First Community Bankshares (FCBC) 10-Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, 2005

Commission file number 000-19297

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Nevada	55-0694814
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)
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 the to such filing requirements for the past 90 days.

þ      Yes           o      No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

þ      Yes           o      No

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

o      Yes           þ      No

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

Class – Common Stock, $1.00 Par Value; 11,273,248 shares outstanding as of October 31, 2005

FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended September 30, 2005

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2005, and December 31, 2004	3
Consolidated Statements of Income for the Three- and Nine-Month Periods Ended September 30, 2005 and 2004	4
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004	5
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2005 and 2004	6
Notes to Consolidated Financial Statements	7
Report of Independent Registered Public Accounting Firm	17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures about Market Risk	30
Item 4. Controls and Procedures	32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3. Defaults Upon Senior Securities	33
Item 4. Submission of Matters to a Vote of Security Holders	33
Item 5. Other Information	33
Item 6. Exhibits	34
SIGNATURES	36
EXHIBIT INDEX	37
EX-15
EX-31.1
EX-31.2
EX-32

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PART I.

ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)

	September 30,			December 31,
	2005			2004
	(Unaudited)			(Note 1)
Assets
Cash and due from banks	$	48,122		$	37,294
Interest-bearing balances with banks		47,822			17,452
Total cash and cash equivalents		95,944			54,746
Securities available for sale (amortized cost of $421,801 at September 30, 2005; $384,746 at December 31, 2004)		424,631			388,678
Securities held to maturity (fair value of $25,645 at September 30, 2005; $35,610 at December 31, 2004)		24,723			34,221
Loans held for sale		1,377			1,194
Loans held for investment, net of unearned income		1,321,221			1,238,756
Less allowance for loan losses		14,486			16,339
Net loans held for investment		1,306,735			1,222,417
Premises and equipment		35,640			37,360
Other real estate owned		1,690			1,419
Interest receivable		10,175			8,554
Goodwill and other intangible assets		61,287			61,310
Other assets		25,312			20,923
Total Assets	$	1,987,514		$	1,830,822
Liabilities
Deposits:
Noninterest-bearing	$	237,455		$	221,499
Interest-bearing		1,208,583			1,137,565
Total Deposits		1,446,038			1,359,064
Interest, taxes and other liabilities		15,169			14,313
Federal funds purchased		—			32,500
Securities sold under agreements to repurchase		125,739			109,857
FHLB borrowings and other indebtedness		207,180			131,855
Total Liabilities		1,794,126			1,647,589
Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued and outstanding in 2005 and 2004		—			—
Common stock, $1 par value; 25,000,000 and 15,000,000 shares authorized in 2005 and 2004; 11,495,570 and 11,472,311 issued in 2005 and 2004, and 11,273,248 and 11,250,927 outstanding in 2005 and 2004		11,496			11,472
Additional paid-in capital		108,606			108,263
Retained earnings		78,484			68,019
Treasury stock, at cost		(6,897	)		(6,881	)
Accumulated other comprehensive income		1,699			2,360
Total Stockholders’ Equity		193,388			183,233
Total Liabilities and Stockholders’ Equity	$	1,987,514		$	1,830,822

See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands Except Share and Per Share Data) (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Interest Income
Interest and fees on loans held for investment	$	23,263		$	19,953		$	66,183		$	56,195
Interest on securities-taxable		2,904			2,960			7,755			9,659
Interest on securities-nontaxable		1,783			1,642			5,597			4,985
Interest on deposits in banks		343			94			737			395
Total interest income		28,293			24,649			80,272			71,234
Interest Expense
Interest on deposits		6,296			4,702			16,805			13,830
Interest on borrowings		3,276			2,246			8,471			6,092
Total interest expense		9,572			6,948			25,276			19,922
Net interest income		18,721			17,701			54,996			51,312
Provision for loan losses		1,060			1,152			2,824			2,407
Net interest income after provision for loan losses		17,661			16,549			52,172			48,905
Noninterest Income
Fiduciary income		541			499			1,668			1,429
Service charges on deposit accounts		2,660			2,461			7,431			6,722
Other service charges, commissions and fees		949			728			2,634			2,000
Gain on sale of securities		536			60			679			1,509
Other operating income		346			530			912			1,435
Total noninterest income		5,032			4,278			13,324			13,095
Noninterest Expense
Salaries and employee benefits		7,260			6,807			22,030			19,582
Occupancy expense of bank premises		1,000			913			2,911			2,659
Furniture and equipment expense		855			735			2,452			2,108
Core deposit amortization		112			112			333			287
Other operating expense		3,891			3,670			11,189			10,737
Total noninterest expense		13,118			12,237			38,915			35,373
Income from continuing operations before income taxes		9,575			8,590			26,581			26,627
Income tax expense		2,641			1,968			7,372			6,817
Income from continuing operations		6,934			6,622			19,209			19,810
Loss from discontinued operations before income tax		(36	)		(1,266	)		(206	)		(5,531	)
Income tax benefit		(14	)		(1,054	)		(80	)		(2,006	)
Loss from discontinued operations	$	(22	)	$	(212	)	$	(126	)	$	(3,525	)
Net income	$	6,912		$	6,410		$	19,083		$	16,285
Basic earnings per common share	$	0.61		$	0.57		$	1.69		$	1.45
Diluted earnings per common share	$	0.61		$	0.57		$	1.68		$	1.44
Basic earnings per common share from continuing operations	$	0.61		$	0.59		$	1.70		$	1.76
Diluted earnings per common share from continuing operations	$	0.61		$	0.58		$	1.69		$	1.75
Dividends declared per common share	$	0.255		$	0.25		$	0.765		$	0.75
Weighted average basic shares outstanding		11,275,156			11,231,973			11,269,515			11,235,462
Weighted average diluted shares outstanding		11,342,912			11,326,999			11,342,233			11,331,718

See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands) (Unaudited)

	Nine Months Ended
	September 30
	2005			2004
Cash flows from operating activities-continuing operations:
Net income from continuing operations	$	19,209		$	19,810
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Provision for loan losses		2,824			2,407
Depreciation and amortization of premises and equipment		2,474			2,137
Core deposit amortization		333			287
Net investment amortization and accretion		1,139			1,880
Net gain on the sale of assets		(490	)		(1,763	)
Mortgage loans originated for sale		(28,419	)		(18,994	)
Proceeds from sale of mortgage loans		28,236			18,255
Deferred income tax expense		1,098			54
(Increase) decrease in interest receivable		(1,621	)		489
Increase in other assets		(4,231	)		(1,206	)
Increase in other liabilities		671			1,068
Net cash provided by operating activities from continuing operations		21,223			24,424
Cash flows from investing activities-continuing operations:
Proceeds from sales of securities available for sale		18,959			49,951
Proceeds from maturities and calls of securities available for sale		33,798			105,065
Proceeds from maturities and calls of securities held to maturity		9,552			3,834
Purchase of securities available for sale		(90,326	)		(78,012	)
Net increase in loans made to customers		(87,064	)		(74,858	)
Purchase of premises and equipment		(2,462	)		(5,077	)
Proceeds from sale of equipment		1,005			359
Net cash used in acquisitions		—			(26,325	)
Net cash used in investing activities from continuing operations		(116,538	)		(25,063	)
Cash flows from financing activities-continuing operations:
Net increase in demand and savings deposits		8,053			10,619
Net increase (decrease) in time deposits		78,921			(22,689	)
Net proceeds from and repayments of FHLB and other borrowings		74,861			5,012
Net decrease in federal funds purchased		(32,500	)		—
Net increase in securities sold under agreement to repurchase		15,882			12,668
Issuance of common stock		333			420
Acquisition of treasury stock		(293	)		(1,195	)
Dividends paid		(8,618	)		(8,427	)
Net cash provided by (used in) financing activities from continuing operations		136,639			(3,592	)
Net increase (decrease) in cash and cash equivalents from continuing operations	$	41,324		$	(4,231	)
Net cash used in discontinued operations	$	(126	)	$	—
Cash and cash equivalents at beginning of period-continuing operations	$	54,746		$	59,309
Cash and cash equivalents at beginning of period-discontinued operations		—			—
Cash and cash equivalents at beginning of period	$	54,746		$	59,309
Cash and cash equivalents at end of period-continuing operations	$	95,944		$	55,078
Cash and cash equivalents at end of period-discontinued operations		—			—
Cash and cash equivalents at end of period	$	95,944		$	55,078

See Notes to Consolidated Financial Statements.

