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~~


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended ~~June~~September 30, 2006

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.)
~~incorporation)~~

P.O. Box 989
Bluefield, Virginia		24605-0989

(Address of principal executive offices)		(Zip Code)

(276) 326-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the to such filing requirements for the past 90 days.

þ Yes oNo

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


~~Large accelerated filer~~o		~~Accelerated filer~~þ		Large accelerated filero Accelerated filerþNon-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

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

Class —– Common Stock, $1.00 Par Value; ~~11,164,774~~11,191,889 shares outstanding as of ~~July~~October 31, 2006

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended ~~June~~September 30, 2006
INDEX

~~INDEX~~


PART I. FINANCIAL INFORMATION

	Item 1. Financial Statements
		~~Item 1. Financial Statements~~
				Consolidated Balance Sheets as of ~~June~~September 30, 2006 (Unaudited), and December 31, 2005	3
				Consolidated Statements of Income for the Three- and ~~Six-Month~~Nine-Month Periods Ended ~~June~~September 30, 2006 and 2005 (Unaudited)	4
				Consolidated Statements of Cash Flows for the ~~Six-Month~~Nine-Month Periods Ended ~~June~~September 30, 2006 and 2005 (Unaudited)	5
				Consolidated Statements of Changes in Stockholders’ Equity for the ~~Six~~Nine Months Ended ~~June~~September 30, 2006 and 2005 (Unaudited)	6
				Notes to Consolidated Financial Statements	7

		Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17

		Item 3. Quantitative and Qualitative Disclosures about Market Risk			28

		Item 4. Controls and Procedures			30

PART II. OTHER INFORMATION

		Item 1. Legal Proceedings			31

		Item 1A. Risk Factors			31

		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31

		Item 3. Defaults Upon Senior Securities			31

		Item 4. Submission of Matters to a Vote of Security Holders			31

		Item 5. Other Information			31

		Item 6. Exhibits			32

SIGNATURES			34

EXHIBIT INDEX			35
EX-3(II)
EX-31.1
EX-31.2
EX-32

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PART I.

ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,			September 30,			December 31,
	2006			2005			2006			2005
(Amounts in Thousands, Except Share Data)	(Unaudited)			(Note 1)			(Unaudited)			(Note 1)
Assets
Cash and due from banks	$	43,620		$	46,872		$	38,961		$	46,872
Interest-bearing balances with banks		29,714			10,667			13,473			10,667

Total cash and cash equivalents		73,334			57,539			52,434			57,539
Securities available for sale (amortized cost of $412,660 at June 30, 2006; $405,667 at December 31, 2005)		405,761			404,381
Securities held to maturity (fair value of $21,057 at June 30, 2006; $24,877 at December 31, 2005)		20,641			24,173
Securities available for sale (amortized cost of $475,733 at September 30, 2006; $405,667 at December 31, 2005)								475,528			404,381
Securities held to maturity (fair value of $20,659 at September 30, 2006; $24,877 at December 31, 2005)								20,250			24,173
Loans held for sale		1,293			1,274			1,046			1,274
Loans held for investment, net of unearned income		1,318,943			1,331,039			1,299,220			1,331,039
Less allowance for loan losses		14,710			14,736			14,946			14,736

Net loans held for investment		1,304,233			1,316,303			1,284,274			1,316,303
Premises and equipment		35,888			34,993			35,879			34,993
Other real estate owned		910			1,400			753			1,400
Interest receivable		10,179			10,232			11,435			10,232
Goodwill and other intangible assets		60,883			61,119			60,796			61,119
Other assets		66,510			41,069			65,174			41,069

Total Assets	$	1,979,632		$	1,952,483		$	2,007,569		$	1,952,483


Liabilities
Deposits:
Noninterest-bearing	$	253,664		$	230,542		$	245,097		$	230,542
Interest-bearing		1,159,462			1,175,402			1,154,358			1,175,402

Total Deposits		1,413,126			1,405,944			1,399,455			1,405,944
Interest, taxes and other liabilities		14,938			16,153			15,994			16,153
Federal funds purchased		—			82,500			15,500			82,500
Securities sold under agreements to repurchase		149,507			124,154			172,711			124,154
FHLB borrowings and other indebtedness		204,158			129,231			198,127			129,231

Total Liabilities		1,781,729			1,757,982			1,801,787			1,757,982


Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; none issued		—			—			—			—
Common stock, $1 par value; 25,000,000 shares authorized; 11,499,018 and 11,496,312 shares issued at June 30, 2006, and December 31, 2005, including 322,563 and 244,509 shares in treasury, respectively		11,499			11,496
Common stock, $1 par value; 25,000,000 shares authorized; 11,499,018 and 11,496,312 shares issued at September 30, 2006, and December 31, 2005, including 315,350 and 244,509 shares in treasury, respectively								11,499			11,496
Additional paid-in capital		108,602			108,573			108,605			108,573
Retained earnings		91,136			82,828			95,414			82,828
Treasury stock, at cost		(10,097	)		(7,625	)		(9,866	)		(7,625	)
Accumulated other comprehensive income		(3,237	)		(771	)
Accumulated other comprehensive income (loss)								130			(771	)

Total Stockholders’ Equity		197,903			194,501			205,782			194,501

Total Liabilities and Stockholders’ Equity	$	1,979,632		$	1,952,483		$	2,007,569		$	1,952,483

See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended						Six Months Ended					Three Months Ended						Nine Months Ended
	June 30,						June 30,					September 30,						September 30,
(Amounts in Thousands Except Share and Per Share Data)	2006			2005			2006		2005			2006			2005			2006		2005
Interest Income
Interest and fees on loans held for investment	$	24,506		$	22,192		$	48,431	$	42,920		$	24,578		$	23,263		$	73,009	$	66,183
Interest on securities-taxable		3,224			2,555			6,101		4,851			3,734			2,904			9,835		7,755
Interest on securities-nontaxable		1,816			1,865			3,642		3,814			1,877			1,783			5,519		5,597
Interest on deposits in banks		479			178			774		393			51			343			825		737

Total interest income		30,025			26,790			58,948		51,978			30,240			28,293			89,188		80,272
Interest Expense
Interest on deposits		8,326			5,547			15,973		10,509			8,760			6,296			24,733		16,805
Interest on borrowings		3,526			2,721			6,737		5,194			3,724			3,276			10,461		8,471

Total interest expense		11,852			8,268			22,710		15,703			12,484			9,572			35,194		25,276

Net interest income		18,173			18,522			36,238		36,275			17,756			18,721			53,994		54,996
Provision for loan losses		811			1,073			1,219		1,764			579			1,060			1,798		2,824

Net interest income after provision for loan losses		17,362			17,449			35,019		34,511			17,177			17,661			52,196		52,172

Noninterest Income
Wealth management income		732			793			1,415		1,482			623			757			2,038		2,239
Service charges on deposit accounts		2,655			2,623			5,072		4,771			2,611			2,660			7,683		7,431
Other service charges, commissions and fees		711			671			1,451		1,330			750			733			2,201		2,063
Gain (loss) on sale of securities		(94	)		121			66		143			(6	)		536			60		679
Other operating income		1,516			362			2,664		566			1,120			346			3,784		912

Total noninterest income		5,520			4,570			10,668		8,292			5,098			5,032			15,766		13,324

Noninterest Expense
Salaries and employee benefits		6,782			7,452			14,683		14,770			6,151			7,260			20,834		22,030
Occupancy expense of bank premises		1,011			968			2,051		1,911			1,039			1,000			3,090		2,911
Furniture and equipment expense		858			813			1,708		1,597			871			855			2,579		2,452
Core deposit amortization		144			111			234		221			88			112			322		333
Other operating expense		3,793			3,957			7,245		7,298			4,064			3,891			11,309		11,189

Total noninterest expense		12,588			13,301			25,921		25,797			12,213			13,118			38,134		38,915

Income from continuing operations before income taxes		10,294			8,718			19,766		17,006			10,062			9,575			29,828		26,581
Income tax expense		3,002			2,494			5,630		4,731			2,877			2,641			8,507		7,372

Income from continuing operations		7,292			6,224			14,136		12,275			7,185			6,934			21,321		19,209

Loss from discontinued operations before income tax		—			(39	)		—		(170	)		—			(36	)		—		(206	)
Income tax benefit		—			(15	)		—		(66	)		—			(14	)		—		(80	)

Loss from discontinued operations		—			(24	)		—		(104	)		—			(22	)		—		(126	)

Net income	$	7,292		$	6,200		$	14,136	$	12,171		$	7,185		$	6,912		$	21,321	$	19,083


Basic earnings per common share	$	0.65		$	0.55		$	1.26	$	1.08		$	0.64		$	0.61		$	1.90	$	1.69

Diluted earnings per common share	$	0.65		$	0.55		$	1.25	$	1.07		$	0.64		$	0.61		$	1.89	$	1.68


Basic earnings per common share — continuing operations	$	0.65		$	0.55		$	1.26	$	1.09		$	0.64		$	0.61		$	1.90	$	1.70

Diluted earnings per common share — continuing operations	$	0.65		$	0.55		$	1.25	$	1.08		$	0.64		$	0.61		$	1.89	$	1.69


Dividends declared per common share	$	0.26		$	0.255		$	0.52	$	0.51		$	0.26		$	0.255		$	0.78	$	0.765


Weighted average basic shares outstanding		11,201,052			11,273,724			11,216,940		11,266,648			11,174,479			11,275,156			11,202,631		11,269,515
Weighted average diluted shares outstanding		11,258,581			11,344,480			11,277,032		11,341,847			11,245,073			11,342,912			11,273,293		11,342,233

See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Six Months Ended						Nine Months Ended
	June 30,						September 30,
(Amounts in thousands)	2006			2005			2006			2005
Operating activities — continuing operations:
Income from continuing operations	$	14,136		$	12,275		$	21,321		$	19,209
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Provision for loan losses		1,219			1,764			1,798			2,824
Depreciation and amortization of premises and equipment		1,709			1,628			2,564			2,474
Core deposit amortization		234			221			322			333
Net investment amortization and accretion		303			781			602			1,139
Net (gain) loss on the sale of assets		(785	)		14
Net gain on the sale of assets								(796	)		(490	)
Mortgage loans originated for sale		(13,332	)		(15,956	)		(23,204	)		(28,419	)
Proceeds from sales of mortgage loans		13,372			16,138			23,551			28,351
Gain on sales of loans		(59	)		(63	)		(119	)		(115	)
Deferred income tax expense (benefit)		60			(379	)
Decrease (increase) in interest receivable		43			(922	)
Deferred income tax (benefit) expense								(34	)		1,098
Increase in interest receivable								(1,213	)		(1,621	)
Excess tax benefit from stock-based compensation		(105	)		—			(139	)		—
Decrease (increase) in other assets		2,508			(4,082	)
(Decrease) increase in other liabilities		(1,206	)		600
Other operating activities, net								582			(3,560	)

Net cash provided by operating activities — continuing operations		18,097			12,019			25,235			21,223


Investing activities — continuing operations:
Proceeds from sales of securities available for sale		1,824			16,707			14,073			18,959
Proceeds from maturities and calls of securities available for sale		12,807			24,410			17,628			33,798
Proceeds from maturities and calls of securities held to maturity		3,574			4,377			3,974			9,552
Purchase of securities available for sale		(20,379	)		(35,218	)		(100,834	)		(90,326	)
Purchase of bank-owned life insurance		(25,000	)		—			(25,000	)		—
Net decrease (increase) in loans held for investment		9,514			(59,276	)		29,056			(87,064	)
Net cash used in branch divestiture		(13,721	)		—			(13,721	)		—
Purchase of premises and equipment		(3,237	)		(1,577	)		(4,094	)		(2,462	)
Proceeds from sale of equipment		298			760			323			1,005

