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 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to 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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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; 10,968,097 shares outstanding as of November 3, 2008

 

 

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended September 30, 2008

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007		3
Consolidated Statements of Income for the Three- and Nine-Month Periods Ended September 30, 2008 and 2007 (Unaudited)		4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)		5
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)		6
Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures about Market Risk		30
Item 4. Controls and Procedures		32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		33
Item 1A. Risk Factors		33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 3. Defaults Upon Senior Securities		33
Item 4. Submission of Matters to a Vote of Security Holders		33
Item 5. Other Information		34
Item 6. Exhibits		34
SIGNATURES		36
EXHIBIT INDEX		37
EX-31.1
EX-31.2
EX-32

PART I. ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2008				2007
(Dollars in Thousands, Except Per Share Data)		(Unaudited)
Assets
Cash and due from banks		$	53,238			$	50,051
Interest-bearing balances with banks			664				2,695
Total cash and cash equivalents			53,902				52,746
Securities available-for-sale (amortized cost of $607,249 at September 30, 2008; $674,937 at December 31, 2007)			513,001				664,120
Securities held-to-maturity (fair value of $9,187 at September 30, 2008; $12,298 at December 31, 2007)			9,043				12,075
Loans held for sale			140				811
Loans held for investment, net of unearned income			1,168,286				1,225,502
Less allowance for loan losses			14,510				12,833
Net loans held for investment			1,153,776				1,212,669
Premises and equipment			50,504				48,383
Other real estate owned			896				545
Interest receivable			9,156				12,465
Goodwill and other intangible assets			72,222				70,056
Other assets			104,817				75,968
Total Assets		$	1,967,457			$	2,149,838
Liabilities
Deposits:
Noninterest-bearing		$	214,582			$	224,087
Interest-bearing			1,134,962				1,169,356
Total Deposits			1,349,544				1,393,443
Interest, taxes and other liabilities			20,494				21,454
Federal funds purchased			29,500				18,500
Securities sold under agreements to repurchase			180,388				207,427
FHLB borrowings and other indebtedness			216,720				291,916
Total Liabilities			1,796,646				1,932,740
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 September 30, 2008, and December 31, 2007, including 531,421 and 429,372 shares in treasury, respectively			11,499				11,499
Additional paid-in capital			108,862				108,825
Retained earnings			124,731				117,670
Treasury stock, at cost			(16,882	)			(13,613	)
Accumulated other comprehensive loss			(57,399	)			(7,283	)
Total Stockholders’ Equity			170,811				217,098
Total Liabilities and Stockholders’ Equity		$	1,967,457			$	2,149,838

See Notes to Consolidated Financial Statements.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Dollars in Thousands, Except Per Share Data)		2008				2007				2008				2007
Interest Income
Interest and fees on loans held for investment		$	19,266			$	23,478			$	60,394			$	70,401
Interest on securities-taxable			5,567				6,772				17,101				17,783
Interest on securities-nontaxable			1,708				2,078				5,775				6,140
Interest on deposits in banks			9				404				260				1,073
Total interest income			26,550				32,732				83,530				95,397
Interest Expense
Interest on deposits			6,684				10,083				22,543				29,131
Interest on borrowings			3,543				5,506				11,679				15,094
Total interest expense			10,227				15,589				34,222				44,225
Net interest income			16,323				17,143				49,308				51,172
Provision for loan losses			3,461				—				4,721				—
Net interest income after provision for loan losses			12,862				17,143				44,587				51,172
Noninterest Income
Wealth management income			957				908				2,954				2,931
Service charges on deposit accounts			3,808				3,006				10,370				8,077
Other service charges, commissions and fees			1,040				902				3,225				2,609
Insurance commissions			1,240				—				3,730				—
Gain on sale of securities			163				50				2,133				209
Other operating income			675				1,154				2,336				2,956
Total noninterest income			7,883				6,020				24,748				16,782
Noninterest Expense
Salaries and employee benefits			7,371				6,544				22,741				19,120
Occupancy expense of bank premises			1,297				933				3,717				3,010
Furniture and equipment expense			924				844				2,798				2,447
Intangible amortization			166				105				484				313
Prepayment penalty on FHLB advance			—				—				1,647				—
Other operating expense			4,683				4,410				14,096				12,179
Total noninterest expense			14,441				12,836				45,483				37,069
Income before income taxes			6,304				10,327				23,852				30,885
Income tax expense			1,753				3,011				6,751				9,006
Net income		$	4,551			$	7,316			$	17,101			$	21,879
Basic earnings per common share		$	0.42			$	0.65			$	1.56			$	1.95
Diluted earnings per common share		$	0.41			$	0.65			$	1.54			$	1.94
Dividends declared per common share		$	0.28			$	0.27			$	0.84			$	0.81
Weighted average basic shares outstanding			10,956,867				11,179,322				10,992,901				11,232,895
Weighted average diluted shares outstanding			11,034,059				11,230,220				11,071,925				11,299,727

See Notes to Consolidated Financial Statements.

