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

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		(IRS Employer Identification No.)
of incorporation)
P.O. Box 989
Bluefield, Virginia		24605-0989
(Address of principal executive offices)		(Zip Code)

(276) 326-9000

 

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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

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; 17,895,599 shares outstanding as of May 6, 2011

 

 

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended March 31, 2011

INDEX

PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010			3
		Consolidated Statements of Income for the Three Months Periods Ended March 31, 2011
		and 2010 (Unaudited)			4
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and
		2010 (Unaudited)			5
		Consolidated Statements of Changes in Stockholders’ Equity for the Three Months
		Ended March 31, 2011 and 2010 (Unaudited)			6
		Notes to Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			41
Item 4.		Controls and Procedures			44
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			44
Item 1A.		Risk Factors			44
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3.		Defaults Upon Senior Securities			45
Item 4.		Reserved			45
Item 5.		Other Information			45
Item 6.		Exhibits			45
SIGNATURES					48
EXHIBIT INDEX					49

PART I. ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2011				2010
(Dollars in Thousands)		(Unaudited)
Assets
Cash and due from banks		$	52,684			$	28,816
Federal funds sold			121,974				81,526
Interest-bearing balances with banks			809				1,847
Total cash and cash equivalents			175,467				112,189
Securities available-for-sale			430,965				480,064
Securities held-to-maturity			4,524				4,637
Loans held for sale			2,614				4,694
Loans held for investment, net of unearned income			1,375,685				1,386,206
Less allowance for loan losses			26,482				26,482
Net loans held for investment			1,349,203				1,359,724
Premises and equipment, net			56,189				56,244
Other real estate owned			5,644				4,910
Interest receivable			7,288				7,675
Goodwill and other intangible assets			90,396				90,639
Other assets			118,690				123,462
Total assets		$	2,240,980			$	2,244,238
Liabilities
Deposits:
Noninterest-bearing		$	222,072			$	205,151
Interest-bearing			1,414,945				1,415,804
Total deposits			1,637,017				1,620,955
Interest, taxes and other liabilities			20,459				21,318
Securities sold under agreements to repurchase			139,472				140,894
FHLB borrowings and other indebtedness			166,186				191,193
Total liabilities			1,963,134				1,974,360
Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued or outstanding at March 31, 2011 or December 31, 2010			—				—
Common stock, $1 par value; 50,000,000 shares authorized; 18,082,822 shares issued at March 31, 2011, and 18,082,822 issued at December 31, 2010, and 187,923 and 216,487 shares in treasury, respectively			18,083				18,083
Additional paid-in capital			188,742				189,239
Retained earnings			85,450				81,486
Treasury stock, at cost			(5,851	)			(6,740	)
Accumulated other comprehensive loss			(8,578	)			(12,190	)
Total stockholders’ equity			277,846				269,878
Total liabilities and stockholders’ equity		$	2,240,980			$	2,244,238

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

		Three Months Ended
		March 31,
(Dollars In Thousands, Except Share and Per Share Data)		2011				2010
Interest Income
Interest and fees on loans held for investment		$	20,455			$	21,354
Interest on securities — taxable			2,533				3,786
Interest on securities — nontaxable			1,533				1,426
Interest on federal funds sold and deposits in banks			69				46
Total interest income			24,590				26,612
Interest Expense
Interest on deposits			3,880				5,502
Interest on borrowings			2,435				2,491
Total interest expense			6,315				7,993
Net interest income			18,275				18,619
Provision for loan losses			1,612				3,665
Net interest income after provision for loan losses			16,663				14,954
Noninterest Income
Wealth management income			894				885
Service charges on deposit accounts			3,031				2,992
Other service charges and fees			1,406				1,281
Insurance commissions			1,943				2,201
Total impairment losses on securities			(527	)			—
Portion of loss recognized in other comprehensive income			—				—
Net impairment losses recognized in earnings			(527	)			—
Net gains on sale of securities			1,836				250
Other operating income			916				969
Total noninterest income			9,499				8,578
Noninterest Expense
Salaries and employee benefits			9,129				7,969
Occupancy expense of bank premises			1,647				1,709
Furniture and equipment expense			915				904
Amortization of intangible assets			259				256
FDIC premiums and assessments			878				701
Prepayment penalties on FHLB advances			471				—
Other operating expense			4,764				4,533
Total noninterest expense			18,063				16,072
Income before income taxes			8,099				7,460
Income tax expense			2,348				2,182
Net income available to common shareholders		$	5,751			$	5,278
Basic earnings per common share		$	0.32			$	0.30
Diluted earnings per common share		$	0.32			$	0.30
Cash dividends per common share		$	0.10			$	0.10
Weighted average basic shares outstanding			17,867,953				17,765,556
Weighted average diluted shares outstanding			17,887,118				17,784,449