Net cash used in investing activities — continuing operations		(34,320	)		(49,817	)		(78,595	)		(116,538	)


Financing activities — continuing operations:
Net increase (decrease) in demand and savings deposits		13,344			(21,242	)		(6,881	)		8,053
Net increase in time deposits		10,141			60,077			16,695			78,921
Net decrease in federal funds purchased		(82,500	)		(32,500	)		(67,000	)		(32,500	)
Net increase in securities sold under agreement to repurchase		25,632			15,428			48,836			15,882
Net proceeds from and repayments of FHLB and other borrowings		74,927			74,912			68,896			74,861
Proceeds from the exercise of stock options		322			255			871			333
Excess tax benefit from stock-based compensation		105			—			139			—
Acquisition of treasury stock		(4,125	)		(125	)		(4,566	)		(293	)
Dividends paid		(5,828	)		(5,746	)		(8,735	)		(8,618	)

Net cash provided by financing activities — continuing operations		32,018			91,059			48,255			136,639

Cash flows of discontinued operations: (Revised — See Note 2)
Net cash used in operating activities		—			(104	)		—			(126	)
Net cash used in investing activities		—			—			—			—
Net cash used in financing activities		—			—			—			—

Net cash used in discontinued operations		—			(104	)		—			(126	)

Increase in cash and cash equivalents		15,795			53,157
(Decrease) increase in cash and cash equivalents								(5,105	)		41,198

Cash and cash equivalents at beginning of period		57,539			54,746			57,539			54,746

Cash and cash equivalents at end of period	$	73,334		$	107,903		$	52,434		$	95,944


Supplemental information — Noncash items
Transfer of loans to other real estate	$	490		$	196
Supplemental information — Noncash items Transfer of loans to other real estate							$	883		$	1,214

See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in Thousands, Except Share and Per Share Information) (Unaudited)


												Accumulated																	Accumulated
			Additional									Other								Additional									Other
	Common		Paid-in			Retained			Treasury			Comprehensive						Common		Paid-in			Retained			Treasury			Comprehensive
	Stock		Capital			Earnings			Stock			(Loss) Income			Total			Stock		Capital			Earnings			Stock			(Loss) Income			Total
Balance January 1, 2005	$	11,472	$	108,263		$	68,019		$	(6,881	)	$	2,360		$	183,233		$	11,472	$	108,263		$	68,019		$	(6,881	)	$	2,360		$	183,233
Comprehensive income:
Net income		—		—			12,171			—			—			12,171			—		—			19,083			—			—			19,083
Other comprehensive income, net of tax:
Unrealized loss on securities available for sale		—		—			—			—			(276	)		(276	)		—		—			—			—			(307	)		(307	)
Less reclassification adjustment for gains realized in net income		—		—			—			—			(78	)		(78	)		—		—			—			—			(354	)		(354	)

Comprehensive income		—		—			12,171			—			(354	)		11,817			—		—			19,083			—			(661	)		18,422

Common dividends declared		—		—			(5,746	)		—			—			(5,746	)		—		—			(8,618	)		—			—			(8,618	)
Acquisition of 4,426 treasury shares		—		—			—			(125	)		—			(125	)
Acquisition of 9,917 treasury shares																			—		—			—			(293	)		—			(293	)
Acquisition of Stone Capital 2,447 shares issued		2		85			—			—			—			87			2		85			—			—			—			87
Stock awards 1,500 shares issued		2		18												20			2		18												20
Tax benefit from exercise stock options		—		180			—			—			—			180			—		204			—			—			—			204
Option exercise 23,876 shares		20		93			—			142			—			255
Option exercise 28,224 shares																			20		36			—			277			—			333

Balance June 30, 2005	$	11,496	$	108,639		$	74,444		$	(6,864	)	$	2,006		$	189,721
Balance September 30, 2005																		$	11,496	$	108,606		$	78,484		$	(6,897	)	$	1,699		$	193,388


Balance January 1, 2006	$	11,496	$	108,573		$	82,828		$	(7,625	)	$	(771	)	$	194,501		$	11,496	$	108,573		$	82,828		$	(7,625	)	$	(771	)	$	194,501
Comprehensive income:
Net income		—		—			14,136			—			—			14,136			—		—			21,321			—			—			21,321
Other comprehensive income, net of tax:
Unrealized loss on securities available for sale		—		—			—			—			(3,352	)		(3,352	)
Unrealized gain on securities available for sale																			—		—			—			—			663			663
Less reclassification adjustment for gains realized in net income		—		—			—			—			(16	)		(16	)		—		—			—			—			(14	)		(14	)
Unrealized gain on derivative securities		—		—			—			—			902			902			—		—			—			—			252			252

Comprehensive income		—		—			14,136			—			(2,466	)		11,670			—		—			21,321			—			901			22,222

Common dividends declared		—		—			(5,828	)		—			—			(5,828	)		—		—			(8,735	)		—			—			(8,735	)
Acquisition of 130,861 treasury shares		—		—			—			(4,125	)		—			(4,125	)
Acquisition of 145,161 treasury shares																			—		—			—			(4,566	)		—			(4,566	)
Acquisition of Stone Capital 2,706 shares issued		3		85			—			—			—			88			3		85			—			—			—			88
Stock awards 5,132 shares		—		(36	)		—			160			—			124			—		(42	)		—			160			—			118
ESOP allocation 27,733 shares				16						867						883					16						867						883
Equity-based compensation expense		—		140			—			—			—			140			—		223			—			—			—			223
Tax benefit from exercise stock options		—		139			—			—			—			139			—		189			—			—			—			189
Option exercises 19,942 shares		—		(315	)		—			626			—			311
Option exercises 41,455 shares																			—		(439	)		—			1,298			—			859

Balance June 30, 2006	$	11,499	$	108,602		$	91,136		$	(10,097	)	$	(3,237	)	$	197,903
Balance September 30, 2006																		$	11,499	$	108,605		$	95,414		$	(9,866	)	$	130		$	205,782

See Notes to Consolidated Financial Statements.

- 6 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

Unaudited Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements of First Community Bancshares, Inc. and subsidiaries (“First Community” or the “Company”) have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments including normal recurring accruals, necessary for a fair presentation, have been made. These results are not necessarily indicative of the results of consolidated operations that might be expected for the full calendar year.

The consolidated balance sheet as of December 31, 2005, has been derived from the audited financial statements included in the Company’s 2005 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2005 Annual Report of First Community on Form 10-K.

A more complete and detailed description of First Community’s significant accounting policies is included within Footnote 1 to the Company’s Annual Report on Form 10-K for December 31, 2005. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.

The Company operates within one business segment, community banking.

The cash flows resulting from discontinued operations have been revised to conform to the current year’s presentation, which details cash flows from operating, investing, and financing activities.

Recent Accounting Pronouncements

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108, “Financial Statements – Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This SAB provides guidance on the consideration of prior year misstatements in determining whether the current year’s financial statements are materially misstated. In providing this guidance, the SEC staff references both the “iron curtain” and “rollover” approaches to quantifying a current year misstatement for purposes of determining materiality. The iron curtain approach focuses on how the current year’s balance sheet would be affected in correcting misstatements without considering the year in which the misstatement originated. The rollover approach focuses on the amount of the misstatements that originated in the current year’s income statement. The SEC staff indicates that registrants should quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. This SAB is effective for fiscal years ending after November 15, 2006. Registrants may either restate their financials for any material misstatements arising from the application of this SAB or recognize a cumulative effect of applying SAB 108 within the current year opening balance in retained earnings. The adoption of this SAB is not expected to have a material impact on the Company’s financial condition, the results of operations, or liquidity.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of Statement No. 109 “Accounting for Income Taxes.” FIN 48 provides guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. FIN 48 also requires additional disclosures related to an entity’s accounting for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on its consolidated financial statements, and is not yet in a position to determine the impact of the interpretation.

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets,” which amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The Statement permits an entity to measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the change occurs. The Statement is effective as of an entity’s first fiscal year beginning after September 15, 2006. However, earlier adoption of the Statement is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements for any interim period of that fiscal year.

- 7 -

The adoption of this standard is not expected to have a material impact on the Company’s financial condition, the results of operations, or liquidity.

In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments —– An Amendment of FASB Statements No. 133 and 140.” This Statement amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to require evaluation of all interests in securitized financial assets under Statement No. 133, eliminating a long-standing (but always intended to be temporary) exemption from Statement No. 133 for such financial instruments. As a result of the Statement, entities will have to determine if such interests may be (1) freestanding derivatives, (2) hybrid financial instruments containing embedded derivatives requiring bifurcation, or (3) hybrid financial instruments containing embedded derivatives that do not require bifurcation. In addition, the Statement permits fair value ~~remeasurement~~re-measurement for any hybrid instrument that contains an embedded derivative that would otherwise have to be bifurcated.

~~- 7 -~~

The Statement is effective for all financial instruments acquired, issued, or subject to a ~~remeasurement~~re-measurement event occurring after the beginning of an entity’s first fiscal year beginning after September 15, 2006. Earlier adoption of the Statement is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements for any interim period of that fiscal year. The adoption of this standard is not expected to have a material impact on the Company’s financial condition, the results of operations, or liquidity.

Note 2. Discontinued Operations

In August 2004, the Company sold its mortgage banking subsidiary. The transaction completed the Company’s exit from the mortgage banking business segment.

The business related to the former mortgage banking subsidiary is accounted for as discontinued operations and, therefore, the results of operations and cash flows have been removed from the Company’s results of continuing operations in accordance with SFAS 144 for all periods presented in this report. Results of the former mortgage subsidiary are presented as discontinued operations in a separate category on the income statement relating to the 2005 period following results from continuing operations. The results of discontinued operations for the three and ~~six~~nine months ended ~~June~~September 30, 2005, are presented below. The Company had no related income or loss from discontinued operations in 2006.


	Three Months Ended			Six Months Ended			Three Months Ended			Nine Months Ended
(Amounts in thousands)	June 30, 2005			June 30, 2005			September 30, 2005			September 30, 2005
Interest Income	$	—		$	—		$	—		$	—
Interest Expense		—			—			—			—


Net interest income		—			—			—			—

Other Income		—			—			—			—
Other Expense		39			170			36			206


Loss before income taxes		(39	)		(170	)		(36	)		(206	)
Applicable income tax benefit		(15	)		(66	)		(14	)		(80	)


Net Loss	$	(24	)	$	(104	)	$	(22	)	$	(126	)

All assets and liabilities of the mortgage banking subsidiary were disposed of in the third quarter of 2004. Accordingly, there were no assets or liabilities related to discontinued operations included in the ~~June~~September 30, 2006, or the December 31, 2005, consolidated balance sheets.

The cash flows resulting from discontinued operations have been revised to conform to the current year’s presentation, which details cash flows from operating, investing, and financing activities.

Note 3. ~~Mergers, Acquisitions and~~ Branch ~~Development~~Divestitures

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

- 8 -

In March 2006, the Company entered into a definitive agreement to sell its branch location in Rowlesburg, West Virginia. The branch had deposits and repurchase agreements totaling approximately $10.7 million and loans of approximately $3.2 million at December 31, 2005. The transaction is expected to result in a pre-tax gain of approximately $382 thousand, and is expected to be completed by December 31, 2006.

