Edgar Filing: FIRST COMMUNITY BANCSHARES INC /NV/

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

Commission file number 000-19297

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


Nevada		55-0694814
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

P.O. Box 989 Bluefield, Virginia		24605-0989
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (276) 326-9000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of exchange on which registered
Common Stock, $1.00 par value		NASDAQ Global Select

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Approximately $184.73 million based on the closing sales price at June 30, 2011.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date.

Class – Common Stock, $1.00 Par Value; 17,849,376 shares outstanding as of February 27, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the annual meeting of shareholders to be held on April 24, 2012, are incorporated by reference in Part III of this Form 10-K.

Table of Contents


		Page
Part I
Item 1.	Business		3
Item 1A.	Risk Factors		13
Item 1B.	Unresolved Staff Comments		21
Item 2.	Properties		21
Item 3.	Legal Proceedings		21
Item 4.	Mine Safety Disclosures		21

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		22
Item 6.	Selected Financial Data		24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 8.	Financial Statements and Supplementary Data		48
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		105
Item 9A.	Controls and Procedures		105
Item 9B.	Other Information		105

Part III

Item 10.	Directors, Executive Officers and Corporate Governance		105
Item 11.	Executive Compensation		107
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		107
Item 13	Certain Relationships and Related Transactions, and Director Independence		107
Item 14.	Principal Accounting Fees and Services		107

Part IV

Item 15.	Exhibits, Financial Statement Schedules		108
	Signatures		111

PART I

ITEM 1.

Business.

Corporate Overview

First Community Bancshares, Inc. (the “Company”) is a financial holding company incorporated in 1997 under the laws of the State of Nevada and founded in 1989. The Company serves as the holding company for First Community Bank (the “Bank”) which is a Virginia-chartered banking institution founded in 1874. The Company also owns Greenpoint Insurance Group, Inc. (“Greenpoint”), a full-service insurance agency. The Bank is the parent of First Community Wealth Management, a registered investment advisory firm that offers wealth management and investment advice. The Company is the Common Stockholder of FCBI Capital Trust, which was created in October 2003 to issue trust preferred securities to raise capital for the Company.

The Company’s banking operations are expected to remain the principal business and major source of revenue for the Company. The Company also considers and evaluates options for growth and expansion of the existing subsidiary banking operations. Although the Company is a corporate entity, legally separate and distinct from its affiliates, bank holding companies, such as the Company, are required to act as a source of financial strength for their subsidiary banks. The principal source of the Company’s income is dividends from the Bank. Dividend payments by the Bank are determined in relation to earnings, asset growth, and capital position and are subject to certain restrictions by regulatory agencies as described more fully under “Regulation and Supervision – The Bank” of this item.

The Company’s principal executive offices are located at One Community Place, Bluefield, Virginia 24605 and its telephone number is (276) 326-9000.

Business Overview

Through its subsidiaries, the Company offers commercial and consumer banking services and products, as well as wealth management and insurance services. Those products and services include the following:

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demand deposit accounts, savings and money market accounts, certificates of deposit, and individual retirement arrangements,

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commercial, consumer, real estate mortgage loans, and lines of credit,

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various debit card and automated teller machine card services,

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corporate and personal trust services,

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investment management services, and

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life, health, and property and casualty insurance products.

The Company provides financial services and conducts banking operations within the states of Virginia, West Virginia, North Carolina, and Tennessee. The Company serves a diverse customer base consisting of individual consumers and a wide variety of industries, including, among others, manufacturing, mining, services, construction, retail, healthcare, military and transportation. The Company is not dependent upon any single industry or customer. The Company had total consolidated assets of $2.16 billion at December 31, 2011, and conducts its banking operations through 55 locations.

Operating Segments

The Company’s operations are managed along two reportable business segments consisting of community banking and insurance services. See “Note 19 – Segment Information” in the Notes to Consolidated Financial Statements in Item 8 herein.

Competition

There is significant competition among banks in the Company’s market areas. The Company also competes with other providers of financial services, such as thrifts, savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, insurance agencies, commercial finance and leasing companies, full service brokerage firms, and discount brokerage firms. The Company faces substantial competition for deposits and loans throughout its market areas. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations, automated services and office hours. Competition for deposits comes primarily from other commercial banks, savings institutions, credit unions, mutual funds and other investment alternatives. The primary factors in competing for commercial and business loans are interest rates, loan origination fees, the quality and range of lending services and personalized service. Competition for origination of mortgage loans comes primarily from savings institutions, mortgage banking firms, mortgage brokers, other commercial banks and insurance companies. Factors which affect competition include the general and local economic conditions, current interest rate levels and volatility in the

mortgage markets. Some of the Company’s competitors have greater resources and, as such, may have higher lending limits and may offer other services that are not provided by the Company. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and banking regulatory reform. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Overview – Competition” in Item 7 herein.

Employees

The Company and its subsidiaries employed 633 full-time equivalent employees at December 31, 2011. Management considers employee relations to be excellent.

Regulation and Supervision

General

The supervision and regulation of the Company and its subsidiaries by applicable federal and state banking agencies is intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”), and the banking system as a whole, and not for the protection of stockholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines and other penalties for violations of laws and regulations.

The following description summarizes some of the laws to which the Company and the Bank are subject. References in the following description to applicable statutes and regulations are brief summaries of these statutes and regulations, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. A change in statutes, regulations or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the business of the Company.

The Dodd-Frank Act

On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

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Centralizes responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws (“CFPB”).

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Requires financial holding companies, such as the Company, to be well capitalized and well managed as of July 21, 2011. Bank holding companies and banks must also be both well capitalized and well managed in order to engage in interstate bank acquisitions.

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Imposes comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institutions themselves.

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Implements corporate governance revisions, including with regard to executive compensation and proxy access by shareholders.

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Made permanent the $250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provides unlimited federal deposit insurance until January 1, 2013 for noninterest bearing demand transaction accounts at all insured depository institutions.

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Repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

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Amended the Electronic Fund Transfer Act to, among other things, give the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and enforces a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

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Increased the authority of the Federal Reserve Board to examine bank holding companies, such as the Company, and their non-bank subsidiaries.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

The Company

The Company is a financial holding company pursuant to the Gramm-Leach-Bliley Act (“GLB Act”) and a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). Accordingly, the Company is subject to supervision, regulation and examination by the Federal Reserve Board. The BHCA, the GLB Act, and other federal laws subject financial and bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The BHCA generally provides for “umbrella” regulation of financial holding companies, such as the Company, by the Federal Reserve Board, and for functional regulation of banking activities by bank regulators, securities activities by securities regulators, and insurance activities by insurance regulators.

Regulatory Restrictions on Dividends; Source of Strength. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only from income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. As discussed below, a bank holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary.

Scope of Permissible Activities. Under the BHCA, bank holding companies generally may not acquire a direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or bank holding company or engage in activities other than those of banking, managing or controlling banks or furnishing services to or performing services for its subsidiaries, except that it may engage in, directly or indirectly, certain activities that the Federal Reserve Board determined to be closely related to banking or managing and controlling banks as to be a proper incident thereto.

Notwithstanding the foregoing, the GLB Act eliminated the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers and permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities and activities that the Federal Reserve Board has determined to be closely related to banking. No regulatory approval is generally required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

Under the GLB Act, a bank holding company may become a financial holding company by filing a declaration with the Federal Reserve Board if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act of 1977 (“CRA”). The Company elected financial holding company status in December 2006. Beginning in July 2011, the Company’s financial holding company status also depends upon it maintaining its status as “well capitalized” and “well managed’ under applicable Federal Reserve Board regulations. If a financial holding company ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. In addition, the Federal Reserve Board may require divestiture of the holding company’s depository institutions if the deficiencies persist.

Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.

Stock Repurchases. A bank holding company is required to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation.

Capital Adequacy Requirements. The Federal Reserve Board has promulgated capital adequacy guidelines for use in its examination and supervision of bank holding companies. If a bank holding company’s capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital and its ability to pay dividends, or making acquisitions of new banks or engaging in certain other activities may be restricted or prohibited.

The Federal Reserve Board currently uses two types of capital adequacy guidelines for holding companies, a two-tiered risk-based capital guideline and a leverage capital ratio guideline. The two-tiered risk-based capital guideline assigns risk weightings to all assets and certain off-balance sheet items of the holding company’s operations, and then establishes a minimum ratio of the holding company’s Tier 1 capital to the aggregate dollar amount of risk-weighted assets (which amount is usually less than the aggregate dollar amount of such assets without risk weighting) and a minimum ratio of the holding company’s total capital (Tier 1 capital plus Tier 2 capital, as adjusted) to the aggregate dollar amount of such risk-weighted assets. The leverage ratio guideline establishes a minimum ratio of the holding company’s Tier 1 capital to its total tangible assets (total assets less goodwill and certain identifiable intangibles), without risk-weighting. As discussed below, the Bank is subject to similar capital requirements.

Under both guidelines, Tier 1 capital is defined to include: common shareholders’ equity (including retained earnings), qualifying noncumulative perpetual preferred stock and related surplus, qualifying cumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of consolidated subsidiaries (limited to a maximum of 25% of Tier 1 capital), and certain trust preferred securities. The Dodd-Frank Act excludes trust preferred securities issued after May 19, 2010, from being included in Tier 1 capital, unless the issuing company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date will continue to count as Tier 1 capital for bank holding companies with less than $15 billion in total assets, such as the Company. Goodwill and most intangible assets are deducted from Tier 1 capital. For purposes of the total risk-based capital guidelines, Tier 2 capital (sometimes referred to as “supplementary capital”) is defined to include, subject to limitations: perpetual preferred stock not included in Tier 1 capital, intermediate-term preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt and mandatory convertible debt securities, allowances for loan and lease losses, and intermediate-term subordinated debt instruments. The maximum amount of qualifying Tier 2 capital is 100% of qualifying Tier 1 capital. For purposes of the total capital guideline, total capital equals Tier 1 capital, plus qualifying Tier 2 capital, minus investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets and other deductions. The Federal Reserve Board’s current capital adequacy guidelines require that a bank holding company maintain a Tier 1 risk-based capital ratio of at least 4.00% and a total risk-based capital ratio of at least 8.00%. At December 31, 2011, the Company’s ratio of Tier 1 capital to total risk-weighted assets was 16.89% and its ratio of total capital to risk-weighted assets was 18.15%.

In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly rated bank holding companies may maintain a minimum leverage ratio of 3.00%, but other bank holding companies are required to maintain a leverage ratio of 4.00% or more, depending on their overall condition. At December 31, 2011, the Company’s leverage ratio was 11.50%.

The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

The current risk-based capital guidelines that apply to the Company and the Bank are based on the 1988 capital accord of the International Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, as implemented by the Federal Reserve Board. In 2004, the Basel Committee published a new capital accord, which is referred to as “Basel II,” to replace Basel I. Basel II provides two approaches for setting capital standards for credit risk: an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines, which became effective in 2008 for large international banks (total assets of $250 billion or more or consolidated foreign exposure of $10 billion or more). Other U.S. banking organizations can elect to adopt the requirements of this rule (if they meet applicable qualification requirements), but they are not required to apply them. Basel II emphasizes internal assessment of credit, market and operational risk, as well as supervisory assessment and market discipline in determining minimum capital requirements.

In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity, which is referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States. Basel III will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios: (i) 3.5% Common Equity Tier 1 (generally consisting of common shares and retained earnings) to risk-weighted assets; (ii) 4.5% Tier 1 capital to risk-weighted assets; and (iii) 8.0% Total capital to risk-weighted assets.

When fully phased-in on January 1, 2019, and if implemented by the U.S. banking agencies, Basel III will require banks to maintain:

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a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer,”

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a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer,

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a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, and

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a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures.

Basel III also includes the following significant provisions:

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An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice.

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Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.

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Deduction from common equity of deferred tax assets that depend on future profitability to be realized.

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For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement that the instrument must be written off or converted to common equity if a triggering event occurs, either pursuant to applicable law or at the direction of the banking regulator. A triggering event is an event that would cause the banking organization to become nonviable without the write off or conversion, or without an injection of capital from the public sector.

Since the Basel III framework is not self-executing, the rules and standards promulgated under Basel III require that the U.S. federal banking regulators adopt them prior to becoming effective in the U.S. Although U.S. federal banking regulators have expressed support for Basel III, the timing and scope of its implementation, as well as any potential modifications or adjustments that may result during the implementation process, are not yet known.

The Dodd-Frank Act requires or permits the federal banking agencies to adopt regulations affecting banking institutions’ capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. The Dodd-Frank Act requires the Federal Reserve Board, the Office of the Comptroller of the Currency (the “OCC”) and the FDIC to adopt regulations imposing a continuing “floor” of the Basel I-based capital requirements in cases where the Basel II-based capital requirements and any changes in capital regulations resulting from Basel III otherwise would permit lower requirements. In December 2010, the Federal Reserve Board, the OCC and the FDIC issued a joint notice of proposed rulemaking that would implement this requirement, which the agencies implemented as proposed, effective July 28, 2011. This final rule applies to large international banks (total assets of $250 billion or more or consolidated foreign exposure of $10 billion or more) and, therefore, will not have any immediate impact on the Company or the Bank.

Acquisitions by Bank Holding Companies. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors.

Incentive Compensation. In June 2010, the Federal Reserve Board, the OCC and the FDIC issued their final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk taking. The final guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. The Federal Reserve Board indicated that all banking organizations are to evaluate their incentive compensation arrangements and related risk management, controls, and corporate governance processes and immediately address deficiencies in these arrangements or processes that are inconsistent with safety and soundness.

The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In February 2011, the Federal Reserve Board, the OCC and the FDIC approved a joint proposed rulemaking to implement Section 956 of the Dodd-Frank Act, which prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses.

The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain and motivate its key employees.

The Bank

Effective with the close of business on June 28, 2011, the Bank converted its charter from a national association to a Virginia state-chartered banking institution. The Bank will continue operating under the name First Community Bank. The charter conversion does not affect insurance coverage of the Bank’s deposits, which are insured by the FDIC to the maximum amounts permitted by law, and does not affect the financial services or products provided by the Bank. As a Virginia state-chartered bank, the Bank is supervised and regulated by the Virginia Bureau of Financial Institutions (the “Virginia Bureau”) and as a member of the Federal Reserve, the Bank’s primary federal regulator is the Federal Reserve Bank of Richmond (“FRB”), both of which are based in the Company’s home state of Virginia. The regulations of these agencies govern most aspects of the Bank’s business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices.

Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its non-banking subsidiaries and/or affiliates, including the Company, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Company or its subsidiaries.

Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other non-affiliated persons. The Federal Reserve Board has issued Regulation W which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.

The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to such persons. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by the Bank have provided the Company’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to the Company will continue to be the Company’s primary source of operating funds.

Capital adequacy requirements applicable to insured depository institutions serve to limit the amount of dividends that may be paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, it will be classified as “undercapitalized.” Further, prior approval of the Federal Reserve Board is required if cash dividends declared in any given year exceed the total of the Bank’s net profits for such year, plus its retained profits for the preceding two years. Virginia law also imposes restrictions on the ability of Virginia-chartered banks to pay dividends if such dividends would impair a bank’s paid-in capital. The payment of dividends by the Bank may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines. The Virginia Bureau and the Federal Reserve Board have the general authority to limit dividends paid by the Bank if such payments are deemed to constitute an unsafe and unsound practice.

Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of liquidation or other resolution of an insured depository institution, such as the Bank, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company or any shareholder or creditor thereof.

Examinations. Under the FDICIA, all insured institutions must undergo regular on-site examination by their appropriate banking agency and such agency may assess the institution for its costs of conducting the examination. As a state-chartered, Federal Reserve member bank, the Bank is subject to examination by the Virginia Bureau and FRB. These examinations review areas such as capital adequacy, reserves, loan portfolio quality and management, consumer and other compliance issues, investments, information systems, disaster recovery, and contingency planning and management practices.

Capital Adequacy Requirements. The various federal bank regulatory agencies, including the Federal Reserve Board, have adopted risk-based capital requirements for assessing the capital adequacy of banks and bank holding companies. The federal capital standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, as adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profile among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

Pursuant to the Federal Reserve Board’s risk-based capital requirements, state member banks are required to meet a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.00% and a ratio of total capital to total risk-weighted assets of 8.00%. The capital categories have the same definitions for the Bank as for the Company. See “Regulation and Supervision – The Company – Capital Adequacy Requirements” for additional information on the capital requirements applicable to the Bank.

In addition to the risk-based capital requirements, the Federal Reserve Board has adopted regulations that supplement the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to quarterly average assets (“leverage ratio”) of 3.00%. The Federal Reserve Board has emphasized that the foregoing standards are supervisory minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not experiencing or anticipating significant growth. All other banking organizations are required to maintain a leverage ratio of at least 4.00% to 5.00% of Tier 1 capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets.

Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take “prompt corrective action” with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A “well capitalized” institution has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An “adequately capitalized” institution has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth); and does not meet the criteria for a well capitalized bank. An “undercapitalized” institution has a total risk-based capital ratio that is less than 8.0%; a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%. A “significantly undercapitalized” institution has a total risk-based capital ratio of less than 6.0%; a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%. A “critically undercapitalized” institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital

category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes. The Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulation as of December 31, 2011.

In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.

As an institution’s capital decreases, the federal regulators’ enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The FDIC has limited discretion in dealing with a critically undercapitalized institution and is generally required to appoint a receiver or conservator. Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

Deposit Insurance Assessments. The Bank’s deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. Currently the FDIC utilizes a risk-based assessment system to evaluate the risk of each financial institution based on three primary sources of information: (1) its supervisory rating, (2) its financial ratios, and (3) its long-term debt issuer rating, if the institution has one. The FDIC’s initial base assessment schedule can be adjusted up or down, and premiums in effect from January 1, 2010, through March 31, 2011, ranged from 12 basis points in the lowest risk category to 45 basis points for banks in the highest risk category. Effective April 1, 2011, the FDIC set initial base assessment rates from 5 basis points in the lowest risk category to 35 basis points for banks in the higher risk category.

The Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will necessitate increased deposit insurance premiums that are to be borne primarily by institutions with assets of greater than $10 billion. In October 2010, the FDIC addressed plans to bolster the DIF by increasing the required reserve ratio for the industry to 1.35 percent (ratio of reserves to insured deposits) by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed to raise its industry target ratio of reserves to insured deposits to 2 percent, 65 basis points above the statutory minimum.

In February 2011, the FDIC adopted new rules that amend its current deposit insurance assessment regulations. The new rules implement a provision in the Dodd-Frank Act that changed the assessment base for deposit insurance premiums from one based on domestic deposits to one based on average consolidated total assets minus average tangible equity. The rules also changed the assessment rate schedules for insured depository institutions so that approximately the same amount of revenue would be collected under the new assessment base as would be collected under the current rate schedule and the schedules previously proposed by the FDIC in October 2010. In addition, the new rules revised the risk-based assessment system for large insured depository institutions (generally, institutions with at least $10 billion in total assets) and “highly complex” institutions by requiring that the FDIC use a scorecard method to calculate assessment rates for all such institutions. The Bank will not be deemed a “highly complex” institution for these purposes.

Under the Federal Deposit Insurance Act, as amended (the “FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Safety and Soundness Standards. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA.

See “Regulation and Supervision – The Bank – Corrective Measures for Capital Deficiencies” for additional information. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Enforcement Powers. The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Company or the Bank, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. The appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptable capital restoration plan; or materially fails to implement an accepted capital restoration plan.

Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act, and various state counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.

In addition, federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, a financial institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure.

The Dodd-Frank Act provided for the creation of the CFPB as an independent entity within the Federal Reserve Board. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s functions include investigating consumer complaints, rulemaking, supervising and examining banks’ consumer transactions, and enforcing rules related to consumer financial products and services. Banks with less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with federal consumer financial laws by their primary federal banking agency.

USA PATRIOT Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”) was enacted in October 2001. The Patriot Act has broadened existing anti-money laundering legislation while imposing new compliance and due diligence obligations on banks and other financial institutions, with a particular focus on detecting and reporting money laundering transactions involving domestic or international customers. The U.S. Treasury Department has issued and will continue to issue regulations clarifying the Patriot Act’s requirements. The Patriot Act requires all “financial institutions,” as defined, to establish certain anti-money laundering compliance and due diligence programs. Recently, the regulatory agencies have intensified their examination procedures in light of the Patriot Act’s anti-money laundering and Bank Secrecy Act requirements. The Company believes that its controls and procedures were in compliance with the Patriot Act as of December 31, 2011.

Interstate Banking and Branching. The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether the transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) or by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997, that applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Such interstate bank mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act.

Prior to the enactment of the Dodd-Frank Act, national and state-chartered banks were generally permitted to branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. However, interstate branching is now permitted for all national and state-chartered banks as a result of the Dodd-Frank Act, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch, thus effectively giving out of state banks parity with in state banks with respect to de novo branching.

Repurchase of Securities Issued in the Troubled Asset Relief Program Capital Purchase Program

On November 21, 2008, the Company issued and sold to the U.S. Department of the Treasury (“Treasury”) (i) 41,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”) and (ii) a Warrant (the “Warrant”) to purchase 176,546 shares of the Company’s Common Stock, par value $1.00 per share (the “Common Stock”), for an aggregate purchase price of $41.50 million in cash. On June 5, 2009, the Company completed a public offering of its Common Stock that resulted in the reduction of the shares of Common Stock underlying the Warrant from 176,546 shares to 88,273 shares. On July 8, 2009, the Company repurchased from the Treasury all of the Preferred Shares that it had issued to the Treasury in November 2008. On November 23, 2011, the Company repurchased the Warrant from the Treasury for $30,600. The purchase price represents the amount that the Company bid in a public auction for the Warrant that took place on November 17, 2011. The Warrant had a 10-year term and was immediately exercisable upon its issuance, with an initial per share exercise price of $35.26.

Series A Noncumulative Convertible Preferred Stock

On May 20, 2011, the Company completed a private placement of 18,921 shares of its 6.00% Series A Noncumulative Convertible Preferred Stock (the “Series A Preferred Stock”). The shares carry a 6.00% dividend rate and are noncumulative. Each share is convertible into 69 shares of the Company’s Common Stock at any time and mandatorily converts after five years. The Company may redeem the shares at face value after the third anniversary.

Available Information

Under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Any document the Company files with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference room. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The Company makes available, free of charge, on its website at www.fcbinc.com its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after the Company files such reports with, or furnishes them to, the SEC. Investors are encouraged to access these reports and the other information about the Company’s business on its website. Information found on the Company’s website is not part of this Annual Report on Form 10-K. The Company will also provide copies of its Annual Report on Form 10-K, free of charge, upon written request of the Investor Relations Department at the Company’s main address, P.O. Box 989, Bluefield, VA 24605.

Also posted on the Company’s website, and available in print upon written request of any shareholder to the Company’s Investor Relations Department, are the charters of the standing committees of its Board of Directors, the Standards of Conduct governing the Company’s directors, officers, and employees, and the Company’s Insider Trading & Disclosure Policy.

Forward-Looking Statements

This Annual Report on Form 10-K may include “forward-looking statements,” 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:

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the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations;

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the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

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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;

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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);

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technological changes;

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the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

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the growth and profitability of the Company’s noninterest or fee income being less than expected;

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unanticipated regulatory or judicial proceedings;

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changes in consumer spending and saving habits; and

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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 all-inclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, then the Company’s actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Annual Report on Form 10-K. Therefore, the Company cautions you not to place undue reliance on these forward-looking statements.

The Company does not intend to update these forward-looking statements, whether written or oral, to reflect change. All forward-looking statements attributable to the Company are expressly qualified by these cautionary statements.

ITEM 1A.

Risk Factors.

An investment in the Company’s Common Stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of the Company’s Common Stock could decline significantly, and you could lose all or part of your investment.

Risks Related to the Company’s Business

The current economic environment poses significant challenges for the Company and could adversely affect its financial condition and results of operations.

The U.S. economy was in recession from December 2007 through June 2009. Business activity across a wide range of industries and regions in the U. S. was greatly reduced. Although economic conditions have improved, certain sectors, such as real estate and manufacturing, remain weak and unemployment remains high. Continued declines in real estate values, home sales volumes, and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on the Company’s borrowers or its customers, which could adversely affect the Company’s financial condition and results of operations. In addition, local governments and many businesses are still experiencing difficulty due to lower consumer spending and decreased liquidity in the credit markets. Deterioration in local economic conditions, particularly within the Company’s geographic regions and markets, could drive losses beyond that which is provided for in its allowance for loan losses. The Company may also face the following risks in connection with these events:

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Economic conditions that negatively affect housing prices and the job market have resulted, and may continue to result, in deterioration in credit quality of the Company’s loan portfolios, and such deterioration in credit quality has had, and could continue to have, a negative impact on the Company’s business.

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Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities.

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The processes the Company uses to estimate allowance for loan losses and reserves may no longer be reliable because they rely on complex judgments that may no longer be capable of accurate estimation.

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The Company’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches it uses to select, manage, and underwrite its customers become less predictive of future charge-offs.

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The Company expects to face increased regulation of its industry, and compliance with such regulation may increase its costs, limit its ability to pursue business opportunities, and increase compliance challenges.

As the above conditions or similar ones continue to exist or worsen, the Company could experience continuing or increased adverse effects on its financial condition and results of operations.

The Company and its subsidiary business are subject to interest rate risk and variations in interest rates may negatively affect its financial performance.

The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, and (ii) the fair value of the Company’s financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

The Bank’s allowance for loan losses may not be adequate to cover actual losses.

Like all financial institutions, the Bank maintains an allowance for loan losses to provide for probable losses. The Bank’s allowance for loan losses may not be adequate to cover actual loan losses and future provisions for loan losses could materially and adversely affect the Bank’s operating results. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Bank to make significant estimates of current credit risks and future trends, all of which may undergo material changes. The Bank’s allowance for loan losses is determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, changes in the size and composition of the loan portfolio, and industry information. Also included in management’s estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond the Bank’s control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review the Bank’s loans and allowance for loan losses. Although the Company believes that the Bank’s allowance for loan losses is adequate to provide for probable losses, there are no assurances that future increases in the allowance for loan losses will not be needed or that regulators will not require the Bank to increase its allowance. Either of these occurrences could materially and adversely affect the Company’s earnings and profitability.

The Company has experienced increases in the levels of non-performing assets in recent periods. The Company’s total non-performing assets totaled $31.00 million at December 31, 2011, $29.65 million at December 31, 2010, and $23.50 million at December 31, 2009. The Company had $9.32 million of net loan charge-offs for the year ended December 31, 2011, compared to $12.55 million and $9.31 million in net loan charge-offs for the years ended December 31, 2010 and 2009, respectively. The Company’s provision for loan losses was $9.05 million for the year ended December 31, 2011, $14.76 million for the year ended December 31, 2010, and $15.80 million for the year ended December 31, 2009. At December 31, 2011, the ratios of the Company’s allowance for loan losses to non-performing loans and to total loans outstanding were 104.5% and 1.88%, respectively. Additional increases in the Company’s non-performing assets or loan charge-offs may require an increase to the allowance for loan losses, which would have an adverse effect upon the Company’s future results of operations.

The declining real estate market could impact the Company’s business.

The Company’s business activities are conducted in Virginia, West Virginia, North Carolina, Tennessee and the surrounding regions. Over the past several years, the real estate market in these regions experienced declines with falling home prices and increased foreclosures. As a result of the Company’s elevated net charge-offs during this period and in recognition of the continued deterioration in the real estate market and the potential for further increases in non-performing assets, the Company increased its provision for loan losses over historical levels during 2009, 2010, and 2011. A continued downturn in this regional real estate market could hurt the Company’s business because its operations are concentrated within this geographic area and the vast majority of the Company’s loans are secured by real estate. If there is a further decline in real estate values, the collateral for the Company’s loans will provide less security. As a result, the Company’s ability to recover on defaulted loans by selling the underlying real estate will be diminished, and it will be more likely to suffer losses on defaulted loans.

Additionally, recent weakness in the secondary market for residential lending could have a material adverse impact on the Company’s profitability. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae and Freddie Mac loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could adversely affect the value of collateral securing mortgage loans, mortgage loan originations and gains on sale of mortgage loans. Continued declines in real estate values and home sales volumes, and

financial stress on borrowers as a result of job losses or other factors, could have further adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods, which could materially and adversely affect the Company.

The Company’s level of credit risk may increase due to its focus on commercial lending and the concentration on small businesses and middle market customers with significant vulnerability to economic conditions.

Commercial business and commercial real estate loans generally are considered riskier than single family residential loans because they have larger balances to a single borrower or group of related borrowers. Commercial business and commercial real estate loans involve risks because the borrowers’ ability to repay the loans typically depends primarily on the successful operation of the businesses or the properties securing the loans. Most of the Company’s commercial business loans are made to small business or middle market customers who may have a significant vulnerability to economic conditions. Moreover, a portion of these loans have been made or acquired by the Company in recent years and the borrowers may not have experienced a complete business or economic cycle. At December 31, 2011, the Company’s largest outstanding commercial business loan and largest outstanding commercial real estate loan amounted to $6.18 million and $7.30 million, respectively. At such date, the Company’s commercial business loans amounted to $93.31 million, or 6.68% of the Company’s total loan portfolio, and the Company’s commercial real estate loans amounted to $556.96 million, or 39.90% of the Company’s total loan portfolio.

In addition to commercial real estate and commercial business loans, the Company holds a portfolio of commercial construction loans. Construction loans generally have a higher risk of loss primarily due to the critical nature of the initial estimates of a property’s value upon completion of construction compared with the estimated costs, including interest, of construction as well as other assumptions. If the estimates upon which construction loans are made prove to be inaccurate, the Company may be confronted with projects that, upon completion, have values which are below the loan amounts. While the Company is not aware of any specific, material impediments impacting any of its builder/developer borrowers at this time, there continues to be nationwide reports of significant problems which have adversely affected many property developers and builders as well as the institutions that have provided those loans. If significant numbers of the builder/developers to which the Company has extended construction loans experience the type of difficulties that are being reported, it could have adverse consequences upon future results of operations. At December 31, 2011, the Company’s largest outstanding commercial construction loan amounted to $5.74 million. At such date, the Company’s commercial construction loans amounted to $61.77 million, or 4.42% of the Company’s total loan portfolio.

The Bank may suffer losses in its loan portfolio despite its underwriting practices.

The Bank seeks to mitigate the risks inherent in the Bank’s loan portfolio by adhering to specific underwriting practices. These practices include analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of collateral based on reports of independent appraisers and verification of liquid assets. Although the Bank believes that its underwriting criteria are appropriate for the various kinds of loans it makes, the Bank may incur losses on loans that meet its underwriting criteria, and these losses may exceed the amounts set aside as reserves in the Bank’s allowance for loan losses.

Changes in the fair value of the Company’s securities may reduce its stockholders’ equity and net income.