See Notes to Consolidated Financial Statements.

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

		Three Months Ended
		March 31,
(Dollars In Thousands)		2011				2010
Operating activities:
Net income		$	5,751			$	5,278
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,612				3,665
Depreciation and amortization of premises and equipment			1,010				1,021
Intangible amortization			259				256
Net investment amortization and accretion			599				1
Net gain on the sale of assets and securities			(1,843	)			(214	)
Mortgage loans originated for sale			(9,182	)			(7,583	)
Proceeds from sales of mortgage loans			11,517				17,886
Gain on sales of loans			(255	)			(221	)
Equity-based compensation expense			9				22
Deferred income tax expense			274				73
Decrease (increase) in interest receivable			387				(20	)
FHLB debt prepayment fees			471				—
Net impairment losses recognized in earnings			527				—
Other operating activities, net			1,912				1,925
Net cash provided by operating activities			13,048				22,089
Investing activities:
Proceeds from sales of securities available-for-sale			80,416				11,512
Proceeds from maturities and calls of securities available-for-sale			11,937				23,490
Proceeds from maturities and calls of securities held-to-maturity			115				301
Purchase of securities available-for-sale			(36,830	)			(65,168	)
Net (increase) decrease in loans held for investment			8,118				(580	)
Purchase of premises and equipment			(1,113	)			(853	)
Proceeds from sales of equipment			175				3
Net cash provided by (used in) investing activities			62,818				(31,295	)
Financing activities:
Net increase in demand and savings deposits			35,441				58,674
Net decrease in time deposits			(19,379	)			(49,023	)
Net decrease in FHLB and other borrowings			(25,007	)			(3,051	)
FHLB debt prepayment fees			(471	)			—
Net decrease in securities sold under agreement to repurchase			(1,422	)			(9,253	)
Proceeds from the exercise of stock options			32				—
Excess tax benefit from stock-based compensation			5				—
Common dividends paid			(1,787	)			(1,776	)
Net cash used in financing activities			(12,588	)			(4,429	)
Increase (decrease) in cash and cash equivalents			63,278				(13,635	)
Cash and cash equivalents at beginning of period			112,189				101,341
Cash and cash equivalents at end of period		$	175,467			$	87,706
Supplemental information — noncash items
Transfer of loans to other real estate		$	1,763			$	1,587

See Notes to Consolidated Financial Statements.

