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
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31,June 30, 2011
Commission file number 000-19297
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
   
Nevada 55-0694814
   
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
of incorporation)  
P.O. Box 989

Bluefield, Virginia		24605-0989

(Address of principal executive offices)		 24605-0989
(Zip Code)
(276) 326-9000

(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yeso No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
oþ Yeso No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated fileroAccelerated filerþNon-accelerated filero
Smaller reporting companyo
(Do not check if a smaller reporting company)Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yesþ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class — Common Stock, $1.00 Par Value; 17,895,59917,917,824 shares outstanding as of May 6,August 5, 2011
 
 

 

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended March 31,June 30, 2011
INDEX
     
PART I. FINANCIAL INFORMATION
  
PART I.
Item 1. Financial Statements
 FINANCIAL
Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
3
Condensed Consolidated Statements of Income for the Three- and Six-Month Periods Ended June 30, 2011 and 2010 (Unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
6
Notes to Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3. Quantitative and Qualitative Disclosures about Market Risk
46
Item 4. Controls and Procedures
48
PART II. OTHER INFORMATION
    
     
Item 1.
Financial Statements
Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 20103
Consolidated Statements of Income for the Three Months Periods Ended March 31, 2011
and 2010 (Unaudited)4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and
2010 (Unaudited)5
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months
Ended March 31, 2011 and 2010 (Unaudited)6
Notes to Consolidated Financial Statements7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations31
Item 3.Quantitative and Qualitative Disclosures about Market Risk41
Item 4.Controls and Procedures44
PART II.OTHER INFORMATION
Item 1.Legal Proceedings44
Item 1A.Risk Factors44
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds44
Item 3.Defaults Upon Senior Securities45
Item 4.Reserved45
Item 5.Other Information45
Item 6.Exhibits45
SIGNATURES  48 
     
Item 1A. Risk Factors
48
  
EXHIBIT INDEX
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
48
Item 3. Defaults Upon Senior Securities
  49 
Item 4. Reserved
49
Item 5. Other Information
49
Item 6. Exhibits
49
SIGNATURES
52
EXHIBIT INDEX
53
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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PART I. ITEM 1. Financial Statements
FIRST COMMUNITY BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
                
 March 31, December 31,  June 30, December 31, 
 2011 2010  2011 2010 
(Dollars in Thousands) (Unaudited)  (Unaudited) 
Assets
  
Cash and due from banks $52,684 $28,816  $31,451 $28,816 
Federal funds sold 121,974 81,526  162,629 81,526 
Interest-bearing balances with banks 809 1,847  36,539 1,847 
          
Total cash and cash equivalents 175,467 112,189  230,619 112,189 
Securities available-for-sale 430,965 480,064  349,976 480,064 
Securities held-to-maturity 4,524 4,637  4,106 4,637 
Loans held for sale 2,614 4,694  920 4,694 
Loans held for investment, net of unearned income 1,375,685 1,386,206  1,373,944 1,386,206 
Less allowance for loan losses 26,482 26,482  26,482 26,482 
          
Net loans held for investment 1,349,203 1,359,724  1,347,462 1,359,724 
Premises and equipment, net 56,189 56,244  55,808 56,244 
Other real estate owned 5,644 4,910  5,585 4,910 
Interest receivable 7,288 7,675  6,202 7,675 
Goodwill and other intangible assets 90,396 90,639 
Goodwill 85,132 84,914 
Other intangible assets 5,205 5,725 
Other assets 118,690 123,462  115,385 123,462 
          
Total assets $2,240,980 $2,244,238  $2,206,400 $2,244,238 
          
  
Liabilities
  
Deposits:  
Noninterest-bearing $222,072 $205,151  $219,488 $205,151 
Interest-bearing 1,414,945 1,415,804  1,360,188 1,415,804 
          
Total deposits 1,637,017 1,620,955  1,579,676 1,620,955 
Interest, taxes and other liabilities 20,459 21,318  20,563 21,318 
Securities sold under agreements to repurchase 139,472 140,894  137,778 140,894 
FHLB borrowings and other indebtedness 166,186 191,193 
FHLB borrowings 150,000 175,000 
Other indebtedness 16,179 16,193 
          
Total liabilities 1,963,134 1,974,360  1,904,196 1,974,360 
          
  
Stockholders’ Equity
  
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued or outstanding at March 31, 2011 or December 31, 2010 — — 
Common stock, $1 par value; 50,000,000 shares authorized; 18,082,822 shares issued at March 31, 2011, and 18,082,822 issued at December 31, 2010, and 187,923 and 216,487 shares in treasury, respectively 18,083 18,083 
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued or outstanding at June 30, 2011, or December 31, 2010 — — 
Series A preferred stock, $0.01 par value; 25,000 shares authorized; 18,921 shares issued at June 30, 2011, and no shares issued at December 31, 2010 18,921 — 
Common stock, $1 par value; 50,000,000 shares authorized; 18,082,822 shares issued at June 30, 2011, and 18,082,822 issued at December 31, 2010, and 164,998 and 216,487 shares in treasury, respectively 18,083 18,083 
Additional paid-in capital 188,742 189,239  188,278 189,239 
Retained earnings 85,450 81,486  89,257 81,486 
Treasury stock, at cost  (5,851)  (6,740)  (5,137)  (6,740)
Accumulated other comprehensive loss  (8,578)  (12,190)  (7,198)  (12,190)
          
Total stockholders’ equity 277,846 269,878  302,204 269,878 
          
Total liabilities and stockholders’ equity $2,240,980 $2,244,238  $2,206,400 $2,244,238 
          
See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                        
 Three Months Ended  Three Months Ended Six Months Ended 
 March 31,  June 30, June 30, 
(Dollars In Thousands, Except Share and Per Share Data) 2011 2010  2011 2010 2011 2010 
Interest Income
  
Interest and fees on loans held for investment $20,455 $21,354  $20,094 $20,997 $40,549 $42,351 
Interest on securities — taxable 2,533 3,786  1,850 3,730 4,383 7,516 
Interest on securities — nontaxable 1,533 1,426  1,291 1,394 2,824 2,820 
Interest on federal funds sold and deposits in banks 69 46 
Interest on deposits in banks 100 34 169 80 
              
Total interest income 24,590 26,612  23,335 26,155 47,925 52,767 
              
Interest Expense
  
Interest on deposits 3,880 5,502  3,273 5,106 7,153 10,608 
Interest on borrowings 2,435 2,491  2,308 2,507 4,743 4,998 
              
Total interest expense 6,315 7,993  5,581 7,613 11,896 15,606 
              
Net interest income 18,275 18,619  17,754 18,542 36,029 37,161 
Provision for loan losses 1,612 3,665  3,079 3,596 4,691 7,261 
              
Net interest income after provision for loan losses 16,663 14,954  14,675 14,946 31,338 29,900 
              
Noninterest Income
  
Wealth management income 894 885  930 1,012 1,824 1,897 
Service charges on deposit accounts 3,031 2,992  3,353 3,347 6,384 6,339 
Other service charges and fees 1,406 1,281  1,461 1,250 2,867 2,531 
Insurance commissions 1,943 2,201  1,561 1,389 3,504 3,590 
Total impairment losses on securities  (527) —  —  (185)  (527)  (185)
Portion of loss recognized in other comprehensive income — —  — — — — 
              
Net impairment losses recognized in earnings  (527) —  —  (185)  (527)  (185)
Net gains on sale of securities 1,836 250  3,224 1,201 5,060 1,451 
Other operating income 916 969  834 890 1,750 1,859 
              
Total noninterest income 9,499 8,578  11,363 8,904 20,862 17,482 
              
Noninterest Expense
  
Salaries and employee benefits 9,129 7,969  8,685 8,487 17,814 16,456 
Occupancy expense of bank premises 1,647 1,709  1,568 1,570 3,215 3,279 
Furniture and equipment expense 915 904  909 918 1,824 1,822 
Amortization of intangible assets 259 256  261 253 520 509 
FDIC premiums and assessments 878 701  414 710 1,292 1,411 
Prepayment penalties on FHLB advances 471 —  — — 471 — 
Other operating expense 4,764 4,533  5,901 4,660 10,665 9,193 
              
Total noninterest expense 18,063 16,072  17,738 16,598 35,801 32,670 
              
Income before income taxes 8,099 7,460  8,300 7,252 16,399 14,712 
Income tax expense 2,348 2,182  2,572 2,121 4,920 4,303 
              
Net income 5,728 5,131 11,479 10,409 
Dividends on preferred stock 131 — 131 — 
         
Net income available to common shareholders $5,751 $5,278  $5,597 $5,131 $11,348 $10,409 
              
  
Basic earnings per common share $0.32 $0.30  $0.31 $0.29 $0.63 $0.59 
Diluted earnings per common share $0.32 $0.30  $0.31 $0.29 $0.63 $0.59 
  
Cash dividends per common share $0.10 $0.10  $0.10 $0.10 $0.20 $0.20 
  
Weighted average basic shares outstanding 17,867,953 17,765,556  17,895,904 17,787,325 17,882,006 17,776,500 
Weighted average diluted shares outstanding 17,887,118 17,784,449  18,534,489 17,805,393 18,200,184 17,792,535 
See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                
 Three Months Ended  Six Months Ended 
 March 31,  June 30, 
(Dollars In Thousands) 2011 2010  2011 2010 
Operating activities:  
Net income $5,751 $5,278  $11,479 $10,409 
Adjustments to reconcile net income to net cash provided by operating activities:  
Provision for loan losses 1,612 3,665  4,691 7,261 
Depreciation and amortization of premises and equipment 1,010 1,021  2,034 2,036 
Intangible amortization 259 256  520 509 
Net investment amortization and accretion 599 1  162 7 
Net gain on the sale of assets and securities  (1,843)  (214)
Net loss on the sale of property, plant, and equipment 42 56 
Net gain on the sale of securities  (5,060)  (1,425)
Mortgage loans originated for sale  (9,182)  (7,583)  (19,704)  (17,365)
Proceeds from sales of mortgage loans 11,517 17,886  23,884 27,157 
Gain on sales of loans  (255)  (221)  (406)  (357)
Equity-based compensation expense 9 22  21 36 
Deferred income tax expense 274 73 
Decrease (increase) in interest receivable 387  (20)
Deferred income tax expense (benefit) 2,618  (147)
Decrease in interest receivable 1,473 751 
FHLB debt prepayment fees 471 —  471 — 
Net impairment losses recognized in earnings 527 —  527 185 
Other operating activities, net 1,912 1,925  1,638 10,116 
          
Net cash provided by operating activities 13,048 22,089  24,390 39,229 
          
  
Investing activities:  
Proceeds from sales of securities available-for-sale 80,416 11,512  182,167 71,708 
Proceeds from maturities and calls of securities available-for-sale 11,937 23,490  19,317 38,488 
Proceeds from maturities and calls of securities held-to-maturity 115 301  535 998 
Purchase of securities available-for-sale  (36,830)  (65,168)  (59,334)  (113,690)
Net (increase) decrease in loans held for investment 8,118  (580)
Purchase of premises and equipment  (1,113)  (853)
Proceeds from sales of equipment 175 3 
Proceeds from (originations of) loans and leases 6,822  (15,098)
Proceeds from the redemption of FHLB stock 736 — 
Purchase of property, plant, and equipment  (1,799)  (1,552)
Proceeds from sales of property, plant, and equipment 175 86 
          
Net cash provided by (used in) investing activities 62,818  (31,295) 148,619  (19,060)
          
  
Financing activities:  
Net increase in demand and savings deposits 35,441 58,674 
Net decrease in time deposits  (19,379)  (49,023)
Net increase (decrease) in noninterest-bearing deposits 14,337  (2,513)
Net decrease in interest-bearing deposits  (55,616)  (30,028)
Net decrease in FHLB and other borrowings  (25,007)  (3,051)  (25,014)  (3,059)
FHLB debt prepayment fees  (471) —   (471) — 
Net decrease in securities sold under agreement to repurchase  (1,422)  (9,253)  (3,116)  (5,862)
Proceeds from the exercise of stock options 32 —  32 30 
Net proceeds from the issuance of preferred stock 18,841 — 
Excess tax benefit from stock-based compensation 5 —  5 9 
Common dividends paid  (1,787)  (1,776)  (3,577)  (3,556)
          
Net cash used in financing activities  (12,588)  (4,429)  (54,579)  (44,979)
          
Increase (decrease) in cash and cash equivalents 63,278  (13,635) 118,430  (24,810)
Cash and cash equivalents at beginning of period 112,189 101,341  112,189 101,341 
          
Cash and cash equivalents at end of period $175,467 $87,706  $230,619 $76,531 
          
 
Supplemental information — noncash items  $5,065 $5,075 
Transfer of loans to other real estate $1,763 $1,587  
See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
                            
 Accumulated                               
 Additional Other    Accumulated   
 Preferred Common Paid-in Retained Treasury Comprehensive    Additional Other   
 Stock Stock Capital Earnings Stock Income (Loss) Total  Preferred Common Paid-in Retained Treasury Comprehensive   
(Dollars in Thousands)  Stock Stock Capital Earnings Stock Income (Loss) Total 
Balance January 1, 2010 $— $18,083 $190,967 $66,760 $(9,891) $(13,652) $252,267  $— $18,083 $190,967 $66,760 $(9,891) $(13,652) $252,267 
Comprehensive income:  
Net income — — — 5,278 — — 5,278  — — — 10,409 — — 10,409 
Other comprehensive income — see note 9 — — — — — 5,161 5,161  — — — — — 8,205 8,205 
                              
Comprehensive income — — — 5,278 — 5,161 10,439  — — — 10,409 — 8,205 18,614 
                              
Common dividends declared and paid — — —  (1,776) — —  (1,776) — — —  (3,556) — —  (3,556)
Issuance of vested shares — —  (25) — 25 — — 
Equity-based compensation expense — — 22 — — — 22  — — 36 — — — 36 
Retirement plan contribution — 17,627 shares issued — —  (339) — 549 — 210 
Retirement plan contribution — 38,560 shares issued — —  (667) — 1,201 — 534 
Option exercises — 2,631 shares — —  (52) — 82 — 30 
                              
Balance March 31, 2010 $— $18,083 $190,650 $70,262 $(9,342) $(8,491) $261,162 
Balance June 30, 2010 $— $18,083 $190,259 $73,613 $(8,583) $(5,447) $267,925 
                              
  
Balance January 1, 2011 $— $18,083 $189,239 $81,486 $(6,740) $(12,190) $269,878  $— $18,083 $189,239 $81,486 $(6,740) $(12,190) $269,878 
Comprehensive income:  
Net income — — — 5,751 — — 5,751  — — — 11,479 — — 11,479 
Other comprehensive income — see note 9 — — — — — 3,612 3,612  — — — — — 4,992 4,992 
                              
Comprehensive income — — — 5,751 — 3,612 9,363  — — — 11,479 — 4,992 16,471 
                              
Common dividends declared and paid — — —  (1,787) — —  (1,787) — — —  (3,577) — —  (3,577)
Preferred dividends declared — — —  (131) — —  (131)
Issuance of preferred stock 18,921 —  (80) — — — 18,841 
Issuance of vested shares — —  (22) — 22 — — 
Equity-based compensation expense — — 9 — — — 9  — — 13 — 8 — 21 
Retirement plan contribution — 25,595 shares issued — —  (446) — 797 — 351 
Retirement plan contribution — 47,570 shares issued — —  (812) — 1,481 — 669 
Option exercises — 2,969 shares — —  (60) — 92 — 32  — —  (60) — 92 — 32 
                              
Balance March 31, 2011 $— $18,083 $188,742 $85,450 $(5,851) $(8,578) $277,846 
Balance June 30, 2011 $18,921 $18,083 $188,278 $89,257 $(5,137) $(7,198) $302,204 
                              
See Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of First Community Bancshares, Inc. and subsidiaries (“First Community” or the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, including normal recurring accruals, necessary for a fair presentation have been made. All significant intercompany balances and transactions have been eliminated in consolidation. These results are not necessarily indicative of the results of consolidated operations that might be expected for the full calendar year.
The consolidated balance sheet as of December 31, 2010, has been derived from the audited consolidated financial statements included in the Company’s 2010 Annual Report on Form 10-K (the “2010 Form 10-K”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2010 Form 10-K.
A more complete and detailed description of First Community’s significant accounting policies is included within Note 1 of Item 8, “Financial Statements and Supplementary Data” in the Company’s 2010 Form 10-K. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.
The Company operates within two business segments,segments-community banking and insurance services. Insurance services are comprised of agencies whichthat sell property and casualty and life and health insurance policies and arrangements. All other operations, including commercial and consumer banking, lending activities, and wealth management are included within the banking segment.
Earnings Per Share
Basic earnings per share are determined by dividing net income available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per share are determined by dividing net income available to common shareholders by the weighted average shares outstanding, which includes the dilutive effect of stock options, warrants, and contingently issuable shares, and convertible preferred shares. Basic and diluted net income per common share calculations follow:
                        
 For the Three Months  For the Three Months For the Six Months 
 ended March 31,  ended June 30, ended June 30, 
(In Thousands, Except Share and Per Share Data) 2011 2010  2011 2010 2011 2010 
Net income $5,728 $5,131 $11,479 $10,409 
Dividends on preferred stock 131 — 131 — 
         
Net income available to common shareholders $5,751 $5,278  $5,597 $5,131 $11,348 $10,409 
  
Weighted average shares outstanding 17,867,953 17,765,556  17,895,904 17,787,325 17,882,006 17,776,500 
Diluted shares for stock options 10,266 4,336  27,497 6,487 6,706 4,454 
Contingently issuable shares 8,899 14,557  8,527 11,581 8,527 11,581 
Convertible preferred shares 602,561 — 302,945 — 
              
Weighted average dilutive shares outstanding 17,887,118 17,784,449  18,534,489 17,805,393 18,200,184 17,792,535 
              
  
Basic earnings per share $0.32 $0.30  $0.31 $0.29 $0.63 $0.59 
Diluted earnings per share $0.32 $0.30  $0.31 $0.29 $0.63 $0.59 
For the three-month periodthree- and six-month periods ended March 31,June 30, 2011, options and warrants to purchase 483,558457,045 and 480,396 shares, respectively, of common stock were outstanding but were not included in the computation of diluted earnings per common

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share because they would have an anti-dilutive effect. Likewise, options and warrants to purchase 576,962 and 699,156 shares, respectively, of common stock were excluded from the three-month periodthree- and six-month periods ended March 31,June 30, 2010, computation of diluted earnings per common share because their effect would be anti-dilutive.

