UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, 2007

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Nevada		55-0694814
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)
P.O. Box 989
Bluefield, Virginia		24605-0989
(Address of principal executive offices)		(Zip Code)

(276) 326-9000

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

þ Yes      o No

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

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

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

o Yes      þ No

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

Class – Common Stock, $1.00 Par Value; 11,167,050 shares outstanding as of October 31, 2007

 

 

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended September 30, 2007

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2007 (Unaudited), and December 31, 2006			3
Consolidated Statements of Income for the Three- and Nine-Month Periods Ended September 30, 2007 and 2006 (Unaudited)			4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (Unaudited)			5
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2007 and 2006 (Unaudited)			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities			30
Item 4. Submission of Matters to a Vote of Security Holders			30
Item 5. Other Information			30
Item 6. Exhibits			31
SIGNATURES			33
EXHIBIT INDEX			34
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. ITEM 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2007				2006
(Dollars in Thousands, Except Per Share Data)		(Unaudited)
Assets
Cash and due from banks		$	39,877			$	47,909
Interest-bearing balances with banks			19,427				9,850
Total cash and cash equivalents			59,304				57,759
Securities available-for-sale (amortized cost of $681,164 at September 30, 2007; $508,423 at December 31, 2006)			671,360				508,370
Securities held-to-maturity (fair value of $12,776 at September 30, 2007; $20,350 at December 31, 2006)			12,548				20,019
Loans held for sale			2,294				781
Loans held for investment, net of unearned income			1,239,207				1,284,863
Less allowance for loan losses			13,190				14,549
Net loans held for investment			1,226,017				1,270,314
Premises and equipment			46,702				36,889
Other real estate owned			211				258
Interest receivable			13,289				12,141
Goodwill and other intangible assets			69,104				62,196
Other assets			73,817				64,971
Total Assets		$	2,174,646			$	2,033,698
Liabilities
Deposits:
Noninterest-bearing		$	224,297			$	244,771
Interest-bearing			1,178,740				1,150,000
Total Deposits			1,403,037				1,394,771
Interest, taxes and other liabilities			20,120				19,641
Federal funds purchased			15,600				7,700
Securities sold under agreements to repurchase			226,784				201,185
FHLB borrowings and other indebtedness			291,942				197,671
Total Liabilities			1,957,483				1,820,968
Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; none issued			—				—
Common stock, $1 par value; 25,000,000 shares authorized; 11,499,018 shares issued at September 30, 2007, and December 31, 2006, including 323,468 and 253,276 shares in treasury, respectively			11,499				11,499
Additional paid-in capital			108,794				108,806
Retained earnings			112,911				100,117
Treasury stock, at cost			(10,051	)			(7,924	)
Accumulated other comprehensive (loss) income			(5,990	)			232
Total Stockholders’ Equity			217,163				212,730
Total Liabilities and Stockholders’ Equity		$	2,174,646			$	2,033,698

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Dollars in Thousands, Except Per Share Data)		2007				2006				2007				2006
Interest Income
Interest and fees on loans held for investment		$	23,478			$	24,578			$	70,401			$	73,009
Interest on securities-taxable			6,772				3,497				17,783				9,598
Interest on securities-nontaxable			2,078				1,877				6,140				5,519
Interest on deposits in banks			404				288				1,073				1,062
Total interest income			32,732				30,240				95,397				89,188
Interest Expense
Interest on deposits			10,083				8,760				29,131				24,733
Interest on borrowings			5,506				3,724				15,094				10,461
Total interest expense			15,589				12,484				44,225				35,194
Net interest income			17,143				17,756				51,172				53,994
Provision for loan losses			—				579				—				1,798
Net interest income after provision for loan losses			17,143				17,177				51,172				52,196
Noninterest Income
Wealth management income			908				623				2,931				2,038
Service charges on deposit accounts			3,006				2,611				8,077				7,683
Other service charges, commissions and fees			902				750				2,609				2,201
Gain (loss) on sale of securities			50				(6	)			209				60
Other operating income			1,154				1,120				2,956				3,784
Total noninterest income			6,020				5,098				16,782				15,766
Noninterest Expense
Salaries and employee benefits			6,544				6,151				19,120				20,834
Occupancy expense of bank premises			933				1,039				3,010				3,090
Furniture and equipment expense			844				871				2,447				2,579
Intangible amortization			105				88				313				322
Other operating expense			4,410				4,064				12,179				11,309
Total noninterest expense			12,836				12,213				37,069				38,134
Income before income taxes			10,327				10,062				30,885				29,828
Income tax expense			3,011				2,877				9,006				8,507
Net income		$	7,316			$	7,185			$	21,879			$	21,321
Basic earnings per common share		$	0.65			$	0.64			$	1.95			$	1.90
Diluted earnings per common share		$	0.65			$	0.64			$	1.94			$	1.89
Dividends declared per common share		$	0.27			$	0.26			$	0.81			$	0.78
Weighted average basic shares outstanding			11,179,322				11,174,479				11,232,895				11,202,631
Weighted average diluted shares outstanding			11,230,220				11,245,073				11,299,727				11,273,293