~~- 8 -~~

Note 4. Investment Securities

As of ~~June~~September 30, 2006, and December 31, 2005, the amortized cost and estimated fair value of available for sale securities are as follows:


	June 30, 2006									September 30, 2006
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(Amounts in thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. Government agency securities	$	92,717	$	—	$	(3,360	)	$	89,357	$	117,774	$	86	$	(1,355	)	$	116,505
States and political subdivisions		147,678		1,479		(2,789	)		146,368		154,698		2,409		(733	)		156,374
Corporate notes		61,520		254		(251	)		61,523		71,788		289		(363	)		71,714
Mortgage-backed securities		103,905		67		(3,432	)		100,540		124,595		235		(2,282	)		122,548
Equities		6,840		1,272		(139	)		7,973		6,878		1,582		(73	)		8,387

Total	$	412,660	$	3,072	$	(9,971	)	$	405,761	$	475,733	$	4,601	$	(4,806	)	$	475,528


	December 31, 2005
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government agency securities	$	92,739	$	—	$	(1,315	)	$	91,424
States and political subdivisions		151,118		2,426		(1,376	)		152,168
Corporate notes		61,466		125		(317	)		61,274
Mortgage-backed securities		94,954		155		(2,115	)		92,994
Equities		5,390		1,282		(151	)		6,521

Total	$	405,667	$	3,988	$	(5,274	)	$	404,381

As of ~~June~~September 30, 2006, and December 31, 2005, the amortized cost and estimated fair value of held to maturity securities are as follows:


	June 30, 2006									September 30, 2006
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(Amounts in thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
States and political subdivisions	$	20,255	$	425	$	(8	)	$	20,672	$	19,867	$	412	$	(2	)	$	20,277
Mortgage-backed securities		11		—		—			11		8		—		—			8
Other securities		375		—		(1	)		374		375		—		(1	)		374

Total	$	20,641	$	425	$	(9	)	$	21,057	$	20,250	$	412	$	(3	)	$	20,659


	December 31, 2005
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
States and political subdivisions	$	23,781	$	706	$	(1	)	$	24,486
Mortgage-backed securities		17		—		—			17
Other securities		375		—		(1	)		374

Total	$	24,173	$	706	$	(2	)	$	24,877

Management does not believe any individual unrealized loss as of June 30, 2006, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the declines in value are attributable to changes in market interest rates and not the credit quality of the issuer.

- 9 -

The following table reflects those investments in an unrealized loss position at ~~June~~September 30, 2006, and December 31, 2005. There were no securities in a continuous unrealized loss position for 12 or more months for which the Company does not have the ability to hold until the security matures or recovers in value.


	June 30, 2006															September 30, 2006
	Less than 12 Months					12 Months or longer					Total					Less than 12 Months					12 Months or longer					Total
(Amounts in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
U. S. Government agency securities	$	59,440	$	(1,858	)	$	29,918	$	(1,502	)	$	89,358	$	(3,360	)	$	53,447	$	(537	)	$	40,539	$	(818	)	$	93,986	$	(1,355	)
States and political subdivisions		54,933		(1,562	)		26,877		(1,235	)		81,810		(2,797	)		24,464		(252	)		28,534		(483	)		52,998		(735	)
Other securities		32,629		(252	)		—		—			32,629		(252	)		15,487		(154	)		27,295		(210	)		42,782		(364	)
Mortgage-backed securities		29,374		(393	)		66,621		(3,039	)		95,995		(3,432	)		26,121		(384	)		73,175		(1,898	)		99,296		(2,282	)
Equity securities		2,322		(137	)		14		(2	)		2,336		(139	)		1,958		(71	)		47		(2	)		2,005		(73	)

Total	$	178,698	$	(4,202	)	$	123,430	$	(5,778	)	$	302,128	$	(9,980	)	$	121,477	$	(1,398	)	$	169,590	$	(3,411	)	$	291,067	$	(4,809	)


	December 31, 2005
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses
U. S. Government agency securities	$	61,469	$	(722	)	$	29,851	$	(593	)	$	91,320	$	(1,315	)
States and political subdivisions		47,706		(830	)		18,583		(547	)		66,289		(1,377	)
Other securities		41,523		(318	)		—		—			41,523		(318	)
Mortgage-backed securities		40,651		(952	)		45,607		(1,163	)		86,258		(2,115	)
Equity securities		1,786		(129	)		99		(22	)		1,885		(151	)

Total	$	193,135	$	(2,951	)	$	94,140	$	(2,325	)	$	287,275	$	(5,276	)

At September 30, 2006, the combined depreciation in value of the 200 individual security holdings in an unrealized loss position was less than 1.00% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of September 30, 2006, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the declines in value are mostly attributable to changes in market interest rates and not the credit quality of the issuer.

Note 5. Loans

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


	June 30, 2006					December 31, 2005					September 30, 2006					December 31, 2005
(Dollars in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Loans held for investment:
Commercial and agricultural	$	108,749		8.25	%	$	110,211		8.28	%	$	105,624		8.13	%	$	110,211		8.28	%
Commercial real estate		434,161		32.92	%		464,510		34.90	%		425,622		32.76	%		464,510		34.90	%
Residential real estate		514,019		38.97	%		504,386		37.89	%		509,940		39.25	%		504,386		37.89	%
Construction		160,685		12.18	%		143,976		10.82	%		160,840		12.38	%		143,976		10.82	%
Consumer		99,018		7.51	%		106,148		7.97	%		95,000		7.31	%		106,148		7.97	%
Other		2,311		0.17	%		1,808		0.14	%		2,194		0.17	%		1,808		0.14	%

Total	$	1,318,943		100.00	%	$	1,331,039		100.00	%	$	1,299,220		100.00	%	$	1,331,039		100.00	%


Loans held for sale	$	1,293				$	1,274				$	1,046				$	1,274

- 10 -

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.

~~- 10 -~~

Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit and written financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.

Financial instruments whose contract amounts represent credit risk at ~~June~~September 30, 2006, are commitments to extend credit (including availability of lines of credit) of ~~$201.3~~$207.2 million and standby letters of credit and financial guarantees written of ~~$4.9~~$7.1 million.

Note 6. Allowance for Loan Losses

The allowance for loan losses is maintained at a level sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio.

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

- 11 -

The following table details the Company’s allowance for loan loss activity for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2006 and 2005.


	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
(Amounts in thousands)	2006			2005			2006			2005			2006			2005			2006			2005
Beginning balance	$	14,797		$	16,543		$	14,736		$	16,339		$	14,710		$	15,984		$	14,736		$	16,339
Provision for loan losses		811			1,073			1,219			1,764			579			1,060			1,798			2,824
Charge-offs		(1,389	)		(1,638	)		(2,104	)		(2,482	)		(832	)		(3,037	)		(2,936	)		(5,519	)
Recoveries		491			398			859			755			489			479			1,348			1,234
Reclassification of allowance for lending-related commitments		—			(392	)		—			(392	)		—			—			—			(392	)

Ending balance	$	14,710		$	15,984		$	14,710		$	15,984		$	14,946		$	14,486		$	14,946		$	14,486

~~- 11 -~~

Note 7. Deposits

The following is a summary of interest-bearing deposits by type as of ~~June~~September 30, 2006, and December 31, 2005.


	June 30,		December 31,		September 30,		December 31,
(Amounts in thousands)	2006		2005		2006		2005
Interest-bearing demand deposits	$	139,861	$	144,314	$	145,519	$	144,314
Savings deposits		344,436		355,184		327,120		355,184
Certificates of deposit		675,165		675,904		681,719		675,904

Total	$	1,159,462	$	1,175,402	$	1,154,358	$	1,175,402

Note 8. Borrowings

The following schedule details the Company’s Federal Home Loan Bank (“FHLB”) borrowings and other indebtedness at ~~June~~September 30, 2006, and December 31, 2005.


	June 30,		December 31,			September 30,		December 31,
(Amounts in thousands)	2006		2005		(Amounts in thousands)	2006		2005
FHLB borrowings	$	188,694	$	113,767		$	182,663	$	113,767
Subordinated debt		15,464		15,464			15,464		15,464

Total	$	204,158	$	129,231		$	198,127	$	129,231

FHLB borrowings include ~~$182.3~~$176.4 million in convertible and callable advances and ~~$6.4~~$6.3 million of noncallable term advances from the FHLB of Atlanta at ~~June~~September 30, 2006. The weighted average interest rates of advances are ~~4.46%~~4.69% and 4.17% at ~~June~~September 30, 2006, and December 31, 2005, respectively.

In January 2006, the Company entered into a derivative swap instrument where it receives LIBOR-based variable interest payments and pays fixed interest payments. The notional amount of the derivative swap is $50 million and effectively fixes a portion of the FHLB borrowings at approximately 4.34%. After considering the effect of the interest rate swap, the effective weighted average interest rate of the FHLB borrowings is ~~4.27%~~4.26% at ~~June~~September 30, 2006. The fair value of the interest rate swap was $421 thousand at September 30, 2006.

- 12 -

At ~~June~~September 30, 2006, the FHLB advances have maturities between ~~six~~three months and 15 years. The scheduled maturities of the advances are as follows:


	Amount		Amount
	(in thousands)		(in thousands)
2006	$	365	$	439
2007		6,250		6,250
2008		—		—
2009		—		—
2010		25,000		25,000
2011 and thereafter		157,079		150,974

Total	$	188,694	$	182,663

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

Also included in borrowings is $15.5 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”) with an interest rate of three-month

~~- 12 -~~

LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are callable beginning October 8, 2008. The net proceeds from the offering were contributed as capital to the Company’s subsidiary bank to support further growth.

The Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the trust remaining available for distribution, in each case to the extent the Trust has funds available.

Note 9. Commitments and Contingencies

In the normal course of business, the Company is a defendant in various legal actions and asserted ~~claims, most of which involve lending, collection and employment matters.~~claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

Note 10. Equity-Based Compensation

The Company maintains share-based compensation plans to encourage and facilitate investment in the common stock of the Company by key executives and to assist in the long-term retention of service by those executives. The Company has made stock option awards to officers and directors under a total of four stock-based compensation plans. Non-qualified and incentive stock options, as well as restricted and unrestricted stock may continue to be awarded under the 2004 Omnibus Stock Option Plan. Vesting under the 2004 plan is generally over a three-year period.

The Company adopted FASB Statement No. 123R, “Share-Based Payment” (“SFAS 123R”), on January 1, 2006, using the “modified prospective” method. Under this method, awards that are granted, modified, or settled after December 31, 2005, are measured and accounted for in accordance with SFAS 123R. Also under this method, expense is recognized for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Prior to the adoption of SFAS 123R, the Company accounted for stock compensation under the intrinsic value method permitted by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, the Company previously recognized no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.

- 13 -

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 in 2005.


	Three Months			Six Months			Three Months			Nine Months
	Ended			Ended			Ended			Ended
(Dollars in thousands, except per share data)	June 30, 2005			June 30, 2005			September 30, 2005			September 30, 2005
Net income as reported	$	6,200		$	12,171		$	6,912		$	19,083
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(47	)		(91	)		(53	)		(144	)

Pro forma net income	$	6,153		$	12,080		$	6,859		$	18,939


Income from continuing operations	$	6,224		$	12,275		$	6,934		$	19,209
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(47	)		(91	)		(53	)		(144	)

Pro forma income from continuing operations	$	6,177		$	12,184		$	6,881		$	19,065


Earnings per share:

Basic as reported	$	0.55		$	1.08		$	0.61		$	1.69
Basic pro forma	$	0.55		$	1.07		$	0.61		$	1.68

Diluted as reported	$	0.55		$	1.07		$	0.61		$	1.68
Diluted pro forma	$	0.54		$	1.07		$	0.60		$	1.67

Earnings per share from continuing operations:

Basic as reported	$	0.55		$	1.09		$	0.61		$	1.70
Basic pro forma	$	0.55		$	1.08		$	0.61		$	1.69

Diluted as reported	$	0.55		$	1.08		$	0.61		$	1.69
Diluted pro forma	$	0.54		$	1.07		$	0.61		$	1.68

Prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options and the vesting of restricted stock as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options and restricted stock (“excess tax benefits”) to be classified as financing cash flows. An excess tax benefit totaling ~~$105~~$139 thousand is classified as a financing cash inflow for the ~~six~~nine months ended ~~June~~September 30, 2006.