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

																						Accumulated
										Additional												Other
		Preferred				Common				Paid-in				Retained				Treasury				Comprehensive
		Stock				Stock				Capital				Earnings				Stock				Income (Loss)				Total
(Dollars in Thousands)
Balance January 1, 2010		$	—			$	18,083			$	190,967			$	66,760			$	(9,891	)		$	(13,652	)		$	252,267
Comprehensive income:
Net income			—				—				—				5,278				—				—				5,278
Other comprehensive income — see note 9			—				—				—				—				—				5,161				5,161
Comprehensive income			—				—				—				5,278				—				5,161				10,439
Common dividends declared and paid			—				—				—				(1,776	)			—				—				(1,776	)
Equity-based compensation expense			—				—				22				—				—				—				22
Retirement plan contribution — 17,627 shares issued			—				—				(339	)			—				549				—				210
Balance March 31, 2010		$	—			$	18,083			$	190,650			$	70,262			$	(9,342	)		$	(8,491	)		$	261,162
Balance January 1, 2011		$	—			$	18,083			$	189,239			$	81,486			$	(6,740	)		$	(12,190	)		$	269,878
Comprehensive income:
Net income			—				—				—				5,751				—				—				5,751
Other comprehensive income — see note 9			—				—				—				—				—				3,612				3,612
Comprehensive income			—				—				—				5,751				—				3,612				9,363
Common dividends declared and paid			—				—				—				(1,787	)			—				—				(1,787	)
Equity-based compensation expense			—				—				9				—				—				—				9
Retirement plan contribution — 25,595 shares issued			—				—				(446	)			—				797				—				351
Option exercises — 2,969 shares			—				—				(60	)			—				92				—				32
Balance March 31, 2011		$	—			$	18,083			$	188,742			$	85,450			$	(5,851	)		$	(8,578	)		$	277,846

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 (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, including normal recurring accruals, necessary for a fair presentation have been made. These results are not necessarily indicative of the results of consolidated operations that might be expected for the full calendar year.

The consolidated balance sheet as of December 31, 2010, has been derived from the audited consolidated financial statements included in the Company’s 2010 Annual Report on Form 10-K (the “2010 Form 10-K”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2010 Form 10-K.

A more complete and detailed description of First Community’s significant accounting policies is included within Note 1 of Item 8, “Financial Statements and Supplementary Data” in the Company’s 2010 Form 10-K. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.

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

Earnings Per Share

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

		For the Three Months
		ended March 31,
(In Thousands, Except Share and Per Share Data)		2011				2010
Net income available to common shareholders		$	5,751			$	5,278
Weighted average shares outstanding			17,867,953				17,765,556
Diluted shares for stock options			10,266				4,336
Contingently issuable shares			8,899				14,557
Weighted average dilutive shares outstanding			17,887,118				17,784,449
Basic earnings per share		$	0.32			$	0.30
Diluted earnings per share		$	0.32			$	0.30

For the three-month period ended March 31, 2011, options and warrants to purchase 483,558 shares of common stock were outstanding but were not included in the computation of diluted earnings per common share because they would have an anti-dilutive effect. Likewise, options and warrants to purchase 576,962 shares of common stock were excluded from the three-month period ended March 31, 2010, computation of diluted earnings per common share because their effect would be anti-dilutive.

Recent Accounting Pronouncements

Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 310, Receivables. New authoritative accounting guidance under ASC Topic 310 amends prior guidance to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables by providing additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 310 during the fourth quarter of 2010. Other than the additional disclosures, the adoption of the new guidance had no significant impact on the Company’s financial statements.

In April 2011, FASB issued Accounting Standard Update (“ASU”) 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and is applied retrospectively to restructurings at the beginning of the year of adoption. The guidance on measuring the impairment of a receivable restructured in a troubled restructuring is effective on a prospective basis. The Company is currently assessing the impact on the financial statements.

Note 2. Mergers, Acquisitions, and Branching Activity

In July 2010, GreenPoint Insurance Group, Inc. (“GreenPoint”), the Company’s wholly-owned insurance subsidiary, acquired Murphy Insurance Agency, based in Princeton, West Virginia, issuing cash consideration of approximately $190 thousand. Acquisition terms call for additional cash consideration if certain operating performance targets are met. The Company has recorded the fair value of the expected additional cash consideration as $477 thousand in long-term debt. If those targets are not met, the value of the consideration ultimately paid will decrease the liability and will be recognized as a gain in the period in which the targets are not met. Goodwill and other intangibles associated with the acquisition total approximately $667 thousand.