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

		Nine Months Ended
		September 30,
(In Thousands)		2007				2006
Operating activities:
Net Income		$	21,879			$	21,321
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			—				1,798
Depreciation and amortization of premises and equipment			2,362				2,564
Intangible amortization			313				322
Net investment amortization and accretion			435				602
Net gain on the sale of assets			(186	)			(796	)
Mortgage loans originated for sale			(34,794	)			(23,204	)
Proceeds from sales of mortgage loans			33,472				23,551
Gain on sales of loans			(191	)			(119	)
Deferred income tax expense (benefit)			552				(34	)
Increase in interest receivable			(1,148	)			(1,213	)
Other operating activities, net			(967	)			443
Net cash provided by operating activities			21,727				25,235
Investing activities:
Proceeds from sales of securities available-for-sale			1,288				14,073
Proceeds from maturities and calls of securities available-for-sale			22,258				17,628
Proceeds from maturities and calls of securities held-to-maturity			7,437				3,974
Purchase of securities available-for-sale			(196,479	)			(100,834	)
Net decrease in loans held for investment			44,322				29,056
Purchase of FHLB stock			(4,077	)			—
Purchase of bank-owned life insurance			—				(25,000	)
Net cash used in acquisition of GreenPoint			(5,135	)			—
Net cash used in branch divestiture			—				(13,721	)
Purchase of premises and equipment			(11,981	)			(4,094	)
Proceeds from sale of equipment			—				323
Net cash used in investing activities			(142,367	)			(78,595	)
Financing activities:
Net increase (decrease) in demand and savings deposits			13,283				(6,881	)
Net (decrease) increase in time deposits			(5,180	)			16,695
Net increase (decrease) in federal funds purchased			7,900				(67,000	)
Net increase in securities sold under agreement to repurchase			25,599				48,836
Net increase in FHLB and other borrowings			93,698				68,896
Proceeds from the exercise of stock options			715				871
Excess tax benefit from stock-based compensation			290				139
Acquisition of treasury stock			(5,035	)			(4,566	)
Dividends paid			(9,085	)			(8,735	)
Net cash provided by financing activities			122,185				48,255
Increase (decrease) in cash and cash equivalents			1,545				(5,105	)
Cash and cash equivalents at beginning of period			57,759				57,539
Cash and cash equivalents at end of period		$	59,304			$	52,434
Supplemental information — Noncash items
Transfer of loans to other real estate		$	973			$	883

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

																		Accumulated
						Additional												Other
		Common				Paid-in				Retained				Treasury				Comprehensive
(Dollars in Thousands)		Stock				Capital				Earnings				Stock				Income (Loss)				Total
Balance January 1, 2006		$	11,496			$	108,573			$	82,828			$	(7,625	)		$	(771	)		$	194,501
Comprehensive income:
Net income			—				—				21,321				—				—				21,321
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale			—				—				—				—				663				663
Less reclassification adjustment for gains realized in net income																			(14	)			(14	)
Unrealized gain on derivative security			—				—				—				—				252				252
Comprehensive income			—				—				21,321				—				901				22,222
Common dividends declared			—				—				(8,735	)			—				—				(8,735	)
Net acquisition of 145,161 treasury shares			—				—				—				(4,566	)			—				(4,566	)
Acquisition of Stone Capital - 2,706 shares issued			3				85				—				—				—				88
Stock awards 5,132 shares issued			—				(42	)			—				160				—				118
ESOP allocation 27,733 shares			—				16				—				867				—				883
Equity-based compensation expense			—				223				—				—				—				223
Tax benefit from exercise of stock options			—				189				—				—				—				189
Option exercises - 41,455 shares			—				(439	)			—				1,298				—				859
Balance September 30, 2006		$	11,499			$	108,605			$	95,414			$	(9,866	)		$	130			$	205,782
Balance January 1, 2007		$	11,499			$	108,806			$	100,117			$	(7,924	)		$	232			$	212,730
Comprehensive income:
Net income			—				—				21,879				—				—				21,879
Other comprehensive income, net of tax:
Unrealized loss on securities available-for-sale			—				—				—				—				(5,834	)			(5,834	)
Less reclassification adjustment for gains realized in net income			—				—				—				—				(16	)			(16	)
Unrealized loss on derivative security			—				—				—				—				(372	)			(372	)
Comprehensive income			—				—				21,879				—				(6,222	)			15,657
Common dividends declared			—				—				(9,085	)			—				—				(9,085	)
Acquisition of 163,500 treasury shares			—				—				—				(5,035	)			—				(5,035	)
Acquisition of GreenPoint Insurance - 49,088 shares issued			—				133				—				1,524				—				1,657
Equity-based compensation expense			—				121				—				87				—				208
Tax benefit from exercise of stock options			—				337				—				—				—				337
Option exercises - 41,470 shares			—				(603	)			—				1,297				—				694
Balance September 30, 2007		$	11,499			$	108,794			$	112,911			$	(10,051	)		$	(5,990	)		$	217,163

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

Unaudited Consolidated Financial Statements

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

The consolidated balance sheet as of December 31, 2006, has been derived from the audited financial statements included in the Company’s 2006 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.

