PART I. ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2009			2008*
(Dollars in Thousands, Except Per Share Data)	(Unaudited)
Assets
Cash and due from banks	$	32,758		$	39,310
Interest-bearing balances with banks		68,202			7,129

Total cash and cash equivalents		100,960			46,439
Securities available-for-sale		549,664			520,723
Securities held-to-maturity		8,471			8,670
Loans held for sale		1,445			1,024
Loans held for investment, net of unearned income		1,276,790			1,298,159
Less allowance for loan losses		16,555			15,978

Net loans held for investment		1,260,235			1,282,181
Premises and equipment		54,893			55,024
Other real estate owned		3,114			1,326
Interest receivable		8,848			10,084
Goodwill and other intangible assets		89,338			89,612
Other assets		122,173			118,231

Total Assets	$	2,199,141		$	2,133,314


Liabilities
Deposits:
Noninterest-bearing	$	207,947		$	199,712
Interest-bearing		1,375,497			1,304,046

Total Deposits		1,583,444			1,503,758
Interest, taxes and other liabilities		28,293			27,423
Securities sold under agreements to repurchase		153,824			165,914
FHLB borrowings and other indebtedness		215,870			215,877

Total Liabilities		1,981,431			1,912,972


Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; 41,500 issued at March 31, 2009, and December 31, 2008		40,471			40,419
Common stock, $1 par value; 25,000,000 shares authorized; 12,051,234 shares issued at March 31, 2009, and December 31, 2008, including 454,985 and 483,785 shares in treasury, respectively		12,051			12,051
Additional paid-in capital		127,992			128,526
Retained earnings		118,021			107,231
Treasury stock, at cost		(14,453	)		(15,368	)
Accumulated other comprehensive loss		(66,372	)		(52,517	)

Total Stockholders’ Equity		217,710			220,342

Total Liabilities and Stockholders’ Equity	$	2,199,141		$	2,133,314


*		Derived from audited financial statements.

See Notes to Consolidated Financial Statements.

- 3 -

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF INCOME (Unaudited)

September 30, December 31,
2008 2007
(Dollars in Thousands, Except Per Share Data) (Unaudited)
Assets

Cash and due from banks $ 53,238 $ 50,051
Interest-bearing balances with banks 664 2,695

Total cash and cash equivalents 53,902 52,746
Securities available-for-sale (amortized cost of $607,249 at September 30, 2008; $674,937 at December 31, 2007) 513,001 664,120
Securities held-to-maturity (fair value of $9,187 at September 30, 2008; $12,298 at December 31, 2007) 9,043 12,075
Loans held for sale 140 811
Loans held for investment, net of unearned income 1,168,286 1,225,502
Less allowance for loan losses 14,510 12,833

Net loans held for investment 1,153,776 1,212,669
Premises and equipment 50,504 48,383
Other real estate owned 896 545
Interest receivable 9,156 12,465
Goodwill and other intangible assets 72,222 70,056
Other assets 104,817 75,968

Total Assets $ 1,967,457 $ 2,149,838

Liabilities

Deposits:
Noninterest-bearing $ 214,582 $ 224,087
Interest-bearing 1,134,962 1,169,356

Total Deposits 1,349,544 1,393,443
Interest, taxes and other liabilities 20,494 21,454
Federal funds purchased 29,500 18,500
Securities sold under agreements to repurchase 180,388 207,427
FHLB borrowings and other indebtedness 216,720 291,916

Total Liabilities 1,796,646 1,932,740

Stockholders’ Equity

Preferred stock, par value undesignated; 1,000,000 shares authorized; none issued — —
Common stock, $1 par value; 25,000,000 shares authorized; 11,499,018 shares issued at September 30, 2008, and December 31, 2007, including 531,421 and 429,372 shares in treasury, respectively 11,499 11,499
Additional paid-in capital 108,862 108,825
Retained earnings 124,731 117,670
Treasury stock, at cost (16,882 ) (13,613 )
Accumulated other comprehensive loss (57,399 ) (7,283 )

Total Stockholders’ Equity 170,811 217,098

Total Liabilities and Stockholders’ Equity $ 1,967,457 $ 2,149,838


	Three Months Ended
	March 31,
(Dollars in Thousands, Except Per Share Data)	2009			2008
Interest Income
Interest and fees on loans held for investment	$	19,984		$	21,237
Interest on securities-taxable		5,164			6,067
Interest on securities-nontaxable		1,676			2,063
Interest on deposits in banks		39			180

Total interest income		26,863			29,547
Interest Expense
Interest on deposits		7,567			8,741
Interest on borrowings		2,863			4,446

Total interest expense		10,430			13,187

Net interest income		16,433			16,360
Provision for loan losses		2,087			323

Net interest income after provision for loan losses		14,346			16,037

Noninterest Income
Wealth management income		984			899
Service charges on deposit accounts		3,157			3,099
Other service charges, commissions and fees		1,178			1,121
Insurance commissions		2,317			1,344
Total other-than-temporary impairment losses		(209	)		—
Portion of loss recognized in other comprehensive income		—			—

Net impairment losses recognized in earnings		(209	)		—
Gain on sale of securities		411			1,820
Other operating income		586			858

Total noninterest income		8,424			9,141

Noninterest Expense
Salaries and employee benefits		7,866			7,790
Occupancy expense of bank premises		1,603			1,164
Furniture and equipment expense		938			901
Intangible amortization		245			160
Prepayment penalty on FHLB advance		—			1,647
Other operating expense		4,542			4,621

Total noninterest expense		15,194			16,283

Income before income taxes		7,576			8,895
Income tax expense		2,346			2,583

Net income		5,230			6,312
Dividends on preferred stock		571			—

Net income available to common shareholders	$	4,659		$	6,312


Basic earnings per common share	$	0.40		$	0.57

Diluted earnings per common share	$	0.40		$	0.57


Dividends declared per common share	$	—		$	0.28


Weighted average basic shares outstanding		11,567,769			11,029,931
Weighted average diluted shares outstanding		11,616,568			11,107,610

See Notes to Consolidated Financial Statements.

~~-3-~~- 4 -

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF ~~INCOME~~CASH FLOWS (Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands, Except Per Share Data) 2008 2007 2008 2007
Interest Income

Interest and fees on loans held for investment $ 19,266 $ 23,478 $ 60,394 $ 70,401
Interest on securities-taxable 5,567 6,772 17,101 17,783
Interest on securities-nontaxable 1,708 2,078 5,775 6,140
Interest on deposits in banks 9 404 260 1,073

Total interest income 26,550 32,732 83,530 95,397
Interest Expense

Interest on deposits 6,684 10,083 22,543 29,131
Interest on borrowings 3,543 5,506 11,679 15,094

Total interest expense 10,227 15,589 34,222 44,225

Net interest income 16,323 17,143 49,308 51,172
Provision for loan losses 3,461 — 4,721 —

Net interest income after provision for loan losses 12,862 17,143 44,587 51,172

Noninterest Income

Wealth management income 957 908 2,954 2,931
Service charges on deposit accounts 3,808 3,006 10,370 8,077
Other service charges, commissions and fees 1,040 902 3,225 2,609
Insurance commissions 1,240 — 3,730 —
Gain on sale of securities 163 50 2,133 209
Other operating income 675 1,154 2,336 2,956

Total noninterest income 7,883 6,020 24,748 16,782

Noninterest Expense

Salaries and employee benefits 7,371 6,544 22,741 19,120
Occupancy expense of bank premises 1,297 933 3,717 3,010
Furniture and equipment expense 924 844 2,798 2,447
Intangible amortization 166 105 484 313
Prepayment penalty on FHLB advance — — 1,647 —
Other operating expense 4,683 4,410 14,096 12,179

Total noninterest expense 14,441 12,836 45,483 37,069

Income before income taxes 6,304 10,327 23,852 30,885
Income tax expense 1,753 3,011 6,751 9,006

Net income $ 4,551 $ 7,316 $ 17,101 $ 21,879

Basic earnings per common share $ 0.42 $ 0.65 $ 1.56 $ 1.95

Diluted earnings per common share $ 0.41 $ 0.65 $ 1.54 $ 1.94

Dividends declared per common share $ 0.28 $ 0.27 $ 0.84 $ 0.81

Weighted average basic shares outstanding 10,956,867 11,179,322 10,992,901 11,232,895
Weighted average diluted shares outstanding 11,034,059 11,230,220 11,071,925 11,299,727


	Three Months Ended
	March 31,
	2009			2008
(In Thousands)
Operating activities:
Net Income	$	5,230		$	6,312
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,087			323
Depreciation and amortization of premises and equipment		1,096			889
Intangible amortization		245			160
Net investment amortization and accretion		193			(340	)
Net gain on the sale of assets		(439	)		(1,781	)
Mortgage loans originated for sale		(8,481	)		(13,280	)
Proceeds from sales of mortgage loans		8,083			12,058
Gain on sales of loans		(23	)		(83	)
Deferred income tax benefit		(317	)		(149	)
Decrease in interest receivable		1,235			2,723
Other operating activities, net		1,194			3,543

Net cash provided by operating activities		10,103			10,375


Investing activities:
Proceeds from sales of securities available-for-sale		46,394			30,797
Proceeds from maturities and calls of securities available-for-sale		10,346			37,723
Proceeds from maturities and calls of securities held-to-maturity		200			—
Purchase of securities available-for-sale		(97,018	)		(14,118	)
Net decrease in loans held for investment		18,065			45,809
Proceeds from the redemption of FHLB stock		324			—
Proceeds from sales of equipment		7			—
Purchase of premises and equipment		(971	)		(1,952	)

Net cash provided by (used in) investing activities		(22,653	)		98,259


Financing activities:
Net increase (decrease) in demand and savings deposits		27,482			(2,662	)
Net increase (decrease) in time deposits		52,204			(31,828	)
Net decrease in federal funds purchased		—			(18,500	)
Net (decrease) increase in securities sold under agreement to repurchase		(12,090	)		573
Net decrease in FHLB and other borrowings		(7	)		(26,674	)
Proceeds from the exercise of stock options		—			66
Excess tax benefit from stock-based compensation		—			10
Acquisition of treasury stock		—			(2,168	)
Preferred dividends paid		(518	)		—
Common dividends paid		—			(3,082	)

Net cash (used in) provided by financing activities		67,071			(84,265	)

Increase in cash and cash equivalents		54,521			24,369
Cash and cash equivalents at beginning of period		46,439			52,746

Cash and cash equivalents at end of period	$	100,960		$	77,115

Supplemental information — Noncash items
Transfer of loans to other real estate	$	2,030		$	282
Cumulative effect adjustment of FAS 115-2, net of tax	$	6,131		$	—

See Notes to Consolidated Financial Statements.

~~-4-~~- 5 -

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

Nine Months Ended
September 30,
(In Thousands) 2008 2007
Operating activities:
Net Income $ 17,101 $ 21,879
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 4,721 —
Depreciation and amortization of premises and equipment 2,785 2,362
Intangible amortization 484 313
Net investment amortization and accretion (292 ) 435
Net gain on the sale of assets (2,070 ) (186 )
Mortgage loans originated for sale (28,299 ) (34,794 )
Proceeds from sales of mortgage loans 29,137 33,472
Gain on sales of loans (167 ) (191 )
Deferred income tax (benefit) expense (330 ) 552
Decrease (increase) in interest receivable 3,309 (1,148 )
Other operating activities, net 2,522 (967 )

Net cash provided by operating activities 28,901 21,727

Investing activities:
Proceeds from sales of securities available-for-sale 97,232 1,288
Proceeds from maturities and calls of securities available-for-sale 80,997 22,258
Proceeds from maturities and calls of securities held-to-maturity 3,042 7,437
Purchase of securities available-for-sale (108,124 ) (196,479 )
Net decrease in loans held for investment 54,828 44,322
Purchase of FHLB stock — (4,077 )
Net cash used in insurance agency acquisitions (1,080 ) (5,135 )
Proceeds from sales of equipment 23 —
Purchase of premises and equipment (4,922 ) (11,981 )

Net cash provided by (used in) investing activities 121,996 (142,367 )

Financing activities:
Net increase in demand and savings deposits 8,088 13,283
Net decrease in time deposits (51,987 ) (5,180 )
Net increase in federal funds purchased 11,000 7,900
Net (decrease) increase in securities sold under agreement to repurchase (27,039 ) 25,599
Net (decrease) increase in FHLB and other borrowings (75,196 ) 93,698
Prepayment penalty (1,647 ) —
Proceeds from the exercise of stock options 440 715
Excess tax benefit from stock-based compensation 49 290
Acquisition of treasury stock (4,222 ) (5,035 )
Dividends paid (9,227 ) (9,085 )

Net cash (used in) provided by financing activities (149,741 ) 122,185

Increase in cash and cash equivalents 1,156 1,545
Cash and cash equivalents at beginning of period 52,746 57,759

Cash and cash equivalents at end of period $ 53,902 $ 59,304

Supplemental information — Noncash items
Transfer of loans to other real estate $ 1,413 $ 973