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

		Nine Months Ended
		September 30,
(In Thousands)		2008				2007
Operating activities:
Net Income		$	17,101			$	21,879
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			4,721				—
Depreciation and amortization of premises and equipment			2,785				2,362
Intangible amortization			484				313
Net investment amortization and accretion			(292	)			435
Net gain on the sale of assets			(2,070	)			(186	)
Mortgage loans originated for sale			(28,299	)			(34,794	)
Proceeds from sales of mortgage loans			29,137				33,472
Gain on sales of loans			(167	)			(191	)
Deferred income tax (benefit) expense			(330	)			552
Decrease (increase) in interest receivable			3,309				(1,148	)
Other operating activities, net			2,522				(967	)
Net cash provided by operating activities			28,901				21,727
Investing activities:
Proceeds from sales of securities available-for-sale			97,232				1,288
Proceeds from maturities and calls of securities available-for-sale			80,997				22,258
Proceeds from maturities and calls of securities held-to-maturity			3,042				7,437
Purchase of securities available-for-sale			(108,124	)			(196,479	)
Net decrease in loans held for investment			54,828				44,322
Purchase of FHLB stock			—				(4,077	)
Net cash used in insurance agency acquisitions			(1,080	)			(5,135	)
Proceeds from sales of equipment			23				—
Purchase of premises and equipment			(4,922	)			(11,981	)
Net cash provided by (used in) investing activities			121,996				(142,367	)
Financing activities:
Net increase in demand and savings deposits			8,088				13,283
Net decrease in time deposits			(51,987	)			(5,180	)
Net increase in federal funds purchased			11,000				7,900
Net (decrease) increase in securities sold under agreement to repurchase			(27,039	)			25,599
Net (decrease) increase in FHLB and other borrowings			(75,196	)			93,698
Prepayment penalty			(1,647	)			—
Proceeds from the exercise of stock options			440				715
Excess tax benefit from stock-based compensation			49				290
Acquisition of treasury stock			(4,222	)			(5,035	)
Dividends paid			(9,227	)			(9,085	)
Net cash (used in) provided by financing activities			(149,741	)			122,185
Increase in cash and cash equivalents			1,156				1,545
Cash and cash equivalents at beginning of period			52,746				57,759
Cash and cash equivalents at end of period		$	53,902			$	59,304
Supplemental information — Noncash items
Transfer of loans to other real estate		$	1,413			$	973

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

																		Accumulated
						Additional												Other
		Common				Paid-in				Retained				Treasury				Comprehensive
(Dollars in Thousands)		Stock				Capital				Earnings				Stock				Income (Loss)				Total
Balance January 1, 2007		$	11,499			$	108,806			$	100,117			$	(7,924	)		$	232			$	212,730
Comprehensive income:
Net income			—				—				21,879				—				—				21,879
Other comprehensive loss, net of tax:
Unrealized loss on securities available for sale			—				—				—				—				(5,834	)			(5,834	)
Less reclassification adjustment for gains realized in net income																			(16	)			(16	)
Unrealized gain on cash flow hedge			—				—				—				—				(372	)			(372	)
Comprehensive income			—				—				21,879				—				(6,222	)			15,657
Common dividends declared			—				—				(9,085	)			—				—				(9,085	)
Acquisition of 163,500 treasury shares			—				—				—				(5,035	)			—				(5,035	)
Acquisition of GreenPoint Insurance — 49,088 shares issued			—				133				—				1,524				—				1,657
Equity-based compensation expense			—				121				—				87				—				208
Tax benefit from exercise of stock options			—				337				—				—				—				337
Option exercises — 41,470 shares			—				(603	)			—				1,297				—				694
Balance September 30, 2007		$	11,499			$	108,794			$	112,911			$	(10,051	)		$	(5,990	)		$	217,163
Balance January 1, 2008		$	11,499			$	108,825			$	117,670			$	(13,613	)		$	(7,283	)		$	217,098
Comprehensive income:
Net income			—				—				17,101				—				—				17,101
Other comprehensive loss, net of tax:
Unrealized loss on securities available-for-sale			—				—				—				—				(49,081	)			(49,081	)
Less reclassification adjustment for gains realized in net income			—				—				—				—				(977	)			(977	)
Unrealized loss on cash flow hedge			—				—				—				—				(58	)			(58	)
Comprehensive loss			—				—				17,101				—				(50,116	)			(33,015	)
Cumulative effect of change in accounting principle			—				—				(813	)			—				—				(813	)
Common dividends declared			—				—				(9,227	)			—				—				(9,227	)
Acquisition of 132,100 treasury shares			—				—				—				(4,222	)			—				(4,222	)
Acquisition of GreenPoint Insurance Group — 7,728 shares issued			—				22				—				245				—				267
Equity-based compensation expense			—				161				—				—				—				161
Tax benefit from exercise of stock options			—				122				—				—				—				122
Option exercises — 22,323 shares			—				(268	)			—				708				—				440
Balance September 30, 2008		$	11,499			$	108,862			$	124,731			$	(16,882	)		$	(57,399	)		$	170,811

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 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, 2007, has been derived from the audited consolidated financial statements included in the Company’s 2007 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 2007 Annual Report on Form 10-K.

A more complete and detailed description of First Community’s significant accounting policies is included within Footnote 1 of Item 8, “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for December 31, 2007. 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 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, 2004 through 2007 are currently open to audit under statutes of limitation by the Internal Revenue Service and various state tax departments.

Effective January 1, 2008, the Company operates within two business segments, community banking and insurance services.

Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement establishes a framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with US GAAP. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles,” and is not expected to have an impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). This statement requires enhanced disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 161 on its disclosures.

In December 2007, the FASB revised Statement No. 141, “Business Combinations” (“SFAS 141R”). This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This statement recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. This statement also defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquiree achieves control. Additionally this statement determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS 141R on its financial condition, results of operations and disclosures.

In December 2007, the FASB issued Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). This statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years beginning after January 1, 2009. The Company is currently evaluating the impact of SFAS 160 on its financial condition, results of operations and disclosures.