Note 3. Investment Securities

As of March 31, 2011, and December 31, 2010, the amortized cost and estimated fair value of available-for-sale securities were as follows:

		March 31, 2011
		Amortized				Unrealized				Unrealized				Fair				OTTI in
(In Thousands)		Cost				Gains				Losses				Value				AOCI*
U.S. Government agency securities		$	10,000			$	—			$	(270	)		$	9,730			$	—
States and political subdivisions			146,751				2,627				(2,286	)			147,092				—
Trust preferred securities:
Single issue			55,607				—				(10,840	)			44,767				—
Pooled			23				537				—				560				—
Total trust preferred securities			55,630				537				(10,840	)			45,327				—
Mortgage-backed securities:
Agency			211,848				5,242				(1,111	)			215,979				—
Non-Agency Alt-A residential			18,487				—				(6,267	)			12,220				(6,267	)
Total mortgage-backed securities			230,335				5,242				(7,378	)			228,199				(6,267	)
Equity securities			441				217				(41	)			617				—
Total		$	443,157			$	8,623			$	(20,815	)		$	430,965			$	(6,267	)
		December 31, 2010
		Amortized				Unrealized				Unrealized				Fair				OTTI in
(In Thousands)		Cost				Gains				Losses				Value				AOCI*
U.S. Government agency securities		$	10,000			$	—			$	(168	)		$	9,832			$	—
States and political subdivisions			178,149				2,649				(4,660	)			176,138				—
Trust preferred securities:
Single issue			55,594				—				(14,350	)			41,244				—
Pooled			23				241				—				264				—
Total trust preferred securities			55,617				241				(14,350	)			41,508				—
Corporate FDIC insured			25,282				378				—				25,660				—
Mortgage-backed securities:
Agency			209,281				7,039				(1,307	)			215,013				—
Non-Agency Alt-A residential			19,181				—				(7,904	)			11,277				(7,904	)
Total mortgage-backed securities			228,462				7,039				(9,211	)			226,290				(7,904	)
Equity securities			495				206				(65	)			636				—
Total		$	498,005			$	10,513			$	(28,454	)		$	480,064			$	(7,904	)

As of March 31, 2011, and December 31, 2010, the amortized cost and estimated fair value of held-to-maturity securities were as follows:

		March 31, 2011
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
States and political subdivisions		$	4,524			$	80			$	—			$	4,604
Total		$	4,524			$	80			$	—			$	4,604
		December 31, 2010
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
States and political subdivisions		$	4,637			$	67			$	—			$	4,704
Total		$	4,637			$	67			$	—			$	4,704

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

		Amortized
(In Thousands)		Cost				Fair Value
Due within one year		$	116			$	117
Due after one year but within five years			15,305				15,868
Due after five years but within ten years			34,035				35,455
Due after ten years			162,925				150,709
			212,381				202,149
Mortgage-backed securities			230,335				228,199
Equity securities			441				617
Total		$	443,157			$	430,965

The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at March 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.

		Amortized
(In Thousands)		Cost				Fair Value
Due within one year		$	1,426			$	1,451
Due after one year but within five years			2,312				2,350
Due after five years but within ten years			786				803
Due after ten years			—				—
Total		$	4,524			$	4,604

The carrying value of securities pledged to secure public deposits as required by law and for other purposes was $297.65 million and $302.67 million at March 31, 2011, and December 31, 2010, respectively.

During the three months ended March 31, 2011, gross gains on the sale of securities were $2.36 million while gross losses were $520 thousand. During the three months ended March 31, 2010, gross gains on the sale of securities were $258 thousand while gross losses were $8 thousand.

The following tables reflect those investments, both available-for-sale and held-to-maturity, in a continuous unrealized loss position for less than 12 months and for 12 months or longer at March 31, 2011, and December 31, 2010.