At December 31, 2011, $482.43 million of the Company’s securities were classified as available-for-sale. At such date, the aggregate unrealized losses on the Company’s available-for-sale securities totaled $21.74 million. The Company increases or decreases stockholders’ equity by the amount of the change in the unrealized gain or loss (the difference between the estimated fair value and the amortized cost) of the Company’s available-for-sale securities portfolio, net of the related tax effect, under the category of accumulated other comprehensive loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders’ equity, as well as book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold and there are no credit impairments, the decrease will be recovered at the maturity of the securities. In the case of equity securities which have no stated maturity, the declines in fair value may or may not be recovered over time.

The Company conducts periodic reviews and evaluations of its entire securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. Factors which the Company considered in its analysis of debt securities include, but are not limited to, intent to sell the security, evidence available to determine if it is more likely than not that the Company will have to sell the securities before recovery of the amortized cost, and probable credit losses. Probable credit losses are evaluated based upon, but are not limited to: the present value of future cash flows, the severity and duration of the decline in fair value of the security below its amortized cost, the financial condition and near-term prospects of the issuer, whether the decline appears to be related to issuer conditions or general market or industry conditions, the payment structure of the security, failure of the security to make scheduled interest or principal payments, and changes to the

rating of the security by rating agencies. The Company generally views changes in fair value for debt securities caused by changes in interest rates as temporary, which is consistent with the Company’s experience. If the Company deems such decline to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of noninterest income. For the year ended December 31, 2011, the Company recognized other-than-temporary impairment (“OTTI”) charges of $2.29 million on its debt securities portfolio.

Factors that the Company considers in its analysis of equity securities include, but are not limited to: intent to sell the security before recovery of the cost, the severity and duration of the decline in fair value of the security below its cost, the financial condition and near-term prospects of the issuer, and whether the decline appears to be related to issuer conditions or general market or industry conditions. For the year ended December 31, 2011, the Company recognized no OTTI charges on its equity securities portfolio.

The Company continues to monitor the fair value of its entire securities portfolio as part of its ongoing OTTI evaluation process. No assurance can be given that the Company will not need to recognize OTTI charges related to securities in the future.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material effect on the Company’s operations.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, which imposes significant regulatory and compliance changes. The key provisions of the Dodd-Frank Act that are anticipated to affect the Company’s operations include:

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changes to regulatory capital requirements;

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creation of new government regulatory agencies, including the Consumer Financial Protection Bureau;

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limitation on federal preemption;

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changes in insured depository institution regulations and assessments; and

•

mortgage loan origination and risk retention.

Many of the requirements of the Dodd-Frank Act will be implemented over time and most will be subject to the rulemaking process at various regulatory agencies. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on the Company’s operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require the Company to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements or with any future changes in laws or regulations may negatively impact our results of operations and financial condition.

The Company and its subsidiaries are subject to extensive regulation which could adversely affect them.

The Company and its subsidiaries’ operations are subject to extensive regulation and supervision by federal and state governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of the Company’s operations. Banking regulations governing the Company’s operations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not stockholders. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. These laws, rules and regulations, or any other laws, rules or regulations that may be adopted in the future, could make compliance more difficult or expensive, restrict the Company’s ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by the Bank and otherwise adversely affect the Company’s business, financial condition or prospects.

The financial services industry is likely to face increased regulation and supervision as a result of the recent financial crisis. Such additional regulation and supervision may increase the Company’s costs and limit its ability to pursue business opportunities. The affects of such recently enacted, and proposed, legislation and regulatory programs on the Company cannot reliably be determined at this time.

The Bank’s ability to pay dividends is subject to regulatory limitations which, to the extent the Company requires such dividends in the future, may affect the Company’s ability to pay its obligations and pay dividends.

The Company is a separate legal entity from the Bank and its subsidiaries and does not have significant operations of its own. The Company currently depends on the Bank’s cash and liquidity as well as dividends from the Bank to pay the Company’s operating expenses and dividends to its stockholders. No assurance can be made that in the future the Bank will have the capacity to pay the necessary dividends and that the Company will not require dividends from the Bank to satisfy the Company’s obligations. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the Federal Reserve Board or the Virginia Bureau, the Bank’s primary regulators, could assert that payment of dividends or other payments by the Bank are an unsafe or unsound practice. In the event the Bank is unable to pay dividends sufficient to satisfy the Company’s obligations or is otherwise unable to pay dividends to the Company, the Company may not be able to service its obligations as they become due, including payments required to be made to the FCBI Capital Trust, a business trust subsidiary of the Company, or pay dividends on the Company’s Common Stock or Series A Preferred Stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows and prospects.

The Company faces strong competition from other financial institutions, financial service companies and other organizations offering services similar to those offered by the Company and its subsidiaries, which could hurt the Company’s business.

The Company’s business operations are centered primarily in Virginia, West Virginia, North Carolina, and Tennessee. Increased competition within these regions may result in reduced loan originations and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the types of loans and banking services that the Bank offers. These competitors include other savings associations, national banks, regional banks and other community banks. The Company also faces competition from other types of financial institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, the Bank’s competitors include other state and national banks and major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns.

Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger clients. These institutions, particularly to the extent they are more diversified than the Company, may be able to offer the same loan products and services that the Company offers at more competitive rates and prices. If the Company is unable to attract and retain banking clients, the Company may be unable to continue the Bank’s loan and deposit growth and the Company’s business, financial condition and prospects may be negatively affected.

Potential acquisitions may disrupt the Company’s business and dilute stockholder value.

The Company may seek merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:

•

Potential exposure to unknown or contingent liabilities of the target company.

•

Exposure to potential asset quality issues of the target company.

•

Difficulty, expense, and delays of integrating the operations and personnel of the target company.

•

Potential disruption to the Company’s business.

•

Potential diversion of the Company’s management’s time and attention.

•

The possible loss of key employees and customers of the target company.

•

Difficulty in estimating the value of the target company.

•

Potential changes in banking or tax laws or regulations that may affect the target company.

•

Unexpected costs and delays.

•

Risks that the acquired target company does not perform consistent with the Company’s growth and profitability expectations.

•

Risks associated with entering new markets or product areas where the Company has limited experience.

•

Risks that growth will strain the Company’s infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures.

•

Potential short-term decreases in profitability.

The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some initial dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on the Company’s financial condition and results of operations.

The Company may engage in FDIC-assisted transactions, which could present additional risks to its business.

The Company may have opportunities to acquire the assets and liabilities of failed banks in FDIC-assisted transactions, which present the risks of acquisitions discussed above, as well as some risks specific to these transactions. Because FDIC-assisted acquisitions provide for limited diligence and negotiation of terms, these transactions may require additional resources and time, including servicing acquired problem loans and costs related to integration of personnel and operating systems, and the establishment of processes to service acquired assets. Such transactions may also require the Company to raise additional capital, which may be dilutive to existing stockholders. If the Company is unable to manage these risks, FDIC-assisted acquisitions could have a material adverse effect on its business, financial condition and results of operations.

Attractive acquisition opportunities may not be available in the future.

The Company expects that other banking and financial companies, many of which have significantly greater resources, will compete with it to acquire financial services businesses. This competition could increase prices for potential acquisitions that the Company believes are attractive. Also, acquisitions are subject to various regulatory approvals. If the Company fails to receive the appropriate regulatory approvals, it will not be able to consummate an acquisition that it believes is in its best interests. Among other things, the Company’s regulators consider the Company’s capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to the Company’s earnings and stockholders’ equity per share of the Company’s Common Stock and Series A Preferred Stock.

The Company’s goodwill may be determined to be impaired.

As of December 31, 2011, the carrying amount of the Company’s goodwill was $83.06 million. The Company tests goodwill for impairment on an annual basis, or more frequently if necessary. Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measuring impairment, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. If the Company determines that the carrying amount of its goodwill exceeds its implied fair value, the Company would be required to write-down the value of the goodwill on its balance sheet. This, in turn, would result in a charge against earnings and, thus, a reduction in the Company’s stockholders’ equity and certain related capital measures. During 2011, the Company recognized a charge of $1.24 million to write-down the value of goodwill at its insurance agency subsidiary.

The Company may lose members of its management team and have difficulty attracting skilled personnel.

The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense and the Company may not be able to hire such people or to retain them. The unexpected loss of services of key personnel of the Company could have a material adverse impact on its business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. In addition, recent regulatory proposals and guidance relating to compensation may negatively impact the Company’s ability to retain and attract skilled personnel.

An increase in FDIC deposit insurance premiums could adversely affect the Company’s earnings.

Market developments have significantly depleted the DIF of the FDIC and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC revised its assessment rates which raised deposit premiums for certain insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. The Company is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures, the FDIC may increase the deposit insurance assessment rates. Any future assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect the Company’s earnings and could have a material adverse effect on the value of its Common Stock.

The Company may seek to raise additional capital in the future, and such capital may not be available on acceptable terms or at all.

The Company may seek to raise additional capital in the future to provide it with sufficient capital resources and liquidity to meet its commitments, business needs, and growth objectives, particularly if its asset quality or earnings were to deteriorate significantly. The Company’s ability to raise additional capital will depend on, among other things, conditions in the capital markets at that time, which are outside of its control, and its financial performance. Economic conditions and the loss of confidence in financial institutions may increase the Company’s cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the FRB. Any occurrence that may limit the Company’s access to the capital markets may adversely affect the Company’s capital costs and its ability to raise capital and, in turn, its liquidity. Accordingly, the Company cannot provide any assurance that additional capital will be available on acceptable terms or at all. An inability to raise additional capital on acceptable terms could have a materially adverse effect on the Company’s businesses, financial condition and results of operations.

Liquidity risk could impair the Company’s ability to fund operations and jeopardize its financial condition.

Liquidity is essential to the Company’s business. An inability to raise funds through deposits, borrowings, equity and debt offerings and other sources could have a substantial negative effect on the Company’s liquidity. The Company’s access to funding sources in amounts adequate to finance its activities, or on terms attractive to the Company, could be impaired by factors that affect the Company specifically or the financial services industry in general. Factors that could detrimentally impact the Company’s access to liquidity sources include a reduction in its credit ratings, if any, an increase in costs of capital in financial capital markets, a decrease in the level of its business activity due to a market downturn or adverse regulatory action against the Company, or a decrease in depositor or investor confidence. The Company’s access to liquidity sources could also be impaired by factors that are not specific to it, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.

The Company’s controls and procedures may fail or be circumvented.

Management regularly reviews and updates the Company’s internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

The failure of other financial institutions could adversely affect the Company.

The Company’s ability to engage in routine funding transactions could be adversely affected by future failures of financial institutions and the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty and other relationships. The Company has exposure to different industries and counterparties and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies and other institutional clients. In certain of these transactions, the Company is required to post collateral to secure the obligations to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, the Company may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty.

In addition, many of these transactions expose the Company to credit risk in the event of a default by the Company’s counterparty or client. In addition, the credit risk may be exacerbated when the collateral held by the Company cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to the Company. Any losses resulting from the Company’s routine funding transactions may materially and adversely affect its financial condition and results of operations.

The Company is subject to environmental liability risk associated with lending activities.

A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.

Risks Associated with the Company’s Common Stock

The Company’s Common Stock price can be volatile.

Stock price volatility may make it more difficult for holders of the Company’s Common Stock to resell when desired. The Company’s Common Stock price can fluctuate significantly in response to a variety of factors including, among other things:

•

Actual or anticipated variations in quarterly results of operations.

•

Recommendations by securities analysts.

•

Operating and stock price performance of other companies that investors deem comparable to the Company.

•

News reports relating to trends, concerns and other issues in the financial services industry.

•

Perceptions in the marketplace regarding the Company and/or its competitors.

•

New technology used, or services offered, by competitors.

•

Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors.

•

Failure to integrate acquisitions or realize anticipated benefits from acquisitions.

•

Changes in government regulations.

•

Geopolitical conditions such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s Common Stock price to decrease regardless of operating results.

The trading volume in the Company’s Common Stock is less than that of other larger financial services companies.

Although the Company’s Common Stock is listed for trading on the NASDAQ, the trading volume in its Common Stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s Common Stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company’s Common Stock, significant sales of the Company’s Common Stock, or the expectation of these sales, could cause the Company’s stock price to fall.

The Company may not continue to pay dividends on its Common Stock in the future.

The Company’s Common Stockholders are only entitled to receive such dividends the Company’s board of directors declares out of funds legally available for such payments. Although the Company has historically declared cash dividends on its Common Stock, it is not required to do so and may reduce or eliminate its Common Stock dividend in the future. This could adversely affect the market price of the Company’s Common Stock. Also, the Company is a financial holding company and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve Board regarding capital adequacy and dividends.

An investment in the Company’s Common Stock is not an insured deposit.

The Company’s Common Stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in the Company’s Common Stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of the Company’s Common Stock could lose some or all of their investment.

Certain banking laws may have an anti-takeover effect.

Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial to the Company’s shareholders. These provisions effectively inhibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company’s Common Stock.

The Company issued Series A Preferred Stock, which ranks senior to its Common Stock.

The Company issued 18,921 shares of Series A Preferred Stock in May 2011. The Series A Preferred Stock ranks senior to shares of the Company’s Common Stock. As a result, the Company must make dividend payments on its Series A Preferred Stock before any dividends can be paid on the Company’s Common Stock and, in the event of its bankruptcy, dissolution or liquidation, the holders of the Series A Preferred Stock must be satisfied before any distributions can be made on the Company’s Common Stock. If the Company does not remain current in the payment of dividends on the Series A Preferred Stock, no dividends may be paid on its Common Stock. In addition, the dividends declared on the Series A Preferred Stock will reduce any net income available to holders of Common Stock and earnings per common share.

ITEM 1B.

Unresolved Staff Comments.

The Company has no unresolved staff comments as of the filing date of this 2011 Annual Report on Form 10-K.

ITEM 2.

Properties.

The Company’s corporate headquarters are located at One Community Place in Bluefield, Virginia, where the Company owns and occupies approximately 36,000 square feet of office space. In addition to its corporate headquarters, the Company’s community banking segment operated 55 banking centers, loan production, administrative, or other financial services offices at December 31, 2011, of which 45 were owned and 11 were leased or located on leased land. The banking centers were located throughout Virginia, West Virginia, North Carolina, and Tennessee. The Company’s insurance services segment headquarters are located at 711 Gallimore Dairy Road in High Point, North Carolina. Including its headquarters, the Company’s insurance segment operated seven insurance offices at December 31, 2011, of which one was owned, four were leased, and two were located within the Company’s banking centers. The insurance agency offices were located throughout North Carolina, West Virginia, and Virginia. There were no mortgages or liens against any property of the Company. A complete list of all branch and ATM locations can be found on the Company’s website at www.fcbinc.com. Information contained on such website is not part of this Annual Report on Form 10-K. See “Note 6 – Premises and Equipment” of the Notes to Consolidated Financial Statements in Item 8 herein.

ITEM 3.

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 effect on the financial position, results of operations, or cash flows of the Company.

ITEM 4.

Mine Safety Disclosures.

None.

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Common Stock Market Prices and Dividends

The number of Common Stockholders of record on February 27, 2012, was 2,757 and outstanding shares totaled 17,849,376. The number of Common Stockholders is measured by the number of record holders. The Company’s Common Stock trades on the NASDAQ Global Select market under the symbol “FCBC”.

The Company’s ability to pay dividends on its Common Stock is principally dependent on the Bank’s ability to pay dividends to the Company, which is subject to various regulatory restrictions and limitations. For information on the regulatory restrictions and limitations on the ability of the Company to pay dividends to its stockholders and on the Bank to pay dividends to the Company, see “Business – Regulation and Supervision – The Company – Regulatory Restrictions on Dividends; Source of Strength.” and “Business – Regulation and Supervision – The Bank – Restrictions on Distribution of Subsidiary Bank Dividends and Assets” in Item 1 herein. Cash dividends on Common Stock totaled $0.40 per share for 2011 and $0.40 per share in 2010. Total dividends paid on Common Stock for the years ended December 31, 2011, and December 31, 2010, totaled $7.16 million and $7.12 million, respectively. Total cash dividends paid on the Company’s Series A Preferred Stock for the year ended December 31, 2011, totaled $558 thousand.

The following table sets forth the high and low stock prices and dividends paid per share on the Company’s Common Stock during the periods indicated:


	2011				2010
	High		Low		High		Low
Sales Price Per Share
First quarter	$	15.43	$	12.23	$	13.34	$	10.96
Second quarter		15.21		12.94		17.37		12.53
Third quarter		14.60		9.40		16.06		12.02
Fourth quarter		13.02		9.48		15.86		12.55

		$15.43		$15.43

	2011		2010
Cash Dividends Per Share
First quarter	$	0.10	$	0.10
Second quarter		0.10		0.10
Third quarter		0.10		0.10
Fourth quarter		0.10		0.10

Total	$	0.40	$	0.40

Stock Repurchase Plan

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of the Company’s Common Stock during the fourth quarter of 2011:


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan		Maximum Number of Shares That May Yet be Purchased Under the Plan ⁽¹⁾

October 1-31, 2011		—	$	—		—		886,692
November 1-30, 2011		33,200		11.70		33,200		853,492
December 1-31, 2011		—		—		—		866,554

Total		33,200	$	11.70		33,200

(1)

The Company’s stock repurchase plan, as amended, authorized the purchase and retention of up to 1,100,000 shares. The plan has no expiration date and currently is in effect. No determination has been made to terminate the plan or to cease making purchases. The Company held 233,446 shares in treasury at December 31, 2011.

Total Return Analysis

The following chart was compiled by SNL Financial LC, and compares cumulative total shareholder return of the Company’s Common Stock for the five-year period ended December 31, 2011, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and the Asset Size & Regional Peer Group. The Asset Size & Regional Peer Group consists of 48 bank holding companies that are traded on the NASDAQ, OTC Bulletin Board, and pink sheets with total assets between $1 billion and $5 billion and are located in the Southeast Region of the United States. The cumulative returns include reinvestment of dividends by the Company.

LOGO


	*Period Ending*
*Index*	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
First Community Bancshares, Inc.		100.00		83.30		94.34		33.40		42.62		36.76
S&P 500		100.00		105.49		66.46		84.05		96.71		98.76
NASDAQ Composite		100.00		110.66		66.42		96.54		114.06		113.16
Asset & Regional Peer Group⁽¹⁾		100.00		75.38		70.71		52.14		56.73		50.41

(1)

The Asset Size & Regional Peer Group consists of the following institutions: 1st United Bancorp, Inc., American National Bankshares, Inc., Ameris Bancorp, BancTrust Financial Group, Inc., Bank of the Ozarks, Inc., BNC Bancorp, Burke & Herbert Bank & Trust Company, Capital City Bank Group, Inc., Cardinal Financial Corporation, Carter Bank & Trust, CenterState Banks, Inc., City Holding Company, Colony Bankcorp, Inc., Eastern Virginia Bankshares, Inc., Fidelity Southern Corporation, First Bancorp, First Citizens Bancshares, Ins., First M&F Corporation, First Security Group, Inc., First Southern Bancorp, Inc., FNB United Corp., Great Florida Bank, Hamilton State Bancshares, Inc., Hampton Roads Bankshares, Inc., Home BancShares, Inc., Middleburg Financial Corporation, National Bankshares, Inc., NewBridge Bancorp, Palmetto Bancshares, Inc., Peoples Bancorp of North Carolina, Inc., Pinnacle Financial Partners, Inc., Premier Financial Bancorp, Inc., Renasant Corporation, SCBT Financial Corporation, Seacoast Banking Corporation of Florida, Simmons First National Corporation, Southeastern Bank Financial Corporation, Southern BancShares (N.C.), Inc., Southern Community Financial Corporation, State Bank Financial Corporation, StellarOne Corporation, Summit Financial Group, Inc., Tennessee Commerce Bancorp, Inc., TowneBank, Union First Market Bankshares Corporation, Virginia Commerce Bancorp, Inc., Wilson Bank Holding Company, and Yadkin Valley Financial Corporation. The returns of each of the foregoing institutions have been weighted according to their respective stock market capitalization at the beginning of each period for which a return is indicated.

ITEM 6.

Selected Financial Data.

The following consolidated selected financial data is derived from the Company’s audited financial statements as of and for the five years ended December 31, 2011. The consolidated financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included in this Annual Report on Form 10-K. All of the Company’s acquisitions during the five years ended December 31, 2011, were accounted for using the purchase method. Accordingly, the operating results of the acquired companies are included with the Company’s results of operations since their respective dates of acquisition.


	At or for the year ended December 31,
Five-Year Selected Financial Data	2011			2010			2009			2008			2007
(Amounts in thousands, except per share data)
Balance Sheet Summary (at end of period)
Securities	$	485,920		$	484,701		$	493,511		$	529,393		$	676,195
Loans held for sale		5,820			4,694			11,576			1,024			811
Loans held for investment, net of unearned income		1,396,067			1,386,206			1,393,931			1,298,159			1,225,502
Allowance for loan losses		26,205			26,482			24,277			17,782			12,833
Total assets		2,164,789			2,244,238			2,273,283			2,132,187			2,149,838
Deposits		1,543,467			1,620,955			1,645,960			1,503,758			1,393,443
Borrowings		295,141			332,087			352,558			381,791			517,843
Total liabilities		1,859,060			1,974,360			2,021,016			1,912,972			1,932,740
Preferred stock		18,921			—			—			41,500			—
Total stockholders’ equity		305,729			269,878			252,267			219,215			217,098

Summary of Earnings
Interest income	$	94,176		$	103,582		$	107,934		$	110,765		$	127,591
Interest expense		22,147			29,725			38,682			44,930			59,276
Net interest income		72,029			73,857			69,252			65,835			68,315
Provision for loan losses		9,047			14,757			15,801			9,226			717
Net interest income after provision for loan losses		62,982			59,100			53,451			56,609			67,598
Noninterest income		35,534			40,508			(53,677	)		2,374			24,831
Noninterest expense		68,915			69,943			66,624			60,516			50,463
Income (loss) before income taxes		29,601			29,665			(66,850	)		(1,533	)		41,966
Income tax expense (benefit)		9,573			7,818			(28,154	)		(3,487	)		12,334
Net income (loss)		20,028			21,847			(38,696	)		1,954			29,632
Dividends on preferred stock		703			—			2,160			255			—
Net income (loss) available to common shareholders		19,325			21,847			(40,856	)		1,699			29,632

Per Share Data
Basic earnings (loss) per common share	$	1.08		$	1.23		$	(2.75	)	$	0.15		$	2.64
Diluted earnings (loss) per common share	$	1.07		$	1.23		$	(2.75	)	$	0.15		$	2.62

Cash dividends per common share	$	0.40		$	0.40		$	0.30		$	1.12		$	1.08
Book value per common share at year-end	$	15.96		$	15.11		$	14.20		$	15.36		$	19.61

Selected Ratios
Return on average assets		0.88	%		0.97	%		-1.83	%		0.08	%		1.39	%
Return on average common equity		6.81	%		8.11	%		-16.73	%		0.86	%		13.54	%
Average equity to average assets		13.44	%		11.91	%		10.95	%		9.86	%		10.30	%
Dividend payout		37.00	%		32.52	%		N/M	⁽¹⁾		N/M	⁽¹⁾		40.91	%
Risk based capital to risk adjusted assets		18.15	%		15.33	%		13.81	%		12.94	%		12.34	%
Leverage ratio		11.50	%		9.44	%		8.51	%		9.70	%		8.09	%

(1)	N/M – Not meaningful

ITEM 7.

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

Executive Overview

First Community Bancshares, Inc. is a financial holding company that, through its bank subsidiary, provides commercial banking services and has positioned itself as a regional community bank and a financial services alternative to larger banks which often provide less emphasis on personal relationships, and smaller community banks which lack the capital and resources to efficiently serve customer needs. The Company has focused its growth efforts on building financial partnerships and more enduring and complete relationships with businesses and individuals through a very personal and local approach to banking and financial services. The Company and its operations are guided by a strategic plan which includes growth through acquisitions and through office expansion in market areas including Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. While the Company’s mission remains that of a community bank, management believes that entry into new markets will accelerate the Company’s growth rate by diversifying the demographics of its customer base and customer prospects and by generally increasing its sales and service network.

Economy

The local economies in which the Company operates are diverse and span a four-state region. The economies of West Virginia and Southwest Virginia have significant exposure to extractive industries, such as coal, timber and natural gas. The local economies in the central portion of North Carolina have suffered in recent years due to foreign competition in both furniture and textiles, as well as consolidation in the financial services industry. Despite these detractions, the economies in this region continue to benefit from national companies operating in the Triad and Central Piedmont area of North Carolina. The Eastern Virginia local economies have, in recent years, benefited from key corporate and government activities. The economy in Eastern Tennessee continues to benefit from the stability of higher education, healthcare services and tourism.

Despite the stable and positive aspects of the regional economies in which the Company primarily operates, the Company’s markets have experienced significant declines in residential development and construction, not inconsistent with national trends. These declines have led to contraction in residential land development and construction, which has historically been important components of the Company’s lending activities. The economies of the Company’s Southwest Virginia and West Virginia markets have remained stable compared with the national economy and unemployment levels were generally lower than the national average at December 31, 2011.

Competition

As the Company competes for increased market share and growth in both loans and deposits, it continues to encounter strong competition from many sources. Many of the markets targeted by the Company are also being entered by other banks in nearby and distant markets. The expansion of banks, credit unions, and other non-depository financial companies over recent years has intensified competitive pressures on core deposit generation and retention. Competitive forces impact the Company through pressure on interest yields, product fees, and loan structure and terms; however, the Company has countered these pressures with its relationship style of banking, competitive pricing, cost efficiencies, and a disciplined approach to loan underwriting.

Application of Critical Accounting Policies

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

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

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operation. The following is a summary of the Company’s more subjective and complex “critical

accounting policies.” In addition, the disclosures presented in the Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 investment valuation, determination of the allowance for loan losses, accounting for acquisitions and intangible assets, and accounting for income taxes as the accounting areas that require the most subjective or complex judgments.

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, credit rating, and receipt of amounts contractually due, among other factors, 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.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable losses inherent in the loan portfolio, and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. The Company consistently applies a review process to periodically evaluate loans for changes in credit risk. This process serves as the primary means by which the Company evaluates the adequacy of the allowance for loan losses.

The Company determines the allowance for loan losses by making specific allocations to impaired loans that exhibit inherent weaknesses and various credit risk and by general allocations to commercial, residential real estate, and consumer loans by giving weight to risk ratings, historical loss trends and management’s judgment concerning those trends, and other relevant factors. These factors may include, but are not limited to, actual versus estimated losses, regional and national economic conditions, business segment and portfolio concentrations, industry competition and consolidation, and the impact of government regulations. The foregoing analysis is performed by management to evaluate the portfolio and calculate an estimated valuation allowance through a quantitative and qualitative analysis that applies risk factors to those identified risk areas.

This risk management evaluation is applied at both the portfolio level and the individual loan level for commercial loans and credit relationships while the level of consumer and residential mortgage loan allowance is determined primarily on a total portfolio level based on a review of historical loss percentages and other qualitative factors including concentrations, industry specific factors and economic conditions. The commercial portfolio requires more specific analysis of individually significant loans and the borrower’s underlying cash flow, business conditions, capacity for debt repayment and the valuation of secondary sources of payment, such as collateral. This analysis may result in specifically identified weaknesses and corresponding specific impairment allowances. While allocations are made to specific loans and classifications within the various categories of loans, the allowance for loan losses is available for all loan losses.

The use of various estimates and judgments in the Company’s ongoing evaluation of the required level of allowance can significantly impact the Company’s results of operations and financial condition and may result in either greater provisions against earnings to increase the allowance or reduced provisions based upon management’s current view of the portfolio and economic conditions and the application of revised estimates and assumptions. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by increasing or decreasing the loan loss provision based upon current measurement criteria.

Acquisitions and Intangible Assets

The Company may, from time to time, engage in business combinations with other companies. Purchase accounting requires the recording of underlying assets and liabilities of the entity acquired at their fair market value. Any excess of the purchase price of the business over the net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on purchase is recorded. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisal by qualified independent parties for relevant asset and liability categories. Financial assets and liabilities are typically valued using discount models which apply current discount rates to streams of cash flow. All of these valuation methods require the use of assumptions which can result in alternate valuations and varying levels of goodwill and amounts of bargain purchase gain and, in some cases, amortization expense or accretion income.

Management must also make estimates of useful or economic lives of certain acquired assets and liabilities. These lives are used in establishing amortization and accretion of some intangible assets and liabilities, such as the intangible associated with core deposits acquired in the acquisition of a commercial bank.

Goodwill is recorded as the excess of the purchase price, if any, over the fair value of the acquired net assets. Goodwill is tested annually in the fourth quarter for possible impairment by comparing the fair value of each reporting unit to its book value, including goodwill (step 1). If the fair value of the reporting unit is greater than its book value, no goodwill impairment exists. However, if the book value of the reporting unit is greater than its determined fair value, goodwill impairment may exist and further testing is required to determine the amount, if any, of the actual impairment loss (step 2). The step 1 test utilizes a combination of two methods to determine the fair value of the reporting units. For both reporting units, a discounted cash flow model is created projecting cash flows from operations of the business reporting unit, the results of which are weighted 70%. For the banking reporting unit a market multiple model utilizes price to net income and price to tangible book value inputs for closed transactions and for certain common sized institutions and the results are weighted 30%. For the insurance reporting unit the market multiple model primarily utilizes price to sales for closed transactions and certain similar industry public companies and the results are weighted 30%. The end results for both reporting units are then compared to the respective book values to consider if impairment is evident. To determine the overall reasonableness of the reporting unit computations, the combined computed fair value is then compared to the overall market capitalization of the consolidated Company to determine the level of implied control premium.

The discounted cash flow analysis uses estimates in the form of growth and attrition rates, anticipated rates of return, and discount rates. These estimates have a direct bearing on the results of the impairment testing and serve as the basis for management’s conclusions as to potential impairment.

The results of the step 1 analysis performed during the fourth quarter of 2011 determined that no impairment was evident for the banking reporting unit. For the insurance reporting unit the step 1 analysis indicated impairment. A step 2 analysis was performed for the insurance reporting unit resulting in impairment to goodwill of $1.24 million. An adjustment to the weighting of the results, a decline in the market multiples used, further decline in the banking and retail insurance industry valuations, or further decline in our Common Stock price could result in future potential impairment.

Income Taxes

The establishment of provisions for federal and state income taxes is a complex area of accounting which also involves the use of judgments and estimates in applying relevant tax statutes. The Company operates in multiple state tax jurisdictions and this requires the appropriate allocation of income and expense to each state based on a variety of apportionment or allocation bases. The Company is also subject to audit by federal and state tax authorities. Results of these audits may produce indicated liabilities which differ from Company estimates and provisions. The Company continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of possible exposure based on current facts and circumstances.

Deferred tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for tax and financial statement purposes that will reverse in future periods. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. When uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the asset may be reduced by a valuation allowance. The amount of any valuation allowance established is based upon an estimate of the deferred tax asset that is more likely than not to be recovered. Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes.