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. The adoption of SFAS 159 did not have an effect on the Company’s consolidated financial statements.

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 adoption of SFAS 157 did not have a significant effect on the Company’s 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. On January 1, 2008, the Company made a cumulative effect adjustment to equity of $813 thousand in connection with the adoption of EITF 06-4.

Note 2. Mergers, Acquisitions, and Branching Activity

On July 31, 2008, the Company signed a definitive agreement providing for the acquisition of Coddle Creek Financial Corp. (“Coddle Creek”) and its wholly-owned subsidiary, Mooresville Savings Bank, SSB (“Mooresville”). Mooresville is a $156.56 million state-chartered savings bank headquartered in Mooresville, North Carolina. The definitive agreement provides for the payment of $19.60 and .9046 of a share of the Company’s common stock for each outstanding share of Coddle Creek common stock. Coddle Creek and Mooresville will be merged with and into the Company and First Community Bank, N. A., respectively. The transaction has received the required regulatory approvals or waivers and been approved by the stockholders of Coddle Creek. The merger is expected to close in the fourth quarter of 2008.

In September 2007, the Company completed the acquisition of GreenPoint Insurance Group, Inc. (“GreenPoint”), a High Point, North Carolina, insurance agency. In connection with the initial payment of approximately $1.66 million, the Company issued 49,088 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of GreenPoint are entitled to additional consideration aggregating up to $1.45 million in the form of cash or 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. The Company assumed $5.57 million of debt in connection with the acquisition, of which approximately $5.00 million was retired at closing. In March 2008, the Company issued 7,728 additional shares in connection with the acquisition, resulting in a goodwill adjustment of approximately $267 thousand. In July 2008, GreenPoint acquired REL Insurance Agency for $1.08 million in an all cash transaction. Under the terms of the agreement, the former principal of REL is entitled to additional consideration aggregating up to $720 thousand, if certain operating targets are met. The acquisition and activity of GreenPoint has added a total $9.86 million of goodwill and intangibles.

In May 2008, the Company opened a new branch location in Summersville, West Virginia. In December 2007, the Company opened two new branch locations in the Richmond, Virginia, area. In November and October 2007, the Company opened new

branch locations in Princeton and Daniels, West Virginia, respectively. In March 2007, the Company opened two new branch locations in the Winston-Salem, North Carolina, area.

Note 3. Investment Securities

As of September 30, 2008, and December 31, 2007, the amortized cost and estimated fair value of available-for-sale securities were as follows:

		September 30, 2008
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
U.S. Government agency securities		$	68,424			$	106			$	(302	)		$	68,228
States and political subdivisions			163,942				563				(7,976	)			156,529
Trust-preferred securities			164,203				—				(76,681	)			87,522
Mortgage-backed securities			202,214				397				(10,042	)			192,569
Equities			8,466				402				(715	)			8,153
Total		$	607,249			$	1,468			$	(95,716	)		$	513,001
		December 31, 2007
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Government agency securities		$	136,791			$	2,446			$	—			$	139,237
States and political subdivisions			186,834				2,667				(965	)			188,536
Trust-preferred securities			164,731				—				(14,106	)			150,625
Mortgage-backed securities			177,984				816				(2,073	)			176,727
Equities			8,597				814				(416	)			8,995
Total		$	674,937			$	6,743			$	(17,560	)		$	664,120

As of September 30, 2008, and December 31, 2007, the amortized cost and estimated fair value of held-to-maturity securities were as follows:

		September 30, 2008
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
States and political subdivisions		$	8,668			$	146			$	(2	)		$	8,812
Other securities			375				—				—				375
Total		$	9,043			$	146			$	(2	)		$	9,187
		December 31, 2007
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
States and political subdivisions		$	11,699			$	223			$	—			$	11,922
Mortgage-backed securities			1				—				—				1
Other securities			375				—				—				375
Total		$	12,075			$	223			$	—			$	12,298

The following table reflects those investments in an unrealized loss position at September 30, 2008, and December 31, 2007. The Company has the intent and ability to hold until maturity or recovery any security in a continuous unrealized loss position for 12 or more months.

		September 30, 2008
		Less than 12 Months								12 Months or longer								Total
Description of Securities		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In Thousands)		Value				Losses				Value				Losses				Value				Losses
U. S. Government agency securities		$	58,122			$	(302	)		$	—			$	—			$	58,122			$	(302	)
States and political subdivisions			106,525				(5,217	)			15,193				(2,761	)			121,718				(7,978	)
Trust-preferred securities			24,655				(33,745	)			62,867				(42,936	)			87,522				(76,681	)
Mortgage-backed securities			141,804				(1,532	)			19,205				(8,510	)			161,009				(10,042	)
Equity securities			2,806				(560	)			2,268				(155	)			5,074				(715	)
Total		$	333,912			$	(41,356	)		$	99,533			$	(54,362	)		$	433,445			$	(95,718	)
		December 31, 2007
		Less than 12 Months								12 Months or longer								Total
Description of Securities		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U. S. Government agency securities		$	—			$	—			$	—			$	—			$	—			$	—
States and political subdivisions			40,461				(900	)			12,287				(65	)			52,748				(965	)
Trust-preferred securities			129,006				(12,431	)			21,994				(1,675	)			151,000				(14,106	)
Mortgage-backed securities			7,991				(108	)			63,393				(1,965	)			71,384				(2,073	)
Equity securities			2,269				(345	)			1,759				(71	)			4,028				(416	)
Total		$	179,727			$	(13,784	)		$	99,433			$	(3,776	)		$	279,160			$	(17,560	)

At September 30, 2008, there were 375 individual security holdings in an unrealized loss position. 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, changes in market credit risk premiums, and current market illiquidity.

