FIRST CENTURY BANKSHARES INC - FORM 10-Q

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EX-31.2 - SECTION 302 CFO CERTIFICATION - FIRST CENTURY BANKSHARES INC	dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - FIRST CENTURY BANKSHARES INC	dex311.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - FIRST CENTURY BANKSHARES INC	dex321.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - FIRST CENTURY BANKSHARES INC	dex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C., 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended: March 31, 2011

¨	Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number: 0-11671

FIRST CENTURY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

West Virginia

55-0628089

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)


500 Federal Street, Bluefield, WV		24701
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (304) 325-8181

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. Yes x 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). Yes ¨ 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

The number of shares outstanding of the registrant’s $1.25 par value common stock,

as of May 11, 2011, was 1,903,120 shares.

FIRST CENTURY BANKSHARES, INC.

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of March 31, 2011 (Unaudited) and December 31, 2010		3

	Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2011 and 2010		4

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2011 and 2010		5

	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2011 and 2010		6

	Notes to Consolidated Financial Statements		7 - 24

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25 - 28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		29

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.	(Removed and Reserved)		30

Item 5.	Other Information		30

Item 6.	Exhibits		31

	Signatures and Certifications		31 - 35

FIRST CENTURY BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share and per share data)


	March 31, 2011			December 31, 2010
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	10,334		$	9,225
Interest-bearing balances with banks		19,019			9,644
Federal funds sold		10,000			10,000
Securities available for sale		74,416			73,442
Securities held to maturity: (estimated fair value of $24,194 at March 31, 2011 and $24,262 at December 31, 2010)		24,069			24,196
Federal Home Loan Bank and Federal Reserve Bank Stock		1,513			1,572
Loans		262,234			260,257
Less allowance for loan losses		5,875			5,875

Net loans		256,359			254,382
Premises and equipment		12,905			13,070
Real estate owned other than bank premises		1,515			1,750
Other assets		5,618			5,525
Goodwill		5,183			5,183

TOTAL ASSETS	$	420,931		$	407,989


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	54,216		$	47,056
Interest-bearing		306,290			305,285

Total deposits		360,506			352,341
Short-term borrowings		16,148			11,457
Other liabilities		3,986			4,220

TOTAL LIABILITIES		380,640			368,018


STOCKHOLDERS’ EQUITY
Common stock - par value per share $1.25
Shares authorized: 10,000,000
Shares issued: 2,000,000
Shares outstanding: 1,903,120 at March 31, 2011, and at December 31, 2010		2,500			2,500
Paid-in capital		757			757
Retained earnings		41,195			40,726
Treasury stock, at cost; 96,880 shares at March 31, 2011, and at December 31, 2010		(2,280	)		(2,280	)
Accumulated other comprehensive (loss) income, net of tax		(1,881	)		(1,732	)

TOTAL STOCKHOLDERS’ EQUITY		40,291			39,971

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	420,931		$	407,989

The accompanying notes are an integral part of the unaudited consolidated financial statements.

FIRST CENTURY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except share and per share data)


	Three Months Ended
	March 31,
	2011		2010
INTEREST INCOME
Interest and fees on loans	$	3,289	$	3,681
Interest on balances with banks		7		4
Interest and dividends from securities available for sale:
Taxable		478		564
Interest and dividends from securities held to maturity:
Taxable		29		7
Tax-exempt		193		171
Interest on federal funds sold		5		4

TOTAL INTEREST INCOME		4,001		4,431

INTEREST EXPENSE
Interest on time deposits of $100,000 or more		162		234
Interest on other deposits		435		618
Interest on federal funds purchased and securities sold under agreements to repurchase		65		68

TOTAL INTEREST EXPENSE		662		920

Net interest income		3,339		3,511
Provision for loan losses		79		492

Net interest income after provision for loan losses		3,260		3,019

NONINTEREST INCOME
Income from fiduciary activities		529		343
Other operating income		966		855
Securities gains		—		47

TOTAL NONINTEREST INCOME		1,495		1,245

NONINTEREST EXPENSE
Salaries, wages, and other employee benefits		1,588		1,681
Furniture and equipment expense		614		618
Other noninterest expense		1,440		1,317

TOTAL NONINTEREST EXPENSE		3,642		3,616


Income before income taxes		1,113		648
Provision for income taxes		359		227

NET INCOME	$	754	$	421


NET INCOME PER COMMON SHARE:
Basic and diluted	$	0.40	$	0.22
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted		1,903,120		1,903,120

The accompanying notes are an integral part of the unaudited consolidated financial statements.

FIRST CENTURY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except share and per share data)


	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income(loss)			Treasury Stock			Total

Balance at December 31, 2009	$	2,500	$	757	$	39,727		$	(1,248	)	$	(2,280	)	$	39,456
Comprehensive income:
Net income		—		—		421			—			—			421
Change in net unrealized gain(loss) on securities available for sale, net of reclassification adjustment and tax effect		—		—		—			59			—			59

Total comprehensive income		—		—		421			59			—			480

Cash dividends paid - $0.15 per share		—		—		(285	)		—			—			(285	)


Balance at March 31, 2010	$	2,500	$	757	$	39,863		$	(1,189	)	$	(2,280	)	$	39,651


Balance at December 31, 2010	$	2,500	$	757	$	40,726		$	(1,732	)	$	(2,280	)	$	39,971
Comprehensive income:
Net income		—		—		754			—			—			754
Change in net unrealized gain(loss) on securities available for sale, net of reclassification adjustment and tax effect		—		—		—			(149	)		—			(149	)

Total comprehensive income		—		—		754			(149	)		—			605

Cash dividends paid - $0.15 per share		—		—		(285	)		—			—			(285	)


Balance at March 31, 2011	$	2,500	$	757	$	41,195		$	(1,881	)	$	(2,280	)	$	40,291

The accompanying notes are an integral part of the unaudited consolidated financial statements.