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in Thousands, Except Share and Per Share Information) (Unaudited)

											Accumulated
			Additional								Other
	Common		Paid-in		Retained			Treasury			Comprehensive
	Stock		Capital		Earnings			Stock			(Loss) Income			Total
Balance January 1, 2004	$	11,442	$	108,128	$	56,894		$	(6,407	)	$	4,978		$	175,035
Comprehensive income:
Net income		—		—		16,285			—			—			16,285
Other comprehensive income, net of tax:
Net unrealized gain on securities available for sale		—		—		—			—			(723	)		(723	)
Less reclassification adjustment for gains realized in net income		—		—		—			—			(896	)		(896	)
Comprehensive income		—		—		16,285			—			(1,619	)		14,666
Common dividends declared ($.75 per share)		—		—		(8,427	)		—			—			(8,427	)
Purchase 44,400 treasury shares		—		—		—			(1,195	)		—			(1,195	)
Acquisition of Stone Capital 2,541 shares issued		3		85		—			—			—			88
Option exercise 47,950 shares		25		67		—			573			—			665
Balance September 30, 2004	$	11,470	$	108,280	$	64,752		$	(7,029	)	$	3,359		$	180,832
Balance January 1, 2005	$	11,472	$	108,263	$	68,019		$	(6,881	)	$	2,360		$	183,233
Comprehensive income:
Net income		—		—		19,083			—			—			19,083
Other comprehensive income, net of tax:
Unrealized loss on securities available for sale		—		—		—			—			(307	)		(307	)
Less reclassification adjustment for gains realized in net income		—		—		—			—			(354	)		(354	)
Comprehensive income		—		—		19,083			—			(661	)		18,422
Common dividends declared ($.765 per share)		—		—		(8,618	)		—			—			(8,618	)
Net acquisition of 9,917 treasury shares		—		—		—			(293	)		—			(293	)
Acquisition of Stone Capital 2,447 shares issued		2		85		—			—			—			87
Stock awards		2		18		—			—			—			20
Tax benefit from exercise of non- qualified stock options		—		204		—			—			—			204
Option exercises 28,224 shares		20		36		—			277			—			333
Balance September 30, 2005	$	11,496	$	108,606	$	78,484		$	(6,897	)	$	1,699		$	193,388

     See Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

Unaudited Consolidated Financial Statements

The unaudited consolidated balance sheet as of September 30, 2005, the unaudited consolidated statements of income for the three and nine months ended September 30, 2005 and 2004, and the unaudited consolidated statements of cash flows and changes in stockholders’ equity for the nine months ended September 30, 2005 and 2004, have been prepared by the management of First Community Bancshares, Inc. (“FCBI” or the “Company”). In the opinion of management, all adjustments, including normal recurring accruals, necessary to present fairly the financial position of FCBI and subsidiary at September 30, 2005, and its results of operations, cash flows, and changes in stockholders’ equity for the three and nine months ended September 30, 2005 and 2004, 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, 2004, has been derived from the audited financial statements included in the Company’s 2004 Annual Report to Stockholders on Form 10-K. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with standards for the preparation of interim financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the 2004 Annual Report of FCBI on Form 10-K.

A more complete and detailed description of FCBI’s significant accounting policies is included within Footnote 1 to the Company’s Annual Report on Form 10-K for December 31, 2004. 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.

In June 2005, the Financial Accounting Standards Board (“FASB”) directed its staff to draft FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” FSP 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. Management does not anticipate the issuance of the final consensus will have a material impact on financial condition, the results of operations, or liquidity.

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections,” which changes the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impractical to determine either the period-specific or cumulative effects of the change. Statement No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to have a material effect on financial condition, the results of operations, or liquidity.

In December 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which is an amendment of Statement No. 123. Statement 123R changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period, and will be re-measured subsequently at each reporting date through settlement date. In March 2005, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB 107), which expresses the SEC staff’s views on Statement 123R. SAB 107 provides further discussion on various topics, including share-based payment transactions with non-employees, valuation methods, classification of expense in financial statements, and disclosures in management’s discussion and analysis. In April 2005, the SEC announced that it would provide for a phased-in implementation process for Statement 123R, and require registrants to adopt the standard’s fair-value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after December 15, 2005.

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The Company has stock option plans for certain executives and directors accounted for under the intrinsic value method. Because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation for the three- and nine-month periods ended September 30, 2005 and 2004.

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income as reported	$	6,912		$	6,410		$	19,083		$	16,285
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(53	)		(60	)		(144	)		(145	)
Pro forma net income	$	6,859		$	6,350		$	18,939		$	16,140
Income from continuing operations	$	6,934		$	6,622		$	19,209		$	19,810
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(53	)		(60	)		(144	)		(145	)
Pro forma income from continuing operations	$	6,881		$	6,562		$	19,065		$	19,665
Earnings per share:
Basic as reported	$	0.61		$	0.57		$	1.69		$	1.45
Basic pro forma	$	0.61		$	0.57		$	1.68		$	1.44
Diluted as reported	$	0.61		$	0.57		$	1.68		$	1.44
Diluted pro forma	$	0.60		$	0.56		$	1.67		$	1.42
Earnings per share from continuing operations:
Basic as reported	$	0.61		$	0.59		$	1.70		$	1.76
Basic pro forma	$	0.61		$	0.58		$	1.69		$	1.75
Diluted as reported	$	0.61		$	0.58		$	1.69		$	1.75
Diluted pro forma	$	0.61		$	0.58		$	1.68		$	1.74

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Note 2. Discontinued Operations

On August 18, 2004, the Company sold its United First Mortgage, Inc. (“UFM”) subsidiary headquartered in Richmond, Virginia. The transaction resulted in the sale of 100% of the stock of UFM for cash consideration of approximately $250 thousand. The transaction produced an after-tax gain of approximately $380 thousand in the third quarter of 2004, and completed the Company’s exit from the mortgage banking business segment.

The business related to UFM is accounted for as discontinued operations and, therefore, the results of operations and cash flows have been removed from the Company’s results of continuing operations in accordance with Financial Accounting Standard 144 for all periods presented in this report. The results of UFM are presented, along with the after-tax gain on sale, as discontinued operations in a separate category on the income statement following results from continuing operations. The Company continues to incur costs related to UFM in the form of one non-cancelable lease. This lease, along with residual salaries expense, create a loss from discontinued operations in 2005. The results of discontinued operations for the three and nine months ended September 30, 2005 and 2004, are as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Amounts in thousands)	2005			2004			2005			2004
Interest Income		—			115			—			690
Interest Expense		—			55			—			507
							��
Net interest income		—			60			—			183
Other Income		—			165			—			1,015
Other Expense		36			1,491			206			6,729
Loss before income taxes		(36	)		(1,266	)		(206	)		(5,531	)
Applicable income tax benefit		(14	)		(1,054	)		(80	)		(2,006	)
Net Loss	$	(22	)	$	(212	)	$	(126	)	$	(3,525	)

All assets and liabilities of UFM were disposed of in the third quarter of 2004. Accordingly, there were no assets or liabilities related to discontinued operations included in the September 30, 2005, or the December 31, 2004, consolidated balance sheets.

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Note 3. Mergers, Acquisitions and Branch Development

In August 2005, the Company entered into a definitive agreement with Sonabank, N. A., to sell its branch location in Clifton Forge, Virginia. The branch had deposits and repurchase agreements totaling approximately $46 million and loans of approximately $9 million at July 31, 2005. The transaction will result in an approximate $3.9 million pre-tax gain on sale, and is expected to be completed by December 31, 2005, subject to regulatory approvals.

The following schedule details branch openings since January 1, 2004.

Quarter
Opened	Location	Type
Q1 2004	Mount Airy, NC	Loan Production Office
Q1 2004	Charlotte, NC	Loan Production Office
Q2 2004	Blacksburg, Va.	Loan Production Office
Q2 2004	Norfolk, Va.	Loan Production Office
Q4 2004	Princeton, W.Va.	Full Service Branch
Q2 2005	Clarksburg, W.Va.	Loan Production Office
Q3 2005	Charleston, W.Va.	Loan Production Office

After the close of business on March 31, 2004, PCB Bancorp, Inc., a Tennessee-chartered bank holding company (“PCB”) headquartered in Johnson City, Tennessee, was acquired by the Company. PCB had five full service branch offices located in Johnson City, Kingsport and surrounding areas in Washington and Sullivan Counties in East Tennessee. At acquisition, PCB had total assets of $171.0 million, total net loans of $128.0 million and total deposits of $150.0 million. These resources were included in the Company’s financial statements beginning with the second quarter of 2004.

Under the terms of the merger agreement, shares of PCB common stock were purchased for $40.00 per share in cash. The total deal value, including the cash-out of outstanding stock options, was approximately $36.0 million. Concurrent with the PCB acquisition, Peoples Community Bank, the wholly-owned subsidiary of PCB, was merged into the Bank. As a result of the acquisition and preliminary purchase price allocation, approximately $21.3 million in goodwill was recorded which represents the excess of the purchase price over the fair market value of the net assets acquired and identified intangibles.

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Note 4. Investment Securities

As of September 30, 2005, and December 31, 2004, the amortized cost and estimated fair value of available for sale securities are as follows:

	September 30, 2005
	Amortized		Unrealized		Unrealized			Fair
(Amounts in thousands)	Cost		Gains		Losses			Value
U.S. Government agency securities	$	79,120	$	77	$	(395	)	$	78,802
States and political subdivisions		138,626		3,480		(266	)		141,840
Corporate notes		78,959		235		(345	)		78,849
Mortgage-backed securities		105,461		305		(1,239	)		104,527
Equities		19,635		1,145		(167	)		20,613
Total	$	421,801	$	5,242	$	(2,412	)	$	424,631

	December 31, 2004
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government agency securities	$	46,541	$	20	$	(615	)	$	45,946
States and political subdivisions		142,882		2,647		(383	)		145,146
Corporate notes		37,589		540		—			38,129
Mortgage-backed securities		142,427		921		(369	)		142,979
Equities		15,307		1,188		(17	)		16,478
Total	$	384,746	$	5,316	$	(1,384	)	$	388,678

     As of September 30, 2005, and December 31, 2004, the amortized cost and estimated fair value of held to maturity securities are as follows:

	September 30, 2005
	Amortized		Unrealized		Unrealized		Fair
(Amounts in thousands)	Cost		Gains		Losses		Value
U.S. Government agency securities	$	—	$	—	$	—	$	—
States and political subdivisions		24,328		921		—		25,249
Mortgage-backed securities		20		1		—		21
Other securities		375		—		—		375
Total	$	24,723	$	922	$	—	$	25,645

	December 31, 2004
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Government agency securities	$	—	$	—	$	—	$	—
States and political subdivisions		33,814		1,388		—		35,202
Mortgage-backed securities		32		1		—		33
Other securities		375		—		—		375
Total	$	34,221	$	1,389	$	—	$	35,610

At September 30, 2005, the combined depreciation in value of the individual securities in an unrealized loss position for more than 12 months was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not

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believe any individual unrealized loss as of September 30, 2005, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the decline in value is attributable to changes in market interest rates and not the credit quality of the issuer.