~~See Notes to Consolidated Financial Statements.~~

~~-5-~~

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


																															Accumulated
												Accumulated										Additional									Other
			Additional									Other						Preferred		Common		Paid-in			Retained			Treasury			Comprehensive
	Common		Paid-in			Retained			Treasury			Comprehensive						Stock		Stock		Capital			Earnings			Stock			Income (Loss)			Total
(Dollars in Thousands)	Stock		Capital			Earnings			Stock			Income (Loss)			Total
Balance January 1, 2008																		$	—	$	11,499	$	108,825		$	117,670		$	(13,613	)	$	(7,283	)	$	217,098

Balance January 1, 2007	$	11,499	$	108,806		$	100,117		$	(7,924	)	$	232		$	212,730

Cumulative effect of change in accounting principle																			—		—		—			(813	)		—			—			(813	)
Comprehensive income:
Net income		—		—			21,879			—			—			21,879			—		—		—			6,312			—			—			6,312
Other comprehensive loss, net of tax:
Unrealized loss on securities available for sale		—		—			—			—			(5,834	)		(5,834	)		—		—		—			—			—			(7,280	)		(7,280	)
Less reclassification adjustment for gains realized in net income													(16	)		(16	)
Unrealized gain on cash flow hedge		—		—			—			—			(372	)		(372	)
Reclassification adjustment for gains realized in net income																																(534	)		(534	)
Unrealized loss on cash flow hedge																			—		—		—			—			—			(950	)		(950	)

Comprehensive income		—		—			21,879			—			(6,222	)		15,657
Comprehensive loss																			—		—		—			6,312			—			(8,764	)		(2,452	)

Common dividends declared		—		—			(9,085	)		—			—			(9,085	)		—		—		—			(3,082	)		—						(3,082	)
Acquisition of 163,500 treasury shares		—		—			—			(5,035	)		—			(5,035	)
Acquisition of GreenPoint Insurance — 49,088 shares issued		—		133			—			1,524			—			1,657
Acquisition of 67,300 treasury shares																			—		—		—			—			(2,168	)		—			(2,168	)
Acquisition of GreenPoint Insurance - 7,728 shares issued																			—		—		22			—			245			—			267
Equity-based compensation expense		—		121			—			87			—			208			—		—		52			—			—			—			52
Tax benefit from exercise of stock options		—		337			—			—			—			337			—		—		10			—			—			—			10
Option exercises — 41,470 shares		—		(603	)		—			1,297			—			694
Option exercises - 41,470 shares																			—		—		(13	)		—			79			—			66

Balance September 30, 2007	$	11,499	$	108,794		$	112,911		$	(10,051	)	$	(5,990	)	$	217,163
Balance March 31, 2008																		$	—	$	11,499	$	108,896		$	120,087		$	(15,457	)	$	(16,047	)	$	208,978


Balance January 1, 2008	$	11,499	$	108,825		$	117,670		$	(13,613	)	$	(7,283	)	$	217,098
Balance January 1, 2009																		$	40,419	$	12,051	$	128,526		$	107,231		$	(15,368	)	$	(52,517	)	$	220,342

Cumulative effect of change in accounting principle																			—		—		—			6,131			—			—			6,131
Comprehensive income:
Net income		—		—			17,101			—			—			17,101			—		—		—			5,230			—			—			5,230
Other comprehensive loss, net of tax:
Unrealized loss on securities available-for-sale		—		—			—			—			(49,081	)		(49,081	)		—		—		—			—			—			(13,863	)		(13,863	)
Less reclassification adjustment for gains realized in net income		—		—			—			—			(977	)		(977	)
Unrealized loss on cash flow hedge		—		—			—			—			(58	)		(58	)
Reclassification adjustment for gains realized in net income																			—		—		—			—			—			(140	)		(140	)
Unrealized gain on cash flow hedge																			—		—		—			—			—			148			148

Comprehensive loss		—		—			17,101			—			(50,116	)		(33,015	)		—		—		—			5,230			—			(13,855	)		(8,625	)

Cumulative effect of change in accounting principle		—		—			(813	)		—			—			(813	)
Common dividends declared		—		—			(9,227	)		—			—			(9,227	)
Acquisition of 132,100 treasury shares		—		—			—			(4,222	)		—			(4,222	)
Acquisition of GreenPoint Insurance Group — 7,728 shares issued		—		22			—			245			—			267
Preferred dividend, net																			52		—		(38	)		(571	)		—			—			(557	)
Equity-based compensation expense		—		161			—			—			—			161			—		—		40			—			—			—			40
Tax benefit from exercise of stock options		—		122			—			—			—			122
Option exercises — 22,323 shares		—		(268	)		—			708			—			440
Retirement plan contribution - 28,800 shares issued																			—		—		(536	)		—			915			—			379

Balance September 30, 2008	$	11,499	$	108,862		$	124,731		$	(16,882	)	$	(57,399	)	$	170,811
Balance March 31, 2009																		$	40,471	$	12,051	$	127,992		$	118,021		$	(14,453	)	$	(66,372	)	$	217,710

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

Unaudited Consolidated Financial Statements

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

The consolidated balance sheet as of December 31, ~~2007,~~2008, has been derived from the audited consolidated financial statements included in the Company’s ~~2007~~2008 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 (“GAAP”) have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s ~~2007~~2008 Annual Report on Form 10-K.

A more complete and detailed description of First Community’s significant accounting policies is included within Footnote 1 of Item 8, “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for December 31, ~~2007.~~2008. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.

The Company includes interest and penalties related to income tax liabilities in income tax expense. The Company and its subsidiaries’ tax filings for the years ended December 31, 2004 through 2007 are currently open to audit under statutes of limitation by the Internal Revenue Service and various state tax departments.

~~Effective January 1, 2008, the Company~~ operates within two business segments, ~~community~~ banking and insurance services. Insurance services are comprised of agencies which sell property and casualty and life and health insurance policies and arrangements. All other operations, including commercial and consumer banking, lending activities, and wealth management are included within the banking segment.

Earnings Per Share

Basic earnings per share is determined by dividing net income available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per share is determined by dividing net income available to common shareholders by the weighted average shares outstanding increased by the dilutive effect of stock options, warrants and contingently issuable shares. Basic and diluted net income per common share calculations follow:


	For the three months
	ended March 31,
(Amounts in Thousands, Except Share and Per Share Data)	2009		2008
Net income available to common shareholders	$	4,659	$	6,312

Weighted average shares outstanding		11,567,769		11,029,931
Dilutive shares for stock options		6,332		57,040
Contingently issuable shares		42,467		20,639
Common stock warrants		—		—

Weighted average dilutive shares outstanding		11,616,568		11,107,610


Basic earnings per share	$	0.40	$	0.57
Diluted earnings per share	$	0.40	$	0.57

For the three months ended March 31, 2009, options and warrants to purchase 391,104 shares of common stock were outstanding but were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive. This compares to options to purchase 10,000 shares of common stock outstanding but not included in the computation of diluted earnings per common share because their effect would be anti-dilutive for the three months ended March 31, 2008.

- 7 -

Recent Accounting Pronouncements

In ~~May 2008,~~April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” The FSP requires a public entity to provide disclosures about fair value of financial instruments in interim financial information. The FSP will be effective for interim and annual financial periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of FSP FAS 107-1 and APB 28-1 effective January 1, 2009.

In April 2009, the FASB issued FSP FAS 115-2, FAS 124-2 and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary-Impairment.” The FSP (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert: (a) it does not have the intent to sell the debt security; and (b) it is more likely than not that it will not have to sell the debt security before recovery of its cost basis. Under the FSP, declines in the fair value of held-to-maturity and available-for-sale debt securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of FSP FAS 115-2, FAS 124-2 and EITF 99-20-2-1 effective January 1, 2009, and made a cumulative effect credit adjustment in retained earnings of approximately $6.13 million.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The FSP affirms the objective of fair value when a market is not active, clarifies and includes additional factors for determining whether there has been a significant decrease in market activity, eliminates the presumption that all transactions are distressed unless proven otherwise, and requires an entity to disclose a change in valuation technique. The Company adopted the provisions of FSP FAS 157-4 effective January 1, 2009, which did not have a material impact on the Company’s financial condition or results of operations.

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

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities —– an amendment of FASB Statement No. 133” (“SFAS 161”). This statement requires enhanced disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ~~This statement is effective for fiscal years and interim periods beginning after November 15, 2008.~~ The Company ~~is currently evaluating the impact of~~adopted SFAS 161 ~~on its disclosures.~~effective January 1, 2009, and the enhanced disclosures are included in Note 11 – Derivatives and Hedging Activities.

In December 2007, the FASB revised Statement No. 141, “Business Combinations” (“SFAS 141R”). This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This statement recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. This statement also defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquiree achieves control. Additionally this statement determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ~~This statement is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact~~In connection with its January 1, 2009, adoption of SFAS 141R, ~~on its financial condition, results of operations and disclosures.~~

~~-7-~~

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

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The adoption of SFAS 159 did not have an effect on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The adoption of SFAS 157 did not have a significant effect on the Company’s consolidated financial statements.

In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. On January 1, 2008, the Company ~~made a cumulative effect adjustment to equity of $813 thousand in connection~~has expensed costs associated with ~~the adoption of EITF 06-4.~~recently announced transactions.

Note 2. Mergers, Acquisitions, and Branching Activity

On ~~July 31, 2008,~~April 2, 2009, the Company signed a definitive agreement providing for the acquisition of ~~Coddle Creek Financial Corp.~~TriStone Community Bank (“~~Coddle Creek”~~TriStone”) ~~and its wholly-owned subsidiary, Mooresville Savings Bank, SSB (“Mooresville”). Mooresville is~~, a ~~$156.56~~$152.42 million state-chartered ~~savings~~commercial bank headquartered in ~~Mooresville,~~Winston-Salem, North Carolina. The definitive agreement provides for the ~~payment~~exchange of ~~$19.60 and .9046 of a share~~.5262 shares of the Company’s common stock for each outstanding share of ~~Coddle Creek~~TriStone common stock. ~~Coddle Creek and Mooresville~~TriStone will be merged with and into the ~~Company and~~Company’s wholly-owned national bank subsidiary, First Community Bank, N. A.~~, respectively.~~ The transaction ~~has received the required~~is subject to regulatory approvals ~~or waivers~~ and ~~been approved~~approval by the stockholders of ~~Coddle Creek. The merger~~TriStone, and is expected to close in the ~~fourth~~third quarter of ~~2008.~~2009.

- 8 -

~~In September 2007,~~

On November 14, 2008, the Company completed the acquisition of ~~GreenPoint Insurance Group, Inc.~~Coddle Creek Financial Corp. (“~~GreenPoint”~~Coddle Creek”), ~~a High Point,~~based in Mooresville, North ~~Carolina, insurance agency. In connection with the initial payment~~Carolina. Coddle Creek had three full service locations in Mooresville, Cornelius, and Huntersville, North Carolina. At acquisition, Coddle Creek had total assets of approximately ~~$1.66~~$158.66 million, ~~the Company issued 49,088 shares~~loans of ~~common stock.~~approximately $136.99 million, and deposits of approximately $137.06 million. Under the terms of the ~~stock purchase~~merger agreement, ~~former shareholders~~shares of ~~GreenPoint are entitled to additional consideration aggregating up to $1.45 million in the form~~Coddle Creek were exchanged for .9046 shares of ~~cash or~~ the Company’s common stock ~~valued at~~and $19.60 in cash, for a total purchase price of approximately $32.29 million. As a result of the ~~time~~acquisition and purchase price allocation, approximately $14.41 million in goodwill was recorded, which represents the excess purchase price over the fair market value of ~~issuance,~~the net assets acquired and identified intangibles.

Since January 1, 2008, GreenPoint Insurance Group, Inc., the Company’s wholly-owned insurance agency subsidiary, has acquired a total of five agencies, issuing cash consideration of approximately $2.04 million. Acquisition terms in all instances call for additional cash consideration if certain ~~future~~ operating performance targets are met. If those ~~operating~~ targets are met, the value of the consideration ultimately paid will be added to the cost of the ~~acquisition, which will increase the amount of goodwill related to the acquisition. The Company assumed $5.57 million of debt in connection~~acquisitions. Goodwill and other intangibles associated with ~~the acquisition, of which~~those acquisitions total approximately $5.00 million was retired at closing. In March 2008, the Company issued 7,728 additional shares in connection with the acquisition, resulting in a goodwill adjustment of approximately $267 thousand. In July 2008, GreenPoint acquired REL Insurance Agency for $1.08 million in an all cash transaction. Under the terms of the agreement, the former principal of REL is entitled to additional consideration aggregating up to $720 thousand, if certain operating targets are met. The acquisition and activity of GreenPoint has added a total $9.86 million of goodwill and intangibles.$2.04 million.