		March 31, 2011
		Less than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In Thousands)		Value				Losses				Value				Losses				Value				Losses
U.S. Government agency securities		$	9,730			$	(270	)		$	—			$	—			$	9,730			$	(270	)
States and political subdivisions			52,828				(2,286	)			—				—				52,828				(2,286	)
Single issue trust preferred securities			—				—				44,767				(10,840	)			44,767				(10,840	)
Mortgage-backed securities:
Agency			102,306				(1,104	)			2,580				(7	)			104,886				(1,111	)
Alt-A residential			—				—				12,220				(6,267	)			12,220				(6,267	)
Total mortgage-backed securities			102,306				(1,104	)			14,800				(6,274	)			117,106				(7,378	)
Equity securities			123				(36	)			122				(5	)			245				(41	)
Total		$	164,987			$	(3,696	)		$	59,689			$	(17,119	)		$	224,676			$	(20,815	)
		December 31, 2010
		Less than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In Thousands)		Value				Losses				Value				Losses				Value				Losses
U.S. Government agency securities		$	9,832			$	(168	)		$	—			$	—			$	9,832			$	(168	)
States and political subdivisions			80,420				(4,660	)			—				—				80,420				(4,660	)
Single issue trust preferred securities			—				—				41,244				(14,350	)			41,244				(14,350	)
Mortgage-backed securities:
Agency			71,613				(1,307	)			18				—				71,631				(1,307	)
Alt-A residential			—				—				11,277				(7,904	)			11,277				(7,904	)
Total mortgage-backed securities			71,613				(1,307	)			11,295				(7,904	)			82,908				(9,211	)
Equity securities			155				(55	)			93				(10	)			248				(65	)
Total		$	162,020			$	(6,190	)		$	52,632			$	(22,264	)		$	214,652			$	(28,454	)

At March 31, 2011, the combined depreciation in value of the 156 individual securities in an unrealized loss position was approximately 4.83% of the combined reported value of the aggregate securities portfolio. At December 31, 2010, the combined depreciation in value of the 214 individual securities in an unrealized loss position was approximately 5.93% of the combined reported value of the aggregate securities portfolio.

The Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. For debt securities, the Company has determined that, except for pooled trust preferred securities, it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that it will have to sell impaired securities before recovery of the impairment occurs. The Company’s assertion is based upon its investment strategy for the particular type of security and the Company’s 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, single issue trust preferred securities, and FDIC-backed securities. If it is determined that there is evidence that the impairment will not be recovered, the Company performs a present value calculation to determine the amount of credit related impairment and records any credit related OTTI through earnings and the non-credit related OTTI through other comprehensive income (“OCI”). During the three-month period ended March 31, 2011, the Company incurred no OTTI charges related to non-beneficial interest debt securities. The temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, and other current economic factors.

For beneficial interest debt securities, the Company reviews cash flow analyses on each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. Beneficial interest debt securities consist of mortgage-backed securities and pooled trust preferred securities. An adverse change in cash flows expected to be collected has occurred if the present value of cash flows previously projected is greater than the present value of cash flows projected at the current reporting date and less than the current book value. If an adverse change in cash flows is deemed to have occurred, then an OTTI has occurred. The Company then compares the present value of cash flows using the current yield for the current reporting period to the reference amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI is then recorded through earnings and the non-credit related OTTI is accounted for in OCI.

During the three-month period ended March 31, 2011, the Company incurred credit-related OTTI charges related to beneficial interest debt securities of $527 thousand. These charges were related to a non-Agency mortgage-backed security. During the three-month period ended March 31, 2010, the Company realized no credit-related OTTI charges related to beneficial interest debt securities.

For the non-Agency Alt-A residential MBS, the Company models cash flows using the following assumptions: voluntary constant prepayment speed of 5, a customized constant default rate scenario that assumes approximately 25% of the remaining underlying mortgages will default, and a loss severity of 60.