The following table reflects those investments in an unrealized loss position at September 30, 2005, and December 31, 2004. There were no securities in a continuous unrealized loss position for 12 or more months for which the Company does not have the ability to hold until the security matures or recovers in value.

	September 30, 2005
	Less than 12 Months					12 Months or longer					Total
(Amounts in thousands)			Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U. S. Government agency securities	$	10,860	$	(75	)	$	30,179	$	(320	)	$	41,039	$	(395	)
States and political subdivisions		28,130		(265	)		631		(2	)	$	28,761		(267	)
Other securities		41,085		(345	)		—		—			41,085		(345	)
Mortgage-backed securities		62,182		(847	)		28,520		(392	)		90,702		(1,239	)
Equity securities		1,517		(127	)		132		(40	)		1,649		(167	)
Total	$	143,774	$	(1,659	)	$	59,462	$	(754	)	$	203,236	$	(2,413	)

						December 31, 2004
	Less than 12 Months					12 Months or longer					Total
			Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U. S. Government agency securities	$	12,357	$	(101	)	$	28,146	$	(514	)	$	40,503	$	(615	)
States and political subdivisions		35,620		(344	)		2,118		(39	)		37,738		(383	)
Other securities		—		—			—		—			—		—
Mortgage-backed securities		112,755		(369	)		—		—			112,755		(369	)
Equity securities		—		—			136		(17	)		136		(17	)
Total	$	160,732	$	(814	)	$	30,400	$	(570	)	$	191,132	$	(1,384	)

Note 5. Loans

Loans net of unearned income consist of the following:

	September 30, 2005					December 31, 2004
(Dollars in thousands)	Amount		Percent			Amount		Percent
Loans Held for Investment:
Commercial and agricultural	$	110,511		8.36	%	$	99,303		8.02	%
Commercial real estate		456,207		34.53	%		453,899		36.64	%
Residential real estate		497,730		37.67	%		457,386		36.92	%
Construction		143,738		10.89	%		112,732		9.10	%
Consumer		111,148		8.41	%		113,424		9.16	%
Other		1,887		0.14	%		2,012		0.16	%
Total	$	1,321,221		100.00	%	$	1,238,756		100.00	%
Loans Held for Sale	$	1,377				$	1,194

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

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

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

Financial instruments whose contract amounts represent credit risk at September 30, 2005, are commitments to extend credit (including availability of lines of credit) of $219.1 million and standby letters of credit and financial guarantees written of $13.0 million.

Note 6. Allowance for Credit Losses

The allowance for credit losses is maintained at a level sufficient to absorb probable loan losses inherent in the loan portfolio and lending-related commitments. The allowance is increased by charges to earnings in the form of provisions for loan losses and lending-related commitments and recoveries of prior loan charge-offs, and decreased by loans charged off. The provisions are 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 and lending-related commitments.

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

In the third quarter of 2005, the Company charged down $2.2 million of a $4.3 million commercial real estate loan, and transferred the $2.1 million balance to non-accrual loans. The loan had been previously disclosed as a potential problem loan, and carried a specific reserve allocation of $2.2 million.

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At September 30, 2005, the Company’s allowance for loan losses and the allowance for lending-related liabilities were $14.5 million and $460 thousand, respectively. The following table details the Company’s allowance for credit loss activity for the three- and nine-month periods ended September 30, 2005 and 2004.

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Amounts in thousands)	2005			2004			2005			2004
Allowance for Credit Losses
Beginning balance	$	16,597		$	16,160		$	16,339		$	14,624
Provision for credit losses		907			1,152			2,892			2,407
Balance acquired in acquisition		—			—			—			1,786
Charge-offs		(3,037	)		(1,312	)		(5,519	)		(3,456	)
Recoveries		479			233			1,234			872
Ending balance	$	14,946		$	16,233		$	14,946		$	16,233

Note 7. Deposits

The following is a summary of interest-bearing deposits by type as of September 30, 2005, and December 31, 2004.

	September 30,		December 31,
(Amounts in thousands)	2005		2004
Interest-bearing demand deposits	$	152,331	$	150,127
Savings deposits		375,027		385,134
Certificates of deposit		599,625		519,539
Individual Retirement Accounts		81,600		82,765
Total	$	1,208,583	$	1,137,565

Note 8. Borrowings

The following schedule details the Company’s FHLB borrowings and other indebtedness at September 30, 2005, and December 31, 2004.

	September 30,		December 31,
(Amounts in thousands)	2005		2004
FHLB borrowings	$	191,712	$	116,836
Trust preferred issuances		15,464		15,000
Other indebtedness		4		19
Total	$	207,180	$	131,855

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Federal Home Loan Bank (“FHLB”) borrowings and other indebtedness include $182.4 million in convertible and callable advances and $9.3 million of noncallable term advances from the FHLB of Atlanta at September 30, 2005. The weighted-average interest rates of advances are 4.81% and 5.54% at September 30, 2005, and December 31, 2004, respectively. At September 30, 2005, the FHLB advances have maturities between two months and 8 years. The scheduled maturities of the advances are as follows:

Year	Amount
	(in thousands)
2005	$	905
2006		394
2007		6,267
2008		27,000
2009 and thereafter		157,146
Total	$	191,712

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

Also included in other indebtedness is $15 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”) with an interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are callable beginning October 8, 2008. The net proceeds from the offering were contributed as capital to the Bank to support further growth.

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

Note 9. Commitments and Contingencies

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

The previously disclosed state tax audit of state income, franchise, and sales tax in one of the Company’s tax jurisdictions was recently concluded. The outcome of this audit was favorable to the Company and will result in total state income and franchise tax refunds of approximately $470 thousand, subject to the final filing of amended returns. The Company regularly evaluates the tax provision and continues to believe that it has established appropriate provisions for state income and franchise taxes.

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Note 10. Earnings per Share

The following schedule details earnings and shares used in computing basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2004.

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2005			2004			2005			2004
Basic:
Income continuing operations	$	6,934		$	6,622		$	19,209		$	19,810
Loss discontinued operations		(22	)		(212	)		(126	)		(3,525	)
Net income	$	6,912		$	6,410		$	19,083		$	16,285
Weighted average shares outstanding		11,275,156			11,231,973			11,269,515			11,235,462
Dilutive shares for stock options		65,532			92,485			70,494			93,715
Contingently issuable shares for acquisition		2,224			2,541			2,224			2,541
Weighted average dilutive shares outstanding		11,342,912			11,326,999			11,342,233			11,331,718
Basic:
Basic earnings per share continuing operations	$	0.61		$	0.59		$	1.70		$	1.76
Basic (loss) earnings per share discontinued operations		(0.00	)		(0.02	)		(0.01	)		(0.31	)
Basic earnings per share		0.61			0.57			1.69			1.45
Diluted:
Diluted earnings per share continuing operations	$	0.61		$	0.58		$	1.69		$	1.75
Diluted (loss) earnings per share discontinued operations		(0.00	)		(0.01	)		(0.01	)		(0.31	)
Diluted earnings per share		0.61			0.57			1.68			1.44

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Report of Independent Registered Public Accounting Firm

The Board of Directors
First Community Bancshares, Inc.

We have reviewed the condensed consolidated balance sheet of First Community Bancshares, Inc. and subsidiary (the Company) as of September 30, 2005, and the related condensed consolidated statements of income for the three- and nine-month periods ended September 30, 2005 and 2004 and the condensed consolidated statements of cash flows and changes in stockholders’ equity for the nine-month periods ended September 30, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U. S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheet of the Company as of December 31, 2004, and the related consolidated statements of income, cash flows and changes in stockholders’ equity for the year then ended (not presented herein) and in our report dated March 11, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Charleston, West Virginia
November 3, 2005

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First Community Bancshares, Inc.

PART I.

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

The following discussion and analysis is provided to address information about the First Community Bancshares, Inc.’s (the Company) financial condition and results of operations. This discussion and analysis should be read in conjunction with the 2004 Annual Report to Shareholders on Form 10-K and the other financial information included in this report.

The Company is a multi-state bank holding company headquartered in Bluefield, Virginia, with total assets of $1.99 billion at September 30, 2005. Through its community bank subsidiary, First Community Bank, N. A., the Company provides financial, trust and investment advisory services to individuals and commercial customers through fifty-three full-service banking locations, six loan production offices and two asset management offices located in the four states of Virginia, West Virginia, North Carolina and Tennessee. The First Community Bank, N. A. is the parent of Stone Capital, a SEC registered investment advisory firm that offers wealth management and investment advice. The Company’s common stock is traded on the NASDAQ National Market under the symbol “FCBC”.

FORWARD LOOKING STATEMENTS

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

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

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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

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

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the Company’s more subjective and complex “critical accounting policies.” In addition, the disclosures presented in the Notes to the Consolidated Financial Statements and in management’s discussion and analysis provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified i.) the determination of the allowance for credit losses, ii.) accounting for acquisitions and intangible assets, and iii.) accounting for income taxes as the accounting areas that require the most subjective or complex judgments. Derivatives hedging practices were previously included, but were eliminated in August 2004 with the disposition of the Company’s mortgage banking subsidiary.