Included in available-for-sale securities is a portfolio of trust-preferred securities with a total market value of approximately $87.52 million as of September 30, 2008. That portfolio is comprised of single-issue securities and pooled trust-preferred securities. The single-issue securities are trust-preferred issuances from some of the largest banks in the nation, composite A-rated or higher, and had a total market value of approximately $40.95 million as of September 30, 2008, compared with their adjusted cost basis of approximately $55.45 million.

At September 30, 2008, the total market value of the pooled trust-preferred securities was approximately $46.57 million, compared with an adjusted cost basis of approximately $108.76 million. The collateral underlying these securities is comprised of 86% of bank trust-preferred securities and subordinated debt issuances of over 500 banks nationwide. The remaining collateral is from insurance companies and real estate investment trusts. During the third quarter, two of the securities experienced a credit rating downgrade from one rating agency, and certain of these securities are on negative credit watch by one or more rating firms. All of the pooled trust-preferred securities remain composite A-rated and have not deferred an interest payment. The securities carry variable rate structures that float at a prescribed margin over 3-month LIBOR. The Company has modeled the expected cash flows from the pooled trust-preferred securities and, at present, does not expect to have an adverse cash flow effect under any of the scenarios modeled due to the existence of other subordinate classes within the pools.

Although the Company has both the intent and ability to hold the securities to maturity, the Company is closely monitoring this portfolio due to the substantial market discounts. The market discounts reflect the credit market disruption in bank subordinated debt instruments and the possibility of future negative credit events within the banking sector, which could affect collateral within certain of the pools and single-issue securities. Monitoring for other-than-temporary impairment (“OTI”) is dependent on the aforementioned assumptions regarding future credit events and the general strength of the banking industry as it deals with credit losses in the current recessionary real estate market. Acceleration of bank losses and

the possibility of unforeseen bank failures could result in changes in the Company’s outlook for these securities and possible future OTI. Accordingly, there can be no assurance that continued deterioration of credit portfolios within certain of those banks will not lead to unanticipated deferrals of interest payments and defaults. At present, cash flow modeling indicates varying ability to absorb additional deferrals and defaults before incurring breaks in interest or principal for the various pools.

Note 4. Loans

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

		September 30, 2008								December 31, 2007
(Dollars in Thousands)		Amount				Percent				Amount				Percent
Loans held for investment:
Commercial and agricultural		$	83,271				7.13	%		$	96,261				7.85	%
Commercial real estate			386,287				33.06	%			386,112				31.51	%
Residential real estate			498,721				42.69	%			498,345				40.66	%
Construction			127,076				10.88	%			163,310				13.33	%
Consumer			66,333				5.68	%			75,447				6.16	%
Other			6,598				0.56	%			6,027				0.49	%
Total		$	1,168,286				100.00	%		$	1,225,502				100.00	%
Loans held for sale		$	140							$	811

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 $188.81 million and standby letters of credit and financial guarantees written of $2.75 million at September 30, 2008. Additionally, the Company had gross notional amount of outstanding commitments to lend related to secondary market mortgage loans of $4.36 million at September 30, 2008.

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- and nine-month periods ended September 30, 2008 and 2007.

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
(In Thousands)		2008				2007				2008				2007
Beginning balance		$	13,433			$	13,934			$	12,833			$	14,549
Provision for loan losses			3,461				—				4,721				—
Charge-offs			(2,601	)			(1,009	)			(4,765	)			(2,813	)
Recoveries			217				265				1,721				1,454
Ending balance		$	14,510			$	13,190			$	14,510			$	13,190

Note 6. Deposits

The following is a summary of interest-bearing deposits by type as of September 30, 2008, and December 31, 2007.

		September 30,				December 31,
(In Thousands)		2008				2007
Interest-bearing demand deposits		$	186,403			$	153,570
Savings and money market deposits			312,451				327,691
Certificates of deposit			636,108				688,095
Total		$	1,134,962			$	1,169,356

Note 7. Borrowings

The following schedule details the Company’s Federal Home Loan Bank (“FHLB”) borrowings and other indebtedness at September 30, 2008, and December 31, 2007.

		September 30,				December 31,
(In Thousands)		2008				2007
FHLB borrowings		$	200,835			$	275,888
Subordinated debt			15,464				15,464
Other long-term debt			421				564
Total		$	216,720			$	291,916

FHLB borrowings include $200.00 million in convertible and callable advances and $835 thousand of noncallable term advances from the FHLB at September 30, 2008. The weighted average interest rate of advances was 3.24% and 4.38% at September 30, 2008, and December 31, 2007, 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 $50.00 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 all FHLB borrowings was 3.74% at September 30, 2008. The fair value of the interest rate swap was a liability of $1.42 million at September 30, 2008.

At September 30, 2008, the FHLB advances have maturities between five and thirteen years. The scheduled maturities of the advances are as follows:

(In Thousands)		Amount
2008		$	—
2009			—
2010			—
2011			—
2012			—
2013 and thereafter			200,835
Total		$	200,835

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 other indebtedness is $15.46 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”), with an interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are callable beginning October 8, 2008.

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 and loss. The following table summarizes the components of comprehensive income and loss.