FIRST CENTURY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	Three Months Ended
	March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	754		$	421
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		79			492
Depreciation and amortization		213			215
Securities gains		—			(47	)
Gain on disposal of other real estate owned		(28	)		—
Amortization (accretion) of securities premiums (discounts), net		78			41
Decrease in interest receivable and other assets		218			715
Decrease in interest payable and other liabilities		(234	)		(348	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		1,080			1,489

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity		(380	)		(942	)
Purchases of securities available for sale		(13,967	)		(22,018	)
Redemptions of Federal Home Loan Bank stock		59			—
Proceeds from maturities and calls of securities held to maturity		490			855
Proceeds from maturities and calls of securities available for sale		12,695			13,582
Proceeds from sales of securities available for sale		—			792
Net (increase) decrease in loans		(2,086	)		3,625
Proceeds from disposal of other real estate owned		70			—
Acquisition of fixed assets		(48	)		—

NET CASH USED IN INVESTING ACTIVITIES		(3,167	)		(4,106	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits		10,579			8,889
Net decrease in time deposits		(2,414	)		(712	)
Net increase in short-term borrowings		4,691			3,618
Cash dividends paid		(285	)		(285	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		12,571			11,510

Net increase (decrease) in cash and cash equivalents		10,484			8,893
Cash and cash equivalents at beginning of period		28,869			17,342

Cash and cash equivalents at end of period	$	39,353		$	26,235


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	651		$	886
Income taxes		217			—

The accompanying notes are an integral part of the unaudited consolidated financial statements.

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Rule S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments were of a normal recurring nature. Operating results are for the three-month period ended March 31, 2011, and are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information refer to the financial statements and footnotes thereto included as Exhibit 13 to the Corporation’s annual report on Form 10-K for the year ended December 31, 2010.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE B – OTHER COMPREHENSIVE INCOME

Comprehensive income is defined as net income plus transactions and other occurrences that are the result of nonowner changes in equity. Other comprehensive income is defined as comprehensive income exclusive of net income. Unrealized gains and losses on available for sale investment securities and net accrued pension benefit liability are the components of the Corporation’s other accumulated comprehensive income. Information concerning the Corporation’s other comprehensive income for the three-month periods ended March 31, 2011 and 2010 is as follows:


	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Unrealized holding gains (losses) arising during the period	$	(237	)	$	142
Reclassification adjustment for (gains) losses included in net income		—			(47	)

Other comprehensive income (loss) before tax		(237	)		95
Income tax (expense) benefit related to other comprehensive income (loss)		88			(36	)

Other comprehensive income (loss)	$	(149	)	$	59

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE C – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at March 31, 2011 and December 31, 2010 consisted of the following:


	For the Three Months Ended
	March 31, 2011		December 31, 2010
	(Dollars in Thousands)
Commercial	$	28,044	$	29,102
Commercial - real estate
Construction		8,761		8,462
Owner occupied		54,546		52,289
Non-owner occupied		51,727		51,378

Total commercial loans		143,078		141,231

Consumer		17,965		19,045
Residential real estate		94,197		93,044
Residential construction		6,994		6,937

Total consumer loans		119,156		119,026

TOTAL LOANS	$	262,234	$	260,257

Loans are categorized into one of nine loan grades with grades 1 through 5 representing various levels of acceptable loans, or “Pass” grades, and grades 6 through 9 representing various levels of credit deterioration.

6 – Special Mention (OAEM)

A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Loans graded a 6 may be experiencing adverse operating trends such as declining revenues or margins or an ill-proportioned balance sheet caused by increasing accounts receivable and/or inventory balances not supported by an increase in sales revenue. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material structural weakness.

7 – Substandard

Substandard loans are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans are normally graded 7 when they have unsatisfactory characteristics causing more than acceptable levels of risk. A loan graded 7 normally has one or more well-defined weakness that could jeopardize repayment of the debt. The following are examples of situations that might cause a loan to be graded 7:

•

Cash flow deficiencies jeopardize future loan payments.

•

Sale of non-collateral assets has become a primary source of loan repayment.

•

The relationship has deteriorated to the point that sale of collateral is now the bank’s primary source of repayment.

•

The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

8 – Doubtful

Loans are graded 8 if they contain weaknesses so serious that collection or liquidation in full is questionable. An 8 classification will result in the loan being placed in non-accrual.

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE C – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

9 – Loss

A 9 rating is assigned to loans considered uncollectible and of such little value that their continuance as an active bank asset is not warranted. This rating does not mean that the asset has no recovery or salvage value, but rather that the asset should be charged off now, even though partial or full recovery may be possible in the future.

The following table presents loans by credit quality indicator at March 31, 2011.


	Pass		Special Mention		Substandard		Total
	(Dollars in Thousands)
Commercial	$	22,978	$	1,006	$	4,060	$	28,044
Commercial real estate
Construction		3,799		14		4,948		8,761
Owner occupied		41,882		4,179		8,485		54,546
Non-owner occupied		46,557		3,145		2,025		51,727
Consumer		17,556		148		261		17,965
Residential real estate		87,351		1,367		5,479		94,197
Residential construction		6,423		—		571		6,994

TOTAL	$	226,546	$	9,859	$	25,829	$	262,234

The following table presents loans by credit quality indicator at December 31, 2010.