Recent Acquisitions and Divestitures

In July 2009, the Company acquired TriStone Community Bank (“TriStone”), based in Winston-Salem, North Carolina. TriStone had two full service locations in Winston-Salem, North Carolina. At acquisition, TriStone had total assets of $166.82 million, total loans of $132.23 million and total deposits of $142.27 million. Each outstanding common share of TriStone was exchanged for .5262 shares of the Company’s Common Stock and the overall acquisition cost was $10.78 million. The acquisition of TriStone significantly augmented the Company’s market presence and human resources in the Winston-Salem, North Carolina market.

Greenpoint Insurance Group (“Greenpoint”), a wholly-owned subsidiary of the Company, has acquired seven insurance agencies and sold three since its acquisition by the Company in September 2007. In 2011, Greenpoint recorded a net gain of $67 thousand on the sale of two insurance agencies and has the potential to recognize an additional $650 thousand over time as

earn-out payments are received. In connection with those sales, the Company eliminated $1.30 million of goodwill and $379 thousand of other intangibles to the Company’s balance sheet in 2011. In 2010, Greenpoint acquired one insurance agency and issued cash consideration of $190 thousand.

Results of Operations

2011 Compared To 2010

Net income available to common shareholders for 2011 was $19.33 million, a decrease of $2.52 million from $21.85 million in 2010. Basic and diluted earnings per common share for 2011 were $1.08 and $1.07, respectively, as compared to basic and diluted earnings per common share of $1.23 in 2010. The Company’s return on average assets was 0.88% in 2011 compared to 0.97% in 2010. Return on average common equity was 6.81% in 2011 compared to 8.11% in 2010.

Net Interest Income

The primary source of the Company’s earnings is net interest income, the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits and borrowings represent the major portion of interest-bearing liabilities. Net interest income was $72.03 million for 2011, as compared to $73.86 million for 2010, a decrease of $1.83 million, or 2.48%. Tax equivalent net interest income totaled $74.99 million for 2011, a decrease of $2.23 million, or 2.89%, from $77.22 million reported for 2010. The decrease in tax equivalent net interest income was primarily due to decreases in the balances of loans and securities coupled with lower rates of interest earned on those assets.

For purposes of the following discussion, comparison of net interest income is performed on a tax equivalent basis, which provides a common basis for comparing yields on earning assets exempt from federal income taxes to those assets which are fully taxable (see the table titled Average Balance Sheets and Net Interest Income Analysis).

Average earning assets decreased $44.31 million while average interest-bearing liabilities decreased $102.80 million during 2011, as compared to the prior year. The yield on average earning assets decreased 39 basis points to 5.01% for 2011 from 5.40% for 2010. Short-term market interest rates continued to remain low throughout 2011, as the Federal Reserve Board held the “range” of zero to 25 basis points as its target for federal funds. The prevailing low interest rate environment was the largest driver in the overall decrease in the Company’s yield on average earning assets.

Total cost of average interest-bearing liabilities decreased 35 basis points to 1.32% during 2011. The Company’s time deposit portfolio experienced downward repricing during 2011, as many of the higher-rate certificates were redeemed or renewed at lower rates. The net result was a decrease of 4 basis points in the net interest rate spread, or the difference between interest income on earning assets and expense on interest-bearing liabilities, for 2011 compared to 2010. The net interest rate spread for 2011 was 3.69% compared to 3.73% for 2010. The Company’s net interest margin, or net interest income to average earning assets, of 3.87% for 2011 represents a decrease of 3 basis points from 3.90% in 2010.

Loan interest income decreased $4.16 million during 2011, as compared to 2010 as the average volume and the yield on loans decreased. During 2011, the yield on loans decreased 22 basis points to 5.84% while the average balance decreased $17.96 million, as compared to 2010. During 2011, the yield on available-for-sale securities decreased 70 basis points to 3.63% while the average balance decreased $58.12 million, as compared to 2010.

Average interest-bearing balances that the Company maintained with third party banks increased $34.08 million during 2011 to $116.06 million, while the yield increased 1 basis point to 0.25% during the same period. Interest-bearing balances with third party banks are comprised largely of excess liquidity bearing overnight market rates.

The average balance of interest-bearing deposits decreased $63.44 million, or 4.42%, and the average rate paid on those deposits decreased 46 basis points to 0.93% during 2011 compared to the prior year. The average rate paid on interest-bearing demand deposits decreased 23 basis points, while the average rate paid on savings deposits, which include money market and savings accounts, decreased 43 basis points in 2011 compared to 2010. In 2011, average time deposits decreased $77.29 million, or 10.17%, and the average rate paid on those deposits decreased 44 basis points to 1.68%, as compared to 2010. The decrease can be attributed to rate sensitive customers not renewing investments at lower interest rates. The level of average noninterest-bearing demand deposits increased $16.84 million to $223.23 million in 2011 compared to the prior year.

The average balance of retail repurchase agreements, which consists of collateralized retail deposits and commercial treasury accounts, decreased $13.97 million in 2011 and the average rate paid on those funds decreased 37 basis points to 0.65% during the same period. The average balance of federal funds purchased totaled $77 thousand in 2011. The average balance of wholesale repurchase agreements remained unchanged at $50.00 million between 2011 and 2010, while the rate increased 3 basis points due to structure within those borrowings. The average balance of Federal Home Loan Bank (“FHLB”)

advances and other borrowings decreased $25.47 million, or 13.10%, and the rate paid on those borrowings increased 51 basis points in 2011 compared to 2010. Other borrowings include the Company’s trust preferred issuance of $15.46 million, which is indexed to 3-month LIBOR. The Company prepaid $25.00 million of a $75.00 million FHLB convertible advance that carried a 4.00% interest rate during the first quarter of 2011. The advance was a structured borrowing where the interest rate floated with 3-month LIBOR, but changed to a 4.00% fixed cost in the first quarter of 2011.

Average Balance Sheets and Net Interest Income Analysis


	2011							2010							2009
	Average Balance		Interest Income/ Expense ⁽¹⁾		Average Yield/Rate ⁽¹⁾			Average Balance		Interest Income/ Expense ⁽¹⁾		Average Yield/Rate ⁽¹⁾			Average Balance		Interest Income/ Expense ⁽¹⁾		Average Yield/Rate ⁽¹⁾
(Amounts in thousands)
Earning assets
Loans held for investment: ⁽²⁾	$	1,382,097	$	80,742		5.84	%	$	1,400,061	$	84,906		6.06	%	$	1,333,112	$	82,785		6.21	%
Available-for-sale securities		434,583		15,775		3.63	%		492,703		21,313		4.33	%		537,278		27,638		5.14	%
Held-to-maturity securities		3,999		333		8.32	%		6,299		533		8.46	%		7,828		643		8.21	%
Interest-bearing deposits with banks		116,063		285		0.25	%		81,987		194		0.24	%		62,242		165		0.27	%

Total earning assets		1,936,742		97,135		5.01	%		1,981,050		106,946		5.40	%		1,940,460		111,231		5.73	%
Other assets		258,897							282,005							288,450

Total	$	2,195,639						$	2,263,055						$	2,228,910


Interest-bearing liabilities
Demand deposits	$	277,263	$	431		0.16	%	$	252,471	$	980		0.39	%	$	205,997	$	443		0.22	%
Savings deposits		410,240		886		0.22	%		421,184		2,751		0.65	%		334,217		2,588		0.77	%
Time deposits		682,997		11,471		1.68	%		760,286		16,156		2.12	%		863,357		24,765		2.87	%

Total interest-bearing deposits		1,370,500		12,788		0.93	%		1,433,941		19,887		1.39	%		1,403,571		27,796		1.98	%
Federal funds purchased		77		—		0.00	%		—		—		—			—		—		—
Retail repurchase agreements		83,564		544		0.65	%		97,531		992		1.02	%		101,775		1,375		1.38	%
Wholesale repurchase agreements		50,000		1,887		3.77	%		50,000		1,872		3.74	%		50,000		1,922		3.84	%
FHLB borrowings and other long-term debt		168,988		6,928		4.10	%		194,461		6,974		3.59	%		204,678		7,589		3.71	%

Total borrowings		302,629		9,359		3.09	%		341,992		9,838		2.88	%		356,453		10,886		3.05	%

Total interest-bearing liabilities		1,673,129		22,147		1.32	%		1,775,933		29,725		1.67	%		1,760,024		38,682		2.20	%
Noninterest-bearing demand deposits		223,233							206,396							199,917
Other liabilities		4,127							11,280							24,832
Stockholders’ equity		295,150							269,446							244,137

Total	$	2,195,639						$	2,263,055						$	2,228,910

Net interest income, tax-equivalent			$	74,988						$	77,221						$	72,549

Net interest rate spread ⁽³⁾						3.69	%						3.73	%						3.53	%

Net interest margin ⁽⁴⁾						3.87	%						3.90	%						3.74	%

(1)	Fully taxable equivalent at the rate of 35% (“FTE”).

(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 tax equivalent yield on earning assets and cost of funds.

(4)	Represents tax-equivalent net interest income divided by average interest earning assets.

Rate and Volume Analysis of Interest

The following table summarizes the changes in tax-equivalent interest earned and paid detailing the amounts attributable to (i) changes in volume (change in the average volume times the prior year’s average rate), (ii) changes in rate (changes in the average rate times the prior year’s average volume), and (iii) changes in rate/volume (change in the average volume column times the change in average rate):


	Twelve Months Ended December 31, 2011 Compared to 2010 Dollar Increase/(Decrease) due to												Twelve Months Ended December 31, 2010 Compared to 2009 Dollar Increase/(Decrease) due to
(Amounts in thousands)	Volume			Rate			Rate/ Volume			Total			Volume			Rate			Rate/ Volume			Total
Interest Earned On:
Loans (FTE)	$	(1,089	)	$	(3,080	)	$	5		$	(4,164	)	$	4,158		$	(2,000	)	$	(37	)	$	2,121
Securities available-for-sale (FTE)		(2,517	)		(3,449	)		428			(5,538	)		(2,291	)		(4,352	)		318			(6,325	)
Securities held-to-maturity (FTE)		(195	)		(8	)		3			(200	)		(126	)		20			(4	)		(110	)
Interest-bearing deposits with other banks		82			8			1			91			53			(19	)		(5	)		29

Total interest-earning assets		(3,719	)		(6,529	)		437			(9,811	)		1,794			(6,351	)		272			(4,285	)


Interest Paid On:
Demand deposits		97			(581	)		(65	)		(549	)		102			350			85			537
Savings deposits		(71	)		(1,811	)		17			(1,865	)		670			(401	)		(106	)		163
Time deposits		(1,639	)		(3,345	)		299			(4,685	)		(2,958	)		(6,475	)		824			(8,609	)
Federal funds purchased		—			—			—			—			—			—			—			—
Retail repurchase agreements		(142	)		(361	)		55			(448	)		(57	)		(336	)		10			(383	)
Wholesale repurchase agreements		—			15			0			15			—			(50	)		(0	)		(50	)
FHLB borrowings and other long-term debt		(914	)		992			(124	)		(46	)		(379	)		(246	)		10			(615	)

Total interest-bearing liabilities		(2,669	)		(5,091	)		182			(7,578	)		(2,622	)		(7,158	)		823			(8,957	)


Change in net interest income, tax-equivalent	$	(1,050	)	$	(1,438	)	$	255		$	(2,233	)	$	4,416		$	807		$	(551	)	$	4,672

Provision for Loan Losses

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses for 2011 was $9.05 million, a decrease of $5.71 million compared to 2010. The decrease in the loan loss provision is primarily attributed to decreasing net charge-offs during 2011; however, qualitative risk factors for the loan portfolio remained high, reflective of the elevated risk of inherent loan losses due to continued high unemployment, recessionary pressures, and devaluations of various categories of collateral. Net charge-offs for 2011 and 2010 were $9.32 million and $12.55 million, respectively. Net charge-offs, as a percentage of average loans, decreased to 0.67% for 2011 from 0.90% for 2010. See “Financial Position – Allowance for Loan Losses” for additional information.

Noninterest Income

Noninterest income consists of all revenues that are not included in interest and fee income related to earning assets. Noninterest income for 2011, exclusive of the impact of OTTI charges and gains on the sale of securities, was $32.56 million compared to $32.42 million in 2010, an increase of $135 thousand, or 0.42%. See “Financial Position – Available-for-Sale Securities” for information relating to the Company’s securities.

Wealth management income, which includes fees for trust services and commission and fee income generated for investment advisory services, decreased $318 thousand in 2011 to $3.51 million compared to 2010, as a result of a decrease in advisory service revenue. Service charges on deposit accounts increased $110 thousand in 2011 to $13.24 million compared to 2010, as a result of an increase in non-sufficient funds fee income. Other service charges, commissions and fees reflected an increase of $648 thousand in 2011 compared to 2010, primarily due to a continued increase in debit card interchange income as the Company’s customers increasingly chose card-based payment delivery systems.

Insurance commissions earned in 2011 were $6.20 million compared to $6.73 million in 2010, a decrease of $530 thousand, as a result of the sale of two agency offices and continued soft conditions impacting policy and premium levels. Revenue for the insurance subsidiary is derived primarily from commissions earned on the sale of property and casualty policies.

Other operating income for 2011 was $3.89 million, an increase of $225 thousand from 2010. The largest components of the increase in other operating income for 2011 were increased revenue from secondary market mortgage operations of $132 thousand, increased bank-owned life insurance income of $102 thousand, increased rental income of $92 thousand, and net gains recognized on the sale of insurance agency offices and accounts of $67 thousand.

During 2011, the Company recognized net securities gains of $5.26 million, a decrease of $3.01 million from net securities gains of $8.27 million recognized in 2010.

Noninterest Expense

Total noninterest expense was $68.92 million for 2011, a decrease of $1.03 million from 2010. Salaries and benefits decreased $402 thousand in 2011 compared to 2010. At December 31, 2011, the Company had total full-time equivalent employees of 633 compared to 683 at December 31, 2010. Full-time equivalent employees are calculated using the number of hours worked. Greenpoint accounted for 48 full-time equivalent employees at year-end 2011 compared to 59 at year-end 2010. Total full-time equivalent employees at the Bank and its investment advisory firm totaled 585 at December 31, 2011, a decrease of 39 full-time equivalent employees since December 31, 2010. Health insurance costs increased $517 thousand, or 17.38%, and 401(k) employer matching costs increased $217 thousand, or 19.34%. The Company also deferred $269 thousand less in direct loan origination costs than in 2010 primarily due to lower origination volumes.

Occupancy, furniture, and equipment expenses decreased $381 thousand in 2011 to $9.77 million, as compared to $10.15 million in 2010, due to branch closings and insurance agency sales.

FDIC premiums and assessments totaled $1.98 million in 2011, a decrease of $872 thousand compared to 2010. The decrease is attributed to modifications in the FDIC’s assessment methodology in April 2011 that changed the assessment base for deposit insurance premiums from one based on domestic deposits to one based on average consolidated total assets minus average tangible equity.

Other operating expenses decreased $32 thousand in 2011 to $20.31 million, as compared to 2010. Contributing to the reduction in other operating expenses were decreases in professional accounting fees, service fees, and regulatory assessments of $553 thousand, $373 thousand, and $211 thousand, respectively. These decreases were partially offset by increases in interchange expenses, consulting fees, communications expenses, and legal fees of $267 thousand, $151 thousand, $148 thousand, and $107 thousand, respectively. Also included in other operating expenses was a $362 thousand increase in losses and other expenses related to foreclosed properties, which was $3.44 million in 2011 compared to $3.08 million in 2010. As of December 31, 2011, the Company recognized a goodwill impairment of $1.24 million in the insurance reporting unit. Despite strong operating performance and positive market experience in sales of the Company’s non-core agencies, market multiples and other valuation indicators remain depressed resulting in a lower valuation of the insurance segment.

The Company uses an efficiency ratio that is a non-GAAP financial measure of operating expense control and efficiency of operations. Management believes this ratio better focuses attention on the core operating performance of the Company over time than does a GAAP-based ratio, and is highly useful in comparing period-to-period operating performance of the Company’s core business operations. It is used by management as part of its assessment of its performance in managing noninterest expenses. However, this measure is supplemental and is not a substitute for an analysis of performance based on GAAP measures. The efficiency ratio used by the Company may not be comparable to efficiency ratios reported by other financial institutions.

In general, the efficiency ratio used by the Company is noninterest expenses as a percentage of net interest income plus noninterest income. Noninterest expenses used in the calculation exclude nonrecurring expenses. Income for the ratio is increased for the favorable effect of tax-exempt income (see Average Balance Sheets and Net Interest Income Analysis), and excludes securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, nonrecurring gains and losses, and OTTI charges. The measure is different from the GAAP-based efficiency ratio, which also is presented in this report, which is calculated using noninterest expense and income amounts as shown on the face of the Consolidated Statements of Income. Both types of efficiency ratio calculations are set forth and are reconciled in the table below.

The (non-GAAP) efficiency ratios for continuing operations for 2011, 2010, and 2009 were 59.23%, 60.03%, and 60.09%, respectively. The following table details the components used in the calculation of the efficiency ratios:


	2011			2010			2009
(Amounts in thousands)
GAAP-based efficiency ratio
Noninterest expense	$	68,915		$	69,943		$	66,624
Net interest income plus noninterest income	$	107,563		$	114,365		$	15,575

GAAP-based efficiency ratio		64.07	%		61.16	%		427.76	%

Non-GAAP efficiency ratio
Noninterest expenses — GAAP-based	$	68,915		$	69,943		$	66,624
Less non-GAAP adjustments:
Foreclosed property expense		(3,441	)		(3,079	)		(763	)
Prepayment penalties on FHLB advances		(471	)		—			(88	)
Merger related expenses		—			—			(1,726	)
FDIC special assessments		—			—			(988	)
Goodwill impairment		(1,239	)		(1,039	)		—
Other non-core, non-recurring expense items		(77	)		(4	)		(225	)

Adjusted non-interest expenses	$	63,687		$	65,821		$	62,834


Net interest income plus noninterest income — GAAP-based	$	107,563		$	114,365		$	15,575
Plus non-GAAP adjustment:
Tax equivalency adjustment		2,959			3,364			3,297
Less non-GAAP adjustments:
Net (gains) losses on sale of securities		(5,264	)		(8,273	)		11,673
Net impairment losses recognized in earnings		2,285			185			78,863
Net gains on acquisitions		—			—			(4,493	)
Other non-core, non-recurring income items		(18	)		—			(340	)

Adjusted net interest income plus noninterest income	$	107,525		$	109,641		$	104,575


Non-GAAP efficiency ratio		59.23	%		60.03	%		60.09	%

Income Tax Expense

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

Consolidated income taxes for 2011 were $9.57 million compared to income taxes of $7.82 million in 2010. For the years ended December 31, 2011 and 2010, the effective tax expense rates were 32.34% and 26.35%, respectively. The increase in the effective rate can be attributed to a reduction in the impact of both tax exempt income and state income taxes combined with a reduction in 2010 income tax expense necessary to reconcile the Company’s reported tax expense with the actual expense as presented in the Company’s 2009 tax return filed with the Internal Revenue Service and state taxation authorities.

2010 Compared To 2009

Net income available to common shareholders for 2010 was $21.85 million, an increase of $62.70 million from a net loss available to common shareholders of $40.86 million in 2009. Basic and diluted earnings per common share for 2010 were $1.23 compared to basic and diluted losses per common share of $2.75 in 2009. The 2009 net loss to common shareholders was impacted by pre-tax impairment charges and losses on the sale of securities amounting to $90.54 million. The Company’s return on average assets was 0.97% in 2010 compared to a negative 1.83% in 2009. Return on equity was 8.11% in 2010 compared to a negative 16.73% in 2009.

Net Interest Income

The primary source of the Company’s earnings is net interest income, the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits and borrowings represent the major portion of interest-bearing liabilities. Net interest income was $73.86 million for 2010 compared to $69.25 million for 2009, an increase of $4.61 million, or 6.65%. Tax equivalent net interest income totaled $77.22 million for 2010, an increase of $4.67 million, or 6.44%, from $72.55 million reported for 2009. The increase in tax equivalent net interest income was primarily due to decreases in time deposits and borrowing costs as a result of repricing opportunities throughout a sustained low rate environment.

Average earning assets increased $40.59 million while average interest-bearing liabilities increased $15.91 million during 2010, as compared to the prior year. The changes include the full year impact of the July 2009 TriStone acquisition. The yield on average earning assets decreased 33 basis points to 5.40% for 2010 from 5.73% for 2009. Short-term market interest rates remained low throughout 2010, as the Federal Reserve Board held the “range” of zero to 25 basis points as its target for federal funds. The prevailing low interest rate environment was the largest driver in the overall decrease in the Company’s yield on average earning assets.

Total cost of average interest-bearing liabilities decreased 53 basis points to 1.67% during 2010. The Company’s time deposit portfolio experienced downward repricing during 2010, as many of the higher-rate certificates were renewed at lower rates, or not renewed. The net result was an increase of 20 basis points in the net interest rate spread, or the difference between interest income on earning assets and expense on interest-bearing liabilities, for 2010 compared to 2009. The net interest rate spread for 2010 was 3.73% compared to 3.53% for 2009. The Company’s net interest margin, or net interest income to average earning assets, of 3.90% for 2010 represents an increase of 16 basis points from 3.74% in 2009.

Loan interest income increased $2.12 million during 2010, as compared to 2009 as average volume increased, while the yield on loans decreased 15 basis points during the same period. During 2010, the yield on available-for-sale securities decreased 81 basis points to 4.33% while the average balance decreased $44.58 million, as compared to 2009.

Average interest-bearing balances that the Company maintains with third party banks increased $19.75 million during 2010 to $81.99 million, while the yield decreased 3 basis points to 0.24% during the same period. Interest-bearing balances with third party banks are comprised largely of excess liquidity bearing overnight market rates.

The average balances of interest-bearing deposits increased $30.37 million, or 2.16%, while the average rate paid during 2010 decreased 59 basis points when compared to the prior year. The average rate paid on interest-bearing demand deposits increased 17 basis points, while the average rate paid on savings, which includes money market and savings accounts, decreased 12 basis points in 2010 compared to 2009. In 2010, average time deposits decreased $103.07 million while the average rate paid decreased 75 basis points to 2.12%, as compared to 2009. The decrease can be attributed to customers moving to more liquid investment accounts and the non-renewal of certificates at lower interest rates. The level of average noninterest-bearing demand deposits increased $6.48 million to $206.40 million in 2010 compared to the prior year.

The average balance of retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, decreased $4.24 million in 2010 and the average rate paid on those funds decreased 36 basis points to 1.02% during the same period. There were no federal funds purchased on average during 2010. The average balance of wholesale repurchase agreements remained unchanged at $50.00 million between 2010 and 2009, while the rate decreased 10 basis points due to structure within those borrowings. The average balance of Federal Home Loan Bank (“FHLB”) advances and other borrowings decreased $10.22 million, or 4.99%, while the rate paid on those borrowings decreased 12 basis points in 2010 compared to 2009. Other borrowings include the Company’s trust preferred issuance of $15.46 million, which is indexed to 3-month LIBOR.

Provision for Loan Losses

The provision for loan losses for 2010 was $14.76 million, a decrease of $1.04 million compared to 2009. The elevated loan loss provision is primarily attributable to high loss factors as net charge-offs increased during 2010. Qualitative risk factors remained high, reflective of the higher risk of inherent loan losses due to rising unemployment, recessionary pressures, and devaluations of various categories of collateral. Net charge-offs for 2010 and 2009 were $12.55 million and $9.31 million, respectively. Net charge-offs, as a percentage of average loans, increased to 0.90% for 2010 from 0.70% in 2009. See “Financial Position – Allowance for Loan Losses” for additional information.

Noninterest Income

Noninterest income consists of all revenues that are not included in interest and fee income related to earning assets. Noninterest income for 2010, exclusive of the impact of OTTI charges, gains on the sale of securities, and acquisition gains, was $32.42 million compared to $32.37 million in 2009. See “Financial Position – Available-for-Sale Securities” for information relating to the Company’s securities.

Wealth management income, which includes fees for trust services and commission and fee income generated by advisory services, decreased $319 thousand in 2010 to $3.83 million compared to 2009, a result of a decrease in trust service revenues. Service charges on deposit accounts decreased $764 thousand in 2010 to $13.13 million compared to 2009, as a result of lower overall consumer spending leading to lower levels of certain activity charges. Other service charges, commissions and fees reflected an increase of $359 thousand in 2010 compared to 2009, mainly due to increased debit card interchange income, as the Company’s customers increasingly chose card-based payment delivery systems.

Insurance commissions earned in 2010 were $6.73 million compared to $6.99 million in 2009. Income for the insurance subsidiary is derived primarily from commissions earned on the sale of policies.

Other operating income for 2010 was $3.66 million, an increase of $1.04 million from 2009. The largest components of the increase in other operating income for 2010 were increased revenue from secondary market mortgage operations of $797 thousand, a litigation settlement of $162 thousand, and a gain on the sale of real estate of $146 thousand.

During 2010, the Company recognized net securities gains of $8.27 million, an increase of $19.95 million from losses recognized in 2009. In December 2009, net security losses of $11.67 million included four pooled trust preferred securities sold by the Company that resulted in a loss of $14.82 million.

Noninterest Expense

Total noninterest expense was $69.94 million for 2010, an increase of $3.32 million over 2009. Salaries and benefits increased $3.14 million in 2010 compared to 2009. At December 31, 2010, the Company had total full-time equivalent employees of 683 compared to 646 at December 31, 2009. Full-time equivalent employees are calculated using the number of hours worked. Greenpoint accounted for 59 full-time equivalent employees at year-end 2010 compared to 57 at year-end 2009. Total full-time equivalent employees at the Bank and its investment advisory firm totaled 624 at December 31, 2011. an increase of 37 full-time equivalent employees since December 31, 2009. Health insurance costs increased $1.39 million, or 87.70%, and 401(k) employer matching costs decreased $250 thousand, or 18.24%. The Company also deferred $296 thousand less in direct loan origination costs than in 2009 primarily due to lower origination volumes.

Occupancy expenses increased $549 thousand in 2010 to $6.44 million, compared to 2009, due to the full year effect of the acquisition of TriStone and bank building repairs.

FDIC premiums and assessments totaled $2.86 million, a decrease of $1.41 million from 2009. Included in the 2009 amount is a special assessment levied on all banks that approximated $988 thousand for the Company.

Other operating expenses increased $1.84 million in 2010 to $20.34 million, as compared to 2009. The primary cause for the increase in other operating expenses was a $2.32 million increase in losses on the sale of foreclosed properties, which was $3.08 million in 2010 compared to $763 thousand in 2009. Also contributing to the change in other operating expenses were increases in legal, travel, and interchange expenses of $270 thousand, $190 thousand, and $272 thousand, respectively, offset by decreases in consulting fees of $1.69 million. As of December 31, 2010, the Company recognized a goodwill impairment of $1.04 million in the insurance reporting unit.

Income Tax Expense

Consolidated income taxes for 2010 were $7.82 million compared to an income tax benefit of $28.15 million in 2009. For the year ended 2010, the effective tax expense rate was 26.35%. The effective tax rate for 2009 was not meaningful due to the pre-tax loss.

Financial Position

Available-for-Sale Securities

Available-for-sale securities were $482.43 million at December 31, 2011, compared to $480.06 million at December 31, 2010, an increase of $2.37 million. The market value of securities available-for-sale as a percentage of amortized cost was 98.13% and 96.40% at December 31, 2011 and 2010, respectively. At December 31, 2011, the average life and duration of the portfolio were 7.35 years and 6.02, respectively. Average life and duration at December 31, 2010, were 6.82 years and 5.77, respectively.

Available-for-sale and held-to-maturity securities are reviewed quarterly for possible OTTI. 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 to hold the security to recovery or maturity. 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. In the instance of a debt security which is determined to be other-than-temporarily impaired, the Company determines the amount of the impairment due to credit and the amount due to other factors. The amount of impairment related to credit is recognized in the Consolidated Statements of Income and the remainder of the impairment is recognized in other comprehensive income.

During the years ended December 31, 2011 and 2010, the Company recognized credit-related OTTI charges in earnings of $2.29 million and $134 thousand, respectively, related to beneficial interest debt securities. These charges were related to a non-Agency Alt-A residential mortgage-backed security in 2011 and two pooled trust preferred security holdings in 2010. The Company recognized no impairment charges on equity securities during 2011. The Company recognized impairment charges of $51 thousand on certain equity holdings during 2010. At December 31, 2011, the Company’s investment in single issue trust preferred securities is comprised of investments in 5 of the nation’s 25 largest bank holding companies.

The following table details amortized cost and fair value of available-for-sale securities at December 31, 2011, 2010, and 2009:


	2011				2010				2009
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
(Amounts in thousands)
U.S. Government agency securities	$	—	$	—	$	10,000	$	9,832	$	25,421	$	25,276
States and political subdivisions		131,498		137,815		178,149		176,138		133,185		135,601
Trust preferred securities:
Single issue		55,649		40,244		55,594		41,244		55,624		41,110
Pooled		—		—		23		264		1,648		1,648

Total trust preferred securities		55,649		40,244		55,617		41,508		57,272		42,758
Corporate FDIC insured securities		13,685		13,718		25,282		25,660		—		—
Mortgage-backed securities:
Agency		274,384		280,102		209,281		215,013		260,220		264,218
Non-Agency prime residential		—		—		—		—		5,743		5,170
Non-Agency Alt-A residential		15,980		10,030		19,181		11,277		20,968		11,301

Total mortgage-backed securities		290,364		290,132		228,462		226,290		286,931		280,689
Equity securities		419		521		495		636		1,717		1,733

Total	$	491,615	$	482,430	$	498,005	$	480,064	$	504,526	$	486,057

Held-to-Maturity Securities

Investment securities classified as held-to-maturity are comprised primarily of high grade municipal bonds. The portfolio totaled $3.49 million at December 31, 2011, compared to $4.64 million at December 31, 2010. This decrease is reflective of continuing maturities and calls within the portfolio. The market value of held-to-maturity investment securities was 101.20% and 101.44% of book value at December 31, 2011 and 2010, respectively.

The following table details amortized cost and fair value of held-to-maturity securities at December 31, 2011, 2010, and 2009:


	2011				2010				2009
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
(Amounts in thousands)
States and political subdivisions	$	3,490	$	3,532	$	4,637	$	4,704	$	7,454	$	7,579

Total	$	3,490	$	3,532	$	4,637	$	4,704	$	7,454	$	7,579

Loans Held for Sale

At December 31, 2011 and 2010, the Company reported $5.82 million and $4.69 million, respectively, of loans held for sale, which represent mortgage loans sold to investors on a best efforts basis. Accordingly, the Company does not retain the interest rate risk involved in the commitment. The gross notional amount of outstanding commitments to originate mortgage loans for customers at December 31, 2011, was $9.15 million on 53 loans. The Company sells these mortgages on a best effort basis and generates noninterest income through origination fees, servicing release premiums, and yield spread gains.

Loans Held for Investment

Total loans held for investment increased $9.86 million to $1.40 billion at December 31, 2011. The average loan to deposit ratio increased to 86.72% at 2011 compared to 85.35% at 2010. Average loans held for investment for 2011 of $1.38 billion decreased $17.96 million when compared to average loans held for investment for 2010 of $1.40 billion.