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
(In Thousands)		2008				2007				2008				2007
Net income		$	4,551			$	7,316			$	17,101			$	21,879
Other comprehensive income
Unrealized loss on securities available-for-sale			(31,744	)			(2,055	)			(81,802	)			(9,723	)
Reclassification adjustment for (gains) losses realized in net income			(278	)			52				(1,628	)			(27	)
Unrealized gain (loss) on derivative securities			(75	)			(1,095	)			(97	)			(620	)
Income tax effect			12,839				1,239				33,411				4,148
Total other comprehensive loss			(19,258	)			(1,859	)			(50,116	)			(6,222	)
Comprehensive (loss) income		$	(14,707	)		$	5,457			$	(33,015	)		$	15,657

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.

Note 10. Segment Information

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

The following table sets forth information about the reportable operating segments and reconciliation of this information to the consolidated financial statements at and for the three- and nine-month periods ended September 30, 2008.

		For the Three Months Ended
		September 30, 2008
		Community				Insurance				Parent/
(In Thousands)		Banking				Services				Elimination				Total
Net interest income		$	16,559			$	(19	)		$	(217	)		$	16,323
Provision for loan losses			3,461				—				—				3,461
Noninterest income			3,923				1,267				2,693				7,883
Noninterest expense			13,635				1,110				(304	)			14,441
Income before income taxes			3,386				138				2,780				6,304
Provision for income taxes			962				41				750				1,753
Net income		$	2,424			$	97			$	2,030			$	4,551

		For the Nine Months Ended
		September 30, 2008
		Community				Insurance				Parent/
(In Thousands)		Banking				Services				Elimination				Total
Net interest income		$	50,034			$	(30	)		$	(696	)		$	49,308
Provision for loan losses			4,721				—				—				4,721
Noninterest income			18,561				3,757				2,430				24,748
Noninterest expense			43,473				3,147				(1,137	)			45,483
Income before income taxes			20,401				580				2,871				23,852
Provision for income taxes			5,763				171				817				6,751
Net income		$	14,638			$	409			$	2,054			$	17,101
End of period assets		$	1,938,358			$	10,889			$	18,210			$	1,967,457

Note 11: Fair Value Disclosures

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) for financial assets and financial liabilities. In accordance with FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” the Company will delay application of FASB 157 for non- financial assets and non-financial liabilities until January 1, 2009. In October of 2008, the FASB issued Staff Position No. 157-3 ("FSP 157-3") to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements were not issued. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal, or most advantageous, market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset, or the replacement cost. Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

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

Securities Available-for-Sale. Securities classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. For Level 1 securities, the Company obtains fair value measurements from active exchanges. For Level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things.

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

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

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

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

		Fair Value Measurements Using												Total
(In Thousands)		Level 1				Level 2				Level 3				Fair Value
Available-for-sale securities		$	6,348			$	506,653			$	—			$	513,001
Other assets			2,843				—				—				2,843
Derivative assets			—				377				—				377
Other liabilities			2,843				—				—				2,843
Derivative liabilities			—				1,786				—				1,786

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. The fair value of loans considered impaired and collateral dependent was $5.98 million at September 30, 2008.

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As stated above, SFAS 157 will be applicable to these fair value measurements beginning January 1, 2009.

Note 12: Subsequent Event

On October 27, 2008, the Company received approval from the U.S. Treasury Department (the “Treasury”) to participate in the Capital Purchase Program developed by the Treasury Department under the Troubled Asset Relief Program. The terms of the program allow the Company to sell $42.50 million of cumulative, perpetual, non-voting, senior preferred stock, and warrants to purchase common stock, to the Treasury. From the date of the approval, the Company has 30 days to execute the requisite documents.

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 2007 Annual Report on Form 10-K and the other financial information included in this report.

The Company is a multi-state financial holding company headquartered in Bluefield, Virginia, with total assets of $1.97 billion at September 30, 2008. Through its community bank subsidiary, First Community Bank, N. A. (the “Bank”), the Company provides financial, trust and investment advisory services to individuals and commercial customers through more than fifty locations in Virginia, West Virginia, North and South Carolina, and Tennessee. The Company is also the parent of GreenPoint Insurance Group, Inc., a North Carolina-based full-service insurance agency offering commercial and personal lines (“GreenPoint”). The Bank is the parent of Investment Planning Consultants, Inc. (“IPC”), 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. These factors are described in greater detail in Item 1A. Risk Factors of the Company’s 2007 Annual Report on Form 10-K.

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 2007 Annual Report on Form 10-K. Except for the critical accounting policy set forth below, there have been no material changes in the Company’s critical accounting policies since December 31, 2007.

Accounting for investment securities

Management performs an extensive review of the investment securities portfolio quarterly to determine the cause of declines in the fair value of each security within each segment of the portfolio. The Company uses inputs provided by an independent third party to determine the fair values of its investment securities portfolio. Inputs provided by the third party are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the Company’s intent and ability to hold the securities, recoverability of the invested amounts over the Company’s intended holding period, severity in pricing decline and receipt of amounts contractually due, for example, are applied in determining whether a security is other-than-temporarily impaired. If a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

The impairment evaluations noted above are consistent with the accounting guidance in EITF 99-20 “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities,” FASB Staff Position No. 115-1, “ The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and SEC Staff Accounting Bulletin No. 59,“Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities,” to determine if a security is other than temporarily impaired. Securities deemed to be other than temporarily impaired are written-down to their current fair values with a charge to earnings. The review process uses a combination of the severity of pricing declines and the present value of the expected cash flows and compares those results to the current carrying value. Significant inputs provided by the independent third party such as default and loss severity are reviewed internally for reasonableness and from a market participant’s perspective.

