long-term debt			(66	)			154				88
Total interest-bearing liabilities			668				2,145				2,813
Change in net interest income, tax-equivalent		$	(383	)		$	(619	)		$	(1,002	)

Provision and Allowance for Loan Losses

The allowance for loan losses was $14.51 million at March 31, 2007, $14.55 million at December 31, 2006 and $14.80 million at March 31, 2006. The Company’s allowance for loan loss activity for the three-month periods ended March 31, 2007 and 2006, is as follows:

		For the Three Months Ended
		March 31,
(Amounts in thousands)		2007				2006
Allowance for loan losses
Beginning balance		$	14,549			$	14,736
Provision for loan losses			—				408
Charge-offs			(893	)			(715	)
Recoveries			854				368
Net charge-offs			(39	)			(347	)
Ending balance		$	14,510			$	14,797

The total allowance for loan losses to loans held for investment ratio was 1.15% at March 31, 2007, compared to 1.13% at December 31, 2006, and 1.11% at March 31, 2006. Management considers the allowance adequate based upon its analysis of the portfolio as of March 31, 2007. However, no assurances can be made that future adjustments to the allowance for loan losses will not be necessary as a result of increases in non-performing loans and other factors.

Insignificant net charge-offs and improving credit quality metrics led the Company to make no provision for loan losses for the first quarter of 2007 compared to $408 thousand in 2006. Net charge-offs for the first quarter of 2007 were $39 thousand, compared to $347 thousand in 2006.

Non-interest Income

Non-interest income consists of all revenues which are not included in interest and fee income related to earning assets. Non-interest income for the first quarter of 2007 was $5.22 million compared to $5.15 million in the same period of 2006, an increase of 1.30%. Wealth management revenues increased $335 thousand to $1.02 million, reflective of the addition of IPC. In the first quarter 2007, other service charges, commissions, and fees increased $130 thousand, or 17.57%, compared to the same period of 2006. Other operating income was $789 thousand, a decrease of $359 thousand compared to 2006. However, first quarter 2006 included a $676 thousand partial recovery from a decade-old payment systems fraud.

During the first quarter of 2007, securities gains of $129 thousand were realized, compared with $160 thousand in the first quarter of 2006.

Non-interest Expense

Non-interest expense totaled $12.16 million for the quarter ended March 31, 2007, decreasing $1.18 million, or 8.81%, from the same period in 2006. The quarterly decrease is the result of the Company’s continuing efforts to control costs. First quarter salaries and benefits decreased $1.49 million, or 18.86%, from the comparable prior year period. All other operating expenses increased only $315 thousand between the comparable periods.

Income Tax Expense

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

For the first quarter of 2007, income taxes were $2.95 million compared to $2.63 million for the first quarter of 2006. For the quarters ended March 31, 2007 and 2006, the effective tax rates were 29.27% and 27.74%, respectively. The effective tax rate was higher during the current quarter due to lower proportions of tax-free municipal security interest income than in the comparable periods of 2006.

FINANCIAL CONDITION

Total assets at March 31, 2007, increased $82.10 million to $2.12 billion from December 31, 2006, an annualized growth rate of 16.37%. The growth reflects increases in short-term funding sources, which were invested in various debt securities. Subsequent to quarter end, the Company borrowed an additional $100 million in FHLB advances with attractive interest rates, which replaced the short-term funding.

Securities

Available-for-sale securities were $612.98 million at March 31, 2007, compared to $508.37 million at December 31, 2006, an increase of $104.61 million. The Company has continued to reinvest net paydowns from the loan portfolio in additional securities.

Held-to-maturity securities declined to $19.27 million at March 31, 2007, reflective of continuing paydowns, maturities, and calls within the portfolio. The market value of investment securities held-to-maturity was 101.37% and 101.65% of book value at March 31, 2007, and December 31, 2006, respectively.

The Company’s available-for-sale securities portfolio is reported at fair value. The fair value of most securities is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of each individual investment such as the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery or maturity. Management does not believe any unrealized loss, individually or in the aggregate, as of March 31, 2007, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the decrease in value is attributable to changes in market interest rates and not the credit quality of the issuer.

Loan Portfolio

Loans Held for Sale: The $1.07 million balance of loans held for sale at March 31, 2007, 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 at March 31, 2007, was $11.44 million on 74 loans.

Loans Held for Investment: Total loans held for investment were $1.26 billion at March 31, 2007, a slight decline from $1.28 billion at December 31, 2006, and $1.33 billion at March 31, 2006. The average loan to deposit ratio decreased to 90.90% for the first quarter of 2007, compared to 92.97% for the fourth quarter of 2006 and 94.41% for the first quarter of 2006. The 2007 year-to-date average loans of $1.27 billion decreased $69.45 million when compared to the average for the first three months of 2006 of $1.34 billion.

The held for investment loan portfolio continues to be diversified among loan types and industry segments. The following table presents the various loan categories and changes in composition as of March 31, 2007, December 31, 2006, and March 31, 2006.

		March 31, 2007								December 31, 2006								March 31, 2006
(Dollars in thousands)		Amount				Percent				Amount				Percent				Amount				Percent
Loans Held for Investment
Commercial and agricultural		$	99,960				7.94	%		$	106,645				8.30	%		$	107,995				8.12	%
Commercial real estate			414,696				32.94	%			421,067				32.77	%			439,635				33.06	%
Residential real estate			499,621				39.69	%			506,370				39.41	%			512,776				38.56	%
Construction			154,440				12.27	%			158,566				12.34	%			165,271				12.44	%
Consumer			86,506				6.87	%			88,666				6.90	%			101,807				7.66	%
Other			3,624				0.29	%			3,549				0.28	%			2,182				0.16	%
Total		$	1,258,847				100.00	%		$	1,284,863				100.00	%		$	1,329,666				100.00	%
Loans Held for Sale		$	1,068							$	781							$	848