As a result of adopting SFAS 123R, pre-tax income and net income for the three months ended ~~June~~September 30, 2006, are approximately $69 thousand and ~~$41~~$50 thousand lower, respectively, than accounting for stock options under the intrinsic value method. ~~Pre-tax income and net income for the six months ended June 30, 2006, are approximately $140 thousand and $84 thousand lower, respectively.~~ The increased compensation expense ~~resulting from the adoption of SFAS 123R~~ had no effect on basic or diluted earnings per share for the three months ended September 30, 2006. Pre-tax income and ~~six month periods~~net income for the nine months ended ~~June~~September 30, ~~3006.~~2006, are approximately $209 thousand and $152 thousand lower, respectively. The increased compensation expense decreased basic and diluted earnings per share approximately one cent for the nine months ended September 30, 2006.

During the three and ~~six~~nine months ended ~~June~~September 30, 2006, the Company recognized pre-tax compensation expense related to total equity-based compensation of approximately ~~$95~~$86 thousand and ~~$283~~$368 thousand, respectively.

As of ~~June~~September 30, 2006, there was approximately ~~$585~~$515 thousand of unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of ~~1.4~~1.2 years. The actual compensation cost recognized will differ from this estimate due to a number of items, including new awards granted and changes in estimated forfeitures.

- 14 -

A summary of the Company’s stock option activity, and related information for the ~~six~~nine months ended ~~June~~September 30, 2006, is as follows:


						Weighted									Weighted
				Weighted		Average							Weighted		Average
				Average		Remaining		Aggregate					Average		Remaining		Aggregate
	Option			Exercise		Contractual		Intrinsic		Option			Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value		Shares			Price		Term (Years)		Value
								(In thousands)									(In thousands)
Outstanding at January 1, 2006		383,562		$	22.08						383,562		$	22.08
Granted		1,000			31.06						1,000			31.06
Exercised		(19,942	)		16.15						(41,455	)		20.79
Forfeited		(3,182	)		27.47						(3,432	)		27.84

Outstanding at June 30, 2006		361,438		$	22.39		11.8	$	3,833
Outstanding at September 30, 2006											339,675		$	22.21		12.0	$	3,792

Exercisable at June 30, 2006		248,721		$	21.48		10.8	$	2,862
Exercisable at September 30, 2006											227,459		$	21.15		11.0	$	2,779

Weighted-average grant-date fair value of options granted during the period										$	7.57

The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and certain assumptions. The fair values of grants made in the ~~six month~~nine-month periods ended ~~June~~September 30, 2006 and 2005, were estimated using the following weighted average assumptions:


	Six Months Ended						Nine Months Ended
	June 30,						September 30,
	2006			2005			2006			2005
Volatility		28.50	%		28.62	%		28.50	%		28.57	%
Expected dividend yield		3.35	%		3.59	%		3.35	%		3.59	%
Expected term (years)		6.00			6.00			6.00			6.00
Risk-free rate		4.69	%		3.80	%		4.69	%		3.82	%

The weighted average grant-date fair value of options granted during the ~~six~~nine months ended ~~June~~September 30, 2006 and 2005, was $7.57 and ~~$6.71,~~$6.70, respectively. The aggregate intrinsic value of options exercised during the ~~six~~nine months ended ~~June~~September 30, 2006 and 2005, was approximately ~~$348~~$464 thousand and ~~$58~~$521 thousand, respectively.

Stock Awards

The 2004 Omnibus Stock Option Plan permits the granting of restricted and unrestricted stock grants either alone, in addition to, or in tandem with other awards made by the Company. Stock grants are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s stock. Such value is recognized as expense over the corresponding service period. Compensation costs related to these types of awards are consistently reported for all periods presented.

- 15 -

The following table summarizes the status of the Company’s nonvested shares as of ~~June~~September 30, 2006, and changes during the ~~six~~nine months then ended.


				Weighted					Weighted
				Average					Average
	Nonvested			Grant-Date		Nonvested			Grant-Date
	Shares			Fair Value		Shares			Fair Value
Nonvested at January 1, 2006		4,000		$	26.24		4,000		$	26.24
Granted		4,532			31.39		4,532			31.39
Vested		(5,132	)		29.67		(5,132	)		29.67
Forfeited							(100	)		32.62

Nonvested at June 30, 2006		3,400		$	27.93
Nonvested at September 30, 2006							3,300		$	27.79

- 16 -

~~PART I.~~

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

The following discussion and analysis is provided to address information about First Community Bancshares, Inc.’s (the “Company”) financial condition and results of operations. This discussion and analysis should be read in conjunction with the Company’s 2005 Annual Report on Form 10-K and the other financial information included in this report.

The Company is a multi-state bank holding company headquartered in Bluefield, Virginia, with total assets of ~~$1.98~~$2.01 billion at ~~June~~September 30, 2006. Through its community bank subsidiary, First Community Bank, N. A. (the “Bank”), the Company provides financial, trust and investment advisory services to individuals and commercial customers through fifty-nine ~~banking~~ locations and ~~six~~four wealth management offices located in the four states of Virginia, West Virginia, North Carolina and Tennessee. The Bank is the parent of Stone Capital Management, a SEC-registered investment advisory firm that offers wealth management and investment advice. The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “FCBC”.

FORWARD LOOKING STATEMENTS

The Company may from time to time make written or oral “forward-looking statements”, including statements contained in its filings with the SEC (including this Quarterly Report on Form 10-Q and the Exhibits hereto and thereto), in its reports to stockholders and in other communications which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include, among others, statements with respect to the Company’s beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (many of which are beyond the Company’s control). The words “may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company’s financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of competitive new products and services of the Company and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions; the growth and profitability of the Company’s non-interest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and consolidated results of operations.

Estimates, assumptions, and judgments are necessary principally when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third party sources, when available. When third party information is not available, valuation adjustments are estimated by management primarily through the use of internal modeling techniques and appraisal estimates.

- 17 -

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 ~~i.)~~ the determination of the allowance for loan losses, ~~ii.)~~ accounting for acquisitions and intangible assets, and ~~iii.)~~ accounting for income taxes as the accounting areas that require the most subjective or complex judgments. The identified critical accounting policies are described in detail in the Company’s 2005 Annual Report on Form 10-K. There have been no material changes in the Company’s critical accounting policies since December 31, 2005.

~~EXECUTIVE~~COMPANY OVERVIEW

The Company is a full service commercial bank holding company which operates within the four-state region of Virginia, West Virginia, North Carolina, and Tennessee. The Company operates through the Bank, and offers a wide range of financial services. The Company reported total assets of ~~$1.98~~$2.01 billion at ~~June~~September 30, 2006, and operates through fifty-nine ~~banking~~ offices and ~~six~~four wealth management offices.

The Company funds its lending activities primarily through the retail deposit operations of its branch banking network. Borrowings from the Federal Home Loan Bank (“FHLB”) provide additional funding as needed. The Company invests its funds primarily in loans to retail and commercial customers. In addition to loans, the Company also invests a portion of its funds in various debt securities, including those of United States agencies, state and political subdivisions, and certain corporate notes and debt instruments. The Company also maintains overnight interest-bearing balances with the FHLB and correspondent banks. The difference between interest earned on assets and interest paid on liabilities is the Company’s primary source of earnings. ~~In August 2004, the Company divested itself of its mortgage subsidiary.~~

~~RECENT ACQUISITIONS AND~~ BRANCHING ACTIVITY

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

In March 2006, the Company entered into a definitive agreement to sell its branch office in Rowlesburg, West Virginia. The branch had deposits and repurchase agreements totaling approximately $10.7 million and loans of approximately $3.2 million at December 31, 2005. The transaction is expected to result in a gain of approximately $382 thousand, and is expected to be completed by December 31, 2006.

The two transactions are a result of the Company’s ~~current~~recent strategic review of its branch ~~network, and~~network. Resources from the ~~resources~~branch divestitures will be re-deployed in markets which offer improved growth and development opportunities.

The Company currently has plans to open five new branch offices during 2007. Two locations are planned in the Winston-Salem, North Carolina, area and are scheduled to be open during the first quarter of 2007. The remaining locations are Mechanicsville, Virginia, and Daniels and Summersville, West Virginia. These locations are all in various stages of construction, and are anticipated to be open by the third quarter of 2007.

RESULTS OF OPERATIONS

Overview

Net income for the three months ended ~~June~~September 30, 2006, was ~~$7.3~~$7.2 million or ~~$0.65~~$0.64 per basic and diluted share, compared with ~~$6.2~~$6.9 million or ~~$0.55~~$0.61 per basic and diluted share for the three months ended ~~June~~September 30, 2005. Return on average equity for the three months ended ~~June~~September 30, 2006 was ~~14.74%~~14.05% compared to ~~13.19%~~14.23% for the three months ended ~~June 30, 2005. Return on average assets was 1.47% for the three months ended June 30, 2006, compared to 1.31% for the three months ended June 30, 2005.~~

Net income for the six months ended June 30, 2006, was $14.1 million or $1.26 per basic and $1.25 per diluted share, compared with $12.2 million or $1.08 per basic and $1.07 per diluted share for the six months ended June 30, 2005. Return on average equity for the six months ended June 30, 2006 was 14.42% compared to 13.09% for the six months ended JuneSeptember 30, 2005. Return on average assets was 1.45% for the ~~six~~three months ended ~~June~~September 30, 2006, compared to ~~1.31%~~1.40% for the ~~six~~three months ended ~~June~~September 30, 2005.

Net income for the nine months ended September 30, 2006, was $21.3 million or $1.90 per basic and $1.89 per diluted share, compared with $19.1 million or $1.69 per basic and $1.68 per diluted share for the nine months ended September 30, 2005. Return on average equity for the nine months ended September 30, 2006 was 14.29% compared to 13.49% for the nine

- 18 -

months ended September 30, 2005. Return on average assets was 1.45% for the nine months ended September 30, 2006, compared to 1.34% for the nine months ended September 30, 2005.

Net Interest Income —– Quarterly Comparison (See Table I)

Net interest income, the largest contributor to earnings, was ~~$18.2~~$17.8 million for the three months ended ~~June~~September 30, 2006, compared to ~~$18.5~~$18.7 million for the corresponding period in 2005. Tax-equivalent net interest income totaled ~~$19.2~~$18.8 million for the three months ended ~~June~~September 30, 2006, a decrease of ~~$374~~$916 thousand from ~~$19.5~~$19.7 million for the ~~second three months~~third quarter of 2005. The decrease was due partly to increases in rates paid on liabilities which outpaced increases in the rates earned on assets. The Company also acquired $25 million of bank-owned life insurance (“BOLI”), which shifted that amount from earning assets to other assets and the related income from interest income to other income.

Compared to the ~~second three months~~third quarter of 2005, average earning assets ~~increased $58.1~~decreased $30.2 million while interest-bearing liabilities ~~increased $69.8~~decreased $8.3 million. Contributing to the decrease in average earning assets was the Company’s $25 million ~~during~~investment in bank-owned life insurance in the second ~~three months~~quarter of 2006. The yield on average earning assets increased 5156 basis points to ~~6.92%~~6.99% from ~~6.41%~~6.43%. Total cost of interest-bearing liabilities increased 8378 basis points during the ~~same period,~~third quarter of 2006, which resulted in a net interest rate spread (the difference between interest income on earning assets and expense on interest bearing liabilities) that was 3222 basis points lower at ~~3.82%~~3.71% compared to ~~4.14%~~3.93% for the same period last year. The Company’s tax-equivalent net interest margin of ~~4.28%~~4.20% for the three months ended ~~June~~September 30, 2006, decreased 2313 basis points from ~~4.51% in~~4.33% for the same period of 2005.