	Pass		Special Mention		Substandard		Total
	(Dollars in Thousands)
Commercial	$	24,069	$	918	$	4,115	$	29,102
Commercial real estate
Construction		3,514		—		4,948		8,462
Owner occupied		40,104		4,080		8,105		52,289
Non-owner occupied		46,238		3,152		1,988		51,378
Consumer		18,614		148		283		19,045
Residential real estate		86,446		1,497		5,101		93,044
Residential construction		6,365		—		572		6,937

TOTAL	$	225,350	$	9,795	$	25,112	$	260,257

Consumer loans consist of performing loans of $17,834,000 and nonperforming loans of $131,000 at March 31, 2011, and performing loans of $18,896,000 and nonperforming loans of $149,000 at December 31, 2010.

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE C – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents loans by past due status at March 31, 2011.


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing
	(Dollars in Thousands)
Commercial	$	281	$	99	$	1,382	$	1,762	$	26,282	$	28,044	$	101
Commercial real estate
Construction		108		—		4,962		5,070		3,692		8,762		99
Owner occupied		446		36		2,486		2,968		51,577		54,545		—
Non-owner occupied		123		36		1,866		2,025		49,702		51,727		5
Consumer		201		81		91		373		17,592		17,965		32
Residential real estate		1,616		1,340		1,888		4,844		89,353		94,197		535
Residential construction		—		—		538		538		6,456		6,994		—

TOTAL	$	2,775	$	1,592	$	13,213	$	17,580	$	244,654	$	262,234	$	772

The following table presents loans by past due status at December 31, 2010.


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing
	(Dollars in Thousands)
Commercial	$	338	$	919	$	543	$	1,800	$	27,302	$	29,102	$	—
Commercial real estate
Construction		4,948		14		—		4,962		3,500		8,462		65
Owner occupied		312		2,374		150		2,836		49,453		52,289		—
Non-owner occupied		690		968		930		2,588		48,790		51,378		5
Consumer		389		83		91		563		18,482		19,045		44
Residential real estate		2,428		625		1,183		4,236		88,808		93,044		525
Residential construction		—		21		65		86		6,851		6,937		—

TOTAL	$	9,105	$	5,004	$	2,962	$	17,071	$	243,186	$	260,257	$	639

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE C – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents impaired loans at March 31, 2011.


	Carrying Amount		Unpaid Principal Balance		Associated Allowance		Average Carrying Amount		Interest Income Recognized
	(Dollars in Thousands)
With no related allowance recorded:
Commercial	$	588	$	838	$	—	$	838	$	—
Commercial Real Estate
Construction		4,948		4,948		—		4,948		—
Owner occupied		2,850		2,850		—		2,855		(5	)
Nonowner occupied		1,311		1,311		—		1,311		—

Total Commercial	$	9,697	$	9,947	$	—	$	9,952	$	(5	)

Consumer	$	10	$	10	$	—	$	10	$	—
Residential real estate		409		409		—		410		—
Residential construction		452		452		—		452		—

Total Consumer	$	871	$	871	$	—	$	872	$	—

With an allowance recorded:
Commercial	$	2,666	$	2,890	$	1,217	$	3,029	$	20
Commercial Real Estate
Owner occupied		1,737		1,737		739		1,755		—
Nonowner occupied		550		550		347		550		—

Total Commercial	$	4,953	$	5,177	$	2,303	$	5,334	$	20

Consumer	$	61	$	61	$	53 3	$	63	$	—
Residential real estate		1,418		1,418		232		1,912		—

Total Consumer	$	1,479	$	1,479	$	285	$	1,975	$	—

Total:
Commercial	$	3,254	$	3,728	$	1,217	$	3,867	$	20
Commercial Real Estate
Construction		4,948		4,948		—		4,948		—
Owner occupied		4,587		4,587		739		4,610		(5	)
Nonowner occupied		1,861		1,861		347		1,861		—

Total Commercial	$	14,650	$	15,124	$	2,303	$	15,286	$	15

Consumer	$	71	$	71	$	53	$	73	$	—
Residential real estate		1,827		1,827		232		2,322		—
Residential construction		452		452		—		452		—

Total Consumer	$	2,350	$	2,350	$	285	$	2,847	$	—

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE C – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents impaired loans at December 31, 2010.


	Carrying Amount		Unpaid Principal Balance		Associated Allowance		Average Carrying Amount		Interest Income Recognized
	(Dollars in Thousands)
With no related allowance recorded:
Commercial	$	588	$	838	$	—	$	1,012	$	—
Commercial Real Estate
Construction		4,948		4,948		—		4,883		140
Owner occupied		2,356		2,356		—		2,392		—
Nonowner occupied		1,423		1,423		—		1,428		—

Total Commercial	$	9,315	$	9,565	$	—	$	9,715	$	140

Consumer	$	10	$	10	$	—	$	178	$	—
Residential real estate		411		411		—		434		—
Residential construction		452		452		—		452		—

Total Consumer	$	873	$	873	$	—	$	1,064	$	—

With an allowance recorded:
Commercial	$	2,615	$	2,839	$	1,178	$	4,260	$	130
Commercial Real Estate
Owner occupied		1,710		1,710		734		1,717		62
Nonowner occupied		550		550		330		561		—

Total Commercial	$	4,875	$	5,099	$	2,242	$	6,538	$	192

Consumer	$	62	$	62	$	53	$	76	$	1
Residential real estate		1,639		1,639		304		2,170		55

Total Consumer	$	1,701	$	1,701	$	357	$	2,246	$	56

Total:
Commercial	$	3,203	$	3,677	$	1,178	$	5,272	$	130
Commercial Real Estate
Construction		4,948		4,948		—		4,883		140
Owner occupied		4,066		4,066		734		4,109		62
Nonowner occupied		1,973		1,973		330		1,989		—

Total Commercial	$	14,190	$	14,664	$	2,242	$	16,253	$	332

Consumer	$	72	$	72	$	53	$	254	$	1
Residential real estate		2,050		2,050		304		2,604		55
Residential construction		452		452		—		452		—

Total Consumer	$	2,574	$	2,574	$	357	$	3,310	$	56

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE C – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents nonaccrual loans, accruing loans past due 90 days or more, and restructured loans at March 31, 2011 and December 31, 2010.