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Series A Preferred Stock

On May 20, 2011, the Company completed a private placement of 18,921 shares of its Series A Preferred Stock. The shares carry a 6% dividend rate and are non-cumulative. Each share is convertible into 69 shares of the Company’s common stock at any time and mandatorily convert after five years. The Company may redeem the shares at face value after the third anniversary.
Recent Accounting Pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 310, Receivables.New authoritative accounting guidance under ASC Topic 310 amends prior guidance to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables by providing additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 310 during the fourth quarter of 2010. Other than the additional disclosures, the adoption of the new guidance had no significant impact on the Company’s financial statements.
In April 2011, FASB issued Accounting Standard Update (“ASU”) 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and is applied retrospectively to restructurings at the beginning of the year of adoption. The guidance on measuring the impairment of a receivable restructured in a troubled restructuring is effective on a prospective basis. The Company is currently assessing the impact on its financial statements.
In April 2011, FASB issued ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements,” which simplifies the accounting for financial assets transferred under repurchase agreements and similar arrangements by eliminating the transferor’s ability criteria from the assessment of effective control over those assets as well as the related implementation guidance. The guidance is effective for interim and annual periods beginning on or after December 15, 2011, and is applied on a prospective basis. The Company is currently assessing the impact on its financial statements.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requires in the U.S. GAAP and IFRSs,” which was issued primarily to provide largely identical guidance about fair value measurement and disclosure requirements for International Financial Reporting Standards (“IFRS”) and U.S. GAAP. The new standards do not extend the use of fair value but rather provide guidance about how fair value should be determined where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. Public companies are required to apply the standard prospectively for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the impact on its financial statements.
In June 2011, FASB issued ASU 2011-05, “Presentation of Comprehensive Income”, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 22 and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income. The amendments of ASU 2011-05 are effective for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company is currently assessing the impact on its financial statements.
Conversion to State Charter
Effective with the close of business June 28, 2011, the Company’s wholly-owned banking subsidiary, First Community Bank, converted its charter from a national association to a Virginia state-chartered banking institution. First Community Bank will continue operating under the name First Community Bank. The charter conversion does not affect insurance coverage of First Community Bank’s deposits, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum amounts permitted by law, and does not affect the financial statements.services or products provided by First Community Bank. As a Virginia state-chartered bank, First Community Bank is supervised and regulated by the Virginia Bureau of Financial Institutions and its primary federal regulator is the Federal Reserve Bank of Richmond, both of which are based in the Company’s home state of Virginia. As a financial holding company, the Company will continue to be supervised and regulated by the Board of Governors of the Federal Reserve System.
Note 2. Mergers, Acquisitions, and Branching Activity
In July 2010, GreenPoint Insurance Group, Inc. (“GreenPoint”), the Company’s wholly-owned insurance subsidiary, acquired Murphy Insurance Agency, based in Princeton, West Virginia, issuing cash consideration of approximately $190 thousand. Acquisition terms call for additional cash consideration if certain operating performance targets are met. The Company has recorded the fair value of the expected additional cash consideration as $477 thousand in long-term debt. If those targets are not met, the value of the consideration ultimately paid will decrease the liability and will be recognized as a gain in the period in which the targets are not met. Goodwill and other intangibles associated with the acquisition total approximately $667 thousand.

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Note 3. Investment Securities
As of March 31,June 30, 2011, and December 31, 2010, the amortized cost and estimated fair value of available-for-sale securities were as follows:
                                        
 March 31, 2011  June 30, 2011 
 Amortized Unrealized Unrealized Fair OTTI in  Amortized Unrealized Unrealized Fair OTTI in 
(In Thousands) Cost Gains Losses Value AOCI*  Cost Gains Losses Value AOCI* 
U.S. Government agency securities $10,000 $— $(270) $9,730 $— 
States and political subdivisions 146,751 2,627  (2,286) 147,092 —  $124,579 $2,653 $(452) $126,780 $— 
Trust preferred securities: 
Single issue 55,607 —  (10,840) 44,767 — 
Pooled 23 537 — 560 — 
           
Total trust preferred securities 55,630 537  (10,840) 45,327 — 
Mortgage-backed securities: 
Agency 211,848 5,242  (1,111) 215,979 — 
Non-Agency Alt-A residential 18,487 —  (6,267) 12,220  (6,267)
           
Total mortgage-backed securities 230,335 5,242  (7,378) 228,199  (6,267)
Equity securities 441 217  (41) 617 — 
           
Total $443,157 $8,623 $(20,815) $430,965 $(6,267)
           
 
 December 31, 2010 
 Amortized Unrealized Unrealized Fair OTTI in 
(In Thousands) Cost Gains Losses Value AOCI* 
U.S. Government agency securities $10,000 $— $(168) $9,832 $— 
States and political subdivisions 178,149 2,649  (4,660) 176,138 — 
Trust preferred securities: 
Single issue 55,594 —  (14,350) 41,244 — 
Pooled 23 241 — 264 — 
           
Total trust preferred securities 55,617 241  (14,350) 41,508 — 
Single issue trust preferred securities 55,618 —  (9,021) 46,597 — 
Corporate FDIC insured 25,282 378 — 25,660 —  13,830 —  (28) 13,802 — 
Mortgage-backed securities:  
Agency 209,281 7,039  (1,307) 215,013 —  147,304 3,748  (126) 150,926 — 
Non-Agency Alt-A residential 19,181 —  (7,904) 11,277  (7,904) 18,191 —  (6,935) 11,256  (6,935)
                      
Total mortgage-backed securities 228,462 7,039  (9,211) 226,290  (7,904) 165,495 3,748  (7,061) 162,182  (6,935)
Equity securities 495 206  (65) 636 —  440 218  (43) 615 — 
                      
Total $498,005 $10,513 $(28,454) $480,064 $(7,904) $359,962 $6,619 $(16,605) $349,976 $(6,935)
                      
                     
  December 31, 2010 
  Amortized  Unrealized  Unrealized  Fair  OTTI in 
(In Thousands) Cost  Gains  Losses  Value  AOCI* 
U.S. Government agency securities $10,000  $—  $(168) $9,832  $— 
States and political subdivisions  178,149   2,649   (4,660)  176,138   — 
Trust preferred securities:                    
Single issue  55,594   —   (14,350)  41,244   — 
Pooled  23   241   —   264   — 
                
Total trust preferred securities  55,617   241   (14,350)  41,508   — 
Corporate FDIC insured  25,282   378   —   25,660   — 
Mortgage-backed securities:                    
Agency  209,281   7,039   (1,307)  215,013   — 
Non-Agency Alt-A residential  19,181   —   (7,904)  11,277   (7,904)
                
Total mortgage-backed securities  228,462   7,039   (9,211)  226,290   (7,904)
Equity securities  495   206   (65)  636   — 
                
Total $498,005  $10,513  $(28,454) $480,064  $(7,904)
                
 
* Other-than-temporary impairment in accumulated other comprehensive incomeincome.

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As of March 31,June 30, 2011, and December 31, 2010, the amortized cost and estimated fair value of held-to-maturity securities were as follows:
                                
 March 31, 2011  June 30, 2011 
 Amortized Unrealized Unrealized Fair  Amortized Unrealized Unrealized Fair 
(In Thousands) Cost Gains Losses Value  Cost Gains Losses Value 
States and political subdivisions $4,524 $80 $— $4,604  $4,106 $51 $— $4,157 
                  
Total $4,524 $80 $— $4,604  $4,106 $51 $— $4,157 
                  
 
 December 31, 2010 
 Amortized Unrealized Unrealized Fair 
(In Thousands) Cost Gains Losses Value 
States and political subdivisions $4,637 $67 $— $4,704 
         
Total $4,637 $67 $— $4,704 
         
                 
  December 31, 2010 
  Amortized  Unrealized  Unrealized  Fair 
(In Thousands) Cost  Gains  Losses  Value 
States and political subdivisions $4,637  $67  $—  $4,704 
             
Total $4,637  $67  $—  $4,704 
             
The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at March 31,June 30, 2011, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
                
 Amortized    Amortized   
(In Thousands) Cost Fair Value  Cost Fair Value 
Due within one year $116 $117  $116 $118 
Due after one year but within five years 15,305 15,868  27,147 27,545 
Due after five years but within ten years 34,035 35,455  24,073 25,072 
Due after ten years 162,925 150,709  142,691 134,444 
          
 212,381 202,149  194,027 187,179 
Mortgage-backed securities 230,335 228,199  165,495 162,182 
Equity securities 441 617  440 615 
          
Total $443,157 $430,965  $359,962 $349,976 
          
The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at March 31,June 30, 2011, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
                
 Amortized    Amortized 
(In Thousands) Cost Fair Value  Cost Fair Value 
Due within one year $1,426 $1,451  $1,426 $1,441 
 
Due after one year but within five years 2,312 2,350  2,310 2,340 
Due after five years but within ten years 786 803  370 376 
Due after ten years — —  — — 
          
Total $4,524 $4,604  $4,106 $4,157 
          
The carrying value of securities pledged to secure public deposits as required by law and for other purposes was $297.65$246.86 million and $302.67 million at March 31,June 30, 2011, and December 31, 2010, respectively.
During the three months ended March 31,June 30, 2011, gross gains on the sale of securities were $2.36$4.33 million while gross losses were $520 thousand.$1.10 million. During the six months ended June 30, 2011, gross gains on the sale of securities were $6.68 million while gross losses were $1.62 million. During the three months ended March 31,June 30, 2010, gross gains on the sale of securities were $258 thousand$1.23 million while gross losses were $8$26 thousand. During the six months ended June 30, 2010, gross gains on the sale of securities were $1.49 million while gross losses were $34 thousand.

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The following tables reflect those investments, both available-for-sale and held-to-maturity, in a continuous unrealized loss position for less than 12 months and for 12 months or longer at March 31,June 30, 2011, and December 31, 2010.
                                                
 March 31, 2011  June 30, 2011 
 Less than 12 Months 12 Months or longer Total  Less than 12 Months 12 Months or longer Total 
 Fair Unrealized Fair Unrealized Fair Unrealized  Fair Unrealized Fair Unrealized Fair Unrealized 
(In Thousands) Value Losses Value Losses Value Losses  Value Losses Value Losses Value Losses 
U.S. Government agency securities $9,730 $(270) $— $— $9,730 $(270)
States and political subdivisions 52,828  (2,286) — — 52,828  (2,286) $27,090 $(452) $— $— $27,090 $(452)
Single issue trust preferred securities — — 44,767  (10,840) 44,767  (10,840) — — 46,597  (9,021) 46,597  (9,021)
FDIC-backed securities 13,802  (28) — — 13,802  (28)
Mortgage-backed securities:  
Agency 102,306  (1,104) 2,580  (7) 104,886  (1,111) 29,319  (119) 4,924  (7) 34,243  (126)
Alt-A residential — — 12,220  (6,267) 12,220  (6,267) — — 11,256  (6,935) 11,256  (6,935)
                          
Total mortgage-backed securities 102,306  (1,104) 14,800  (6,274) 117,106  (7,378) 29,319  (119) 16,180  (6,942) 45,499  (7,061)
Equity securities 123  (36) 122  (5) 245  (41) 127  (23) 116  (20) 243  (43)
                          
Total $164,987 $(3,696) $59,689 $(17,119) $224,676 $(20,815) $70,338 $(622) $62,893 $(15,983) $133,231 $(16,605)
                          
 
 December 31, 2010 
 Less than 12 Months 12 Months or longer Total 
 Fair Unrealized Fair Unrealized Fair Unrealized 
(In Thousands) Value Losses Value Losses Value Losses 
U.S. Government agency securities $9,832 $(168) $— $— $9,832 $(168)
States and political subdivisions 80,420  (4,660) — — 80,420  (4,660)
Single issue trust preferred securities — — 41,244  (14,350) 41,244  (14,350)
Mortgage-backed securities: 
Agency 71,613  (1,307) 18 — 71,631  (1,307)
Alt-A residential — — 11,277  (7,904) 11,277  (7,904)
             
Total mortgage-backed securities 71,613  (1,307) 11,295  (7,904) 82,908  (9,211)
Equity securities 155  (55) 93  (10) 248  (65)
             
Total $162,020 $(6,190) $52,632 $(22,264) $214,652 $(28,454)
             
                         
  December 31, 2010 
  Less than 12 Months  12 Months or longer  Total 
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
(In Thousands) Value  Losses  Value  Losses  Value  Losses 
U.S. Government agency securities $9,832  $(168) $—  $—  $9,832  $(168)
States and political subdivisions  80,420   (4,660)  —   —   80,420   (4,660)
Single issue trust preferred securities  —   —   41,244   (14,350)  41,244   (14,350)
Mortgage-backed securities:                        
Agency  71,613   (1,307)  18   —   71,631   (1,307)
Alt-A residential  —   —   11,277   (7,904)  11,277   (7,904)
                   
Total mortgage-backed securities  71,613   (1,307)  11,295   (7,904)  82,908   (9,211)
Equity securities  155   (55)  93   (10)  248   (65)
                   
Total $162,020  $(6,190) $52,632  $(22,264) $214,652  $(28,454)
                   
At March 31,June 30, 2011, the combined depreciation in value of the 15690 individual securities in an unrealized loss position was approximately 4.83%4.74% of the combined reported value of the aggregate securities portfolio. At December 31, 2010, the combined depreciation in value of the 214 individual securities in an unrealized loss position was approximately 5.93% of the combined reported value of the aggregate securities portfolio.
The Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. For debt securities, the Company has determined that except for pooled trust preferred securities, it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that itthe Company will have to sell impaired securities before recovery of the impairment occurs. The Company’s assertionThis determination is based upon itsthe Company’s investment strategy for the particular type of security and the Company’sits cash flow needs, liquidity position, capital adequacy and interest rate risk position.
For non-beneficial interest debt securities, the Company analyzes several qualitative factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating agencies and other qualitative factors to determine if the impairment will be recovered. Non-beneficial interest debt securities consist of U. S. government agency securities, states and political subdivisions, and single issue trust preferred securities, and FDIC-backed securities. If it is determined that there is evidence that the impairment will not be recovered, the Company performs a present value calculation to determine the amount of credit related impairment and records any credit related OTTI through earnings and the non-credit related OTTI through other comprehensive income (“OCI”). During the three-month periodthree- and six-month periods ended March 31,June 30, 2011, the Company incurred no OTTI charges related to non-beneficial interest debt securities. The temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, and other current economic factors.

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For beneficial interest debt securities, the Company reviews cash flow analyses on each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. Beneficial interest debt securities consist of mortgage-backed securities and pooled trust preferred securities. An adverse change in cash flows expected to be collected has occurred if the present value of cash flows previously projected is greater than the present value of cash flows projected at the current reporting date and less than the current book value. If an adverse change in cash flows is deemed to have occurred, then an OTTI has occurred. The Company then compares the present value of cash flows using the current yield for the current reporting period to the reference amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI is then recorded through earnings and the non-credit related OTTI is accounted for in OCI.
During the three-month period ended March 31,June 30, 2011, the Company incurred no credit-related OTTI charges related to beneficial interest debt securities. During the six-month period ended June 30, 2011, the Company incurred credit-related OTTI charges related to beneficial interest debt securities of $527 thousand. These charges were related to a non-Agency mortgage-backed security.security (“MBS”). During the three-month periodthree- and six-month periods ended March 31,June 30, 2010, the Company realized noincurred credit-related OTTI charges related toon beneficial interest debt securities.securities of $134 thousand. These charges were related to two pooled trust preferred security holdings and brought the carrying value of those securities to zero.
For the non-Agency, Alt-A residential MBS, the Company models cash flows using the following assumptions: voluntary constant prepayment speed of 5, a customized constant default rate scenario that assumes approximately 25%22% of the remaining underlying mortgages will default, and a loss severity of 60.
The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities for which a portion of an OTTI is recognized in OCI:
            
 For the Three Months  For the Three Months For the Six Months 
(In Thousands) Ended March 31, 2011  Ended June 30, 2011 Ended June 30, 2011 
Estimated credit losses, beginning balance (1) $4,251  $4,778 $4,251 
Additions for credit losses on securities not previously OTTI —  — — 
Additions for credit losses on securities previously OTTI 527  — 527 
Reduction for increases in cash flows —  — — 
Reduction for securities management no longer intends to hold to recovery —  — — 
Reduction for realized losses —  — — 
        
Estimated credit losses, ending balance $4,778  $4,778 $4,778 
        
 
(1) The beginning balance includes credit-related losses included in OTTI charges recognized on debt securities in prior periods.
For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During the three-month periodthree- and six-month periods ended March 31,June 30, 2011, the Company did not recognize any OTTI charges on equity securities. For the three-month periodthree- and six-month periods ended March 31,June 30, 2010, the Company did not recognize anyrecognized OTTI charges on certain of its equity securities.securities of $51 thousand.
As a condition to membership in the Federal Home Loan Bank (“FHLB”) system, the Company is required to subscribe to a minimum level of stock in the FHLB of Atlanta (“FHLBA”). The Company feelsbelieves this ownership position provides access to relatively inexpensive wholesale and overnight funding. The Company accounts for FHLBA and Federal Reserve Bank stock as a long-term investment in other assets. At both March 31,June 30, 2011, and December 31, 2010, the Company owned approximately $11.50 million and $12.24 million, respectively, in FHLBA stock, which is classified as other assets. The Company’s policy is to review for impairment of such assets at the end of each reporting period. During the three months ended March 31, 2011, FHLBA paid a quarterly dividend. At March 31, 2011, FHLBA was in compliance with all of its regulatory capital requirements. Based on the Company’s review of publicly available information about the FHLBA and its review,own internal analysis, the Company believes that as of March 31, 2011, its FHLBA stock was not impaired.impaired as of June 30, 2011.

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Note 4. Loans
Loans, net of unearned income, consist of the following:
                                
 March 31, 2011 December 31, 2010  June 30, 2011 December 31, 2010 
(Dollars in Thousands) Amount Percent Amount Percent  Amount Percent Amount Percent 
Commercial loans  
Construction — commercial $30,758  2.24% $42,694  3.08% $34,966  2.55% $42,694  3.08%
Land development 5,781  0.42% 16,650  1.20% 4,694  0.34% 16,650  1.20%
Other land loans 23,959  1.74% 24,468  1.77% 23,354  1.70% 24,468  1.77%
Commercial and industrial 91,964  6.68% 94,123  6.79% 92,891  6.76% 94,123  6.79%
Multi-family residential 75,269  5.47% 67,824  4.89% 78,163  5.69% 67,824  4.89%
Non-farm, non-residential 345,265  25.10% 351,904  25.39% 333,475  24.27% 351,904  25.39%
Agricultural 1,392  0.10% 1,342  0.10% 1,677  0.12% 1,342  0.10%
Farmland 47,228  3.43% 36,954  2.67% 37,227  2.71% 36,954  2.67%
                  
Total commercial loans 621,616  45.18% 635,959  45.89% 606,447  44.14% 635,959  45.89%
Consumer real estate loans  
Home equity lines 111,802  8.13% 111,620  8.05% 111,995  8.15% 111,620  8.05%
Single family residential mortgage 545,316  39.64% 549,157  39.61% 560,527  40.80% 549,157  39.61%
Owner-occupied construction 22,506  1.64% 18,349  1.32% 18,062  1.31% 18,349  1.32%
                  
Total consumer real estate loans 679,624  49.41% 679,126  48.98% 690,584  50.26% 679,126  48.98%
Consumer and other loans  
Consumer loans 62,029  4.51% 63,475  4.58% 64,692  4.71% 63,475  4.58%
Other 12,416  0.90% 7,646  0.55% 12,221  0.89% 7,646  0.55%
                  
Total consumer and other loans 74,445  5.41% 71,121  5.13% 76,913  5.60% 71,121  5.13%
                  
Total loans $1,375,685  100.00% $1,386,206  100.00% $1,373,944  100.00% $1,386,206  100.00%
                  
  
Loans held for sale $2,614 $4,694  $920 $4,694 
          
Acquired, Impaired Loans
Loans acquired in a business combination are recorded at estimated fair value on their purchase date and prohibitdate. Under applicable accounting standards, it is not appropriate to carryover a valuation for the carryover of the related allowance for loan losses at the time of acquisition when the acquired loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments.deterioration. Evidence of credit quality deterioration as of the purchase date may include measures such as credit scores, decline in collateral value, past due and non-accrual status. TheFor acquired, impaired loans the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. PurchasedAcquired performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to the acquisition.