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

~~-8-~~

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

Note 3. Investment Securities

As of ~~September 30, 2008,~~March 31, 2009, and December 31, ~~2007,~~2008, the amortized cost and estimated fair value of available-for-sale securities were as follows:


										March 31, 2009
	September 30, 2008									Amortized		Unrealized		Unrealized			Fair
	Amortized		Unrealized		Unrealized			Fair		Cost		Gains		Losses			Value
(In Thousands)	Cost		Gains		Losses			Value

U.S. Government agency securities	$	68,424	$	106	$	(302	)	$	68,228	$	53,425	$	702	$	—		$	54,127
States and political subdivisions		163,942		563		(7,976	)		156,529		141,536		2,296		(2,209	)		141,623
Trust-preferred securities		164,203		—		(76,681	)		87,522		148,882		—		(99,409	)		49,473
Mortgage-backed securities		202,214		397		(10,042	)		192,569		303,431		7,149		(11,989	)		298,591
Equities		8,466		402		(715	)		8,153		7,005		376		(1,531	)		5,850

Total	$	607,249	$	1,468	$	(95,716	)	$	513,001	$	654,279	$	10,523	$	(115,138	)	$	549,664


	December 31, 2007
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

U.S. Government agency securities	$	136,791	$	2,446	$	—		$	139,237
States and political subdivisions		186,834		2,667		(965	)		188,536
Trust-preferred securities		164,731		—		(14,106	)		150,625
Mortgage-backed securities		177,984		816		(2,073	)		176,727
Equities		8,597		814		(416	)		8,995

Total	$	674,937	$	6,743	$	(17,560	)	$	664,120

The following table reflects those investments in an unrealized loss position at ~~September 30, 2008,~~March 31, 2009, and December 31, ~~2007.~~2008. The Company has the intent and ability to hold until maturity or recovery any security in a continuous unrealized loss position for 12 or more months.


	September 30, 2008															March 31, 2009
	Less than 12 Months					12 Months or longer					Total					Less than 12 Months					12 Months or longer					Total
Description of Securities	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
																Value		Losses			Value		Losses			Value		Losses
(In Thousands)	Value		Losses			Value		Losses			Value		Losses
U. S. Government agency securities	$	58,122	$	(302	)	$	—	$	—		$	58,122	$	(302	)	$	—	$	—		$	—	$	—		$	—	$	—
States and political subdivisions		106,525		(5,217	)		15,193		(2,761	)		121,718		(7,978	)		43,135		(1,194	)		11,225		(1,015	)		54,360		(2,209	)
Trust-preferred securities		24,655		(33,745	)		62,867		(42,936	)		87,522		(76,681	)		—		—			49,473		(99,409	)		49,473		(99,409	)
Mortgage-backed securities		141,804		(1,532	)		19,205		(8,510	)		161,009		(10,042	)		24,705		(330	)		16,558		(11,659	)		41,263		(11,989	)
Equity securities		2,806		(560	)		2,268		(155	)		5,074		(715	)		2,059		(1,245	)		2,153		(286	)		4,212		(1,531	)

Total	$	333,912	$	(41,356	)	$	99,533	$	(54,362	)	$	433,445	$	(95,718	)	$	69,899	$	(2,769	)	$	79,409	$	(112,369	)	$	149,308	$	(115,138	)


	December 31, 2007
	Less than 12 Months					12 Months or longer					Total
Description of Securities	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

U. S. Government agency securities	$	—	$	—		$	—	$	—		$	—	$	—
States and political subdivisions		40,461		(900	)		12,287		(65	)		52,748		(965	)
Trust-preferred securities		129,006		(12,431	)		21,994		(1,675	)		151,000		(14,106	)
Mortgage-backed securities		7,991		(108	)		63,393		(1,965	)		71,384		(2,073	)
Equity securities		2,269		(345	)		1,759		(71	)		4,028		(416	)

Total	$	179,727	$	(13,784	)	$	99,433	$	(3,776	)	$	279,160	$	(17,560	)

downgrades and certain of these securities are on negative ~~credit watch by~~watch. As of December 31, 2008, the Company recorded pre-tax other-than-temporary impairment charges of $15.46 million on one ~~or more rating firms. All~~ of ~~the~~its pooled ~~trust-preferred~~trust preferred securities ~~remain composite A-rated and have not deferred an interest payment. The securities carry variable rate structures that float at~~which demonstrated a ~~prescribed margin over 3-month LIBOR. The Company has modeled~~probable adverse change in cash flow. Recent modeling of the expected cash flows from the pooled trust-preferred securities, ~~and,~~ at present, does not ~~expect to have an adverse cash flow effect~~suggest any of the remaining securities will incur credit losses under any of the scenarios modeled due to the existence of other subordinate classes within the ~~pools.~~pools and on current projections for deferrals and defaults of underlying collateral.

~~Although~~The Company made a cumulative effect adjustment of $6.13 million, $10.22 million pre-tax, as of January 1, 2009, to recognize the portion of non-credit losses associated with a non-agency mortgage-backed security for which the Company ~~has both~~recognized a pre-tax other-than-temporary impairment charge of $14.47 million as of December 31, 2008. The Company determined that only $4.25 million of the ~~intent~~original impairment charge was due to probable credit losses. The amount due to probable credit losses was determined using customized default and ~~ability~~prepayment scenarios.

At March 31, 2009, the combined depreciation in value of the 193 individual securities in an unrealized loss position was approximately 26.36% of the combined reported value of the aggregate securities portfolio. At December 31, 2008, the combined depreciation in value of the 310 individual securities in an unrealized loss position was approximately 17.04% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of March 31, 2009, represents other-than-temporary impairment. The Company intends to hold these securities until recovery or maturity and it is more likely than not that it will not sell these securities before recovery. For the ~~securities to maturity,~~quarter ended March 31, 2009, the Company ~~is closely monitoring this portfolio due to the substantial market discounts. The market discounts reflect the credit market disruption in bank subordinated debt instruments and the possibility~~recognized impairment of ~~future negative credit events within the banking sector, which could affect collateral within~~$209 thousand on certain of its equity securities holdings.

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity, at March 31, 2009, are shown below. Expected maturities may differ from contractual maturities because issuers may have the ~~pools~~right to call or prepay obligations with or without call or prepayment penalties.


	Amortized
	Cost		Fair Value
	(Dollars in Thousands)
Due within one year	$	1,378	$	1,399
Due after one year but within five years		5,222		5,330
Due after five years within ten years		75,311		76,792
Due after ten years		261,932		161,702

		343,843		245,223
Mortgage-backed securities		303,431		298,591
Equity securities		7,005		5,850

Total	$	654,279	$	549,664

The amortized cost and ~~single-issue securities. Monitoring for other-than-temporary impairment (“OTI”) is dependent on~~estimated fair value of held-to-maturity securities by contractual maturity, at March 31, 2009, are shown below. Expected maturities may differ from contractual maturities because issuers may have the ~~aforementioned assumptions regarding future credit events and the general strength of the banking industry as it deals~~right to call or prepay obligations with ~~credit losses in the current recessionary real estate market. Acceleration of bank losses and~~or without call or prepayment penalties.


	Amortized
	Cost		Fair Value
	(Dollars in Thousands)
Due within one year	$	551	$	556
Due after one year but within five years		4,116		4,197
Due after five years within ten years		3,804		3,867
Due after ten years		—		—

Total	$	8,471	$	8,620

~~-10-~~- 11 -

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

Note 4. Loans

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


	September 30, 2008					December 31, 2007					March 31, 2009					December 31, 2008
(Dollars in Thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Loans held for investment:
Commercial and agricultural	$	83,271		7.13	%	$	96,261		7.85	%
Commercial real estate		386,287		33.06	%		386,112		31.51	%
Residential real estate		498,721		42.69	%		498,345		40.66	%
Construction		127,076		10.88	%		163,310		13.33	%
Commercial, financial, and agricultural											$	81,880		6.41	%	$	85,034		6.55	%
Real estate — commercial												405,549		31.76	%		407,638		31.40	%
Real estate — construction												124,320		9.74	%		130,610		10.06	%
Real estate — residential												597,372		46.79	%		602,573		46.42	%
Consumer		66,333		5.68	%		75,447		6.16	%		62,353		4.88	%		66,258		5.10	%
Other		6,598		0.56	%		6,027		0.49	%		5,316		0.42	%		6,046		0.47	%

Total	$	1,168,286		100.00	%	$	1,225,502		100.00	%	$	1,276,790		100.00	%	$	1,298,159		100.00	%


Loans held for sale	$	140				$	811				$	1,445				$	1,024

Note 9.8. Commitments and Contingencies

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

Note ~~10.~~9. Segment Information

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

The following table sets forth information about the reportable operating segments and reconciliation of this information to the consolidated financial statements at and for the ~~three- and nine-month~~three periods ended ~~September 30, 2008.~~March 31, 2009.


(In Thousands)											For the Three Months Ended
											March 31, 2009
	For the Three Months Ended										Community		Insurance			Parent/
	September 30, 2008
	Community		Insurance			Parent/
(In Thousands)	Banking		Services			Elimination			Total
	Banking		Services			Elimination			Total
Net interest income	$	16,559	$	(19	)	$	(217	)	$	16,323	$	16,492	$	(18	)	$	(41	)	$	16,433
Provision for loan losses		3,461		—			—			3,461		2,087		—			—			2,087
Noninterest income		3,923		1,267			2,693			7,883		6,124		2,344			(44	)		8,424
Noninterest expense		13,635		1,110			(304	)		14,441		13,582		1,638			(26	)		15,194

Income before income taxes		3,386		138			2,780			6,304		6,947		688			(59	)		7,576
Provision for income taxes		962		41			750			1,753		1,932		203			211			2,346

Net income	$	2,424	$	97		$	2,030		$	4,551	$	5,015	$	485		$	(270	)	$	5,230

End of period goodwill and other intangibles											$	78,657	$	10,681		$	—			89,338

End of period assets											$	2,170,694	$	11,698		$	16,749			2,199,141

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

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


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


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


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

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

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

Securities Available-for-Sale.: Securities classified as available-for-sale are reported at fair value utilizing Level 1, Level 2, and Level 23 inputs. ~~For~~Securities are classified as Level 1 within the valuation hierarchy when quoted prices are available in an active market. This includes securities, ~~the Company obtains fair~~such as U.S. Treasuries, whose value ~~measurements from~~is based on quoted market prices in active ~~exchanges. For~~markets for identical assets.

Securities are classified as Level 2 ~~securities,~~within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things.

Securities are classified as Level 3 within the valuation hierarchy in certain cases when there is limited activity or less transparency to the valuation inputs. These securities include certain pooled trust preferred securities. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

~~-15-~~- 16 -

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current or pricing variations are significant. The Company’s fair value from third party models utilize modeling software that uses market participant data and knowledge of the structures of each individual security to develop cash flows specific to each security. The fair values of the securities are determined by using the cash flows developed by the fair value model and applying appropriate market observable discount rates. The discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity developed based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Specific securities that have increased uncertainty regarding the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of the specific markets and the general economic indicators.

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

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

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

Other Real Estate Owned. The fair value of the Company’s other real estate owned is determined using current and prior appraisals, estimates of costs to sell, and proprietary adjustments. Accordingly, other real estate owned is stated at a Level 3 fair value.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of ~~September 30,~~March 31, 2009, and December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	Fair Value Measurements Using						Total
(In Thousands)	Level 1		Level 2		Level 3		Fair Value		March 31, 2009
									Fair Value Measurements Using						Total
	Level 1		Level 2		Level 3		Fair Value
Available-for-sale securities	$	6,348	$	506,653	$	—	$	513,001	$	5,706	$	521,253	$	22,705	$	549,664
Other assets		2,843		—		—		2,843		2,269		—		—		2,269
Derivative assets		—		377		—		377		—		57		—		57
Other liabilities		2,843		—		—		2,843		2,269		—		—		2,269
Derivative liabilities		—		1,786		—		1,786		—		3,085		—		3,085

The following table shows a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using significant unobservable inputs. There were no financial assets or liabilities stated at Level 3 at March 31, 2008.


(In Thousands)	Available-for-
	Sale Securities
Beginning balance January 1, 2009	$	28,067
Total gains or loss (realized/unrealized)
Included in earnings		—
Included in other comprehensive income		(7,508	)
Paydowns and maturities		(33	)
Transfers into Level 3		2,179

Ending balance March 31, 2009	$	22,705

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. ~~The~~Items subjected to nonrecurring fair value ~~of loans considered impaired~~adjustments at March 31, 2009, and ~~collateral dependent was $5.98 million at September 30, 2008.~~December 31, 2008, are as follows:


(In Thousands)	March 31, 2009
	Fair Value Measurements Using						Total
	Level 1		Level 2		Level 3		Fair Value
Impaired loans	$	—	$	—	$	4,923	$	4,923
Other real estate owned		—		—		3,114		3,114


(In Thousands)	December 31. 2008
	Fair Value Measurements Using						Total
	Level 1		Level 2		Level 3		Fair Value
Impaired loans	$	—	$	—	$	5,980	$	5,980

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As

- 18 -

Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists.


	March 31, 2009				December 31, 2008
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
			(Amounts in Thousands)
Assets
Cash and cash equivalents	$	100,960	$	100,960	$	46,439	$	46,439
Investment Securities		558,135		558,284		529,393		529,525
Loans held for sale		1,445		1,458		1,024		1,026
Loans held for investment		1,260,235		1,255,995		1,282,181		1,276,479
Derivative financial assets		57		57		39		39
Deferred compensation assets		2,269		2,269		2,637		2,637

Liabilities
Demand deposits		207,947		207,947		199,712		199,712
Interest-bearing demand deposits		194,934		194,934		185,117		185,117
Savings deposits		319,007		319,007		309,577		309,577
Time deposits		861,556		876,545		809,352		824,068
Securities sold under agreements to repurchase		153,824		165,340		165,914		177,454
FHLB and other indebtedness		215,870		236,836		215,877		242,223
Derivative financial liabilities		3,085		3,085		3,343		3,343
Deferred compensation liabilities		2,269		2,269		2,637		2,637

The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

Financial Instruments with Book Value Equal to Fair Value:The book values of cash and due from banks and federal funds sold and purchased are considered to be equal to fair value as a result of the short-term nature of these items.