A more complete and detailed description of First Community’s significant accounting policies is included within Footnote 1 to the Company’s Annual Report on Form 10-K for December 31, 2006. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.

The Company operates within one business segment, community banking.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company adopted FIN 48 on January 1, 2007, and the adoption did not have an effect on its consolidated financial statements. 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, 2003 through 2006 are currently open to audit under statutes of limitation by the Internal Revenue Service and various state tax departments.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.” SFAS 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value and permits (but does not require) subsequent measurement of servicing assets and liabilities at fair value. This statement is effective for fiscal years beginning after September 15, 2006. The adoption of this standard did not have a material effect on the financial condition, the results of operations, or liquidity of the Company.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company must adopt these new requirements no later than the first quarter of 2008. The Company has not yet determined the effect of adopting SFAS 157 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 123(R).” SFAS 158 requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the

fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company does not expect the full adoption of this standard to have a significant impact on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company is currently evaluating the impact of the adoption of this EITF on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-5 “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” The scope of EITF 06-5 is limited to the determination of net cash surrender value of a life insurance contract in accordance with Technical Bulletin 85-4. This EITF outlines when contractual limitations of the policy should be considered when determining the net realizable value of the contract. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted. The adoption of EITF 06-5 did not have a material effect on the condition, results of operations, or liquidity of the Company.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value.  The Statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet.  SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.  Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. The Company did not elect early adoption as provided for in the Statement, and is currently evaluating the impact, if any, of adopting this Statement on the consolidated financial statements.

Note 2. Mergers, Acquisitions and Branching Activity

In September 2007, the Company completed the acquisition of GreenPoint Insurance Group, Inc. (“GreenPoint”), a High Point, North Carolina, insurance agency. In connection with the initial payment of approximately $1.66 million, the Company issued 49,088 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of GreenPoint are entitled to additional consideration aggregating up to $1.45 million in the form of cash or the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition. The acquisition of GreenPoint added $7.19 million of goodwill and intangibles. The Company is in the process of identifying and valuing intangibles. The Company also assumed $5.57 million debt in connection with the acquisition, of which approximately $5.00 million was paid off at closing.

In October 2007, the Company opened a new branch location in Daniels, West Virginia. In March 2007, the Company opened two new branch locations in the Winston-Salem, North Carolina, area. The Company currently has plans to open four more branch offices during the next six months. In Richmond, Virginia, locations are planned for the Chesterfield Towne Center and on Mechanicsville Turnpike, Route 360. In West Virginia, locations are planned for Summersville and Princeton.

In December 2006, the Company completed the sale of its Rowlesburg, West Virginia, branch location. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $10.6 million and loans of approximately $2.2 million. The transaction resulted in a pre-tax gain of approximately $333 thousand.

In November 2006, the Company completed the acquisition of Investment Planning Consultants, Inc. (“IPC”), a registered investment advisory firm. In connection with the initial payment of approximately $1.47 million, the Company issued 39,874

shares of common stock. Under the terms of the stock purchase agreement, former shareholders of IPC are entitled to additional consideration aggregating up to $1.43 million in the form of the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition.

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

Note 3. Investment Securities

As of September 30, 2007, and December 31, 2006, the amortized cost and estimated fair value of available-for-sale securities are as follows:

		September 30, 2007
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
U.S. Government agency securities		$	136,788			$	292			$	(428	)		$	136,652
States and political subdivisions			187,661				1,632				(2,285	)			187,008
Corporate notes			164,880				—				(8,620	)			156,260
Mortgage-backed securities			183,553				398				(2,376	)			181,575
Equities			8,282				1,832				(249	)			9,865
Total		$	681,164			$	4,154			$	(13,958	)		$	671,360

		December 31, 2006
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Government agency securities		$	117,777			$	—			$	(1,716	)		$	116,061
States and political subdivisions			152,189				2,379				(521	)			154,047
Corporate notes			85,080				350				(397	)			85,033
Mortgage-backed securities			146,444				206				(1,896	)			144,754
Equities			6,933				1,615				(73	)			8,475
Total		$	508,423			$	4,550			$	(4,603	)		$	508,370

As of September 30, 2007, and December 31, 2006, the amortized cost and estimated fair value of held-to-maturity securities are as follows:

		September 30, 2007
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
States and political subdivisions		$	12,172			$	230			$	(2	)		$	12,400
Mortgage-backed securities			1				—				—				1
Other securities			375				—				—				375
Total		$	12,548			$	230			$	(2	)		$	12,776

		December 31, 2006
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
States and political subdivisions		$	19,638			$	334			$	(2	)		$	19,970
Mortgage-backed securities			6				—				—				6
Other securities			375				—				(1	)			374
Total		$	20,019			$	334			$	(3	)		$	20,350

The following table reflects those investments in an unrealized loss position at September 30, 2007, and December 31, 2006. There were no securities in a continuous unrealized loss position for 12 or more months which the Company does not have the ability to hold until the security matures or recovers in value.