Allowance for Credit Losses

The allowance for credit losses is established and maintained at levels management deems adequate to cover losses inherent in the portfolio and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. The allowance for credit losses is comprised of the allowance for loan losses and the allowance for lending-related commitments. Estimates for credit losses are determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, the opinions of FCBI’s regulators, changes in the size and composition of the loan portfolio and industry information. Also included in management’s estimates for credit losses are considerations with respect to the impact of economic events, the outcome of which are uncertain. These events may include, but are not limited to, a general slowdown in the economy, fluctuations in overall lending rates, political conditions, legislation that may directly or indirectly affect the banking industry, and economic conditions affecting specific geographic areas in which the Company conducts business.

The Company determines the allowance for credit losses by making specific allocations to impaired loans and loan pools that exhibit inherent weaknesses and various credit risk factors. Allocations to loan pools are developed giving weight to risk ratings, historical loss trends and management’s judgment concerning those trends and other relevant factors. These factors may include, among others, actual versus estimated losses, regional and national economic conditions, business segment and portfolio concentrations, industry competition and consolidation, and the impact of government regulations. The foregoing analysis is performed by management to evaluate the portfolio and calculate an estimated valuation allowance through a quantitative and qualitative analysis that applies risk factors to those identified risk areas.

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

The use of various estimates and judgments in the Company’s ongoing evaluation of the required level of allowance can significantly impact the Company’s results of operations and financial condition and may result in either greater provisions against earnings to increase the allowance or reduced provisions based upon management’s current view of portfolio and economic conditions and the application of revised estimates and assumptions.

Acquisitions and Intangible Assets

As part of its growth plan, the Company engages in business combinations with other companies. The acquisition of a business is generally accounted for under purchase accounting rules promulgated by the Financial Accounting Standards Board (“FASB”). Purchase accounting requires the recording of underlying assets and liabilities of the entity acquired at their fair market value. Any excess of the purchase price of the business over the net assets acquired and any identified intangibles is recorded as goodwill. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisal by qualified independent parties for relevant asset and liability categories. Financial assets and liabilities are typically valued using discount models which apply current discount rates to streams of cash flow. All of these valuation methods require the use of assumptions which can result in alternate valuations and varying levels of goodwill and, in some cases, amortization expense or accretion income.

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

Goodwill is recorded as the excess of the purchase price, if any, over the fair value of the revalued net assets. Goodwill is tested at least annually in the month of November for possible impairment. This testing again uses a discounted cash flow model applied to the anticipated stream of cash flows from operations of the business or segment being tested. Impairment testing necessarily uses estimates in the form of growth and attrition rates, anticipated rates of return, and discount rates. These estimates have a direct bearing on the results of the impairment testing and serve as the basis for management’s conclusions as to impairment.

Income Taxes

The establishment of provisions for federal and state income taxes is a complex area of accounting which also involves the use of judgments and estimates in applying relevant tax statutes. The Company operates in multiple state tax jurisdictions and this requires the appropriate allocation of income and expense to each state based on a variety of apportionment or allocation bases. Management strives to keep abreast of changes in tax law and the issuance of regulations which may impact tax reporting and provisions for income tax expense. The Company is also subject to audit by federal and state tax authorities. Results of these audits may produce indicated liabilities which differ from Company estimates and provisions. The Company continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of possible exposure based on current facts and circumstances. The Company recently completed a state tax audit. The results of that audit are discussed under the heading “Results of Operations – Income Tax Expense.”

EXECUTIVE OVERVIEW

The Company is a full service commercial bank holding company which operates within the four-state region of Virginia, West Virginia, North Carolina, and Tennessee. The Company operates through its community bank subsidiary, First Community Bank, N. A. and offers a wide range of financial services. The Company reported total assets of $1.99 billion at September 30, 2005, and operates through fifty-three full service banking offices and six commercial loan production offices in addition to its asset management offices.

The Company funds its lending activities primarily through the retail deposit operations of its branch banking network. Borrowings from the Federal Home Loan Bank (“FHLB”) provide additional funding as needed from time to time. The Company invests its funds primarily in loans to retail and commercial customers. In addition to loans, the Company also invests a portion of its funds in various debt securities, including those of United States agencies, state and political subdivisions, and certain corporate notes and debt instruments. The Company also maintains overnight interest-bearing balances with the FHLB and correspondent banks. The difference between interest earned on assets and interest paid on liabilities is the Company’s primary source of earnings. In August 2004, the Company divested itself of its mortgage subsidiary. Small losses from discontinued operations in 2005 stem from residual costs of remaining leases and trailing personnel costs.

RECENT ACQUISITIONS AND BRANCHING ACTIVITY

In August 2005, the Company entered into a definitive agreement with Sonabank, N. A., to sell its branch location in Clifton Forge, Virginia. The branch had deposits and repurchase agreements totaling approximately $46 million and loans of approximately $9 million at July 31, 2005. The transaction is expected to result in an approximate $3.9 million pre-tax gain on sale, and is expected to be completed by December 31, 2005, subject to regulatory approvals. The branch sale is part of a continuing strategic review of the branch network, and is designed to re-deploy resources to markets which offer improved growth and development opportunities.

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The following schedule details branch openings since January 1, 2004.

Quarter
Opened	Location	Type
Q1 2004	Mount Airy, NC	Loan Production Office
Q1 2004	Charlotte, NC	Loan Production Office
Q2 2004	Blacksburg, Va.	Loan Production Office
Q2 2004	Norfolk, Va.	Loan Production Office
Q4 2004	Princeton, W.Va.	Full Service Branch
Q2 2005	Clarksburg, W.Va.	Loan Production Office
Q3 2005	Charleston, W.Va.	Loan Production Office

The Company acquired PCB Bancorp, Inc., a Tennessee-chartered bank holding company (“PCB Bancorp”) after the close of business on March 31, 2004. PCB Bancorp had five full service branch offices located in Johnson City, Kingsport and surrounding areas in Washington and Sullivan Counties in East Tennessee. PCB Bancorp had total assets of $171 million, loans of $128 million and total deposits of $150 million as of the date of the merger. The assets, liabilities and results of operations have been included in the Company’s financial statements beginning with the second quarter 2004.

Under the terms of the acquisition agreement, shares of PCB Bancorp common stock were purchased for $40.00 per share in cash. The total deal value, including the cash-out of outstanding stock options, was approximately $36.0 million. Concurrent with the PCB Bancorp acquisition, Peoples Community Bank, the wholly-owned subsidiary of PCB Bancorp, was merged into First Community Bank, N. A.

FINANCIAL POSITION

Total assets at September 30, 2005, increased $156.7 million to $1.99 billion from December 31, 2004, an annualized growth rate of 11%. The increases in the balance sheet were primarily driven by the addition of $82.5 million in loans, $26.5 million in investment securities, and $30.4 million in interest-bearing deposits with banks. Increases in assets were funded primarily through increases of $87.0 million in deposits, $15.9 million in repurchase agreements, and borrowings of $75.3 million.

Securities

Securities available for sale were $424.6 million at September 30, 2005, compared to $388.7 million at December 31, 2004, an increase of $36.0 million. This change reflects the purchase of $90.3 million in securities, $4.6 million in maturities and calls, proceeds from sales of $18.3 million, a market value decrease of approximately $1.1 million, the continuation of larger pay-downs of $29.2 million on mortgage-backed securities and collateralized mortgage obligations triggered by the low interest rate environment and approximately $1.1 million in bond premium amortization. Securities available for sale are recorded at their estimated fair market value. The unrealized gain or loss, which is the difference between amortized cost and estimated market value, net of related deferred taxes, is recognized in the stockholders’ equity section of the balance sheet as either accumulated other comprehensive income or loss. The unrealized gain after taxes of $1.7 million at September 30, 2005, represents a decrease of $661 thousand from the $2.4 million gain at December 31, 2004, the result of market value changes in reaction to rate movements on similar instruments.

The Company attempts to maintain an acceptable level of interest rate risk within its securities portfolio. At September 30, 2005, the average life and duration of the portfolio were 5.6 years and 4.3, respectively. Average life and duration were somewhat higher than December 31, 2004, at 4.0 years and 3.5, respectively. However, the Company has been shifting towards more floating-rate securities. At September 30, 2005, 21% of the portfolio was floating-rate, compared to 16% at December 31, 2004.

The Company’s available-for-sale securities portfolio is reported at fair value. The fair value of most securities is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Available-for-sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of each individual investment such as

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the length of time the fair value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and the Company’s intent and ability to hold the security to recovery or maturity. At September 30, 2005, the combined depreciation in value of the individual securities in an unrealized loss position for more than 12 months was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not believe any unrealized loss, individually or in the aggregate, as of September 30, 2005, represents other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the value is attributable to changes in market interest rates and not the credit quality of the issuer.

Securities held to maturity totaled $24.7 million at September 30, 2005, reflective of a continuing decrease due primarily to continuing paydowns, maturities and calls within the portfolio. The market value of investment securities held to maturity was 103.7% and 104.1% of book value at September 30, 2005, and December 31, 2004, respectively. Recent trends in interest rates have had little effect on the portfolio market value since December 31, 2004, due to its larger percentage of municipal securities which display less price sensitivity to rate changes.

Loan Portfolio

Loans Held for Sale:The $1.4 million balance of loans held for sale at September 30, 2005, are long-term mortgage loans that are sold to investors on a best efforts basis; accordingly, the Company does not retain the interest rate risk involved in the commitment. The gross notional amount of outstanding commitments at September 30, 2005, was $6.2 million on 48 loans.

Loans Held for Investment:Total loans held for investment increased $82.5 million to $1.32 billion at September 30, 2005, from the $1.24 billion level at December 31, 2004, and increased $92.0 million from September 30, 2004, as a result of increased loan production and contributions by new loan production offices. The loan to deposit ratio increased slightly to 91.5% at September 30, 2005, compared with 91.2% at December 31, 2004, and 90.2% at September 30, 2004. 2005 year-to-date average loans held for investment of $1.29 billion increased $160.0 million when compared to the average for the first nine months of 2004 of $1.13 billion. The increase in average loans reflects the impact of the acquisition of PCB on March 31, 2004.