Investment Securities and Deferred Compensation Assets and Liabilities:Fair values are determined in the same manner as described above.

Loans:The estimated fair value of loans held for investment is measured based upon discounted future cash flows using current rates for similar loans, applying a discount for illiquidity. Loans held for sale are recorded at lower of cost or estimated fair value. The fair value of loans held for sale is determined based upon the market sales price of similar loans.

Derivative Financial Instruments:The estimated fair value of derivative financial instruments is based upon the current market price for similar instruments.

Deposits and Securities Sold Under Agreements to Repurchase:Deposits without a stated ~~above,~~maturity, including demand, interest-bearing demand, and savings accounts, are reported at their carrying value in accordance with SFAS ~~157~~107. No value has been assigned to the franchise value of these deposits. For other types of deposits and repurchase agreements with fixed maturities and rates, fair value has been estimated by discounting future cash flows based on interest rates currently being offered on instruments with similar characteristics and maturities.

- 19 -

Other Indebtedness:Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar characteristics and maturities.

Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees:The amount of off-balance sheet commitments to extend credit, standby letters of credit, and financial guarantees is considered equal to fair value. Because of the uncertainty involved in attempting to assess the likelihood and timing of commitments being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures, the Company does not believe it is meaningful to provide an estimate of fair value that differs from the given value of the commitment.

Note 11. Derivatives and Hedging Activities

The Company, through its mortgage banking and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers’ financing needs. Derivative assets and liabilities are recorded at fair value on the balance sheet.

The primary derivatives that the Company uses are interest rate swaps and interest rate lock commitments (“IRLCs”). Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be ~~applicable~~adversely affected by fluctuations in external factors, such as interest rates, market-driven loan rates and prices or other economic factors.

The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments as of the dates indicated:


(In Thousands)	March 31, 2009		December 31, 2008		March 31, 2008
Interest rate swap	$	50,000	$	50,000	$	50,000
IRLC’s		11,300		10,500		13,200

As of March 31, 2009, December 31, 2008 and March 31, 2008, the fair values of the Company’s derivatives were as follows:


	Asset Derivatives
	March 31, 2009			December 31, 2008			March 31, 2008
	Balance Sheet	Fair		Balance Sheet	Fair		Balance Sheet	Fair
(In Thousands)	Location	Value		Location	Value		Location	Value
Derivatives designated as hedges
Interest rate swap	Other assets	$	—	Other assets	$	—	Other assets	$	—

Total		$	—		$	—		$	—


Derivatives not designated as hedges
IRLC’s	Other assets	$	57	Other assets	$	39	Other assets	$	52

Total		$	57		$	39		$	52


Total derivatives		$	57		$	39		$	52

- 20 -


	Liability Derivatives
	March 31, 2009			December 31, 2008			March 31, 2008
	Balance Sheet	Fair		Balance Sheet	Fair		Balance Sheet	Fair
(In Thousands)	Location	Value		Location	Value		Location	Value
Derivatives designated as hedges
Interest rate swap	Other liabilities	$	3,081	Other liabilities	$	3,327	Other liabilities	$	2,903

Total		$	3,081		$	3,327		$	2,903


Derivatives not designated as hedges
IRLC’s	Other liabilities	$	4	Other liabilities	$	16	Other liabilities	$	14

Total		$	4		$	16		$	14


Total derivatives		$	3,085		$	3,343		$	2,917

Interest Rate Swaps.The Company uses interest rate swap contracts to ~~these~~modify its exposure to interest rate risk. The Company currently employs a cash flow hedging strategy to effectively convert certain floating-rate liabilities into fixed-rate instruments. The interest rate swap is accounted for under the “short-cut” method in SFAS 133. Changes in fair value ~~measurements beginning January 1, 2009.~~of the interest rate swap are reported as a component of other comprehensive income. The Company does not currently employ fair value hedging strategies.

~~Note 12: Subsequent Event~~Interest Rate Lock Commitments.In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan market. During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with mortgage loans that are in the “mortgage pipeline.” A pipeline loan is one on which the potential borrower has set the interest rate for the loan by entering into an interest rate lock commitment (“IRLC”). Once a mortgage loan is closed and funded, it is included within loans held for sale and awaits sale and delivery into the secondary market. During the term of an IRLC, the Company has the risk that interest rates will change from the rate quoted to the borrower.

~~On October 27,~~The Company’s balance of mortgage loans held for sale is subject to changes in fair value, due to fluctuations in interest rates from the loan closing date through the date of sale of the loan into the secondary market. Typically, the fair value of the warehouse declines in value when interest rates increase and rises in value when interest rates decrease.

Effect of Derivatives and Hedging Activities on the Income Statement

For the quarters ended March 31, 2009 and 2008, the Company ~~received approval from~~has determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains and losses recognized in income on non-designated hedging instruments under SFAS 133 for the ~~U.S. Treasury Department (the “Treasury”)~~quarters ended March 31, 2009 and 2008.

Derivatives not

Amount of Gain/(Loss)

designated as hedging

Location of Gain/(Loss)

Recognized in Income on Derivative

instruments under

Recognized in Income on

Quarter ended

SFAS 133

Derivative

March 31, 2009

March 31, 2008

(Amounts in Thousands)

IRLC’s

Other income

Total

Counterparty Credit Risk.Like other financial instruments, derivatives contain an element of “credit risk.” Credit risk is the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to ~~participate in~~meet its contractual obligations. This risk is measured as the ~~Capital Purchase Program developed~~expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the ~~Treasury Department under the Troubled~~Company’s Asset ~~Relief Program.~~and Liability Management Committee. The ~~terms~~Company reviews its counterparty risk regularly and has determined that, as of the program allow the Company to sell $42.50 million of cumulative, perpetual, non-voting, senior preferred stock, and warrants to purchase common stock, to the Treasury. From the date of the approval, the Company has 30 days to execute the requisite documents.March 31, 2009, there is no significant counterparty credit risk.

~~-16-~~- 21 -

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”)~~the Company financial condition and results of operations. This discussion and analysis should be read in conjunction with the Company’s ~~2007~~2008 Annual Report on Form 10-K and the other financial information included in this report.

The Company is a multi-state financial holding company headquartered in Bluefield, Virginia, with total assets of ~~$1.97~~$2.20 billion at ~~September 30, 2008.~~March 31, 2009. Through its community bank subsidiary, First Community Bank, N. A. (the “Bank”), the Company provides financial, trust and investment advisory services to individuals and commercial customers through more than fifty locations in Virginia, West Virginia, North ~~and~~Carolina, South Carolina, and Tennessee. The Company is also the parent of GreenPoint Insurance Group, Inc., a North Carolina-based full-service insurance agency offering commercial and personal lines (“GreenPoint”). The Bank is the parent of Investment Planning Consultants, Inc. (“IPC”), a ~~SEC-registered~~registered investment advisory firm that offers wealth management and investment advice. The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol, “FCBC”.

FORWARD-LOOKING STATEMENTS

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

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

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. These factors are described in greater detail in Item 1A. Risk Factors, ofin the Company’s ~~2007~~2008 Annual Report on Form 10-K.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with ~~U.S. generally accepted accounting principles (“GAAP”)~~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

~~-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 the accounting for and valuation of investment securities, the determination of the allowance for loan losses, accounting for acquisitions and intangible assets, and accounting for income taxes as the four accounting areas that require the most subjective or complex judgments. The identified critical accounting policies are described in detail in the Company’s ~~2007~~2008 Annual Report on Form 10-K. ~~Except for the critical accounting policy set forth below, there have been no material changes in the Company’s critical accounting policies since December 31, 2007.~~

~~Accounting for investment securities~~

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

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

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

COMPANY OVERVIEW

The Company is a financial holding company which operates within the five-state region of Virginia, West Virginia, North ~~and~~Carolina, South Carolina, and Tennessee. The Company operates through the Bank, ~~IPC,~~Investment Planning Consultants, and GreenPoint to offer a wide range of financial services. The Company reported total assets of ~~$1.97~~$2.20 billion at ~~September 30, 2008.~~March 31, 2009.

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

The Company also conducts asset management activities through the Bank’s Trust and Financial Services Division (“Trust Division”) and its registered investment advisory firm, IPC. The Bank’s Trust Division and IPC manage assets with an aggregate market value of ~~$897~~$791 million. These assets are not assets of the Company, but are managed under various fee-based arrangements as fiduciary or agent.

~~-18-~~

~~Recent Market Developments~~RECENT MARKET DEVELOPMENTS

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

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

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

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

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

MERGERS, ACQUISITIONS AND BRANCHING ACTIVITY

~~In July 2008,~~On April 2, 2009, the Company ~~announced its proposed~~signed a definitive agreement providing for the acquisition of ~~Coddle Creek Financial Corp.~~TriStone Community Bank (“~~Coddle Creek”~~TriStone”) a $152.42 million state-chartered commercial bank headquartered in ~~Mooresville,~~Winston-Salem, North Carolina. ~~Coddle Creek is~~The definitive agreement provides for the bank holding company for Mooresville Savings Bank, SSB (“Mooresville Savings”), a state-chartered savings bank providing deposit and loan services in Mooresville, Huntersville, and Cornelius, North Carolina (the Lake Norman region just northexchange of ~~Charlotte, North Carolina). At June 30, 2008, Coddle Creek had total assets of $158.60 million, loans of $133.71 million, deposits of $136.97 million and stockholders’ equity of $19.09 million.~~

Pursuant to the terms of the definitive merger agreement, Coddle Creek will merge with and into the Company. Immediately thereafter, Mooresville Savings will be merged with and into the Bank and operate under the name, identity, and branch network of First Community Bank, N. A. Stockholders of Coddle Creek will receive merger consideration of $19.60 per share and 0.9046.5262 shares of the Company’s common stock for each outstanding share of ~~Coddle Creek~~TriStone common stock. TriStone will be merged with and into the Bank. The ~~merger~~ transaction is ~~valued at approximately $33.01 million, based on~~subject to regulatory approvals and approval by the ~~Company’s closing price~~stockholders of ~~$35.83 on July 31, 2008. The value~~TriStone, and is expected to close in the third quarter of 2009.

On November 14, 2008, the ~~transaction and value of each share~~Company completed the acquisition of Coddle Creek ~~common stock on consummation~~Financial Corp. (“Coddle Creek”), based in Mooresville, North Carolina. Coddle Creek had three full service locations in Mooresville, Cornelius, and Huntersville, North Carolina. At acquisition, Coddle Creek had total assets of approximately $158.66 million, loans of approximately $136.99 million, and deposits of approximately $137.06 million. Under the terms of the merger ~~may be higher or lower depending on the value~~agreement, shares of Coddle Creek were exchanged for .9046 shares of the Company’s common stock ~~on such date. The transaction has received~~and $19.60 in cash, for a total purchase price of approximately $32.29 million. As a result of the ~~required regulatory approvals or waivers~~acquisition and ~~been approved by the stockholders of Coddle Creek. The merger is expected to be completed~~purchase price allocation, approximately $14.41 million in ~~the fourth quarter of 2008.~~

~~The proposed acquisition of Mooresville Savings~~goodwill was recorded, which represents the ~~Company’s continued expansion into targeted suburban markets as part of its strategic plan for growth~~excess purchase price over the fair market value of the ~~franchise in desirable markets in~~net assets acquired and ~~near important MSA’s in the Mid-Atlantic and~~identified intangibles.

~~-19-~~-23-

~~Southeast United States. The Company expects to substantially expand customer offerings, support technologies, and delivery channels to enhance the existing core business~~Since January 1, 2008, GreenPoint has acquired a total of ~~Mooresville Savings.~~

~~In September 2007, the Company acquired GreenPoint, a High Point, North Carolina, insurance agency. In connection with the initial payment~~five agencies, issuing cash consideration of approximately ~~$1.66 million, the Company issued 49,088 shares of its common stock. Under the~~$2.04 million. Acquisition terms ~~of the stock purchase agreement, former shareholders of GreenPoint are entitled to~~in all instances call for additional ~~consideration aggregating up to $1.45 million in the form of~~ cash ~~or the Company’s common stock, valued at the time of issuance,~~consideration if certain ~~future~~ operating performance targets are met. If those ~~operating~~ targets are met, the value of the consideration ultimately paid will be added to the cost of the ~~acquisition, which will increase the amount of goodwill related to the acquisition. The Company assumed $5.57 million debt in connection~~acquisitions. Goodwill and other intangibles associated with ~~the acquisition, of which~~GreenPoint’s acquisitions total approximately $5.00 million was retired at closing. In March 2008, the Company issued 7,728 additional shares in connection with the acquisition, resulting in a goodwill adjustment of approximately $267 thousand. In July 2008, GreenPoint acquired REL Insurance Agency for $1.08 million in an all cash transaction. Under the terms of the agreement, the former principal of REL is entitled to additional consideration aggregating up to $720 thousand, if certain operating targets are met. The acquisition and activity of GreenPoint has added a total $9.86 million of goodwill and intangibles.$2.04 million.