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The following table presents the required detailinformation regarding acquired, impaired loans at December 31, 2010,for the three- and March 31, 2011.six-month periods ended June 30, 2011 and 2010. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference includes estimated future credit losses expected to be incurred over the life of the loan. The Company has not noted any further deterioration in the acquired impaired loans.
                        
 Acquired, Impaired Loans 
             2011 2010 
 Acquired, Impaired Loans  TriStone Other Total TriStone Other Total 
(In thousands) TriStone Other Total  
Balance, January 1, 2010 $3,838 $4,196 $8,034 
Balance, January 1 $2,814 $407 $3,221 $3,838 $4,196 $8,034 
Principal payments received  (1,034)  (2,900)  (3,934)  (173) —  (173)  (961)  (224)  (1,185)
Accretion 61 — 61  13 — 13 30 — 30 
Other 448 — 448  60 — 60 426 — 426 
Charge-offs  (499)  (889)  (1,388) — — —  (499) —  (499)
                    
Balance, December 31, 2010 $2,814 $407 $3,221 
Balance, June 30 $2,714 $407 $3,121 $2,834 $3,972 $6,806 
                    
  
Balance, January 1, 2011 $2,814 $407 $3,221 
Balance, March 31 $2,884 $407 $3,291 $3,323 $3,972 $7,295 
Principal payments received  (35) —  (35)  (138) —  (138)  (94) —  (94)
Accretion 7 — 7  6 — 6 15 — 15 
Other 98 — 98   (38) —  (38) 10 — 10 
Charge-offs — — —  — — —  (420) —  (420)
                    
Balance, March 31, 2011 $2,884 $407 $3,291 
Balance, June 30 $2,714 $407 $3,121 $2,834 $3,972 $6,806 
                    
The remaining balance of the accretable difference at March 31,June 30, 2011, and December 31, 2010, was $937$931 thousand and $944 thousand, respectively
Off-Balance Sheet Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.
Standby letters of credit and written financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.
Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including availability of lines of credit) of $201.48$210.53 million and standby letters of credit and financial guarantees written of $4.52$2.93 million at March 31,June 30, 2011. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $7.63$3.50 million at March 31,June 30, 2011.

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Note 5. Allowance for Loan Losses and Credit Quality
The allowance for loan losses is maintained at a level that the Company believes is sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates by risk grade are adjusted by environmental factors to estimate the amount of reserve needed by segment. The Company believes this enhancement will result in increased granularity within the allowance for loan losses and will be more reflective of improving and/or declining trends within the commercial loan portfolio.
Management performs quarterly assessments to determine the appropriate level of allowance.allowance for loan losses. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the allowance based upon current measurement criteria. Commercial, consumer real estate, and non-real estate consumer loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans that have been deemed impaired. Management’s general reserve allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.
The following tables detail the Company’s allowance for loan loss activity, by portfolio segment, for the three-monththree- and six-month periods ended March 31,June 30, 2011 and 2010.
                                
 For the Three Months Ended March 31, 2011  For the Three Months Ended June 30, 2011 
 Consumer Real Consumer and    Consumer Real Consumer and   
(In Thousands) Commercial Estate Other Total  Commercial Estate Other Total 
Allowance for credit losses:  
Beginning balance $12,300 $12,641 $1,541 $26,482  $12,300 $12,641 $1,541 $26,482 
Provision for loan losses 361 1,213 38 1,612  2,504 408 167 3,079 
Loans charged off  (440)  (1,372)  (215)  (2,027)  (2,727)  (457)  (272)  (3,456)
Recoveries credited to allowance 79 159 177 415  223 49 105 377 
                  
Net charge-offs  (361)  (1,213)  (38)  (1,612)  (2,504)  (408)  (167)  (3,079)
                  
Ending balance $12,300 $12,641 $1,541 $26,482  $12,300 $12,641 $1,541 $26,482 
                  
                                
 For the Three Months Ended March 31, 2010  For the Three Months Ended June 30, 2010 
 Consumer Real Consumer and    Consumer Real Consumer and   
(In Thousands) Commercial Estate Other Total  Commercial Estate Other Total 
Allowance for credit losses:  
Beginning balance $13,802 $8,457 $2,018 $24,277  $14,043 $8,417 $2,048 $24,508 
Provision for loan losses 2,093 1,278 294 3,665  1,989 1,304 303 3,596 
Loans charged off  (2,079)  (1,330)  (323)  (3,732)  (2,503)  (588)  (282)  (3,373)
Recoveries credited to allowance 227 12 59 298  120 24 136 280 
                  
Net charge-offs  (1,852)  (1,318)  (264)  (3,434)  (2,383)  (564)  (146)  (3,093)
                  
Ending balance $14,043 $8,417 $2,048 $24,508  $13,649 $9,157 $2,205 $25,011 
                  

-15-- 15 -

                 
  For the Six Months Ended June 30, 2011 
      Consumer Real  Consumer and    
(In Thousands) Commercial  Estate  Other  Total 
Allowance for credit losses:                
Beginning balance $12,300  $12,641  $1,541  $26,482 
Provision for loan losses  2,865   1,621   205   4,691 
Loans charged off  (3,167)  (1,829)  (487)  (5,483)
Recoveries credited to allowance  302   208   282   792 
             
Net charge-offs  (2,865)  (1,621)  (205)  (4,691)
             
Ending balance $12,300  $12,641  $1,541  $26,482 
             
                 
  For the Six Months Ended June 30, 2010 
      Consumer Real  Consumer and    
(In Thousands) Commercial  Estate  Other  Total 
Allowance for credit losses:                
Beginning balance $13,802  $8,457  $2,018  $24,277 
Provision for loan losses  4,082   2,582   597   7,261 
Loans charged off  (4,582)  (1,918)  (605)  (7,105)
Recoveries credited to allowance  347   36   195   578 
             
Net charge-offs  (4,235)  (1,882)  (410)  (6,527)
             
Ending balance $13,649  $9,157  $2,205  $25,011 
             
The Company identifies loans for potential impairment through a variety of means including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If it is determined that it is probable that the Company will not collect all principal and interest amounts contractually due, the loan is generally deemed to be impaired.

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The following table presents the Company’s recorded investment in loans considered to be impaired and related information on those impaired loans for the periodsperiod ended March 31,June 30, 2011, and December 31, 2010. The table does not include acquired, impaired loans.Data for December 31, 2010, has been modified from the presentation in previous periods to match the current period presentation.
                                                        
 March 31, 2011  June 30, 2011 
 Recorded Recorded          Quarter-to-Date Year-to-Date 
 Investment Investment Total Unpaid Average Interest  Unpaid Average Interest Average Interest 
 With With No Recorded Related Principal Recorded Income  Recorded Related Principal Recorded Income Recorded Income 
(Amounts in Thousands) Allowance Allowance Investment Allowance Balance Investment Recognized  Investment Allowance Balance Investment Recognized Investment Recognized 
Loans without a related allowance
 
Construction — commercial $— $469 $469 $— $483 $549 $—  $758 $— $770 $888 $3 $953 $3 
Land development — — — — — — —  185 — 185 916 — 916 — 
Other land loans 113 130 243 5 242 435 1  1,083 — 1,083 1,588 1 2,517 1 
Commercial and industrial 622 990 1,612 340 9,403 6,608 —  3,908 — 3,930 3,937 4 4,363 4 
Multi-family residential 477 1,933 2,410 200 2,452 2,505 13  1,422 — 1,433 1,539 2 1,545 15 
Non-farm, non-residential 1,564 3,388 4,952 193 5,093 5,403 3  2,503 — 2,615 2,684 30 3,072 30 
Farmland — — — — — — — 
Home equity lines 94 1,323 1,417 34 1,447 1,507 6  1,293 — 1,331 1,318 14 1,398 20 
Single family residential mortgage 7,844 7,795 15,639 1,298 15,861 16,763 97  8,666 — 8,875 9,034 98 9,639 132 
Owner-occupied construction — 126 126 — 128 127 1  259 — 264 332 3 333 4 
Consumer loans — 70 70 — 72 78 —  53 — 57 58 2 60 2 
                              
 $10,714 $16,224 $26,938 $2,070 $35,181 $33,975 $121  $20,130 $— $20,543 $22,294 $156 $24,796 $211 
                              
Loans with a related allowance
 
Construction — commercial $268 $25 $268 $269 $— $269 $— 
Land development — — — — — — — 
Other land loans 112 4 112 113 2 113 3 
Commercial and industrial 612 340 637 641 8 651 8 
Multi-family residential 788 310 788 780 — 786 — 
Non-farm, non-residential 3,129 883 3,129 3,048 8 3,052 11 
Farmland 334 60 334 333 — 333 — 
Home equity lines — — — — — — — 
Single family residential mortgage 8,230 1,317 8,298 8,247 83 8,342 146 
Owner-occupied construction — — — — — — — 
Consumer loans — — — — — — — 
               
 $13,473 $2,939 $13,566 $13,431 $101 $13,546 $168 
               

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 December 31. 2010  December 31, 2010 
 Recorded Recorded          Year-to-Date 
 Investment Investment Total Unpaid Average Interest  Unpaid Average Interest 
 With With No Recorded Related Principal Recorded Income  Recorded Related Principal Recorded Income 
(Amounts in Thousands) Allowance Allowance Investment Allowance Balance Investment Recognized  Investment Allowance Balance Investment Recognized 
Loans without a related allowance
 
Construction — commercial $— $285 $285 $— $732 $730 $3  $285 $— $732 $730 $3 
Land development — 50 50 5 144 143 2  50 — 144 143 2 
Other land loans 113 323 436 — 855 266 20  323 — 742 152 13 
Commercial and industrial — 3,518 3,518 — 5,384 6,237 10  3,518 — 5,384 6,237 10 
Multi-family residential 723 2,526 3,249 257 3,432 3,448 126  2,526 — 2,673 2,680 105 
Non-farm, non-residential 1,070 3,824 4,894 158 6,125 5,809 79  3,824 — 4,985 4,658 53 
Home equity lines 95 1,302 1,397 34 1,693 1,703 40  1,302 — 1,595 1,605 38 
Single family residential mortgage 8,801 7,992 16,793 1,870 18,430 18,006 640  7,992 — 10,882 9,093 330 
Owner-occupied construction — 6 6 — 6 6 —  6 — 6 6 — 
Consumer loans — 98 98 — 102 111 5  98 — 102 11 5 
                          
 $10,802 $19,924 $30,726 $2,324 $36,903 $36,459 $925  $19,924 $— $27,245 $25,315 $559 
                          
Loans with a related allowance
 
Construction — commercial $— $— $— $— $— 
Land development 113 5 113 114 7 
Other land loans — — — — — 
Commercial and industrial — — — — — 
Multi-family residential 723 257 759 768 21 
Non-farm, non-residential 1,070 158 1,140 1,151 26 
Home equity lines 95 34 98 98 2 
Single family residential mortgage 8,801 1,870 7,548 8,913 310 
Owner-occupied construction — — — — — 
Consumer loans — — — — — 
           
 $10,802 $2,324 $9,658 $11,044 $366 
           
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, non-performing loans and general economic conditions. The Company’s loan review function generally reviews all commercial loan relationships greater than $2.00 million on an annual basis and at various times through the year. Smaller commercial and retail loans are sampled for review throughout the year by our internal loan review department. Through the loan review process, loans are identified for upgrade or downgrade in risk rating and changed to reflect current information as part of the process.

-16-

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of the risk grades is as follows:
 • Pass — This grade includes loans to borrowers of acceptable credit quality and risk. The Company further differentiates within this grade based upon borrower characteristics which include: capital strength, earnings stability, leverage, and industry.
 
 • Special Mention — This grade includes loans that require more than a normal degree of supervision and attention. These loans have all the characteristics of an adequate asset, but due to being adversely affected by economic or financial conditions have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan.
•Substandard — This grade includes loans that have well defined weaknesses which make payment default or principal exposure possible, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business to meet the repayment terms.
 
 • Doubtful — This grade includes loans that are placed on non-accrual status. These loans have all the weaknesses inherent in a “substandard’ loan with the added factor that the weaknesses are so severe that collection or liquidation in full, on the basis of current existing facts, conditions and values, is extremely unlikely, but because of certain specific pending factors, the amount of loss cannot yet be determined.
•Loss — This grade includes loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the asset has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off all or some portion of the loan, even though partial recovery may be affected in the future.

- 18 -

Loss — This grade includes loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the asset has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off all or some portion of the loan, even though partial recovery may be affected in the future.
The following tables present the Company’s investment in loans by internal credit grade indicator at March 31,June 30, 2011, and December 31, 2010.
                                                
 March 31, 2011  June 30, 2011 
 Special          Special         
(Amounts in Thousands) Pass Mention Substandard Doubtful Loss Total  Pass Mention Substandard Doubtful Loss Total 
Construction — commercial $26,115 $493 $4,150 $— $— $30,758  $33,028 $518 $1,420 $— $— $34,966 
Land development 4,865 — 916 — — 5,781  4,255 254 185 — — 4,694 
Other land loans 19,485 480 3,994 — — 23,959  16,103 5,924 1,327 — — 23,354 
Commercial and industrial 85,150 977 4,855 982 — 91,964  87,151 443 4,560 737 — 92,891 
Multi-family residential 70,399 1,560 3,310 — — 75,269  73,360 1,235 3,568 — — 78,163 
Non-farm, non-residential 321,393 8,350 15,522 — — 345,265  304,944 7,245 20,814 472 — 333,475 
Agricultural 1,367 — 25 — — 1,392  1,654 — 23 — — 1,677 
Farmland 44,900 1,024 1,304 — — 47,228  34,700 1,636 891 — — 37,227 
Home equity lines 107,323 1,834 2,645 — — 111,802  106,964 1,979 3,052 — — 111,995 
Single family residential mortgage 500,236 10,611 34,469 — — 545,316  511,574 11,146 37,807 — — 560,527 
Owner-occupied construction 21,685 346 475 — — 22,506  17,272 132 658 — — 18,062 
Consumer loans 61,414 86 527 — 2 62,029  64,013 115 564 — — 64,692 
Other 12,416 — — — — 12,416  12,206 3 12 — — 12,221 
                          
Total loans $1,276,748 $25,761 $72,192 $982 $2 $1,375,685  $1,267,224 $30,630 $74,881 $1,209 $— $1,373,944 
                          
                         
  December 31, 2010 
      Special             
(Amounts in Thousands) Pass  Mention  Substandard  Doubtful  Loss  Total 
Construction — commercial $40,497  $663  $1,534  $—  $—  $42,694 
Land development  14,458   1,226   966   —   —   16,650 
Other land loans  16,723   6,138   1,607   —   —   24,468 
Commercial and industrial  87,156   1,756   5,211   —   —   94,123 
Multi-family residential  61,059   2,553   4,212   —   —   67,824 
Non-farm, non-residential  316,026   18,942   16,936   —   —   351,904 
Agricultural  1,318   —   24   —   —   1,342 
Farmland  33,042   2,569   1,343   —   —   36,954 
Home equity lines  106,803   1,923   2,894   —   —   111,620 
Single family residential mortgage  498,830   15,224   34,449   654   —   549,157 
Owner-occupied construction  17,389   789   171   —   —   18,349 
Consumer loans  62,676   306   493   —   —   63,475 
Other  7,635   11   —   —   —   7,646 
                   
Total loans $1,263,612  $52,100  $69,840  $654  $—  $1,386,206 
                   

-17-- 19 -

                         
  December 31, 2010 
      Special             
(Amounts in Thousands) Pass  Mention  Substandard  Doubtful  Loss  Total 
Construction — commercial $40,497  $663  $1,534  $—  $—  $42,694 
Land development  14,458   1,226   966   —   —   16,650 
Other land loans  16,723   6,138   1,607   —   —   24,468 
Commercial and industrial  87,156   1,756   5,211   —   —   94,123 
Multi-family residential  61,059   2,553   4,212   —   —   67,824 
Non-farm, non-residential  316,026   18,942   16,936   —   —   351,904 
Agricultural  1,318   —   24   —   —   1,342 
Farmland  33,042   2,569   1,343   —   —   36,954 
Home equity lines  106,803   1,923   2,894   —   —   111,620 
Single family residential mortgage  498,830   15,224   34,449   654   —   549,157 
Owner-occupied construction  17,389   789   171   —   —   18,349 
Consumer loans  62,676   306   493   —   —   63,475 
Other  7,635   11   —   —   —   7,646 
                   
Total loans $1,263,612  $52,100  $69,840  $654  $—  $1,386,206 
                   
The following tables detail the Company’s recorded investment in loans related to each segment in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology at March 31,June 30, 2011, and December 31, 2010.
                        