The largest contributor to the increase in the yield on average earning assets in 2006 was the increase in the rate earned on the loan portfolio. The increase in the rate to ~~7.40%~~7.47% from ~~6.85%~~6.99%, attributable to the general rise in market rates of interest, resulted in a ~~$1.8~~$1.6 million increase in tax-equivalent interest income compared to the ~~second~~third quarter of 2005. The ~~increase in the loan portfolio contributed approximately $521 thousand to the change in~~ interest ~~income. The volume of~~rates on variable rate loans tied to prime and other indices increased in response to the recent increases in short-term market interest rates.

During the three months ended ~~June~~September 30, 2006, the tax-equivalent yield on securities available for sale increased 5370 basis points to ~~5.52%~~5.60%, while the average balance increased by ~~$20.1~~$5.6 million. The average tax-equivalent yield increased due to the addition of higher rate securities and the reduction of lower rate securities. The average balance of the securities held-to-maturity portfolio continues to decline as securities mature and are not replaced.

Compared to the ~~second three months~~third quarter of 2005, average interest-bearing balances with banks ~~increased~~decreased to ~~$41.4~~$24.8 million during the ~~second three months~~third quarter of 2006, as the yield increased ~~158~~117 basis points to ~~4.65%~~4.63%. Interest-bearing balances with banks are excess liquidity and bear market rates, which have increased with short-term benchmark interest rates.

Compared to the same period in 2005, the average balances of interest-bearing demand and savings deposits decreased ~~$7.3~~$8.6 million and ~~$3.0~~$30.7 million, respectively, for the three months ended ~~June~~September 30, 2006. The average rate paid on interest-bearing demand deposits increased by 56 basis points, while the average rate paid on savings increased ~~106~~89 basis points. Average time deposits increased ~~$24.0~~$10.3 million while the average rate paid increased 98100 basis points from ~~2.79%~~3.02% in 2005 to ~~3.77%~~4.02% in 2006. The level of average non-interestbearing demand deposits increased ~~$12.0~~$7.7 million to ~~$240.3~~$240.5 million during the quarter ended ~~June~~September 30, 2006, compared to the corresponding period of the prior year.

The changes in average deposits between the two quarters include the effect of the previously disclosed sale of the Company’s Clifton Forge ~~Virginia, branch office. The changes also include the effects of the divestiture of the~~and Drakes Branch, Virginia, branch ~~office, although to a very small degree, because the sale was late in June.~~offices.

Compared to the same period in 2005, average federal funds purchased and repurchase agreements increased ~~$11.1~~$27.9 million to ~~$136.5~~$151.8 million during the ~~second~~third quarter of 2006, while the average rate increased ~~130~~112 basis points. The average balance of FHLB borrowings and other long-term debt ~~increased~~decreased by ~~$45.0~~$7.1 million in 2006 to ~~$204.2~~$200.1 million, while the rate paid on those borrowings decreased 5610 basis points.

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

Net interest income was $54.0 million for the nine months ended September 30, 2006, compared to $55.0 million for the corresponding period in 2005. Tax-equivalent net interest income totaled $57.0 million for the nine months ended September 30, 2006, a decrease of $1.1 million from $58.1 million for the nine months ended September 30, 2005. The decrease reflects a $119 thousand decrease due to lower net volumes and a $944 thousand decrease due to net rate changes.

During the first nine months of 2006, average earning assets increased $36.6 million while interest-bearing liabilities increased $46.8 million over the comparable period of 2005. Included the change between periods is the part-year effect of the Company’s $25 million investment in bank-owned life insurance. The yield on average earning assets increased 54 basis points to 6.90% for the nine months ended September 30, 2006, from 6.36% for the nine months ended September 30, 2005. Total cost of interest-bearing liabilities increased 81 basis points during the same period, leaving the net interest rate spread 27 basis points lower at 3.80% compared

- 19 -

to 4.07% for the same period last year. The Company’s tax-equivalent net interest margin of 4.26% for the nine months ended September 30, 2006, decreased 17 basis points from 4.43% in 2005.

The largest contributor to the increase in the yield on average earning assets in 2006, on a volume-weighted basis, was the increase in the rate earned on the loan portfolio. The increase in the rate to 7.38% from 6.85%, attributable to the general rise in market rates of interest, resulted in a $5.3 million increase in tax-equivalent interest income compared to the first nine months of 2005. The increase in the loan portfolio contributed approximately $1.5 million to the change in interest income. The interest rates on variable rate loans tied to prime and other indices increased in response to the recent increases in short-term interest rates.

During the nine months ended September 30, 2006, the tax-equivalent yield on securities available for sale increased 53 basis points to 5.46% while the average balance increased by $15.2 million compared to the nine months ended September 30, 2005. The average tax-equivalent yield increased due to the addition of higher-rate securities and the reduction of lower-rate securities. The average balance of the securities held-to-maturity portfolio continues to decline as securities mature and are not replaced.

Compared to the first nine months of 2005, average interest-bearing balances with banks remained steady during 2006, while the yield increased 134 basis points to 4.49%.

The average balances of interest-bearing demand and savings deposits decreased $7.6 million and $16.8 million, respectively, for the nine months ended September 30, 2006, as compared to the same period of 2005. The average rate paid on interest-bearing demand deposits increased 5 basis points, while the average rate paid on savings increased 95 basis points. Average time deposits increased $26.7 million while the average rate paid increased 97 basis points from 2.80% in 2005 to 3.77% in 2006. The increases in rates paid are attributable to the general rise in market rates of interest. The level of average non-interest-bearing demand deposits increased $10.5 million to $237.5 million through September 30, 2006, compared to the corresponding period of the prior year.

The changes in average deposits between the two periods include the effect of the previously disclosed sale of the Company’s Clifton Forge, Virginia, branch office.

Compared to the same period in 2005, average federal funds purchased and repurchase agreements increased $13.5 million to $139.7 million for the first nine months of 2006, and the average rate paid increased 122 basis points to 3.23%. The average balance of FHLB and other borrowings increased by $30.9 million in 2006 to $201.4 million, while the rate paid on those borrowings decreased 45 basis points. The significant decrease in the rate is due to the FHLB debt restructuring near year-end 2005, where the Company paid off high interest rate obligations. The restructuring reduced the interest rate paid on $50 million of effectively fixed-rate FHLB borrowings by approximately 1.63%, and the rate paid on $25 million of floating-rate borrowings by 1.86% at the time of the transaction.

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

Net interest income was $36.2 million for the six months ended June 30, 2006, compared to $36.3 million for the corresponding period in 2005. Tax-equivalent net interest income totaled $38.2 million for the six months ended June 30, 2006, a decrease of $148 thousand from the $38.4 million for the first six months of 2005. The increase reflects a $351 thousand increase due to increased volume, which was completely offset by a $499 thousand decrease due to net rate changes on the liabilities.

During the first six months of 2006, average earning assets increased $70.5 million while interest-bearing liabilities increased $74.7 million over the comparable period. The yield on average earning assets increased 52 basis points to 6.85% from 6.33% for the six months ended June 30, 2005. Total cost of interest-bearing liabilities increased 82 basis points during the

~~- 19 -~~

same period, leaving the net interest rate spread 30 basis points lower at 3.84% compared to 4.14% for the same period last year. The Company’s tax-equivalent net interest margin of 4.30% for the six months ended June 30, 2006, decreased 19 basis points from 4.49% in 2005.

The largest contributor to the increase in the yield on average earning assets in 2006, on a volume-weighted basis, was the increase in the rate earned on the loan portfolio. The increase in the rate to 7.34% from 6.77%, attributable to the general rise in market rates of interest, resulted in a $3.7 million increase in tax-equivalent interest income compared to the first six months of 2005. The increase in the loan portfolio contributed approximately $1.8 million to the change in interest income. The volume of variable rate loans tied to prime and other indices increased in response to the recent increases in short-term interest rates.

During the six months ended June 30, 2006, the tax-equivalent yield on securities available for sale increased 45 basis points to 5.39% while the average balance increased by $20.1 million. Although the total portfolio decreased through the period, the average tax-equivalent yield increased due to the addition of higher-rate securities and the reduction of lower-rate securities.

~~Compared to the first six months of 2005, average interest-bearing balances with banks increased to $35.1 million during the six months of 2006, while the yield increased 152 basis points to 4.44%.~~

The average balances of interest-bearing demand and savings deposits decreased $7.1 million and $9.7 million, respectively, for the six months ended June 30, 2006. The average rate paid on interest-bearing demand deposits increased 5 basis points, while the average rate paid on savings increased 97 basis points. Average time deposits increased $35.1 million while the average rate paid increased 97 basis points from 2.68% in 2005 to 3.65% in 2006. The increases in rates paid are attributable to the general rise in market rates of interest. The level of average non-interest-bearing demand deposits increased $12.0 million to $236.0 million through June 30, 2006, compared to the corresponding period of the prior year.

~~The changes in average deposits between the two periods include the effect of the previously disclosed sale of the Company’s Clifton Forge, Virginia, branch office.~~

Compared to the same period in 2005, average federal funds purchased and repurchase agreements increased $6.2 million to $133.6 million for the first six months of 2006, and the average rate paid increased 127 basis points to 3.18%. The average balance of FHLB and other borrowings increased by $50.2 million in 2006 to $202.1 million, while the rate paid on those borrowings decreased 67 basis points. Like the quarterly comparison, the significant decrease in the rate is due to the FHLB debt restructuring near year-end 2005.

- 20 -

Table I

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS


	Three Months Ended							Three Months Ended							Three Months Ended							Three Months Ended
	June 30, 2006							June 30, 2005							September 30, 2006							September 30, 2005
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest (1)		Rate (1)			Balance		Interest (1)		Rate (1)			Balance		Interest (1)		Rate (1)			Balance		Interest (1)		Rate (1)
	(Dollars in thousands)														(Dollars in thousands)
ASSETS
Earning Assets:
Loans: (2)
Taxable	$	1,327,278	$	24,487		7.40	%	$	1,296,274	$	22,175		6.86	%	$	1,304,500	$	24,562		7.47	%	$	1,318,759	$	23,241		6.99	%
Tax-exempt		1,490		30		8.08	%		3,084		28		3.64	%		1,339		24		7.11	%		1,675		33		7.84	%

Total		1,328,768		24,517		7.40	%		1,299,358		22,203		6.85	%		1,305,839		24,586		7.47	%		1,320,434		23,274		6.99	%
Securities available for sale:
Taxable		257,838		3,218		5.01	%		243,680		2,548		4.19	%		269,061		3,490		5.15	%		275,775		2,901		4.17	%
Tax-exempt		147,869		2,367		6.42	%		141,932		2,247		6.35	%		154,221		2,482		6.39	%		141,865		2,255		6.31	%

Total		405,707		5,585		5.52	%		385,612		4,795		4.99	%		423,282		5,972		5.60	%		417,640		5,156		4.90	%
Securities held to maturity:
Taxable		388		5		5.17	%		401		4		4.00	%		385		6		6.18	%		398		3		2.99	%
Tax-exempt		20,990		427		8.16	%		30,266		624		8.27	%		20,013		406		8.05	%		26,682		487		7.23	%

Total		21,378		432		8.11	%		30,667		628		8.21	%		20,398		412		8.01	%		27,080		490		7.17	%
Interest-bearing deposits		41,361		479		4.65	%		23,510		180		3.07	%		24,758		289		4.63	%		39,350		343		3.46	%