The held for investment loan portfolio continues to be well diversified among loan types and industry segments. The following table presents the various loan categories and changes in composition for the five years ended December 31, 2011:


(Amounts in thousands)	2011		2010		2009		2008		2007
Commercial loans
Construction — commercial	$	35,482	$	42,694	$	47,469	$	58,264	$	72,805
Land development		2,902		16,650		22,832		20,671		30,017
Other land loans		23,384		24,468		32,566		28,590		27,497
Commercial and industrial		91,939		94,123		95,115		83,632		93,850
Multi-family residential		77,050		67,824		65,603		46,754		37,691
Single family non-owner occupied		106,743		104,960		109,532		85,244		91,686
Non-farm, non-residential		336,005		351,904		343,975		315,547		313,845
Agricultural		1,374		1,342		1,251		1,402		2,410
Farmland		37,161		36,954		41,034		45,337		34,575

Total commercial loans		712,040		740,919		759,377		685,441		704,376
Consumer real estate loans
Home equity lines		111,387		111,620		111,597		90,556		67,628
Single family owner occupied		473,067		444,197		436,238		426,773		339,032
Owner occupied construction		19,577		18,349		22,028		23,085		32,991

Total consumer real estate loans		604,031		574,166		569,863		540,414		439,651
Consumer and other loans
Consumer loans		67,129		63,475		60,090		66,258		75,451
Other		12,867		7,646		4,601		6,046		6,027

Total consumer and other loans		79,996		71,121		64,691		72,304		81,478

Total loans held for investment		1,396,067		1,386,206		1,393,931		1,298,159		1,225,505
Less unearned income		—		—		—		1		3

		1,396,067		1,386,206		1,393,931		1,298,158		1,225,502
Less allowance for loan losses		26,205		26,482		24,277		17,782		12,833

Net loans held for investment	$	1,369,862	$	1,359,724	$	1,369,654	$	1,280,376	$	1,212,669

The Company maintained no foreign loans in the periods presented. The Company’s loans are made primarily in the four-state region in which it operates. The Company had no concentrations of loans to one borrower representing 10% or more of outstanding loans at December 31, 2011. The Company had 11.98% of outstanding loans concentrated to lessors of residential buildings and dwellings for the year ended December 31, 2011.

At December 31, 2011, commercial loans comprised 51.00% of the total loan portfolio. Commercial loans include loans to small to mid-size industrial, commercial, and service companies that include, but are not limited to, mining related companies, natural gas producers, automobile dealers, and retail and wholesale merchants. Commercial real estate projects represent a variety of sectors of the commercial real estate market, including single family and apartment lessors, commercial real estate lessors, residential land developers, and hotel/motel operators. Underwriting standards require that comprehensive reviews and independent evaluations be performed on credits exceeding predefined size limits on commercial loans. Updates to these loan reviews are done periodically or on an annual basis depending on the size of the loan relationship.

At December 31, 2011, consumer oriented real estate loans comprised 43.27% of the total loan portfolio. Residential real estate loans include loans to individuals within the Company’s market footprint for the acquisition or construction of owner occupied homes, as well as, home equity loans and lines of credit. Underwriting standards require that borrowers meet certain credit, income and collateral underwriting standards at origination.

The following table details the maturities and rate sensitivity of the Company’s loan portfolio at December 31, 2011:


	Remaining Maturities
			Over One
	One Year		to		Over Five
(Amounts in thousands)	and Less		Five Years		Years		Total
Commercial loans
Construction — commercial	$	7,359	$	23,359	$	4,764	$	35,482
Land development		1,055		1,847		—		2,902
Other land loans		14,614		8,636		134		23,384
Commercial and industrial		15,125		63,564		13,250		91,939
Multi-family residential		16,797		50,188		10,065		77,050
Single family non-owner occupied		13,452		76,890		16,401		106,743
Non-farm, non-residential		63,187		233,029		39,789		336,005
Agricultural		410		964		—		1,374
Farmland		11,225		16,763		9,173		37,161

Total commercial loans		143,224		475,240		93,576		712,040
Consumer real estate loans
Home equity lines		7,844		28,521		75,022		111,387
Single family owner occupied		13,243		56,442		403,382		473,067
Owner occupied construction		7,647		5,458		6,472		19,577

Total consumer real estate loans		28,734		90,421		484,876		604,031
Consumer and other loans
Consumer loans		19,990		44,209		2,930		67,129
Other		12,773		94		—		12,867

Total consumer and other loans		32,763		44,303		2,930		79,996

Total loans	$	204,721	$	609,964	$	581,382	$	1,396,067


Rate Sensitivity:
Predetermined rate	$	108,830	$	433,869	$	245,745	$	788,444
Floating or adjustable rate		95,891		176,095		335,637		607,623

	$	204,721	$	609,964	$	581,382	$	1,396,067

The balance of construction loans with maturities of over five years includes construction to permanent loans which have not converted to principal and interest payments.

Allowance for Loan Losses

The allowance for loan losses is increased by charges to earnings in the form of provisions and recoveries of prior loan charge-offs and decreased by loan charge-offs. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio. Additional information regarding the determination of the allowance for loan losses can be found in “Note 1 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8 herein.

The Company’s allowance for loan losses was $26.21 million at December 31, 2011, compared to $26.48 million at December 31, 2010, a decrease of $277 thousand. The decrease in the allowance for loan losses was influenced by net charge-off activity during the year, which totaled $9.32 million as of December 31, 2011, as compared to $12.55 million as of December 31, 2010.

The Company determines the allowance for loan losses by making specific allocations to impaired loans that exhibit inherent weaknesses and various credit risk and general allocations to commercial loans, consumer residential real estate, and consumer loans by giving weight to risk ratings, historical loss trends and management’s judgment concerning those trends, and other relevant factors. The general allocations are determined through a methodology that utilizes a rolling five year average loss history that is adjusted for current qualitative or environmental factors that management deems likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience. Management considers the allowance adequate based upon its analysis of the portfolio as of December 31, 2011; however, no assurance can be made that additions to the allowance for loan losses will not be required in future periods.

The following table details charge-offs and recoveries by loan type for the five years ended December 31, 2011:


	2011			2010			2009			2008			2007
(Amounts in thousands)
Allowance for loan losses at beginning of period	$	26,482		$	24,277		$	17,782		$	12,833		$	14,549
Acquisition balances		—			—			—			1,169			—
Charge-offs:
Commercial loans
Construction — commercial		574			1,342			173			605			75
Land development		724			736			925			1,430			—
Other land loans		610			633			443			44			—
Commercial and industrial		417			2,900			3,263			939			741
Multi-family residential		2,551			697			—			51			53
Single family non-owner occupied		1,812			1,665			550			320			80
Non-farm, non-residential		1,074			1,666			1,076			555			983
Agricultural		—			6			7			60			—
Farmland		219			—			50			—			97
Consumer real estate loans
Home equity lines		691			1,089			395			333			116
Single family owner occupied		1,615			1,594			1,349			972			766
Owner occupied construction		195			4			101			126			—
Consumer and other loans
Consumer loans		448			514			1,043			952			843
Other		530			756			980			984			541

Total charge-offs		11,460			13,602			10,355			7,371			4,295

Recoveries:
Commercial loans
Construction — commercial		73			17			21			5			3
Land development		507			9			—			—			—
Other land loans		237			11			—			—			—
Commercial and industrial		271			83			459			572			442
Multi-family residential		68			12			—			—			9
Single family non-owner occupied		121			39			48			8			21
Non-farm, non-residential		148			144			106			763			238
Agricultural		1			32			4			1			—
Farmland		—			31			—			—			31
Consumer real estate loans
Home equity lines		155			12			1			—			40
Single family owner occupied		63			52			62			113			506
Owner occupied construction		34			6			2			—			—
Consumer and other
Consumer loans		139			163			346			243			356
Other		319			439			—			220			216

Total recoveries		2,136			1,050			1,049			1,925			1,862

Net charge-offs		9,324			12,552			9,306			5,446			2,433
Provision charged to operations		9,047			14,757			15,801			9,226			717

Allowance for loan losses at end of period	$	26,205		$	26,482		$	24,277		$	17,782		$	12,833


Ratio of net charge-offs to average loans outstanding		0.67	%		0.90	%		0.70	%		0.45	%		0.19	%
Ratio of allowance for loan losses to total loans outstanding		1.88	%		1.91	%		1.74	%		1.37	%		1.05	%

The following tables detail the allocation of the allowance for loan losses and the percent of loans in each category to total loans for the five years ended December 31, 2011. During 2011, the Company segmented the single family residential loan class into owner occupied and non-owner occupied loan classes. During 2008, the Company increased the number of individual loan categories analyzed in the allowance for loan loss calculation which resulted in a difference in the loan segmentation for 2007.


	2011					2010					2009					2008
	Amount⁽¹⁾		Percent⁽²⁾			Amount⁽¹⁾		Percent⁽²⁾			Amount⁽¹⁾		Percent⁽²⁾			Amount⁽¹⁾		Percent⁽²⁾
(Amounts in thousands)
Commercial loans
Construction — commercial	$	865		3	%	$	1,472		3	%	$	1,191		3	%	$	867		5	%
Land development		481		0	%		1,772		1	%		2,175		2	%		1,296		2	%
Other land loans		546		2	%		747		2	%		648		2	%		71		2	%
Commercial and industrial		3,716		7	%		4,511		7	%		5,096		7	%		2,519		6	%
Multi-family residential		1,889		6	%		1,081		5	%		449		5	%		117		4	%
Single family non-owner occupied		2,960		8	%		3,212		8	%		2,263		8	%		1,959		6	%
Non-farm, non-residential		6,933		24	%		2,846		25	%		3,931		25	%		3,154		24	%
Agricultural		19		0	%		19		0	%		42		0	%		31		0	%
Farmland		343		3	%		70		3	%		75		3	%		49		4	%
Consumer real estate loans
Home equity lines		1,365		8	%		2,138		8	%		1,198		8	%		749		7	%
Single family owner occupied		6,134		34	%		6,657		32	%		4,690		31	%		4,060		33	%
Owner occupied construction		212		1	%		193		1	%		186		2	%		431		2	%
Consumer and other loans
Consumer loans		742		5	%		1,764		5	%		1,990		4	%		2,029		5	%
Other		—		1	%		—		1	%		—		0	%		—		0	%
Unallocated		—					—					343					450

Total	$	26,205		101	%	$	26,482		100	%	$	24,277		100	%	$	17,782		100	%


	2007
	Amount⁽¹⁾		Percent⁽²⁾
(Amounts in thousands)
Commercial, financial and agricultural	$	7,118		39	%
Real estate — construction		409		13	%
Real estate — mortgage		3,613		41	%
Installment loans to individuals		1,693		7	%

Total	$	12,833		100	%

(1)	Represents the amount of the allowance for loan losses allocated per loan class.

(2)	Represents the percent of loans in each loan class to total loans.

Risk Elements

Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or more and still accruing interest, unseasoned loan restructurings, and other real estate owned (“OREO”). The following table presents the levels of non-performing assets and additional detail for non-performing and restructured loans for the five years ending December 31, 2011:


	2011			2010			2009			2008			2007
(Amounts in thousands)
Non-accrual loans	$	24,487		$	19,414		$	17,527		$	12,763		$	2,923
Loans 90 days or more past due and still accruing interest		—			—			—			—			—
Restructured loans ⁽¹⁾		600			5,325			1,390			—			—

Total non-performing loans		25,087			24,739			18,917			12,763			2,923

OREO		5,914			4,910			4,578			1,326			545

Total non-performing assets	$	31,001		$	29,649		$	23,495		$	14,089		$	3,468


Restructured loans performing in accordance with modified terms ⁽²⁾	$	827		$	3,911		$	2,062		$	113		$	245
Total restructured loans ⁽³⁾		9,454			12,191			3,565			328			245

Gross interest income that would have been recorded under original terms of non-accrual and restructured loans		1,154			1,341			698			458			301
Actual interest income during the period on non-accrual and restructured loans		640			757			395			89			179

Non-performing loans to total loans		1.80	%		1.78	%		1.36	%		0.98	%		0.24	%
Non-performing assets to total loans and OREO		2.21	%		2.13	%		1.68	%		1.08	%		0.28	%
Allowance for loan losses to non-performing loans		104.5	%		107.0	%		128.3	%		139.3	%		439.0	%
Allowance for loan losses to non-performing assets		84.5	%		89.3	%		103.3	%		126.2	%		370.0	%

(1)	Unseasoned restructured loans include loans modified within the last six months, excluding those on non-accrual status.

(2)	Performing restructured loans include loans modified in the last six to twelve months, excluding those on non-accrual status.

(3)	Total restrucutred loans include all modified loans, excluding those on non-accrual status.

Total non-performing assets totaled $31.00 million at December 31, 2011, compared to $29.65 million at December 31, 2010, an increase of $1.35 million. Non-performing assets increased during 2011 as the broad economy and borrowers continued to suffer through slow growth economic conditions. At December 31, 2011, there were no significant potential problem loans beyond those addressed in the preceding table.

Non-accrual loans increased $5.07 million to $24.49 million at December 31, 2011, compared to $19.41 million at December 31, 2010. The majority of the increase in non-accrual loans can be attributed to a $4.32 million increase in the single family owner occupied loan class and a $3.39 million increase in the non-farm, non-residential loan class. These increases were offset by a $2.12 million decrease in the multi-family residential loan class and a $787 thousand decrease in the single family non-owner occupied loan class. Non-accrual loans at December 31, 2011, were primarily comprised of: 33.71% single family owner occupied loan class; 32.93% non-farm, non-residential loan class; and 17.61% commercial and industrial loan class. Approximately $2.94 million, or 12.02%, of non-accrual loans can be attributed to the TriStone loan portfolio that was acquired during the third quarter of 2009. Certain loans included in the non-accrual category have been written down to the estimated realizable value or have been assigned specific reserves within the allowance for loan losses based upon management’s estimate of loss upon ultimate resolution.

Loan restructurings at December 31, 2011, totaled $9.45 million, net of $3.27 million on non-accrual status, and the allowance for loan losses related to restructured loans totaled $1.14 million. When restructuring loans for troubled borrowers, the Company generally makes concessions in interest rates and amortization terms. After six months of satisfactory payment performance restructured loans are generally removed from non-performing loans, but remain identified as impaired until full payment or other satisfaction of the obligation. As of December 31, 2011, there were no outstanding commitments to lend additional funds to borrowers under restructured loans.

Ongoing activity within the classification and categories of non-performing loans includes collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the non-performing classification as a result of changing economic conditions, borrower financial capacity, and resolution efforts on the part of the Company. There were no loans 90 days past due and still accruing at December 31, 2011 or 2010. OREO was $5.91 million at December 31, 2011, an increase of $1.00 million from December 31, 2010, and is carried at the lesser of estimated net realizable value or cost. OREO increased from December 31, 2010, as a result of loan resolution and foreclosure activity. OREO at December 31, 2011, was primarily comprised of: $2.35 million in the non-farm, non-residential loan class, $1.50 million in the single family non-owner occupied loan class, and $1.10 million in the single family owner occupied loan class. OREO located in Winston-Salem and Mooresville, North Carolina; Richmond, Virginia; and Tennessee accounted for 50.48%, 20.27%, and 9.29%, respectively, of total OREO at December 31, 2011. The present foreclosure process in North Carolina prohibits more timely resolution of real estate secured loans within that state. At December 31, 2011, OREO consisted of 63 properties with an average holding period of 5 months. During the year ended December 31, 2011, net losses on the sale of OREO totaled $2.38 million.

Total delinquent loans as of December 31, 2011, measured 2.62% of total loans, of which 0.87% were comprised of loans 30-89 days delinquent and 1.75% were comprised of loans in non-accrual status. Total delinquent loans have increased approximately $233 thousand, or 0.64%, since December 31, 2010. Non-performing loans, comprised of non-accrual loans and unseasoned loan restructurings, measured 1.80% and 1.78% of total loans as of December 31, 2011 and 2010, respectively.

The Company has considered all loans determined to be impaired in the evaluation of the adequacy of the allowance for loan losses at December 31, 2011. The Company’s provision for loan losses and the allowance for loan losses remained elevated during 2011 due to the weakness in the real estate market and the weak economic conditions experienced during the year. As a result of the elevated levels of charge-offs and in light of the broader economy, the Company deemed it appropriate to maintain an elevated level of qualitative factors that adjust upward the historical loss rates in its allowance model.

The Company maintains an active and robust problem credit identification system. When a credit is identified as exhibiting characteristics of weakening, the Company will assess the credit for potential impairment. Examples of weakening include delinquency and deterioration of the borrower’s capacity to repay as determined by our ongoing credit review function. As part of the impairment review, the Company evaluates the current collateral value. It is the Company’s standard practice to obtain updated third party collateral valuations to assist management in measuring potential impairment of a credit and the amount of the impairment to be recorded, if any.

Internal collateral valuations are generally performed within two to four weeks of the original identification of potential impairment and receipt of the third party valuation. The internal valuation is performed by comparing the original appraisal to current local real estate market conditions and experience and considers expected liquidation costs. The result of the internal valuation is compared to the outstanding loan balance, and, if warranted, a specific impairment reserve will be established at the completion of the internal evaluation.

A third party evaluation is typically received within thirty to forty-five days of the completion of the internal evaluation. Once received, the third party evaluation is reviewed for reasonableness. Once the evaluation is reviewed and accepted, discounts to fair market value are applied based upon such factors as the bank’s historical liquidation experience of like collateral, and an estimated net realizable value is established. That estimated net realizable value is then compared to the outstanding loan balance to determine the amount of specific impairment reserve. The specific impairment reserve, if necessary, is adjusted to reflect the results of the updated evaluation. A specific impairment reserve is generally maintained on impaired loans during the period while awaiting receipt of the third party evaluation, as well as on impaired loans that continue to make some form of payment where liquidation is not imminent. Impaired loans not meeting the aforementioned criteria and that do not have a specific impairment reserve typically have been previously written down through a partial charge off to their net realizable value.

The Company’s Special Assets staff assumes the management and monitoring of all loans determined to be impaired. While awaiting the completion of the third party appraisal, the Company generally begins to complete the tasks necessary to gain control of the collateral and prepare for liquidation, including, but not limited to engagement of counsel, inspection of collateral, and continued communication with the borrower, if appropriate. Special Assets staff also regularly reviews the relationship to identify any potential adverse developments during this time.

Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan less the specific reserve is any downward adjustment to the appraised value that the Company’s Special Assets staff determines appropriate. These differences generally consist of costs to sell the property, as well as a deflator for the devaluation of property when banks are the sellers, and management deems these fair value adjustments.

Based on prior experience, the Bank does not generally return loans to performing status after the loans have been partially charged off. Credits identified as impaired move quickly through the process towards ultimate resolution of the problem credit except in cases involving bankruptcy and various state judicial processes which may extend the time for ultimate resolution.

Deposits

Total deposits were $1.54 billion at December 31, 2011, a decrease of $77.49 million from $1.62 billion at December 31, 2010. The decrease was primarily due runoff in the time portfolio. Noninterest-bearing demand deposits increased $35.12 million and interest-bearing demand deposits increased $12.74 million during 2011. Savings deposits, which consist of money market accounts and savings accounts, decreased $31.84 million and time deposits decreased $93.50 million during 2011.

Average total deposits decreased $46.60 million to $1.59 billion during 2011, as compared to $1.64 billion during 2010. Average interest-bearing demand deposits increased $24.79 million during 2011 to $277.26 million. Average noninterest-bearing demand deposits increased $16.84 million to $223.23 million while savings deposits decreased $10.94 million to $410.24 million during 2011. Average time deposits decreased $77.29 million in 2011. The average rate paid on interest-bearing deposits during 2011 was 0.93%, down 46 basis points from 1.39% in 2010. Throughout 2011, the Company decreased higher-rate certificates of deposit in an effort to manage net revenues and net interest margin.

Borrowings

The Company’s borrowings consist primarily of securities sold under agreements to repurchase and term FHLB borrowings. This category of liabilities represents wholesale sources of funding and liquidity for the Company.

Short-term borrowings decreased on average $13.89 million for 2011 compared to the prior year as a result of decreasing funding needs and strong deposit inflows. Average federal funds purchased totaled $77 thousand at December 31, 2011. There were no federal funds purchased at December 31, 2010. Repurchase agreements totaled $129.21 million and $140.89 million at December 31, 2011 and 2010, respectively. Retail repurchase agreements are sold to customers as an alternative to traditional deposit products and commercial treasury accounts. At December 31, 2011 and 2010, wholesale repurchase agreements totaled $50.00 million and the weighted average rate was 3.71%. The underlying securities included in retail repurchase agreements remain under the Company’s control during the term of the agreements.

Short-term borrowings include overnight federal funds and repurchase agreements. Balances and weighted average rates paid on short-term borrowings used in daily operations are summarized as follows:


	2011					2010					2009
	Amount		Rate			Amount		Rate			Amount		Rate
(Amounts in thousands)
At year-end	$	79,208		0.52	%	$	90,894		0.77	%	$	103,634		1.22	%
Average during the year		83,641		0.65	%		97,531		1.02	%		101,775		1.35	%
Maximum month-end balance		96,925					108,643					106,407

At December 31, 2011, FHLB borrowings included $150.00 million in convertible and callable advances. The weighted average interest rate of all FHLB advances was 4.12% and 2.39% at December 31, 2011 and 2010, respectively. The decrease is due to structure within those borrowings. In January 2011, an interest rate swap agreement expired that previously hedged $50.00 million of the advances at a fixed rate of 4.34%. At December 31, 2011, the FHLB advances had maturities between five and ten years.

Also included in other indebtedness is $15.46 million of junior subordinated debentures issued by the Company in October 2003 through FCBI Capital Trust, an unconsolidated trust subsidiary, with an interest rate of three-month LIBOR plus 2.95%. The debentures mature in October 2033 and are currently callable at the option of the Company.

Stockholders’ Equity

Total stockholders’ equity increased $35.85 million, or 13.28%, from $269.88 million at December 31, 2010, to $305.73 million at December 31, 2011. The increase in stockholders’ equity was primarily the result of net income of $20.03 million for the year ended December 31, 2011, and the completion of an $18.92 million capital raise through the private placement of

the Company’s Series A Preferred Stock. Other changes in stockholders’ equity included aggregate dividend payments to common shareholders of $7.16 million, an increase in accumulated other comprehensive income of $4.86 million and a decrease in treasury stock of $1.02 million during the year ended December 31, 2011.

Risk-Based Capital

Risk-based capital guidelines promulgated by state and federal banking agencies weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. The Company’s and the Bank’s capital ratios are presented in the following table for the dates indicated:


	December 31, 2011			December 31, 2010
Total Capital to Risk-Weighted Assets
First Community Bancshares, Inc.		18.15	%		15.33	%
First Community Bank		16.12	%		14.18	%
Tier 1 Capital to Risk-Weighted Assets
First Community Bancshares, Inc.		16.89	%		14.07	%
First Community Bank		14.86	%		12.92	%
Tier 1 Capital to Average Assets (Leverage)
First Community Bancshares, Inc.		11.50	%		9.44	%
First Community Bank		10.08	%		8.66	%

See “Note 14 – Regulatory Capital Requirements and Restrictions” in the Notes to Consolidated Financial Statements in Item 8 herein.

Liquidity and Capital Resources

Liquidity represents the Company’s ability to respond to demands for funds and is primarily derived from maturing investment securities, overnight investments, periodic repayment of loan principal, and the Company’s ability to generate new deposits. The Company also has the ability to attract short-term sources of funds and draw on credit lines that have been established at financial institutions to meet cash needs.

At December 31, 2011, total liquidity of $468.87 million was comprised of the following: unencumbered cash on hand and deposits with other financial institutions of $47.29 million; unpledged available-for-sale securities of $193.63 million; held-to-maturity securities due within one year of $1.05 million; FHLB credit availability of $132.39 million; and federal funds lines availability of $94.51 million.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally used to pay down borrowings. On a longer-term basis, the Company maintains a strategy of investing in securities, mortgage-backed obligations and loans with varying maturities. The Company uses these funds to meet ongoing commitments, pay maturing certificates of deposit and savings withdrawals, fund loan commitments, and maintain a portfolio of securities.

The Company also maintains policies and procedures regarding liquidity contingency planning. The procedures call for liquidity monitoring through trending and ratio analysis, as well as forecasting budgeted and stressed scenarios. The procedures provide guidance for potential action to be taken when certain liquidity thresholds are met.

Since the Company is a holding company and does not conduct significant operations, its primary sources of liquidity are dividends upstreamed from the Bank and borrowings from outside sources. Banking regulations limit the amount of dividends that may be paid by the Bank. See “Note 14 – Regulatory Capital Requirements and Restrictions” of the Notes to Consolidated Financial Statements in Item 8 herein regarding such dividends. At December 31, 2011, the Company had liquid assets, including cash and investment securities, totaling $25.35 million.

At December 31, 2011, approved loan commitments outstanding amounted to $194.27 million and time deposits scheduled to mature in one year or less totaled $355.84 million. Management believes that the Company has adequate resources to fund outstanding commitments and could either adjust rates on certificates of deposit in order to retain or attract deposits in changing interest rate environments or replace such deposits with advances from the FHLB or other funds providers if it proved to be cost effective to do so.

The following table presents contractual cash obligations as of December 31, 2011:


	Total Payments Due by Period
	Total		Less than One year		One to Three Years		Three to Five Years		More than Five Years
(Amounts in thousands)
Deposits without a stated maturity ⁽¹⁾	$	910,131	$	910,131	$	—	$	—	$	—
Overnight security repurchase agreements		66,993		66,993		—		—		—
Certificates of deposit ⁽²⁾⁽³⁾		651,907		363,503		154,683		133,612		109
Term security repurchase agreements		73,656		8,034		10,214		28,696		26,712
FHLB advances ⁽²⁾⁽³⁾		190,341		6,180		12,360		12,360		159,441
Trust preferred indebtedness		28,056		644		1,244		1,244		24,924
Leases		4,095		952		1,242		566		1,335
Other commitments		2,968		2,118		850		—		—

Total	$	1,928,147	$	1,358,555	$	180,593	$	176,478	$	212,521

(1)	Excludes interest.

(2)

Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based upon interest rates in effect at December 31, 2011. The interest to be paid on variable rate obligations is affected by changes in market interest rates, which materially affect the contractual obligation amounts to be paid.

(3)	Excludes carrying value adjustments such as unamortized premiums or discounts.

The following table presents detailed information regarding the Company’s off-balance sheet arrangements at December 31, 2011:


	Amount of Commitment Expiration Per Period
(Amounts in thousands)	Total		Less than One Year⁽¹⁾		One to Three Years		Three to Five Years		More than Five Years
Commitments to extend credit
Commercial loans
Construction — commercial	$	15,610	$	8,850	$	2,242	$	2,504	$	2,014
Land development		1,735		—		1,735		—		—
Commercial and industrial		28,763		25,437		2,859		340		127
Multi-family residential		643		188		—		455		—
Single family non-owner occupied		1,317		355		810		103		49
Non-farm, non-residential		8,918		4,970		504		605		2,839
Agricultural		573		523		50		—		—
Farmland		1,670		1,391		202		77		—
Consumer real estate loans
Home equity lines		78,905		3,317		9,666		13,992		51,930
Single family owner occupied		943		202		55		133		553
Owner occupied construction		4,214		2,105		13		15		2,081
Consumer and other loans
Consumer loans		50,982		50,825		147		1		9

Total unused commitments	$	194,273	$	98,163	$	18,283	$	18,225	$	59,602


Financial letters of credit	$	324	$	314	$	—	$	—	$	10
Performance letters of credit		2,572		2,182		7		289		94

Total letters of credit	$	2,896	$	2,496	$	7	$	289	$	104

(1)	Lines of credit with no stated maturity date are included in commitments for less than one year.

Wealth Management Services

As part of its community banking services, the Company offers trust management and estate administration services through its Trust and Financial Services Division (“Trust Division”). The Trust Division reported a total market value of assets under management of $444 million and $426 million at December 31, 2011 and 2010, respectively. The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit plans and individual retirement plans and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature and complexity of the account.

The Company also offers investment advisory services through the Bank’s wholly-owned subsidiary, First Community Wealth Management, which reported assets under management of $429 million and $433 million at December 31, 2011 and 2010, respectively. Revenues consist primarily of commissions on assets under management and investment advisory fees.

Insurance Services

The Company offers insurance services through its subsidiary Greenpoint. Revenues are primarily derived from commissions paid by issuing companies on the sale of policies. Commission revenue was $6.20 million for 2011 compared to $6.73 million for 2010. The decrease in commission revenue reflects the sale of two agency offices and soft conditions impacting policy and premium levels. See “Note 19 – Segment Information” of the Notes to Consolidated Financial Statements in Item 8 herein.

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk.

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 off-balance sheet financial instruments and combines the various factors affecting rate sensitivity into an earnings outlook and estimates of the economic value of equity for a range of assumed interest rate scenarios. The results of these simulations indicate the existence and severity of interest rate risk in each of those rate environments based upon the current balance sheet position, assumptions as to changes in the volume and mix of interest-earning assets and interest-paying liabilities and the Company’s estimate of yields to be attained in those future rate environments and rates that will be paid on various deposit instruments and borrowings. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and the Company’s strategies. However, the earnings simulation model is currently the best tool available to the Company and the industry for managing interest rate risk.

The Company has established policy limits for tolerance of interest rate risk in various interest rate scenarios. In addition, the policy addresses exposure limits to changes in the economic value of equity according to predefined policy guidelines. The most recent simulation indicates that current exposure to interest rate risk is within the Company’s defined policy limits.

The following table summarizes the impact of immediate and sustained rate shocks in the interest rate environment on net interest income and the economic value of equity as of December 31, 2011 and 2010. The model simulates plus 300 to minus 100 basis point changes from the base case rate simulation and illustrates the prospective effects of hypothetical interest rate changes over a twelve-month time period. This modeling technique, although useful, does not take into account all strategies that management might undertake in response to a sudden and sustained rate shock as depicted. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. As of December 31, 2011, the Federal Open Market Committee maintained a target range for federal funds of 0 to 25 basis points, rendering a complete downward shock of 200 basis points less meaningful; accordingly, downward rate scenarios are limited to minus 100 basis points. In the downward rate shocks presented, benchmark interest rates are assumed at levels with floors near 0%.