                         June 30, 2011 
 March 31, 2011  Acquired, Allowance for 
 Loans Allowance Loans Allowance Acquired, Allowance for  Loans Allowance Loans Allowance Impaired Acquired, 
 Individually for Loans Collectively for Loans Impaired Loans Acquired,  Individually for Loans Collectively for Loans Loans Impaired 
 Evaluated for Individually Evaluated for Collectively Evaluated for Impaired Loans  Evaluated for Individually Evaluated for Collectively Evaluated for Loans 
(Amounts in Thousands) Impairment Evaluated Impairment Evaluated Impairment Evaluated  Impairment Evaluated Impairment Evaluated Impairment Evaluated 
Commercial loans  
Construction — commercial $469 $— $30,289 $885 $— $—  $1,026 $25 $33,940 $821 $— $— 
Land development — — 5,781 472 — —  185 — 4,509 224 — — 
Other land loans 243 5 23,204 1,356 512 —  1,195 4 21,734 584 425 — 
Commercial and industrial 1,612 340 89,734 1,937 618 —  4,520 340 87,752 1,849 619 — 
Multi-family residential 2,410 200 72,859 1,593 — —  2,210 310 75,953 1,773 — — 
Non-farm, non-residential 4,952 193 339,889 4,795 424 —  5,632 883 327,399 5,055 444 — 
Agricultural — — 1,392 19 — —  — — 1,677 23 — — 
Farmland — — 47,228 505 — —  334 60 36,893 380 — — 
                          
Total commercial loans 9,686 738 610,376 11,562 1,554 —  15,102 1,622 589,857 10,709 1,488 — 
Consumer real estate loans  
Home equity lines 1,417 34 110,385 2,056 — —  1,293 — 110,702 2,029 — — 
Single family residential mortgage 15,639 1,298 527,940 8,923 1,737 —  16,896 1,317 541,998 8,943 1,633 — 
Owner-occupied construction 126 — 22,380 330 — —  259 — 17,803 276 — — 
                          
Total consumer real estate loans 17,182 1,332 660,705 11,309 1,737 —  18,448 1,317 670,503 11,248 1,633 — 
Consumer and other loans  
Consumer loans 70 — 61,959 1,541 — —  53 — 64,639 1,586 — — 
Other — — 12,416 — — —  — — 12,221 — — — 
                          
Total consumer and other loans 70 — 74,375 1,541 — —  53 — 76,860 1,586 — — 
                          
Total loans $26,938 $2,070 $1,345,456 $24,412 $3,291 $—  $33,603 $2,939 $1,337,220 $23,543 $3,121 $— 
                          
                        
 December 31, 2010 
 Acquired, Allowance for 
 Loans Allowance Loans Allowance Impaired Acquired, 
 Individually for Loans Collectively for Loans Loans Impaired 
 Evaluated for Individually Evaluated for Collectively Evaluated for Loans 
(Amounts in Thousands) Impairment Evaluated Impairment Evaluated Impairment Evaluated 
Commercial loans 
Construction — commercial $285 $— $42,409 $1,472 $— $— 
Land development 50 5 16,600 1,767 — — 
Other land loans 436 — 23,520 747 512 — 
Commercial and industrial 3,518 — 90,084 4,511 521 — 
Multi-family residential 3,249 257 64,575 824 — — 
Non-farm, non-residential 4,894 158 346,586 2,688 424 — 
Agricultural — — 1,342 19 — — 
Farmland — — 36,954 70 — — 
             
Total commercial loans 12,432 420 622,070 12,098 1,457 — 
Consumer real estate loans 
Home equity lines 1,397 34 110,223 2,104 — — 
Single family residential mortgage 16,793 1,870 530,600 7,999 1,764 — 
Owner-occupied construction 6 — 18,343 193 — — 
             
Total consumer real estate loans 18,196 1,904 659,166 10,296 1,764 — 
Consumer and other loans 
Consumer loans 98 — 63,377 1,764 — — 
Other — — 7,646 — — — 
             
Total consumer and other loans 98 — 71,023 1,764 — — 
             
Total loans $30,726 $2,324 $1,352,259 $24,158 $3,221 $— 
             

-18-- 20 -

                         
  December 31, 2010 
  Loans  Allowance  Loans  Allowance  Acquired,  Allowance for 
  Individually  for Loans  Collectively  for Loans  Impaired Loans  Acquired, 
  Evaluated for  Individually  Evaluated for  Collectively  Evaluated for  Impaired Loans 
(Amounts in Thousands) Impairment  Evaluated  Impairment  Evaluated  Impairment  Evaluated 
Commercial loans                        
Construction — commercial $285  $—  $42,409  $1,472  $—  $— 
Land development  50   5   16,600   1,767   —   — 
Other land loans  436   —   23,520   747   512   — 
Commercial and industrial  3,518   —   90,084   4,511   521   — 
Multi-family residential  3,249   257   64,575   824   —   — 
Non-farm, non-residential  4,894   158   346,586   2,688   424   — 
Agricultural  —   —   1,342   19   —   — 
Farmland  —   —   36,954   70   —   — 
                   
Total commercial loans  12,432   420   622,070   12,098   1,457   — 
Consumer real estate loans                        
Home equity lines  1,397   34   110,223   2,104   —   — 
Single family residential mortgage  16,793   1,870   530,600   7,999   1,764   — 
Owner-occupied construction  6   —   18,343   193   —   — 
                   
Total consumer real estate loans  18,196   1,904   659,166   10,296   1,764   — 
Consumer and other loans                        
Consumer loans  98   —   63,377   1,764   —   — 
Other  —   —   7,646   —   —   — 
                   
Total consumer and other loans  98   —   71,023   1,764   —   — 
                   
Total loans $30,726  $2,324  $1,352,259  $24,158  $3,221  $— 
                   
Non-accrual and Past Due Loans
Non-accrual loans, presented by loan class, consisted of the following at March 31,June 30, 2011, and December 31, 2010:
                
 March 31, December 31,  June 30, December 31, 
(Amounts in Thousands) 2011 2010  2011 2010 
Construction — commercial $469 $285  $1,026 $285 
Land development — 50  185 50 
Other land loans 130 321  807 321 
Commercial and industrial 3,972 3,518  4,113 3,518 
Multi-family residential 1,624 2,463  2,210 2,463 
Non-farm, non-residential 4,706 4,670  5,304 4,670 
Farmland 334 — 
Home equity lines 889 868  900 868 
Single family residential mortgage 4,940 6,364  6,163 6,364 
Owner-occupied construction 126 6  259 6 
Consumer loans 70 99  53 99 
          
Total 16,926 18,644  21,354 18,644 
Acquired, impaired loans 777 770  683 770 
          
Total non-accrual loans $17,703 $19,414  $22,037 $19,414 
          

-19-

The following tables present the aging of the recorded investment in past due loans, by loan class, as of March 31,June 30, 2011, and December 31, 2010. There were no loans past due 90 days and still accruing interest at March 31,June 30, 2011 or December 31, 2010. Non-accrual loans, excluding those 0 to 29 days past due, are included in the applicable delinquency category.
                                                
 March 31, 2011  June 30, 2011 
 Total Current Total  Total Current Total 
(Amounts in Thousands) 30 - 59 Days 60 - 89 Days 90+ Days Past Due Loans Loans  30 - 59 Days 60-89 Days 90+ Days Past Due Loans Loans 
Construction — commercial $657 $— $95 $752 $30,006 $30,758  $139 $281 $348 $768 $34,198 $34,966 
Land development — — — — 5,781 5,781  — — — — 4,694 4,694 
Other land loans 100 — 499 599 23,360 23,959  — — 359 359 22,995 23,354 
Commercial and industrial 230 34 3,593 3,857 88,107 91,964  117 — 4,505 4,622 88,269 92,891 
Multi-family residential 1,823 — 1,624 3,447 71,822 75,269  395 — 1,626 2,021 76,142 78,163 
Non-farm, non-residential 2,024 124 3,669 5,817 339,448 345,265  2,178 868 2,381 5,427 328,048 333,475 
Agricultural 17 — — 17 1,375 1,392  25 — — 25 1,652 1,677 
Farmland 372 — — 372 46,856 47,228  567 — — 567 36,660 37,227 
Home equity lines 475 38 525 1,038 110,764 111,802  165 362 900 1,427 110,568 111,995 
Single family residential mortgage 6,505 1,468 3,308 11,281 534,035 545,316  3,040 668 4,246 7,954 552,573 560,527 
Owner-occupied construction 132 — 124 256 22,250 22,506  120 — 51 171 17,891 18,062 
Consumer loans 179 7 15 201 61,828 62,029  188 — 53 241 64,451 64,692 
Other 3 — — 3 12,413 12,416  — 1 — 1 12,220 12,221 
                          
Total loans $12,517 $1,671 $13,452 $27,640 $1,348,045 $1,375,685  $6,934 $2,180 $14,469 $23,583 $1,350,361 $1,373,944 
                          

- 21 -

                                                
 December 31, 2010  December 31, 2010 
 Total Current Total  Total Current Total 
(Amounts in Thousands) 30 - 59 Days 60 - 89 Days 90+ Days Past Due Loans Loans  30 - 59 Days 60-89 Days 90+ Days Past Due Loans Loans 
Construction — commercial $531 $— $122 $653 $42,041 $42,694  $531 $— $122 $653 $42,041 $42,694 
Land development — — 50 50 16,600 16,650  — — 50 50 16,600 16,650 
Other land loans — — 684 684 23,784 24,468  — — 684 684 23,784 24,468 
Commercial and industrial 3,648 121 356 4,125 89,998 94,123  3,648 121 356 4,125 89,998 94,123 
Multi-family residential 956 — 1,793 2,749 65,075 67,824  956 — 1,793 2,749 65,075 67,824 
Non-farm, non-residential 3,251 2,056 3,249 8,556 343,348 351,904  3,251 2,056 3,249 8,556 343,348 351,904 
Agricultural 19 — — 19 1,323 1,342  19 — — 19 1,323 1,342 
Farmland 110 — — 110 36,844 36,954  110 — — 110 36,844 36,954 
Home equity lines 682 250 608 1,540 110,080 111,620  682 250 608 1,540 110,080 111,620 
Single family residential mortgage 10,287 1,741 4,213 16,241 532,916 549,157  10,287 1,741 4,213 16,241 532,916 549,157 
Owner-occupied construction 855 326 6 1,187 17,162 18,349  855 326 6 1,187 17,162 18,349 
Consumer loans 433 47 31 511 62,964 63,475  433 47 31 511 62,964 63,475 
Other — — — — 7,646 7,646  — — — — 7,646 7,646 
                          
Total loans $20,772 $4,541 $11,112 $36,425 $1,349,781 $1,386,206  $20,772 $4,541 $11,112 $36,425 $1,349,781 $1,386,206 
                          
Note 6. Deposits
The following is a summary of interest-bearing deposits by type as of March 31,June 30, 2011, and December 31, 2010.
                
 March 31, December 31,  June 30, December 31, 
(In Thousands) 2011 2010  2011 2010 
Interest-bearing demand deposits $287,006 $262,420  $271,622 $262,420 
Savings and money market deposits 420,481 426,547  405,409 426,547 
Certificates of deposit and individual retirement accounts 707,458 726,837  683,157 726,837 
          
Total $1,414,945 $1,415,804  $1,360,188 $1,415,804 
          

-20-

Note 7. Borrowings
The following schedule details the Company’s indebtedness at March 31,June 30, 2011, and December 31, 2010.
                
 March 31, December 31,  June 30, December 31, 
(In Thousands) 2011 2010  2011 2010 
Securities sold under agreements to repurchase $139,472 $140,894  $137,778 $140,894 
FHLB borrowings 150,000 175,000  150,000 175,000 
Subordinated debt 15,464 15,464  15,464 15,464 
Other long-term debt 722 729  715 729 
          
Total $305,658 $332,087  $303,957 $332,087 
          
Securities sold under agreements to repurchase consist of $89.47$87.78 million and $90.89 million of retail overnight and term repurchase agreements at March 31,June 30, 2011, and December 31, 2010, respectively, and $50.00 million of wholesale repurchase agreements at both March 31,June 30, 2011, and December 31, 2010.
The Company had a derivative interest rate swap instrument where it received LIBOR-based variable interest payments and paid fixed interest payments that endedexpired in January 2011. The instrument effectively fixed $50.00 million of FHLB borrowings at 4.34% for a period of five years. For a more detailed discussion of activities regarding derivatives, please see Note 13 to the Consolidated Financial Statements.

- 22 -

FHLB borrowings included $150.00 million in convertible and callable advances at March 31,June 30, 2011, and $175.00 million at December 31, 2010. During the first quarter of 2011, the companyCompany prepaid a $25.00 million FHLB advance with an associated prepayment penalty of $471 thousand.advance. The weighted average interest rate of all the advances was 4.12% at March 31,June 30, 2011, and 2.39% at December 31, 2010.
At March 31,June 30, 2011, the FHLB advances have approximate contractual maturities between sixfive and ten years. The scheduled maturities of the advances are as follows:
     
(In Thousands) Amount 
2011 $— 
2012  — 
2013  — 
2014  — 
2015  — 
2016 and thereafter  150,000 
Total $150,000 
    
The callable advances may be redeemed at quarterly intervals after various lockout periods. These call options may substantially shorten the lives of these instruments. If these advances are called, the debt may be paid in full or converted to another FHLB credit product. Prepayment of the advances may result in substantial penalties based upon the differential between contractual note rates and current advance rates for similar maturities. At March 31,June 30, 2011, advances from the FHLB were secured by qualifying loans of $302.76$310.71 million.
Also included in other indebtedness is $15.46 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”), with an interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are currently callable.
The Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the Trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the Trust remaining available for distribution, in each case to the extent the Trust has funds available.

-21-

In addition to investment securities, at June 30, 2011, wholesale repurchase agreements were collateralized by $35.77 million of interest-bearing balances with banks.

Note 8. Net Periodic Benefit Cost-Defined Benefit Plans
The following sets forth the components of the net periodic benefit cost of the Company’s domestic non-contributory, non-qualified defined executive retention plan for the three-monththree- and six-month periods ended March 31,June 30, 2011 and 2010.
                        
 For the Three Months  For the Three Months For the Six Months 
 Ended March 31,  Ended June 30, Ended June 30, 
(In Thousands) 2011 2010  2011 2010 2011 2010 
Service cost $73 $52  $73 $53 $146 $106 
Interest cost 55 52  56 47 111 94 
              
Net periodic cost $128 $104  $129 $100 $257 $200 
              

- 23 -

The following sets forth the components of the net periodic benefit cost of the Company’s domestic non-contributory, non-qualified directors’ retirement plan, which was effective as of January 1, 2011, for the three-month periodthree- and six-month periods ended March 31,June 30, 2011.
            
 For the Three Months  For the Three Months For the Six Months 
 Ended March 31,  Ended June 30, Ended June 30, 
(In Thousands) 2011  2011 2011 
Service cost $29  $29 $58 
Interest cost 11  11 22 
        
Net periodic cost $40  $40 $80 
        
Note 9. Comprehensive Income
The components of the Company’s comprehensive income, net of deferred income taxes, for the three-monththree- and six-month periods ended March 31,June 30, 2011 and 2010, are as follows:
                        
 For the Three Months  For the Three Months For the Six Months 
 Ended March 31,  Ended June 30, Ended June 30, 
(In Thousands) 2011 2010  2011 2010 2011 2010 
Net income $5,751 $5,278  $5,728 $5,131 $11,479 $10,409 
Other comprehensive income  
Unrealized loss on securities available-for-sale with other-than-temporary impairment 943 — 
Unrealized loss on securities available-for-sale without other-than-temporary impairment 6,122 8,050 
Unrealized (loss) gain on securities available-for-sale with other-than-temporary impairment  (964)  (164)  (21) 3 
Unrealized gain on securities available-for-sale without other-than-temporary impairment 6,357 5,435 12,479 13,319 
Reclassification adjustment for gains realized in net income  (1,836)  (250)  (2,574)  (1,201)  (5,060)  (1,451)
Reclassification adjustment for credit related other-than-temporary impairments recognized in earnings 527 —  — 185 527 185 
Unrealized gain on derivative contract — 424  — 596 30 1,020 
Income tax effect  (2,144)  (3,063)  (1,050)  (1,807)  (2,963)  (4,871)
              
Total other comprehensive income 3,612 5,161  1,769 3,044 4,992 8,205 
              
Comprehensive income $9,363 $10,439  $7,497 $8,175 $16,471 $18,614 
              
Note 10. Commitments and Contingencies
In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

-22-

Note 11. Segment Information
The Company operates within two business segments, Community Banking and Insurance Services. The Community Banking segment includes both commercial and consumer lending and deposit services. This segment provides customers with such products as commercial loans, real estate loans, business financing, and consumer loans. This segment also provides customers with a range 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.

- 24 -

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-monththree-and six-month periods ended March 31,June 30, 2011 and 2010.
                
                 For the Three Months 
 For the Three Months  Ended June 30, 2011 
 Ended March 31, 2011  Community Insurance Parent/   
 Community Insurance Parent/    Banking Services Elimination Total 
(In Thousands) Banking Services Elimination Total  
Net interest income (loss) $18,346 $(38) $(33) $18,275 
Net interest income (expense) $17,864 $(31) $(79) $17,754 
Provision for loan losses 1,612 — — 1,612  3,079 — — 3,079 
Noninterest income (loss) 7,804 1,966  (271) 9,499  9,920 1,584  (141) 11,363 
Noninterest expense (income) 16,936 1,525  (398) 18,063  16,357 1,542  (161) 17,738 
                  
Income before income taxes 7,602 403 94 8,099  8,348 11  (59) 8,300 
Provision for income taxes 2,151 159 38 2,348  2,587 4  (19) 2,572 
                  
Net income $5,451 $244 $56 $5,751 
Net income (loss) 5,761 7  (40) 5,728 
Preferred dividend — — 131 131 
         
Net income to common shareholders $5,761 $7 $(171) $5,597 
                  
End of period goodwill and other intangibles $78,518 $11,878 $— $90,396  $78,339 $11,998 $— $90,337 
                  
End of period assets $2,223,371 $12,797 $4,812 $2,240,980  $2,184,336 $12,836 $9,228 $2,206,400 
                  
                
                 For the Six Months 
 For the Three Months  Ended June 30, 2011 
 Ended March 31, 2010  Community Insurance Parent/   
 Community Insurance Parent/    Banking Services Elimination Total 
(In Thousands) Banking Services Elimination Total  
Net interest income (loss) $18,678 $(33) $(26) $18,619 
Net interest income (expense) $36,210 $(69) $(112) $36,029 
Provision for loan losses 3,665 — — 3,665  4,691 — — 4,691 
Noninterest income (loss) 6,609 2,219  (250) 8,578  17,724 3,550  (412) 20,862 
Noninterest expense (income) 15,021 1,479  (428) 16,072  33,293 3,067  (559) 35,801 
                  
Income before income taxes 6,601 707 152 7,460  15,950 414 35 16,399 
Provision for income taxes 1,869 291 22 2,182  4,738 163 19 4,920 
                  
Net income $4,732 $416 $130 $5,278 
Net income (loss) 11,212 251 16 11,479 
Preferred dividend — — 131 131 
         
Net income to common shareholders $11,212 $251 $(115) $11,348 
                  
End of period goodwill and other intangibles $79,237 $11,568 $— $90,805  $78,339 $11,998 $— $90,337 
                  
End of period assets $2,252,443 $12,465 $14,031 $2,278,939  $2,184,336 $12,836 $9,228 $2,206,400 
                  
                 
      For the Three Months     
  Ended June 30, 2010 
  Community  Insurance  Parent/    
  Banking  Services  Elimination  Total 
(In Thousands)                
Net interest income (expense) $18,581  $(24) $(15) $18,542 
Provision for loan losses  3,596   —   —   3,596 
Noninterest income  7,431   1,408   65   8,904 
Noninterest expense (income)  15,362   1,402   (166)  16,598 
             
Income before income taxes  7,054   (18)  216   7,252 
Provision for income taxes  2,014   (19)  126   2,121 
             
Net income $5,040  $1  $90  $5,131 
             
End of period goodwill and other intangibles $79,057  $11,700  $—  $90,757 
             
End of period assets $2,227,198  $12,163  $7,485  $2,246,846 
             

- 25 -

                 
      For the Six Months     
  Ended June 30, 2010 
  Community  Insurance  Parent/    
(In Thousands) Banking  Services  Elimination  Total 
Net interest income (expense) $37,259  $(57) $(41) $37,161 
Provision for loan losses  7,261   —   —   7,261 
Noninterest income (loss)  14,040   3,627   (185)  17,482 
Noninterest expense (income)  30,383   2,881   (594)  32,670 
             
Iincome before income taxes  13,655   689   368   14,712 
Provision for income taxes  3,883   272   148   4,303 
             
Net income $9,772  $417  $220  $10,409 
             
End of period goodwill and other intangibles $79,057  $11,700  $—  $90,757 
             
End of period assets $2,227,198  $12,163  $7,485  $2,246,846 
             
Note 12. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal, or most advantageous, market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