	March 31, 2011		December 31, 2010
	(Dollars in Thousands)

Nonaccrual loans	$	17,000	$	16,764
Accruing loans past due 90 days or more		772		639
Restructured loans (accruing)		513		904

The following table presents the composition of nonaccrual loans at March 31, 2011 and December 31, 2010.


	March 31, 2011		December 31, 2010
	(Dollars in Thousands)
Commercial	$	3,254	$	3,203
Commercial - Real Estate
Construction		4,948		4,948
Owner Occupied		4,587		4,066
Non-Owner Occupied		1,861		1,973

Total Commercial Loans		14,650		14,190
Consumer		71		72
Residential Real Estate		1,827		2,050
Residential Construction		452		452

Total Consumer Loans		2,350		2,574

TOTAL NONACCRUAL LOANS	$	17,000	$	16,764

In addition to the review of credit quality through the credit review process, we construct a comprehensive allowance analysis for the loan portfolio at least quarterly. The procedures that we use entail preparation of a loan “watch” list and assigning each loan a classification. Commercial loans with an aggregate loan balance in excess of $250,000 that meet one or more of the following conditions require the completion of a Problem Loan Report and an impairment analysis by the responsible lender. The conditions are as follows:

a.	Commercial loans graded OAEM, Substandard, Doubtful or Loss

b.	Commercial loan in non-accrual status

c.	Commercial loans deemed impaired

d.	Commercial loans past due greater than 90 days

e.	Trouble debt restructures

f.	Other mitigating circumstances i.e. bankruptcy, death of borrower/guarantor, etc.

The loans specified on the loan “watch” list have been assigned a classification that is intended to be representative of the degree of risk associated with that particular loan(s). An on-going three-year migration analysis of the pools of loans graded OAEM, Substandard, Doubtful and Loss as compared to their historical charge-offs is completed annually. This three year average percentage is then applied to the respective loan pool.

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE C – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The remaining portfolio is segregated into loan pools consisting of commercial loans, commercial real estate owner occupied loans, commercial real estate non-owner occupied loans, commercial construction and land development loans, residential real estate loans, residential construction loans and consumer loans. The historical net charge-off percentage of each category is compiled for ten successive years. This data is then used to establish an average charge-off percentage for each category.

Also, we review concentrations of credit, classes of loans and pledged collateral to determine the existence of any deterioration. In addition, we consider volume and trends in delinquencies and nonaccrual loans, the loan portfolio composition, loan volume and maturity of the portfolio, national and local economic conditions and the experience, ability and depth of our lending management and staff.

The following tables summarize changes in the allowance for loan losses applicable to each category of the loan portfolio:


	For the Three Months Ended March 31, 2011
	Commercial			Commercial Real Estate		Consumer			Residential Real Estate			Construction			Unallocated		Total
	(Dollars in Thousands)
Balance at beginning of quarter	$	1,758		$	1,966	$	588		$	1,206		$	283		$	74	$	5,875
Provision for loan losses		1			168		(4	)		(16	)		(125	)		55		79
Recoveries on loans previously charged off		—			10		15			—			—			—		25
Loans charged off		—			—		(34	)		(70	)		—			—		(104	)

Balance at end of quarter	$	1,759		$	2,144	$	565		$	1,120		$	158		$	129	$	5,875


	For the Three Months Ended March 31, 2010
	Commercial			Commercial Real Estate		Consumer			Residential Real Estate			Construction			Unallocated		Total
	(Dollars in Thousands)
Balance at beginning of quarter	$	752		$	1,328	$	508		$	767		$	938		$	32	$	4,325
Provision for loan losses		(48	)		45		122			131			200			42		492
Recoveries on loans previously charged off		1			10		14			2			—			—		27
Loans charged off		(1	)		—		(68	)		—			—			—		(69	)

Balance at end of quarter	$	704		$	1,383	$	576		$	900		$	1,138		$	74	$	4,775

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE C – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables present the allocation of the allowance for loan losses at March 31, 2011 and December 31, 2010.


	March 31, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Residential Construction		Unallocated		Total
	(Dollars in Thousands)
Reserve ending balance:	$	1,759	$	2,144	$	565	$	1,120	$	158	$	129	$	5,875
Individually evaluated for Impairment	$	1,240	$	1,242	$	1	$	110	$	3	$	0	$	2,596
Collectively evaluated for Impairment	$	519	$	902	$	564	$	1,010	$	155	$	129	$	3,279

	December 31 2010
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Residential Construction		Unallocated		Total
	(Dollars in Thousands)
Reserve ending balance:	$	1,758	$	1,966	$	588	$	1,206	$	283	$	74	$	5,875
Individually evaluated for Impairment	$	1,199	$	1,039	$	1	$	110	$	3	$	0	$	2,352
Collectively evaluated for Impairment	$	559	$	927	$	587	$	1,096	$	280	$	74	$	3,523

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE D – RETIREMENT AND BENEFIT PLANS

The following summarizes the components of net periodic benefit cost for the three-month periods ended March 31, 2011 and 2010:


	Pension Benefits						Postretirement Benefits
(Dollars in thousands)	Three Months Ended March 31,
	2011			2010			2011			2010
Service cost	$	86		$	79		$	3		$	3
Interest cost		110			111			13			14
Expected return on plan assets		(134	)		(128	)		—			—
Amortization of transition amount		—			—			14			14
Amortization of prior service cost		(22	)		(22	)		—			—
Recognition of net actuarial loss (gain)		63			55			(10	)		(8	)

Net periodic benefit cost	$	103		$	95		$	20		$	23

The Corporation contributed $75,000 to the pension plan in the first quarter of 2011 and 2010. Approximately $11,000 and $14,000 in contributions were made for postretirement benefits for the three-month periods ended March 31, 2011 and 2010, respectively. Contributions of $225,000 for pension benefits and $42,000 for postretirement benefits are expected to be made during the remainder of 2011.