The held for investment loan portfolio continues to be diversified among loan types and industry segments. The following table presents the various loan categories and changes in composition as of September 30, 2005, December 31, 2004 and September 30, 2004.

Loan Portfolio Overview

	September 30, 2005					December 31, 2004					September 30, 2004
(Dollars in Thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Loans Held for Investment:
Commercial and agricultural	$	110,511		8.36	%	$	99,303		8.02	%	$	97,539		7.93	%
Commercial real estate		456,207		34.53	%		453,899		36.64	%		439,486		35.75	%
Residential real estate		497,730		37.67	%		457,386		36.92	%		450,266		36.63	%
Construction		143,738		10.89	%		112,732		9.10	%		124,165		10.10	%
Consumer		111,148		8.41	%		113,424		9.16	%		115,720		9.41	%
Other		1,887		0.14	%		2,012		0.16	%		2,094		0.17	%
Total	$	1,321,221		100.00	%	$	1,238,756		100.00	%	$	1,229,270		100.00	%
Loans Held for Sale	$	1,377				$	1,194				$	1,163

Non-Performing Assets

Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or more and still accruing interest, other real estate owned (“OREO”), and repossessions. Non-performing assets were $7.1 million at September 30, 2005, $6.6 million at December 31, 2004, and $5.4 million at September 30, 2004. The percentage of non-performing assets to total loans, OREO and repossessions was 0.54% at September 30, 2005, consistent with 0.53% at December 31, 2004, and up from 0.44% at September 30, 2004.

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The following schedule details non-performing assets by category at the close of each of the quarters ended September 30, 2005 and 2004, and December 31, 2004.

	September 30,		December 31,		September 30,
(Amounts in Thousands)	2005		2004		2004
Non-accrual	$	5,417	$	5,168	$	3,679
Ninety days past due and accruing		—		—		—
Other real estate owned		1,690		1,419		1,636
Repossessions		14		1		40
Total non-performing assets	$	7,121	$	6,588	$	5,355
Restructured loans performing in accordance with modified terms	$	313	$	354	$	368

At September 30, 2005, non-accrual loans increased $249 thousand from December 31, 2004, and increased $1.7 million from September 30, 2004. Ninety-day past due and accruing loans remained at zero. Ongoing activity within the classification and categories of non-performing loans continues to include collections on delinquencies, foreclosures and movements into or out of the non-performing classification as a result of changing customer business conditions. OREO of $1.7 million increased from December 31, 2004, and is comparable to September 30, 2004. OREO is carried at the lesser of estimated net realizable value or cost.

In the third quarter of 2005, the Company charged down $2.2 million of a $4.3 million commercial real estate loan, and transferred the $2.1 million balance to non-accrual loans. The loan had been previously disclosed as a potential problem loan, and carried a specific reserve allocation of $2.2 million.

Deposits and Other Borrowings

Total deposits grew by $87.0 million or 6.4% during the first nine months of 2005. Non interest-bearing demand deposits increased by $16.0 million, while interest-bearing demand deposits remained stable. Savings decreased $10.1 million while time deposits increased $78.9 million, or 13.1%. The attrition from savings and the increase in time deposits reflects the continued migration of new and current customer funds in response to the upward movement in time deposit interest rates.

The Company’s convertible and callable FHLB borrowings at September 30, 2005, increased $75.0 million to $182.4 million. The first and second quarter advances allowed the Company to fund increasing loan demand, lock in current low-cost funding, and increase the asset-sensitive position of the Company. Noncallable term advances decreased slightly to $9.3 million. For further discussion of FHLB borrowings, see the Borrowings Note to the Unaudited Consolidated Financial Statements included in this report. Securities sold under repurchase agreements increased $15.9 million in the first nine months of 2005. There were no federal funds purchased outstanding at September 30, 2005, as the Company experienced increased liquidity in the first nine months of 2005.

Stockholders’ Equity

Total stockholders’ equity increased $10.2 million from December 31, 2004, as the Company continued to balance capital adequacy and returns to stockholders. The increase in equity was due mainly to net earnings of $19.1 million after dividends paid to stockholders of $8.6 million.

Risk-based capital guidelines and leverage ratio measure capital adequacy of banking institutions. Risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. At September 30, 2005, the Company’s total capital to risk-weighted assets ratio was 11.33% versus 12.09% at December 31, 2004. The Company’s Tier 1 capital to risk-weighted assets ratio was 10.25% at September 30, 2005, compared to 10.80% at December 31, 2004. The Company’s Tier 1 leverage ratio at September 30, 2005, was 7.71% compared to 7.62% at December 31, 2004. All of the Company’s regulatory capital ratios exceed the current well-capitalized levels prescribed for banks.

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RESULTS OF OPERATIONS

Overview

Net income for the nine months ended September 30, 2005, was $19.1 million or $1.69 per basic and $1.68 per diluted share, compared with $16.3 million or $1.45 per basic and $1.44 per diluted share for the nine months ended September 30, 2004. Return on average equity for the nine months ended September 30, 2005 was 13.49% compared to 12.30% for the nine months ended September 30, 2004. Return on average assets was 1.34% for the nine months ended September 30, 2005, compared to 1.21% for the nine months ended September 30, 2004.

The $2.8 million increase in net income between 2004 and 2005 is largely due to the elimination of losses from the now discontinued operations of the Company’s former mortgage banking subsidiary. While income from continuing operations remained constant at $26.6 million, 2004 results benefited from an additional $830 thousand in investment securities gains. The higher effective tax rate from continuing operations in 2005 also resulted in an additional $555 thousand in income taxes.

Income from continuing operations for the nine months ended September 30, 2005, was $19.2 million, versus $19.8 million for the nine months ended September 30, 2004. Return on average equity from continuing operations for the first nine months of 2005 was 13.57% compared to 14.97% for the first nine months of last year. Return on average assets from continuing operations was 1.35% compared to 1.49% for the first nine months of 2004.

Net income for the three months ended September 30, 2005, was $6.9 million or $0.61 per basic and diluted share, compared with $6.4 million or $0.57 per basic and diluted share for the three months ended September 30, 2004. Return on average equity for the quarter ended September 30, 2005, was 14.23% compared to 13.06% for the same period of 2004. Return on average assets was 1.40% for the three months ended September 30, 2005, and 1.22% for the comparable period of 2004.

Income from continuing operations for the three months ended September 30, 2005, was $6.9 million, versus $6.6 million for the three months ended September 30, 2004. Return on average equity from continuing operations for the third quarter of 2005 was 14.28% compared to 17.33% for the same period last year and return on average assets from continuing operations was 1.40% in 2005, compared to 1.65% for 2004.

In August 2004, the Company sold its mortgage banking subsidiary. The loss from discontinued operations was $126 thousand for the first nine months of 2005, compared to $3.5 million or $0.31 per basic and diluted share for the nine months ended September 30, 2004.

Net Interest Income – Quarterly Comparison (See Table I)

Net interest income for the quarter ended September 30, 2005 was $18.7 million compared to $17.7 million for the same period in 2004, an increase of $1 million. Tax-equivalent net interest income increased $1.4 million, or 7.5%, from $18.3 million for the quarter ended September 30, 2004, to $19.7 million for the quarter ended September 30, 2005. For purposes of the net interest income discussions, comparisons are made on a tax-equivalent basis, which provides a common basis for comparing yields on earning assets exempt from federal income taxes to those which are fully taxable. The yield on earning assets increased 38 basis points to 6.43%, while the cost of interest-bearing liabilities increased 48 basis points to 2.50%. The result was a 10 basis point decrease in the net interest rate spread for the quarter compared to 2004. Tax-equivalent net interest margin remained steady at 4.33%. Net interest spread for the third quarter of 2005 was 3.93%.

In this period of continuing industry-wide margin compression, the Company’s margin has remained relatively strong. The Company’s loan portfolio continues to produce increasing yields. The yield on loans for the third quarter of 2005 increased 44 basis points over the comparable period to 6.99%. Increases in deposit and borrowing costs have been managed through the Company’s asset/liability and pricing management processes. Maintaining lower borrowing costs in the rising rate environment has been, and continues to be, dependent on control of savings and time deposit rates, which are influenced by market and competitive forces.

Average earning assets increased $123.5 million in the third quarter of 2005 compared to the third quarter of 2004, contributing to the improvements noted in net interest income. The largest increase in average earning assets was in average loans held for investment of $106.8 million. Securities available for sale decreased $1.2 million while the tax-equivalent yield increased 35 basis points. Average securities held-to-maturity decreased $8.0 million while the tax-equivalent yield decreased 73 basis points. Average interest-bearing deposit with banks increased $26.0 million to $39.4 million and yielded 3.46%.

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The increase in average interest-bearing liabilities was smaller at $94.8 million, and was mostly driven by increases in time deposits of $50.7 million and borrowings of $58.5 million. Total interest-bearing deposits increased $27.1 million, but due to the continuing customer shift from certain transaction accounts to time deposits, the cost on total interest-bearing deposits increased 39 basis points.

The $1.4 million increase in tax-equivalent net interest income was achieved through the combined effect of changes in volume and corresponding rates on the underlying assets and liabilities. Earnings attributable to the net volume increase in earning assets over paying liabilities was approximately $1.1 million while the effect of changing rates represented an addition of approximately $263 thousand for a combined effect on net interest income of an additional $1.4 million.