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

RESULTS OF OPERATIONS

Overview

Net income available to common shareholders for the three months ended ~~September 30, 2008,~~March 31, 2009, was ~~$4.55~~$4.66 million, or ~~$0.42~~$0.40 per basic ~~share~~ and ~~$0.41 per~~ diluted share, compared with ~~$7.32~~$6.31 million, or ~~$0.65~~$0.57 per basic and diluted share, for the three months ended ~~September 30, 2007,~~March 31, 2008, a decrease of ~~$2.77~~$1.65 million, or ~~37.79%~~26.19%. Return on average assets was ~~0.90%~~0.87% for the three months ended ~~September 30, 2008,~~March 31, 2009, compared with ~~1.34%~~1.21% for the same period in ~~2007.~~2008. Return on average common equity for the three months ended ~~September 30, 2008,~~March 31, 2009, was ~~9.39%~~10.61% compared with ~~13.31%~~11.66% for the three months ended ~~September 30, 2007.~~

~~Net income~~March 31, 2008. The main reason for the ~~nine months ended September 30, 2008,~~decrease in net income was ~~$17.10 million, or $1.56 per basic share and $1.54 per diluted share, compared with $21.88 million, or $1.95 per basic share and $1.94 per diluted share,~~increased provisions for the nine months ended September 30, 2007, a decrease of $4.78 million, or 21.84%. Return on average assets was 1.12% for the nine months ended September 30, 2008, compared with 1.38% for the same period in 2007. Return on average equity for the nine months ended September 30, 2008, was 11.09% compared with 13.40% for the nine months ended September 30, 2007.loan losses.

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

Net interest income, the largest contributor to earnings, was ~~$16.32~~$16.43 million for the three months ended ~~September 30, 2008,~~March 31, 2009, compared with ~~$17.14~~$16.36 million for the corresponding period in ~~2007, a decrease~~2008, an increase of ~~$820~~$73 thousand, or ~~4.78%~~0.45%. Tax-equivalent net interest income totaled ~~$17.26~~$17.35 million for the three months ended ~~September 30, 2008,~~March 31, 2009, a decrease of ~~$1.02 million~~$142 thousand from ~~$18.28~~$17.49 million for the ~~third~~first quarter of ~~2007.~~2008. The decrease in tax-equivalent net interest income was due primarily to decreases in loan and investment ~~balances and those~~ yields as a result of the precipitous declines in benchmark interest rates, including the New York Prime Rate, ~~during the last nine months.~~since late 2007.

Compared with the ~~third~~first quarter of ~~2007,~~2008, average earning assets ~~decreased $199.96~~increased $24.15 million while interest-bearing liabilities ~~decreased $124.63~~increased $93.30 million during the three months ended ~~September 30,~~March 31, 2009. The changes include the impact of the Coddle Creek acquisition in November 2008. The yield on average earning assets decreased by 6465 basis points to ~~6.22%~~5.97% from ~~6.86%~~6.62% between the three months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ respectively. Total cost of interest-bearing liabilities decreased ~~105~~79 basis points between the ~~third~~first quarters of ~~2007~~2008 and ~~2008,~~2009, which resulted in a net interest rate spread that was 4114 basis points higher at ~~3.64%~~3.53% for the ~~third~~first quarter of 2008 compared with ~~3.23%~~3.39% for the same period last year. The Company’s tax-equivalent net interest margin of ~~3.90%~~3.73% for the three months ended ~~September 30, 2008, increased 20~~March 31, 2009, decreased five basis points from ~~3.70%~~3.78% for the same period of ~~2007.~~2008.

The rate earned on loans decreased 9581 basis points to ~~6.53%~~6.28% from ~~7.48%~~7.09% for the three months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ respectively. The effect of the cuts in the target federal funds rate by the Federal Open Market Committee and the associated decline in the Prime rate had a profound impact on loan yields throughout ~~2008. Declines~~2008 and 2009, resulting in ~~the average portfolio balances also contributed to~~ a net decrease of ~~$4.21~~$1.26 million, or ~~17.92%~~5.93%, in tax-equivalent loan interest income for the ~~third~~first quarter of ~~2008~~2009 compared with the ~~third~~first quarter of ~~2007.~~2008.

~~-20-~~

During the three months ended ~~September 30, 2008,~~March 31, 2009, the tax-equivalent yield on available-for-sale securities ~~decreased 21~~increased 17 basis points to ~~5.58%~~5.98%, while the average balance decreased by ~~$93.15~~$109.98 million, or ~~13.98%~~17.64%, compared with the same period in ~~2007.~~2008. The decline in average ~~tax-equivalent yield decreased~~balance was due to ~~the large portion of variable rate securities~~declines in the ~~portfolio.~~fair value of available-for-sale securities. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.

Compared with the ~~third~~first quarter of ~~2007,~~2008, average interest-bearing balances with banks ~~decreased~~increased to ~~$1.44~~$73.63 million during the ~~third~~first quarter of 2008, as the yield decreased ~~228~~299 basis points to 2.50% during the same period. Interest-bearing balances with banks is comprised largely of excess liquidity bearing overnight market rates. The rate earned on these overnight balances during the third quarter of 2008 decreased along with decreases in short-term benchmark interest rates.

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

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

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

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

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

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

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

~~-21-~~

Compared with the same period in ~~2007,~~2008, the average balances of interest-bearing demand deposits increased ~~$25.38~~$28.04 million, or ~~17.35%~~17.29%, while the average rate paid during the first ~~nine months~~quarter of ~~2008~~2009 decreased 15by two basis points. During the ~~nine~~three months ended ~~September 30, 2008,~~March 31, 2009, the average balances of savings deposits decreased ~~$14.95~~$14.50 million, or ~~4.53%~~4.43%, while the average rate paid ~~was 1.63%, a 61~~decreased 98 basis ~~point decrease from~~points compared to the ~~first nine months of 2007.~~same period in 2008. Average time deposits ~~decreased $51.72~~increased $185.38 million, or ~~7.39%~~27.56%, while the average rate paid on time deposits decreased 63106 basis points from ~~4.44%~~4.29% in the first ~~nine months~~quarter of ~~2007~~2008 to ~~3.81%~~3.23% in the first ~~nine months~~quarter of ~~2008.~~ 2009. The level of average non-interest-bearing demand deposits decreased $13.66 million, or 6.41%, to $199.31 million during the quarter ended March 31, 2009, compared with the corresponding period of the prior year. The overall increase in the level of average deposits reflects the addition of Coddle Creek. Movements within the deposit types reflect customers seeking yield enhancement within FDIC insured products.

Retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, decreased ~~$16.05~~$43.11 million, or ~~9.60%~~28.82%, to ~~$151.11~~$106.47 million for the ~~nine months ended September 30, 2008,~~first quarter of 2009, while the rate decreased ~~130~~126 basis points to ~~2.25%~~1.49% during the same period. The ~~level~~decrease in average balance can be largely attributed to the customers converting retail repurchase agreements to certificates of deposit. There were no fed funds purchased on average ~~non-interest-bearing demand deposits decreased $17.25 million, or 7.46%, to $213.93 million~~ during the ~~nine months ended September 30, 2008,~~first quarter of 2009, compared with ~~the corresponding period of the prior year.~~

~~Compared with~~$1.82 million in the same period in ~~2007, average federal funds purchased increased $12.79 million to $18.24 million during the first nine months of 2008, and wholesale~~2008. Wholesale repurchase agreements remained unchanged at $50.00 million, while the rate ~~decreased 153~~increased 34 basis points between the two periods. The average balance of FHLB borrowings and other long-term debt ~~increased~~decreased by ~~$5.09~~$60.69 million, or ~~2.06%~~21.95%, in the first ~~nine months~~quarter of ~~2008~~2009 to ~~$252.52~~$215.81 million, while the rate paid on those borrowings decreased 6558 basis points. The Company prepaid a $25.00 million FHLB advance during the first nine months of 2008. The advance carried an interest rate of 5.47% and was extinguished using current liquidity. A $50.00 million advance paying 3.64% was also called in June 2008.

~~-22-~~-25-

Table I

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS


	Three Months Ended							Three Months Ended							Three Months Ended							Three Months Ended
	September 30, 2008							September 30, 2007							March 31, 2009							March 31, 2008
	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)	$	1,174,855	$	19,286		6.53	%	$	1,246,530	$	23,497		7.48	%	$	1,292,179	$	19,997		6.28	%	$	1,205,481	$	21,258		7.09	%
Securities available for sale		573,046		8,035		5.58	%		666,199		9,715		5.79	%		513,300		7,571		5.98	%		623,275		8,998		5.81	%
Securities held to maturity		9,559		161		6.70	%		12,591		254		8.00	%		8,473		172		8.23	%		12,075		242		8.06	%
Interest-bearing deposits		1,435		9		2.50	%		33,538		404		4.78	%		73,628		39		0.21	%		22,602		180		3.20	%

Total Earning Assets		1,758,895		27,491		6.22	%		1,958,858		33,870		6.86	%		1,887,580		27,779		5.97	%		1,863,433		30,678		6.62	%
Other assets		242,296							212,178							290,182							227,964

TOTAL ASSETS	$	2,001,191						$	2,171,036						$	2,177,762						$	2,091,397


LIABILITIES
Interest-bearing deposits:
Demand deposits	$	178,632	$	73		0.16	%	$	145,324	$	119		0.32	%	$	190,215	$	79		0.17	%	$	162,175	$	76		0.19	%
Savings deposits		309,364		1,172		1.51	%		344,866		2,088		2.40	%		312,563		656		0.85	%		327,061		1,487		1.83	%
Time deposits		632,142		5,439		3.42	%		698,280		7,876		4.47	%		858,020		6,832		3.23	%		672,645		7,178		4.29	%

Total interest-bearing deposits		1,120,138		6,684		2.37	%		1,188,470		10,083		3.37	%		1,360,798		7,567		2.26	%		1,161,881		8,741		3.03	%
Borrowings:
Federal funds purchased		42,702		251		2.34	%		751		10		5.28	%		—		—					1,819		18		3.98	%
Retail repurchase agreements		149,984		730		1.94	%		173,630		1,516		3.46	%		106,469		390		1.49	%		149,581		1,022		2.75	%
Wholesale repurchase agreements		50,000		389		3.10	%		50,000		556		4.41	%		50,000		510		4.14	%		50,000		473		3.80	%
FHLB borrowings and other indebtedness		216,789		2,173		3.99	%		291,394		3,424		4.66	%		215,813		1,963		3.69	%		276,503		2,933		4.27	%

Total borrowings		459,475		3,543		3.07	%		515,775		5,506		4.24	%		372,282		2,863		3.12	%		477,903		4,446		3.74	%

Total interest-bearing liabilities		1,579,613		10,227		2.58	%		1,704,245		15,589		3.63	%		1,733,080		10,430		2.44	%		1,639,784		13,187		3.23	%

Non-interestbearing demand deposits		211,155							229,452	��						199,311							212,972
Other liabilities		17,680							19,920							25,718							20,962
Stockholders’ Equity		192,743							218,049							219,653							217,679

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,001,191						$	2,171,666						$	2,177,762						$	2,091,397

Net Interest Income, Tax Equivalent			$	17,264						$	18,281						$	17,349						$	17,491

Net Interest Rate Spread (3)						3.64	%						3.23	%						3.53	%						3.39	%

Net Interest Margin (4)						3.90	%						3.70	%						3.73	%						3.78	%

~~Table II~~

~~AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS~~

Nine Months Ended Nine Months Ended
September 30, 2008 September 30, 2007
Average Yield/ Average Yield/
Balance Interest (1) Rate (1) Balance Interest (1) Rate (1)
(Dollars in Thousands)
ASSETS
Earning Assets
Loans (2) $ 1,187,006 $ 60,456 6.80 % $ 1,255,209 $ 70,445 7.50 %
Securities available for sale 602,802 25,310 5.61 % 609,772 26,267 5.76 %
Securities held to maturity 10,849 675 8.31 % 16,171 965 7.98 %
Interest-bearing deposits 12,363 260 2.81 % 29,726 1,073 4.83 %

Total Earning Assets 1,813,020 86,701 6.39 % 1,910,878 98,750 6.91 %
Other assets 232,933 203,831

TOTAL ASSETS $ 2,045,953 $ 2,114,709

LIABILITIES
Interest-bearing deposits:
Demand deposits $ 171,661 $ 213 0.17 % $ 146,283 $ 349 0.32 %
Savings deposits 314,903 3,847 1.63 % 329,854 5,537 2.24 %
Time deposits 648,282 18,483 3.81 % 700,006 23,245 4.44 %

Total interest-bearing deposits 1,134,846 22,543 2.65 % 1,176,143 29,131 3.31 %
Borrowings:
Federal funds purchased 18,241 330 2.42 % 5,447 229 5.62 %
Retail repurchase agreements 151,107 2,540 2.25 % 167,154 4,441 3.55 %
Wholesale repurchase agreements 50,000 1,077 2.88 % 50,000 1,651 4.41 %
FHLB borrowings and other indebtedness 252,520 7,732 4.09 % 247,428 8,773 4.74 %

Total borrowings 471,868 11,679 3.31 % 470,029 15,094 4.29 %

Total interest-bearing liabilities 1,606,714 34,222 2.85 % 1,646,172 44,225 3.59 %

Non-interestbearing demand deposits 213,934 231,187
Other liabilities 19,326 19,064
Stockholders’ Equity 205,979 218,286

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,045,953 $ 2,114,709

Net Interest Income, Tax Equivalent $ 52,479 $ 54,525

Net Interest Rate Spread (3) 3.54 % 3.32 %

Net Interest Margin (4) 3.87 % 3.81 %


~~(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.~~

~~-24-~~-26-

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 dollar amounts.