		September 30, 2007
		Less than 12 Months								12 Months or longer								Total
Description of Securities		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In Thousands)		Value				Losses				Value				Losses				Value				Losses
U. S. Government agency securities		$	—			$	—			$	29,926			$	(428	)		$	29,926			$	(428	)
States and political subdivisions			62,279				(1,721	)			34,524				(566	)			96,803				(2,287	)
Corporate Notes			126,259				(8,479	)			10,375				(141	)			136,634				(8,620	)
Mortgage-backed securities			97,006				(1,333	)			50,849				(1,043	)			147,855				(2,376	)
Equity securities			1,551				(198	)			1,632				(51	)			3,183				(249	)
Total		$	287,095			$	(11,731	)		$	127,306			$	(2,229	)		$	414,401			$	(13,960	)

		December 31, 2006
		Less than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
U. S. Government agency securities		$	60,416			$	(517	)		$	55,645			$	(1,199	)		$	116,061			$	(1,716	)
States and political subdivisions			10,732				(34	)			36,797				(489	)			47,529				(523	)
Corporate Notes			28,339				(213	)			27,698				(185	)			56,037				(398	)
Mortgage-backed securities			50,093				(223	)			66,620				(1,673	)			116,713				(1,896	)
Equity securities			2,186				(70	)			32				(3	)			2,218				(73	)
Total		$	151,766			$	(1,057	)		$	186,792			$	(3,549	)		$	338,558			$	(4,606	)

At September 30, 2007, the combined depreciation in value of the 276 individual security holdings in an unrealized loss position was 2.04% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of September 30, 2007, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the

Company believes the declines in value are attributable to changes in market interest rates and not the credit quality of the issuer.

Note 4. Loans

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

		September 30, 2007								December 31, 2006
(Dollars in Thousands)		Amount				Percent				Amount				Percent
Loans held for investment:
Commercial and agricultural		$	94,168				7.60	%		$	106,645				8.30	%
Commercial real estate			396,147				31.97	%			421,067				32.77	%
Residential real estate			500,760				40.41	%			506,370				39.41	%
Construction			167,089				13.48	%			158,566				12.34	%
Consumer			77,724				6.27	%			88,666				6.90	%
Other			3,319				0.27	%			3,549				0.28	%
Total		$	1,239,207				100.00	%		$	1,284,863				100.00	%
Loans held for sale		$	2,294							$	781

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 at September 30, 2007, are commitments to extend credit (including availability of lines of credit) of $222.12 million and standby letters of credit and financial guarantees written of $3.23 million. Additionally, the Company had gross notional amount of outstanding commitments to lend related to secondary market mortgage loans of $8.10 million at September 30, 2007.

Note 5. Allowance for Loan Losses

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

Management performs periodic assessments to determine the appropriate level of allowance. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the loss provision based upon current measurement criteria. Commercial, consumer and mortgage loan portfolios are evaluated

separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans. Management’s allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.

The following table details the Company’s allowance for loan loss activity for the three- and nine-month periods ended September 30, 2007 and 2006.

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
(In Thousands)		2007				2006				2007				2006
Beginning balance		$	13,934			$	14,710			$	14,549			$	14,736
Provision for loan losses			—				579				—				1,798
Charge-offs			(1,009	)			(832	)			(2,813	)			(2,936	)
Recoveries			265				489				1,454				1,348
Ending balance		$	13,190			$	14,946			$	13,190			$	14,946

Note 6. Deposits

The following is a summary of interest-bearing deposits by type as of September 30, 2007, and December 31, 2006.

		September 30,				December 31,
(In Thousands)		2007				2006
Interest-bearing demand deposits		$	143,719			$	140,578
Savings deposits			348,457				317,678
Certificates of deposit			686,564				691,744
Total		$	1,178,740			$	1,150,000

Note 7. Borrowings

The following schedule details the Company’s Federal Home Loan Bank (“FHLB”) borrowings and other indebtedness at September 30, 2007, and December 31, 2006.

		September 30,				December 31,
(In thousands)		2007				2006
FHLB borrowings		$	275,905			$	182,207
Subordinated debt			15,464				15,464
Other long-term debt			573				—
Total		$	291,942			$	197,671

FHLB borrowings include $275.00 million in convertible and callable advances and $905 thousand of noncallable term advances from the FHLB at September 30, 2007. The weighted average interest rates of advances are 4.46% and 4.64% at September 30, 2007, and December 31, 2006, respectively.

The Company has entered into a derivative interest rate swap instrument where it receives LIBOR-based variable interest payments and pays fixed interest payments. The notional amount of the derivative swap is $50 million and effectively fixes a portion of the FHLB borrowings at approximately 4.34%. After considering the effect of the interest rate swap, the effective weighted average interest rate of all FHLB borrowings is 4.35% at September 30, 2007. The fair value of the interest rate swap was $(180) thousand at September 30, 2007.