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

Net interest income, the largest contributor to earnings, was $55.0 million for the nine months ended September 30, 2005, compared to $51.3 million for the corresponding period in 2004. Tax-equivalent net interest income totaled $58.1 million for the nine months ended September 30, 2005, an increase of $4.0 million from the $54.1 million for the first nine months of 2004. The increase reflects a $5.2 million increase due to increased volume, which was partially offset by a $1.2 million decrease due to rate changes on the underlying assets and liabilities.

During the first nine months of 2005, average earning assets increased $110.2 million while interest-bearing liabilities increased $92.0 million over the comparable period. The yield on average earning assets increased 34 basis points to 6.36% from 6.02% for the nine months ended September 30, 2004. Total cost of interest-bearing liabilities increased 36 basis points during the same period leaving the net interest rate spread (the difference between interest income on earning assets and expense on interest bearing liabilities) 3 basis points lower at 4.07% compared to 4.10% for the same period last year. The Company’s tax-equivalent net interest margin of 4.43% for the nine months ended September 30, 2005, increased 3 basis points from 4.40% in 2004.

The largest contributor to the increase in the yield on average earning assets in 2005, on a volume-weighted basis, was the $160.0 million increase in loans held for investment. The loan portfolio contributed approximately $10.0 million to the change in interest income, while the portfolio’s average yield increased 22 basis points from the prior year to 6.85%. The volume of variable rate loans tied to prime and other indices increased in response to the recent increases in short-term interest rates.

During the nine months ended September 30, 2005, the tax-equivalent yield on securities available for sale increased 31 basis points to 4.93% while the average balance decreased by $42.7 million. Although the total portfolio decreased through the period, the average tax-equivalent yield increased due to the addition of higher-rate securities and the reduction of lower-rate securities. Funds received from the paydowns, maturities, calls, and sales of investment securities helped fund the loan growth.

Compared to the first nine months of 2004, average interest-bearing balances with banks remained steady at $31.2 million during the first nine months of 2005, while the yield increased 150 basis points to 3.15%.

The Company actively manages its product pricing by staying abreast of the current economic climate and competitive forces in order to enhance repricing opportunities available with respect to the liability side of its balance sheet. In doing so, the cost of interest-bearing liabilities increased by 36 basis points from 1.93% for the nine months ended September 30, 2004, to 2.29% for the same period of 2005 while the average volume increased $92 million.

The average balance of borrowings increased by $24.9 million in 2005 to $170.6 million, while the rate paid on those borrowings increased 47 basis points. These changes were due to the combined effects of the addition of balances added from the PCB acquisition, the allocation of FHLB borrowings to the discontinued segment in 2004, the call of a $25.0 million advance at the end of the fourth quarter of 2004, and the subsequent take-downs of $25.0 million and $50.0 million FHLB advances in mid-first quarter and the end of the second quarter 2005, respectively.

Compared to the same period in 2004, average federal funds purchased and repurchase agreements increased $18.2 million at September 30, 2005, while the average rate increased 79 basis points. In addition, the average balances of interest-bearing demand and savings deposits increased $5.9 million and $7.3 million, respectively, for the nine months ended September 30, 2005. The average rate paid on interest-bearing demand deposits remained consistent, increasing only 2 basis points, while the average rate paid on savings increased 19 basis points. Average time deposits increased $35.6 million while the average rate paid increased 36 basis points from 2.44% in 2004 to 2.80% in 2005. The level of average non-interest-bearing demand deposits increased $18.1 million to $227.0 million at September 30, 2005, compared to the corresponding period of the prior year.

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Table I

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

	Three Months Ended							Three Months Ended
	September 30, 2005							September 30, 2004
	Average		Interest		Yield/Rate			Average		Interest		Yield/Rate
	Balance		(1)		(1)			Balance		(1)		(1)
	(Dollars in Thousands)
ASSETS
Earning Assets:
Loans Held for Investment: (2)
Taxable	$	1,318,759	$	23,241		6.99	%	$	1,208,446	$	19,899		6.55	%
Tax-Exempt		1,675		33		7.84	%		5,236		82		6.23	%
Total		1,320,434		23,274		6.99	%		1,213,682		19,981		6.55	%
Securities Available for Sale:
Taxable		275,775		2,901		4.17	%		309,742		2,951		3.79	%
Tax-Exempt		141,865		2,255		6.31	%		109,133		1,839		6.70	%
Total		417,640		5,156		4.90	%		418,875		4,790		4.55	%
Securities Held to Maturity:
Taxable		398		3		2.99	%		411		9		8.71	%
Tax-Exempt		26,682		487		7.23	%		34,684		688		7.89	%
Total		27,080		490		7.17	%		35,095		697		7.90	%
Interest-Bearing Deposits		39,350		343		3.46	%		13,330		94		2.81	%
Total Earning Assets		1,804,504		29,263		6.43	%		1,680,982		25,562		6.05	%
Other Assets (3)		155,079							150,614
Assets Related to Discontinued Operations		—							9,315
TOTAL ASSETS	$	1,959,583						$	1,840,911
LIABILITIES
Interest-Bearing Liabilities:
Demand Deposits	$	152,658	$	105		0.27	%	$	155,435	$	399		1.02	%
Savings Deposits (4)		367,314		1,108		1.20	%		388,194		866		0.89	%
Time Deposits		667,986		5,083		3.02	%		617,251		3,737		2.41	%
Total Deposits		1,187,958		6,296		2.10	%		1,160,880		5,002		1.71	%
Fed Funds Purchased & Repurchase
Agreements		123,936		691		2.21	%		114,670		362		1.26	%
Short-term Borrowings		139,735		1,790		5.08	%		131,728		1,658		5.01	%
Long-term Borrowings		67,471		795		4.67	%		17,016		226		5.28	%
Total Interest-Bearing liabilities		1,519,100		9,572		2.50	%		1,424,294		7,248		2.02	%
Demand Deposits		232,841							218,073
Other Liabilities		14,994							13,344
Liabilities Related to Discontinued Operations		—							8,831
Stockholders’ Equity		192,648							176,369
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,959,583						$	1,840,911
Net Interest Income, Tax Equivalent			$	19,691						$	18,314
Net Interest Rate Spread (5)						3.93	%						4.03	%
Net Interest Margin (6)						4.33	%						4.33	%

(1)	Fully Taxable Equivalent (“FTE”) at the rate of 35%. The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
(2)	Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual.
(3)	In previous years, the Allowance for Credit Losses was netted against loans in the earning asset section. In 2005, the Allowance was netted against other assets and the comparable prior period was reclassified to conform to the 2005 presentation.
(4)	In previous years, certain interest-bearing Money Market Demand accounts were included in the interest-bearing demand category in the earning asset section. In 2005, these accounts were reclassified to savings and the comparable prior period was reclassified to conform to the 2005 presentation.
(5)	Represents the difference between the yield on earning assets and cost of funds.
(6)	Represents tax equivalent net interest income divided by average interest-earning assets.

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Table II

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

	Nine Months Ended							Nine Months Ended
	September 30, 2005							September 30, 2004
	Average		Interest		Yield/Rate			Average		Interest		Yield/Rate
	Balance		(1)		(1)			Balance		(1)		(1)
					(Dollars in Thousands)
ASSETS
Earning Assets:
Loans Held for Investment: (2)
Taxable	$	1,290,606	$	66,089		6.85	%	$	1,128,762	$	56,047		6.64	%
Tax-Exempt		3,052		144		6.31	%		4,918		227		6.17	%
Total		1,293,658		66,233		6.85	%		1,133,680		56,274		6.63	%
Securities Available for Sale:
Taxable		253,335		7,744		4.09	%		331,158		9,638		3.89	%
Tax-Exempt		142,400		6,835		6.42	%		107,318		5,513		6.86	%
Total		395,735		14,579		4.93	%		438,476		15,151		4.62	%
Securities Held to Maturity:
Taxable		402		11		3.66	%		422		21		6.65	%
Tax-Exempt		29,774		1,775		7.97	%		36,114		2,157		7.98	%
Total		30,176		1,786		7.91	%		36,536		2,178		7.96	%
Interest-Bearing Deposits		31,241		736		3.15	%		31,812		394		1.65	%
Federal Funds Sold		—		—					80		1		1.67	%
Total Earning Assets		1,750,810		83,334		6.36	%		1,640,584		73,998		6.02	%
Other Assets (3)		152,466							137,821
Assets Related to Discontinued Operations		—							19,969
TOTAL ASSETS	$	1,903,276						$	1,798,374
LIABILITIES
Interest-Bearing Liabilities:
Demand Deposits	$	153,938	$	295		0.26	%	$	147,992	$	270		0.24	%
Savings Deposits (4)		367,415		2,813		1.02	%		360,097		2,247		0.83	%
Time Deposits		654,397		13,697		2.80	%		618,758		11,313		2.44	%
Total Deposits		1,175,750		16,805		1.91	%		1,126,847		13,830		1.64	%
Fed Funds Purchased & Repurchase Agreements		126,215		1,897		2.01	%		107,977		987		1.22	%
Short-term Borrowings		136,982		5,218		5.09	%		128,652		4,462		4.63	%
Long-term Borrowings		33,570		1,355		5.40	%		17,012		643		5.05	%
Total Interest-Bearing liabilities		1,472,517		25,275		2.29	%		1,380,488		19,922		1.93	%
Demand Deposits		227,038							208,905
Other Liabilities		14,522							14,472
Liabilities Related to Discontinued Operations		—							19,969
Stockholders’ Equity		189,199							174,540
TOTAL LIABILITIES
AND STOCKHOLDERS’ EQUITY	$	1,903,276						$	1,798,374
Net Interest Income, Tax Equivalent			$	58,059						$	54,076
Net Interest Rate Spread (5)						4.07	%						4.10	%
Net Interest Margin (6)						4.43	%						4.40	%

(1)	Fully Taxable Equivalent (“FTE”) at the rate of 35%. The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
(2)	Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual.
(3)	In previous years, the Allowance for Credit Losses was netted against loans in the earning asset section. In 2005, the Allowance was netted against other assets and the comparable prior period was reclassified to conform to the 2005 presentation.
(4)	In previous years, certain interest-bearing Money Market Demand accounts were included in the interest-bearing demand category in the earning asset section. In 2005, these accounts were reclassified to savings and the comparable prior period was reclassified to conform to the 2005 presentation.
(5)	Represents the difference between the yield on earning assets and cost of funds.
(6)	Represents tax equivalent net interest income divided by average interest-earning assets.