Rate Sensitivity Analysis
	December 31, 2011
(Amounts in thousands) Increase (Decrease) in Interest Rates (Basis Points)	Change in Net Interest Income			Percent Change			Change in Economic Value of Equity			Percent Change

300	$	8,881			13.0		$	(7,278	)		(2.4	)
200		6,124			9.0			(1,557	)		(0.5	)
100		3,355			4.9			1,957			0.7
(100)		(826	)		(1.2	)		(19,977	)		(6.7	)

	December 31, 2010
(Amounts in thousands) Increase (Decrease) in Interest Rates (Basis Points)	Change in Net Interest Income			Percent Change			Change in Economic Value of Equity			Percent Change

300	$	932			1.2		$	(10,634	)		(3.6	)
200		121			0.2			(1,530	)		(0.5	)
100		329			0.4			4,734			1.6
(100)		(105	)		(0.1	)		(21,503	)		(7.3	)

The rate sensitivity simulation results show significantly improved performance in upward rate shock environments. The improvement is largely due to increases in adjustable rate investment securities and low-cost, stable non-maturity deposits which were partially offset by decreases in cash balances.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. In management’s opinion, interest rates have a greater impact on the Company's consolidated performance than do the effects of general levels of inflation. Interest rates do not necessarily fluctuate in the same direction or to the same extent as the price of goods and services.

ITEM 8.

Financial Statements and Supplementary Data.

Consolidated Financial Statements


Consolidated Balance Sheets			49
Consolidated Statements of Operations			50
Consolidated Statements of Cash Flows			51
Consolidated Statements of Changes in Stockholders’ Equity			52
Notes to Consolidated Financial Statements			53
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements			102
Management’s Assessment of Internal Control Over Financial Reporting			103
Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control Over Financial Reporting			104

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
(Amounts in thousands)	2011			2010
Assets
Cash and due from banks	$	34,578		$	28,816
Federal funds sold		1,909			81,526
Interest-bearing balances with banks		10,807			1,847

Total cash and cash equivalents		47,294			112,189
Securities available-for-sale		482,430			480,064
Securities held-to-maturity		3,490			4,637
Loans held for sale		5,820			4,694
Loans held for investment, net of unearned income		1,396,067			1,386,206
Less allowance for loan losses		26,205			26,482

Net loans held for investment		1,369,862			1,359,724
Premises and equipment, net		54,721			56,244
Other real estate owned		5,914			4,910
Interest receivable		6,193			7,675
Goodwill		83,056			84,914
Other intangible assets		4,326			5,725
Other assets		101,683			123,462

Total assets	$	2,164,789		$	2,244,238


Liabilities
Deposits:
Non-interest bearing	$	240,268		$	205,151
Interest bearing		1,303,199			1,415,804

Total deposits		1,543,467			1,620,955
Interest, taxes and other liabilities		20,452			21,318
Securities sold under agreements to repurchase		129,208			140,894
FHLB borrowings		150,000			175,000
Other indebtedness		15,933			16,193

Total liabilities		1,859,060			1,974,360


Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued or outstanding at December 31, 2011 or December 31, 2010		—			—
Series A preferred stock, $0.01 par value; 25,000 shares authorized; 18,921 shares issued at December 31, 2011, and no shares issued at December 31, 2010		18,921			—
Common stock, $1 par value; 50,000,000 shares authorized; 18,082,822 shares issued at December 31, 2011 and December 31, 2010; and 17,849,376 and 17,866,335 shares outstanding at December 31, 2011 and December 31, 2010, respectively		18,083			18,083
Additional paid-in capital		188,118			189,239
Retained earnings		93,656			81,486
Treasury stock, at cost		(5,721	)		(6,740	)
Accumulated other comprehensive loss		(7,328	)		(12,190	)

Total stockholders’ equity		305,729			269,878

Total liabilities and stockholders’ equity	$	2,164,789		$	2,244,238

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
(Amounts in thousands, except share and per share data)	2011			2010			2009
Interest Income
Interest and fees on loans held for investment	$	80,580		$	84,741		$	82,704
Interest on securities — taxable		8,117			12,704			19,093
Interest on securities — nontaxable		5,194			5,943			5,972
Interest on deposits in banks		285			194			165

Total interest income		94,176			103,582			107,934

Interest Expense
Interest on deposits		12,788			19,887			27,796
Interest on short-term borrowings		2,475			2,883			3,297
Interest on long-term debt		6,884			6,955			7,589

Total interest expense		22,147			29,725			38,682

Net interest income		72,029			73,857			69,252
Provision for loan losses		9,047			14,757			15,801

Net interest income after provision for loan losses		62,982			59,100			53,451

Noninterest Income
Wealth management income		3,510			3,828			4,147
Service charges on deposit accounts		13,238			13,128			13,892
Other service charges and fees		5,722			5,074			4,715
Insurance commissions		6,197			6,727			6,988
Total impairment losses on securities		(2,285	)		(185	)		(88,435	)
Portion of loss recognized in other comprehensive income		—			—			9,572

Net impairment losses recognized in earnings		(2,285	)		(185	)		(78,863	)
Net gains (losses) on sale of securities		5,264			8,273			(11,673	)
Net gains on acquisitions		—			—			4,493
Other operating income		3,888			3,663			2,624

Total noninterest income		35,534			40,508			(53,677	)

Noninterest Expense
Salaries and employee benefits		34,126			34,528			31,385
Occupancy expense of bank premises		6,280			6,438			5,889
Furniture and equipment expense		3,490			3,713			3,746
Amortization of intangible assets		1,020			1,032			1,028
FDIC premiums and assessments		1,984			2,856			4,262
FHLB debt prepayment fees		471			—			88
Merger related expenses		—			—			1,726
Goodwill impairment		1,239			1,039			—
Other operating expense		20,305			20,337			18,500

Total noninterest expense		68,915			69,943			66,624

Income (loss) before income taxes		29,601			29,665			(66,850	)
Income tax expense (benefit)		9,573			7,818			(28,154	)

Net income (loss)		20,028			21,847			(38,696	)
Dividends on preferred stock		703			—			2,160

Net income (loss) available to common shareholders	$	19,325		$	21,847		$	(40,856	)


Basic earnings (loss) per common share	$	1.08		$	1.23		$	(2.75	)

Diluted earnings (loss) per common share	$	1.07		$	1.23		$	(2.75	)


Cash dividends per common share	$	0.40		$	0.40		$	0.30


Weighted average basic shares outstanding		17,877,421			17,802,009			14,868,547

Weighted average diluted shares outstanding		18,691,081			17,822,944			14,868,547

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
(Amounts in thousands)	2011			2010			2009
Operating activities
Net income (loss)	$	20,028		$	21,847		$	(38,696	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		9,047			14,757			15,801
Depreciation and amortization of premises and equipment		3,982			4,091			4,028
Intangible amortization		1,020			1,032			1,028
Goodwill impairment		1,239			1,039			—
Net investment amortization and accretion		1,611			1,112			1,234
Net loss (gain) on the sale of property, plant, and equipment		202			344			(63	)
Net (gain) loss on the sale of securities		(5,264	)		(8,273	)		11,673
Net gain on acquisitions		—			—			(4,493	)
Mortgage loans originated for sale		(45,879	)		(49,762	)		(35,249	)
Proceeds from sale of mortgage loans		45,466			57,479			27,464
Gain on sale of loans		(713	)		(835	)		(83	)
Equity-based compensation expense		98			58			153
Deferred income tax expense (benefit)		597			13,008			(18,866	)
Decrease in interest receivable		1,482			935			2,071
Excess tax benefit from stock-based compensation		(5	)		(9	)		(2	)
FHLB debt prepayment fees		471			—			88
Contribution of treasury stock to 401(k) plan		821			1,044			1,414
Prepaid FDIC assessments		—			—			(10,885	)
Net impairment losses recognized in earnings		2,285			185			78,863
Other operating activities, net		15,512			(1,625	)		(20,338	)

Net cash provided by operating activities		52,000			56,427			15,142


Investing activities
Proceeds from sales of securities available-for-sale		192,847			170,540			167,060
Proceeds from maturities and calls of securities available-for-sale		49,193			90,633			77,178
Proceeds from maturities and calls of securities held-to-maturity		1,299			2,825			1,238
Purchase of securities available-for-sale		(234,818	)		(248,101	)		(218,961	)
(Originations) repayments of loans		(20,488	)		(5,437	)		18,902
Proceeds from the redemption of FHLB stock		1,417			1,459			351
Cash from (invested in) acquisitions and divestitures, net		835			(882	)		21,749
Purchase of property, plant, and equipment		(3,065	)		(3,743	)		(4,380	)
Proceeds from sales of property, plant, and equipment		598			163			327

Net cash (used in) provided by investing activities		(12,182	)		7,457			63,464


Financing activities
Net increase (decrease) in noninterest-bearing deposits		35,117			(3,093	)		(2,861	)
Net (decrease) increase in interest-bearing deposits		(112,605	)		(21,912	)		2,366
Net decrease in FHLB and other borrowings		(25,260	)		(8,208	)		(25,130	)
FHLB debt prepayment fees		(471	)		—			(88	)
Net decrease in securities sold under agreement to repurchase		(11,686	)		(12,740	)		(12,280	)
Redemption of preferred stock		—			—			(41,500	)
Proceeds from the exercise of stock options		32			29			21
Net proceeds from the issuance of common stock		—			—			61,668
Net proceeds from the issuance of preferred stock		18,802			—			—
Excess tax benefit from stock-based compensation		5			9			2
Repurchase of treasury stock		(904	)		—			(167	)
Repurchase of common stock warrants		(30	)		—			—
Preferred dividends paid		(558	)		—			(1,116	)
Common dividends paid		(7,155	)		(7,121	)		(4,619	)

Net cash used in financing activities		(104,713	)		(53,036	)		(23,704	)


Net (decrease) increase in cash and cash equivalents		(64,895	)		10,848			54,902
Cash and cash equivalents at beginning of year		112,189			101,341			46,439

Cash and cash equivalents at end of year	$	47,294		$	112,189		$	101,341


Supplemental information — noncash items
Transfers of loans to other real estate	$	9,722		$	6,793		$	6,490
Cumulative effect adjustment, net of tax	$	—		$	—		$	6,131

(See Note 1 for detail of income taxes and interest paid and Note 2 for detail of cash from (invested in) acquisitions and divestitures.)

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


	Preferred Stock			Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive (Loss) Income			Total
(Amounts in thousands)
Balance January 1, 2009	$	40,419		$	12,051	$	128,526		$	106,104		$	(15,368	)	$	(52,517	)	$	219,215
Cumulative effect of change in accounting principle		—			—		—			6,131			—			(6,131	)		—
Comprehensive income:
Net loss		—			—		—			(38,696	)		—			—			(38,696	)
Other comprehensive income — see note 17		—			—		—			—			—			44,996			44,996

Comprehensive income		—			—		—			(32,565	)		—			38,865			6,300

Preferred dividends, net		1,081			—		(37	)		(2,160	)		—			—			(1,116	)
Common dividends declared — $0.30 per share		—			—		—			(4,619	)		—			—			(4,619	)
Redemption of preferred stock		(41,500	)		—		—			—			—			—			(41,500	)
Issuance of common stock, net — 5,290,000 shares		—			5,290		56,378			—			—			—			61,668
Acquisition of Greenpoint Insurance Group — 22,008 shares		—			—		(404	)		—			685			—			281
Acquisition of Investment Planning Consultants — 43,054 shares		—			—		(851	)		—			1,341			—			490
Acquisition of TriStone Community Bank — 741,588 shares		—			742		9,385			—			—			—			10,127
Equity-based compensation		—			—		115			—			38			—			153
Common stock options exercised — 2,000 shares		—			—		(42	)		—			63			—			21
Contribution of treasury stock to 401(k) plan — 111,365 shares		—			—		(2,103	)		—			3,517			—			1,414
Purchase of 13,500 treasury shares at $12.29 per share		—			—		—			—			(167	)		—			(167	)

Balance December 31, 2009		—			18,083		190,967			66,760			(9,891	)		(13,652	)		252,267

Comprehensive income:
Net income		—			—		—			21,847			—			—			21,847
Other comprehensive income — see note 17		—			—		—			—			—			1,462			1,462

Comprehensive income		—			—		—			21,847			—			1,462			23,309

Common dividends declared — $0.40 per share		—			—		—			(7,121	)		—			—			(7,121	)
Acquisition of Greenpoint Insurance Group — 22,814 shares		—			—		(419	)		—			711			—			292
Equity-based compensation		—			—		33			—			25			—			58
Common stock options exercised — 2,631 shares		—			—		(53	)		—			82			—			29
Contribution of treasury stock to 401(k) plan — 74,926 shares		—			—		(1,289	)		—			2,333			—			1,044

Balance December 31, 2010		—			18,083		189,239			81,486			(6,740	)		(12,190	)		269,878

Comprehensive income:
Net income		—			—		—			20,028			—			—			20,028
Other comprehensive income — see note 17		—			—		—			—			—			4,862			4,862

Comprehensive income		—			—		—			20,028			—			4,862			24,890

Preferred dividends declared — $37.15 per share		—			—		—			(703	)		—			—			(703	)
Common dividends declared — $0.40 per share		—			—		—			(7,155	)		—			—			(7,155	)
Issuance of preferred stock, net — 18,921 shares		18,921			—		(119	)		—			—			—			18,802
Repurchase of common stock warrants		—			—		(30	)		—			—			—			(30	)
Equity-based compensation		—			—		68			—			30			—			98
Common stock options exercised — 2,969 shares		—			—		(60	)		—			92			—			32
Contribution of treasury stock to 401(k) plan — 60,632 shares		—			—		(980	)		—			1,801			—			821
Purchase of 81,510 treasury shares at $10.88 per share		—			—		—			—			(904	)		—			(904	)

Balance December 31, 2011	$	18,921		$	18,083	$	188,118		$	93,656		$	(5,721	)	$	(7,328	)	$	305,729

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 1.

Summary of Significant Accounting Policies

Basis of Presentation

The accounting and reporting policies of First Community Bancshares, Inc. and subsidiaries (“First Community” or the “Company”) conform to accounting principles generally accepted in the United States (“U.S. GAAP”) and to predominant practices within the banking industry. In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Assets held in an agency or fiduciary capacity are not assets of the Company and are not included in the accompanying consolidated balance sheets.

Principles of Consolidation

The consolidated financial statements of First Community include the accounts of all wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company operates within two business segments, community banking and insurance services.

Use of Estimates

In preparing consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Financial statement items requiring the significant use of estimates and assumptions include, but are not limited to, fair values of investment securities, fair value adjustment of acquired businesses and the establishment of the allowance for loan losses. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, time deposits with other banks, federal funds sold, and interest-bearing balances on deposit with the Federal Home Loan Bank (“FHLB”) that are available for immediate withdrawal. Interest and income taxes paid were as follows:


	2011		2010		2009
(Amounts in thousands)
Interest	$	22,857	$	30,609	$	39,871
Income Taxes		8,500		5,300		9,318

Pursuant to agreements with the Federal Reserve Bank of Richmond (“FRB”), the Company maintains a cash balance of $250 thousand in lieu of charges for check clearing and other services.

Investment Securities

Securities to be held for indefinite periods of time, including securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, changes in prepayment risk, or other similar factors, are classified as available-for-sale and are recorded at estimated fair value. Unrealized appreciation or depreciation in fair value above or below amortized cost is included in stockholders’ equity, net of income taxes, under the category of accumulated other comprehensive loss. Premiums and discounts are amortized or accreted to income over the life of the security. Gain or loss on sale is based on the specific identification method.

Investments in debt securities that management has determined it does not intend to sell and has asserted that it is not more likely than not that it will have to sell, are deemed to be held to maturity, and are carried at amortized cost. Premiums and discounts are amortized to expense and accreted to income over the lives of the securities. Gain or loss on the call or maturity of investment securities, if any, is recorded based on the specific identification method.

The Company 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 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 whether the Company determines it has the intent to sell the security or whether it is more likely than not it will be required to sell the security, recoverability of the invested amounts

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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. In the instance of a debt security which is determined to be other-than-temporarily impaired, the Company determines the amount of the impairment due to credit and the amount due to other factors. The amount of impairment related to credit is recognized in the Consolidated Statements of Income and the remainder of the impairment is recognized in other comprehensive income.

Loans Held for Sale

Loans held for sale primarily consist of one-to-four family residential loans originated for sale in the secondary market and are carried at the lower of cost or estimated fair value determined on an aggregate basis. The long-term, fixed rate loans are sold to investors on a best efforts basis such that the Company does not absorb the interest rate risk involved in the loans. The fair value of loans held for sale is determined by reference to quoted prices for loans with similar coupon rates and terms.

The Company enters into interest rate lock commitments (“IRLCs”) with customers on mortgage loans with the intention to sell the loan in the secondary market. The derivatives arising from the IRLCs are recorded at fair value in other assets and liabilities and changes in that fair value are included in other income. The fair value of the IRLC derivatives are determined by reference to quoted prices for loans with similar coupon rates and terms. Gains and losses on the sale of those loans are included in other income.

Loans Held for Investment

Loans held for investment are carried at the principal amount outstanding less any write-downs which may be necessary to reduce individual loans to net realizable value. Individually significant loans are evaluated for impairment when evidence of impairment exists. Impairment allowances are recorded through specific additions to the allowance for loan losses. Loans are considered past due when principal or interest becomes contractually delinquent by 30 days or more. Consumer loans are charged off against the allowance for loan losses when the loan becomes 120 days past due (180 days if secured by residential real estate). All other loans are charged off against the allowance for loan losses after collection attempts have been exhausted, which generally is within 120 days. Recoveries of loans charged off are credited to the allowance for loan losses in the period received.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable losses inherent in the portfolio, and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. The Company consistently applies a review process to periodically evaluate loans for changes in credit risk. This process serves as the primary means by which the Company evaluates the adequacy of the allowance for loan losses.

The Company determines the allowance for loan losses by making specific allocations to impaired loans that exhibit inherent weaknesses and various credit risk and general allocations to commercial loans, consumer residential real estate, and consumer loans by giving weight to risk ratings, historical loss trends and management’s judgment concerning those trends, and other relevant factors. The general allocations are determined through a methodology that utilizes a rolling five year average loss history that is adjusted for current qualitative or environmental factors that management deems likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience. The foregoing analysis is performed by management to evaluate the portfolio and calculate an estimated valuation allowance through a quantitative and qualitative analysis that applies risk factors to those identified risk areas.

This risk management evaluation is applied at both the portfolio level for non-impaired loans and the individual loan level for impaired commercial loans while the level of consumer and residential mortgage loan allowance is determined primarily on a total portfolio level based on a review of historical loss percentages and other qualitative factors including concentrations, industry specific factors and economic conditions. The commercial portfolio requires more specific analysis of individually significant loans and the borrower’s underlying cash flow, business conditions, capacity for debt repayment and the valuation of secondary sources of payment, such as collateral. This analysis may result in specifically identified weaknesses and corresponding specific impairment allowances. While allocations are made to specific loans and classifications within the various categories of loans, the allowance for loan losses is available for all loan losses.

The use of various estimates and judgments in the Company’s ongoing evaluation of the required level of allowance can significantly impact the Company’s results of operations and financial condition and may result in either greater provisions against earnings to increase the allowance or reduced provisions based upon management’s current view of portfolio and economic conditions and the application of revised estimates and assumptions. Differences between actual loan loss experience and estimates are reflected through adjustments either increasing or decreasing the allowance based upon current measurement criteria.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Long-term Investments

Certain long-term equity investments representing less than 20% ownership are accounted for under the cost method, are carried at cost, and are included in other assets. At December 31, 2011 and 2010, these equity investments totaled $574 thousand and $570 thousand, respectively. These investments in operating companies represent required long-term investments in insurance, investment, and service company affiliates or consortiums which serve as vehicles for the delivery of various support services. In accordance with the cost method, dividends received are recorded as current period revenues and there is no recognition of the Company’s proportionate share of net operating income or loss. The Company has determined that fair value measurement is not practical, and further, nothing has come to the attention of the Company that would indicate impairment of any of these investments.

As a condition to membership in the FHLB system, the Company is required to subscribe to a minimum level of stock in the FHLB of Atlanta (“FHLBA”). The Company feels this ownership position provides access to relatively inexpensive wholesale and overnight funding. The Company accounts for FHLBA and FRB stock as a long-term investment in other assets. At December 31, 2011 and 2010, the Company owned $10.82 million and $12.24 million in FHLBA stock, respectively, which is classified as other assets. The Company’s policy is to review the stock for impairment at each reporting period. During the year ended December 31, 2011, FHLBA repurchased excess activity-based stock from the Company and paid quarterly dividends. At December 31, 2011, FHLBA was in compliance with all of its regulatory capital requirements. Based on the Company’s review, it believes that as of December 31, 2011 and 2010, its FHLBA stock was not impaired. At December 31, 2011 and 2010, the Company owned $4.78 million in FRB stock.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed on the straight-line method over estimated useful lives. Useful lives range from five to 10 years for furniture, fixtures, and equipment; three to five years for software, hardware, and data handling equipment; and 10 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 20 years, and leasehold improvements are amortized over the lesser of the useful life or the term of the lease plus the first optional renewal period, when renewal is reasonably assured. Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses are reflected in current operations.

The Company leases various properties within its branch network. Leases generally have initial terms of up to 20 years and most contain options to renew with reasonable increases in rent. All leases are accounted for as operating leases.

Other Real Estate Owned

Other real estate owned and acquired through foreclosure is stated at the lower of cost or fair value less estimated costs to sell. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Expenses incurred in connection with operating the properties, subsequent write-downs and gains or losses upon sale are included in other noninterest expense.

Goodwill and Other Intangible Assets

The excess of the cost of an acquired company over the fair value of the net assets and identified intangibles acquired is recorded as goodwill. The net carrying amount of goodwill was $83.06 million and $84.91 million at December 31, 2011 and 2010, respectively. A portion of the purchase price in certain transactions has been allocated to values associated with the future earnings potential of acquired deposits and is amortized over the estimated lives of the deposits that range from one to seven years while the weighted average remaining life of these core deposits is 5.83 years. As of December 31, 2011 and 2010, the balance of core deposit intangibles was $2.20 million and $2.85 million, respectively, net of corresponding accumulated amortization of $5.74 million and $5.09 million, respectively. The annual amortization expense for all intangible assets for 2012 and the succeeding four years is $802 thousand, $728 thousand, $706 thousand, $706 thousand, and $600 thousand, respectively. Greenpoint’s acquisition and sales activity eliminated $618 thousand of goodwill and other intangible assets for the period ended December 31, 2011.

The Company reviews and tests goodwill annually in the fourth quarter for possible impairment by comparing the fair value of each reporting unit to its book value (step 1), including goodwill. If the fair value of the reporting unit is greater than its book value, no goodwill impairment exists. However, if the book value of the reporting unit is greater than its determined fair value, goodwill impairment may exist and further testing is required to determine the amount, if any, of the actual impairment

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

loss (step 2). The step 1 test utilizes a combination of two methods to determine the fair value of the reporting units. For both reporting units, a discounted cash flow model uses estimates in the form of growth and attrition rates of return and discount rates to project cash flows from operations of the business reporting unit, the results of which are weighted 70%. For the banking reporting unit, a market multiple model utilizes price to net income and price to tangible book value inputs for closed transactions and for certain common sized institutions and the results are weighted 30%. For the insurance reporting unit, the market multiple model primarily utilizes price to sales for closed transactions and certain similar industry public companies and the results are weighted 30%. The end results for both reporting units are then compared with the respective book values to consider if impairment is evident. To determine the overall reasonableness of the reporting unit computations, the combined computed fair value is then compared with the overall market capitalization of the consolidated Company to determine the level of implied control premium. The analysis performed for 2011 and 2010 indicated an impairment of goodwill at the insurance reporting unit of $1.24 million and $1.04 million, respectively.

The progression of the Company’s goodwill and intangible assets for continuing operations for the three years ended December 31, 2011, is detailed in the following table:


(Amounts in thousands)	Goodwill			Other Intangible Assets
Balance at December 31, 2008	$	83,192		$	6,419
Acquisitions and dispositions, net		1,456			1,022
Amortization		—			(1,028	)

Balance at December 31, 2009	$	84,648		$	6,413
Acquisitions and dispositions, net		1,305			344
Amortization		—			(1,032	)
Impairment		(1,039	)		—

Balance at December 31, 2010	$	84,914		$	5,725

Acquisitions and dispositions, net		(619	)		(379	)
Amortization		—			(1,020	)
Impairment		(1,239	)		—

Balance at December 31, 2011	$	83,056		$	4,326

Other Assets

In addition to FHLB stock and FRB stock, other assets included $44.39 million and $42.30 million in the cash surrender value of life insurance policies owned by the Company at December 31, 2011 and 2010, respectively, and $28.28 million and $46.74 million in current and deferred tax assets at December 31, 2011 and 2010, respectively.

In connection with bank-owned life insurance, the Company entered into Life Insurance Endorsement Method Split Dollar Agreements with certain of the individuals whose lives are insured. Under these agreements, the Company shares 80% of the death benefits (after recovery of cash surrender value) with the designated beneficiaries of the plan participants under life insurance contracts. The Company, as owner of the policies, retains a 20% interest in life proceeds and a 100% interest in the cash surrender value of the policies. Split dollar agreements totaled $873 thousand and $1.19 million at December 31, 2011 and 2010, respectively. The Company recorded income of $316 thousand on split dollar agreements for the year ended 2011 as a result of revised projections that indicated lower expenses than previously accrued. Expenses associated with split dollar agreements totaled $72 thousand for the year ended 2010.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions. Securities, generally U.S. government and federal agency securities, pledged as collateral under these arrangements cannot be sold or repledged by the secured party. The fair value of the collateral provided to a third party is continually monitored, and additional collateral is provided as appropriate.

Loan Interest Income Recognition

Accrual of interest on loans is based generally on the daily amount of principal outstanding. Loans are considered past due when either principal or interest payments are delinquent by 30 or more days. It is the Company’s policy to discontinue the accrual of interest on loans based on the payment status and evaluation of the related collateral and the financial strength of the borrower. The accrual of interest income is normally discontinued when a loan becomes 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the loan is well secured and in process of

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

collection. When interest accruals are discontinued, interest accrued and not collected in the current year is reversed from income and interest accrued and not collected from prior years is charged to the allowance for loan losses. Interest income realized on impaired loans is recognized upon receipt if the impaired loan is on a non-accrual basis. Accrual of interest on non-accrual loans may be resumed if the loan is brought current and follows a period of sustained performance, including six months of regular principal and interest payments. Accrual of interest on impaired loans is generally continued unless the loan becomes delinquent 90 days or more.

Loan Fee Income

Loan origination and underwriting fees are reduced by direct costs associated with loan processing, including salaries, review of legal documents and obtainment of appraisals. Net origination fees and costs are deferred and amortized over the life of the related loan. Loan commitment fees are deferred and amortized over the related commitment period. Net deferred loan fees were $1.69 million and $1.15 million at December 31, 2011 and 2010, respectively

Advertising Expenses

Advertising costs are generally expensed as incurred. Amounts recognized for the three years ended December 31, 2011, are detailed in “Note 15 – Other Operating Income and Expense” of the Notes to Consolidated Financial Statements in Item 8 herein.

Equity-Based Compensation

The cost of employee services received in exchange for equity instruments including options and restricted stock awards generally are measured at fair value at the grant date. The effect of option shares on earnings per share relates to the dilutive effect of the underlying options outstanding. To the extent the granted exercise share price is less than the current market price, or “in the money,” there is an economic incentive for the options to be exercised and an increase in the dilutive effect on earnings per share.

Income Taxes

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

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, 2007 through 2010 are currently open to audit under statutes of limitation by the Internal Revenue Service and various state tax departments.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Earnings Per Common Share

Basic earnings per common share are determined by dividing net income available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per common share are determined by dividing net income by the weighted average shares outstanding, which includes the dilutive effect of stock options, warrants, contingently issuable shares, and convertible preferred shares. The dilutive effects of stock options, warrants, and contingently issuable shares were not considered for the year ended December 31, 2009, because of the reported net loss available to common shareholders. The calculation for basic and diluted earnings per common share for the three years ended December 31, 2011, are as follows:


	2011		2010		2009
(Amounts in thousands, except share and per share data)
Net income (loss)	$	20,028	$	21,847	$	(38,696	)
Dividends on preferred stock		703		—		2,160

Net income (loss) available to common shareholders	$	19,325	$	21,847	$	(40,856	)

Weighted average shares outstanding		17,877,421		17,802,009		14,868,547
Dilutive shares for stock options		5,293		12,463		—
Contingently issuable shares		—		8,472		—
Convertible preferred shares		808,367		—		—

Weighted average dilutive shares outstanding		18,691,081		17,822,944		14,868,547


Basic earnings (loss) per common share	$	1.08	$	1.23	$	(2.75	)
Diluted earnings (loss) per common share	$	1.07	$	1.23	$	(2.75	)

For the years ended December 31, 2011, 2010, and 2009, options and warrants to purchase 395,633, 483,558, and 488,689 shares, respectively, of Common Stock were outstanding but not included in the computation of diluted earnings per common share because the exercise price was greater than the market price of the Company’s Common Stock or the Company incurred losses; and would have an anti-dilutive effect.

Variable Interest Entities

The Company maintains ownership positions in various entities which it deems variable interest entities (“VIE’s”). These VIE’s include certain tax credit limited partnerships and other limited liability companies which provide aviation services, insurance brokerage, title insurance, and other financial and related services. Based on the Company’s analysis, it is a non-primary beneficiary; accordingly, these entities do not meet the criteria for consolidation. The carrying value of VIE’s was $1.70 million and $1.86 million at December 31, 2011 and 2010, respectively. The Company’s maximum possible loss exposure was $1.70 million and $1.86 million at December 31, 2011 and 2010, respectively. Management does not believe net losses, if any, resulting from its ownership in these entities will be material.

Derivative Instruments

The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. In addition, certain contracts and commitments are defined as derivatives under generally accepted accounting principles.

All derivative instruments are carried at fair value on the balance sheet. Special hedge accounting provisions are provided, which permit the change in the fair value of the hedged item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedged transaction.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Reclassifications

The Company has made certain reclassifications of prior years’ amounts necessary to conform to the current year’s presentation. These reclassifications had no effect on the Company’s financial position, stockholders’ equity, or results of operations.

Accounting Standards Updates

In April 2011, FASB issued Accounting Standard Update (“ASU”) 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (‘TDR’),” which clarifies when creditors should classify loan modifications as TDRs. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and is applied retrospectively to restructurings at the beginning of the year of adoption. The guidance on measuring the impairment of a receivable restructured in a troubled restructuring is effective on a prospective basis. The Company adopted the new guidance during the third quarter of 2011 and the new disclosures are presented in “Note 5 – Allowance for Loan Losses and Credit Quality” to the Consolidated Financial Statements in Item 8 herein.

In April 2011, FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements,” which simplifies the accounting for financial assets transferred under repurchase agreements and similar arrangements by eliminating the transferor’s ability criteria from the assessment of effective control over those assets as well as the related implementation guidance. The guidance is effective for interim and annual periods beginning on or after December 15, 2011, and is applied on a prospective basis. The Company is currently assessing the impact on its financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the U.S. GAAP and IFRS,” which was issued primarily to provide largely identical guidance about fair value measurement and disclosure requirements for International Financial Reporting Standards (“IFRS”) and U.S. GAAP. The new standards do not extend the use of fair value but rather provide guidance about how fair value should be determined where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. Public companies are required to apply the standard prospectively for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the impact on its financial statements.