NOTE E – REGULATORY CAPITAL REQUIREMENTS

Regulators of the Corporation and its subsidiary have implemented risk-based capital guidelines which require the maintenance of certain minimum capital as a percent of assets and certain off-balance sheet items adjusted for predefined credit risk factors. The regulatory minimums for Tier 1 and combined Tier 1 and Tier 2 capital ratios are 4.0% and 8.0%, respectively. Tier 1 capital includes common stockholders’ equity reduced by goodwill and certain other intangibles. Tier 2 capital includes portions of the allowance for loan losses, not to exceed Tier 1 capital. In addition to the risk-based guidelines, a minimum leverage ratio (Tier 1 capital as a percentage of average total consolidated assets) of 4% is required. The following table contains the capital ratios for the Corporation and the Bank.


	March 31, 2011									December 31, 2010
	Combined Capital									Combined Capital
Entity	Tier 1			(Tier 1 and Tier 2)			Leverage			Tier 1			(Tier 1 and Tier 2)			Leverage

Consolidated		13.98	%		15.24	%		9.16	%		13.82	%		15.08	%		9.00	%
First Century Bank, N.A.		13.55	%		14.81	%		8.87	%		13.35	%		14.61	%		8.68	%

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE F – COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Corporation is involved in various legal suits and proceedings. In the opinion of management, based on the advice of legal counsel, these suits are without substantial merit and should not result in judgments that, in the aggregate, would have a material adverse effect on the Corporation’s financial statements.

First Century Bank, N.A., the Corporation’s wholly-owned banking subsidiary, is party to various financial instruments with off-balance sheet risk arising in the normal course of business to meet the financing needs of its customers. These commitments include standby letters of credit of approximately $3,806,000 at March 31, 2011 and $3,887,000 at December 31, 2010. These instruments contain various elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Additionally, certain off-balance sheet items of approximately $43,883,000 at March 31, 2011, and $42,342,000 at December 31, 2010, were comprised primarily of unfunded loan commitments.

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE G – INVESTMENT SECURITIES

Securities available for sale are summarized as follows:


	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in Thousands)

U.S. Government agency obligations	$	56,108	$	87	$	607	$	55,588
U.S. Government agency mortgage-backed securities		18,098		730		—		18,828

TOTAL SECURITIES AVAILABLE FOR SALE	$	74,206	$	817	$	607	$	74,416


	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in Thousands)

U.S. Government agency obligations	$	56,151	$	132	$	475	$	55,808
U.S. Government agency mortgage-backed securities		16,844		790		—		17,634

TOTAL SECURITIES AVAILABLE FOR SALE	$	72,995	$	922	$	475	$	73,442

Securities held to maturity are summarized as follows:


	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in Thousands)
State and municipal obligations	$	24,069	$	353	$	228	$	24,194

TOTAL SECURITIES HELD TO MATURITY	$	24,069	$	353	$	228	$	24,194


	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in Thousands)
State and municipal obligations	$	24,196	$	345	$	279	$	24,262

TOTAL SECURITIES HELD TO MATURITY	$	24,196	$	345	$	279	$	24,262

Securities with an aggregate fair value of $43,534,000 at March 31, 2011 and $34,551,000 at December 31, 2010, were pledged to secure public and trust deposits and for other purposes required or permitted by law, including approximately $16,122,000 at March 31, 2011 and $11,431,000 at December 31, 2010 pledged to secure repurchase agreements.

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE G – INVESTMENT SECURITIES (Continued)

Sales of securities available for sale were as follows:


	Three Months Ended March 31,
	2011		2010
	(Dollars in thousands)
Proceeds from sales	$	—	$	792
Gross realized gains		—		47
Gross realized losses		—		—

The amortized cost and estimated fair value for securities available for sale and securities held to maturity by contractual maturities at March 31, 2011 are shown in the following tables. Expected maturities may differ from contractual maturities because some securities may have call or prepayment features.


	Amortized Cost		Fair Value		Net Unrealized Gains (Losses)
	(Dollars in Thousands)
Due in one year or less	$	648	$	669	$	21
Due after one year through five years		39,255		39,027		(228	)
Due after five years through ten years		28,032		28,327		295
Due after ten years		6,271		6,393		122

TOTAL SECURITIES AVAILABLE FOR SALE	$	74,206	$	74,416	$	210


	Amortized Cost		Fair Value		Net Unrealized Gains (Losses)
	(Dollars in Thousands)
Due in one year or less	$	860	$	868	$	8
Due after one year through five years		5,229		5,392		163
Due after five years through ten years		10,418		10,518		100
Due after ten years		7,562		7,416		(146	)

TOTAL SECURITIES HELD TO MATURITY	$	24,069	$	24,194	$	125

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE G – INVESTMENT SECURITIES (Continued)

The following table shows the gross unrealized losses and fair value of the Corporation’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category at March 31, 2011:


(Dollars in thousands)	Less Than Twelve Months				Over Twelve Months
Description of security	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities available for sale:
U.S. Treasury obligations and direct obligations of U.S. government agencies	$	607	$	38,980	$	—	$	—

Total securities available for sale	$	607	$	38,980	$	—	$	—


Securities held to maturity:
Municipal bonds	$	227	$	6,577	$	1	$	203

Total securities held to maturity	$	227	$	6,577	$	1	$	203

For all of these securities, because the decline in market value is attributable to changes in interest rates and not credit quality and because the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

NOTE H – FAIR VALUE MEASUREMENT

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value guidance establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Required disclosures include identification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These include:

•

Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),

•

Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE H – FAIR VALUE MEASUREMENT (Continued)

•

Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.