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The following table summarizes the changes in interest earned and paid resulting from changes in the volume of earning assets and paying liabilities and changes in their interest rates. The changes in interest due to both rate and volume have been allocated to the volume and rate columns in proportion to absolute dollar amounts.

	Three Months Ended September 30, 2005,									Nine Months Ended September 30, 2005,
	Compared to 2004									Compared to 2004
	$ Increase/(Decrease) due to									$ Increase/(Decrease) due to
(Amounts in Thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest Earned On:
Loans	$	1,857		$	1,436		$	3,293		$	8,110		$	1,849		$	9,959
Securities available for sale		193			173			366			(666	)		94			(572	)
Securities held to maturity		(148	)		(59	)		(207	)		(381	)		(11	)		(392	)
Interest-bearing deposits with other banks		222			27			249			(7	)		349			342
Federal funds sold		—			—			—			(1	)		(1	)		(2	)
Total interest-earning assets		2,124			1,577			3,701			7,055			2,280			9,335
Interest Paid On:
Demand deposits		(7	)		(287	)		(294	)		11			14			25
Savings deposits		(49	)		291			242			46			520			566
Time deposits		330			1,016			1,346			675			1,709			2,384
Fed funds purchased and repurchase agreements		32			297			329			189			721			910
Short-term borrowings		106			26			132			298			458			756
Long-term debt		598			(29	)		569			665			46			711
Total interest-bearing liabilities		1,010			1,314			2,324			1,884			3,468			5,352
Change in net interest income	$	1,114		$	263		$	1,377		$	5,171		$	(1,188	)	$	3,983

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Provision and Allowance for Credit Losses

The Company’s allowance for credit losses is made up of two separate components. The primary component is the allowance for loan losses, and is presented as such on the balance sheet. The allowance for losses attributable to lending-related commitments, such as unfunded loan commitments and letters of credit, is the allowance for lending-related commitments, and is included in other liabilities. The combination of the two allowances is referred to as the allowance for credit losses. At September 30, 2005, the Company’s allowance for loan losses and the allowance for lending-related liabilities were $14.5 million and $460 thousand, respectively.

The allowance for credit losses was $14.9 million at September 30, 2005, compared to $16.3 million at December 31, 2004 and $16.2 million at September 30, 2004. The allowance for credit losses represents 276% of non-performing loans at September 30, 2005, versus 316% and 441% at December 31, 2004, and September 30, 2004, respectively. When other real estate and repossessions are combined with non-performing loans, the allowance equals 210% of non-performing assets at September 30, 2005, versus 248% and 303% at December 31, 2004, and September 30, 2004, respectively.

The Company’s allowance for credit loss activity for the three- and nine-month periods ended September 30, 2005 and 2004, are as follows:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Amounts in thousands)	2005			2004			2005			2004
Allowance for Credit Losses
Beginning balance	$	16,597		$	16,160		$	16,339		$	14,624
Provision for Credit Losses		907			1,152			2,892			2,407
Balance acquired in acquisition		—			—			—			1,786
Charge-offs		(3,037	)		(1,312	)		(5,519	)		(3,456	)
Recoveries		479			233			1,234			872
Ending balance	$	14,946		$	16,233		$	14,946		$	16,233

The total allowance for credit losses to loans held for investment ratio was 1.13% at September 30, 2005, compared to 1.32% at both December 31 and September 30, 2004. Management considers the allowance adequate based upon its analysis of the portfolio as of September 30, 2005, however no assurances can be made that future adjustments will not be necessary as a result of increases in non-performing loans and other factors.

The provision for credit losses for the nine-month period ended September 30, 2005, increased to $2.9 million when compared to the nine-month period ending September 30, 2004, of $2.4 million. The increase in loss provision between the periods is primarily attributable to new, or increased, specific allocations, increased commercial and residential real estate loan volume, and changes in various qualitative risk factors. Net charge-offs for the first nine months of 2005 were $4.3 million, compared to $2.6 million for the corresponding period in 2004. Expressed as a percentage of average loans held for investment, net charge-offs increased from 0.22% for the nine months ended September 30, 2004, to 0.33% for the same period of 2005. Net charge-offs for the three and nine months ended September 30, 2005, were negatively influenced by the charge off of the commercial relationship discussed under “Non-Performing Assets.”

The provision for credit losses for the three-month period ended September 30, 2005, was $907 thousand compared to $1.2 million for the same quarter of 2004. Net charge offs were $2.6 million in the third quarter of 2005, versus $1.1 million for the third quarter of 2004.

Non-interest Income

Non-interest income consists of all revenues which are not included in interest and fee income related to earning assets. Non-interest income from continuing operations for the third quarter of 2005 was $5.0 million compared to $4.3 million in the same period of 2004. The third quarter of 2005 included securities gains which were $476 thousand greater than those recognized in 2004. The remaining components of non-interest income increased by $278 thousand, or 6.6%, in the third quarter of 2005 compared to the same period of 2004.

Third quarter 2005 trust services income increased $42 thousand, or 8.4%, compared to 2004 as a result of growth in trust accounts, trust assets and the related fees generated by such growth in all areas, including estates, employee benefits and

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investment related accounts. Service charges on deposit accounts increased $199 thousand or 8.1%. All other service charges, commissions and fees increased $221 thousand, or 30%, compared to the third quarter of 2004.

Year-to-date non-interest income was $13.3 million compared to $13.1 million for the first nine months of 2004. Securities gains in the first nine months of 2005 were $679 thousand compared to $1.5 million for the same period of 2004. All other components of non-interest income increased by $1.1 million, or 9.1%, in the first three quarters of 2005 compared to the same period of 2004.

Year-to-date 2005 trust services income increased by $239 thousand, or 17%, compared to 2004. Service charges on deposit accounts increased $709 thousand, or 11%, and other service charges, commissions and fees increased $634 thousand, or 32%, for the comparable period.

Non-interest Expense

Non-interest expense totaled $13.1 million for the quarter ended September 30, 2005, increasing $881 thousand, or 7.2%, over the same period of 2004. Year-to-date non-interest expense was $38.9 million, an increase of $3.5 million, or 11%, over the same period in 2004. The increases over the third quarter and year-to-date periods in 2004 are primarily attributable to increases in salaries and benefits of $453 thousand and $2.4 million, respectively. The increases are due to increases in staffing to support added corporate services and continued branch growth and increased health benefits costs. In addition to human resource costs, year-to-date costs related to Sarbanes-Oxley compliance and audit fees have increased $332 thousand compared to 2004. All other components of non-interest expense remained relatively stable between the two periods.

Income Tax Expense

Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax earnings of the Company. Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the calculation of taxable income. These items are commonly referred to as permanent differences. The most significant permanent differences for the Company include i) income on state and municipal securities which are exempt from federal income tax, ii) certain dividend payments which are deductible by the Company, iii) tax credits generated by investments in low income housing and iv) for 2004, goodwill impairment expense which is not deductible.

For the third quarter of 2005, consolidated income taxes were $2.6 million compared to $914 thousand for the third quarter of 2004. For the quarters ended September 30, 2005 and 2004, the effective tax rates were 27.54% and 12.48%, respectively. For the first nine months of 2005, consolidated income taxes were $7.3 million, a 27.65% effective tax rate, compared to $4.8 million, an effective tax rate of 22.81%, for the first nine months of 2004. Effective tax rates for the 2004 periods were less than comparable current periods due to the tax benefits realized from the divestiture of the mortgage banking subsidiary.

The previously disclosed state tax audit of state income, franchise, and sales tax in one of the Company’s tax jurisdictions was recently concluded. The outcome of this audit was favorable to the Company and will result in total state income and franchise tax refunds of approximately $470 thousand, subject to the final filing of amended returns. The Company regularly evaluates the tax provision and continues to believe that it has established appropriate provisions for state income and franchise taxes.

Hurricanes Katrina, Rita, and Wilma Exposure

The Company performed an evaluation of its exposure to potential loss as a result of the devastation caused during 2005 by hurricanes Katrina, Rita, and Wilma in the states of Louisiana, Mississippi, Alabama, Texas, Florida, and other effected areas. The evaluation included the review of investment securities, loan and deposit portfolios, commitments to lend and letters of credit, and adverse interest rate movements. The evaluation disclosed no significant areas of potential loss exposure.

PART I.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Liquidity and Capital Resources

At September 30, 2005, the Company maintained a significant level of liquidity in the form of cash and cash equivalent balances of $55.9 million, investment securities available for sale of $424.6 million, and FHLB credit availability of approximately $205.3 million. Cash and cash equivalents as well as advances from the FHLB are immediately available for satisfaction of deposit withdrawals, customer credit needs and operations of the Company. Investment securities available for sale represent a secondary level of liquidity available for conversion to liquid funds in the event of extraordinary needs. The Company also maintains approved lines of credit with correspondent banks as backup liquidity sources.