As of September 30, 2008, the Company has not determined any of its investment securities to be other than temporarily impaired.

COMPANY OVERVIEW

The Company is a financial holding company which operates within the five-state region of Virginia, West Virginia, North and South Carolina, and Tennessee. The Company operates through the Bank, IPC, and GreenPoint to offer a wide range of financial services. The Company reported total assets of $1.97 billion at September 30, 2008.

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

The Company also conducts asset management activities through the Bank’s Trust and Financial Services Division (“Trust Division”) and its registered investment advisory firm, IPC. The Bank’s Trust Division and IPC manage assets with an aggregate market value of $897 million. These assets are not assets of the Company, but are managed under various fee-based arrangements as fiduciary or agent.

Recent Market Developments

The global and U.S. economies are experiencing significantly reduced business activity as a result of, among other factors, disruptions in the financial system during the past year. Dramatic declines in the housing market during the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.

In response to the financial crises affecting the banking system and financial markets, Congress passed, and President Bush signed, the Emergency Economic Stabilization Act of 2008 (the “EESA”) on October 3, 2008. Pursuant to the EESA, the U.S. Department of Treasury (“Treasury”) was granted the authority to, among others, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On October 14, 2008, Treasury announced the Troubled Asset Relief Program Capital Purchase Program (the “Capital Purchase Program”), under which it will purchase equity stakes in a wide variety of banks and thrifts. Pursuant to the Capital Purchase Program, Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions will be required to adopt Treasury’s standards for executive compensation and corporate governance for the period during which Treasury holds equity issued under the Capital Purchase Program. On October 27, 2008, the Company was notified by the Treasury that it was preliminarily approved to participate in the Capital Purchase Program. The Company’s participation in the Capital Purchase Program, as well as the amount Treasury may invest, is subject to Treasury’s approval, the execution of definitive agreements, and standard closing conditions.

Additionally, on October 14, 2008, Treasury triggered the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program (“TLGP”). Coverage under the TLGP is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum surcharge for non-interest bearing transaction deposits in excess of $250,000 per account. The Company is currently evaluating its participation in the TLGP.

It is presently unclear what impact the EESA, the CPP, the TLGP, other previously announced liquidity and funding initiatives of the Federal Reserve and other agencies and any additional programs that may be initiated in the future will have on the financial markets and the other difficulties described above, or on the U.S. banking and financial industries and the broader U.S. and global economies. Further adverse effects could have an adverse impact on the Company and its business.

MERGERS, ACQUISITIONS AND BRANCHING ACTIVITY

In July 2008, the Company announced its proposed acquisition of Coddle Creek Financial Corp. (“Coddle Creek”) headquartered in Mooresville, North Carolina. Coddle Creek is the bank holding company for Mooresville Savings Bank, SSB (“Mooresville Savings”), a state-chartered savings bank providing deposit and loan services in Mooresville, Huntersville, and Cornelius, North Carolina (the Lake Norman region just north of Charlotte, North Carolina). At June 30, 2008, Coddle Creek had total assets of $158.60 million, loans of $133.71 million, deposits of $136.97 million and stockholders’ equity of $19.09 million.

Pursuant to the terms of the definitive merger agreement, Coddle Creek will merge with and into the Company. Immediately thereafter, Mooresville Savings will be merged with and into the Bank and operate under the name, identity, and branch network of First Community Bank, N. A. Stockholders of Coddle Creek will receive merger consideration of $19.60 per share and 0.9046 shares of the Company’s common stock for each outstanding share of Coddle Creek common stock. The merger transaction is valued at approximately $33.01 million, based on the Company’s closing price of $35.83 on July 31, 2008. The value of the transaction and value of each share of Coddle Creek common stock on consummation of the merger may be higher or lower depending on the value of the Company’s common stock on such date. The transaction has received the required regulatory approvals or waivers and been approved by the stockholders of Coddle Creek. The merger is expected to be completed in the fourth quarter of 2008.

The proposed acquisition of Mooresville Savings represents the Company’s continued expansion into targeted suburban markets as part of its strategic plan for growth of the franchise in desirable markets in and near important MSA’s in the Mid-Atlantic and

Southeast United States. The Company expects to substantially expand customer offerings, support technologies, and delivery channels to enhance the existing core business of Mooresville Savings.

In September 2007, the Company acquired GreenPoint, a High Point, North Carolina, insurance agency. In connection with the initial payment of approximately $1.66 million, the Company issued 49,088 shares of its common stock. Under the terms of the stock purchase agreement, former shareholders of GreenPoint are entitled to additional consideration aggregating up to $1.45 million in the form of cash or 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. The Company assumed $5.57 million debt in connection with the acquisition, of which approximately $5.00 million was retired at closing. In March 2008, the Company issued 7,728 additional shares in connection with the acquisition, resulting in a goodwill adjustment of approximately $267 thousand. In July 2008, GreenPoint acquired REL Insurance Agency for $1.08 million in an all cash transaction. Under the terms of the agreement, the former principal of REL is entitled to additional consideration aggregating up to $720 thousand, if certain operating targets are met. The acquisition and activity of GreenPoint has added a total $9.86 million of goodwill and intangibles.

The Company opened a new branch location in Summersville, West Virginia, in May 2008. In December 2007, the Company opened two new locations in the Richmond, Virginia, area. In November and October 2007, the Company opened a new branch location in Princeton and Daniels, West Virginia, respectively. In March 2007, the Company opened two new branch locations in the Winston-Salem, North Carolina, area.