Investment Securities Available-for-Sale:

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Loans:

The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. The fair value of impaired loans is estimated using one of several methods, including collateral value, recent appraisal value and /or tax assessed value, liquidation value and discounted cash flows. At March 31, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the impaired loan as nonrecurring Level 2.

Foreclosed Assets / Repossessions:

Foreclosed assets and repossessions are adjusted to fair value upon transfer of the loans to foreclosed assets and repossessions. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the foreclosed asset as nonrecurring Level 2.

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE H – FAIR VALUE MEASUREMENT (Continued)

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.


Description	Fair Value March 31, 2011		Fair Value Measurements at March 31, 2011, Using
(Dollars in thousands)			Level 1		Level 2		Level 3
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government agency obligations	$	55,588	$	—	$	55,588	$	—
U.S. Government agency mortgage-backed securities		18,828		—		18,828		—

Total	$	74,416	$	—	$	74,416	$	—

Assets and liabilities measured on a nonrecurring basis:
Impaired loans	$	14,412	$	—	$	14,412	$	—
Foreclosures and repossessions		1,527		—		1,527		—

Total	$	15,939	$	—	$	15,939	$	—

Description	Fair Value December 31, 2010		Fair Value Measurements at December 31, 2010, Using
(Dollars in thousands)			Level 1		Level 2		Level 3
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government agency obligations	$	55,808	$	—	$	55,808	$	—
U.S. Government agency mortgage-backed securities		17,634		—		17,634		—

Total	$	73,442	$	—	$	73,442	$	—

Assets and liabilities measured on a nonrecurring basis:
Impaired loans	$	14,165	$	—	$	14,165	$	—
Foreclosures and repossessions		1,768		—		1,768		—

Total	$	15,933	$	—	$	15,933	$	—

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE H – FAIR VALUE MEASUREMENT (Continued)

The following table presents the carrying amounts and fair values of the Company’s financial instruments: (in thousands)


	March 31, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash & cash equivalents	$	39,353	$	39,353	$	28,869	$	28,869
Investment securities available for sale		74,416		74,416		73,442		73,442
Investment securities held to maturity		24,069		24,194		24,196		24,262
Loans, net		256,359		266,071		254,382		264,533
Accrued interest receivable		1,421		1,421		1,243		1,243
Deposits		360,506		361,265		352,341		353,246
Borrowings		16,148		16,148		11,457		11,457
Accrued interest payable		147		147		137		137

NOTE I – RECENT ACCOUNTING PRONOUNCEMENTS

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

Also in April 2011, the FASB issued ASU 2011-03 Reconsideration of Effective Control for Repurchase Agreements to remove from the assessment of effective control the (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion.

FIRST CENTURY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2011

NOTE I – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

In May 2011, ASU 2011-04 was issued which amends U.S. GAAP to conform with measurement and disclosure requirements in International Financial Reporting Standards (“IFRS”). The amendments in this Update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include the following:

1. Those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements

2. Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.

In addition, to improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in U.S. GAAP). The amendments in this Update are to be applied prospectively and. are effective during interim and annual period beginning after December 15, 2011.

FIRST CENTURY BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

March 31, 2011

This narrative will assist you, the reader, in your analysis of the accompanying consolidated financial statements and supplemental financial information. You should read it in conjunction with the unaudited consolidated financial statements and the notes presented elsewhere in this report. We are not aware of any market or institutional trends, events or uncertainties that will have or are reasonably likely to have a material effect on the liquidity, capital resources or operations of the Corporation, except as discussed herein. We are also not aware of any current recommendations by any regulatory authorities, which would have such a material effect if implemented.

Forward-looking Statements

This report contains certain forward-looking statements (as defined in the Private Securities Litigation Act of 1995), including certain plans, expectations, goals and projections, which are inherently subject to numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by such statements for a variety of factors, including, but not limited to: changes in economic conditions which may affect our primary market area; rapid movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; success and timing of loan workout strategies; the nature and extent of governmental actions and reforms; continuing consolidation on the financial services industry; rapidly changing technology; and evolving financial industry standards.

Critical Accounting Policies

Our accounting policies are an integral part to understanding the results reported. Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America, and they conform to general practices within the financial services industry. The most complex accounting policies require our best judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value obtained by the use of assumptions that involve significant uncertainty at the time of estimation. In some instances, we use a discount factor to determine the present value of assets and liabilities. A change in the discount factor could increase or decrease the values of those assets and liabilities, resulting in either a beneficial or an adverse impact on our financial results. The following is a brief description of our current accounting policies involving significant management valuation judgments and estimates.

Allowance for Loan Losses

We maintain, through the provision expense, an allowance for loan losses that we believe to be adequate to absorb probable credit losses inherent in the portfolio. The procedures that we use entail preparation of a loan watch list and assigning each loan a classification. For those individually significant loans where it is determined that it is not probable that the borrower will make all payments in accordance with the original loan agreement, we perform an impairment analysis. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan.