In June 2011, FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The guidance does not change the items that must be reported in other comprehensive income. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company is currently assessing the impact on its financial statements.

In September 2011, FASB issued ASU 2011-08, “Testing Goodwill for Impairment,” which simplifies how an entity tests goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is necessary to perform additional impairment testing. The guidance is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is currently assessing the impact on its financial statements.

Note 2.

Merger, Acquisitions, and Branching Activity

In July 2009, the Company acquired TriStone Community Bank (“TriStone”), based in Winston-Salem, North Carolina. TriStone had two full service locations in Winston-Salem, North Carolina. At acquisition, TriStone had total assets of $166.82 million, total loans of $132.23 million and total deposits of $142.27 million. Shares of TriStone were exchanged for .5262 shares of the Company’s Common Stock and the overall acquisition cost was $10.78 million. The acquisition of TriStone significantly augmented the Company’s market presence and human resources in the Winston-Salem, North Carolina region. The Company recorded a $4.49 million gain on the acquisition of TriStone.

Greenpoint has acquired seven insurance agencies and sold three since its acquisition by the Company. In 2011, Greenpoint sold two insurance agencies. Cash received from those sales totaled $1.58 million resulting in a net gain of $67 thousand and has the potential to recognize an additional $650 thousand over time as earn-out payments are received. The sales eliminated $1.68 million of goodwill and intangible assets to the Company’s balance sheet during 2011. Greenpoint issued aggregate cash consideration of $190 thousand in 2010 in connection with acquisitions. For acquisitions prior to 2009, terms call for issuing further cash consideration of $2.14 million if certain operating targets are met. If those targets are met, the value of the consideration ultimately paid will be added to the costs of the acquisitions. Acquisitions prior to 2011 added $680 thousand, $1.17 million, and $803 thousand of goodwill and intangibles to the Company’s balance sheet in 2011, 2010, and 2009, respectively. The acquisition of Greenpoint in 2007, and its subsequent acquisitions and dispositions, have added $9.40 million of goodwill and intangibles to the Company’s balance sheet, net of corresponding amortization of $1.31 million.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table summarizes the net cash provided by or used in acquisitions and divestitures during the three years ended December 31, 2011. Net cash paid (received) for acquisitions include transactions that occurred during the current and prior years.


	2011			2010		2009
(Amounts in thousands)
Fair value of investments acquired	$	—		$	—	$	7,837
Fair value of loans acquired		—			—		129,937
Fair value of premises and equipment acquired		—			—		1,797
Fair value of other assets		—			—		26,746
Fair value of deposits assumed		—			—		(142,697	)
Fair value of other liabilities assumed		—			—		(9,008	)
Purchase price in excess of (less than) net assets acquired		680			1,650		(3,037	)

Total purchase price		680			1,650		11,575

Less non-cash purchase price		—			768		11,579
Less cash acquired		—			—		21,295

Net cash paid (received) for acquisition	$	680		$	882	$	(21,299	)


Book value of assets sold	$	(1,678	)	$	—	$	(110	)
Book value of liabilities sold		170			—		—
Sales price in excess of net liabilities assumed		(67	)		—		(340	)

Total sales price		(1,575	)		—		(450	)

Add cash on hand sold		—			—		—
Less amount due remaining on books		60			—		—

Net cash paid (received) for divestiture	$	(1,515	)	$	—	$	(450	)

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 3.

Investment Securities

The amortized cost and estimated fair value of securities, with gross unrealized gains and losses, classified as available-for-sale at December 31, 2011 and 2010, were as follows:


	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		OTTI in AOCI ⁽¹⁾
(Amounts in thousands)
States and political subdivisions	$	131,498	$	6,317	$	—		$	137,815	$	—
Single issue trust preferred securities		55,649		—		(15,405	)		40,244		—
Corporate FDIC insured securities		13,685		33		—			13,718		—
Mortgage-backed securities:
Agency		274,384		6,003		(285	)		280,102		—
Non-Agency Alt-A residential		15,980		—		(5,950	)		10,030		(5,950	)

Total mortgage-backed securities		290,364		6,003		(6,235	)		290,132		(5,950	)
Equity securities		419		206		(104	)		521		—

Total	$	491,615	$	12,559	$	(21,744	)	$	482,430	$	(5,950	)


	December 31, 2010
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		OTTI in AOCI ⁽¹⁾
(Amounts in thousands)
U.S. Government agency securities	$	10,000	$	—	$	(168	)	$	9,832	$	—
States and political subdivisions		178,149		2,649		(4,660	)		176,138		—
Trust preferred securities:
Single issue		55,594		—		(14,350	)		41,244		—
Pooled		23		241		—			264		—

Total trust preferred securities		55,617		241		(14,350	)		41,508		—
Corporate FDIC insured securities		25,282		378		—			25,660		—
Mortgage-backed securities:
Agency		209,281		7,039		(1,307	)		215,013		—
Non-Agency Alt-A residential		19,181		—		(7,904	)		11,277		(7,904	)

Total mortgage-backed securities		228,462		7,039		(9,211	)		226,290		(7,904	)
Equity securities		495		206		(65	)		636		—

Total	$	498,005	$	10,513	$	(28,454	)	$	480,064	$	(7,904	)

(1)	Other-than-temporary impairment in accumulated other comprehensive income

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The amortized cost, fair value, and weighted-average yield of available-for-sale securities by contractual maturity at December 31, 2011, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


(Amounts in thousands)	States and Political Subdivisions			Corporate Notes			Total			Tax Equivalent Purchase Yield ⁽¹⁾
Available-for-Sale
Amortized cost maturity:
Within one year	$	115		$	13,685		$	13,800			0.51	%
After one year through five years		16,562			—			16,562			5.78	%
After five years through ten years		17,333			—			17,333			6.28	%
After ten years		97,488			55,649			153,137			3.87	%

Amortized cost	$	131,498		$	69,334			200,832

Mortgage-backed securities								290,364			2.78	%
Equity securities								419			2.14	%

Total amortized cost							$	491,615

Tax equivalent purchase yield		5.45	%		1.27	%		3.28	%
Average contractual maturity (in years)		11.00			12.96			17.61

Fair value maturity:
Within one year	$	117		$	13,718		$	13,835
After one year through five years		17,305			—			17,305
After five years through ten years		18,194			—			18,194
After ten years		102,199			40,244			142,443

Fair value	$	137,815		$	53,962			191,777

Mortgage-backed securities								290,132
Equity securities								521

Total fair value							$	482,430

(1)	Fully taxable equivalent at the rate of 35%.

The amortized cost and estimated fair value of securities, with gross unrealized gains and losses, classified as held-to-maturity at December 31, 2011 and 2010, were as follows:


	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
(Amounts in thousands)
States and political subdivisions	$	3,490	$	42	$	—	$	3,532

Total	$	3,490	$	42	$	—	$	3,532


	December 31, 2010
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
(Amounts in thousands)
States and political subdivisions	$	4,637	$	67	$	—	$	4,704

Total	$	4,637	$	67	$	—	$	4,704

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The amortized cost, fair value, and weighted-average yield of securities by contractual maturity at December 31, 2011, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


(Amounts in thousands)	States and Political Subdivisions			Tax Equivalent Purchase Yield ⁽¹⁾
Held-to-Maturity
Amortized cost maturity:
Within one year	$	1,048			7.59	%
After one year through five years		2,442			8.16	%
After five years through ten years		—			0.00	%
After ten years		—			0.00	%

Total amortized cost	$	3,490

Tax equivalent purchase yield		7.99	%
Average contractual maturity (in years)		2.08

Fair value maturity:
Within one year	$	1,054
After one year through five years		2,478
After five years through ten years		—
After ten years		—

Total fair value	$	3,532

(1)	Fully taxable equivalent at the rate of 35%.

The carrying value of securities pledged to secure public deposits and for other purposes required by law were $288.80 million and $302.67 million at December 31, 2011 and 2010, respectively.

The following table details the gains and losses from the sale of securities:


	2011			2010			2009
(Amounts in thousands)
Gross gains	$	6,963		$	8,969		$	4,111
Gross losses		(1,699	)		(696	)		(15,784	)

Net gains (losses) on sales of securities	$	5,264		$	8,273		$	(11,673	)

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables reflect those investments, both available-for-sale and held-to-maturity, in a continuous unrealized loss position for less than 12 months and for 12 months or longer at December 31, 2011 and 2010. There were 14 securities in a continuous unrealized loss position for 12 or more months for which the Company does not intend to sell any and has determined that it is more likely than not going to be required to sell at December 31, 2011, until the security matures or recovers in value.


	December 31, 2011
	Less than 12 Months					12 Months or longer					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(Amounts in thousands)
Single issue trust preferred securities	$	—	$	—		$	40,244	$	(15,405	)	$	40,244	$	(15,405	)
Mortgage-backed securities:
Agency		52,300		(285	)		—		—			52,300		(285	)
Non-Agency Alt-A residential		—		—			10,030		(5,950	)		10,030		(5,950	)

Total mortgage-backed securities		52,300		(285	)		10,030		(5,950	)		62,330		(6,235	)
Equity securities		—		—			188		(104	)		188		(104	)

Total	$	52,300	$	(285	)	$	50,462	$	(21,459	)	$	102,762	$	(21,744	)


	December 31, 2010
	Less than 12 Months					12 Months or longer					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(Amounts in thousands)
U.S. Government agency securities	$	9,832	$	(168	)	$	—	$	—		$	9,832	$	(168	)
States and political subdivisions		80,420		(4,660	)		—		—			80,420		(4,660	)
Single issue trust preferred securities		3,390		(1,517	)		37,854		(12,833	)		41,244		(14,350	)
Mortgage-backed securities:
Agency		71,613		(1,307	)		18		—			71,631		(1,307	)
Non-Agency Alt-A residential		—		—			11,277		(7,904	)		11,277		(7,904	)

Total mortgage-backed securities		71,613		(1,307	)		11,295		(7,904	)		82,908		(9,211	)
Equity securities		155		(55	)		93		(10	)		248		(65	)

Total	$	165,410	$	(7,707	)	$	49,242	$	(20,747	)	$	214,652	$	(28,454	)

At December 31, 2011, the combined depreciation in value of the 28 individual securities in an unrealized loss position was 4.51% of the combined reported value of the aggregate securities portfolio. At December 31, 2010, the combined depreciation in value of the 214 individual securities in an unrealized loss position was 5.93% of the combined reported value of the aggregate securities portfolio.

The Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. For debt securities, the Company has determined that it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that the Company will have to sell impaired securities before recovery of the impairment occurs. This determination is based upon the Company’s investment strategy for the particular type of debt security and its cash flow needs, liquidity position, capital adequacy and interest rate risk position.

For non-beneficial interest debt securities, the Company analyzes several qualitative factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating agencies and other qualitative factors to determine if the impairment will be recovered. Non-beneficial interest debt securities consist of U.S. government agency securities, states and political subdivisions, and single issue trust preferred securities. If it is determined that there is evidence that the impairment will not be recovered, the Company performs a present value calculation to determine the amount of credit related impairment and records any credit related OTTI through earnings and the non-credit related OTTI through other comprehensive income (“OCI”). During the years ended December 31, 2011 and 2010, the Company incurred no OTTI charges related to non-beneficial interest debt securities. The temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, destabilization in the Eurozone, and other current economic factors. At December 31, 2011, the Company’s investment in single issue trust preferred securities is comprised of investments in 5 of the nation’s 25 largest bank holding companies.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For beneficial interest debt securities, the Company reviews cash flow analyses on each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. Beneficial interest debt securities consist of pooled trust preferred securities, corporate FDIC insured securities, and mortgage-backed securities (“MBS”). An adverse change in cash flows expected to be collected has occurred if the present value of cash flows previously projected is greater than the present value of cash flows projected at the current reporting date and less than the current book value. If an adverse change in cash flows is deemed to have occurred, then an OTTI has occurred. The Company then compares the present value of cash flows using the current yield for the current reporting period to the reference amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI is then recorded through earnings and the non-credit related OTTI is accounted for in OCI. During the years ended December 31, 2011 and 2010, the Company incurred credit-related OTTI charges related to beneficial interest debt securities of $2.29 million and $134 thousand, respectively. These charges were related to a non-Agency Alt-A residential MBS in 2011 and two pooled trust preferred security holdings in 2010.

For the non-Agency Alt-A residential MBS, the Company models cash flows using the following assumptions: voluntary constant prepayment speed of 5, a customized constant default rate scenario that assumes 15% of the remaining underlying mortgages will default within the next three years, and a loss severity of 60.

The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities for which a portion of an OTTI is recognized in OCI:


	December 31, 2011		December 31, 2010
(Amounts in thousands)

Estimated credit losses, beginning balance ⁽¹⁾	$	4,251	$	4,251
Additions for credit losses on securities not previously recognized		—		—
Additions for credit losses on securities previously recognized		2,285		—
Reduction for increases in cash flows		—		—
Reduction for securities management no longer intends to hold to recovery		—		—
Reduction for securities sold/realized losses		—		—

Estimated credit losses, ending balance	$	6,536	$	4,251

(1)	The beginning balance includes credit related losses included in OTTI charges recognized on debt securities in prior periods.

For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During 2011, the Company recognized no OTTI charges on equity securities. During 2010, the Company recognized OTTI charges of $51 thousand on certain of its equity positions.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 4.

Loans

Loans, net of unearned income, consisted of the following at December 31, 2011 and 2010:


(Amounts in thousands)	2011		2010
Commercial loans
Construction — commercial	$	35,482	$	42,694
Land development		2,902		16,650
Other land loans		23,384		24,468
Commercial and industrial		91,939		94,123
Multi-family residential		77,050		67,824
Single family non-owner occupied		106,743		104,960
Non-farm, non-residential		336,005		351,904
Agricultural		1,374		1,342
Farmland		37,161		36,954

Total commercial loans		712,040		740,919
Consumer real estate loans
Home equity lines		111,387		111,620
Single family owner occupied		473,067		444,197
Owner occupied construction		19,577		18,349

Total consumer real estate loans		604,031		574,166
Consumer and other loans
Consumer loans		67,129		63,475
Other		12,867		7,646

Total consumer and other loans		79,996		71,121

Loans held for investment, net of unearned income	$	1,396,067	$	1,386,206


Loans held for sale	$	5,820	$	4,694

Acquired, Impaired Loans

Loans acquired in a business combination are recorded at estimated fair value on their purchase date. Under applicable accounting standards, it is not appropriate to carryover a valuation for allowance for loan losses at the time of acquisition when the acquired loans have evidence of credit deterioration. Evidence of credit quality deterioration as of the purchase date may include measures such as credit scores, decline in collateral value, past due and non-accrual status. For acquired, impaired loans the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference, which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Acquired performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

The carrying amount of acquired loans at July 31, 2009, consisted of loans with credit deterioration, or impaired loans, and loans with no credit deterioration, or performing loans. The following table presents the acquired performing loans receivable at the acquisition date of July 31, 2009. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond.


	July 31, 2009
(Amounts in thousands)
Contractually required principal payments to balance sheet received	$	125,366
Fair value of adjustment for credit, interest rate, and liquidity		(472	)

Fair value of loans receivable, with no credit deterioration	$	124,894

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents information regarding acquired, impaired loans. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest.


	TriStone			Other			Total
(Amounts in thousands)
Balance, January 1, 2010	$	3,838		$	4,196		$	8,034
Principal payments received		(1,034	)		(2,900	)		(3,934	)
Accretion		61			—			61
Other		448			—			448
Charge-offs		(499	)		(889	)		(1,388	)

Balance, December 31, 2010	$	2,814		$	407		$	3,221


Balance, January 1, 2011	$	2,814		$	407		$	3,221
Principal payments received		(513	)		—			(513	)
Accretion		174			—			174
Other		4			—			4
Charge-offs		—			—			—

Balance, December 31, 2011	$	2,479		$	407		$	2,886

At December 31, 2011 and 2010, the remaining balance of the accretable difference totaled $919 thousand and $944 thousand, respectively.

Off-Balance Sheet Financial Instruments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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

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

Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including availability of lines of credit) of $194.27 million and standby letters of credit and financial guarantees written of $2.90 million at December 31, 2011. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $9.15 million at December 31, 2011.

Related Party Loans

In the normal course of business, the Company’s subsidiary bank has made loans to directors and executive officers of the Company, its subsidiaries, and to affiliates of such directors and officers (collectively referred to as “related parties”). All loans and commitments made to such officers and directors and to companies in which they are officers, or have significant ownership interest, have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company. The aggregate dollar amount of loans to related parties totaled $18.41 million and $12.46 million at December 31, 2011 and 2010, respectively. During 2011,

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

$10.08 million in new loans and increases were made and repayments on such loans to related parties totaled $4.13 million. There were no changes to related party loans resulting from changes in the composition of the Company’s subsidiary board members and executive officers.

Overdrafts

At December 31, 2011 and 2010, customer overdrafts totaling $1.48 million and $1.46 million, respectively, were reclassified as loans.

Note 5.

Allowance for Loan Losses and Credit Quality

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Management performs quarterly assessments to determine the appropriate level of allowance for loan losses. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by increasing or decreasing the allowance based upon current measurement criteria. Commercial, consumer real estate, and non-real estate consumer loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial loans and credit relationships and allocations to the remaining non-homogeneous and homogeneous pools of loans that have been deemed impaired. Additionally, a loan that becomes adversely classified or graded is removed from a group of non-classified or non-graded loans with similar risk characteristics in order to evaluate the removed loan collectively in a group of adversely classified or graded loans with similar risk characteristics. Management’s general reserve allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.

As part of the Company’s continuing refinement of its methodology, the qualitative adjustments historically applied to consumer loans were revised downward based upon review and analysis of historical loss experience within the portfolio, as the Company now estimates fewer losses on that portfolio. The decrease in estimated losses on the consumer portfolio segment was offset by increases in estimated losses on the commercial portfolio segment. Primarily, the increase was in the specific loss estimated on certain impaired loans as a result of new information regarding the values of underlying collateral. This refinement initially created a small difference in the allowance allocated to each portfolio segment. The allocation of the allowance at the beginning of 2011 has been reclassified to reflect the application of the refinement.

During 2011, the Company further segmented the single family residential real estate class into owner occupied and non-owner occupied classes, which management believes provides better granularity and segmentation of loans with similar risk characteristics. This segmentation also contributed to the overall reduction of estimated losses on non-impaired consumer loan segments in the allowance model, as losses on the Company’s non-owner occupied residential real estate loans have historically been higher than losses on owner occupied residential real estate loans.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table details the activity in the allowance for loan loss by portfolio segment:


(Amounts in thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total
Allowance for credit losses:
Beginning balance, January 1, 2009	$	8,104		$	7,199		$	2,479		$	17,782
Provision for loan losses		10,850			3,420			1,531			15,801
Loans charged off		(5,937	)		(2,395	)		(2,023	)		(10,355	)
Recoveries credited to allowance		590			113			346			1,049

Net charge-offs		(5,347	)		(2,282	)		(1,677	)		(9,306	)

Ending balance, December 31, 2009	$	13,607		$	8,337		$	2,333		$	24,277


Beginning balance, January 1, 2010	$	13,607		$	8,337		$	2,333		$	24,277
Provision for loan losses		6,552			8,106			99			14,757
Loans charged off		(7,980	)		(4,352	)		(1,270	)		(13,602	)
Recoveries credited to allowance		339			109			602			1,050

Net charge-offs		(7,641	)		(4,243	)		(668	)		(12,552	)

Ending balance, December 31, 2010	$	12,518		$	12,200		$	1,764		$	26,482


Beginning balance, January 1, 2011	$	12,300		$	12,641		$	1,541		$	26,482
Provision for loan losses		12,007			(2,681	)		(279	)		9,047
Loans charged off		(7,981	)		(2,501	)		(978	)		(11,460	)
Recoveries credited to allowance		1,426			252			458			2,136

Net charge-offs		(6,555	)		(2,249	)		(520	)		(9,324	)

Ending balance, December 31, 2011	$	17,752		$	7,711		$	742		$	26,205

The negative provision in the consumer real estate and consumer and other segments was the result of the aforementioned methodology refinement.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company identifies loans for potential impairment through a variety of means including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If it is determined that it is probable that the Company will not collect all principal and interest amounts contractually due, the loan is generally deemed to be impaired. The following table presents the Company’s recorded investment in loans considered to be impaired and related information on those impaired loans for the periods ended December 31, 2011 and 2010:


	December 31, 2011
(Amounts in thousands)	Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
Loans without a related allowance
Commercial loans
Construction — commercial	$	411	$	—	$	411	$	282	$	—
Land development		250		—		250		293		—
Other land loans		—		—		—		766		—
Commercial and industrial		114		—		127		2,251		4
Multi-family residential		278		—		278		1,177		24
Single family non-owner occupied		1,206		—		1,244		1,659		39
Non-farm, non-residential		1,616		—		1,647		2,059		25
Agricultural		—		—		—		—		—
Farmland		258		—		258		167		—
Consumer real estate loans
Home equity lines		368		—		378		476		15
Single family owner occupied		2,428		—		2,508		1,825		43
Owner occupied construction		—		—		—		60		3
Consumer and other loans
Consumer loans		6		—		6		23		2

	$	6,935	$	—	$	7,107	$	11,038	$	155


Loans with a related allowance
Commercial loans
Construction — commercial	$	—	$	—	$	—	$	135	$	3
Land development		—		—		—		—		—
Other land loans		112		4		112		113		6
Commercial and industrial		4,031		2,048		4,069		2,358		21
Multi-family residential		—		—		—		470		—
Single family non-owner occupied		2,232		124		2,232		2,323		107
Non-farm, non-residential		5,317		1,819		5,480		4,112		191
Agricultural		—		—		—		—		—
Farmland		—		—		—		83		—
Consumer real estate loans
Home equity lines		—		—		—		108		—
Single family owner occupied		5,529		1,203		5,612		5,794		164
Owner occupied construction		—		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—		—

	$	17,221	$	5,198	$	17,505	$	15,496	$	492

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2010
(Amounts in thousands)	Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
Loans without a related allowance
Commercial loans
Construction — commercial	$	122	$	—	$	132	$	471	$	—
Land development		50		—		50		500		—
Other land loans		362		—		362		889		—
Commercial and industrial		3,808		—		3,837		3,540		—
Multi-family residential		2,329		—		2,345		1,475		32
Single family non-owner occupied		1,197		—		1,238		823		4
Non-farm, non-residential		2,974		—		3,068		2,009		15
Consumer real estate loans
Home equity lines		330		—		335		221		7
Single family owner occupied		678		—		698		1,237		32
Owner occupied construction		—		—		—		—		—
Consumer and other loans
Consumer loans		1		—		1		2		—

	$	11,851	$	—	$	12,066	$	11,167	$	90


Loans with a related allowance
Commercial loans
Construction — commercial	$	—	$	—	$	—	$	131	$	—
Land development		—		—		—		—		—
Other land loans		113		5		113		28		2
Commercial and industrial		—		—		—		3,172		—
Multi-family residential		723		257		758		987		28
Single family non-owner occupied		3,386		770		3,395		1,247		38
Non-farm, non-residential		1,080		158		1,140		1,992		59
Consumer real estate loans
Home equity lines		95		34		98		298		3
Single family owner occupied		5,415		1,100		5,491		2,181		67
Owner occupied construction		—		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—		—

	$	10,812	$	2,324	$	10,995	$	10,036	$	197

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, non-performing loans and general economic conditions. The Company’s loan review function generally reviews all commercial loan relationships greater than $2.00 million on an annual basis and at various times through the year. Smaller commercial and retail loans are sampled for review throughout the year by our internal loan review department. Through the loan review process, loans are identified for upgrade or downgrade in risk rating and changed to reflect current information as part of the process.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of the risk grades is as follows:

•

Pass – This grade includes loans to borrowers of acceptable credit quality and risk. The Company further differentiates within this grade based upon borrower characteristics which include: capital strength, earnings stability, liquidity leverage, and industry.

•

Special Mention –This grade includes loans that require more than a normal degree of supervision and attention. These loans have all the characteristics of an adequate asset, but due to being adversely affected by economic or financial conditions have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan.

•

Substandard – This grade includes loans that have well defined weaknesses which make payment default or principal exposure possible, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business to meet the repayment terms.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

•

Doubtful – This grade includes loans that are placed on non-accrual status. These loans have all the weaknesses inherent in a “substandard’ loan with the added factor that the weaknesses are so severe that collection or liquidation in full, on the basis of current existing facts, conditions and values, is extremely unlikely, but because of certain specific pending factors, the amount of loss cannot yet be determined.

•

Loss – This grade includes loans that are to be charged off or charged down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the asset has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off all or some portion of the loan, even though partial recovery may be realized in the future.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables present the Company’s investment in loans by internal credit grade indicator at December 31, 2011 and 2010:

		00000000000		00000000000		00000000000		00000000000		00000000000		00000000000
	December 31, 2011
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial loans
Construction — commercial	$	34,512	$	15	$	955	$	—	$	—	$	35,482
Land development		2,479		—		423		—		—		2,902
Other land loans		17,171		5,629		584		—		—		23,384
Commercial and industrial		86,288		568		2,679		2,404		—		91,939
Multi-family residential		74,486		965		1,599		—		—		77,050
Single family non-owner occupied		93,444		1,346		11,953		—		—		106,743
Non-farm, non-residential		303,071		9,635		22,855		444		—		336,005
Agricultural		1,327		7		40		—		—		1,374
Farmland		35,568		1,055		538		—		—		37,161
Consumer real estate loans
Home equity lines		105,535		2,237		3,615		—		—		111,387
Single family owner occupied		435,001		8,936		29,130		—		—		473,067
Owner occupied construction		19,190		128		259		—		—		19,577
Consumer and other loans
Consumer loans		66,357		198		574		—		—		67,129
Other		12,857		1		9		—		—		12,867

Total loans	$	1,287,286	$	30,720	$	75,213	$	2,848	$	—	$	1,396,067

		00000000000		00000000000		00000000000		00000000000		00000000000		00000000000
	December 31, 2010
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial loans
Construction — commercial	$	40,497	$	663	$	1,534	$	—	$	—	$	42,694
Land development		14,458		1,226		966		—		—		16,650
Other land loans		16,723		6,138		1,607		—		—		24,468
Commercial and industrial		87,156		1,756		5,211		—		—		94,123
Multi-family residential		61,059		2,553		4,212		—		—		67,824
Single family non-owner occupied		90,985		3,563		10,412		—		—		104,960
Non-farm, non-residential		316,026		18,942		16,936		—		—		351,904
Agricultural		1,318		—		24		—		—		1,342
Farmland		33,042		2,569		1,343		—		—		36,954
Consumer real estate loans
Home equity lines		106,803		1,923		2,894		—		—		111,620
Single family owner occupied		407,845		11,661		24,037		654		—		444,197
Owner occupied construction		17,389		789		171		—		—		18,349
Consumer and other loans
Consumer loans		62,676		306		493		—		—		63,475
Other		7,635		11		—		—		—		7,646

Total loans	$	1,263,612	$	52,100	$	69,840	$	654	$	—	$	1,386,206

Loans graded as special mention decreased $21.38 million, or 41.04%, between the years ended December 31, 2011 and 2010, primarily due to the improved performance of borrowers which mitigated the potential weakness previously identified.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables detail the Company’s recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology at December 31, 2011 and 2010:


	December 31, 2011
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated		Acquired, Impaired Loans Evaluated for Impairment		Allowance for Acquired, Impaired Loans Evaluated
Commercial loans
Construction — commercial	$	411	$	—	$	35,071	$	865	$	—	$	—
Land development		250		—		2,652		481		—		—
Other land loans		112		4		23,123		542		149		—
Commercial and industrial		3,738		1,847		87,563		1,668		638		201
Multi-family residential		278		—		76,772		1,889		—		—
Single family non-owner occupied		3,438		124		102,063		2,836		1,242		—
Non-farm, non-residential		6,933		1,819		328,610		5,114		462		—
Agricultural		—		—		1,374		19		—		—
Farmland		258		—		36,903		343		—		—

Total commercial loans		15,418		3,794		694,131		13,757		2,491		201
Consumer real estate loans
Home equity lines		368		—		111,019		1,365		—		—
Single family owner occupied		7,957		1,203		464,715		4,931		395		—
Owner occupied construction		—		—		19,577		212		—		—

Total consumer real estate loans		8,325		1,203		595,311		6,508		395		—
Consumer and other loans
Consumer loans		6		—		67,123		742		—		—
Other		—		—		12,867		—		—		—

Total consumer and other loans		6		—		79,990		742		—		—

Total loans	$	23,749	$	4,997	$	1,369,432	$	21,007	$	2,886	$	201


	December 31, 2010
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated		Acquired, Impaired Loans Evaluated for Impairment		Allowance for Acquired, Impaired Loans Evaluated
Commercial loans
Construction — commercial	$	122	$	—	$	42,572	$	1,472	$	—	$	—
Land development		50		—		16,600		1,772		—		—
Other land loans		113		5		23,843		742		512		—
Commercial and industrial		3,401		—		90,201		4,511		521		—
Multi-family residential		3,052		257		64,772		824		—		—
Single family non-owner occupied		4,583		770		98,981		2,442		1,396		—
Non-farm, non-residential		4,054		158		347,426		2,688		424		—
Agricultural		—		—		1,342		19		—		—
Farmland		—		—		36,954		70		—		—

Total commercial loans		15,375		1,190		722,691		14,540		2,853		—
Consumer real estate loans
Home equity lines		425		34		111,195		2,104		—		—
Single family owner occupied		6,093		1,100		437,736		5,557		368		—
Owner occupied construction		—		—		18,349		193		—		—

Total consumer real estate loans		6,518		1,134		567,280		7,854		368		—
Consumer and other loans
Consumer loans		1		—		63,474		1,764		—		—
Other		—		—		7,646		—		—		—

Total consumer and other loans		1		—		71,120		1,764		—		—

Total loans	$	21,894	$	2,324	$	1,361,091	$	24,158	$	3,221	$	—

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Non-accrual and Past Due Loans

Non-accrual loans, presented by loan class, consisted of the following at December 31, 2011 and 2010:


(Amounts in thousands)	2011		2010
Commercial loans
Construction — commercial	$	461	$	285
Land development		297		50
Other land loans		35		321
Commercial and industrial		3,905		3,518
Multi-family residential		341		2,463
Single family non-owner occupied		1,639		2,426
Non-farm, non-residential		8,063		4,670
Farmland		271		—
Consumer real estate loans
Home equity lines		516		868
Single family owner occupied		8,255		3,938
Owner-occupied construction		1		6
Consumer and other loans
Consumer loans		52		99

Total		23,836		18,644
Acquired, impaired loans		651		770

Total non-accrual loans	$	24,487	$	19,414

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables present the aging of the recorded investment in past due loans, by loan class, at December 31, 2011 and 2010. Non-accrual loans, excluding those 0 to 29 days past due, are included in the applicable delinquency category. There were no loans past due 90 days and still accruing interest at December 31, 2011 or 2010.