				Three Months Ended									Nine Months Ended						Three Months Ended
				September 30, 2008									September 30, 2008						March 31, 2009
				Compared to 2007									Compared to 2007						Compared to 2008
	$ Increase/(Decrease) due to									$ Increase/(Decrease) due to									$ Increase/(Decrease) due to
(In Thousands)	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
Interest Earned On:
Loans (1)	$	(1,314	)	$	(2,897	)	$	(4,211	)	$	(3,676	)	$	(6,313	)	$	(9,989	)	$	2,100		$	(3,361	)	$	(1,261	)
Securities available-for-sale (1)		(1,337	)		(343	)		(1,680	)		(291	)		(666	)		(957	)		(1,722	)		295			(1,427	)
Securities held-to-maturity (1)		(55	)		(38	)		(93	)		(332	)		42			(290	)		(75	)		5			(70	)
Interest-bearing deposits with other banks		(263	)		(132	)		(395	)		(474	)		(339	)		(813	)		136			(277	)		(141	)

Total interest-earning assets		(2,969	)		(3,410	)		(6,379	)		(4,773	)		(7,276	)		(12,049	)		439			(3,338	)		(2,899	)


Interest Paid On:
Demand deposits		39			(85	)		(46	)		77			(213	)		(136	)		8			(5	)		3
Savings deposits		(198	)		(718	)		(916	)		(241	)		(1,449	)		(1,690	)		(64	)		(767	)		(831	)
Time deposits		(700	)		(1,738	)		(2,438	)		(1,628	)		(3,134	)		(4,762	)		1,675			(2,021	)		(346	)
Fed funds purchased		243			(2	)		241			133			(32	)		101			(9	)		(9	)		(18	)
Retail repurchase agreements		(185	)		(600	)		(785	)		(393	)		(1,508	)		(1,901	)		(244	)		(388	)		(632	)
Wholesale repurchase agreements		—			(167	)		(167	)		—			(574	)		(574	)		—			37			37
FHLB borrowings and other long-term debt		(799	)		(452	)		(1,251	)		184			(1,225	)		(1,041	)		(600	)		(370	)		(970	)

Total interest-bearing liabilities		(1,600	)		(3,762	)		(5,362	)		(1,868	)		(8,135	)		(10,003	)		766			(3,523	)		(2,757	)


Change in net interest income, tax-equivalent	$	(1,369	)	$	352		$	(1,017	)	$	(2,905	)	$	859		$	(2,046	)	$	(327	)	$	185		$	(142	)

Noninterest income consists of all revenues that are not included in interest and fee income related to earning assets. Noninterest income for the ~~third~~first quarter of ~~2008~~2009 was ~~$7.88~~$8.42 million compared with ~~$6.02~~$9.14 million in the same period of ~~2007, an increase~~2008, a decrease of ~~$1.86 million,~~$717 thousand, or ~~30.95%~~7.84%. Wealth management revenues increased ~~$49~~$85 thousand, or ~~5.40%~~9.45%, to ~~$957~~$984 thousand for the three months ended ~~September 30, 2008,~~March 31, 2009, compared with the same period in ~~2007.~~2008. IPC added several large accounts during 2008. Service charges on deposit accounts increased ~~$802~~$58 thousand, or ~~26.68%~~1.87%, to ~~$3.81~~$3.16 million for the three months ended ~~September 30, 2008,~~March 31, 2009, compared with the same period in ~~2007.~~2008. The ~~strong~~ increase ~~in deposit service charges reflects the continuing success~~is smaller than recent quarters’ increases due to lower consumer spending and a generally higher rate of ~~new retail programs and initiatives implemented in 2007, which have positively impacted account service charges and new account openings.~~savings. Other service charges, commissions, and fees increased ~~$138~~$57 thousand, or ~~15.30%~~5.08%, to ~~$1.04~~$1.18 million for the three months ended ~~September 30, 2008,~~March 31, 2009, compared with the same period in ~~2007. Increases include higher levels of ATM service charges and electronic interchange income.~~2008. Insurance commissions for the ~~third~~first quarter of ~~2008~~2009 were ~~$1.24 million.~~$2.32 million, an increase of $973 thousand, or 41.99%, over 2008. Increased insurance commissions reflect revenue increases associated with agency acquisitions made by GreenPoint throughout 2008. Other operating income was ~~$675~~$586 thousand for the three months ended ~~September 30, 2008,~~March 31, 2009, a decrease of ~~$479~~$272 thousand, or ~~41.51%~~46.42%, compared with the same period in ~~2007.~~2008. Other operating income was down due largely to decreases in dividends on FHLB stock. At March 31, 2009, the Company recognized $209 thousand of other-than-temporary impairment on several smaller equity security holdings. During the ~~third~~first quarter of ~~2008,~~2009, securities gains of ~~$163~~$411 thousand were realized, compared with a gain of ~~$50 thousand~~$1.82 million in the comparable period in ~~2007.~~2008.

Noninterest income for the first nine months of 2008 was $24.75 million compared with $16.78 million in the same period of 2007, an increase of $7.97 million, or 47.47%. Wealth management revenues increased $23 thousand, or 0.78%, to $2.95 million for the nine months ended September 30, 2008, compared with the same period in 2007. Wealth management revenues were slightly elevated in 2007 as the Trust Division settled several large estates. Service charges on deposit accounts increased $2.29 million, or 28.39%, to $10.37 million for the nine months ended September 30, 2008, compared with the same period in 2007. The strong increase in deposit service charges reflects the continuing success of new retail programs and initiatives implemented in 2007, which have positively impacted account service charges and new account openings. Other service charges, commissions, and fees increased $616 thousand, or 23.61%, to $3.23 million for the nine months ended September 30, 2008, compared with the same period in 2007. Deposit service charges and other service charges and commissions reflect the year-to-date impact of the previously discussed retail program changes. Insurance commissions for the first nine months of 2008 were $3.73 million. Other operating income was $2.34 million for the three months ended September 30, 2008, a decrease of $620 thousand, or 20.97%, compared with the same period in 2007. During the first nine months of 2008, securities gains of $2.13 million were realized compared with a gain of $209 thousand in the comparable period in 2007. During the first quarter of 2008, certain investment securities in the Company’s portfolio significantly increased in value following the passage of a one-time call opportunity, and as the interest rate environment declined, the Company elected to monetize that value.

Noninterest Expense

Noninterest expense totaled ~~$14.44~~$15.19 million for the quarter ended ~~September 30, 2008, an increase~~March 31, 2009, a decrease of ~~$1.61~~$1.09 million, or ~~12.50%~~6.69%, from the same period in ~~2007.~~2008. Salaries and benefits for the first quarter of ~~2008~~2009 increased ~~$827~~$76 thousand, or ~~12.64%~~0.98%, compared to the same period in ~~2007.~~2008. Salaries and benefits at GreenPoint ~~accounted for $687~~increased $438 thousand ~~of the increase in the third quarter of 2008~~ over the prior ~~third quarter. Increases~~first quarter, a result of new agency acquisitions, and salaries and benefits at the new branches from Coddle Creek were $341 thousand. Decreases in ~~retirement plan accruals, incentive compensation accruals,~~general bank staffing levels and ~~commissions expense made up~~benefits largely offset the remainder of the increase. Other non-interest expense totaled $4.68 million for the third quarter of 2008, an increase of $273 thousand, or 6.19%, from $4.41 million for the third quarter of 2007. The increase between comparable periods is due mostly to increases in consulting expense, new account promotions, and legal expenses.increases. Occupancy and furniture and fixtures expenses increased between the comparable periods with the addition of GreenPoint and the ~~new~~Coddle Creek branches.

~~Noninterest~~ Other non- interest expense totaled $45.48 million for the nine months ended September 30, 2008, an increase of $8.41 million, or 22.70%, from the same period in 2007. Salaries and benefits for the first nine months of 2008 increased $3.62 million, or 18.94%, compared to the same period in 2007. Salaries and benefits at GreenPoint accounted for $1.90 million of the increase in the first nine months of 2008 over the prior year. Increases in retirement plan accruals, incentive compensation accruals, and commissions expense made up the remainder of the increase. Included in noninterest expense for the first nine months of 2008 is a prepayment penalty of $1.65 million incurred in connection with the early payment of a $25.00 million FHLB advance. Other non-interest expense totaled $14.10$4.54 million for the first ~~nine months~~quarter of ~~2008, an increase~~2009, a decrease of ~~$1.92 million,~~$79 thousand, or ~~15.74%~~1.71%, from ~~$12.18~~$4.62 million for the first ~~nine months~~quarter of ~~2007. The increase between comparable periods is due mostly to increases in legal and consulting expense and new account promotions. Occupancy and furniture and fixtures expenses increased between~~2008.

-28-

Over the ~~comparable periods with~~course of the ~~addition of GreenPoint and the new branches.~~

~~In October 2008,~~last two quarters, the FDIC has announced ~~its intention to seek an increase~~increases in deposit insurance premiums, ~~that, beginning in 2009, would effectively double~~as well as proposals to levy special assessments. The Company expects the ~~average~~increased deposit insurance premiums ~~paid~~will add approximately $400 thousand in quarterly expense and the FDIC’s proposed special assessment could approximate $3.20 million, depending on the final special assessment level determined by ~~depository institutions, such as~~ the Bank, to ensure that the deposit insurance fund can adequately cover projected losses from future bank failures. At this time, the Company cannot provide any assurance as to the amount of any projected increase in its deposit insurance premium rate, should such an increase occur, as such changes are dependent upon a variety of factors, some of which are beyond the Company’s control.FDIC.

Income Tax Expense

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

For the ~~third~~first quarter of ~~2008,~~2009, income taxes were ~~$1.75~~$2.35 million compared with ~~$3.01~~$2.58 million for the ~~third~~first quarter of ~~2007.~~2008. For the quarters ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ the effective tax rates were ~~27.81%~~30.97% and ~~29.16%~~28.44%, respectively. ~~For the nine months ended September 30, 2008, income taxes were $6.75 million compared with $9.01 million for the same period~~The increase in ~~2007. For the nine months ended September 30, 2008 and 2007,~~ the effective tax ~~rates were 28.30% and 29.16%, respectively.~~rate is due largely to decreases in tax-free municipal security income.

FINANCIAL CONDITION

Total assets at ~~September 30, 2008, decreased $182.38~~March 31, 2009, increased $65.91 million, or ~~8.48%~~3.09%, to ~~$1.97~~$2.20 billion from December 31, ~~2007.~~2008. The ~~decline~~increase reflects ~~declining~~net increases in the securities portfolio, ~~valuations,~~ continued loan payoffs, and ~~managed attrition~~higher levels of ~~high-rate~~customer deposits as a result of deposit ~~single-service households.~~campaigns and a general movement of funds into FDIC insured products.

Securities

Available-for-sale securities were ~~$513.00~~$549.66 million at ~~September 30, 2008,~~March 31, 2009, compared with ~~$664.12~~$520.72 million at December 31, ~~2007, a decrease~~2008, an increase of ~~$151.12~~$28.94 million, or ~~22.75%~~5.56%. Held-to-maturity securities declined to ~~$9.04~~$8.47 million at ~~September 30, 2008,~~March 31, 2009, compared with ~~$12.08~~$8.67 million at December 31, ~~2007.~~2008.

~~For a more detailed discussion~~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, timing and amount of contractual cash flows, 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. The portion of a decline in value associated with probable credit losses, if any, would be recorded as a loss within noninterest income in the Consolidated Statements of Income. The Company does not believe any unrealized loss remaining in the investment portfolio, ~~refer~~individually or in the aggregate, as of March 31, 2009, represents other-than-temporary impairment. The Company intends to ~~footnote 3~~hold these securities until recovery or maturity and it is more likely than not that it will not sell these securities before recovery.

Included in available-for-sale securities is a portfolio of trust-preferred securities with a total market value of approximately $49.47 million as of March 31, 2009. That portfolio is comprised of single-issue securities and pooled trust-preferred securities. The single-issue securities had a total market value of approximately $26.77 million as of March 31, 2009, compared with their adjusted cost basis of approximately $55.52 million.

At March 31, 2009, the total market value of the pooled trust-preferred securities was approximately $22.71 million, compared with an adjusted cost basis of approximately $93.37 million. The collateral underlying these securities is comprised of 86% of bank trust-preferred securities and subordinated debt issuances of over 500 banks nationwide. The remaining collateral is from insurance companies and real estate investment trusts. The securities carry variable rate structures that float at a prescribed margin over 3-month LIBOR. During 2008 and 2009, these securities experienced credit rating downgrades, and certain of these securities are on negative watch. As of December 31, 2008, the Company recorded pre-tax other-than-temporary impairment charges of $15.46 million for one of its pooled trust preferred securities with demonstrated a probable adverse change in cash flow. Recent modeling of the expected cash flows from the pooled trust-preferred securities, at present, does not suggest any of the remaining securities will have an adverse cash flow effect under any of the scenarios modeled due to the ~~September 30, 2008, financial statements~~existence of other subordinate classes within the pools.