At September 30, 2007, the FHLB advances have maturities between three and fourteen years. The scheduled maturities of the advances are as follows:

(In Thousands)		Amount
2007		$	—
2008			—
2009			—
2010			25,000
2011			—
2012 and thereafter			250,905
Total		$	275,905

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

Also included in borrowings is $15.46 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”), with an interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are callable beginning October 8, 2008. The net proceeds from the offering were contributed as capital to the Company’s subsidiary bank to support further growth.

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

Note 8. Comprehensive Income

Comprehensive income is the total of net income and other comprehensive income. The following table summarizes the components of comprehensive income.

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
(In Thousands)		2007				2006				2007				2006
Net income		$	7,316			$	7,185			$	21,879			$	21,321
Other comprehensive income Unrealized (loss) gain on securities available-for-sale			(2,055	)			6,673				(9,723	)			1,087
Reclassification adjustment for losses (gains) realized in net income			52				4				(27	)			(23	)
Unrealized (loss) gain on derivative securities			(1,095	)			(1,090	)			(620	)			413
Income tax effect			1,239				(2,220	)			4,148				(576	)
Total other comprehensive (loss) income			(1,859	)			3,367				(6,222	)			901
Comprehensive income		$	5,457			$	10,552			$	15,657			$	22,222

Note 9. Commitments and Contingencies

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

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

The following discussion and analysis is provided to address information about First Community Bancshares, Inc.’s (the “Company”) financial condition and results of operations. This discussion and analysis should be read in conjunction with the Company’s 2006 Annual Report on Form 10-K and the other financial information included in this report.

The Company is a multi-state financial holding company headquartered in Bluefield, Virginia, with total assets of $2.17 billion at September 30, 2007. Through its community bank subsidiary, First Community Bank, N. A. (the “Bank”), the Company provides financial, trust and investment advisory services to individuals and commercial customers through over fifty locations in the four states of Virginia, West Virginia, North Carolina and Tennessee. The Company is also the parent of GreenPoint Insurance Group, Inc., a North Carolina-based full-service insurance agency offering commercial and personal lines (“GreenPoint”). The Bank is the parent of Investment Planning Consultants, Inc., a SEC-registered investment advisory firm that offers wealth management and investment advice (“IPC”). The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “FCBC”.

FORWARD LOOKING STATEMENTS

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

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

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. These factors are described in greater detail in Item 1A. Risk Factors of the Company’s 2006 Annual Report on Form 10-K.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

Estimates, assumptions, and judgments are necessary principally when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third party sources, when available. When third party information

is not available, valuation adjustments are estimated by management primarily through the use of internal modeling techniques and appraisal estimates.

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operation. The disclosures presented in the Notes to the Consolidated Financial Statements and in Management’s Discussion and Analysis provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, accounting for acquisitions and intangible assets, and accounting for income taxes as the accounting areas that require the most subjective or complex judgments. The identified critical accounting policies are described in detail in the Company’s 2006 Annual Report on Form 10-K. There have been no material changes in the Company’s critical accounting policies since December 31, 2006.

COMPANY OVERVIEW

The Company is a full service commercial financial holding company which operates within the four-state region of Virginia, West Virginia, North Carolina, and Tennessee. The Company operates through the Bank, IPC, and GreenPoint, and offers a wide range of financial services. The Company reported total assets of $2.17 billion at September 30, 2007.

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

The Company also conducts asset management activities through its Trust and Financial Services Division and its registered investment advisory firm, IPC. These two divisions manage assets with a market value of $844 million. These assets are not assets of the Company, but are managed under various fee-based arrangements as fiduciary or agent.

MERGERS, ACQUISITIONS AND BRANCHING ACTIVITY

In September 2007, the Company acquired GreenPoint, a High Point, North Carolina, insurance agency. As of September 30, 2007, GreenPoint had annualized commission revenues of approximately $4.60 million. In connection with the initial payment of approximately $1.66 million, the Company issued 49,088 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of GreenPoint are entitled to additional consideration aggregating up to $1.45 million in the form of cash or the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition. The acquisition of GreenPoint added $7.19 million of goodwill and intangibles. The Company is in the process of identifying and valuing intangibles. The Company also assumed $5.57 million debt in connection with the acquisition, of which approximately $5.00 million was paid off at closing.

In October 2007, the Company opened a new branch location in Daniels, West Virginia. In March 2007, the Company opened two new branch locations in the Winston-Salem, North Carolina, area. The Company currently has plans to open four more branch offices during the next six months. In Richmond, Virginia, locations are planned for the Chesterfield Towne Center and on Mechanicsville Turnpike, Route 360. In West Virginia, locations are planned for Summersville and Princeton.

In December 2006, the Company completed the sale of its Rowlesburg, West Virginia, branch location. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $10.6 million and loans of approximately $2.2 million. The transaction resulted in a pre-tax gain of approximately $333 thousand.