RESULTS OF OPERATIONS

Overview

Net income for the three months ended September 30, 2008, was $4.55 million, or $0.42 per basic share and $0.41 per diluted share, compared with $7.32 million, or $0.65 per basic and diluted share, for the three months ended September 30, 2007, a decrease of $2.77 million, or 37.79%. Return on average assets was 0.90% for the three months ended September 30, 2008, compared with 1.34% for the same period in 2007. Return on average equity for the three months ended September 30, 2008, was 9.39% compared with 13.31% for the three months ended September 30, 2007.

Net income for the nine months ended September 30, 2008, was $17.10 million, or $1.56 per basic share and $1.54 per diluted share, compared with $21.88 million, or $1.95 per basic share and $1.94 per diluted share, for the nine months ended September 30, 2007, a decrease of $4.78 million, or 21.84%. Return on average assets was 1.12% for the nine months ended September 30, 2008, compared with 1.38% for the same period in 2007. Return on average equity for the nine months ended September 30, 2008, was 11.09% compared with 13.40% for the nine months ended September 30, 2007.

Net Interest Income — Quarterly Comparison (See Table I)

Net interest income, the largest contributor to earnings, was $16.32 million for the three months ended September 30, 2008, compared with $17.14 million for the corresponding period in 2007, a decrease of $820 thousand, or 4.78%. Tax-equivalent net interest income totaled $17.26 million for the three months ended September 30, 2008, a decrease of $1.02 million from $18.28 million for the third quarter of 2007. The decrease in net interest income was due primarily to decreases in loan and investment balances and those yields as a result of the precipitous declines in benchmark interest rates, including the New York Prime Rate, during the last nine months.

Compared with the third quarter of 2007, average earning assets decreased $199.96 million while interest-bearing liabilities decreased $124.63 million during the three months ended September 30, 2008. The yield on average earning assets decreased by 64 basis points to 6.22% from 6.86% between the three months ended September 30, 2008 and 2007, respectively. Total cost of interest-bearing liabilities decreased 105 basis points between the third quarters of 2007 and 2008, which resulted in a net interest rate spread that was 41 basis points higher at 3.64% for the third quarter of 2008 compared with 3.23% for the same period last year. The Company’s tax-equivalent net interest margin of 3.90% for the three months ended September 30, 2008, increased 20 basis points from 3.70% for the same period of 2007.

The rate earned on loans decreased 95 basis points to 6.53% from 7.48% for the three months ended September 30, 2008 and 2007, respectively. The effect of the cuts in the target federal funds rate by the Federal Open Market Committee and the associated decline in the Prime rate had a profound impact on loan yields throughout 2008. Declines in the average portfolio balances also contributed to a net decrease of $4.21 million, or 17.92%, in tax-equivalent loan interest income for the third quarter of 2008 compared with the third quarter of 2007.

During the three months ended September 30, 2008, the tax-equivalent yield on available-for-sale securities decreased 21 basis points to 5.58%, while the average balance decreased by $93.15 million, or 13.98%, compared with the same period in 2007. The average tax-equivalent yield decreased due to the large portion of variable rate securities in the portfolio. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.

Compared with the third quarter of 2007, average interest-bearing balances with banks decreased to $1.44 million during the third quarter of 2008, as the yield decreased 228 basis points to 2.50% during the same period. Interest-bearing balances with banks is comprised largely of excess liquidity bearing overnight market rates. The rate earned on these overnight balances during the third quarter of 2008 decreased along with decreases in short-term benchmark interest rates.

Compared with the same period in 2007, the average balances of interest-bearing demand deposits increased $33.31 million, or 22.92%, while the average rate paid during the third quarter of 2008 decreased by 16 basis points. During the three months ended September 30, 2008, the average balances of savings deposits decreased $35.50 million, or 10.29%, while the average rate paid decreased 89 basis points compared to the same period in 2007. Average time deposits decreased $66.14 million, or 9.47%, while the average rate paid on time deposits decreased 105 basis points from 4.47% in the third quarter of 2007 to 3.42% in the third quarter of 2008. Retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, decreased $23.65 million, or 13.62%, to $149.98 million for the three months ended September 30, 2008, while the rate decreased 152 basis points to 1.94% during the same period. The level of average non-interest-bearing demand deposits decreased $18.30 million, or 7.97%, to $211.16 million during the quarter ended September 30, 2008, compared with the corresponding period of the prior year.

Compared with the same period in 2007, average federal funds purchased increased $41.95 million to $42.70 million during the third quarter of 2008. Average federal funds purchased increased as a $50.00 million FHLB advance paying 3.64% was called in June 2008, and the Company borrowed overnight at a significant savings. Wholesale repurchase agreements remained unchanged at $50.00 million, while the rate decreased 131 basis points between the two periods. The average balance of FHLB borrowings and other long-term debt decreased by $74.61 million, or 25.60%, in the third quarter of 2008 to $216.79 million, while the rate paid on those borrowings decreased 67 basis points.

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

Net interest income was $49.31 million for the nine months ended September 30, 2008, compared with $51.17 million for the corresponding period in 2007, a decrease of $1.86 million, or 3.64%. Tax-equivalent net interest income totaled $52.48 million for the nine months ended September 30, 2008, a decrease of $2.05 million from $54.53 million for the first nine months of 2007. The decrease in net interest income was due primarily to decreases in loan balances and in loan yields as a result of the precipitous declines in benchmark interest rates, including the New York Prime Rate, during the last twelve months.