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

		For the Three Months
(In Thousands)		Ended March 31, 2011
Estimated credit losses, beginning balance (1)		$	4,251
Additions for credit losses on securities not previously OTTI			—
Additions for credit losses on securities previously OTTI			527
Reduction for increases in cash flows			—
Reduction for securities management no longer intends to hold to recovery			—
Reduction for realized losses			—
Estimated credit losses, ending balance		$	4,778

For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During the three-month period ended March 31, 2011, the Company did not recognize any OTTI charges on equity securities. For the three-month period ended March 31, 2010, the Company did not recognize any OTTI charges on its equity securities.

As a condition to membership in the Federal Home Loan Bank (“FHLB”) system, the Company is required to subscribe to a minimum level of stock in the FHLB of Atlanta (“FHLBA”). The Company feels this ownership position provides access to relatively inexpensive wholesale and overnight funding. The Company accounts for FHLBA and Federal Reserve Bank stock as a long-term investment in other assets. At both March 31, 2011, and December 31, 2010, the Company owned approximately $12.24 million in FHLBA stock, which is classified as other assets. The Company’s policy is to review for impairment of such assets at the end of each reporting period. During the three months ended March 31, 2011, FHLBA paid a quarterly dividend. At March 31, 2011, FHLBA was in compliance with all of its regulatory capital requirements. Based on its review, the Company believes that as of March 31, 2011, its FHLBA stock was not impaired.

Note 4. Loans

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

		March 31, 2011								December 31, 2010
(Dollars in Thousands)		Amount				Percent				Amount				Percent
Commercial loans
Construction — commercial		$	30,758				2.24	%		$	42,694				3.08	%
Land development			5,781				0.42	%			16,650				1.20	%
Other land loans			23,959				1.74	%			24,468				1.77	%
Commercial and industrial			91,964				6.68	%			94,123				6.79	%
Multi-family residential			75,269				5.47	%			67,824				4.89	%
Non-farm, non-residential			345,265				25.10	%			351,904				25.39	%
Agricultural			1,392				0.10	%			1,342				0.10	%
Farmland			47,228				3.43	%			36,954				2.67	%
Total commercial loans			621,616				45.18	%			635,959				45.89	%
Consumer real estate loans
Home equity lines			111,802				8.13	%			111,620				8.05	%
Single family residential mortgage			545,316				39.64	%			549,157				39.61	%
Owner-occupied construction			22,506				1.64	%			18,349				1.32	%
Total consumer real estate loans			679,624				49.41	%			679,126				48.98	%
Consumer and other loans
Consumer loans			62,029				4.51	%			63,475				4.58	%
Other			12,416				0.90	%			7,646				0.55	%
Total consumer and other loans			74,445				5.41	%			71,121				5.13	%
Total loans		$	1,375,685				100.00	%		$	1,386,206				100.00	%
Loans held for sale		$	2,614							$	4,694

Acquired, Impaired Loans

Loans acquired in a business combination are recorded at estimated fair value on their purchase date and prohibit the carryover of the related allowance for loan losses, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. 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. 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. Purchased performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to the acquisition.

The following table presents the required detail regarding acquired, impaired loans at December 31, 2010, and March 31, 2011. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference includes estimated future credit losses expected to be incurred over the life of the loan. The Company has not noted any further deterioration in the acquired impaired loans.

		Acquired, Impaired Loans
(In thousands)		TriStone				Other				Total
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			(35	)			—				(35	)
Accretion			7				—				7
Other			98				—				98
Charge-offs			—				—				—
Balance, March 31, 2011		$	2,884			$	407			$	3,291

The remaining balance of the accretable difference at March 31, 2011, and December 31, 2010, was $937 thousand and $944 thousand, respectively

Off-Balance Sheet Financial Instruments

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

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

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

Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including availability of lines of credit) of $201.48 million and standby letters of credit and financial guarantees written of $4.52 million at March 31, 2011. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $7.63 million at March 31, 2011.