In November 2006, the Company completed the acquisition of IPC, a registered investment advisory firm. In connection with the initial payment of approximately $1.47 million, the Company issued 39,874 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of IPC are entitled to additional consideration aggregating up to $1.43 million in

the form of the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition.

In June 2006, the Company sold its Drakes Branch, Virginia, branch office. At the time of the sale, the branch had deposits and repurchase agreements totaling approximately $16.4 million and loans of approximately $1.9 million. The transaction resulted in a gain of approximately $702 thousand. The sale of this and the previously referenced Rowlesburg branch were designed to enhance the efficiency of the Company’s branch network.

RESULTS OF OPERATIONS

Overview

Net income for the three months ended September 30, 2007, was $7.32 million, or $0.65 per basic and diluted share, compared with $7.19 million or $0.64 per basic and diluted share for the three months ended September 30, 2006, an improvement of $131 thousand, or 1.82%. Return on average assets was 1.34% for the three months ended September 30, 2007, compared with 1.45% for the same period in 2006. Return on average equity for the three months ended September 30, 2007, was 13.31% compared with 14.05% for the three months ended September 30, 2006.

Net income for the nine months ended September 30, 2007, was $21.88 million, or $1.95 per basic and $1.94 per diluted share, compared with $21.32 million or $1.90 per basic and $1.89 per diluted share for the nine months ended September 30, 2006, an improvement of $558 thousand, or 2.62%. Return on average assets was 1.38% for the nine months ended September 30, 2007, compared with 1.45% for the same period in 2006. Return on average equity for the nine months ended September 30, 2007, was 13.40%, compared with 14.29% for the nine months ended September 30, 2006.

Net Interest Income – Quarterly Comparison (See Table I)

Net interest income, the largest contributor to earnings, was $17.14 million for the three months ended September 30, 2007, compared with $17.76 million for the corresponding period in 2006, a decrease of $613 thousand, or 3.45%. Tax-equivalent net interest income totaled $18.28 million for the three months ended September 30, 2007, a decrease of $494 thousand from $18.78 million for the third quarter of 2006. The net decrease was due mostly to increases in rates paid on interest-bearing liabilities which outpaced increases in the rates earned on loans and securities.

Compared with the third quarter of 2006, average earning assets increased $184.58 million while interest-bearing liabilities increased $194.93 million. The yield on average earning assets decreased by 13 basis points to 6.86% from 6.99%. Total cost of interest-bearing liabilities increased 34 basis points between the third quarters of 2006 and 2007, which resulted in a net interest rate spread that was 47 basis points lower at 3.23% compared with 3.70% for the same period last year. The Company’s tax-equivalent net interest margin of 3.70% for the three months ended September 30, 2007, decreased 50 basis points from 4.20% for the same period of 2006.

The rate earned on loans increased one basis point to 7.48% from 7.47%. The effect of the September 18, 2007, 50 basis point cut in the target federal funds rate by the Federal Open Market Committee and the associated decline in the prime rate was late enough to not have a material effect on loan yields in the third quarter. Declines in the average portfolio balances contributed largely to a net $1.09 million decrease in tax-equivalent loan interest income compared with the third quarter of 2006.

The largest contributors to the increase in the tax-equivalent interest income in 2007 were the increases in both average balance and rate earned on the securities portfolio. During the three months ended September 30, 2007, the tax-equivalent yield on available-for-sale securities increased 19 basis points to 5.79%, while the average balance increased by $242.92 million. The average tax-equivalent yield increased due to the addition of higher rate securities and the reduction of lower rate securities. As net payoffs in the loan portfolio are realized, the Company has been reinvesting those funds in securities. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.

Compared with the third quarter of 2006, average interest-bearing balances with banks increased to $33.54 million during the third quarter of 2007, as the yield increased 15 basis points to 4.78%. Interest-bearing balances with banks is made up largely of excess liquidity bearing overnight market rates and a small portfolio of certificates of deposit. The rate earned on overnight balances has risen along with increases in short-term benchmark interest rates. The balance has increased as the Company experienced higher levels of liquidity during the third quarter.

Compared with the same period in 2006, the average balances of interest-bearing demand and savings deposits increased $1.29 million and $8.26 million, respectively, for the three months ended September 30, 2007. The average rate paid on interest-bearing demand deposits decreased by one basis point, while the average rate paid on savings increased 31 basis points. Average time deposits increased $23.18 million while the average rate paid increased 43 basis points from 4.04% in 2006 to 4.47% in 2007. Retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, increased $24.95 million to $173.63 million, while the rate increased 12 basis points to 3.46%. The level of average non-interest-bearing demand deposits decreased $11.08 million to $229.45 million during the quarter ended September 30, 2007, compared with the corresponding period of the prior year.

The changes in average deposits between the two quarters include the effect of the previously disclosed sale of the Company’s Rowlesburg, West Virginia, branch office. The average deposit balances held by that branch in the third quarter of 2006 totaled $10.71 million.