Compared with the first nine months of 2007, average earning assets decreased $97.86 million while interest-bearing liabilities decreased $39.46 million during the nine months ended September 30, 2008. The yield on average earning assets decreased by 52 basis points to 6.39% from 6.91% between the nine months ended September 30, 2008 and 2007, respectively. Total cost of interest-bearing liabilities decreased 74 basis points between the first nine months of 2007 and 2008, which resulted in a net interest rate spread that was 22 basis points higher at 3.54% for the first nine months of 2008 compared with 3.32% for the same period last year. The Company’s tax-equivalent net interest margin of 3.87% for the nine months ended September 30, 2008, increased six basis points from 3.81% for the same period of 2007.

The rate earned on loans decreased 70 basis points to 6.80% from 7.50% for the nine months ended September 30, 2008 and 2007, respectively. The effect of the cuts in the target federal funds rate by the Federal Open Market Committee and the associated decline in the Prime rate had a profound impact on loan yields in the first nine months of 2008. Declines in the average portfolio balances also contributed to a net decrease of $9.99 million, or 14.18%, in tax-equivalent loan interest income for the first nine months of 2008 compared with the first nine months of 2007.

During the nine months ended September 30, 2008, the tax-equivalent yield on available-for-sale securities decreased 15 basis points to 5.61%, while the average balance decreased by $6.97 million, or 1.14%, compared with the same period in 2007. The average tax-equivalent yield decreased due to the large portion of variable-rate securities in the portfolio. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.

Compared with the first nine months of 2007, average interest-bearing balances with banks decreased to $12.36 million during the first nine months of 2008, as the yield decreased 202 basis points to 2.81% during the same period. Interest-bearing balances with banks is comprised largely of excess liquidity bearing overnight market rates. The rate earned on these overnight balances during the first nine months of 2008 decreased along with decreases in short-term benchmark interest rates.

Compared with the same period in 2007, the average balances of interest-bearing demand deposits increased $25.38 million, or 17.35%, while the average rate paid during the first nine months of 2008 decreased 15 basis points. During the nine months ended September 30, 2008, average savings deposits decreased $14.95 million, or 4.53%, while the rate paid was 1.63%, a 61 basis point decrease from the first nine months of 2007. Average time deposits decreased $51.72 million, or 7.39%, while the average rate paid on time deposits decreased 63 basis points from 4.44% in the first nine months of 2007 to 3.81% in the first nine months of 2008. Retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, decreased $16.05 million, or 9.60%, to $151.11 million for the nine months ended September 30, 2008, while the rate decreased 130 basis points to 2.25% during the same period. The level of average non-interest-bearing demand deposits decreased $17.25 million, or 7.46%, to $213.93 million during the nine months ended September 30, 2008, compared with the corresponding period of the prior year.

Compared with the same period in 2007, average federal funds purchased increased $12.79 million to $18.24 million during the first nine months of 2008, and wholesale repurchase agreements remained unchanged at $50.00 million, while the rate decreased 153 basis points between the two periods. The average balance of FHLB borrowings and other long-term debt increased by $5.09 million, or 2.06%, in the first nine months of 2008 to $252.52 million, while the rate paid on those borrowings decreased 65 basis points. The Company prepaid a $25.00 million FHLB advance during the first nine months of 2008. The advance carried an interest rate of 5.47% and was extinguished using current liquidity. A $50.00 million advance paying 3.64% was also called in June 2008.

Table I

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

		Three Months Ended												Three Months Ended
		September 30, 2008												September 30, 2007
		Average								Yield/				Average								Yield/
		Balance				Interest (1)				Rate (1)				Balance				Interest (1)				Rate (1)
		(Dollars in Thousands)
ASSETS
Earning Assets
Loans (2)		$	1,174,855			$	19,286				6.53	%		$	1,246,530			$	23,497				7.48	%
Securities available for sale			573,046				8,035				5.58	%			666,199				9,715				5.79	%
Securities held to maturity			9,559				161				6.70	%			12,591				254				8.00	%
Interest-bearing deposits			1,435				9				2.50	%			33,538				404				4.78	%
Total Earning Assets			1,758,895				27,491				6.22	%			1,958,858				33,870				6.86	%
Other assets			242,296												212,178
TOTAL ASSETS		$	2,001,191											$	2,171,036
LIABILITIES
Interest-bearing deposits:
Demand deposits		$	178,632			$	73				0.16	%		$	145,324			$	119				0.32	%
Savings deposits			309,364				1,172				1.51	%			344,866				2,088				2.40	%
Time deposits			632,142				5,439				3.42	%			698,280				7,876				4.47	%
Total interest-bearing deposits			1,120,138				6,684				2.37	%			1,188,470				10,083				3.37	%
Borrowings:
Federal funds purchased			42,702				251				2.34	%			751				10				5.28	%
Retail repurchase agreements			149,984				730				1.94	%			173,630				1,516				3.46	%
Wholesale repurchase agreements			50,000				389				3.10	%			50,000				556				4.41	%
FHLB borrowings and other indebtedness			216,789				2,173				3.99	%			291,394				3,424				4.66	%
Total borrowings			459,475				3,543				3.07	%			515,775				5,506				4.24	%
Total interest-bearing liabilities			1,579,613				10,227				2.58	%			1,704,245				15,589				3.63	%
Non-interestbearing demand deposits			211,155												229,452
Other liabilities			17,680												19,920
Stockholders’ Equity			192,743												218,049
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,001,191											$	2,171,666
Net Interest Income, Tax Equivalent						$	17,264											$	18,281
Net Interest Rate Spread (3)											3.64	%											3.23	%
Net Interest Margin (4)											3.90	%											3.70	%