The Company maintains a liquidity policy as a means to manage the liquidity risk process and associated risk. The policy includes a Liquidity Contingency Plan (“Liquidity Plan”) that is designed as a tool for the Company to detect liquidity issues promptly in order to protect depositors, creditors and shareholders. The Liquidity Plan includes monitoring various internal and external indicators such as changes in core deposits and changes in market conditions. It provides for timely responses to

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a wide variety of funding scenarios ranging from changes in loan demand to a decline in the Company’s quarterly earnings to a decline in the market price of the Company’s stock. The Liquidity Plan calls for specific responses designed to meet a wide range of liquidity needs based upon assessments on a recurring basis by management and the Board of Directors.

Interest Rate Risk and Asset/Liability Management

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

The Company’s primary component of operational revenue, NII, is subject to variation as a result of changes in interest rate environments in conjunction with unbalanced repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has four primary components including repricing risk, basis risk, yield curve risk and option risk. Repricing risk occurs when earning assets and paying liabilities reprice at differing times as interest rates change. Basis risk occurs when the underlying rates on the assets and liabilities the institution holds change at different levels or in varying degrees. Yield curve risk is the risk of adverse consequences as a result of unequal changes in the spread between two or more rates for different maturities for the same instrument. Lastly, option risk is due to “embedded options,” often put or call options, given or sold to holders of financial instruments.

In order to mitigate the effect of changes in the general level of interest rates, the Company manages repricing opportunities and thus, its interest rate sensitivity. The Company seeks to control its IRR exposure to insulate NII and net earnings from fluctuations in the general level of interest rates. To measure its exposure to IRR, quarterly simulations of NII are performed using financial models that project NII through a range of possible interest rate environments including rising, declining, most likely and flat rate scenarios. The simulation model used by the Company captures all earning assets, interest-bearing liabilities and all off-balance sheet financial instruments and combines the various factors affecting rate sensitivity into an earnings outlook. The results of these simulations indicate the existence and severity of IRR in each of those rate environments based upon the current balance sheet position, assumptions as to changes in the volume and mix of interest-earning assets and interest-paying liabilities and management’s estimate of yields to be attained in those future rate environments and rates that will be paid on various deposit instruments and borrowings. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on NII. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management’s strategies. However, the earnings simulation model is currently the best tool available to management for managing IRR.

Specific strategies for management of IRR have included shortening the amortized maturity of new fixed-rate loans, increasing the volume of adjustable-rate loans to reduce the average maturity of the Company’s interest-earning assets and monitoring the term structure of liabilities to maintain a balanced mix of maturity and re-pricing structures to mitigate the potential exposure. Based upon the latest simulation, the Company believes that it is biased toward an asset sensitive position. Absent adequate management, asset sensitive positions can negatively impact net interest income in a falling rate environment or, alternatively, positively impact net interest income in a rising rate environment.

The Company has established policy limits for tolerance of interest rate risk that allow for no more than a 10% reduction in projected NII based on quarterly income simulations compared to forecasted results. In addition, the policy addresses exposure limits to changes in the Economic Value of Equity (“EVE”) according to predefined policy guidelines. The most recent simulation indicates that current exposure to interest rate risk is within the Company’s defined policy limits.

The following table summarizes the impact on NII and the EVE as of September 30, 2005, and December 31, 2004, of immediate and sustained rate shocks in the interest rate environment of plus and minus 100 basis points and plus 200 basis points from the base simulation, assuming no remedial measures are effected.

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Rate Sensitivity Analysis

	September 30, 2005
	Change in						Change in
Increase (Decrease) in	Net Interest			%			Market Value		%
Interest Rates (Basis Points)	Income			Change			of Equity		Change
				(Dollars in Thousands)
200	$	4,236			5.6		$	448		0.2
100		2,182			2.9			5,596		2.1
(100)		(3,395	)		(4.5	)		3,570		1.3

	December 31, 2004
	Change in						Change in
Increase (Decrease) in	Net Interest			%			Market Value			%
Interest Rates (Basis Points)	Income			Change			of Equity			Change
				(Dollars in Thousands)
200	$	2,768			4.0		$	(6,497	)		(2.5	)
100		1,622			2.4			(2,495	)		(1.0	)
(100)		(2,770	)		(4.0	)		(10,114	)		(3.9	)

When comparing the impact of the rate shock analysis between September 30, 2005, and December 31, 2004, the changes in NII reflect relatively similar results and the impact of the balance sheet composition of assets and liabilities as the profile continues to reflect asset sensitivity. As a result, the simulation scenario in a falling rate environment depicts net interest income declining and the opposite occurs in a rising environment. The asset sensitivity is reflected in on-hand liquidity of $95.9 million (interest-bearing balances held with other banks) and in the loan portfolio which includes adjustable or variable rates on approximately 51% of the portfolio at September 30, 2005. Combined with the relatively short duration of the investment portfolio this creates an asset-sensitive position favoring a rising rate environment.

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

PART I.

ITEM 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(b). Based on that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2005, that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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

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

     (a) Not Applicable

     (b) Not Applicable

     (c) Issuer Purchases of Equity Securities

The following table sets forth open market purchases by the Company of its equity securities during the nine months ended September 30, 2005.

							Maximum
							Number of
					Total Number of		Shares that
	Total # of		Average		Shares Purchased		May yet be
	Shares		Price Paid		as Part of Publicly		Purchased
	Purchased		per Share		Announced Plan		Under the Plan
January 1-31, 2005		303	$	32.63		303		281,000
February 1-28, 2005		—		—		—		281,000
March 1-31, 2005		—		—		—		281,000
April 1-30, 2005		—		—		—		281,216
May 1-31, 2005		2,000		28.12		2,000		330,080
June 1-30, 2005		2,123		29.46		2,123		328,821
July 1-31, 2005		—		—		—		331,845
August 1-31, 2005		5,000		30.50		5,000		328,169
September 1-30, 2005		491		29.44		491		327,678
Total		9,917	$	29.51		9,917

The Company’s stock repurchase plan, as amended, allows the purchase and retention of up to 550,000 shares. The plan has no expiration date and remains open. The Company currently holds 222,322 shares in treasury.

ITEM 3. Defaults Upon Senior Securities

     Not Applicable

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

     Not Applicable

ITEM 5. Other Information

     Not Applicable

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Item 6. Exhibits

       (a) Exhibits

Exhibit No.	Exhibit
3(i)	Articles of Incorporation of First Community Bancshares, Inc., as amended. (1)
3(ii)	Bylaws of First Community Bancshares, Inc., as amended. (2)
4.1	Specimen stock certificate of First Community Bancshares, Inc. (3)
4.2	Indenture Agreement dated September 25, 2003. (11)
4.3	Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. (11)
4.4	Preferred Securities Guarantee Agreement dated September 25, 2003. (11)
10.1	First Community Bancshares, Inc. 1999 Stock Option Contracts (2) and Plan. (4)*
10.1.1	Amendment to the First Community Bancshares, Inc. 1999 Stock Option Plan (12)*
10.2	First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (5)*
10.3	Employment Agreement dated January 1, 2000, and amended October 17, 2000, between First Community Bancshares, Inc. and John M. Mendez. (2)(6)*
10.4	First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended. (4)*
10.5	First Community Bancshares, Inc. Split Dollar Plan and Agreement. (4)*
10.6	First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. (2)*
10.6.1	First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second Amendment (B. W. Harvey, Sr.—October 19, 2004). (14)*
10.7	First Community Bancshares, Inc. Wrap Plan. (3)*
10.8	Employment Agreement between First Community Bancshares, Inc. and J. E. Causey Davis. (8)*
10.9	Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors and Certain Executive Officers. (9)*
10.10	Form of Indemnification Agreement between First Community Bank, N. A., its Directors and Certain Executive Officers. (9)*
10.12	First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan-Stock Award Agreement (13)*
11.0	Statement regarding computation of earnings per share. (7)
15.0	Acknowledgement of Independent Registered Public Accounting Firm.
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32	Certification of Chief Executive and Chief Financial Officer Section 1350.

* Management contract or compensatory plan or arrangement.

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(1)	Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2005, filed on August 5, 2005.
(2)	Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.
(3)	Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002, filed on March 25, 2003, as amended on March 31, 2003.
(4)	Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 1999, filed on March 30, 2000, as amended April 13, 2000.
(5)	The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.
(6)	First Community Bancshares, Inc. has entered into substantially identical agreements with Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title, salary and the use of a vehicle.
(7)	Incorporated by reference from the Earnings per Share footnote of the Notes to Consolidated Financial Statements included herein.
(8)	Incorporated by reference from S-4 Registration Statement filed on March 28, 2003. The Company has entered into a substantially identical contract with Phillip R. Carriger dated March 31, 2004.
(9)	Form of indemnification agreement entered into by the Corporation and by First Community Bank, N. A. with their respective directors and certain officers of each including, for the registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, Kenneth P. Mulkey, E. Stephen Lilly and at the Bank level: Samuel L. Elmore. Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2003, filed on March 15, 2004, and amended on May 19, 2004.
(10)	Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 19, 2004.
(11)	Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003 filed on November 10, 2003.
(12)	Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March 31, 2004 filed on May 7, 2004.
(13)	Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2004 filed on August 6, 2004.
(14)	Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2004, and filed on March 16, 2005. Amendments in substantially similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford, and Stafford II but are not filed herewith.

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SIGNATURES

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

First Community Bancshares, Inc.

DATE: November 3, 2005

/s/ John M. MendezJohn M. Mendez

President & Chief Executive Officer

(Duly Authorized Officer)

DATE: November 3, 2005

/s/ Robert L. SchumacherRobert L. Schumacher

Chief Financial Officer

(Principal Accounting Officer)

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Index to Exhibits

Exhibit No.	Exhibit
15	Acknowledgement of Independent Registered Public Accounting Firm
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32	Certification of Chief Executive and Chief Financial Officer pursuant to 18 USC Section 1350

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