Compared with the same period in 2006, average federal funds purchased decreased $1.30 million to $751 thousand during the third quarter of 2007. Wholesale repurchase agreements increased $48.91 million, as the Company added approximately $50.00 million of wholesale repurchase agreements funding in the latter part of 2006. The average balance of FHLB borrowings and other long-term debt increased by $91.30 million in 2007 to $291.39 million, while the rate paid on those borrowings decreased 19 basis points. The Company borrowed an additional $100 million in FHLB advances early in the second quarter of 2007 that have a weighted-average cost of 4.18%.

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

Net interest income was $51.17 million for the nine months ended September 30, 2007, compared with $53.99 million for the corresponding period in 2006, a decrease of $2.82 million, or 5.23%. Tax-equivalent net interest income totaled $54.53 million for the nine months ended September 30, 2007, a decrease of $2.47 million from $57.00 million for the first nine months of 2006. The net decrease was due mostly to increases in rates paid on interest-bearing liabilities which outpaced increases in the rates earned on loans and securities.

Compared with the first nine months of 2006, average earning assets increased $123.49 million while interest-bearing liabilities increased $128.01 million. The yield on average earning assets increased one basis point to 6.91% from 6.90%. Total cost of interest-bearing liabilities increased 49 basis points during the first nine months of 2007, which resulted in a net interest rate spread that was 48 basis points lower at 3.32% compared with 3.80% for the same period last year. The Company’s tax-equivalent net interest margin of 3.81% for the nine months ended September 30, 2007, decreased 45 basis points from 4.26% for the same period of 2006.

The rate earned on loans increased to 7.50% from 7.38%, which is attributable to the general rise in market rates of interest since the beginning of 2006. Declines in the average portfolio balances contributed largely to a net $2.59 million decrease in tax-equivalent loan interest income compared with the first nine months of 2006.

The largest contributors to the increase in the tax-equivalent interest income in 2007 were the increases in both average balance and rate earned on the securities portfolio. During the nine months ended September 30, 2007, the tax-equivalent yield on available-for-sale securities increased 30 basis points to 5.76%, while the average balance increased by $198.82 million. The average tax-equivalent yield increased due to the addition of higher rate securities and the reduction of lower rate securities. As net payoffs in the loan portfolio are realized, the Company has been reinvesting those funds in securities. The average balance of the held-to-maturity securities portfolio continued to decline as securities matured or were called and were not replaced.

Compared with the first nine months of 2006, average interest-bearing balances with banks decreased to $29.73 million during the first nine months of 2007, as the yield increased 34 basis points to 4.83%. Interest-bearing balances with banks is made up largely of excess liquidity bearing overnight market rates and a small portfolio of certificates of deposit. The rate earned on those balances has risen along with increases in short-term benchmark interest rates. The balance has decreased as the Company has invested in higher yielding securities.

Compared with the same period in 2006, the average balances of interest-bearing demand and savings deposits decreased $42 thousand and $20.81 million, respectively, for the nine months ended September 30, 2007. The average rate paid on interest-bearing demand deposits increased by one basis point, while the average rate paid on savings increased 27 basis points. Average time deposits increased $21.83 million while the average rate paid increased 65 basis points from 3.79% in 2006 to 4.44% in 2007. Retail repurchase agreements, which consist of collateralized retail deposits and commercial treasury accounts, increased $30.54 million to $167.15 million, while the rate increased 36 basis points to 3.55%. The level of

average non-interest-bearing demand deposits decreased slightly to $231.19 million during the nine months ended September 30, 2007, compared with the corresponding period of the prior year.

The changes in average deposits between the two periods include the effect of the previously disclosed sale of the Company’s Drakes Branch, Virginia, and Rowlesburg, West Virginia, branch offices. The average deposit and repurchase agreement balances held by those two branches in the first nine months of 2006 totaled $21.38 million.

Compared with the same period in 2006, average federal funds purchased increased $2.72 million to $5.45 million during the first nine months of 2007, while the average rate increased 28 basis points. Wholesale repurchase agreements increased $49.63 million, as the Company added approximately $50.00 million of wholesale repurchase agreement funding in the latter part of 2006. The average balance of FHLB borrowings and other long-term debt increased by $45.99 million in 2007 to $247.43 million, while the rate paid on those borrowings increased four basis points. The Company borrowed an additional $100 million in FHLB advances early in the second quarter that have a weighted-average cost of 4.18%.