The Company made a cumulative effect adjustment of $6.13 million as of January 1, 2009, to recognize the portion of non-credit losses associated with a non-agency mortgage-backed security for which the Company recognized a pre-tax other-than-temporary impairment charge of $14.47 million as of December 31, 2008. The Company determined that only $4.25 million of the original impairment charge was due to probable credit losses.

-29-

The following table provides details regarding the type and credit ratings within the securities portfolios as of March 31, 2009. In the case of multiple ratings, the lower rating was utilized.


							Unrealized
							Gains/(Losses)
	Par		Fair		Amortized		Recognized			Cumulative
	Value		Value		Cost		in OCL			OTTI
	(Amounts in Thousands)
Available for sale
Agency securities	$	53,435	$	54,127	$	53,425	$	702		$	—
Agency mortgage-backed securities		273,870		282,075		275,257		6,818			—
Non-Agency mortgage-backed securities:
AAA		7,250		5,786		7,206		(1,420	)		—
B		25,000		10,730		20,968		(10,238	)		4,252

Total		32,250		16,516		28,174		(11,658	)		4,252
Municipals:
AAA		5,955		6,043		5,956		87			—
AA		54,230		54,739		54,261		478			—
A		46,282		46,394		46,284		110			—
BBB		30,005		28,788		29,106		(318	)		—
Not rated		5,920		5,659		5,929		(270	)		—

Total		142,392		141,623		141,536		87			—
Single issuer bank trust preferred securities:
AA		10,300		4,171		10,064		(5,893	)		—
A		17,130		8,852		16,750		(7,898	)		—
BB		29,125		13,745		28,703		(14,958	)		—

Total		56,555		26,768		55,517		(28,749	)		—
Pooled trust preferred securities:
A		20,000		935		20,000		(19,065	)		15,456
CCC		88,659		21,770		73,367		(51,597	)		—

Total		108,659		22,705		93,367		(70,662	)		15,456
Equity securities				5,850		7,006		(1,156	)		209

Total	$	667,161	$	549,664	$	654,282	$	(104,618	)	$	19,917


Held to maturity
Municipals:
AA	$	3,680	$	3,727	$	3,665	$	—		$	—
A		3,670		3,566		3,491		—			—
BBB		1,395		1,327		1,315		—			—

Total	$	8,745	$	8,620	$	8,471	$	—		$	—

The Company closely monitors this portfolio due to the substantial market discounts. The market discounts reflect the credit market disruption in ~~Part 1, Item 1~~bank subordinated debt instruments and the possibility of ~~this Quarterly Report~~future negative credit events within the banking sector, which could affect collateral within certain of the pooled and single-issue securities. Monitoring for other-than-temporary impairment (“OTI”) is dependent on ~~Form 10-Q.~~the aforementioned assumptions regarding future credit events and the general strength of the banking industry as it deals with credit losses in the current recessionary real estate market. Acceleration of bank losses and the possibility of unforeseen bank failures could result in changes in the Company’s outlook for these securities and possible future OTI. Accordingly, there can be no assurance that continued deterioration of credit portfolios within certain of those banks will not lead to unanticipated deferrals of interest payments and defaults beyond those assumed in the Company’s impairment testing. At present, cash flow modeling indicates varying ability to absorb additional deferrals and defaults before incurring breaks in interest or principal for the various pools.

~~-27-~~-30-

Loan Portfolio

Loans Held for Sale:The ~~$140 thousand~~$1.45 million balance of loans held for sale at ~~September 30, 2008,~~March 31, 2009, represents mortgage loans that are sold to investors on a best efforts basis. Accordingly, the Company does not retain the interest rate risk involved in the commitment. The gross notional amount of outstanding commitments at ~~September 30, 2008,~~March 31, 2009, was ~~$4.36~~$11.28 million on 3371 loans.

Loans Held for Investment:Total loans held for investment were ~~$1.17~~$1.28 billion at ~~September 30, 2008,~~March 31, 2009, representing ~~declines~~a decline of ~~$57.22 million and $70.92~~$21.37 million from December 31, 2008, and ~~September 30, 2007, respectively.~~an increase of $97.29 million from March 31, 2008. The average loan to deposit ratio decreased to ~~88.25%~~82.83% for the ~~third~~first quarter of ~~2008,~~2009, compared with ~~88.49%~~86.01% for the fourth quarter of ~~2007~~2008 and ~~87.91%~~87.68% for the ~~third~~first quarter of ~~2007.~~2008. Year-to-date average loans of ~~$1.19~~$1.29 billion ~~decreased $68.20~~increased $86.70 million when compared ~~with the first nine months of 2007 average of $1.26 billion.~~to 2008.

Over the course of the last three years, the Company has taken measures to ~~tighten~~enhance its commercial underwriting standards. The more stringent underwriting has led to improved credit quality, ~~but,~~and coupled with a reduced complement of commercial loan officers, has resulted in decreases in the loan portfolio. The Company also continues to realize net payoffs in the area of consumer finance, as it competes with credit card lenders and captive automobile finance companies.

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 ~~September 30, 2008,~~March 31, 2009, December 31, ~~2007,~~2008, and ~~September 30, 2007.~~March 31, 2008.


	September 30, 2008					December 31, 2007					September 30, 2007					March 31 , 2009					December 31, 2008					March 31 , 2008
(Dollars in Thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Loans Held for Investment
Commercial and agricultural	$	83,271		7.13	%	$	96,261		7.85	%	$	94,168		7.60	%	$	81,880		6.41	%	$	85,034		6.55	%	$	88,532		7.51	%
Commercial real estate		386,287		33.06	%		386,112		31.51	%		396,147		31.97	%		405,549		31.76	%		407,638		31.40	%		376,087		31.89	%
Residential real estate		498,721		42.69	%		498,345		40.66	%		500,760		40.41	%		597,372		46.79	%		602,573		46.42	%		488,860		41.45	%
Construction		127,076		10.88	%		163,310		13.33	%		167,089		13.48	%		124,320		9.74	%		130,610		10.06	%		151,242		12.82	%
Consumer		66,333		5.68	%		75,447		6.16	%		77,724		6.27	%		62,353		4.88	%		66,258		5.10	%		69,377		5.88	%
Other		6,598		0.56	%		6,027		0.49	%		3,319		0.27	%		5,316		0.42	%		6,046		0.47	%		5,406		0.46	%

Total	$	1,168,286		100.00	%	$	1,225,502		100.00	%	$	1,239,207		100.00	%	$	1,276,790		100.00	%	$	1,298,159		100.00	%	$	1,179,504		100.01	%


Loans Held for Sale	$	140				$	811				$	2,294				$	1,445				$	1,024				$	2,116

Deposits and Other Borrowings

Total deposits ~~decreased~~increased by ~~$43.90~~$79.69 million, or ~~3.15%~~5.30%, during the first ~~nine~~three months of ~~2008.~~2009. Non interest-bearing demand deposits ~~decreased $9.51~~increased $8.24 million to ~~$214.58~~$207.95 million at ~~September 30, 2008,~~March 31, 2009, compared with ~~$224.09~~$199.71 million at December 31, ~~2007.~~2008. Interest-bearing demand deposits increased ~~$32.83~~$9.82 million to ~~$186.40~~$194.93 million at ~~September 30, 2008.~~March 31, 2009. Savings ~~decreased $15.24~~increased $9.43 million, or ~~4.65%~~3.05%, and time deposits ~~decreased $51.99~~increased $52.20 million, or ~~7.56%~~6.45%, during the first ~~nine~~three months of ~~2008. Throughout most of the last twelve months, the Company has aggressively lowered money market~~2009. The Company’s increase in deposits is likely due to increasing customer household savings and ~~certificate of~~a desire for FDIC insured deposit ~~rates, which is the primary cause of the decreases in deposits.~~products.

Securities sold under repurchase agreements decreased ~~$27.04~~$12.09 million, or ~~13.04%~~7.29%, in the first ~~nine months of 2008~~quarter 2009 to ~~$180.39~~$153.82 million. There were ~~$29.50 million in~~no federal funds purchased outstanding at ~~September 30, 2008. Overnight balances increased~~March 31, 2009, as the Company ~~replaced high-cost term advances with low-cost, short-term funds.~~maintained strong liquidity through the first quarter.

Stockholders’ Equity

Total stockholders’ equity decreased ~~$46.29~~$2.63 million, or ~~21.32%~~1.19%, from ~~$217.10~~$220.34 million at December 31, ~~2007,~~2008, to ~~$170.81~~$217.71 million at ~~September 30, 2008,~~March 31, 2009, as the Company ~~pursued its stock repurchase program and~~ experienced increases in other comprehensive losses associated with the Company’s investment portfolio. The change in equity was the result of net earnings of ~~$17.10~~$5.23 million, less preferred dividends ~~paid to stockholders~~ of ~~$9.23 million, common stock repurchases~~$571 thousand, the cumulative effect adjustment of ~~$4.22~~$6.13 million, and other comprehensive loss of ~~$50.12~~$13.86 million.

~~The~~During the first quarter, the Company ~~repurchased 132,100 shares~~common stock traded at a level below its book value per share, and as a result, the Company performed a level one goodwill evaluation for each of its ~~common stock~~segments. The results of the level one evaluation did not provide evidence of impairment of goodwill in either of the ~~first nine months of 2008. The share repurchases were conducted as part of a share repurchase plan previously adopted by the Company.~~Company’s segments.

Risk-Based Capital

Risk-based capital guidelines promulgated by federal banking agencies weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. At ~~September 30, 2008,~~March 31, 2009, the Company’s total capital to risk-weighted assets ratio was ~~13.30%~~12.64% compared with ~~12.34%~~12.91% at December 31, ~~2007.~~2008. The Company’s Tier 1 capital to risk-weighted assets ratio was ~~12.23%~~11.70% at ~~September 30, 2008,~~March 31, 2009, compared with ~~11.45%~~11.92% at December 31, ~~2007.~~2008. The Company’s Tier 1 leverage ratio at ~~September 30, 2008,~~March 31, 2009, was ~~8.68%~~9.77% compared with ~~8.09%~~9.75% at December 31, ~~2007.~~2008. All of the Company’s regulatory capital ratios exceed the current well-capitalized levels. Regulatory capital ratios declined from December 31, 2008, primarily because of the treatment of collateralized mortgage obligations and collateralized debt obligations when rated below investment grade.

~~-29-~~

PART I. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Liquidity and Capital Resources

At ~~September 30, 2008,~~March 31, 2009, the Company maintained liquidity in the form of cash and cash equivalent balances of ~~$53.24~~$100.96 million, unpledged securities available-for-sale of ~~$141.27~~$183.90 million, and total FHLB credit availability of approximately ~~$57.89~~$143.9 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~~represents 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 liquidity and the associated risk. The policy includes a Liquidity Contingency Plan (the “Liquidity Plan”) that is designed as a tool for the Company to detect liquidity issues promptly in order to protect depositors, creditors and shareholders. The Liquidity Plan includes monitoring various internal and external indicators such as changes in core deposits and changes in market conditions. It provides for timely responses to a wide variety of funding scenarios ranging from changes in loan demand to a decline in the Company’s quarterly earnings to a decline in the market price of the Company’s stock. The Liquidity Plan calls for specific responses designed to meet a wide range of liquidity needs based upon assessments on a recurring basis by the Company and its Board of Directors.

-32-

Interest Rate Risk and Asset/Liability Management

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

The Company’s primary component of operational revenue, net interest income, is subject to variation as a result of changes in interest rate environments in conjunction with unbalanced repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has four primary components: repricing risk, basis risk, yield curve risk and option risk. Repricing risk occurs when earning assets and paying liabilities reprice at differing times as interest rates change. Basis risk occurs 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 the Company’s estimate of yields to be attained in those future rate environments and rates that will be paid on various deposit instruments and borrowings. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and the Company’s strategies. However, the earnings simulation model is currently the best tool available to the Company for managing interest rate risk.

Specific strategies for management of interest rate risk have included shortening the amortized maturity of new fixed-rate loans, increasing the volume of adjustable-rate loans to reduce the average maturity of the Company’s interest-earning assets, and monitoring the term and structure of liabilities to maintain a balanced mix of maturity and repricing structures to mitigate potential exposure. At ~~September 20, 2008,~~March 31, 2009, net interest income modeling shows the Company to be in a ~~slightly asset-sensitive~~relatively neutral position. Additionally, structure in the Company’s assets and liabilities creates a situation where net interest income decreases in a sustained increasing rate environment.

~~-30-~~

The following table summarizes the projected impact on the next twelve months’ net interest income and the economic value of equity as of ~~September 30, 2008,~~March 31, 2009, and December 31, ~~2007,~~2008, of immediate and sustained rate shocks in the interest rate environments of plus and minus 100 and 200 basis points from the base simulation, assuming no remedial measures are effected. As of March 31, 2009, the Federal Open Market Committee set a target range for federal funds of 0 to 25 basis points, rendering a complete downward shock of 200 basis points not realistic and not meaningful. In the downward rate shocks presented, benchmark interest rates are dropped with floors near 0%.