Total Earning Assets		1,797,214		31,013		6.92	%		1,739,147		27,806		6.41	%		1,774,277		31,259		6.99	%		1,804,504		29,263		6.43	%
Other assets		187,527							152,186							195,726							155,079

TOTAL ASSETS	$	1,984,741						$	1,891,333						$	1,970,003						$	1,959,583


LIABILITIES
Interest-bearing liabilities:
Demand deposits	$	148,502	$	111		0.30	%	$	155,841	$	98		0.25	%	$	144,034	$	120		0.33	%	$	152,658	$	105		0.27	%
Savings deposits		355,826		1,761		1.99	%		358,811		836		0.93	%		336,611		1,773		2.09	%		367,314		1,108		1.20	%
Time deposits		686,161		6,454		3.77	%		662,127		4,613		2.79	%		678,262		6,867		4.02	%		667,986		5,083		3.02	%

Total interest-bearing deposits		1,190,489		8,326		2.81	%		1,176,779		5,547		1.89	%		1,158,907		8,760		3.00	%		1,187,958		6,296		2.10	%
Federal funds purchased and repurchase agreements		136,522		1,142		3.36	%		125,415		645		2.06	%		151,813		1,276		3.33	%		123,936		691		2.21	%
FHLB borrowings and other long-term debt		204,172		2,384		4.68	%		159,147		2,079		5.24	%		200,096		2,448		4.85	%		207,206		2,585		4.95	%

Total interest-bearing liabilities		1,531,183		11,852		3.10	%		1,461,341		8,271		2.27	%		1,510,816		12,484		3.28	%		1,519,100		9,572		2.50	%

Non-interestbearing demand deposits		240,296							228,307							240,528							232,841
Other liabilities		14,822							13,153							15,737							14,994
Stockholders’ Equity		198,440							188,532							202,922							192,648

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,984,741						$	1,891,333						$	1,970,003						$	1,959,583

Net Interest Income, Tax Equivalent			$	19,161						$	19,535						$	18,775						$	19,691

Net Interest Rate Spread (3)						3.82	%						4.14	%						3.71	%						3.93	%

Net Interest Margin (4)						4.28	%						4.51	%						4.20	%						4.33	%


(1)		Fully Taxable Equivalent (“FTE”) at the rate of 35%. 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 interest-earning assets.

- 21 -

Table II

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS


	Six Months Ended							Six Months Ended							Nine Months Ended							Nine Months Ended
	June 30, 2006							June 30, 2005							September 30, 2006							September 30, 2005
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest (1)		Rate (1)			Balance		Interest (1)		Rate (1)			Balance		Interest (1)		Rate (1)			Balance		Interest (1)		Rate (1)
	(Dollars in thousands)																		(Dollars in thousands)
ASSETS
Earning Assets:
Loans: (2)
Taxable	$	1,330,375	$	48,391		7.34	%	$	1,276,295	$	42,848		6.77	%	$	1,321,656	$	72,953		7.38	%	$	1,290,606	$	66,089		6.85	%
Tax-exempt		1,531		62		8.17	%		3,751		111		5.97	%		1,466		85		7.75	%		3,052		144		6.31	%

Total		1,331,906		48,453		7.34	%		1,280,046		42,959		6.77	%		1,323,122		73,038		7.38	%		1,293,658		66,233		6.85	%
Securities available for sale:
Taxable		254,702		6,091		4.82	%		241,929		4,843		4.04	%		259,540		9,581		4.94	%		253,335		7,744		4.09	%
Tax-exempt		149,991		4,726		6.35	%		142,672		4,580		6.47	%		151,417		7,208		6.36	%		142,400		6,835		6.42	%

Total		404,693		10,817		5.39	%		384,601		9,423		4.94	%		410,957		16,789		5.46	%		395,735		14,579		4.93	%
Securities held to maturity:
Taxable		389		10		5.18	%		404		8		3.99	%		388		17		5.86	%		402		11		3.66	%
Tax-exempt		21,938		876		8.05	%		31,346		1,288		8.29	%		21,289		1,283		8.06	%		29,774		1,775		7.97	%

Total		22,327		886		8.00	%		31,750		1,296		8.23	%		21,677		1,300		8.02	%		30,176		1,786		7.91	%
Interest-bearing deposits		35,134		774		4.44	%		27,119		393		2.92	%		31,637		1,063		4.49	%		31,241		736		3.15	%

Total Earning Assets		1,794,060		60,930		6.85	%		1,723,516		54,071		6.33	%		1,787,393		92,190		6.90	%		1,750,810		83,334		6.36	%
Other assets		178,179							151,065							184,092							152,466

TOTAL ASSETS	$	1,972,239						$	1,874,581						$	1,971,485						$	1,903,276


LIABILITIES
Interest-bearing liabilities:
Demand deposits	$	147,490	$	217		0.30	%	$	154,589	$	190		0.25	%	$	146,325	$	338		0.31	%	$	153,938	$	295		0.26	%
Savings deposits		357,804		3,393		1.91	%		367,467		1,705		0.94	%		350,662		5,166		1.97	%		367,415		2,813		1.02	%
Time deposits		682,598		12,363		3.65	%		647,489		8,614		2.68	%		681,136		19,229		3.77	%		654,397		13,697		2.80	%

Total interest-bearing deposits		1,187,892		15,973		2.71	%		1,169,545		10,509		1.81	%		1,178,123		24,733		2.81	%		1,175,750		16,805		1.91	%
Federal funds purchased and repurchase agreements		133,566		2,103		3.18	%		127,373		1,206		1.91	%		139,716		3,378		3.23	%		126,215		1,897		2.01	%
FHLB borrowings and other long-term debt		202,118		4,634		4.62	%		151,921		3,988		5.29	%		201,437		7,083		4.70	%		170,552		6,573		5.15	%

Total interest-bearing liabilities		1,523,576		22,710		3.01	%		1,448,839		15,703		2.19	%		1,519,276		35,194		3.10	%		1,472,517		25,275		2.29	%

Non-interestbearing demand deposits		235,987							224,028							237,517							227,038
Other liabilities		14,953							14,260							15,217							14,522
Stockholders’ Equity		197,723							187,454							199,475							189,199

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,972,239						$	1,874,581						$	1,971,485						$	1,903,276

Net Interest Income, Tax Equivalent			$	38,220						$	38,368						$	56,996						$	58,059

Net Interest Rate Spread (3)						3.84	%						4.14	%						3.80	%						4.07	%

Net Interest Margin (4)						4.30	%						4.49	%						4.26	%						4.43	%


(1)		Fully Taxable Equivalent (“FTE”) at the rate of 35%. 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 interest-earning assets.

- 22 -

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


	Three Months Ended June 30, 2006,									Six Months Ended June 30, 2006,									Three Months Ended September 30, 2006,									Nine Months Ended September 30, 2006,
	Compared to 2005									Compared to 2005									Compared to 2005									Compared to 2005
	$ Increase/(Decrease) due to									$ Increase/(Decrease) due to									$ Increase/(Decrease) due to									$ Increase/(Decrease) due to
(Amounts in thousands)	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
Interest Earned On:
Loans (1)	$	521		$	1,793		$	2,314		$	1,786		$	3,708		$	5,494		$	(260	)	$	1,572		$	1,312		$	1,533		$	5,272		$	6,805
Securities available for sale (1)		249			541			790			498			896			1,394			126			690			816			623			1,587			2,210
Securities held to maturity (1)		(189	)		(7	)		(196	)		(377	)		(33	)		(410	)		(131	)		53			(78	)		(512	)		26			(486	)
Interest-bearing deposits with other banks		178			121			299			138			243			381			(150	)		96			(54	)		9			318			327

Total interest-earning assets		759			2,448			3,207			2,045			4,814			6,859			(415	)		2,411			1,996			1,653			7,203			8,856


Interest Paid On:
Demand deposits		(5	)		18			13			(9	)		36			27			(6	)		21			15			(15	)		58			43
Savings deposits		(7	)		932			925			(46	)		1,734			1,688			(100	)		765			665			(134	)		2,487			2,353
Time deposits		173			1,669			1,842			489			3,260			3,749			79			1,705			1,784			580			4,952			5,532
Fed funds purchased and repurchase agreements		62			435			497			61			836			897			180			405			585			221			1,260			1,481
FHLB borrowings and other long-term debt		542			(238	)		304			1,200			(554	)		646			(88	)		(49	)		(137	)		1,120			(610	)		510

Total interest-bearing liabilities		765			2,816			3,581			1,695			5,312			7,007			65			2,847			2,912			1,772			8,147			9,919


Change in net interest income, tax-equivalent	$	(6	)	$	(368	)	$	(374	)	$	350		$	(498	)	$	(148	)	$	(480	)	$	(436	)	$	(916	)	$	(119	)	$	(944	)	$	(1,063	)


(1)		Fully taxable equivalent using a rate of 35%.

Provision and Allowance for Loan Losses

The allowance for loan losses was $14.9 million at September 30, 2006, $14.7 million at ~~June 30, 2006, and~~ December 31, 2005 and ~~$16.0~~$14.5 million at ~~June~~September 30, 2005. The Company’s allowance for loan loss activity for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2006 and 2005, is as follows:


	For the Three Months ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
(Amounts in thousands)	2006			2005			2006			2005			2006			2005			2006			2005
Allowance for loan losses
Beginning balance	$	14,797		$	16,543		$	14,736		$	16,339		$	14,710		$	15,984		$	14,736		$	16,339
Provision for loan losses		811			1,073			1,219			1,764			579			1,060			1,798			2,824
Charge-offs		(1,389	)		(1,638	)		(2,104	)		(2,482	)		(832	)		(3,037	)		(2,936	)		(5,519	)
Recoveries		491			398			859			755			489			479			1,348			1,234
Reclassification of allowance for lending-related commitments		—			(392	)		—			(392	)		—			—			—			(392	)

Ending balance	$	14,710		$	15,984		$	14,710		$	15,984		$	14,946		$	14,486		$	14,946		$	14,486

- 23 -

The total allowance for loan losses to loans held for investment ratio was ~~1.12%~~1.15% at ~~June~~September 30, 2006, compared to 1.11% at December 31, 2005, and ~~1.23%~~1.10% at ~~June~~September 30, 2005. Management considers the allowance adequate based upon its analysis of the portfolio as of ~~June~~September 30, 2006. However, no assurances can be made that future adjustments to the allowance for loan losses will not be necessary as a result of increases in non-performing loans and other factors.

The provision for loan losses for the ~~second~~third quarter of 2006 was ~~$811~~$579 thousand, a decrease of ~~$262~~$481 thousand compared to $1.1 million in 2005. The provision for loan losses for the ~~six-month~~nine-month period ended ~~June~~September 30, 2006, decreased to ~~$1.2~~$1.8 million when compared to $2.8 million for the ~~six-month~~nine-month period ending ~~June~~September 30, ~~2005, of $1.8 million.~~2005. The decrease in provision between all periods compared is primarily attributable to lower net charge-offs. Net charge-offs for the ~~second~~third quarter of 2006 were ~~$898~~$343 thousand, compared to ~~$1.2~~$2.6 million in 2005. Year-to-date net charge-offs were ~~$1.2~~$1.6 million compared to ~~$1.7~~$4.3 million in 2005. The third quarter and year-to-date periods of 2005 were negatively influenced by the $2.2 million partial charge-off of a commercial loan relationship in the hospitality industry.