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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 assets and liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon third party models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities Available-for-Sale:Securities classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. Securities are classified as Level 1 within the valuation hierarchy when quoted prices are available in an active

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market. This includes securities whose value is based on quoted market prices in active markets for identical assets. The Company also uses Level 1 inputs for the valuation of equity securities traded in active markets.
Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U. S. Agency securities, mortgage-backed securities, municipal securities, single issue trust preferred securities, pooled trust preferred securities, and certain equity securities that are not actively traded.
Other Assets and Associated Liabilities:Securities held for trading purposes are recorded at fair value and included in “other assets” on the consolidated balance sheets. Securities held for trading purposes include assets related to employee deferred compensation plans. The assets associated with these plans are generally invested in equities and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.
Derivatives:Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations based on observable data to value its derivatives.
Impaired Loans:Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on appraisals adjusted for customized discounting criteria.
The Company maintains an active and robust problem credit identification system. When a credit is identified as exhibiting characteristics of weakening, the Company will assess the credit for potential impairment. Examples of weakening include delinquency and deterioration of the borrower’s capacity to repay as determined by the Company’s regular credit review function. As part of the impairment review, the Company will evaluate the current collateral value. It is the Company’s

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standard practice to obtain updated third party collateral valuations to assist management in measuring potential impairment of a credit and the amount of the impairment to be recorded.
Internal collateral valuations are generally performed within two to four weeks of the original identification of potential impairment and receipt of the third party valuation. The internal valuation is performed by comparing the original appraisal to current local real estate market conditions and experience with consideration of liquidation costs. The result of the internal valuation is compared to the outstanding loan balance, and, if warranted, a specific impairment reserve will be established at the completion of the internal evaluation.
A third party evaluation is typically received within thirty to forty-five days of the completion of the internal evaluation. Once received, the third party evaluation is reviewed by Special Assets staff and/or Credit Appraisal staff for reasonableness. Once the evaluation is reviewed and accepted, discounts to fair market value are applied based upon such factors as the bank’s historical liquidation experience of like collateral, and an estimated net realizable value is established. That estimated net realizable value is then compared to the outstanding loan balance to determine the amount of specific impairment reserve. The specific impairment reserve, if necessary, is adjusted to reflect the results of the updated evaluation. A specific impairment reserve is generally maintained on impaired loans during the time period while awaiting receipt of the third party evaluation as well as on impaired loans that continue to make some form of payment and liquidation is not imminent. Impaired loans not meeting the aforementioned criteria and that do not have a specific impairment reserve have usually been previously written down through a partial charge-off, to their net realizable value.
Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan less the specific reserve is any downward adjustment to the appraised value that the Company determines appropriate. These differences generally consist of costs to sell the property, as well as a deflator for the devaluation of property seen by bank sellers. The Company considers these factors in fair value adjustments.
In the Company’s experience, it rarely returns loans to performing status after they have been partially charged off. Generally, credits identified as impaired move quickly through the process towards ultimate resolution.
Other Real Estate Owned. The fair value of the Company’s other real estate owned is determined using current and prior appraisals, estimates of costs to sell, and proprietary qualitative adjustments. Accordingly, other real estate owned is stated at a Level 3 fair value.

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The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31,June 30, 2011, and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
                
                 June 30, 2011 
 March 31, 2011  Fair Value Measurements Using   
 Fair Value Measurements Using Total  Total 
(In Thousands) Level 1 Level 2 Level 3 Fair Value  Level 1 Level 2 Level 3 Fair Value 
Available-for-sale securities:  
Agency securities $— $9,730 $— $9,730 
Agency mortgage-backed securities — 215,979 — 215,979  $— $150,926 $— $150,926 
Non-Agency Alt-A residential MBS — 12,220 — 12,220  — 11,256 — 11,256 
Municipal securities — 147,092 — 147,092  — 126,780 — 126,780 
FDIC-backed securities — 13,802 — 13,802 
Single issue trust preferred securities — 44,767 — 44,767  — 46,597 — 46,597 
Pooled trust preferred securities — 560 — 560 
Equity securities 597 20 — 617  595 20 — 615 
                  
Total available-for-sale securities $597 $430,368 $— $430,965  $595 $349,381 $— $349,976 
                  
Deferred compensation assets $3,099 $— $— $3,099  $3,188 $— $— $3,188 
                  
Derivative assets  
Interest rate lock commitments — 64 — 64  — 39 — 39 
                  
Total derivative assets $— $64 $— $64  $— $39 $— $39 
                  
Deferred compensation liabilities $3,099 $— $— $3,099  $3,188 $— $— $3,188 
                  
Derivative liabilities  
Interest rate lock commitments — 14 — 14  — 7 — 7 
                  
Total derivative liabilities $— $14 $— $14  $— $7 $— $7 
                  
                
 December 31, 2010 
                 Fair Value Measurements Using   
 December 31, 2010  Total 
 Fair Value Measurements Using Total  Level 1 Level 2 Level 3 Fair Value 
(In Thousands) Level 1 Level 2 Level 3 Fair Value  
Available-for-sale securities:  
Agency securities $— $9,832 $— $9,832  $— $9,832 $— $9,832 
Agency mortgage-backed securities — 215,013 — 215,013  — 215,013 — 215,013 
Non-Agency Alt-A residential MBS — 11,277 — 11,277  — 11,277 — 11,277 
Municipal securities — 176,138 — 176,138  — 176,138 — 176,138 
FDIC-backed securities 25,660 25,660  25,660 25,660 
Single issue trust preferred securities — 41,244 — 41,244  — 41,244 — 41,244 
Pooled trust preferred securities — 264 — 264  — 264 — 264 
Equity securities 616 20 — 636  616 20 — 636 
                  
Total available-for-sale securities $616 $479,448 $— $480,064  $616 $479,448 $— $480,064 
                  
Deferred compensation assets $3,192 $— $— $3,192  $3,192 $— $— $3,192 
                  
Derivative assets  
Interest rate lock commitments — 28 — 28  — 28 — 28 
                  
Total derivative assets $— $28 $— $28  $— $28 $— $28 
                  
Deferred compensation liabilities $3,192 $— $— $3,192  $3,192 $— $— $3,192 
                  
Derivative liabilities  
Interest rate swap — 31 — 31  — 31 — 31 
Interest rate lock commitments — 59 — 59  — 59 — 59 
                  
Total derivative liabilities $— $90 $— $90  $— $90 $— $90 
                  

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Certain financial and non-financial assets are measured at fair value on a nonrecurring basis; thus, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as, when there is evidence of impairment. Items subject to nonrecurring fair value adjustments at March 31,June 30, 2011, and December 31, 2010, are as follows:
                
                 June 30, 2011 
 March 31, 2011 Fair Value Measurements Using Total 
 Fair Value Measurements Using Total Level 1 Level 2 Level 3 Fair Value 
(In Thousands) Level 1 Level 2 Level 3 Fair Value 
Impaired loans $ — $ — $5,145 $5,145  $— $— $6,580 $6,580 
Restructured loans — — 6,520 6,520  — — 7,600 7,600 
Other real estate owned — — 5,644 5,644  — — 5,585 5,585 
                
                 December 31, 2010 
 December 31, 2010 Fair Value Measurements Using Total 
 Fair Value Measurements Using Total Level 1 Level 2 Level 3 Fair Value 
(In Thousands) Level 1 Level 2 Level 3 Fair Value 
Impaired loans $ — $ — $10,906 $10,906  $— $— $10,906 $10,906 
Restructured loans — — 5,771 5,771  — — 5,771 5,771 
Other real estate owned — — 4,910 4,910  — — 4,910 4,910 

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Fair Value of Financial Instruments
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists.
                
                 June 30, 2011 December 31, 2010 
 March 31, 2011 December 31, 2010 Carrying Carrying   
 Carrying Carrying   Amount Fair Value Amount Fair Value 
(In Thousands) Amount Fair Value Amount Fair Value 
 
Assets
  
Cash and cash equivalents $175,467 $175,467 $112,189 $112,189  $230,619 $230,619 $112,189 $112,189 
Investment securities 435,489 435,569 484,701 484,768  354,082 354,133 484,701 484,768 
Loans held for sale 2,614 2,631 4,694 4,700  920 924 4,694 4,700 
Loans held for investment, less allowance 1,349,203 1,361,063 1,359,724 1,370,173  1,347,462 1,371,895 1,359,724 1,370,173 
Accrued interest receivable 7,288 7,288 7,675 7,675  6,202 6,202 7,675 7,675 
Bank owned life insurance 42,583 42,583 42,241 42,241  43,607 43,607 42,241 42,241 
Derivative financial assets 64 64 28 28  39 39 28 28 
Deferred compensation assets 3,099 3,099 3,192 3,192  3,188 3,188 3,192 3,192 
  
Liabilities
  
Demand deposits $222,072 $222,072 $205,151 $205,151  $219,488 $219,488 $205,151 $205,151 
Interest-bearing demand deposits 287,006 287,006 262,420 262,420  271,622 271,622 262,420 262,420 
Savings deposits 420,481 420,481 426,547 426,547  405,409 405,409 426,547 426,547 
Time deposits 707,458 714,388 726,837 735,332  683,157 692,867 726,837 735,332 
Securities sold under agreements to repurchase 139,472 159,687 140,894 161,100  137,778 144,173 140,894 161,100 
Accrued interest payable 3,001 3,001 3,264 3,264  2,872 2,872 3,264 3,264 
FHLB and other indebtedness 166,186 176,234 191,193 203,539  166,179 177,903 191,193 203,539 
Derivative financial liabilities 14 14 90 90  7 7 90 90 
Deferred compensation liabilities 3,099 3,099 3,192 3,192  3,188 3,188 3,192 3,192 
The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
Cash and Cash Equivalents:The book values of cash and due from banks and federal funds sold and purchased are considered to be equal to fair value as a result of the short-term nature of these items.
Investment Securities and Deferred Compensation Assets and Liabilities:Fair values are determined in the same manner as described above.
Loans:The estimated fair value of loans held for investment is measured based upon discounted future cash flows using current rates for similar loans. Loans held for sale are recorded at lower of cost or estimated fair value. The fair value of loans held for sale is determined based upon the market sales price of similar loans.
Accrued Interest Receivable and Payable:The book value is considered to be equal to the fair value due to the short-term nature of the instrument.
Bank-owned Life Insurance:The fair value is determined by stated contract values.

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Derivative Financial Instruments:The estimated fair value of derivative financial instruments is based upon the current market price for similar instruments.
Deposits and Securities Sold Under Agreements to Repurchase:Deposits without a stated maturity, including demand, interest-bearing demand, and savings accounts, are reported at their carrying value. No value has been assigned to the franchise value of these deposits. For other types of deposits and repurchase agreements with fixed maturities and rates, fair value has been estimated by discounting future cash flows based on interest rates currently being offered on instruments with similar characteristics and maturities.
FHLB and Other Indebtedness:Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar characteristics and maturities. The fair value for trust preferred obligations has been estimated based on credit spreads seen in the marketplace for like issues.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees:The amount of off-balance sheet commitments to extend credit, standby letters of credit, and financial guarantees is considered equal to fair value. Because of the uncertainty involved in attempting to assess the likelihood and timing of commitments being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures, the Company does not believe it is meaningful to provide an estimate of fair value that differs from the given value of the commitment.
Note 13. Derivatives and Hedging Activities
The Company, through its mortgage banking and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers’ financing needs. Derivative assets and liabilities are recorded at fair value on the balance sheet.
The primary derivatives that the Company uses are interest rate swaps and interest rate lock commitments (“IRLC’s”). Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors, such as interest rates, market-driven loan rates and prices or other economic factors.
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments as of the dates indicated:
            
             June 30, 2011 December 31, 2010 June 30, 2010 
(In Thousands) March 31, 2011 December 31, 2010 March 31, 2010 
Interest rate swap $— $50,000 $50,000  $— $50,000 $50,000 
IRLC’s 7,629 7,566 2,966  3,500 7,566 6,823 
As of March 31,June 30, 2011, December 31, 2010, and March 31,June 30, 2010, the fair values of the Company’s derivatives were as follows:
                                                
 Asset Derivatives  Asset Derivatives 
 March 31, 2011 December 31, 2010 March 31, 2010  June 30, 2011 December 31, 2010 June 30, 2010 
 Balance Sheet Fair Balance Sheet Fair Balance Sheet Fair  Balance Sheet Fair Balance Sheet Fair Balance Sheet Fair 
(In Thousands) Location Value Location Value Location Value  Location Value Location Value Location Value 
Derivatives not designated as hedges  
IRLC’s Other assets $64 Other assets $28 Other assets $—  Other assets $39 Other assets $28 Other assets $52 
                    
Total $64 $28 $—  $39 $28 $52 
                    

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                         Liability Derivatives 
 Liability Derivatives  June 30, 2011 December 31, 2010 June 30, 2010 
 March 31, 2011 December 31, 2010 March 31, 2010  Balance Sheet Fair Balance Sheet Fair Balance Sheet Fair 
 Balance Sheet Fair Balance Sheet Fair Balance Sheet Fair  Location Value Location Value Location Value 
(In Thousands) Location Value Location Value Location Value  
Derivatives designated as hedges  
Interest rate swap Other liabilities $— Other liabilities $31 Other liabilities $1,691  Other liabilities $— Other liabilities $31 Other liabilities $1,093 
                    
Total $— $31 $1,691  $— $31 $1,093 
                    
  
Derivatives not designated as hedges  
IRLC’s Other liabilities $14 Other liabilities $59 Other liabilities $49  Other liabilities $7 Other liabilities $59 Other liabilities $22 
                    
Total $14 $59 $49  $7 $59 $22 
                    
  
Total derivatives $14 $90 $1,740  $7 $90 $1,115 
                    
Interest Rate Swaps.The Company uses interest rate swap contracts to modify its exposure to interest rate risk. The Company had a derivative interest rate swap instrument that ended in January 2011. The Company employed a cash flow hedging strategy to effectively convert certain floating-rate liabilities into fixed-rate instruments. The interest rate swap was accounted for under the “short-cut” method as required by the Derivatives and Hedging Topic 815 of the ASC. Changes in fair value of the interest rate swap were reported as a component of other comprehensive income. The Company does not currently employ fair value hedging strategies.
Interest Rate Lock Commitments.In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan market. During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with mortgage loans that are in the “mortgage pipeline.” A pipeline loan is one on which the potential borrower has set the interest rate for the loan by entering into an IRLC. Once a mortgage loan is closed and funded, it is included within loans held for sale and awaits sale and delivery into the secondary market. During the term of an IRLC, the Company has the risk that interest rates will change from the rate quoted to the borrower.
The Company’s balance of mortgage loans held for sale is subject to changes in fair value due to fluctuations in interest rates from the loan closing date through the date of sale of the loan into the secondary market. Typically, the fair value of these loans declines when interest rates increase and rises when interest rates decrease.
Effect of Derivatives and Hedging Activities on the Income Statement
For the quarters ended March 31,June 30, 2011 and 2010, the Company has determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains and losses recognized in income on non-designated hedging instruments for the three-monththree- and six-month periods ended March 31,June 30, 2011 and 2010.
                                
 Amount of Gain  Amount of Gain (Loss) 
Derivatives Not Location of Gain Recognized in Income on Derivative  Location of Gain (Loss) Recognized in Income on Derivative 
Designated as Hedging Recognized in Income on Three Months Ended March 31,  Recognized in Income on Three Months Ended June 30, Six Months Ended June 30, 
Instruments Derivative 2011 2010  Derivative 2011 2010 2011 2010 
(In Thousands)  
IRLC’s Other income $81 $23  Other income $(18) $79 $63 $102 
                
Total $81 $23  $(18) $79 $63 $102 
                
Counterparty Credit Risk.Like other financial instruments, derivatives contain an element of “credit risk.” Credit risk is the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee. The Company reviews its counterparty risk regularly and has determined that, as of March 31,June 30, 2011, there is no significant counterparty credit risk.

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PART I. ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity.
The following discussion and analysis is provided to address information about the Company’s financial condition and results of operations.operations for the periods covered. This discussion and analysis should be read in conjunction with the Company’s 2010 Annual Report on Form 10-K (“2010 Form 10-K”) and the other financial information included in this report.
The Company is a multi-state financial holding company headquartered in Bluefield, Virginia, with total assets of $2.24$2.21 billion at March 31,June 30, 2011. 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 5654 locations in Virginia, West Virginia, North Carolina, and Tennessee. The Company is also the parent of GreenPoint Insurance Group, Inc. (“GreenPoint”), a North Carolina based full-service insurance agency offering commercial and personal lines.lines of insurance. The Bank is the parent of Investment Planning Consultants, Inc. (“IPC”), a registered investment advisory firm that offers wealth management and investment advice. The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol, “FCBC”.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral “forward-looking statements,” including statements contained in its filings with the Securities and Exchange Commission (“SEC”) (including this Quarterly Report on Form 10-Q and the Exhibits hereto and thereto), in its reports to stockholders and in other communications which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements with respect to the Company’s beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (many of which are beyond the Company’s control). The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and similar expressions are intended to identify forward-looking statements. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements. The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:
 • The strength of the United States economy in general and the strength of the local economies in which we conduct operations;
 
 • Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
 
 • The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
 
 • Inflation, interest rate, market and monetary fluctuations;
 
 • The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
 
 • The willingness of users to substitute competitors’ products and services for our products and services;
 
 • The impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
 
 • Technological changes;
 
 • The effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
 
 • The growth and profitability of noninterest or fee income being less than expected;
 
 • Changes in the level of our non-performing assets and charge-offs;
 
 • The effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters;
 
 • Possible other-than-temporary impairments of securities held by us;
 
 • The impact of current governmental efforts to restructure the U. S. financial regulatory system, including the recent enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act;Act (the “Dodd-Frank Act”);

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 • Changes in consumer spending and savings habits; and
 
 • Unanticipated regulatory or judicial proceedings.
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports filed by us with the SEC. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.
The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. These factors and other risks and uncertainties are discussed in Item 1A., “Risk Factors,” in Part II of this Quarterly Report on Form 10-Q and the Company’s 2010 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 financial modeling techniques and appraisal estimates.
The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operation. The disclosures presented in the Notes to the Consolidated Financial Statements and in Management’s Discussion and Analysis provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the accounting for and valuation of investment securities, the determination of the allowance for loan losses, accounting for acquisitions and intangible assets, and accounting for income taxes as the four accounting areas that require the most subjective or complex judgments. The identified critical accounting policies are described in detail in the Company’s 2010 Form 10-K.
COMPANY OVERVIEW
The Company is a financial holding company which operates within the four-state region of Virginia, West Virginia, North Carolina, and Tennessee. The Company operates through the Bank, IPC, and GreenPoint to offer a wide range of financial services. The Company reported total assets of $2.24$2.21 billion at March 31,June 30, 2011.
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 Federal Reserve and other correspondent banks. The difference between interest earned on assets and interest paid on liabilities is the Company’s primary source of earnings. NetThe Company’s 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

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aggregate market value of $893$892 million as of March 31,June 30, 2011. These assets are not assets of the Company, but are managed under various fee-based arrangements as fiduciary or agent.
RECENT LEGISLATION
On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law by President Obama. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:
 • Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws.
•Limit the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks, such as the Bank, from availing themselves of such preemption.
•Require the Office of the Comptroller of the Currency (the “OCC”) to seek to make its capital requirements for national banks, such as the Bank, countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.
 