Note 5. Allowance for Loan Losses and Credit Quality

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. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates by risk grade are adjusted by environmental factors to estimate the amount of reserve needed by segment. The Company believes this enhancement will result in increased granularity within the allowance for loan losses and will be more reflective of improving and/or declining trends within the commercial loan portfolio.

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

The following tables detail the Company’s allowance for loan loss activity, by portfolio segment, for the three-month periods ended March 31, 2011 and 2010.

		For the Three Months Ended March 31, 2011
						Consumer Real				Consumer and
(In Thousands)		Commercial				Estate				Other				Total
Allowance for credit losses:
Beginning balance		$	12,300			$	12,641			$	1,541			$	26,482
Provision for loan losses			361				1,213				38				1,612
Loans charged off			(440	)			(1,372	)			(215	)			(2,027	)
Recoveries credited to allowance			79				159				177				415
Net charge-offs			(361	)			(1,213	)			(38	)			(1,612	)
Ending balance		$	12,300			$	12,641			$	1,541			$	26,482

		For the Three Months Ended March 31, 2010
						Consumer Real				Consumer and
(In Thousands)		Commercial				Estate				Other				Total
Allowance for credit losses:
Beginning balance		$	13,802			$	8,457			$	2,018			$	24,277
Provision for loan losses			2,093				1,278				294				3,665
Loans charged off			(2,079	)			(1,330	)			(323	)			(3,732	)
Recoveries credited to allowance			227				12				59				298
Net charge-offs			(1,852	)			(1,318	)			(264	)			(3,434	)
Ending balance		$	14,043			$	8,417			$	2,048			$	24,508

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 March 31, 2011, and December 31, 2010. The table does not include acquired, impaired loans.

		March 31, 2011
		Recorded				Recorded
		Investment				Investment				Total								Unpaid				Average				Interest
		With				With No				Recorded				Related				Principal				Recorded				Income
(Amounts in Thousands)		Allowance				Allowance				Investment				Allowance				Balance				Investment				Recognized
Construction — commercial		$	—			$	469			$	469			$	—			$	483			$	549			$	—
Land development			—				—				—				—				—				—				—
Other land loans			113				130				243				5				242				435				1
Commercial and industrial			622				990				1,612				340				9,403				6,608				—
Multi-family residential			477				1,933				2,410				200				2,452				2,505				13
Non-farm, non-residential			1,564				3,388				4,952				193				5,093				5,403				3
Home equity lines			94				1,323				1,417				34				1,447				1,507				6
Single family residential mortgage			7,844				7,795				15,639				1,298				15,861				16,763				97
Owner-occupied construction			—				126				126				—				128				127				1
Consumer loans			—				70				70				—				72				78				—
		$	10,714			$	16,224			$	26,938			$	2,070			$	35,181			$	33,975			$	121

		December 31. 2010
		Recorded				Recorded
		Investment				Investment				Total								Unpaid				Average				Interest
		With				With No				Recorded				Related				Principal				Recorded				Income
(Amounts in Thousands)		Allowance				Allowance				Investment				Allowance				Balance				Investment				Recognized
Construction — commercial		$	—			$	285			$	285			$	—			$	732			$	730			$	3
Land development			—				50				50				5				144				143				2
Other land loans			113				323				436				—				855				266				20
Commercial and industrial			—				3,518				3,518				—				5,384				6,237				10
Multi-family residential			723				2,526				3,249				257				3,432				3,448				126
Non-farm, non-residential			1,070				3,824				4,894				158				6,125				5,809				79
Home equity lines			95				1,302				1,397				34				1,693				1,703				40
Single family residential mortgage			8,801				7,992				16,793				1,870				18,430				18,006				640
Owner-occupied construction			—				6				6				—				6				6				—
Consumer loans			—				98				98				—				102				111				5
		$	10,802			$	19,924			$	30,726			$	2,324			$	36,903			$	36,459			$	925