The economic value of equity is a measure which reflects the impact of changing rates on the underlying values of the Company’s assets and liabilities in various rate scenarios. The scenarios illustrate the potential estimated impact of instantaneous rate shocks on the underlying value of equity. The economic value of the equity is based on the present value of all the future cash flows under the different rate scenarios.

Rate Sensitivity Analysis


(Dollars in Thousands)	September 30, 2008												March 31, 2009
	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	$	(1,051	)		(1.5	)	$	(21,155	)		(8.6	)	$	(370	)		(0.6	)	$	11,911			5.0
100		967			1.4			954			0.4			(575	)		(0.9	)		15,508			6.5
(100)		(1,523	)		(2.2	)		(10,705	)		(4.4	)		176			0.3			(26,274	)		(11.0	)
(200)		(4,379	)		(6.4	)		(34,456	)		(14.0	)

PART I. ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) along with the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(b). Based on that evaluation, the Company’s CEO along with the Company’s CFO concluded that the Company’s disclosure controls and procedures 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 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.

-34-

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company is currently a defendant in various legal actions and asserted claims in the normal course of business. Although the Company and legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, they are of the belief that the resolution of these actions should not have a material adverse affect on the financial position, results of operations, or cash flows of the Company.

ITEM 1A. Risk Factors

~~Except for the risk factor set forth below, there~~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, ~~2007.~~

~~Declines in asset values may result in impairment charges and adversely impact the value of our investments~~

The Company maintains an investment portfolio, which includes trust-preferred securities. At September 30, 2008, the total market value of these trust-preferred securities was approximately $87.52 million, compared with an adjusted cost basis of approximately $164.20 million. The decline in market value of these securities is primarily due to the credit market disruptions in bank subordinated debt instruments, credit rating downgrades and the possibility of future negative credit events within the banking sector. The Company periodically, but not less than quarterly, evaluates its investments and other assets for impairment indicators. In the event that the Company is required to record impairment charges for its investments due to a decline in value that is considered other-than-temporarily impaired, it could have a material adverse affect on the Company’s results of operations and a non-cash impact on funds from operations in the period in which the write-down occurs.2008.

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

	(a)		Not Applicable

	(b)		Not Applicable

	(c)		Issuer Purchases of Equity Securities

~~The following table sets forth~~There were no open market purchases by the Company of its equity securities during the three months ended ~~September 30, 2008.~~

Maximum
Total Number of Number of
Total # of Average Shares Purchased Shares That May
Shares Price Paid as Part of Publicly Yet be Purchased
Purchased per Share Announced Plan Under the Plan

July 1-31, 2008 4,000 $ 27.60 4,000 551,060
August 1-31, 2008 — — — 562,493
September 1-30, 2008 — — — 568,579

Total 4,000 $ — 4,000

March 31, 2009. The maximum number of shares that may yet be purchased under a publicly announced plan at March 31, 2009, was 645,015 shares. The Company’s stock repurchase plan allows for the purchase and retention of up to 1,100,000 shares. The plan has no expiration date and remains open. The Company held ~~531,421~~454,985 shares in treasury at ~~September 30, 2008.~~March 31, 2009.

ITEM 3. Defaults Upon Senior Securities

Not Applicable

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

Not Applicable

~~-33-~~

ITEM 6. Exhibits

(a)

Exhibits


Exhibit
~~Exhibit~~ No.		Exhibit
~~3.1~~ 2.1	—Agreement and Plan of Merger dated July 31, 2008, among First Community Bancshares, Inc. and Coddle Creek FinancialCorp. (21)

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

3(ii)	Certificate of Designation Series A Preferred Stock (22)

~~3.2~~	—3(iii)	Bylaws of First Community Bancshares, Inc., as amended. ~~(15)~~(17)

4.1	—	Specimen stock certificate of First Community Bancshares, Inc. (3)

4.2	—	Indenture Agreement dated September 25, 2003. ~~(10)~~(11)

4.3	—	Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. ~~(10)~~(11)

4.4	—	Preferred Securities Guarantee Agreement dated September 25, 2003. ~~(10)~~(11)

4.5	Form of Certificate for the Series A Preferred Stock (22)

4.6	Warrant to purchase 176,546 shares of common stock of First Community Bancshares, Inc (22)

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

10.1.1	—	Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan. ~~(10)~~(11)

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,~~December 16, 2008, between First Community Bancshares, Inc. and John M. Mendez. ~~(2)~~ (6)

10.4	—	First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended. ~~(2)~~(24)

10.5	—	First Community Bancshares, Inc. Split Dollar Plan and Agreement. (2)

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). ~~(12)~~(14)

10.7	—	First Community Bancshares, Inc. Wrap Plan. (7)

10.8	—	Reserved.

10.9	—	Form of Indemnification Agreement between First Community Bancshares, Inc. ~~and~~, its Directors and Certain Executive Officers. ~~(8)~~(9)

10.10	—	Form of Indemnification Agreement between First Community Bank, N. ~~A.,~~A, its Directors and Certain Executive Officers. ~~(8)~~(9)

10.11	—	Reserved.

10.12	—	First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan ~~(9)~~(10) and Award Agreement. ~~(11)~~(13)

10.13	—	Reserved.

10.14	—	First Community Bancshares, Inc. Directors Deferred Compensation Plan. (7)

10.15	—	First Community Bancshares, Inc. Deferred Compensation and Supplemental Bonus Plan For Key Employees. ~~(13)~~(15)

10.16	—	Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and Ronald L. Campbell. ~~(16)~~(19)

10.17	—	Employment Agreement dated September 28, 2007, between GreenPoint Insurance Group, Inc. and Shawn C. Cummings. ~~(17)~~(20)

10.18	Securities Purchase Agreement by and between the United States Department of the Treasury and First Community Bancshares, Inc. dated November 21, 2008. (22)

~~31.1~~10.19	—Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and David D. Brown. (23)

31.1*	Rule 13a-14(a)/a5d-14(a) Certification of Chief Executive ~~Officer~~Officer.

~~31.2~~	—31.2*	Rule 13a-14(a)/a5d-14(a) Certification of Chief Financial ~~Officer~~Officer.

32	—32*	Certification of Chief Executive Officer and Chief Financial Officer Section 1350.


*		Furnished herewith.

(1)		Incorporated by reference from ~~Exhibit 3.1 of~~ the Quarterly Report on Form 10-Q for the period ended ~~March 31, 2007,~~June 30, 2005, filed on ~~May 10, 2007.~~August 5, 2005.

~~-34-~~


(4)		Incorporated by reference from ~~Exhibit 10.1 of~~ 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.~~Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed December 16, 2008. The Registrant has entered into substantially identical agreements with Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title ~~salary~~ and ~~the use of a vehicle.~~salary.

(7)		Incorporated by reference from ~~Item 1.01 of~~ the Current Report on Form 8-K dated August 22, 2006, and filed August 23, 2006.

(8)		Reserved.

(9)		Form of indemnification agreement entered into by the Company and by First Community Bank, N. A. with their respective directors and certain officers of each including, for the Registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, E. Stephen Lilly, David D. Brown, and Gary R. Mills. Incorporated by reference from ~~Exhibits 10.10 and 10.11 of~~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.

~~(9)~~(10)		Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 19, 2004.

~~(10)~~(11)		Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.

~~(11)~~(12)		Incorporated by reference from ~~Exhibit 10.13 of~~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.

~~(12)~~(14)		Incorporated by reference from ~~Exhibit 10.6.1 of~~ 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.

~~(13)~~(15)		Incorporated by reference from ~~Item 1.01 of~~ the Current Report on Form 8-K dated October 24, 2006, and filed October 25, 2006.

~~(14)~~(16)		Reserved.

~~(15)~~(17)		Incorporated by reference from Exhibit ~~3.2~~3.1 of the ~~Quarterly~~Current Report on Form ~~10-Q for the period ended September 30, 2006,~~8-K dated February 14, 2008, filed on ~~November 8, 2006.~~February 20, 2008.

~~(16)~~(18)		Reserved

(19)		Incorporated by reference from Exhibit 2.1 of the Form S-3 registration statement filed May 2, 2007.

~~(17)~~(20)		Incorporated by reference from ~~Exhibit 10.17 of~~ the Annual Report ofon Form 10-K for the period ended December 31, 2007, filed on March 13, 2008.

(21)		Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated and filed July 31, 2008.

(22)		Incorporated by reference from the Current Report on Form 8-K dated November 21, 2008, and filed November 24, 2008.

(23)		Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed December 16, 2008. The Registrant has entered into substantially identical agreements with Gary R. Mills, Martyn A. Pell, and Robert L. Schumacher, with the only differences being with respect to title, salary, term, and payment upon termination after a change in control.

(24)		Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, and filed January 5, 2009.

~~-35-~~-37-


Nevada		55-0694814

(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

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

(Address of principal executive offices)		(Zip Code)


Large accelerated filero	Accelerated filerþ	Non-accelerated filero		Smaller reporting companyo
		(Do not check if a smaller reporting company)	~~Smaller reporting company~~ o


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of ~~September 30, 2008~~March 31, 2009 (Unaudited) and December 31, ~~2007~~2008		3

Consolidated Statements of Income for the ~~Three- and Nine-Month~~Three-Month Periods Ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (Unaudited)		4

Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (Unaudited)		5

Consolidated Statements of Changes in Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (Unaudited)		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17	22

Item 3. Quantitative and Qualitative Disclosures about Market Risk	30	32

Item 4. Controls and Procedures	32	34

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	33	35

Item 1A. Risk Factors	33	35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33	35

Item 3. Defaults Upon Senior Securities	33	35

Item 4. Submission of Matters to a Vote of Security Holders	33	35

Item 5. Other Information	34	35

Item 6. Exhibits	34	36

SIGNATURES	36	38

EXHIBIT INDEX	37	39
EX-31.1
EX-31.2
EX-32


	September 30,			December 31,
	2008			2007
(Dollars in Thousands, Except Per Share Data)	(Unaudited)
Assets
Cash and due from banks	$	53,238		$	50,051
Interest-bearing balances with banks		664			2,695

Total cash and cash equivalents		53,902			52,746
Securities available-for-sale (amortized cost of $607,249 at September 30, 2008; $674,937 at December 31, 2007)		513,001			664,120
Securities held-to-maturity (fair value of $9,187 at September 30, 2008; $12,298 at December 31, 2007)		9,043			12,075
Loans held for sale		140			811
Loans held for investment, net of unearned income		1,168,286			1,225,502
Less allowance for loan losses		14,510			12,833

Net loans held for investment		1,153,776			1,212,669
Premises and equipment		50,504			48,383
Other real estate owned		896			545
Interest receivable		9,156			12,465
Goodwill and other intangible assets		72,222			70,056
Other assets		104,817			75,968

Total Assets	$	1,967,457		$	2,149,838


Liabilities
Deposits:
Noninterest-bearing	$	214,582		$	224,087
Interest-bearing		1,134,962			1,169,356

Total Deposits		1,349,544			1,393,443
Interest, taxes and other liabilities		20,494			21,454
Federal funds purchased		29,500			18,500
Securities sold under agreements to repurchase		180,388			207,427
FHLB borrowings and other indebtedness		216,720			291,916

Total Liabilities		1,796,646			1,932,740


Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; none issued		—			—
Common stock, $1 par value; 25,000,000 shares authorized; 11,499,018 shares issued at September 30, 2008, and December 31, 2007, including 531,421 and 429,372 shares in treasury, respectively		11,499			11,499
Additional paid-in capital		108,862			108,825
Retained earnings		124,731			117,670
Treasury stock, at cost		(16,882	)		(13,613	)
Accumulated other comprehensive loss		(57,399	)		(7,283	)

Total Stockholders’ Equity		170,811			217,098

Total Liabilities and Stockholders’ Equity	$	1,967,457		$	2,149,838


													For the Three Months Ended
	For the Three Months Ended						For the Nine Months Ended						March 31,
	September 30,						September 30,						2009			2008
(In Thousands)	2008			2007			2008			2007
Beginning balance	$	13,433		$	13,934		$	12,833		$	14,549		$	15,978		$	12,833
Provision for loan losses		3,461			—			4,721			—			2,087			323
Charge-offs		(2,601	)		(1,009	)		(4,765	)		(2,813	)		(1,730	)		(966	)
Recoveries		217			265			1,721			1,454			220			672

Ending balance	$	14,510		$	13,190		$	14,510		$	13,190		$	16,555		$	12,862


(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.


							Maximum
					Total Number of		Number of
	Total # of		Average		Shares Purchased		Shares That May
	Shares		Price Paid		as Part of Publicly		Yet be Purchased
	Purchased		per Share		Announced Plan		Under the Plan

July 1-31, 2008		4,000	$	27.60		4,000		551,060
August 1-31, 2008		—		—		—		562,493
September 1-30, 2008		—		—		—		568,579

Total		4,000	$	—		4,000


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


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


Exhibit No.		Exhibit

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32		Certification of Chief Executive and Chief Financial Officer pursuant to 18 USC Section 1350