Other classified loans are categorized and allocated appropriate reserves. We also reserve for other loans more than 90 days past due that were not considered in the aforementioned procedures. We segregate the remaining portfolio into consumer, commercial and residential real estate loans, and apply the historical net charge off percentage of each category to the current amount outstanding in those categories. Additionally, as part of this analysis we include such factors as concentrations of credit, collateral deficient loans, volume and trends in delinquencies, loan portfolio composition, loan volume and maturity of the portfolio, national and local economic conditions and the experience, ability and depth of lending management and staff.

FIRST CENTURY BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

March 31, 2011

Greater detail regarding the determination of the adequacy of the allowance for loan losses is provided later in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in Note C of Notes to Unaudited Consolidated Financial Statements.

Pensions

We have a defined benefit pension plan covering substantially all employees with at least nine months of service who are at least 20¹/2 years of age. Pension expense is determined by an actuarial valuation based on assumptions that are evaluated annually as of December 31, the measurement date for pension obligations. The most significant assumptions are the long-term expected rate of return on plan assets, the discount rate used to determine the present value of the pension obligations, and the weighted-average rate of expected increase in future compensation levels. We review these assumptions with the plan actuaries and modify them as necessary to reflect current market conditions as well as anticipated long-term market conditions.

Results of Operations for Three Months ended March 31, 2011

Net income for the first three months of 2011 was $754,000, representing an increase of approximately 79.1%, from the comparable 2010 level of $421,000. The most significant component, net interest income, amounted to $3,339,000 for the three-month period ended March 31, 2011, a decrease of $172,000, or 4.9%, as compared to $3,511,000 for the first three months of 2010. This decrease was primarily the result of reduced interest income in excess of the reductions seen in interest expense due to lower loan demand, higher levels of nonperforming assets and the impact of an extended lower interest rate environment on the short-term nature of the Company’s balance sheet. Net interest margins for the three months ended March 31, 2011 and 2010 were 3.15% and 3.38%, respectively.

Interest income for the three-month period ended March 31, 2011 decreased $430,000, or 9.7%, to $4,001,000, from $4,431,000 for the three-month period ended March 31, 2010. Interest income reflected a weighted-average yield on earning assets of 4.09% for the three-month period ended March 31, 2011, compared to 4.67% for the same three-month period in 2010. Average interest-earning assets were $391,080,000 and $379,921,000 during the three months ended March 31, 2011 and 2010, respectively.

Interest expense decreased $258,000, or 28.0%, to $662,000 for the three-month period ended March 31, 2011, from $920,000 for the same period in 2010. This reflected an average cost of funds of 0.82% and 1.14%, respectively, for the three-month periods ended March 31, 2011 and 2010. Average interest-bearing liabilities were $321,340,000 and $324,185,000 during the three months ended March 31, 2011 and 2010, respectively.

The provision for loan losses was $79,000 for the three months ended March 31, 2011. This was a decrease of $413,000 compared to the provision of $492,000 for the same period in 2010. Net charge-offs were $79,000 for the quarter ended March 31, 2011, compared to $42,000 for the quarter ended March 31, 2010. Additional provisions of $450,000 were made in the first quarter of 2010, with no comparable additions made in the first quarter of 2011.

Noninterest income, exclusive of securities gains and losses, was $1,495,000 for the three-month period ended March 31, 2011 and represented an increase of $297,000, or 24.8%, compared to $1,198,000 for the same period in 2010. Increases were seen in all areas of noninterest income, reflecting pricing adjustments for deposit services; enhanced fiduciary fees as the result of a major estate settlement; and, higher fee income from mortgage loan originations.

FIRST CENTURY BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

March 31, 2011

Noninterest expense of $3,642,000 for the quarter ended March 31, 2011 represented a decrease of $26,000, or 0.7%, from $3,616,000 for the same period in 2010. Personnel expense decreased $93,000, or 5.5%, due to recent efforts to reduce staffing levels through this economic downturn. This reduction, however, was offset by higher loan collection expenses, advertising expenses and office supply expenses.

On a per share basis, net income increased to $0.40 per diluted share for the three-month period ended March 31, 2011, compared to $0.22 per diluted share for the same period in 2010. Earnings through March 31, 2011 and March 31, 2010, reflect an annualized return on average assets (ROAA) of 0.71% and 0.40%, respectively. Also, these earnings reflect an annualized return on average equity (ROAE) of 7.50% and 4.23% for the periods ending March 31, 2011 and 2010, respectively. Dividends for the first quarters of 2011 and 2010 were $0.15 per share.

Financial Condition and Asset Quality

Total assets at March 31, 2011 were $420,931,000 as compared to $407,989,000 at December 31, 2010, or an increase of $12,942,000, or 3.2%. The loan portfolio increased 0.9% during this period to $262,234,000 at March 31, 2011, from $260,257,000 at December 31, 2010, reflecting the minimal loan demand experienced during the quarter. The investment portfolio increased approximately $847,000, or 0.9%, during this same period.

Total deposits increased by $8,165,000 to $360,506,000 at March 31, 2011 from $352,341,000 at December 31, 2010. Noninterest-bearing deposits increased by $7,160,000, or 15.2%, which is a normal fluctuation with some larger commercial customers. Interest-bearing deposits increased $1,005,000, or 0.3%, during this same period.

We evaluate the adequacy of the allowance for loan losses on a quarterly basis in order to maintain the allowance at a level that is sufficient to absorb probable credit losses. This evaluation is based on a review of our historical loss experience, known and inherent risks in the loan portfolio, including adverse circumstances that may affect the ability of the borrower to repay interest and/or principal, the estimated value of collateral, and an analysis of the levels and trends of delinquencies, charge-offs and the risk ratings of the various loan categories. Such factors as the level and trend of interest rates and the condition of national and local economies are also considered.