	December 31, 2011
(Amounts in thousands)	30 -59 Days		60 -89 Days		90+ Days		Total Past Due		Current Loans		Total Loans
Commercial loans
Construction — commercial	$	48	$	—	$	411	$	459	$	35,023	$	35,482
Land development		—		—		297		297		2,605		2,902
Other land loans		205		—		279		484		22,900		23,384
Commercial and industrial		150		30		3,568		3,748		88,191		91,939
Multi-family residential		667		—		342		1,009		76,041		77,050
Single family non-owner occupied		1,222		414		1,020		2,656		104,087		106,743
Non-farm, non-residential		837		860		2,180		3,877		332,128		336,005
Agricultural		—		7		—		7		1,367		1,374
Farmland		152		—		258		410		36,751		37,161
Consumer real estate loans
Home equity lines		642		222		235		1,099		110,288		111,387
Single family owner occupied		5,230		1,993		5,333		12,556		460,511		473,067
Owner occupied construction		—		29		—		29		19,548		19,577
Consumer and other loans
Consumer loans		198		71		12		281		66,848		67,129
Other		—		—		—		—		12,867		12,867

Total loans	$	9,351	$	3,626	$	13,935	$	26,912	$	1,369,155	$	1,396,067


	December 31, 2010
(Amounts in thousands)	30 -59 Days		60 -89 Days		90+ Days		Total Past Due		Current Loans		Total Loans
Commercial loans
Construction — commercial	$	531	$	—	$	122	$	653	$	42,041	$	42,694
Land development		—		—		50		50		16,600		16,650
Other land loans		—		—		684		684		23,784		24,468
Commercial and industrial		3,648		121		356		4,125		89,998		94,123
Multi-family residential		956		—		1,793		2,749		65,075		67,824
Single family non-owner occupied		1,784		345		2,169		4,298		100,662		104,960
Non-farm, non-residential		3,251		2,056		3,249		8,556		343,348		351,904
Agricultural		19		—		—		19		1,323		1,342
Farmland		110		—		—		110		36,844		36,954
Consumer real estate loans
Home equity lines		682		250		608		1,540		110,080		111,620
Single family owner occupied		8,503		1,396		2,044		11,943		432,254		444,197
Owner occupied construction		855		326		6		1,187		17,162		18,349
Consumer and other loans
Consumer loans		433		47		31		511		62,964		63,475
Other		—		—		—		—		7,646		7,646

Total loans	$	20,772	$	4,541	$	11,112	$	36,425	$	1,349,781	$	1,386,206

Troubled Debt Restructurings

At December 31, 2011, total loan restructurings were $12.72 million which included $3.27 million of loans on non-accrual status. The allowance for loan losses related to loan restructurings was $1.14 million. Total interest income recognized on loan restructurings for the year ended December 31, 2011, totaled $561 thousand. The Company’s review of loan modifications beginning January 1, 2011, did not identify any TDRs resulting from the adoption of the guidance outlined in ASU 2011-02.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

When restructuring loans for troubled borrowers, the Company generally makes concessions in interest rates, loan terms and/or amortization terms. All restructured loans to troubled borrowers in excess of $250 thousand are evaluated for a specific reserve based on the net present value method. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans.

The following table presents loans modified as TDRs, excluding those on non-accrual status, within the previous 12 months by the types of concessions made by loan class during the year ended December 31, 2011. The post-modification total represents the recorded investment immediately following the modification.


(Amounts in thousands)	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Below market interest rate
Non-farm, non-residential		1	$	373	$	373
Single family owner occupied		2		159		159

Total		3		532		532
Extended payment terms
Non-farm, non-residential		1		126		126
Single family owner occupied		1		267		267

Total		2		393		393
Below market interest rate and extended payment terms
Non-farm, non-residential		1		107		107
Single family residential mortgage		4		759		736

		5		866		843

Total loan concessions		10	$	1,791	$	1,768

The following table presents loans modified as TDRs within the previous 12 months for which there was a payment default during the year ended December 31, 2011:


(Amounts in thousands)	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment

Non-farm, non-residential		1	$	38	$	38

Total loan concessions		1	$	38	$	38

Note 6.

Premises and Equipment

Premises and equipment were comprised of the following at December 31, 2011 and 2010:


	2011		2010
(Amounts in thousands)
Land	$	18,753	$	19,113
Bank premises		51,669		51,526
Equipment		32,525		33,050

		102,947		103,689
Less: accumulated depreciation and amortization		48,226		47,445

Total	$	54,721	$	56,244

Total depreciation and amortization expense for the three years ended December 31, 2011, was $3.98 million, $4.09 million, and $4.03 million, respectively.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company enters into land and building leases for the operation of banking and loan production offices, operations centers and for the operation of automated teller machines. All such leases qualify as operating leases. Following is a schedule by year of future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2011:


	Amount
(Amounts in thousands)
2012	$	952
2013		801
2014		441
2015		323
2016		243
Later years		1,335

Total	$	4,095

Total lease expense for the three years ended December 31, 2011, was $1.17 million, $1.20 million, and $1.03 million, respectively. Certain portions of the above listed leases have been sublet to third parties for properties not currently being used by the Company. The impact of the future lease payments to be received on the non-cancelable subleases is as follows:


	Amount
(Amounts in thousands)
2012	$	217
2013		197
2014		—
2015		—
2016		—
Later years		—

Total	$	414

Related Party Leases

Included in total lease expense were leases with related parties totaling $164 thousand and $160 thousand at December 31, 2011 and 2010, respectively.

Note 7.

Deposits

The following is a summary of interest-bearing deposits by type at December 31, 2011 and 2010:


	2011		2010
(Amounts in thousands)
Interest-bearing demand deposits	$	275,156	$	262,420
Money market accounts		167,379		217,362
Savings deposits		227,328		209,185
Certificates of deposit		528,735		619,776
Individual retirement accounts		104,601		107,061

Total	$	1,303,199	$	1,415,804

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At December 31, 2011, the scheduled maturities of time deposits were as follows:


	Amount
(Amounts in thousands)
2012	$	355,840
2013		103,948
2014		41,699
2015		98,495
2016 and thereafter		33,354

	$	633,336

Time deposits of $100 thousand or more were $289.61 million and $332.09 million at December 31, 2011 and 2010, respectively. At December 31, 2011, the scheduled maturities of certificates of deposit of $100 thousand or more were as follows:


	Amount
(Amounts in thousands)
Three months or less	$	50,515
Over three to six months		66,328
Over six to twelve months		46,860
Over twelve months		125,910

Total	$	289,613

Related Party Deposits

Included in total deposits were deposits by related parties of $3.84 million and $17.11 million at December 31, 2011 and 2010, respectively. During 2011, $1.29 million in new deposits and increases were made while decreases on such deposits to officers and directors totaled $14.57 million. Changes in the composition of the Company’s subsidiary board members and executive officers resulted in decreases of $2.11 million.

Note 8.

Borrowings

The following schedule details borrowings at December 31, 2011 and 2010:


	2011		2010
(Amounts in thousands)
Securities sold under agreements to repurchase	$	129,208	$	140,894
FHLB borrowings		150,000		175,000
Subordinated debt		15,464		15,464
Other debt		469		729

Total	$	295,141	$	332,087

Securities sold under agreements to repurchase consisted of $79.21 million and $90.89 million of retail overnight and term repurchase agreements at December 31, 2011 and 2010, respectively, and $50.00 million of wholesale repurchase agreements at both December 31, 2011 and 2010. The weighted average rate of the wholesale repurchase agreements was 3.71% at both December 31, 2011 and 2010, respectively. The wholesale repurchase agreements had a weighted average maturity of 6.08 years at December 31, 2011, and are collateralized with agency MBS.

First Community Bank (the “Bank”) is a member of the FHLB which provides credit in the form of short-term and long-term advances collateralized by various mortgage assets. Advances from the FHLB were secured by qualifying loans totaling $693.33 million and $587.69 million at December 31, 2011 and 2010, respectively. The FHLB advances are subject to restrictions or penalties in the event of prepayment. At December 31, 2011, unused borrowing capacity with the FHLB totaled $132.39 million.

FHLB borrowings included $150.00 million and $175.00 million in convertible and callable advances at December 31, 2011 and 2010, respectively. During the first quarter of 2011, the Company prepaid $25.00 million of a $75 million FHLB advance. The callable advances may be redeemed at quarterly intervals after various lockout periods. These call options may

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

substantially shorten the lives of these instruments. If these advances are called, the debt may be paid in full or converted to another FHLB credit product. Prepayment of the advances may result in substantial penalties based upon the differential between contractual note rates and current advance rates for similar maturities. The weighted average contractual rate of all FHLB advances was 4.12% and 2.39% at December 31, 2011 and 2010, respectively. The decrease is due to structure within those borrowings. The FHLB advances had a weighted average maturity of 6.57 years at December 31, 2011.

At December 31, 2011, the FHLB advances had approximate contractual final maturities between five and ten years. The scheduled maturities of the advances are as follows:


	Amount
(Amounts in thousands)
2012	$	—
2013		—
2014		—
2015		—
2016		—
2017 and thereafter		150,000

	$	150,000

In January 2006, the Company entered into a five year derivative swap instrument where it received LIBOR-based variable interest payments and paid fixed interest payments. The notional amount of the derivative swap was $50.00 million and effectively fixed a portion of the FHLB borrowings at 4.34%. This derivative interest rate swap instrument expired in January 2011. For a more detailed discussion of activities regarding derivatives, see “Note 13 – Derivative Instruments and Hedging Activities” of the Notes to Consolidated Financial Statements in Item 8 herein.

Also included in borrowings is $15.46 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”), with an interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are currently callable. The net proceeds from the offering were contributed as capital to the Bank to support further growth. The Company’s obligations under the Debentures and other relevant Trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of the Trust’s obligations.

Despite the fact that the accounts of the Trust are not included in the Company’s consolidated financial statements, the trust preferred securities issued by the Trust are included in the Tier 1 capital of the Company for regulatory capital purposes. Federal Reserve Board rules limit the aggregate amount of restricted core capital elements (which includes trust preferred securities, among other things) that may be included in the Tier 1 capital of most bank holding companies to 25% of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. The current quantitative limits do not preclude the Company from including the $15.46 million in trust preferred securities outstanding in Tier 1 capital as of December 31, 2011.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 9.

Income Taxes

The components of income tax expense (benefit) from continuing operations consist of the following:


(Amounts in thousands)	2011		2010			2009
Current tax expense (benefit)
Federal	$	7,101	$	(5,268	)	$	(9,534	)
State		110		78			246

		7,211		(5,190	)		(9,288	)

Deferred tax expense (benefit)
Federal		1,650		12,397			(17,608	)
State		712		611			(1,258	)

		2,362		13,008			(18,866	)


Total income tax expense (benefit)	$	9,573	$	7,818		$	(28,154	)

Deferred income taxes related to continuing operations reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting versus tax purposes. The following table details the tax effects of significant items comprising the Company’s net deferred tax assets as of December 31, 2011 and 2010:


	2011		2010
(Amounts in thousands)
Deferred tax assets:
Allowance for loan losses	$	10,023	$	9,931
Unrealized losses on AFS securities		3,444		6,728
Unrealized loss on derivative security		—		586
Securities impairments		7,349		5,150
Deferred compensation		3,692		4,570
State net operating loss carryforward		579		1,699
Alternative minimum tax credit		2,038		2,782
Other		2,714		3,099

Total deferred tax assets	$	29,839	$	34,545

Deferred tax liabilities:
Intangible assets	$	5,953	$	6,254
Odd days interest deferral		1,734		1,723
Fixed assets		2,398		2,564
Other		873		1,222

Total deferred tax liabilities		10,958		11,763

Net deferred tax assets	$	18,881	$	22,782

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, as well as the utilization of available tax credits. Municipal bond income represents the most significant permanent tax difference.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The reconciliation of the statutory federal tax rate and the effective tax rate from continuing operations for the three years ended December 31, 2011, are as follows:


	2011			2010			2009

Tax at statutory rate		35.00	%		35.00	%		35.00	%
Increase resulting from:
Tax-exempt interest income, net of nondeductible expense		(6.40	)		(6.79	)		2.88
State income taxes, net of federal benefit		2.78			2.32			0.65
Gain on acquisition, net of acquisition related costs		0.00			0.00			2.24
Other, net		0.96			(4.18	)		1.29

Effective tax rate		32.34	%		26.35	%		42.06	%

Note 10.

Employee Benefits

Employee Stock Ownership and Savings Plan

The Company maintains an Employee Stock Ownership and Savings Plan (“KSOP”). Coverage under the plan is provided to all employees meeting minimum eligibility requirements.

Employer Stock Fund. Annual contributions to the stock portion of the plan were made through 2006 at the discretion of the Board of Directors, and allocated to plan participants on the basis of relative compensation. The plan was frozen to future contributions for periods after 2006. Substantially all plan assets are invested in Common Stock of the Company. The Company reports the contributions to the plan as a component of salaries and benefits. All contributions made after 2006 have been made to the employee savings feature of the plan. Accordingly, there were no contributions to the Employer Stock Fund in 2011, 2010, or 2009. The Employer Stock Fund held 588,656, 583,256, and 504,801 shares of the Company’s Common Stock at December 31, 2011, 2010, and 2009, respectively.

Employee Savings Plan. The Company provides a 401(k) savings feature within the KSOP that is available to substantially all employees meeting minimum eligibility requirements. Under the 401(k) feature, the Company makes matching contributions to employee deferrals at levels determined by the board on an annual basis. The cost of the Company’s 100% matching contributions to qualified deferrals under the 401(k) savings component of the KSOP was $1.34 million, $1.12 million, and $1.37 million in 2011, 2010, and 2009, respectively. In 2011, 2010, and 2009, the Company made its matching contribution in Company Common Stock.

Employee Welfare Plan

The Company provides various medical, dental, vision, life, accidental death and dismemberment, and long-term disability insurance benefits to all full-time employees who elect coverage under this program. The health plan is managed by a third party administrator. Monthly employer and employee contributions are made to a tax-exempt employer benefits trust against which the third party administrator processes and pays claims. Stop-loss insurance coverage limits the Company’s risk of loss to $85 thousand and $4.36 million for individual and aggregate claims, respectively. Total Company expenses under the health plan were $3.49 million, $2.98 million, and $1.59 million in 2011, 2010, and 2009, respectively.

Deferred Compensation Plan

The Company has deferred compensation agreements with certain current and former officers providing for benefit payments over various periods commencing at retirement or death. The liability as of year-end 2011 and 2010 was $463 thousand and $467 thousand, respectively. The annual expenses associated with these agreements were $60 thousand in 2011, 2010, and 2009. The obligation is based upon the present value of the expected payments and estimated life expectancies of the individuals.

The Company maintains a life insurance contract on the life of one of the participants covered under these agreements. Proceeds derived from death benefits are intended to provide reimbursement of plan benefits paid over the post employment lives of the participants. Premiums on the insurance contract are currently paid through policy dividends on the cash surrender values of $2.06 million, $1.29 million, and $1.20 million at December 31, 2011, 2010, and 2009, respectively.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Supplemental Executive Retention Plan

The Company maintains a Supplemental Executive Retention Plan (the “SERP”) for key members of senior management. The SERP provides for a defined benefit at normal retirement age targeted at 35% of projected final base salary. Benefits under the SERP become payable at age 62. The associated benefit accrued as of year-end 2011 and 2010 was $5.11 million and $4.07 million, respectively, while the associated expense incurred in connection with the Executive Retention Plan was $519 thousand, $424 thousand, and $402 thousand for 2011, 2010, and 2009, respectively.

Projected benefit payments for the SERP are expected to be paid as follows:


	Amount
(Amounts in thousands)
2012	$	151
2013		213
2014		213
2015		213
2016		213
2017 through 2021		1,836

The following sets forth the components of the net periodic benefit cost of the Company’s domestic non-contributory, non-qualified defined SERP for years ended December 31, 2011 and 2010:


	2011		2010
(Amounts in thousands)
Service cost	$	295	$	213
Interest cost		224		211

Net periodic cost	$	519	$	424

The discount rates assumed as of December 31, 2011, were lowered from 5.50% to 4.40%. The SERP is an unfunded plan, and as such there are no plan assets. At December 31, 2011, the actuarial benefit plan obligation was $5.11 million.

Directors’ Supplemental Retirement Plan

The Company maintains a Directors’ Supplemental Retirement Plan (the “Directors’ Plan”) for its non-management directors. The Directors’ Plan provides for a benefit upon retirement from service on the Board. The Directors’ Plan was amended in December 2010 to substitute a defined benefit in lieu of the previous indexed benefit. Effective January 1, 2011, the Directors’ Plan provides for a defined benefit at normal retirement age targeted at 100% of the highest consecutive three years average compensation. Benefits under the Directors’ Plan become payable at age 70. The associated benefit accrued as of year-end 2011 and 2010 was $943 thousand and $1.60 million, respectively, while the associated expense incurred in connection with the Directors’ Plan was $162 thousand, $259 thousand, and $158 thousand for 2011, 2010, and 2009, respectively.

Projected benefit payments for the Directors’ Plan are expected to be paid as follows:


	Amount
(Amounts in thousands)
2012	$	83
2013		83
2014		83
2015		83
2016		83
2017 through 2021		555

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following sets forth the components of the net periodic benefit cost of the Company’s domestic non-contributory, non-qualified Directors’ Plan, as amended, which was effective as of January 1, 2011, for the year ended December 31, 2011:


	2011
(Amounts in thousands)
Service cost	$	119
Interest cost		43

Net periodic cost	$	162

The discount rates assumed as of December 31, 2011, were lowered from 5.50% to 4.40%. The Directors’ Plan is an unfunded plan, and as such there are no plan assets. At December 31, 2011, the actuarial benefit plan obligation was $943 thousand.

Note 11.

Equity-Based Compensation

Stock Options

The Company maintains share-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors and individuals performing services for the Company to focus on critical long-range objectives.

At the 2004 Annual Meeting, the Company’s shareholders ratified approval of the 2004 Omnibus Stock Option Plan (“2004 Plan”) which made available up to 200,000 shares for potential grants of incentive stock options, non-qualified stock options, restricted stock awards or performance awards. Non-qualified and incentive stock options, as well as restricted and unrestricted stock may continue to be awarded under the 2004 Plan. Vesting under the 2004 Plan is generally over a three-year period.

In 2001, the Company instituted a plan to grant stock options to non-employee directors (the “Directors’ Option Plan”). The options granted pursuant to the Directors’ Option Plan expire at the earlier of ten years from the date of grant or two years after the optionee ceases to serve as a director of the Company. Options not exercised within the appropriate time shall expire and be deemed cancelled. Options under the Directors’ Option Plan were granted in the form of non-statutory stock options with the aggregate number of shares of Common Stock available for grant under the Directors’ Option Plan set at 108,900 shares (adjusted for the 10% stock dividends paid in 2002 and 2003).

In 1999, the Company instituted the 1999 Stock Option Plan (the “1999 Plan”). Options under the 1999 Plan were granted in the form of non-statutory stock options with the aggregate number of shares of Common Stock available for grant under the Plan set at 332,750 (adjusted for 10% stock dividends paid in 2002 and 2003). The options granted under the 1999 Plan represent the rights to acquire the option shares with deemed grant dates of January 1^st for each year beginning with the initial year granted and the following four anniversaries. All stock options granted pursuant to the 1999 Plan vest ratably on the first through the seventh anniversary dates of the deemed grant date. The option price of each stock option is equal to the fair market value (as defined by the 1999 Plan) of the Company’s Common Stock on the date of each deemed grant during the five-year grant period. Vested stock options granted pursuant to the 1999 Plan are exercisable during employment and for a period of five years after the date of the grantee’s retirement, provided retirement occurs at or after age 62. If employment is terminated other than by early retirement, disability, or death, vested options must be exercised within 90 days after the effective date of termination. Any option not exercised within such period will be deemed cancelled.

The Company also has options from various option plans other than described above (the Prior Plans); however, no common shares of the Company are available for grants under the Prior Plans. Awards outstanding under the Prior Plans will remain in effect in accordance with their respective terms.

The cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options and restricted stock (“excess tax benefits”) are classified as financing cash flows. Excess tax benefits totaling $5 thousand, $9 thousand, and $2 thousand are classified as financing cash inflows for 2011, 2010, and 2009, respectively.

During the three years ended December 31, 2011, the Company recognized pre-tax compensation expense related to total equity-based compensation of $98 thousand, $58 thousand, and $153 thousand, respectively. The Company recognizes equity-based compensation on a straight line pro-rata basis, so that the percentage of the total expense recognized for an award is never less than the percentage of the award that has vested.

As of December 31, 2011, there was $221 thousand in unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of 1.47 years. The actual compensation cost recognized will differ from this estimate due to a number of items, including new awards granted and changes in estimated forfeitures.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table summarizes the Company’s stock option activity, and related information for the year ended December 31, 2011:


	Option Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
(Amounts in thousands, except share and per share data)
Outstanding at January 1, 2011		403,218	$	22.81
Granted		102,844		12.07
Exercised		2,969		9.11
Forfeited		23,650		19.31

Outstanding at December 31, 2011		479,443	$	20.78		7.2	$	53

Exercisable at December 31, 2011		395,243	$	22.61		6.7	$	21

The fair value of options was estimated at the date of grant using the Black-Scholes-Merton option pricing model and certain assumptions. Expected volatility is based on the weekly historical volatility of the Company’s stock price over the expected term of the option. Expected dividend yield is based on the ratio of the most recent dividend rate paid per share of the Company’s Common Stock to recent trading price of the Company’s Common Stock. The expected term is generally calculated using the “shortcut method.” The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant for the period equal to the expected term of the option.

The fair values of grants made during the three years ended December 31, 2011, were estimated using the following weighted average assumptions:


	2011			2010		2009

Volatility		27.96	%		—		44.83	%
Expected dividend yield		3.24	%		—		2.71	%
Expected term (in years)		6.18			—		6.20
Risk-free rate		1.50	%		—		2.81	%

The weighted average grant-date fair value of options granted and the aggregate intrinsic value of options exercised during the year ended December 31, 2011, was $2.56 and $13 thousand, respectively. There were no grants made during the year ended December 31, 2010. The weighted average grant-date fair value of options granted and the aggregate intrinsic value of options exercised during the year ended December 31, 2009, was $5.33 and $5 thousand, respectively.

Stock Awards

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

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table summarizes the changes in the Company’s nonvested shares of the Company’s Common Stock for the year ended December 31, 2011:


			Weighted Average
	Shares		Grant-Date Fair Value

Nonvested at January 1, 2011		3,700	$	15.06
Granted		3,600		12.03
Vested		950		12.85
Forfeited		—		—

Nonvested at December 31, 2011		6,350	$	13.67

As of December 31, 2011, there was $76 thousand in unrecognized compensation cost related to unvested stock awards. That cost is expected to be recognized over a weighted average period of 1.05 years. The actual compensation cost recognized will differ from this estimate due to a number of items, including new awards granted and changes in estimated forfeitures.

Note 12.

Litigation, Commitments and Contingencies

Litigation

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

Commitments and Contingencies

Financial instruments, whose contract amounts represent credit risk at December 31, 2011 and 2010, are commitments to extend credit (including availability of lines of credit) of $194.27 million and $209.98 million, respectively, and standby letters of credit and financial guarantees of $2.90 million and $4.04 million, respectively. The Company maintained a liability of $329 thousand and $370 thousand, respectively, at December 31, 2011 and 2010, which represents its reserve for unfunded commitments.

The Company has issued, through the Trust, $15.00 million of trust preferred securities in a private placement. In connection with the issuance of the trust preferred securities, the Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the trust preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions and has the funds therefore: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the Trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the Trust remaining available for distribution.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 13.

Derivative Instruments and Hedging Activities

The Company uses derivative instruments primarily to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These derivatives may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying asset as specified in the contract.

The primary derivatives that the Company uses are interest rate swaps and 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 adversely affected by fluctuations in external factors, such as interest rates, market-driven loan rates and prices or other economic factors.

Interest Rate Swaps. The Company uses interest rate swap contracts to modify its exposure to interest rate risk. The Company had a derivative interest rate swap instrument that ended in January 2011. The Company employed a cash flow hedging strategy to effectively convert certain floating-rate liabilities into fixed-rate instruments. The interest rate swap was accounted for under the “short-cut” method as required by the Derivatives and Hedging Topic 815 of the ASC. Changes in fair value of the interest rate swap were reported as a component of other comprehensive income. The Company does not currently employ fair value hedging strategies.

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

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

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


	December 31, 2011		December 31, 2010
(Amounts in thousands)
Interest rate swap	$	—	$	50,000
IRLC’s		9,155		7,566

The Company entered into an interest rate swap derivative accounted for as a cash flow hedge in January 2006. The $50.00 million notional amount pay fixed, receive variable interest rate swap was a liability with an estimated fair value of $31 thousand at December 31, 2010. The Company paid a fixed rate of 4.34% and received a LIBOR-based floating rate from the counterparty. Any gains and losses associated with the market value fluctuations of the interest rate swap were included in OCI. The derivative expired in January 2011.

As of December 31, 2011 and 2010, the fair values of the Company’s derivatives were as follows:

Asset Derivatives

December 31, 2011

December 31, 2010

(Amounts in thousands)

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

Derivatives not designated as hedges

IRLC’s

Other assets

135

Other assets

Total

135

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Liability Derivatives
	December 31, 2011			December 31, 2010
(Amounts in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedges
Interest rate swap	Other liabilities	$	—	Other liabilities	$	31

Total		$	—		$	31


Derivatives not designated as hedges
IRLC’s	Other liabilities	$	6	Other liabilities	$	59

Total		$	6		$	59


Total derivatives		$	6		$	90

Effect of Derivatives and Hedging Activities on the Income Statement. For the years ended December 31, 2011 and 2010, the Company determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains and losses recognized in income on non-designated hedging instruments for the periods ended December 31, 2011 and 2010:


		Amount of Gain (Loss)
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Recognized in Income on Derivative
		Year Ended December 31,
		2011		2010
(Amounts in thousands)
IRLC’s	Other income	$	160	$	41

Total		$	160	$	41

Counterparty Credit Risk. Like other financial instruments, derivatives contain an element of “credit risk.” Credit risk is the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.

Note 14.

Regulatory Capital Requirements and Restrictions

The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, which applies only to the Bank, the Bank must meet specific capital guidelines that involve quantitative measures of the entity’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios for total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).

To be categorized as well capitalized, the Bank must maintain minimum total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets (leverage) ratios established by banking regulators. At December 31, 2011, the Company and the Bank met all capital adequacy requirements to which they are subject. At December 31, 2011 and 2010, the most recent notifications from regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since those notifications that management believes have changed the institution’s category.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables present the Company’s and the Bank’s capital ratios at December 31, 2011 and 2010:


	December 31, 2011
											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
(Amounts in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to Risk-Weighted Assets
First Community Bancshares, Inc.	$	257,836		18.15	%	$	113,626		8.00	%		N/A		N/A
First Community Bank		226,508		16.12	%		112,411		8.00	%	$	140,514		10.00	%
Tier 1 Capital to Risk-Weighted Assets
First Community Bancshares, Inc.		239,928		16.89	%		56,813		4.00	%		N/A		N/A
First Community Bank		208,833		14.86	%		56,206		4.00	%		84,308		6.00	%
Tier 1 Capital to Average Assets (Leverage)
First Community Bancshares, Inc.		239,928		11.50	%		83,474		4.00	%		N/A		N/A
First Community Bank		208,833		10.08	%		82,909		4.00	%		103,637		5.00	%


	December 31, 2010
											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
(Amounts in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to Risk-Weighted Assets
First Community Bancshares, Inc.	$	224,932		15.33	%	$	117,349		8.00	%		N/A		N/A
First Community Bank		207,143		14.18	%		116,892		8.00	%	$	146,115		10.00	%
Tier 1 Capital to Risk-Weighted Assets
First Community Bancshares, Inc.		206,428		14.07	%		58,675		4.00	%		N/A		N/A
First Community Bank		188,771		12.92	%		58,446		4.00	%		87,669		6.00	%
Tier 1 Capital to Average Assets (Leverage)
First Community Bancshares, Inc.		206,428		9.44	%		87,468		4.00	%		N/A		N/A
First Community Bank		188,771		8.66	%		87,155		4.00	%		108,944		5.00	%

The primary source of funds for dividends paid by the Company is dividends received from the Bank. Dividends paid by the Bank are subject to restrictions by banking regulations. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. As described below, the Bank is required to maintain heightened regulatory capital ratios. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 15.

Other Operating Income and Expense

Other operating income and expense include certain costs, the total of which exceeds one percent of combined interest income and noninterest income, that are presented in the following table for the years indicated:


(Amounts in thousands)	2011		2010		2009
Income
Credited dividends on life insurance	$	968	$	867	$	819
Expenses
Service fees		2,941		3,315		3,656
Advertising and public relations		1,683		1,584		1,633
Telephone and data communications		1,616		1,468		1,399
Professional fees		1,554		1,999		1,759
ATM processing expenses		1,515		1,248		975
Office supplies		1,222		1,369		1,323
Non-employee production commissions		493		526		648

Related Party Fees

Included in other operating expense are legal fees paid to related parties totaling $80 thousand, $208 thousand, and $86 thousand in 2011, 2010, and 2009, respectively.

Note 16.

Fair Value

Financial Instruments Measured at Fair Value

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

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 and provide a reasonable basis for fair value determination, such as interest rates, yield curves, volatilities, prepayment speeds, default rates, and credit risks, or inputs that are derived principally from observable market data.

Level 3 Inputs –		Unobservable inputs for determining the fair values of assets or liabilities for which there is little, if any, market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort. These inputs and assumptions may include model-derived inputs that are not corroborated by observable market data and an entity’s own assumptions.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s assets and liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon third party models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 3 inputs. Securities are classified as Level 1 within the valuation hierarchy when quoted prices are available in an active market. This includes securities whose value is based on quoted market prices in active markets for identical assets. The Company also uses Level 1 inputs for the valuation of equity securities traded in active markets.

Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U.S. government agency securities, single issue and pooled trust preferred securities, corporate FDIC insured securities, MBS, and certain equity securities that are not actively traded.

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. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

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 utilizes 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 based on assumptions about the performance of the underlying collateral. 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. 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 on a nonrecurring basis at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on appraisals adjusted for customized discounting criteria.

The Company maintains an active and robust problem credit identification system. When a credit is identified as exhibiting characteristics of weakening, the Company will assess the credit for potential impairment. Examples of weakening include delinquency and deterioration of the borrower’s capacity to repay as determined by the Company’s regular credit review function. As part of the impairment review, the Company will evaluate the current collateral value. It is the Company’s standard practice to obtain updated third party collateral valuations to assist management in measuring potential impairment of a credit and the amount of the impairment to be recorded.