 • Require financial holding companies, such as First Community, to be well-capitalized and well-managed as of July 21, 2011. Bank holding companies and banks must also be both well-capitalized and well-managed in order to engage in interstate bank acquisitions.
 
 • Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institutions themselves.
 
 • Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders.
 
 • Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.
 
 • Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
 
 • Amend the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
 
 • Increase the authority of the Federal Reserve to examine bank holding companies, such as First Community, and their non-bank subsidiaries.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.
RESULTS OF OPERATIONS
Overview
The following are someincludes significant developments regarding the Company and its operations in the second quarter and first quarterhalf of 2011:
 • Net income increased $473$597 thousand, or 8.96%11.64%, to $5.75$5.73 million for the firstsecond quarter of 2011, as compared to the firstsecond quarter of 2010.
 
 • Return on average assets for the firstsecond quarter of 2011 improved to 1.05%1.02%, as compared to 0.85%0.91% for the fourthsecond quarter of 2010.
•Loan loss provisions were reduced by $2.07 million for the first quarter of 2011, or 56.27%, from the fourth quarter of 2010.
•The allowance for loan losses as a percentage of total loans increased to 1.93% at March 31, 2011, as compared to 1.91% at December 31, 2010.

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•Net interest income for the first quarter of 2011 increased $176 thousand, or 0.97%, over the fourth quarter of 2010.
•Net interest margin for the first quarter of 2011 increased to 3.96%, or 18 basis points, over the fourth quarter of 2010.
•Net charge-offs for the first quarter of 2011 were $1.61 million, a decrease of $2.01 million from the fourth quarter of 2010.
•Tangible book value per common share increased to $10.48, up $0.45, or 4.49%, from December 31, 2010.
 
 • The ratio of non-performing assets to total assets was 111129 basis points for the second quarter of 2011, an improvement of 213 basis points from December 31,year-end 2010.

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Net Income
Net income available to common shareholders for the three months ended March 31,June 30, 2011, was $5.75$5.60 million, or $0.32$0.31 per diluted common share, compared with net income available to common shareholders of $5.28$5.13 million, or $0.30$0.29 per diluted common share, for the three months ended March 31,June 30, 2010, an increase of $473$466 thousand. IncreasesThe increase in net income werewas primarily due to net gains on the sale of securities, a decrease in the provision for loan losses, and the reduction of interest on deposits and borrowings, which were partially offset by the increase in other operating expenses and reduction of interest on earning assets.
Net income available to common shareholders for the six months ended June 30, 2011, was $11.35 million, or $0.63 per diluted common share, compared with net income available to common shareholders of $10.41 million, or $0.59 per diluted common share, for the six months ended June 30, 2010, an increase of $939 thousand. The increase in net income was primarily due to net gains on the sale of securities, a decrease in the provision for loan losses, and the reduction of interest on deposits and borrowings, which were partially offset by the increase in other operating expenses, reduction of interest on earning assets, and increase in salaries and employee benefits.
Net Interest Income — Quarterly Comparison (See Table I)
Net interest income, the largest contributor to earnings, was $18.28$17.75 million for the three months ended March 31,June 30, 2011, compared with $18.62$18.54 million for the corresponding period in 2010, a decrease of $344$788 thousand, or 1.85%4.25%. Tax-equivalent net interest income totaled $19.14$18.49 million for the three months ended March 31,June 30, 2011, a decrease of $291$843 thousand, or 1.50%4.36%, from $19.43$19.33 million for the corresponding period in 2010. The decrease in tax-equivalent net interest income was largely due primarily to decreases in average earning assets and the interest earned on loans and securities.those assets as a result of a sustained low rate environment.
Average earning assets increased $1.03decreased $40.65 million while average interest-bearing liabilities decreased $46.41$88.89 million during the firstsecond quarter of 2011 compared with the same period of 2010. The yield on average earning assets decreased 4148 basis points to 5.26%4.99% from 5.67%5.47% between the three monthsthree-month periods ended March 31,June 30, 2011 and 2010, respectively. Total cost of interest-bearing liabilities decreased 3439 basis points between the firstsecond quarters of 2011 and 2010, which resulted in a net interest rate spread that was seven9 basis points lower, at 3.78%3.66%, for the firstsecond quarter of 2011 compared with 3.85%3.75% for the same period last year. The Company’s tax-equivalent net interest margin of 3.96%3.83% for the three months ended March 31,June 30, 2011, decreased six9 basis points from 4.02%3.92% for the same period of 2010.
The yield on loans decreased 2116 basis points to 6.01%5.88% from 6.22%6.04% for the three months ended March 31,June 30, 2011 and 2010, respectively. Tax-equivalent loan interest income for the firstsecond quarter of 2011 decreased $902$905 thousand, or 4.22%4.30%, compared with the firstsecond quarter of 2010 due to the effect of the extended low interest rate environment in the United States and reduction in loan volume.loans stemming from significant prepayments and scheduled amortization of loans.
The tax-equivalent yield on available-for-sale securities decreased 7568 basis points to 4.17%3.93% during the three months ended March 31,June 30, 2011, while the average balance decreased by $14.83$116.50 million, or 3.08%23.35%, compared with the same period in 2010. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.
Average interest-bearing balances with banks were $108.18$174.78 million during the firstsecond quarter of 2011, and the yield was 0.26%0.23%. Interest-bearing balances with banks are comprised largely of excess liquidity kept at the Federal Reserve and bear overnight market rates. The Company maintained high levels of liquidity during the first three months of 2011 in anticipation of rising interest rates.
The average balances of interest-bearing demand deposits decreased $35.12increased $31.40 million, or 14.85%12.64%, while the average rate paid during the firstsecond quarter of 2011 decreased two24 basis points when compared with the same period in 2010. During the three months ended March 31,June 30, 2011, the average balances of savings deposits increased $14.69decreased $7.23 million, or 3.56%1.71%, while the average rate paid decreased 4851 basis points compared to the same period in 2010. Average time deposits decreased $72.36$70.92 million, or 9.14%9.30%, while the average rate paid on time deposits decreased 4245 basis points from 2.29%2.14% in the firstsecond quarter of 2010 to 1.87%1.69% in the firstsecond quarter of 2011. The level of average noninterest-bearing demand deposits increased $12.83$12.01 million, or 6.44%5.79%, to $211.89$219.40 million during the quarter ended March 31,June 30, 2011, compared with the corresponding period of the prior year. During the quarter ended March 31,June 30, 2011, customers shifted from time accounts into money market and savings products all while the Company reduced the level of time deposit only customer relationships.relationships during the same period.

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The average balance of retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, decreased $3.29$12.46 million, or 3.58%13.23%, to $88.68$81.74 million for the firstsecond quarter of 2011 whilecompared with the same period in 2010. During this same period, the interest rate paid on the retail repurchase agreements decreased 4338 basis points to 0.79% during the same period.0.69%. The decrease in the average balance of retail repurchase agreements is largely attributed to customers converting retail repurchase agreements to certificates oftime deposit and lower business balances in commercial treasury accounts in the slow economy. There were no federal funds purchased on average during the second quarters of 2011 and 2010. Wholesale repurchase agreements remained unchanged at $50.00 million and the rate remained at 3.75% for the second quarters of 2011 and 2010. The average balance of FHLB borrowings and other long-term debt decreased by $29.68 million, or 15.16%, in the second quarter of 2011 to $166.12 million, compared with the same period in 2010, while the rate paid on those borrowings increased 44 basis points between the periods.
Net Interest Income — Year-to-Date Comparison (See Table II)
Net interest income was $36.03 million for the six months ended June 30, 2011, compared with $37.16 million for the corresponding period in 2010, a decrease of $1.13 million, or 3.05%. Tax-equivalent net interest income totaled $37.63 million for the six months ended June 30, 2011, a decrease of $1.13 million, or 2.92%, from $38.76 million for the corresponding period in 2010. The decrease in tax-equivalent net interest income was largely due to decreases in average earning assets and decreases in the interest earned on those assets as a result of a sustained low rate environment.
Average earning assets decreased $19.94 million while interest-bearing liabilities decreased $67.77 million during the first half of 2011 compared with the same period of 2010. The yield on average earning assets decreased 44 basis points to 5.13% from 5.57% between the six months ended June 30, 2011 and 2010, respectively. Total cost of interest-bearing liabilities decreased 37 basis points between the first six months of 2011 and 2010, which resulted in a net interest rate spread that was 7 basis points lower, at 3.73%, for the first half of 2011 compared with 3.80% for the same period last year. The Company’s tax-equivalent net interest margin of 3.89% for the six months ended June 30, 2011, decreased 8 basis points from 3.97% for the same period of 2010.
The yield on loans decreased 19 basis points to 5.94% from 6.13% for the six months ended June 30, 2011 and 2010, respectively. Tax-equivalent loan interest income for the first half of 2011 decreased $1.81 million, or 4.26%, compared with the first half of 2010 due to the effect of the extended low interest rate environment in the United States and reduction in loan volume.
The tax-equivalent yield on available-for-sale securities decreased 70 basis points to 4.06% during the six months ended June 30, 2011, while the average balance decreased by $65.96 million, or 13.46%, compared with the same period in 2010. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.
Average interest-bearing balances with banks were $141.66 million during the first half of 2011, and the yield was 0.24%. Interest-bearing balances with banks are comprised largely of excess liquidity kept at the Federal Reserve and bear overnight market rates.
The average balances of interest-bearing demand deposits increased $33.25 million, or 13.71%, while the average rate paid during the first half of 2011 decreased 13 basis points when compared with the same period in 2010. During the six months ended June 30, 2011, the average balances of savings deposits increased $3.67 million, or 0.88%, while the average rate paid decreased 49 basis points compared to the same period in 2010. Average time deposits decreased $71.64 million, or 9.22%, while the average rate paid on time deposits decreased 44 basis points from 2.22% in the first half of 2010 to 1.78% in the first half of 2011. The level of average noninterest-bearing demand deposits increased $12.42 million, or 6.11%, to $215.67 million for the six months ended June 30, 2011, compared with the corresponding period of the prior year.
The average balance of retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, decreased $7.90 million, or 8.49%, to $85.19 million for the first half of 2011 compared with the same period in 2010. During this same period, the interest rate paid on the retail repurchase agreements decreased 40 basis points to 0.74%. The decrease in the average balance of retail repurchase agreements is largely attributed to customers converting retail repurchase agreements to time deposit and lower balances in commercial treasury accounts in the slow economy. There were no federal funds purchased on average during the first quartershalf of 2011 and 2010. Wholesale repurchase agreements remained unchanged at $50.00 million for the six months ended June 30, 2011 and 2010, while the rate increased three2 basis points between the two periods due to changes in the structure within those borrowings. The average balance of FHLB borrowings and other long-term debt decreased by $20.56$25.15 million, or 10.35%12.75%, in the first quarterhalf of 2011 to $178.18$172.12 million compared to the same period in 2010, while the rate paid on those borrowings increased 5147 basis points.points between the periods. The Company prepaid a $25.00 million FHLB advance payingthat carried a 4.00% interest rate during the first quarter of 2011.

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Table I
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
                                                
 Three Months Ended Three Months Ended  Three Months Ended Three Months Ended 
 March 31, 2011 March 31, 2010  June 30, 2011 June 30, 2010 
 Average Average Average Average  Average Average Average Average 
(Dollars in Thousands) Balance Interest (1) Rate (1) Balance Interest (1) Rate (1)  Balance Interest (1) Rate (1) Balance Interest (1) Rate (1) 
Assets  
Earning assets  
Loans (2) $1,382,526 $20,496  6.01% $1,395,669 $21,398  6.22% $1,373,988 $20,134  5.88% $1,397,528 $21,039  6.04%
Securities available-for-sale 466,288 4,796  4.17% 481,116 5,833  4.92% 382,385 3,747  3.93% 498,880 5,728  4.61%
Securities held-to-maturity 4,545 95  8.48% 7,139 148  8.41% 4,321 90  8.35% 6,928 145  8.39%
Interest-bearing deposits 108,179 69  0.26% 76,587 46  0.24% 174,776 100  0.23% 72,782 34  0.19%
                  
Total earning assets 1,961,538 25,456  5.26% 1,960,511 27,425  5.67% 1,935,470 24,071  4.99% 1,976,118 26,946  5.47%
Other assets 265,717 283,275   261,221  281,473 
     
Total assets $2,227,255 $2,243,786  $2,196,691 $2,257,591 
          
  
Liabilities  
Interest-bearing deposits  
Demand deposits $271,604 $211  0.32% $236,484 $200  0.34% $279,912 $113  0.16% $248,512 $250  0.40%
Savings deposits 427,727 356  0.34% 413,037 831  0.82% 414,439 241  0.23% 421,669 781  0.74%
Time deposits 719,476 3,313  1.87% 791,838 4,471  2.29% 691,941 2,919  1.69% 762,858 4,075  2.14%
                  
Total interest-bearing deposits 1,418,807 3,880  1.11% 1,441,359 5,502  1.55% 1,386,292 3,273  0.95% 1,433,039 5,106  1.43%
Borrowings  
Retail repurchase agreements 88,684 173  0.79% 91,976 276  1.22% 81,736 141  0.69% 94,197 252  1.07%
Wholesale repurchase agreements 50,000 467  3.79% 50,000 463  3.76% 50,000 468  3.75% 50,000 468  3.75%
FHLB borrowings and other indebtedness 178,180 1,795  4.09% 198,744 1,752  3.58% 166,121 1,699  4.10% 195,804 1,787  3.66%
                  
Total borrowings 316,864 2,435  3.12% 340,720 2,491  2.97% 297,857 2,308  3.11% 340,001 2,507  2.96%
                  
Total interest-bearing liabilities 1,735,671 6,315  1.48% 1,782,079 7,993  1.82% 1,684,149  5,581  1.33% 1,773,040  7,613  1.72%
     
Noninterest-bearing demand deposits 211,894 199,065  219,402 207,393 
Other liabilities 4,340 5,223  1,666 10,940 
Stockholders’ equity 275,350 257,419  291,474 266,218 
          
Total liabilities and stockholders’ equity $2,227,255 $2,243,786  $2,196,691 $2,257,591 
          
Net interest income, tax-equivalent $19,141 $19,432  $18,490 $19,333 
          
Net interest rate spread (3)  3.78%  3.85%  3.66%  3.75%
          
Net interest margin (4)  3.96%  4.02%  3.83%  3.92%
          
 
(1) Fully taxable equivalent at the rate of 35% (“FTE”). The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
 
(2) Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual.
 
(3) Represents the difference between the yield on earning assets and cost of funds.
 
(4) Represents tax-equivalent net interest income divided by average earning assets.

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Table II
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
                         
  Six Months Ended  Six Months Ended 
  June 30, 2011  June 30, 2010 
  Average      Average  Average      Average 
(Dollars in Thousands) Balance  Interest (1)  Rate (1)  Balance  Interest (1)  Rate (1) 
Assets                        
Earning assets                        
Loans (2) $1,378,233  $40,629   5.94% $1,396,603  $42,436   6.13%
Securities available-for-sale  424,104   8,544   4.06%  490,062   11,561   4.76%
Securities held-to-maturity  4,432   185   8.42%  7,033   293   8.40%
Interest-bearing deposits  141,662   169   0.24%  74,675   80   0.22%
                     
Total earning assets  1,948,431   49,527   5.13%  1,968,373   54,370   5.57%
Other assets  263,457           282,363         
                       
Total assets $2,211,888          $2,250,736         
                       
                         
Liabilities                        
Interest-bearing deposits                        
Demand deposits $275,781  $324   0.24% $242,531  $450   0.37%
Savings deposits  421,046   598   0.29%  417,377   1,612   0.78%
Time deposits  705,632   6,231   1.78%  777,268   8,546   2.22%
                     
Total interest-bearing deposits  1,402,459   7,153   1.03%  1,437,176   10,608   1.49%
Borrowings                        
Retail repurchase agreements  85,191   314   0.74%  93,093   528   1.14%
Wholesale repurchase agreements  50,000   935   3.77%  50,000   931   3.75%
FHLB borrowings and other indebtedness  172,117   3,494   4.09%  197,266   3,539   3.62%
                     
Total borrowings  307,308   4,743   3.11%  340,359   4,998   2.96%
                     
Total interest-bearing liabilities  1,709,767   11,896   1.40%  1,777,535   15,606   1.77%
                       
Noninterest-bearing demand deposits  215,669           203,252         
Other liabilities  2,995           8,097         
Stockholders’ equity  283,457           261,852         
                       
Total liabilities and stockholders’ equity $2,211,888          $2,250,736         
                       
Net interest income, tax-equivalent     $37,631          $38,764     
                       
Net interest rate spread (3)          3.73%          3.80%
                       
Net interest margin (4)          3.89%          3.97%
                       
(1)Fully taxable equivalent at the rate of 35% (“FTE”). The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
(2)Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual.
(3)Represents the difference between the yield on earning assets and cost of funds.
(4)Represents tax-equivalent net interest income divided by average earning assets.