Table I

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

		Three Months Ended												Three Months Ended
		September 30, 2007												September 30, 2006
		Average								Yield/				Average								Yield/
		Balance				Interest (1)				Rate (1)				Balance				Interest (1)				Rate (1)
		(Dollars in Thousands)
ASSETS
Loans: (2)
Taxable		$	1,243,913			$	23,448				7.48	%		$	1,304,500			$	24,562				7.47	%
Tax-exempt			2,617				49				7.43	%			1,339				24				7.11	%
Total			1,246,530				23,497				7.48	%			1,305,839				24,586				7.47	%
Securities available for sale:
Taxable			480,767				6,766				5.58	%			269,061				3,490				5.15	%
Tax-exempt			185,432				2,949				6.31	%			154,221				2,482				6.39	%
Total			666,199				9,715				5.79	%			423,282				5,972				5.60	%
Securities held to maturity:
Taxable			377				6				6.31	%			385				6				6.18	%
Tax-exempt			12,214				248				8.06	%			20,013				406				8.05	%
Total			12,591				254				8.00	%			20,398				412				8.01	%
Interest-bearing deposits			33,538				404				4.78	%			24,758				289				4.63	%
Total Earning Assets			1,958,858				33,870				6.86	%			1,774,277				31,259				6.99	%
Other assets			212,178												195,726
TOTAL ASSETS		$	2,171,036											$	1,970,003
LIABILITIES
Interest-bearing deposits:
Demand deposits		$	145,324			$	119				0.32	%		$	144,034			$	120				0.33	%
Savings deposits			344,866				2,088				2.40	%			336,611				1,773				2.09	%
Time deposits			698,280				7,876				4.47	%			675,098				6,867				4.04	%
Total interest-bearing deposits			1,188,470				10,083				3.37	%			1,155,743				8,760				3.01	%
Borrowings:
Federal funds purchased			751				10				5.28	%			2,050				14				2.71	%
Retail repurchase agreements			173,630				1,516				3.46	%			148,676				1,250				3.34	%
Wholesale repurchase agreements			50,000				556				4.41	%			1,087				12				4.38	%
FHLB borrowings and other long-term debt			291,394				3,424				4.66	%			200,096				2,448				4.85	%
Total borrowings			515,775				5,506				4.24	%			351,909				3,724				4.20	%
Total interest-bearing liabilities			1,704,245				15,589				3.63	%			1,507,652				12,484				3.29	%
Non-interestbearing demand deposits			229,452												240,528
Other liabilities			19,290												18,901
Stockholders’ Equity			218,049												202,922
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,171,036											$	1,970,003
Net Interest Income, Tax Equivalent						$	18,281											$	18,775
Net Interest Rate Spread (3)											3.23	%											3.70	%
Net Interest Margin (4)											3.70	%											4.20	%

Table II

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

		Nine Months Ended												Nine Months Ended
		September 30, 2007												September 30, 2006
		Average								Yield/				Average								Yield/
		Balance				Interest(1)				Rate(1)				Balance				Interest(1)				Rate(1)
		(Dollars in Thousands)
ASSETS
Loans: (2)
Taxable		$	1,253,069			$	70,325				7.50	%		$	1,321,656			$	72,953				7.38	%
Tax-exempt			2,140				120				7.50	%			1,466				85				7.75	%
Total			1,255,209				70,445				7.50	%			1,323,122				73,038				7.38	%
Securities available for sale:
Taxable			430,792				17,765				5.51	%			259,540				9,581				4.94	%
Tax-exempt			178,980				8,502				6.35	%			151,417				7,208				6.36	%
Total			609,772				26,267				5.76	%			410,957				16,789				5.46	%
Securities held to maturity:
Taxable			379				18				6.35	%			388				17				5.86	%
Tax-exempt			15,792				947				8.02	%			21,289				1,283				8.06	%
Total			16,171				965				7.98	%			21,677				1,300				8.02	%
Interest-bearing deposits			29,726				1,073				4.83	%			31,637				1,063				4.49	%
Total Earning Assets			1,910,878				98,750				6.91	%			1,787,393				92,190				6.90	%
Other assets			203,831												184,092
TOTAL ASSETS		$	2,114,709											$	1,971,485
LIABILITIES
Interest-bearing liabilities:
Demand deposits		$	146,283			$	349				0.32	%		$	146,325			$	338				0.31	%
Savings deposits			329,854				5,537				2.24	%			350,662				5,166				1.97	%
Time deposits			700,006				23,245				4.44	%			678,178				19,229				3.79	%
Total interest-bearng deposits			1,176,143				29,131				3.31	%			1,175,165				24,733				2.81	%
Borrowings:
Federal funds purchased			5,447				229				5.62	%			2,731				109				5.34	%
Retail repurchase agreements			167,154				4,441				3.55	%			136,619				3,257				3.19	%
Wholesale repurchase agreements			50,000				1,651				4.41	%			366				12				4.38	%
FHLB borrowings and other long-term debt			247,428				8,773				4.74	%			201,437				7,083				4.70	%
Total borrowings			470,029				15,094				4.29	%			341,153				10,461				4.10	%
Total interest-bearing liabilities			1,646,172				44,225				3.59	%			1,516,318				35,194				3.10	%
Non-interestbearing demand deposits			231,187												237,517
Other liabilities			19,064												18,175
Stockholders’ Equity			218,286												199,475
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,114,709											$	1,971,485
Net Interest Income, Tax Equivalent						$	54,525											$	56,996
Net Interest Rate Spread (3)											3.32	%											3.80	%
Net Interest Margin (4)											3.81	%											4.26	%