Internal collateral valuations are generally performed within two to four weeks of the original identification of potential impairment and receipt of the third party valuation. The internal valuation is performed by comparing the original appraisal to current local real estate market conditions and experience and considers liquidation costs. The result of the internal valuation is compared with the outstanding loan balance, and, if warranted, a specific impairment reserve will be established at the completion of the internal evaluation.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

discounts to fair market value are applied based upon such factors as the bank’s historical liquidation experience of like collateral, and an estimated net realizable value is established. That estimated net realizable value is then compared with the outstanding loan balance to determine the amount of specific impairment reserve. The specific impairment reserve, if necessary, is adjusted to reflect the results of the updated evaluation. A specific impairment reserve is generally maintained on impaired loans during the time period while awaiting receipt of the third party evaluation as well as on impaired loans that continue to make some form of payment and liquidation is not imminent. Impaired loans not meeting the aforementioned criteria and that do not have a specific impairment reserve have usually been previously written down through a partial charge off, to their net realizable value.

Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan less the specific reserve is any downward adjustment to the appraised value that the Company determines appropriate. These differences are generally made up of costs to sell the property, as well as a deflator for the devaluation of property seen when banks are the sellers, and the Company deemed these adjustments as fair value adjustments.

In the Company’s experience, it rarely returns loans to performing status after they have been partially charged off. Generally, credits identified as impaired move quickly through the process towards ultimate resolution.

Other Real Estate Owned. The fair value of the Company’s other real estate owned is determined on a nonrecurring basis using Level 3 inputs based on current and prior appraisals, estimates of costs to sell, and proprietary qualitative adjustments.

Goodwill. The fair value of the Company’s goodwill is reported on a nonrecurring basis when it has been adjusted to fair value. The values of the Company’s reporting units are determined using Level 3 inputs based on discounted cash flow and market multiple models.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Recurring Fair Value Measurements

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	December 31, 2011
	Fair Value Measurements Using						Total Fair Value
(Amounts in thousands)	Level 1		Level 2		Level 3		Total Fair Value
Available-for-sale securities:
States and political subdivisions	$	—	$	137,815	$	—	$	137,815
Single issue trust preferred securities		—		40,244		—		40,244
Corporate FDIC insured securities		—		13,718		—		13,718
Agency MBS		—		280,102		—		280,102
Non-Agency Alt-A residential MBS		—		10,030		—		10,030
Equity securities		501		20		—		521

Total available-for-sale securities	$	501	$	481,929	$	—	$	482,430

Deferred compensation assets	$	3,210	$	—	$	—	$	3,210

Derivative assets
Interest rate lock commitments	$	—	$	135	$	—	$	135

Total derivative assets	$	—	$	135	$	—	$	135

Deferred compensation liabilities	$	3,210	$	—	$	—	$	3,210

Derivative liabilities
Interest rate swap	$	—	$	—	$	—	$	—
Interest rate lock commitments		—		6				6

Total derivative liabilities	$	—	$	6	$	—	$	6


	December 31, 2010
(Amounts in thousands)	Level 1		Level 2		Level 3		Total Fair Value
(Amounts in thousands)	Level 1		Level 2		Level 3		Total Fair Value
Available-for-sale securities:
U.S. Government agency securities	$	—	$	9,832	$	—	$	9,832
States and political subdivisions		—		176,138		—		176,138
Single issue trust preferred securities		—		41,244		—		41,244
Pooled trust preferred securities		—		264		—		264
Corporate FDIC insured securities		—		25,660		—		25,660
Agency MBS		—		215,013		—		215,013
Non-Agency Alt-A residential MBS		—		11,277		—		11,277
Equity securities		616		20		—		636

Total available-for-sale securities	$	616	$	479,448	$	—	$	480,064

Deferred compensation assets	$	3,192	$	—	$	—	$	3,192

Derivative assets
Interest rate lock commitments	$	—	$	28	$	—	$	28

Total derivative assets	$	—	$	28	$	—	$	28

Deferred compensation liabilities	$	3,192	$	—	$	—	$	3,192

Derivative liabilities
Interest rate swap	$	—	$	31	$	—	$	31
Interest rate lock commitments		—		59		—		59

Total derivative liabilities	$	—	$	90	$	—	$	90

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents additional information about financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010, for which Level 3 inputs are utilized to determine fair value. There were no financial assets or liabilities measured at fair value on a recurring basis that utilized Level 3 inputs to determine fair value during 2011.


	Fair Value Measurements Using Significant Unobservable Inputs
	Available-for-Sale Securities
	Pooled Trust Preferred Securities
(Amounts in thousands)	December 31, 2010
Beginning balance	$	1,648
Transfers into Level 3		—
Transfers out of Level 3		(3,574	)
Total gains or losses
Included in earnings (or changes in net assets)		—
Included in other comprehensive income		1,926
Purchases, issuances, sales, and settlements
Purchases		—
Issuances		—
Sales		—
Settlements		—

Ending balance	$	—

During the first quarter of 2010, the Company changed the fair value of pooled trust preferred securities from Level 3 to Level 2 pricing resulting in a transfer of $3.57 million out of Level 3. The Company was successful in obtaining a quote from a qualified market participant, and although the market for these securities is increasing it still remains inactive.

Nonrecurring Fair Value Measurements

Certain financial and nonfinancial assets 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, such as, when there is evidence of impairment. Items subject to nonrecurring fair value adjustments were as follows:


	December 31, 2011
	Fair Value Measurements Using						Total Fair Value
	Level 1		Level 2		Level 3		Total Fair Value
(Amounts in thousands)
Impaired loans	$	—	$	—	$	8,528	$	8,528
Restructured loans		—		—		6,318		6,318
Other real estate owned		—		—		5,914		5,914
Goodwill — insurance agencies		—		—		9,405		9,405


	December 31, 2010
	Fair Value Measurements Using						Total Fair Value
	Level 1		Level 2		Level 3		Total Fair Value
(Amounts in thousands)
Impaired loans	$	—	$	—	$	10,906	$	10,906
Restructured loans		—		—		5,771		5,771
Other real estate owned		—		—		4,910		4,910
Goodwill — insurance agencies		—		—		11,943		11,943

The fair value of goodwill on a nonrecurring basis at December 31, 2011 and 2010, consisted of the carrying value at the insurance reporting unit after impairment charges of $1.24 million and $1.04 million, respectively.

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.


	December 31, 2011				December 31, 2010
	Carrying				Carrying
(Amounts in thousands)	Amount		Fair Value		Amount		Fair Value
Assets
Cash and cash equivalents	$	47,294	$	47,294	$	112,189	$	112,189
Investment securities		485,920		485,962		484,701		484,768
Loans held for sale		5,820		5,877		4,694		4,700
Loans held for investment less allowance		1,369,862		1,386,419		1,359,724		1,370,173
Accrued interest receivable		6,193		6,193		7,675		7,675
Bank owned life insurance		44,356		44,356		42,241		42,241
Derivative financial assets		135		135		28		28
Deferred compensation assets		3,210		3,210		3,192		3,192

Liabilities
Demand deposits	$	240,268	$	240,268	$	205,151	$	205,151
Interest-bearing demand deposits		275,156		275,156		262,420		262,420
Savings deposits		394,707		394,707		426,547		426,547
Time deposits		633,336		641,604		726,837		735,332
Securities sold under agreements to repurchase		129,208		136,359		140,894		161,100
Accrued interest payable		2,554		2,554		3,264		3,264
FHLB and other indebtedness		165,933		183,722		191,193		203,539
Derivative financial liabilities		6		6		90		90
Deferred compensation liabilities		3,210		3,210		3,192		3,192

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

Cash and Cash Equivalents. The book values of cash and due from banks and federal funds sold and purchased are considered to be equal to fair value as a result of the short-term nature of these items.

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

Loans: The estimated fair value of loans held for investment is measured based upon discounted future cash flows using current rates for similar loans. No estimate for market illiquidity has been made. Loans held for sale are recorded at lower of cost or estimated fair value. The fair value of loans held for sale is determined based upon the market sales price of similar loans.

Accrued Interest Receivable and Payable. The book value is considered to be equal to the fair value due to the short-term nature of the instrument.

Bank-owned Life Insurance. The fair value is determined by stated contract values.

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

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

FHLB and Other Indebtedness. Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar characteristics and maturities. The fair value for trust preferred obligations has been estimated based on credit spreads seen in the marketplace for like issues.

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

Note 17.

Comprehensive Income

The components of the Company’s comprehensive income, net of deferred income taxes, for the three years ended December 31, 2011, were as follows:


	2011			2010			2009
(Amounts in thousands)
Net income (loss)	$	20,028		$	21,847		$	(38,696	)
Other comprehensive income
Unrealized (loss) gain on securities available-for-sale with other-than-temporary impairment		(1,247	)		194			(28	)
Unrealized gain (loss) on securities available-for-sale without other-than-temporary impairment		12,948			8,419			(9,351	)
Reclassification adjustment for (gains) losses recognized in earnings		(5,264	)		(8,273	)		11,673
Reclassification adjustment for credit related other-than-temporary impairments recognized in earnings		2,285			185			78,863
Cumulative effect of change in accounting principle		—			—			(9,771	)
Unrealized gain on derivative securities		30			2,078			1,073
Change related to employee benefit plans		(1,004	)		(273	)		(752	)
Income tax effect		(2,886	)		(868	)		(26,711	)

Total other comprehensive income		4,862			1,462			44,996

Comprehensive income	$	24,890		$	23,309		$	6,300

The components of the Company’s accumulated other comprehensive loss, net of income taxes, as of December 31, 2011 and 2010, were as follows:


	Unrealized			Unrealized Loss			Benefit			Accumulated Other Comprehensive Loss
	Loss			on Cash Flow			Plan
	on Securities			Hedge Derivative			Liability
(Amounts in thousands)
December 31, 2011	$	(5,741	)	$	—		$	(1,587	)	$	(7,328	)

December 31, 2010	$	(11,213	)	$	(20	)	$	(957	)	$	(12,190	)

December 31, 2009	$	(11,543	)	$	(1,323	)	$	(786	)	$	(13,652	)

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 18.

Parent Company Financial Information

Condensed financial information related to First Community Bancshares, Inc. as of December 31, 2011 and 2010, and for each of the years ended December 31, 2011, 2010, and 2009, is as follows:


Condensed Balance Sheets	2011			2010
(Amounts in thousands)
Assets
Cash	$	17,694		$	11,706
Securities available for sale		7,657			9,663
Investment in subsidiary		291,547			266,673
Other assets		5,014			4,325

Total assets	$	321,912		$	292,367

Liabilities
Other liabilities	$	719		$	7,025
Long-term debt		15,464			15,464

Total liabilities		16,183			22,489
Stockholders’ Equity
Preferred stock		18,921			—
Common stock		18,083			18,083
Additional paid-in capital		188,118			189,239
Retained earnings		92,173			79,844
Treasury stock		(5,721	)		(6,740	)
Accumulated other comprehensive loss		(5,845	)		(10,548	)

Total stockholders’ equity		305,729			269,878

Total liabilities and stockholders’ equity	$	321,912		$	292,367


Condensed Statements of Income	2011			2010			2009
(Amounts in thousands)
Cash dividends received from subsidiary bank	$	—		$	—		$	4,027
Other income		2,227			2,134			3,774
Operating expense		(1,796	)		(1,556	)		(3,030	)
Income tax expense		(150	)		(223	)		(2,691	)
Equity in undistributed earnings (loss) of subsidiary		19,747			21,492			(40,776	)

Net income (loss)		20,028			21,847			(38,696	)
Dividends on preferred stock		703			—			2,160

Net income (loss) available to common shareholders	$	19,325		$	21,847		$	(40,856	)

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Condensed Statements of Cash Flows	2011			2010			2009
(Amounts in thousands)
Cash flows from operating activities
Net income (loss)	$	20,028		$	21,847		$	(38,696	)
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiary		(19,747	)		(21,492	)		40,776
(Gain) loss on sale of securities		(139	)		1			60
(Increase) decrease in other assets		(1,529	)		238			661
(Decrease) increase in other liabilities		(5,748	)		6,715			881
Other, net		776			(82	)		1,081

Net cash (used in) provided by operating activities		(6,359	)		7,227			4,763


Cash flows from investing activities
Purchase of securities available for sale		(6	)		—			(931	)
Proceeds from sale of securities available for sale		2,636			535			4,402
Investment in subsidiary		(570	)		(7,500	)		(10,000	)
Other, net		—			—			1,000

Net cash provided by (used in) investing activities		2,060			(6,965	)		(5,529	)


Cash flows from financing activities
Redemption of preferred stock		—			—			(41,500	)
Proceeds from the exercise of stock options		32			29			21
Net proceeds from the issuance of common stock		—			—			61,668
Net proceeds from the issuance of preferred stock		18,802			—			—
Repurchase of treasury stock		(904	)		—			(167	)
Repurchase of common stock warrants		(30	)		—			—
Preferred dividends paid		(558	)		—			(1,116	)
Common dividends paid		(7,155	)		(7,121	)		(4,619	)
Other, net		100			1,110			1,867

Net cash provided by (used in) financing activities		10,287			(5,982	)		16,154


Net increase (decrease) in cash and cash equivalents		5,988			(5,720	)		15,388
Cash and cash equivalents at beginning of year		11,706			17,426			2,038

Cash and cash equivalents at end of year	$	17,694		$	11,706		$	17,426

Note 19.

Segment Information

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

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables set forth information about the reportable operating segments and reconciliation of this information to the consolidated financial statements at and for the years ended December 31, 2011, 2010, and 2009:


	December 31, 2011
	Community		Insurance			Parent/
	Banking		Services			Elimination			Total
(Amounts in thousands)
Net interest income (expense)	$	72,374	$	(100	)	$	(245	)	$	72,029
Provision for loan losses		9,047		—			—			9,047
Noninterest income		29,663		6,327			(456	)		35,534
Noninterest expense		62,942		6,850			(877	)		68,915

Income (loss) before income taxes		30,048		(623	)		176			29,601
Provision for income tax expense		9,325		194			54			9,573

Net income (loss)		20,723		(817	)		122			20,028
Dividends on preferred stock		—		—			703			703

Net income (loss) available to common shareholders	$	20,723	$	(817	)	$	(581	)	$	19,325


End of period goodwill and other intangibles	$	77,977	$	9,405		$	—		$	87,382

End of period assets	$	2,144,104	$	11,465		$	9,220		$	2,164,789


	December 31, 2010
	Community		Insurance			Parent/
	Banking		Services			Elimination			Total
(Amounts in thousands)
Net interest income (expense)	$	74,072	$	(125	)	$	(90	)	$	73,857
Provision for loan losses		14,757		—			—			14,757
Noninterest income		34,132		6,816			(440	)		40,508
Noninterest expense		63,983		6,856			(896	)		69,943

Income (loss) before income taxes		29,464		(165	)		366			29,665
Provision for income tax expense		7,308		345			165			7,818

Net income (loss) available to common shareholders	$	22,156	$	(510	)	$	201		$	21,847


End of period goodwill and other intangibles	$	78,696	$	11,943		$	—		$	90,639

End of period assets	$	2,227,760	$	12,445		$	4,033		$	2,244,238


	December 31, 2009
	Community			Insurance			Parent/
	Banking			Services			Elimination			Total
(Amounts in thousands)
Net interest income (expense)	$	69,364		$	(73	)	$	(39	)	$	69,252
Provision for loan losses		15,801			—			—			15,801
Noninterest income		(60,839	)		7,427			(265	)		(53,677	)
Noninterest expense		61,523			6,139			(1,038	)		66,624

(Loss) income before income taxes		(68,799	)		1,215			734			(66,850	)
Provision for income tax (benefit) expense		(30,568	)		506			1,908			(28,154	)

Net (loss) income available to common shareholders	$	(38,231	)	$	709		$	(1,174	)	$	(38,696	)


End of period goodwill and other intangibles	$	79,419		$	11,642		$	—		$	91,061

End of period assets	$	2,247,396		$	12,230		$	13,657		$	2,273,283

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 20.

Supplemental Financial Data (Unaudited)

The following tables present quarterly earnings for the years ended December 31, 2011 and 2010:


	Quarter Ended
2011	March 31		June 30		Sept 30		Dec 31
(Amounts in thousands, except per share data)
Interest income	$	24,590	$	23,335	$	23,050	$	23,201
Interest expense		6,315		5,581		5,316		4,935

Net interest income		18,275		17,754		17,734		18,266
Provision for loan losses		1,612		3,079		1,920		2,436

Net interest income after provision for loan losses		16,663		14,675		15,814		15,830
Other income		7,663		8,139		7,888		6,580
Net securities gains		1,836		3,224		178		26
Other expenses		18,063		17,738		16,060		17,054

Income before income taxes		8,099		8,300		7,820		5,382
Income tax		2,348		2,572		2,502		2,151

Net income		5,751		5,728		5,318		3,231
Dividends on preferred stock		—		131		286		286

Net income available to common shareholders	$	5,751	$	5,597	$	5,032	$	2,945

Per share:
Basic earnings	$	0.32	$	0.31	$	0.28	$	0.16
Diluted earnings	$	0.32	$	0.31	$	0.28	$	0.17
Dividends	$	0.10	$	0.10	$	0.10	$	0.10

Weighted average basic shares outstanding		17,868		17,896		17,897		17,849

Weighted average diluted shares outstanding		17,887		18,534		19,206		19,159


	Quarter Ended
2010	March 31		June 30		Sept 30		Dec 31
(Amounts in thousands, except per share data)
Interest income	$	26,612	$	26,155	$	25,840	$	24,975
Interest expense		7,993		7,613		7,243		6,876

Net interest income		18,619		18,542		18,597		18,099
Provision for loan losses		3,665		3,596		3,810		3,686

Net interest income after provision for loan losses		14,954		14,946		14,787		14,413
Other income		8,328		7,703		8,364		7,840
Net securities gains		250		1,201		2,574		4,248
Other expenses		16,072		16,598		17,429		19,844

Income before income taxes		7,460		7,252		8,296		6,657
Income tax		2,182		2,121		1,743		1,772

Net income available to common shareholders	$	5,278	$	5,131	$	6,553	$	4,885

Per share:
Basic earnings	$	0.30	$	0.29	$	0.37	$	0.27
Diluted earnings	$	0.30	$	0.29	$	0.37	$	0.27
Dividends	$	0.10	$	0.10	$	0.10	$	0.10

Weighted average basic shares outstanding		17,766		17,787		17,808		17,846

Weighted average diluted shares outstanding		17,784		17,805		17,833		17,892

100

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 21.

Subsequent Events

On March 1, 2012, the Company and Peoples Bank of Virginia (“Peoples”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Peoples will be merged with and into the Company, with the Company as the surviving entity (the “Merger”). Pursuant to the terms of the Merger Agreement, Peoples shareholders will receive $6.08 in cash and 1.07 shares of the Company’s Common Stock for each share of Peoples common stock. The Merger Agreement has been approved by the boards of directors of both the Company and Peoples. The Merger is subject to customary closing conditions, including regulatory approval and Peoples shareholder approval.

101

- Report of Independent Registered Public Accounting Firm -

To the Audit Committee of the Board of Directors and the Stockholders

First Community Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and its Subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Bancshares, Inc. and its Subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Dixon Hughes Goodman LLP

Charlotte, North Carolina

March 2, 2012

102

- Management’s Assessment of Internal Control over Financial Reporting -

First Community Bancshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that its system of internal control over financial reporting was effective as of December 31, 2011.

Dixon Hughes Goodman LLP, independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. The Report of Independent Registered Public Accounting Firm, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, appears hereafter in Item 8 of this Annual Report on Form 10-K.

Dated this 2^nd day of March, 2012.


/s/ John M. Mendez				/s/ David D. Brown

John M. Mendez				David D. Brown
President and Chief Executive Officer				Chief Financial Officer

103

- Report of Independent Registered Public Accounting Firm -

To the Audit Committee of the Board of Directors and the Stockholders

First Community Bancshares, Inc.

We have audited First Community Bancshares, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, First Community Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of First Community Bancshares, Inc. as of and for the year ended December 31, 2011, and our report, dated March 2, 2012, expressed an unqualified opinion on those consolidated financial statements.

/s/ Dixon Hughes Goodman LLP

Charlotte, North Carolina

March 2, 2012

104

ITEM 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

ITEM 9A.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In connection with this Annual Report on Form 10-K, under the direction of the Company’s CEO and CFO, the Company has evaluated the disclosure controls and procedures currently in effect. Based upon that evaluation, the CEO and CFO concluded that, as of December 31, 2011, the Company’s disclosure controls and procedures were effective.

Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

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.

The Company assesses the adequacy of its internal control over financial reporting quarterly and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control Over Financial Reporting are each hereby incorporated by reference from Item 8 of this Annual Report on Form 10-K.

ITEM 9B.

Other Information.

None.

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance.

The required information concerning directors and executive officers has been omitted in accordance with General Instruction G. Such information regarding directors and executive officers will be set forth under the headings of “Election of Directors,” “Continuing Incumbent Directors,” and “Non-Director Executive Officers” of the Proxy Statement relating to the 2012 Annual Meeting of Stockholders (the “2012 Annual Meeting”) to be held on April 24, 2012, and is incorporated herein by reference.

Information relating to compliance with Section 16(a) of the Exchange Act has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement relating to the 2012 Annual Meeting and is incorporated herein by reference.

The Company has adopted Standards of Conduct that apply to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, as well as all employees and directors of the Company. A copy of the Company’s Standards of Conduct is available on the Company’s website at www.fcbinc.com. There have been no waivers of the standards of conduct related to any of the above officers.

Information relating to the Audit Committee and the Audit Committee Financial Expert has been omitted in accordance with General Instruction G. Such information regarding the Audit Committee and the Audit Committee Financial Expert will be set forth under the heading “Report of the Audit Committee” of the Proxy Statement relating to the 2012 Annual Meeting and is incorporated herein by reference.

105

Since the last annual report on Form 10-K, filed on March 11, 2011, the Company has not made any material changes to the procedures by which stockholders may recommend nominees to the Company’s board of directors.

BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.


Franklin P. Hall Businessman; Senior Partner, Hall & Hall Family Law Firm; Former Commissioner, Virginia Department of Alcoholic Beverage Control; Former Chairman, The CommonWealth Bank; Former Minority Leader, Virginia House of Delegates Richard S. Johnson Chairman, President, and CEO, The Wilton Companies I. Norris Kantor Of Counsel, Katz, Kantor & Perkins, Attorneys at Law; Board of Governors, Bluefield State College				John M. Mendez President and Chief Executive Officer, First Community Bancshares, Inc.; Chief Executive Officer, First Community Bank Robert E. Perkinson, Jr. Past Vice President-Operations, MAPCO Coal, Inc. – Virginia Region William P. Stafford President, Princeton Machinery Service, Inc. William P. Stafford, II Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC

EXECUTIVE OFFICERS, FIRST COMMUNITY BANCSHARES, INC.


		John M. Mendez				E. Stephen Lilly
		President and Chief Executive Officer				Chief Operating Officer

		David D. Brown				Robert L. Buzzo
		Chief Financial Officer				Vice President and Secretary

		Robert L. Schumacher
		General Counsel

BOARD OF DIRECTORS, FIRST COMMUNITY BANK


W. C. Blankenship, Jr. Agent, State Farm Insurance Juanita G. Bryan Homemaker Robert L. Buzzo Vice President and Secretary, First Community Bancshares, Inc.; President, First Community Bank C. William Davis Attorney at Law, Richardson & Davis Samuel L. Elmore Senior Vice President – Commercial Lending for Raleigh County, W.Va. Market, First Community Bank T. Vernon Foster President of J. La’Verne Print Communications; Past Director, TriStone Community Bank; Director of Business Solutions, University of Louisville, College of Business				Franklin P. Hall Businessman; Senior Partner, Hall & Hall Family Law Firm; Former Commissioner, Virginia Department of Alcoholic Beverage Control; Former Chairman, The CommonWealth Bank; Former Minority Leader, Virginia House of Delegates Richard S. Johnson Chairman, President, and CEO, The Wilton Companies I. Norris Kantor Of Counsel, Katz, Kantor & Perkins, Attorneys at Law; Board of Governors, Bluefield State College John M. Mendez President and Chief Executive Officer, First Community Bancshares, Inc.; Chief Executive Officer, First Community Bank Robert E. Perkinson, Jr. Past Vice President-Operations, MAPCO Coal, Inc. – Virginia Region

106


William P. Stafford President, Princeton Machinery Service, Inc. William P. Stafford, II Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC				Frank C. Tinder President, Tinder Enterprises, Inc. and Tinco Leasing Corporation; Realtor, Premier Realty Dale F. Woody President, Woody Lumber Company

ITEM 11.

Executive Compensation.

The information called for by Item 11 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Compensation Discussion and Analysis” of the Proxy Statement relating to the 2012 Annual Meeting and is incorporated herein by reference.

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The required information concerning security ownership of certain beneficial owners and management has been omitted in accordance with General Instruction G. Such information appears under the heading of “Information on Stock Ownership” of the Proxy Statement relating to the 2012 Annual Meeting and is incorporated herein by reference.

Equity Compensation Plan Information

Information regarding compensation plans under which the Company’s equity securities are authorized for issuance as of December 31, 2011, is included in the table which follows.


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)

Equity compensation plans approved by security holders		92,074	$	19.48		67,569
Equity compensation plans not approved by security holders		393,469	$	20.74		49,841

Total		485,543				117,410

For additional information regarding equity compensation plans, see “Note 11 – Equity-Based Compensation” of the Notes to Consolidated Financial Statements in Item 8 herein.

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence.

The information called for by Item 13 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Related Person Transactions” of the Proxy Statement relating to the 2012 Annual Meeting and is incorporated herein by reference.

ITEM 14.

Principal Accounting Fees and Services.

The information called for by Item 14 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Independent Registered Public Accounting Firm” of the Proxy Statement relating to the 2012 Annual Meeting and is incorporated herein by reference.

107

PART IV

ITEM 15.

Exhibits, Financial Statement Schedules.

(a)	Documents Filed as a Part of this Report

(1)

The following financial statements are incorporated by reference from Item 8 herein:

Consolidated Balance Sheets as of December 31, 2011 and 2010.

Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009.

Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009.

Notes to Consolidated Financial Statements.

Report of Independent Registered Public Accounting Firm.

(2)

All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not applicable or the required information is included in the consolidated financial statements or related notes thereto.

(b)	Exhibits


Exhibit No.		Exhibit

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

3(ii)		Amended and Restated Bylaws of First Community Bancshares, Inc. (14)

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

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

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

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

4.5		Certificate of Designation of 6.00% Series A Noncumulative Convertible Preferred Stock. (16)

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

10.1.1**		Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan, as amended. (15)

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

10.3**		Amended and Restated Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and John M. Mendez (6) and Waiver Agreement. (22)

10.4**		First Community Bancshares, Inc. 2000 Executive Retention Plan (19) and Amendment #1. (23)

10.5**		First Community Bancshares, Inc. Split Dollar Plan and Agreement. (8)

10.6**		First Community Bancshares, Inc. 2001 Directors’ Supplemental Retirement Plan, as amended. (17)

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

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

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

10.12**		First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Form of Award Agreement. (12)

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

10.19**		Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and David D. Brown. (18)

10.20**		Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and Robert L. Buzzo. (21)

10.21**		Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and E. Stephen Lilly. (21)

10.22**		Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Gary R. Mills. (21)

10.23**		Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Martyn A. Pell. (21)

10.24**		Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Robert L. Schumacher. (21)

10.25**		Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Simpson O. Brown. (20)

10.26**		Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Mark R. Evans. (20)

11		Statement Regarding Computation of Earnings Per Share. (13)

12*		Statement Regarding Computation of Ratios.

21		Subsidiaries of Registrant. (24)

23.1*		Consent of Dixon Hughes Goodman LLP, Independent Registered Public Accounting Firm for First Community Bancshares, Inc.

108



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

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

32*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS***		XBRL Instance Document #

101.SCH***		XBRL Taxonomy Extension Schema Document #

101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document #

101.LAB***		XBRL Taxonomy Extension Label Linkbase Document #

101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document #

101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document #

In accordance with Rule 406T of SEC Regulation S-T, the XBRL related documents in Exhibit 101 to this Annual Report on Form 10-K for the period ended December 31, 2011, are deemed not “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates such information by reference.

*	Furnished herewith.

**	Indicates a management contract or compensation plan.

***	Submitted electronically herewith.

Attached as Exhibit 101 to the Annual Report on Form 10-K for the annual period ended December 31, 2011 of First Community Bancshares, Inc. are the following documents formatted in XBRL (eXtensive Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2011 and December 31, 2010; (ii) Consolidated Statements of Operations for the years ended December 31, 2011, 2010, and 2009; (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010, and 2009; (ix) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011, 2010, and 2009; and (v) Notes to Consolidated Financial Statements.

(1)	Incorporated by reference from Exhibit 3(i) of the Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed August 16, 2010.

(2)	Incorporated by reference from Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed August 14, 2002.

(3)	Incorporated by reference from Exhibit 4.1 of the Annual Report on Form 10-K for the period ended December 31, 2002, filed March 25, 2003, and amended March 31, 2003.

(4)	Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 1999, filed 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 August 14, 2002.

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

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

(8)	Incorporated by reference from Exhibit 10.5 of the Annual Report on Form 10-K for the period ended December 31, 1999, filed April 4, 2000, and amended April 13, 2000.

(9)

Form of indemnification agreement entered into by the Company and by First Community Bank with their respective directors and certain officers of each including, for the Registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, E. Stephen Lilly, David D. Brown, and Gary R. Mills. Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2003, filed March 15, 2004, and amended May 19, 2004.

109

(10)	Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed March 15, 2004.

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

(12)	Incorporated by reference from Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed August 6, 2004.

(13)	Incorporated by reference from “Note 1 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8 herein.

(14)	Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated May 27, 2008, filed May 30, 2008.

(15)	Incorporated by reference from Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed May 7, 2004.

(16)	Incorporated by reference from Exhibit 4.1 of the Current Report on Form 8-K dated May 20, 2011, filed May 23, 2011.

(17)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed December 17, 2010.

(18)	Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed December 16, 2008.

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

(20)	Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed April 3, 2009.

(21)	Incorporated by reference from the Current Report on Form 8-K dated and filed July 6, 2009.

(22)	Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated December 16, 2010, filed December 17, 2010.

(23)	Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed December 17, 2010.

(24)	Incorporated by reference from “Business – Corporate Overview” of the Annual Report on Form 10-K in Item 1 herein.

110

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 2^nd day of March, 2012.

First Community Bancshares, Inc.

(Registrant)


By:	/s/ John M. Mendez	By:	/s/ David D. Brown

	John M. Mendez		David D. Brown
	President and Chief Executive Officer (Principal Executive Officer)		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ John M. Mendez	Director, President and Chief Executive Officer	March 2, 2012

John M. Mendez

/s/ David D. Brown	Chief Financial Officer	March 2, 2012

David D. Brown

/s/ Franklin P. Hall	Director	March 2, 2012

Franklin P. Hall

/s/ Richard S. Johnson	Director	March 2, 2012

Richard S. Johnson

/s/ Robert E. Perkinson, Jr.	Director	March 2, 2012

Robert E. Perkinson, Jr.

/s/ William P. Stafford	Director	March 2, 2012

William P. Stafford

/s/ William P. Stafford, II	Chairman of the Board of Directors	March 2, 2012

William P. Stafford, II

111