Non-interest Income

Non-interest income consists of all revenues which are not included in interest and fee income related to earning assets. Non-interest income for the ~~second~~third quarter of 2006 was ~~$5.5~~$5.1 million compared to ~~$4.6~~$5.0 million in the same period of 2005, an increase of ~~21%~~1.3%. ~~The second quarter of 2006 included $702 thousand in gain on the sale of the Drakes Branch, Virginia banking office.~~ During the second quarter of 2006, the Company purchased $25 million of ~~BOLI,~~bank-owned life insurance, which is the majority of the increase in other assets between December 31, 2005, and ~~June~~September 30, 2006. The increase in cash surrender value on that policy during the ~~second~~third quarter was approximately ~~$249~~$365 thousand. During the third quarter of 2006, securities losses of $6 thousand were realized, compared with a gain of $536 thousand in the third quarter of 2005. The remaining components of non-interest income remained relatively stable between the two comparable quarterly periods.

Non-interest income for the first ~~six~~nine months of 2006 was ~~$10.7~~$15.8 million compared to ~~$8.3~~$13.3 million for the same period of 2005. Included in the 2006 amount is a $676 thousand recovery related to ~~an historical~~a payments system fraud dating back to 1996, in addition to the ~~branch~~$702 thousand in gain on the sale ~~gain.~~of the Drakes Branch, Virginia, banking office.

Non-interest Expense

Non-interest expense totaled ~~$12.6~~$12.2 million for the quarter ended ~~June~~September 30, 2006, decreasing ~~$713~~$905 thousand, or ~~5.4%~~6.9%, from the same period in 2005. Year-to-date non-interest expense was ~~$25.9~~$38.1 million, ~~an increase~~a decrease of ~~less than one half of one percent~~2.0% over the 2005 comparable period. The quarterly ~~decrease~~ and ~~lower~~ year-to-date ~~increase~~decreases are the result of the Company’s refocused efforts to control costs. ~~Second~~Third quarter and year-to-date salaries and benefits decreased ~~$670 thousand~~$1.1 million and ~~$87 thousand,~~$1.2 million, respectively, from the comparable prior year periods. ~~Other~~All other operating expenses ~~also decreased slightly~~increased only $204 thousand and $415 thousand between the comparable quarter and year-to-date ~~periods.~~periods, respectively. Included in the current quarter non-interest expense was a $248 thousand charge-down to fair value of an investment in a cooperative providing community banks investment clearing and accounting services.

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 i) income on state and municipal securities which are exempt from federal income tax, ii) certain dividend payments which are deductible by the Company, and iii) tax credits generated by investments in low income housing and historic rehabilitations.

For the ~~second~~third quarter of 2006, consolidated income taxes were ~~$3.0~~$2.9 million compared to ~~$2.5~~$2.6 million for the ~~second~~third quarter of 2005. For the quarters ended ~~June~~September 30, 2006 and 2005, the effective tax rates were ~~29.16%~~28.59% and ~~28.56%~~27.54%, respectively. For the first nine months of 2006, consolidated income taxes were $8.5 million, a 28.52% effective tax rate, compared to $7.3 million, an effective tax rate of 27.65%, for the first nine months of 2005. The effective tax rate was higher during both the current quarter and year-to-date periods due to a lower ~~proportion~~proportions of tax-free municipal security interest income than in the second quarter of 2005. For the first six months of 2006, consolidated income taxes were $5.6 million, a 28.48% effective tax rate, compared to $4.7 million, an effective tax rate of 27.71%, for the first six monthscomparable periods of 2005.

- 24 -

FINANCIAL ~~POSITION~~CONDITION

Total assets at ~~June~~September 30, 2006, increased ~~$27~~$55.1 million to ~~$1.98~~$2.01 billion from December 31, 2005, an annualized growth rate of ~~2.8%~~3.8%. The lower asset growth rate reflects the mid-year impact of the sale of one of the Company’s banking offices (see Notes to the Consolidated Financial Statements).

Securities

Securities available for sale were ~~$405.8~~$475.5 million at ~~June~~September 30, 2006, compared to $404.4 million at December 31, 2005, an increase of ~~$1.4~~$71.1 million.

Securities held to maturity totaled ~~$20.6~~$20.3 million at ~~June~~September 30, 2006, reflective of continuing paydowns, maturities and calls within the portfolio. The market value of investment securities held to maturity was 102.0% and 102.9% of book value at ~~June~~September 30, 2006, and December 31, 2005, respectively.

The Company’s available-for-sale securities portfolio is reported at fair value. The fair value of most securities is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Available-for-sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of each individual investment such as the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery or maturity. Management does not believe any unrealized loss, individually or in the aggregate, as of ~~June~~September 30, 2006, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the decrease in value is attributable to changes in market interest rates and not the credit quality of the issuer.

Loan Portfolio

Loans Held for Sale:The ~~$1.3~~$1.0 million balance of loans held for sale at ~~June~~September 30, 2006, represents long-term mortgage loans that are sold to investors on a best efforts basis. Accordingly, the Company does not retain the interest rate risk involved in the commitment. The gross notional amount of outstanding commitments at ~~June~~September 30, 2006, was ~~$7.7~~$9.8 million on 5071 loans.

Loans Held for Investment:Total loans held for investment ~~remained relatively stable at $1.32~~were $1.30 billion at ~~June~~September 30, 2006, ~~compared to~~a slight decline from $1.33 billion at December 31, 2005, and ~~increased $22.2 million from June~~$1.32 billion at September 30, 2005. The average loan to deposit ratio increased to ~~92.9%~~93.3% for the ~~second~~third quarter of 2006, compared to 92.3% for the fourth quarter of 2005 and ~~92.5%~~92.9% for the ~~second~~third quarter of 2005. The 2006 year-to-date average loans of ~~$1.33~~$1.32 billion increased ~~$51.9~~$29.5 million when compared to the average for the first ~~six~~nine months of 2005 of ~~$1.28~~$1.29 billion.

The held for investment loan portfolio continues to be diversified among loan types and industry segments. The following table presents the various loan categories and changes in composition as of ~~June~~September 30, 2006, December 31, 2005 and ~~June~~September 30, 2005.


	June 30, 2006					December 31, 2005					June 30, 2005					September 30, 2006					December 31, 2005					September 30, 2005
(Dollars in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Loans Held for Investment
Commercial and agricultural	$	108,749		8.25	%	$	110,211		8.28	%	$	103,565		7.99	%	$	105,624		8.13	%	$	110,211		8.28	%	$	110,511		8.36	%
Commercial real estate		434,161		32.92	%		464,510		34.90	%		471,340		36.35	%		425,622		32.76	%		464,510		34.90	%		456,207		34.53	%
Residential real estate		514,019		38.97	%		504,386		37.89	%		481,577		37.14	%		509,940		39.25	%		504,386		37.89	%		497,730		37.67	%
Construction		160,685		12.18	%		143,976		10.82	%		126,678		9.77	%		160,840		12.38	%		143,976		10.82	%		143,738		10.89	%
Consumer		99,018		7.51	%		106,148		7.97	%		111,654		8.61	%		95,000		7.31	%		106,148		7.97	%		111,148		8.41	%
Other		2,311		0.17	%		1,808		0.14	%		1,914		0.14	%		2,194		0.17	%		1,808		0.14	%		1,887		0.14	%

Total	$	1,318,943		100.00	%	$	1,331,039		100.00	%	$	1,296,728		100.00	%	$	1,299,220		100.00	%	$	1,331,039		100.00	%	$	1,321,221		100.00	%


Loans Held for Sale	$	1,293				$	1,274				$	1,075				$	1,046				$	1,274				$	1,377

- 25 -

Non-Performing Assets

Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or more and still accruing interest, other real estate owned (“OREO”), and repossessions. Non-performing assets were ~~$3.9~~$4.4 million at ~~June~~September 30, 2006, $4.8 million at December 31, 2005, and ~~$5.1~~$7.1 million at ~~June~~September 30, 2005. The percentage of non-performing assets to total loans, OREO and repossessions was ~~0.29%~~0.34% at ~~June~~September 30, 2006, down from 0.36% at December 31, 2005, and ~~0.40%~~0.54% at ~~June~~September 30, 2005.

The following schedule details non-performing assets by category at the close of each of the quarters ended ~~June~~September 30, 2006 and 2005, and December 31, 2005.


	June 30,		December 31,		June 30,		September 30,		December 31,		September 30,
(Amounts in thousands)	2006		2005		2005		2006		2005		2005
											$
Non-accrual	$	2,937	$	3,383	$	4,132	$	3,657	$	3,383		5,417
Ninety days past due and accruing		—		11		—		—		11		—
Other real estate owned		910		1,400		975		753		1,400		1,690
Repossessions		3		55		29		26		55		14

											$
Total non-performing assets	$	3,850	$	4,849	$	5,136	$	4,436	$	4,849		7,121


Restructured loans performing in accordance with modified terms	$	289	$	302	$	327	$	281	$	302	$	313

At ~~June~~September 30, 2006, non-accrual loans ~~decreased $446~~increased $274 thousand from December 31, 2005, and ~~$1.2~~decreased $1.8 million from ~~June~~September 30, 2005. The decrease in non-accrual loans is reflective of the Company’s strict underwriting and improving credit quality. Ongoing activity within the classification and categories of non-performing loans continues to include collections on delinquencies, foreclosures and movements into or out of the non-performing classification as a result of changing customer business conditions. OREO of ~~$910~~$753 thousand decreased from both ~~June~~September 30 and December 31, 2005, levels mostly as a result of property sales. OREO is carried at the lesser of estimated net realizable value or cost.

Deposits and Other Borrowings

Total deposits ~~grew~~decreased by ~~$7.2~~$6.5 million during the first ~~six~~nine months of 2006, net of the transfer of deposits in the Drakes Branch, Virginia, office. Non interest-bearing demand deposits increased by ~~$23.1~~$14.6 million and interest-bearing demand deposits ~~decreased $4.5~~increased $1.2 million. Savings decreased ~~$10.7~~$28.1 million and time deposits ~~decreased $739 thousand.~~

In December 2005, the Company prepaid $77 million of FHLB advances, with interest rates ranging from 5.71% to 6.27%, with a weighted average rate and maturity of 5.96% and 4.3 years, respectively. In January 2006, the Company drew additional FHLB advances of $75 million, with a floating interest rate based on 3-month LIBOR, and which mature in fifteen years. The FHLB has the option, after five years, to convert the new advances to a fixed interest rate of 4%. Concurrent with the new advances, the Company entered into an interest rate swap agreement, effectively fixing the rate on $50 million of the new advances for five years. Under the terms of the swap, the Company will pay fixed interest payments of 4.335% on a notional $50 million, and receive floating interest rate payments of 3-month LIBOR less 45 basis points. The Company expects to save approximately $813 thousand in annual interest expense on the $50 million fixed by the interest rate swap. The remaining $25 million will float at an interest rate based on 3-month LIBOR. The initial interest rate on the floating portion of the FHLB advances is approximately 1.86% less than the weighted average rate of the prepaid advances. For further discussion of FHLB borrowings, see the Borrowings note to the Unaudited Consolidated Financial Statements included in this report.increased $5.8 million.

Securities sold under repurchase agreements increased ~~$25.4~~$48.6 million in the first ~~six~~nine months of 2006. In late September, the Company entered into a wholesale term repurchase agreement for $25 million. There were no$15.5 million in federal funds purchased outstanding at ~~June~~September 30, ~~2006, as the Company has been in a fairly even liquidity position throughout the first six months of~~ 2006.

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Stockholders’ Equity

Total stockholders’ equity increased ~~$3.4~~$11.3 million from December 31, 2005, as the Company continued to balance capital adequacy and returns to stockholders. The increase in equity was due mainly to net earnings of ~~$14.1~~$21.3 million ~~after~~less dividends paid to stockholders of ~~$5.8~~$8.7 million, net changes of ~~$2.5~~$2.2 million to treasury stock, and ~~increases in~~ other comprehensive ~~loss~~income of ~~$2.5 million.~~$901 thousand.