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The following table summarizes the changes in tax-equivalent interest earned and paid detailing the amounts attributable to (i) changes in volume (change in the average volume times the prior year’s average rate), (ii) changes in rate (changes in the average rate times the prior year’s average volume), and (iii) changes in rate/volume (change in the average volume column times the change in average rate).
                                                
 Three Months Ended  Three Months Ended Six Months Ended 
 March 31, 2011, Compared to 2010  June 30, 2011, Compared to 2010 June 30, 2011, Compared to 2010 
 Dollar Increase (Decrease) due to  Dollar Increase (Decrease) due to Dollar Increase (Decrease) due to 
 Rate/    Rate/ Rate/   
(In Thousands) Volume Rate Volume Total  Volume Rate Volume Total Volume Rate Volume Total 
Interest Earned On: 
Interest earned on: �� 
Loans (FTE) $(201) $(707) 6 $(902) $(354) $(560) $9 $(905) $(558) $— $(1,249) $(1,807)
Securities available-for-sale (FTE) $(180) $(885) 28  (1,037)  (1,338)  (839) 196  (1,981)  (1,556) 429  (1,890)  (3,017)
Securities held-to-maturity (FTE) $(54) $1  (0)  (53)  (54)  (1) 0  (55)  (108) — 0  (108)
Interest-bearing deposits with other banks $19 $3 1 23  48 7 11 66  71  (1,266) 1,284 89 
                          
Total interest earning assets $(416)  (1,588) 35  (1,969)  (1,698)  (1,393) 217  (2,875)  (2,151)  (837)  (1,855)  (4,843)
                          
  
Interest Paid On: 
Interest paid on: 
Demand deposits 30  (16)  (3) 11  32  (150)  (19)  (137) 62  (165)  (23)  (126)
Savings deposits 30  (487)  (18)  (475)  (13)  (536) 9  (540) 14  (1,019)  (9)  (1,014)
Time deposits  (409)  (825) 76  (1,158)  (379)  (857) 80  (1,156)  (788)  (1,682) 155  (2,315)
Retail repurchase agreements  (10)  (97) 4  (103)  (33)  (90) 12  (111)  (45)  (185) 16  (214)
Wholesale repurchase agreement — 4  (0) 4  — — — — — 4 0 4 
FHLB borrowings and other long-term debt  (181) 250  (26) 43   (271) 216  (33)  (88)  (451) 465  (59)  (45)
                          
Total interest-bearing liabilities  (540)  (1,171) 33  (1,678)  (664)  (1,416) 49  (2,032)  (1,208)  (2,582) 80  (3,710)
                          
  
Change in net interest income, tax-equivalent $124 $(417) $2 $(291) $(1,034) $23 $168 $(843) $(943) $1,745 $(1,935) $(1,133)
                          
Provision and Allowance for Loan Losses
During the last threefour years, there has been significant stress in both commercial and residential real estate markets, resulting in significant declines in real estate valuations. Decreases in real estate values adversely affect the value of property used as collateral for loans, including loans originated by the Company. In addition, adverse changes in the economy, particularly continued high rates of unemployment may have a negative effect on the ability of the Company’s borrowers to make timely loan payments. A further increase in loan delinquencies could adversely impact loan loss experience, causing potential increases in the provision and allowance for loan losses.
The Company’s allowance for loan losses was $26.48 million at both March 31,June 30, 2011, and$26.48 million at December 31, 2010, and $24.51$25.01 million at March 31,June 30, 2010. The Company’s allowance for loan loss activity for the three-monththree- and six-month periods ended March 31,June 30, 2011 and 2010 is as follows:
                        
 For the Three Months  For the Three Months For the Six Months 
 Ended March 31,  Ended June 30, Ended June 30, 
(In Thousands) 2011 2010  2011 2010 2011 2010 
Allowance for loan losses
  
Beginning balance $26,482 $24,277  $26,482 $24,508 $26,482 $24,277 
Provision for loan losses 1,612 3,665  3,079 3,596 4,691 7,261 
Charge-offs  (2,027)  (3,732)  (3,456)  (3,373)  (5,483)  (7,105)
Recoveries 415 298  377 280 792 578 
              
Net charge-offs  (1,612)  (3,434)  (3,079)  (3,093)  (4,691)  (6,527)
              
Ending balance $26,482 $24,508  $26,482 $25,011 $26,482 $25,011 
              

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The total allowance for loan losses to loans held for investment ratio was 1.93% at March 31,June 30, 2011, compared with 1.91% at December 31, 2010, and 1.80%1.89% at March 31,June 30, 2010. Management considers the allowance to be adequate based upon its analysis of the portfolio as of March 31,June 30, 2011. Management believes that it uses relevantAlthough management utilizes its best judgment and information available, to make

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determinations about the allowance. If circumstances differ substantially from the assumptions used in making determinations, adjustments toadequacy of the allowance may be necessaryis dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the loan portfolio, the economy, changes in interest rates and resultsthe view of operations could be affected. Because of events and conditions affecting borrowers andthe regulatory authorities toward loan collateral, charge-offs cannot be predicted with certainty. Accordingly, there can be no assurance that increases toclassifications. In addition, the allowance will not be necessary should the quality of any loans deteriorate. The methodology for the developmentdetermination of the allowance for loan losses necessarily requires management to make various assumptions. Therefore, actual loan losses could differ materially from management’s determination if actual conditions differ significantly from the assumptions utilized. While management believes the allowance for loan losses is adequate as of June 30, 2011, actual results may prove different and these differences could be significant. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates byfor each risk grade are adjusted by environmental factors to estimate the amount of reserve needed by segment. The Company believes this enhancement will resultresults in increased granularity within the allowance for loan losses and will be more reflective of trends within the commercial loan portfolio.
During the second quarter and first quarterhalf of 2011, the Company incurred net charge-offs of $1.61$3.08 million and $4.69 million, respectively, compared with $3.43$3.09 million and $6.53 million in the respective periodperiods of 2010. Annualized net charge-offs for the firstsecond quarter of 2011 were 0.47%0.90% of the average loan balance.balance, compared to 0.69% of the average loan balance for the same period of 2010. The Company made provisions for loan losses of $1.61$3.08 million and $4.69 million, respectively, for the three-month periodthree- and six-month periods ended March 31,June 30, 2011, compared to $3.67$3.60 million and $7.26 million, respectively, in the same period of 2010. Provisions for loan losses covered 100.00% of net charge-offs for the three-month periodthree- and six-month periods ended March 31,June 30, 2011. The decrease in the loan loss provision for the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, is primarily attributable to the general decline in net charge-offs throughout the last five quarters.
Total delinquent loans as of March 31,June 30, 2011, measured 2.23%2.12% of total loans, andof which 0.52% were comprised of loans 30-89 days delinquent and 1.60% were comprised of 0.94% of total loans and loans in non-accrual status of 1.29% of total loans.status. Total delinquency hasdelinquent loans have decreased approximately $5.71$7.29 million, or 20.02%, since December 31, 2010. Non-performing loans, comprised of non-accrual loans and unseasoned loan restructurings (as the Company does not have any loans that are 90 days past due and still accruing), as a percentage of total loans were 1.40%1.67% at March 31,June 30, 2011, 1.78% at December 31, 2010, and 1.33%1.35% at March 31,June 30, 2010.
At March 31,June 30, 2011, the primary composition of non-accrual loans, including acquired, impaired non-accrual loans, is 27.91%were primarily composed of the following categories of loans: 27.97% were single family residential mortgage; 26.58%24.07% were non-farm, non-residential commercial loans; and 24.74%20.51% were commercial and industrial loans. Approximately $3.46$3.50 million, or 19.56%15.88%, of non-accrual loans is attributed to the TriStone loan portfolio that was acquired during the third quarter of 2009.
During the second quarter of 2011, the company downgraded a $4.60 million loan within the hospitality industry to substandard, which accounted for a majority of the increase in sub-standard loans within the non-farm, non-residential loan segment.
Noninterest Income
Noninterest income consists of all revenues that are not included in interest and fee income related to earning assets. Total noninterest income for the firstsecond quarter of 2011 was $9.50$11.36 million compared with noninterest income of $8.58$8.90 million in the same period of 2010, an increase of $921 thousand.$2.46 million. Exclusive of the impact of other-than-temporary impairment (“OTTI”) charges and gains on the sale of securities, noninterest income for the quarter ended March 31,June 30, 2011, decreased $138increased $251 thousand, or 1.66%3.18%, compared to the same period in 2010. Wealth management revenues increased $9decreased $82 thousand, or 1.02%8.10%, to $894$930 thousand for the three months ended March 31,June 30, 2011, compared with the same period in 2010. Service charges on deposit accounts increased $39$6 thousand, or 1.30%0.18%, to $3.03$3.35 million for the three months ended March 31,June 30, 2011, compared with the same period in 2010. Other service charges and fees increased $125$211 thousand, or 9.76%16.88%, to $1.41$1.46 million for the three months ended March 31,June 30, 2011, compared with the same period in 2010. Insurance commissions for the second quarter of 2011 were $1.56 million, an increase of $172 thousand, or 12.38%, from the comparable period in 2010. Other operating income totaled $834 thousand for the three months ended June 30, 2011, a decrease of $56 thousand, or 6.29%, compared with the same period in 2010. For the quarter ended June 30, 2011, the Company recognized no OTTI charges, compared to $185 thousand of OTTI charges related to two pooled trust preferred securities and several small equity holdings during the same period of 2010. During the second quarter of 2011, net securities gains of $3.22 million were realized compared with net gains of $1.20 million in the comparable period in 2010.
Noninterest income for the first half of 2011 was $20.86 million compared with noninterest income of $17.48 million in the same period of 2010, an increase of $3.38 million. Exclusive of the impact of OTTI charges and gains on the sale of securities, noninterest income for the six months ended June 30, 2011, increased $113 thousand, or 0.70%, compared to the same period in 2010. Wealth management revenues decreased $73 thousand, or 3.85%, to $1.82 million for the first half of 2011, compared with the same period in 2010. Service charges on deposit accounts increased $45 thousand, or 0.71%, to $6.38 million for the six months ended June 30, 2011, compared with the same period in 2010. Other service charges and fees increased $336 thousand, or 13.28%, to $2.87 million for the six months ended June 30, 2011, compared with the same period in 2010. Insurance commissions for the first quarterhalf of 2011 were $1.94$3.50 million, a decrease of $258$86 thousand, or 11.72%2.40%, from the comparable period in 2010. The decrease in insurance commissions reflects the effects of the recent recession, as well as the soft insurance market. Other operating income totaled $916 thousand$1.75 million for the threesix months ended March 31,June 30, 2011, a decrease of $53$109 thousand, or 5.47%5.86%, compared with the same period in 2010. For the quartersix months ended March 31,June 30, 2011, the Company recognized $527 thousand of OTTI charges onrelated to a non-agency mortgage-backed security, compared to no impairment losses$185 thousand of OTTI charges related to two pooled trust preferred securities and several small equity holdings during the same period of 2010.

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During the first quarterhalf of 2011, net securities gains of $1.84$5.06 million were realized compared with net gains of $250 thousand$1.45 million in the comparable period in 2010.
Over the course of the first half of 2011, the Company strategically harvested gains in the investment portfolio as changes in the interest rate environment presented opportunities. Additionally, approximately $967 thousand of the gains realized during the period were recoveries of investment security impairments that occurred during 2009.
For a more detailed discussion of activities regarding investment securities and impairment charges, please see Note 3 to the Consolidated Financial Statements included in Part I.
Noninterest Expense
Noninterest expense totaled $18.06$17.74 million for the quarter ended March 31,June 30, 2011, an increase of $1.99$1.14 million, or 12.39%6.87%, from the same period in 2010. Salaries and employee benefits for the second quarter of 2011 increased $198 thousand, or 2.33%, compared to the same period in 2010. Occupancy and furniture and equipment expenses decreased $11 thousand, or 0.44%, between the comparable periods. Deposit insurance premiums and assessments were $414 thousand for the three-month period ended June 30, 2011, a decrease of $296 thousand, or 41.69%, compared to the same period in 2010, which was primarily due to the FDIC’s change in assessment methodology for deposit insurance to one based on tangible assets. Other operating expense totaled $5.90 million for the second quarter of 2011, an increase of $1.24 million, or 26.63%, from $4.66 million for the second quarter of 2010. The increase in other operating expense was primarily due to a $1.27 million increase in expenses and losses associated with other real estate owned between the comparable quarters.
Noninterest expense totaled $35.80 million for the six months ended June 30, 2011, an increase of $3.13 million, or 9.58%, from the same period in 2010. Salaries and employee benefits for the first quarterhalf of 2011 increased $1.16$1.36 million, or 14.56%8.25%, compared to the same period in 2010. The Company has increased staffing levels in credit administration, marketing, and compliance due to increasing regulatory burdens. The Company has also been experiencingexperienced a significant increase in health insurance costs in recent quarters. Occupancy and furniture and equipment expenses decreased $51$13 thousand, or 1.95%0.56%, between the comparable periods. Deposit insurance premiums and assessments were $878 thousand$1.29 million for the three-monthsix-month period ended March 31,June 30, 2011, an increasea decrease of $177$119 thousand, or 25.25%8.43%, compared to the same period in

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2010. Other operating expense totaled $4.76$10.67 million for the first quarterhalf of 2011, an increase of $231 thousand,$1.47 million, or 5.10%16.01%, from $4.53$9.19 million for the first quarterhalf of 2010. IncreasesThe increase in consultingother operating expenses includes an increase of $772 thousand in expenses and service fees and debit card costs of $401 thousand and $181 thousand, respectively, were largely offset by a decrease inlosses associated with other real estate expenses of $355 thousand.owned.
During the first quarter of 2011, the Company prepaid a $25.00 million FHLB advance, and the expense associated with that prepayment was $471 thousand.
Income Tax Expense
Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax earnings of the Company. Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the calculation of taxable income. These items are commonly referred to as permanent differences. The most significant permanent differences for the Company include income on municipal securities which are exempt from federal income tax and the increases in the cash surrender values of life insurance policies.
For the firstsecond quarter of 2011, income taxes were $2.35$2.57 million compared with income taxes of $2.18$2.12 million for the firstsecond quarter of 2010. For the quarters ended March 31,June 30, 2011 and 2010, the effective tax expense rates were 28.99%30.99% and 29.25%, respectively. For the six months ended June 30, 2011, income taxes were $4.92 million compared with $4.30 million for the same period of 2010. For the six months ended June 30, 2011 and 2010, the effective tax expense rates were 30.00% and 29.25%, respectively.
FINANCIAL CONDITION
Total assets at March 31,June 30, 2011, decreased $3.26$37.84 million, or 0.15%1.69%, to $2.24$2.21 billion from December 31, 2010. CashAt June 30, 2011, cash and cash equivalents increased $63.28$118.43 million since year endyear-end 2010. TotalAt June 30, 2011, total liabilities at March 31, 2011, decreased $11.23were $1.90 billion, a decrease of $70.16 million, or 0.57%3.55%, to $1.96 billion from December 31, 2010. Deposits increased $16.06decreased $41.28 million, securities sold under agreements to repurchase decreased $1.42$3.12 million, and short term borrowings decreased $25.01 million during the first quarter ofsix-month period ended June 30, 2011.
Securities
Available-for-sale securities were $430.97$349.98 million at March 31,June 30, 2011, compared with $480.06 million at December 31, 2010, a decrease of $49.10$130.09 million, or 10.23%27.10%. The market value of securities available-for-sale as a percentage of amortized cost improved from 96.40% at December 31, 2010, to 97.25%97.23% at March 31,June 30, 2011, reflecting improved pricing on certain issues. Held-to-maturity securities declined to $4.52$4.11 million at March 31,June 30, 2011, compared with $4.64 million at December 31, 2010.

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During the second quarter of 2011, the Company recognized no OTTI charges. For the first quarter,half of 2011, the Company recognized OTTI charges in earnings related to a non-agency mortgage-backed security of $527 thousand. During the three- and six-month periods ended June 30, 2011, the Company recognized no OTTI charges on equity securities.
For a more detailed discussion of activities regarding investment securities, please see Note 3 to the Consolidated Financial Statements included in Part I.
Loan Portfolio
Loans Held for Sale
The $2.61 million$920 thousand balance of loans held for sale at March 31,June 30, 2011, represents mortgage loans that are sold to investors on a best efforts basis. Accordingly, the Company does not retain the interest rate risk involved in the commitment. The gross notional amount of outstanding commitments to originate mortgage loans for customers at March 31,June 30, 2011, was $7.63$3.50 million on 5222 loans.
Loans Held for Investment
Total loans held for investment were $1.38$1.37 billion at March 31,June 30, 2011, representing a decrease of $10.52$12.26 million from December 31, 2010, and a decrease of $15.19$25.94 million from March 31,June 30, 2010. The average loan to deposit ratio was 84.78%85.57% for the firstsecond quarter of 2011, compared with 85.54% for the fourth quarter of 2010, and 85.08%85.19% for the firstsecond quarter of 2010. Year-to-date average loans of $1.38 billion decreased $13.14$18.37 million when compared to year-to-date average loans of $1.40 billion in 2010.

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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,June 30, 2011, December 31, 2010, and March 31,June 30, 2010.
                                                
 March 31, 2011 December 31, 2010 March 31, 2010  June 30, 2011 December 31, 2010 June 30, 2010 
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent  Amount Percent Amount Percent Amount Percent 
Loans Held for Investment
  
Commercial loans  
Construction — commercial $30,758  2.24% $42,694  3.08% $41,729  3.00% $34,966  2.55% $42,694  3.08% $45,134  3.22%
Land development 5,781  0.42% 16,650  1.20% 22,122  1.59% 4,694  0.34% 16,650  1.20% 20,414  1.46%
Other land loans 23,959  1.74% 24,468  1.77% 28,536  2.05% 23,354  1.70% 24,468  1.77% 27,313  1.95%
Commercial and industrial 91,964  6.68% 94,123  6.79% 100,744  7.24% 92,891  6.76% 94,123  6.79% 101,672  7.26%
Multi-family residential 75,269  5.47% 67,824  4.89% 70,508  5.07% 78,163  5.69% 67,824  4.89% 70,850  5.06%
Non-farm, non-residential 345,265  25.10% 351,904  25.39% 351,375  25.26% 333,475  24.27% 351,904  25.39% 352,842  25.21%
Agricultural 1,392  0.10% 1,342  0.10% 1,278  0.09% 1,677  0.12% 1,342  0.10% 1,354  0.10%
Farmland 47,228  3.43% 36,954  2.67% 39,659  2.85% 37,227  2.71% 36,954  2.67% 39,053  2.79%
                          
Total commercial loans 621,616  45.18% 635,959  45.89% 655,951  47.15% 606,447  44.14% 635,959  45.89% 658,632  47.05%
Consumer real estate loans Consumer real estate loans
Home equity lines 111,802  8.13% 111,620  8.05% 110,391  7.94% 111,995  8.15% 111,620  8.05% 113,036  8.07%
Single family residential mortgage 545,316  39.64% 549,157  39.61% 537,530  38.65% 560,527  40.80% 549,157  39.61% 536,540  38.33%
Owner-occupied construction 22,506  1.64% 18,349  1.32% 20,753  1.49% 18,062  1.31% 18,349  1.32% 21,346  1.52%
                          
Total consumer real estate loans 679,624  49.41% 679,126  48.98% 668,674  48.08% 690,584  50.26% 679,126  48.98% 670,922  47.92%
Consumer and other loans Consumer and other loans
Consumer loans 62,029  4.51% 63,475  4.58% 60,632  4.36% 64,692  4.71% 63,475  4.58% 62,659  4.48%
Other 12,416  0.90% 7,646  0.55% 5,617  0.41% 12,221  0.89% 7,646  0.55% 7,672  0.55%
                          
Total consumer and other loans 74,445  5.41% 71,121  5.13% 66,249  4.77% 76,913  5.60% 71,121  5.13% 70,331  5.03%
                          
Total $1,375,685  100.00% $1,386,206  100.00% $1,390,874  100.00% $1,373,944  100.00% $1,386,206  100.00% $1,399,885  100.00%
                          
 
Loans Held for Sale
 $2,614 $4,694 $1,494  $920 $4,694 $2,141 
                    

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Non-Performing Assets
Non-performing assets include loans on non-accrual status, unseasoned loan restructurings, loans contractually past due 90 days or more and still accruing interest, and other real estate owned (“OREO”). Non-performing assets were $24.86$28.50 million at March 31,June 30, 2011, $29.65 million at December 31, 2010, and $23.26$25.98 million at March 31,June 30, 2010. The percentage of non-performing assets to total assets was 1.11%1.29% at March 31,June 30, 2011, 1.32% at December 31, 2010, and 1.02%1.16% at March 31,June 30, 2010.

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The following table details non-performing assets by category at the close of each of the quarters ended March 31,June 30, 2011, December 31, 2010, and March 31,June 30, 2010.
                        
