Note 1. General

First Community Bancshares, Inc. is a financial holding company that provides banking products and services to individuals and commercial customers through its wholly-owned subsidiary, First Community Bank (the “Bank”), a Virginia-chartered banking institution, and personal and commercial insurance products and services through its wholly-owned subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”). The Bank offers wealth management services and investment advice through its Trust Division and wholly-owned subsidiary First Community Wealth Management (“FCWM”), a registered investment advisory firm. Unless the context suggests otherwise, the use of the term “Company” refers to First Community Bancshares, Inc. (“the Company”) and its subsidiaries as a consolidated entity. The Company operates in one business segment, Community Banking, which consists of commercial and consumer banking, lending activities, wealth management, and insurance services. The Company’s executive office is located at One Community Place, Bluefield, Virginia. As of September 30, 2014, our operations were conducted through 69 locations in 5 states: Virginia, West Virginia, North Carolina, South Carolina, and Tennessee.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, including normal recurring accruals, necessary for a fair presentation have been made. All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full calendar year.

The condensed consolidated balance sheet as of December 31, 2013, has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K (the “2013 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2014. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s 2013 Form 10-K.

Significant Accounting Policies

A complete and detailed description of the Company’s significant accounting policies is included in Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2013 Form 10-K. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.

Reclassifications and Corrections

Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or cash flow.

Acquisitions and Divestitures

On October 24, 2014, the Company completed the acquisition of seven branches from Bank of America, National Association. At acquisition, the seven branches had deposit totals of approximately $318 million. No loans were included in the purchase. The transaction was accounted for under the business combination method of accounting and accordingly, assets and liabilities acquired and consideration exchanged were recorded at estimated fair value on the acquisition date. The acquisition expands the Company’s presence by six branches in southwestern Virginia and one branch in central North Carolina.

On August 6, 2014, the Company entered into a Purchase and Assumption Agreement with CresCom Bank, Charleston, South Carolina, in which the Bank is selling thirteen branches to CresCom Bank. Ten of the branches are located in the southeastern, coastal region of North Carolina and three branches are located in South Carolina. At announcement, the thirteen branches had deposit totals of approximately $230 million and loan totals of approximately $59 million. The loans being sold are not subject to the Company’s loss share agreement with the Federal Deposit Insurance Corporation (“FDIC”) in connection with its purchase and assumption of Waccamaw Bank (“Waccamaw”). Subject to the satisfaction of customary closing conditions, the transaction is expected to close in the fourth quarter of 2014.

Earnings per Common Share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that could be issued by the Company. In accordance with the treasury stock method of accounting, potential common stock could be issued for stock options, nonvested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that have an exercise price greater than the average market value of the Company’s common stock because the effect would be antidilutive.

The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Amounts in thousands, except share and per share data)	2014		2013		2014		2013
Net income	$	7,043	$	5,412	$	19,775	$	17,988
Dividends on preferred stock		228		261		683		772

Net income available to common shareholders	$	6,815	$	5,151	$	19,092	$	17,216

Weighted average number of common shares outstanding, basic		18,402,764		20,008,861		18,407,173		20,013,095
Dilutive effect of potential common shares from:
Stock options		17,375		19,877		18,027		17,640
Restricted stock		568		3,588		506		6,613
Convertible preferred stock		1,045,419		1,091,462		1,046,430		1,158,715

Weighted average number of common shares outstanding, diluted		19,466,126		21,123,788		19,472,136		21,196,063

Basic earnings per common share	$	0.37	$	0.26	$	1.04	$	0.86
Diluted earnings per common share		0.36		0.26		1.02		0.85
Antidilutive potential common shares:
Stock options		255,244		310,558		255,244		328,258
Restricted stock		—		76		—		26

Total potential antidilutive shares		255,244		310,634		255,244		328,284

The Company’s Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) carries a 6% dividend rate. Each share of the Series A Preferred Stock is convertible into 69 shares of the Company’s common stock at any time. The Company may redeem the shares at face value and the shares mandatorily convert on May 20, 2016. The Series A Preferred Stock outstanding totaled 15,151 shares as of September 30, 2014, 15,251 shares as of December 31, 2013, and 15,471 shares as of September 30, 2013.