For instance, we have evaluated our residential mortgage loan portfolio in light of recent national trends in delinquency and foreclosure. We are also evaluating our commercial real estate loan portfolio as there is continued weakness in this sector from the prolonged economic downturn. Additionally, with the potential for higher interest rates and the variable rate nature of many of our commercial loans, we monitor the impact these changes could have on the ability of our customers to adjust to higher repayment requirements.

Nonperforming assets, including nonaccrual loans, loans past-due over 90 days, restructured loans and other real estate owned, were $19,830,000 at March 31, 2011, and $20,057,000 at December 31, 2010. As a percentage of total assets, nonperforming assets decreased from 4.9% at December 31, 2010 to 4.7% at March 31, 2011. The allowance for loan losses was $5,875,000 at March 31, 2011, and December 31, 2010. The allowance for loan losses as a percentage of total loans decreased from 2.26% at December 31, 2010, to 2.24% at March 31, 2011.

FIRST CENTURY BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

March 31, 2011

Off-Balance Sheet Arrangements

Financial instruments include commitments to extend credit and standby letters of credit. These commitments include standby letters of credit of approximately $3,806,000 at March 31, 2011 and $3,887,000 at December 31, 2010. These instruments contain various elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Additionally, certain off-balance sheet items of approximately $43,883,000 at March 31, 2011, and $42,342,000 at December 31, 2010, were comprised primarily of unfunded loan commitments. The methodology used to determine an estimate for the reserve for unfunded lending commitments is inherently similar to the methodology used in calculating the allowance for loan losses adjusted for factors specific to binding commitments, including the probability of funding and exposure at the time of funding. The reserve for unfunded lending commitments is included in other liabilities with increases or decreases included in noninterest expense. At March 31, 2011 and December 31, 2010, the reserve for unfunded lending commitments was $10,000. Estimates may change at some point in the future.

Liquidity and Capital Resources

Liquidity management involves the ability to meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Liquidity can best be demonstrated by an analysis of cash flows. The primary source of cash flows is from operating activities. Operating activities provided $1,080,000 of liquidity for the three-month period ended March 31, 2011, compared to $1,489,000 for the same three months in 2010. The principal elements of these operating flows are net income, increased for significant non-cash expenses for the provision for loan losses and depreciation and amortization. A secondary source of liquidity comes from investing activities, principally the maturities of investment securities. Maturities and calls of investment securities were $13,185,000 for the three-month period ended March 31, 2011, compared to $14,437,000 for the three-month period ended March 31, 2010. Excess proceeds from maturities and calls of investments during the first quarter of 2011 were reinvested in the portfolio. As of March 31, 2011, there were approximately $8,758,000 of investment securities that mature within 36 months based on contractual maturities.

Additional sources of liquidity are available through the Federal Reserve System and through membership in the Federal Home Loan Bank system. As of March 31, 2011, we had a maximum secured borrowing capacity exceeding $90,000,000 through the Federal Home Loan Bank of Pittsburgh. These funds can be made available with various maturities and interest rate structures. Borrowings are collateralized by a blanket lien by the Federal Home Loan Bank on its members’ qualifying assets. At March 31, 2011, we owned $1,130,300 of FHLB stock, and had no borrowings outstanding for overnight liquidity needs through the FHLB. As of March 31, 2011, there were no outstanding balances on our federal funds purchased lines of $8,700,000 with correspondent banks which are available for short-term liquidity needs.

FIRST CENTURY BANKSHARES, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures:

The Company’s Chief Executive Officer and the Chief Financial Officer have conducted as of March 31, 2011, an evaluation of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of March 31, 2011, were effective in ensuring that information required to be disclosed in the Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time period required by the Securities and Exchange Commission’s rules and forms.

Changes in internal controls over financial reporting:

There were no changes in the Company’s internal control over financial reporting that occurred during the first quarter ended March 31, 2011, or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

FIRST CENTURY BANKSHARES, INC.

PART II. OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

The subsidiary of the Corporation is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Corporation.

ITEM 1A – RISK FACTORS

Not Applicable.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

Not Applicable

(b)

Not Applicable

(c)

Not Applicable

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – (Removed and Reserved)

ITEM 5 – OTHER INFORMATION

(a)

None

(b)

None

FIRST CENTURY BANKSHARES, INC.

PART II. OTHER INFORMATION (Continued)

ITEM 6 – EXHIBITS

The following exhibits are filed herewith or incorporated by reference.


Exhibit Number		Description of Exhibit	Page Number

3.		Articles of Incorporation and Bylaws

	3(a)	Articles of Amendment to Articles of Incorporation ⁽¹⁾		—

	3(b)	Restated Articles of Incorporation ⁽²⁾		—

	3(c)	Amended and Restated By-laws of the Company ⁽³⁾		—

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer		32

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer		33

32.1		18 U.S.C. Section 1350 Certification of Chief Executive Officer		34

32.2		18 U.S.C. Section 1350 Certification of Chief Financial Officer		35

(1)	Incorporated by reference to Exhibit 3 to the Company’s Annual Report on Form 10-K dated December 31, 1999 and filed March 27, 2000, File Number: 000-11671; Film Number: 579818.

(2)	Incorporated by reference to Exhibit 3(b) to the Company’s Quarterly Report on Form 10-Q dated June 30, 1996 and filed August 14, 2006, File Number 000-11671; Film Number: 96610281.

(3)	Incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K dated February 15, 2005 and filed February 18, 2005, File Number: 000-11671; Film Number: 05625963.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


First Century Bankshares, Inc.
(Registrant)

By:		/s/ J. Ronald Hypes
J. Ronald Hypes, Treasurer
(Principal Accounting and Financial Officer)

Date: May 16, 2011

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