(Dollars in Thousands) March 31, 2011 December 31, 2010 March 31, 2010  June 30, 2011 December 31, 2010 June 30, 2010 
Non-accrual loans $17,703 $19,414 $17,477  $22,037 $19,414 $17,668 
Restructured loans 1,509 5,325 1,041  878 5,325 1,206 
Loans 90 days or more past due and still accruing interest — — —  — — — 
              
Total non-performing loans 19,212 24,739 18,518  22,915 24,739 18,874 
 
Other real estate owned 5,644 4,910 4,740  5,585 4,910 7,108 
              
Total non-performing assets $24,856 $29,649 $23,258  $28,500 $29,649 $25,982 
              
 
Restructured loans performing in accordance with modified terms $7,519 $3,911 $2,050  $7,044 $3,911 $1,557 
       
        
Non-performing loans as a percentage of total loans  1.40%  1.78%  1.33%  1.67%  1.78%  1.35%
Non-performing assets as a percentage of total assets  1.11%  1.32%  1.02%  1.29%  1.32%  1.16%
Non-performing assets as a percentage of total loans and other real estate owned  1.80%  2.13%  1.67%  2.07%  2.13%  1.85%
Allowance for loan losses as a percentage of non-performing loans  137.8%  107.0%  132.3%  115.6%  107.0%  132.5%
Ongoing activity within the classification and categories of non-performing loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the non-performing classification as a result of changing economic conditions, borrower financial capacity, and resolution efforts on the part of the Company. There were no loans 90 days past due and still accruing at March 31,June 30, 2011, December 31, 2010, and March 31,or June 30, 2010. OREO was $5.64$5.59 million at March 31,June 30, 2011, an increase of $734$675 thousand from December 31, 2010, and is carried at the lesser of estimated net realizable value or cost. OREO increased from December 31, 2010, as a result of escalation in asset resolution and foreclosure activity. At March 31,June 30, 2011, OREO consisted of 5149 properties with an average book value of $175$193 thousand and an average holding period of 7 months. During the three-month periodthree- and six-month periods ended March 31,June 30, 2011, net losses on the sale of OREO totaled $154 thousand.$1.55 million and $1.70 million, respectively.
The Company’s Special Assets staff assumes the management and monitoring of all loans determined to be seriously delinquent or impaired. When resolution of delinquent loans through secondary repayment sources becomes evident, updated appraisals are ordered and the Company generally begins to complete the tasks necessary to gain control of the collateral and prepare for liquidation including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower, if appropriate. Special Assets staff also regularly reviews the relationship to identify any potential adverse developments during this time and continues to seek alternative resolution processes, where possible.
At March 31,June 30, 2011, the allowance for loan losses related to loan restructurings totaled $1.01$1.32 million. Total interest income recognized on loan restructurings for the three monthsthree- and six- month periods ended March 31,June 30, 2011, totaled $123 thousand.$132 thousand and $254 thousand, respectively. When restructuring loans for troubled borrowers, the Company generally makes concessions in interest rates and amortization terms.

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Deposits and Other Borrowings
Total deposits increaseddecreased by $16.06$41.28 million, or 0.99%2.55%, during the first threesix months of 2011. Noninterest-bearing demand deposits increased $16.92$14.34 million to $222.07$219.49 million at March 31,June 30, 2011, compared with $205.15 million at December 31, 2010. Interest-bearing demand deposits increased $24.59$9.20 million to $287.01$271.62 million at March 31,June 30, 2011, from December 31, 2010. Savings decreased $6.07$21.14 million, or 1.42%4.96%, and time deposits decreased $19.38$43.68 million, or 2.67%6.01%, during the first three monthshalf of 2011.
Securities sold under repurchase agreements decreased $1.42$3.12 million, or 1.01%2.21%, in the first threesix months of 2011 to $139.47$137.78 million. There were no federal funds purchased outstanding at March 31,June 30, 2011, as the Company maintained a very strong liquidity position throughout the first three monthshalf of 2011.

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Stockholders’ Equity
Total stockholders’ equity increased $7.97$32.33 million, or 2.95%11.98%, from $269.88 million at December 31, 2010, to $277.85$302.20 million at March 31,June 30, 2011. Changes in stockholders’ equity during the period were primarily the result of net income of $5.75$11.48 million, an increase in accumulated other comprehensive income of $3.61$4.99 million, the completion of an $18.92 million capital raise through the private placement of convertible preferred stock, and the payment of common dividends paid of $1.79$3.58 million. The convertible preferred stock was issued for general corporate purposes, including the possible capitalization of the Company’s future growth plans.
Risk-Based Capital
Risk-based capital guidelines promulgated by federal banking agencies weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. At March 31,June 30, 2011, the Company’s total risk-based capital ratio was 15.81%17.59% compared with 15.33% at December 31, 2010. The Company’s Tier 1 risk-based capital ratio was 14.55%16.33% at March 31,June 30, 2011, compared with 14.07% at December 31, 2010. The Company’s Tier 1 leverage ratio at March 31,June 30, 2011, was 9.66%11.00% compared with 9.44% at December 31, 2010. All ofAt June 30, 2011, the Company’sBank was deemed “well-capitalized” under regulatory capital ratios exceed the current “well-capitalized” levels.
During the second quarter of 2010, the OCC issued an Individual Minimum Capital Ratio to the Bank which requires it to maintain a total risk-based capital ratio of 11.50%, a Tier 1 risk-based capital ratio of 10.00%, and a Tier 1 leverage ratio of 7.50%. The Bank’s total risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios were 14.65%, 13.40%, and 8.87%, respectively, at March 31, 2011.adequancy standards.
Liquidity and Capital Resources
At March 31,June 30, 2011, the Company maintained liquidity in the form of cash and cash equivalent balances of $175.47$194.85 million, unpledged securities available-for-sale of $133.31$103.12 million, and total FHLB credit availability of approximately $202.28$160.71 million. Cash and cash equivalents as well as advances from the FHLB are immediately available for satisfaction of deposit withdrawals, customer credit needs and operations of the Company. Investment securities available-for-sale represent a secondary level of liquidity available for conversion to liquid funds in the event of extraordinary needs. The Company also maintains approved lines of credit with correspondent banks as backup liquidity sources.
The Company is a holding company, which is a separate legal entity from the Bank, and at March 31,June 30, 2011, maintained cash balances of $10.04$23.36 million. The principal source of the Company’s income is dividends from the Bank, which are subject to regulatory restrictions and limitations. As a result of investment securities impairments in 2009, the Bank is limited as to the dividends it can pay.pay to the Company. Accordingly, the Bank would need permission from the OCCVirginia Bureau of Financial Institutions prior to paying dividends to the Company. The cash reserves and investments held by the Company, as well as management fee arrangements provide adequate working capital to meet its obligations and projected dividends to shareholders for the next twelve months and through the projected period of dividend restrictions.
The Company maintains a liquidity policy as a means to manage liquidity and the associated risk. The policy includes a Liquidity Contingency Plan (the “Liquidity Plan”) that is designed as a tool for the Company to detect liquidity issues promptly in order to protect depositors, creditors and shareholders. The Liquidity Plan includes monitoring various internal and external indicators such as changes in core deposits and changes in market conditions. It provides for timely responses to a wide variety of funding scenarios ranging from changes in loan demand to a decline in the Company’s quarterly earnings to a decline in the market price of the Company’s stock. The Liquidity Plan calls for specific responses designed to meet a wide range of liquidity needs based upon assessments on a recurring basis by the Company and its Board of Directors.

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PART I. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk and Asset/Liability Management
The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company, like other financial institutions, is subject to interest rate risk to the degree that interest-earning assets reprice differently than interest-bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment.
The Company’s primary component of operational revenue, net interest income, is subject to variation as a result of changes in interest rate environments in conjunction with unbalanced repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has four primary components: repricing risk, basis risk, yield curve risk and option risk. Repricing risk occurs when earning assets and paying liabilities reprice at differing times as interest rates change. Basis risk occurs

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when the underlying rates on the assets and liabilities the institution holds change at different levels or in varying degrees. Yield curve risk is the risk of adverse consequences as a result of unequal changes in the spread between two or more rates for different maturities for the same instrument. Lastly, option risk is due to embedded options, often put or call options, given or sold to holders of financial instruments.
In order to mitigate the effect of changes in the general level of interest rates, the Company manages repricing opportunities and thus, its interest rate sensitivity. The Company seeks to control its interest rate risk exposure to insulate net interest income and net earnings from fluctuations in the general level of interest rates. To measure its exposure to interest rate risk, quarterly simulations of net interest income are performed using financial models that project net interest income through a range of possible interest rate environments including rising, declining, most likely and flat rate scenarios. The simulation model used by the Company captures all earning assets, interest-bearing liabilities and off-balance sheet financial instruments and combines the various factors affecting rate sensitivity into an earnings outlook and estimates of the economic value of equity in a range for a range of assumed interest rate scenarios. The results of these simulations indicate the existence and severity of interest rate risk in each of those rate environments based upon the current balance sheet position, assumptions as to changes in the volume and mix of interest-earning assets and interest-paying liabilities and the Company’s estimate of yields to be attained in those future rate environments and rates that will be paid on various deposit instruments and borrowings. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and the Company’s strategies. However, the earnings simulation model is currently the best tool available to the Company and the industry for managing interest rate risk.
Specific strategies for management of interest rate risk have included shortening the amortized maturity of new fixed-rate loans, increasing the volume of adjustable-rate loans to reduce the average maturity of the Company’s interest-earning assets, and monitoring the term and structure of liabilities to maintain a balanced mix of maturity and repricing structures to mitigate potential exposure. At March 31,June 30, 2011, modeling indicates that the Company is in a relatively neutral position with respect to sensitivity to interest rate changes.
The Company has established policy limits for tolerance of interest rate risk in various interest rate scenarios. In addition, the policy addresses exposure limits to changes in the economic value of equity according to predefined policy guidelines. The most recent simulation indicates that current exposure to interest rate risk is within the Company’s defined policy limits.

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The following table summarizes the projected impact on the next twelve months’ net interest income and the economic value of equity as of March 31,June 30, 2011, and December 31, 2010, of immediate and sustained rate shocks in the interest rate environments of plus 300 to minus 100 basis points from the base case rate simulation, assuming no remedial measures are affected.effected. At March 31,June 30, 2011, the Federal Open Market Committee maintained a target range for federal funds of 0 to 25 basis points, rendering complete downward shocks greater than 100 basis points unrealistic and not meaningful. In the downward rate shocks presented, benchmark interest rates are dropped with floors near 0%.
                                
Rate Sensitivity Analysis
 March 31, 2011 June 30, 2011
(Dollars in Thousands) Change in Change in   Change in Change in  
Increase (Decrease) in Net Interest Percent Economic Value Percent Net Interest Percent Economic Value Percent
Interest Rates (Basis Points) Income Change of Equity Change Income Change of Equity Change
 
300 $2,926 4.0 $(3,690)  (1.1) $5,645 8.3 $13,009 3.9
200 1,659 2.3 489 0.2  3,452 5.1 11,293 3.4
100 735 1.0 3,137 1.0  1,599 2.4 7,950 2.4
(100)  (351)  (0.5)  (14,237)  (4.4) (318)  (0.5)  (26,750)  (8.0)
                 
  December 31, 2010 
(Dollars in Thousands) Change in      Change in    
Increase (Decrease) in Net Interest  Percent  Economic Value  Percent 
Interest Rates (Basis Points) Income  Change  of Equity  Change 
300 $932   1.2  $(10,634)  (3.6)
200  121   0.2   (1,530)  (0.5)
100  329   0.4   4,734   1.6 
(100)  (105)  (0.1)  (21,503)  (7.3)
The economic value of equity is a measure which reflects the impact of changing rates on the underlying values of the Company’s assets and liabilities in various rate scenarios. The scenarios illustrate the potential estimated impact of instantaneous rate shocks on the underlying value of equity. The economic value of equity is based on the present value of all the future cash flows under the different rate scenarios.

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PART I.

ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) along with the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(b). Based on that evaluation, the Company’s CEO along with the Company’s CFO concluded that the Company’s disclosure controls and procedures arewere effective as of June 30, 2011, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
Changes in Internal Control over Financial Reporting
The Company assesses the adequacy of its internal control over financial reporting quarterly and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31,June 30, 2011, that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is currently a defendant in various legal actions and asserted claims in the normal course of business. Although the Company and legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, they are of the belief that the resolution of these actions should not have a material adverse affect on the financial position, results of operations, or cash flows of the Company.
ITEM 1A. Risk Factors
There were no material changes to the risk factors as previously disclosed under Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
     (a) 
(a)Not Applicable
     (b) 
(b)Not Applicable
     (c) 
(c)Issuer Purchases of Equity Securities

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The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of the Company’s Common Stock during the firstsecond quarter of 2011.
                 
          Total Number  Maximum 
  Total      of Shares  Number of 
  Number of  Average  Purchased as  Shares That May 
  Shares  Price Paid  Part of a Publicly  Yet be Purchased 
  Purchased  per Share  Announced Plan  Under the Plan (1) 
January 1-31,April 1-30, 2011  —  $—   —   884,513912,777 
February 1-28, 2011———885,851
MarchMay 1-31, 2011  —   —   —   912,077913,027
June 1-30, 2011———935,002 
              
Total  —  $—   —     
              
 
(1) The Company’s stock repurchase plan, as amended, allows the purchase and retention of up to 1,100,000 shares. The plan has no expiration date, remains open and no plans have expired during the reporting period covered by this table. No determination has been made to terminate the plan or to cease making purchases. The Company held 187,923164,998 shares in treasury at March 31,June 30, 2011.
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Reserved
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits
     (a) 
(a)Exhibits
   
Exhibit  
No. Exhibit
3(i) Articles of Incorporation of First Community Bancshares, Inc. (31)
3(ii) Bylaws of First Community Bancshares, Inc., as amended. (17)
3.1 Reserved.
4.1 Specimen stock certificate of First Community Bancshares, Inc. (3)
4.2 Indenture Agreement dated September 25, 2003. (11)
4.3 Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. (11)
4.4 Preferred Securities Guarantee Agreement dated September 25, 2003. (11)
4.5 Reserved.Certificate of Designation of 6.00% Series A Noncumulative Convertible Preferred Stock. (21)
4.6 Warrant to purchase 88,273 shares of Common Stock of First Community Bancshares, Inc. (29)
4.7 Reserved.
4.8 Reserved.
10.1** First Community Bancshares, Inc. 1999 Stock Option Contracts (2) and Plan. (4)
10.1.1** Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan, as amended. (18)
10.2** First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (5)
10.3** Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and John M. Mendez.Mendez (6) and Waiver AgreementAgreement. (27)
10.4** First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended.amended (24) and Amendment #1. (28)
10.5** First Community Bancshares, Inc. Split Dollar Plan and Agreement. (8)
10.6** First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan, as amended. (24)(22)
10.6.1** Reserved.
10.7** First Community Bancshares, Inc. Wrap Plan. (7)
10.8Reserved.

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Exhibit10.8 
No.ExhibitReserved.
   
10.9** Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors and Certain Executive Officers. (9)
10.10** Form of Indemnification Agreement between First Community Bank, N. A, its Directors and Certain Executive Officers. (9)
10.11 Reserved.
10.12** First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Form of Award Agreement. (13)
10.13 Reserved.

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Exhibit
No.Exhibit
10.14** First Community Bancshares, Inc. Directors Deferred Compensation Plan. (7)
10.15**
10.15 Reserved.
10.16** Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and Ronald L. Campbell. (19)
10.17** Employment Agreement dated September 28, 2007, between GreenPoint Insurance Group, Inc. and Shawn C. Cummings. (20)
10.17Reserved.
10.18 Securities Purchase Agreement by and between the United States Department of the Treasury and First Community Bancshares, Inc. dated November 21, 2008. (22)
10.19** Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and David D. Brown. (23)
10.20** Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and Robert L. Buzzo. (26)
10.21** Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and E. Stephen Lilly. (26)
10.22** Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Gary R. Mills. (26)
10.23** Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Martyn A. Pell. (26)
10.24** Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Robert. L. Schumacher. (26)
10.25** Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Simpson O. Brown. (25)
10.26** Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Mark R. Evans. (25)
11 Statement regarding computation of earnings per share. (16)
31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
* Furnished herewith.
 
** Indicates a management contract or compensation plan.
 
(1) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed on August 16, 2010
 
(2) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.
 
(3) Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002, filed on March 25, 2003, as amended on March 31, 2003.
 
(4) Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 1999, filed on March 30, 2000, as amended April 13, 2000.
 
(5) The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.
 
(6) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed December 16, 2008. The Registrant has entered into substantially identical agreements with Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title and salary.

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(7) Incorporated by reference from Item 1.01 of the Current Report on Form 8-K dated August 22, 2006, and filed August 23, 2006.
 
(8) Incorporated by reference from Exhibit 10.5 of the Annual Report on Form 10-K for the period ended December 31, 1999, and filed on April 4, 2000, and amended on April 13, 2000.

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(9) Form of indemnification agreement entered into by the Company and by First Community Bank, N. A. with their respective directors and certain officers of each including, for the Registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, E. Stephen Lilly, David D. Brown, and Gary R. Mills. Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2003, filed on March 15, 2004, and amended on May 19, 2004.
 
(10) Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 15, 2004.
 
(11) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.
 
(12) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004.
 
(13) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004.
 
(14) Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2004, and filed on March 16, 2005. Amendments in substantially similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford, and Stafford II.
 
(15) Incorporated by reference from the Current Report on Form 8-K dated October 24, 2006, and filed October 25, 2006.
 
(16) Incorporated by reference from Note 1 of the Notes to Consolidated Financial Statements included herein.
 
(17) Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated February 14, 2008, filed on February 20, 2008.
 
(18) Incorporated by reference from Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004.
 
(19) Incorporated by reference from Exhibit 2.1 of the Form S-3 registration statement filed May 2, 2007.
 
(20) Incorporated by reference from the Exhibit 10.1799.1 of the AnnualCurrent Report on Form 10-K for the period ended December 31, 2007,8-K dated June 28, 2011, and filed on March 13, 2008.June 28, 2011.
 
(21) Reserved.Incorporated by reference from Exhibit 4.1 of the Current Report on Form 8-K dated May 20, 2011, and filed May 23, 2011.
 
(22) Reserved.Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, and filed December 17, 2010.
 
(23) Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed December 16, 2008.
 
(24) Incorporated by reference from Exhibit 10.310.1 of the Current Report on Form 8-K dated December 16, 2010,30, 2008, and filed December 17, 2010.January 5, 2009.
 
(25) Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009 and filed April 3, 2009.
 
(26) Incorporated by reference from the Current Report on Form 8-K dated and filed July 6, 2009.
 
(27) Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated December 16, 2010, and filed December 17, 2010.
 
(28) Reserved.
Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, and filed December 17, 2010. (29)Reserved. Incorporated by reference from Exhibit 99.3 of the Current Report on Form 8-K dated and filed July 27, 2010.
 
(30) Reserved.
 
(31) Incorporated by reference from Exhibit 3(i) of the Quarterly Report on Form 10-Q for the period dated June 30, 2010, and filed August 16, 2010.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE: MayAugust 9, 201102011
     
/s/ John M. Mendez   
 
John M. Mendez  
 
President & Chief Executive Officer
(Principal Executive Officer) 		 
 
 
/s/ David D. Brown   
 
David D. Brown  
 
Chief Financial Officer
(Principal Accounting Officer) 		 

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EXHIBIT INDEX
   
Exhibit No. Exhibit
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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