Risk-based capital guidelines and the leverage ratio measure capital adequacy of banking institutions. Risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. At ~~June~~September 30, 2006, the Company’s total capital to risk-weighted assets ratio was ~~12.14%~~12.41% versus 11.65% at December 31, 2005. The Company’s Tier 1 capital to risk-weighted assets ratio was ~~11.05%~~11.34% at ~~June~~September 30, 2006, compared to 10.54% at December 31, 2005. The Company’s Tier 1 leverage ratio at ~~June~~September 30, 2006, was ~~8.06%~~8.36% compared to 7.77% at December 31, 2005. All of the Company’s regulatory capital ratios exceed the current well-capitalized levels prescribed for banks.

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PART I.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Liquidity and Capital Resources

At ~~June~~September 30, 2006, the Company maintained a significant level of liquidity in the form of cash and cash equivalent balances of ~~$73.3~~$52.4 million, investment securities available for sale of ~~$405.8~~$475.5 million, and FHLB credit availability of approximately ~~$212.4~~$202.8 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 maintains a liquidity policy as a means to manage the liquidity risk process and 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 management and the Board of Directors.

Interest Rate Risk and Asset/Liability Management

The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company, like other financial institutions, is subject to interest rate risk to the degree that interest-earning assets reprice differently than interest-bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment.

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 including repricing risk, basis risk, yield curve risk and option risk. Repricing risk occurs when earning assets and paying liabilities reprice at differing times as interest rates change. Basis risk occurs when the underlying rates on the assets and liabilities the institution holds change at different levels or in varying degrees. Yield curve risk is the risk of adverse consequences as a result of unequal changes in the spread between two or more rates for different maturities for the same instrument. Lastly, option risk is due to embedded options, often put or call options, given or sold to holders of financial instruments.

In order to mitigate the effect of changes in the general level of interest rates, the Company manages repricing opportunities and thus, its interest rate sensitivity. The Company seeks to control its interest rate risk exposure to insulate net interest income and net earnings from fluctuations in the general level of interest rates. To measure its exposure to interest rate risk, quarterly simulations of net interest income are performed using financial models that project net interest income through a range of possible interest rate environments including rising, declining, most likely and flat rate scenarios. The simulation model used by the Company captures all earning assets, interest-bearing liabilities and all off-balance sheet financial instruments and combines the various factors affecting rate sensitivity into an earnings outlook. The results of these simulations indicate the existence and severity of interest rate risk in each of those rate environments based upon the current balance sheet position, assumptions as to changes in the volume and mix of interest-earning assets and interest-paying liabilities and management’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 management’s strategies. However, the earnings simulation model is currently the best tool available to management 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 structure of liabilities to maintain a balanced mix of maturity and repricing structures to mitigate the potential exposure. Based upon the latest simulation, the Company believes that it is slightly biased toward an asset sensitive

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position. Absent adequate management, asset sensitive positions can negatively impact net interest income in a falling rate environment or, alternatively, positively impact net interest income in a rising rate environment.

The Company has established policy limits for tolerance of interest rate risk that allow for no more than a 10% reduction in projected net interest income based on a comparison of quarterly net interest income simulations in various interest rate scenarios. In addition, the policy addresses exposure limits to changes in the economic value of equity according to predefined policy guidelines. The most recent simulation indicates that current exposure to interest rate risk is within the Company’s defined policy limits.

The following table summarizes the impact on net interest income and the economic value of equity as of ~~June~~September 30, 2006, and December 31, 2005, of immediate and sustained rate shocks in the interest rate environment of plus and minus 200 basis points from the base simulation, assuming no remedial measures are affected.

Rate Sensitivity Analysis


	June 30, 2006												September 30, 2006
(Dollars in thousands)	Change in						Change in						Change in						Change in
Increase (Decrease) in	Net Interest			%			Econcomic Value			%			Net Interest			%			Econcomic Value			%
Interest Rates (Basis Points)	Income			Change			of Equity			Change			Income			Change			of Equity			Change
200	$	1,290			1.7		$	183			0.1		$	(12	)		—		$	(3,877	)		(1.3	)
100		728			1.0			3,966			1.3			716			1.0			1,409			0.5
(100)		(794	)		(1.0	)		3,313			1.1			778			1.1			(6,256	)		(2.0	)
(200)		(2,635	)		(3.5	)		(7,899	)		(2.6	)		(1,149	)		(1.6	)		(17,648	)		(5.7	)


	December 31, 2005
	Change in						Change in
Increase (Decrease) in	Net Interest			%			Econcomic Value			%
Interest Rates (Basis Points)	Income			Change			of Equity			Change
200	$	(764	)		(1.0	)	$	(13,392	)		(4.6	)
100		(403	)		(0.5	)		(6,211	)		(2.2	)
(100)		(950	)		(1.3	)		(4,376	)		(1.5	)
(200)		(4,299	)		(5.8	)		(15,755	)		(5.5	)


	December 31, 2005
	Change in						Change in
Increase (Decrease) in	Net Interest			%			Econcomic Value			%
Interest Rates (Basis Points)	Income			Change			of Equity			Change
200	$	(764	)		(1.0	)	$	(13,392	)		(4.6	)
100		(403	)		(0.5	)		(6,211	)		(2.2	)
(100)		(950	)		(1.3	)		(4,376	)		(1.5	)
(200)		(4,299	)		(5.8	)		(15,755	)		(5.5	)

When comparing the impact of the rate shock analysis between ~~June~~September 30, 2006, and December 31, 2005, the changes in net interest income reflect relatively similar results and the impact of the balance sheet composition of assets and liabilities as the profile ~~continues to reflect asset sensitivity. The asset sensitivity~~ is reflected in on-hand liquidity in cash and cash equivalents of $73.3 million and in the loan portfolio which includes adjustable or variable rates on approximately 50% of the portfolio at June 30, 2006.trending toward a very neutral position.

The economic value of equity is a measure which reflects the impact of changing rates of 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 the equity is based on the present value of all the future cash flows under the different rate scenarios.

Additionally, the Company entered into a pay fixed, receive variable derivative interest rate swap agreement in January 2006. The Company accounts for the derivate swap instrument as a cash flow hedge under the shortcut method allowed by FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At June 30, 2006, the fair market value of the swap was approximately $1.5 million.

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PART I.

ITEM 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) along with the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(b). Based on that evaluation, the Company’s CEO along with the Company’s CFO concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in ~~decision-making~~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.

There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended ~~June~~September 30, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company is currently a defendant in various legal actions and asserted claims ~~involving lending and collection activities and other matters~~ in the normal course of business. While 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 presented in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~(a) Not Applicable~~

~~(b) Not Applicable~~

~~(c)~~

	(a)		Not Applicable

	(b)		Not Applicable

	(c)		Issuer Purchases of Equity Securities

The following table sets forth open market purchases by the Company of its equity securities during the ~~six~~nine months ended ~~June~~September 30, 2006.


							Maximum
							Number of								Maximum
					Total Number of		Shares that						Total Number of		Number of
	Total # of		Average		Shares Purchased		May yet be		Total # of		Average		Shares Purchased		Shares That May
	Shares		Price Paid		as Part of Publicly		Purchased		Shares		Price Paid		as Part of Publicly		Yet be Purchased
	Purchased		per Share		Announced Plan		Under the Plan		Purchased		per Share		Announced Plan		Under the Plan
January 1-31, 2006		23,161	$	32.10		23,161		284,455		23,161	$	32.10		23,161		284,455
February 1-28, 2006		32,900		32.14		32,900		287,234		32,900		32.14		32,900		287,234
March 1-31, 2006		25,000		31.81		25,000		265,566		25,000		31.81		25,000		265,566
April 1-30, 2006		10,000		30.38		10,000		255,566		10,000		30.38		10,000		255,566
May 1-31, 2006		14,300		30.68		14,300		248,337		14,300		30.68		14,300		248,337
June 1-30, 2006		25,500		30.85		25,500		227,437		25,500		30.85		25,500		227,437
July 1-31, 2006										14,300		30.84		14,300		215,756
August 1-31, 2006										—				—		234,650
September 1-30, 2006										—				—		234,650

Total		130,861	$	31.52		130,861				145,161	$	31.46		145,161

The Company’s stock repurchase plan, as amended, allows the purchase and retention of up to 550,000 shares. The plan has no expiration date and remains open. The Company held ~~322,563~~315,350 shares in treasury at ~~June~~September 30, 2006.

ITEM 3. Defaults Upon Senior Securities

Not Applicable

ITEM 4. Submission of Matters to a Vote of Security Holders

Not Applicable

ITEM 5. Other Information

Not Applicable

- 31 -

Item 6. Exhibits

(a) Exhibits


Exhibit No.		Exhibit

	3(i)			Articles of Incorporation of First Community Bancshares, Inc., as amended. (1)

	3(ii)			Bylaws of First Community Bancshares, Inc., as amended. ~~(2)~~

	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)

	10.1			First Community Bancshares, Inc. 1999 Stock Option Contracts (2) and Plan. (4)*

	10.1.1			Amendment to the First Community Bancshares, Inc. 1999 Stock Option Plan (12)*

	10.2			First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (5)*

	10.3			Employment Agreement dated January 1, 2000, and amended October 17, 2000, between First Community Bancshares, Inc. and John M. Mendez. (2)(6)*

	10.4			First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended. (4)*

	10.5			First Community Bancshares, Inc. Split Dollar Plan and Agreement. (4)*

	10.6			First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. (2)*

	10.6.1			First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second Amendment (B. W. Harvey, Sr. — October 19, 2004). (14)*

	10.7			First Community Bancshares, Inc. Wrap Plan. ~~(3)~~(7)*

	10.8			Employment Agreement between First Community Bancshares, Inc. and J. E. Causey Davis. (8)*

	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)*

	10.12			First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Stock Award Agreement (13)*

10.14		First Community Bancshares, Inc. Directors Deferred Compensation Plan. (7)*
	~~10.13~~
10.15		First Community Bancshares, Inc. Deferred Compensation and Supplemental Bonus Plan For Key Employees. (15)*
			~~Change of control agreement between First Community Bank, N. A. and Mark A. Wendel. (15)~~

	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 and Chief Financial Officer Section 1350.


*		Management contract or compensatory plan or arrangement.

- 32 -


(1)		Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2005, filed on August 5, 2005.

(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)		First Community Bancshares, Inc. has entered into substantially identical agreements with Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title, salary and the use of a vehicle.

(7)		~~Not used.~~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 S-4 Registration Statement filed on March 28, 2003. The Company has entered into a substantially identical contract with Phillip R. Carriger dated March 31, 2004.

(9)		Form of indemnification agreement entered into by the Corporation 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, ~~Kenneth P. Mulkey,~~ E. Stephen Lilly and at the Bank level: Samuel L. Elmore. 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 19, 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 but are not filed herewith.

(15)		Incorporated by reference from Item 1.01 of the ~~Annual~~Current Report on Form ~~10-K for the period ended December 31, 2005,~~8-K dated October 24, 2006, and filed ~~on March 15,~~October 25, 2006.

- 33 -

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: ~~August 9,~~November 8, 2006


/s/ John M. Mendez John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)

DATE: ~~August 9,~~November 8, 2006

/s/ David D. Brown David D. Brown
Chief Financial Officer
(Principal Accounting Officer)

- 34 -

Index to Exhibits


Exhibit No.		Exhibit

3(ii)		Bylaws of First Community Bancshares, Inc., as amended

	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 and Chief Financial Officer pursuant to 18 USC Section 1350

- 35 -