FIRST COMMUNITY BANCSHARES INC /NV/ - 10-K Annual Report

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ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2003

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from:________ to________

Commission File Number 0-19297

FIRST COMMUNITY BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)

NEVADA 55-0694814
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)

ONE COMMUNITY PLACE, BLUEFIELD, VIRGINIA 24605-0989
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (276) 326-9000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
- ------------------------------------------------ ------------------------------------------------

NONE NONE

Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $1 per share
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
- ---------

Indicate by check mark whether Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of June 30, 2003.

$370,507,246 based on the closing sales price at that date
Common Stock, $1 par value

Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of March 5, 2004.

Common Stock, $1 par value- 11,242,396

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the annual meeting of shareholders to
be held April 27, 2004 are incorporated by reference in Part III of this Form
10-K.

TABLE OF CONTENTS

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PART I
ITEM 1. BUSINESS

GENERAL

First Community Bancshares, Inc. ("FCBI" or the "Company", "Corporation" or
"Registrant") is a one-bank holding company incorporated in the State of Nevada
and serves as the holding company for First Community Bank, N. A. ("FCBNA" or
the "Bank"), a national association that conducts commercial banking operations
within the states of Virginia, West Virginia and North Carolina. United First
Mortgage, Inc. ("UFM"), acquired in the latter part of 1999, is a wholly owned
subsidiary of FCBNA and serves as a wholesale and retail distribution channel
for FCBNA's mortgage banking business segment. FCBNA also owns Stone Capital
Management ("Stone Capital"), an investment advisory firm purchased in January,
2003. The Company has total consolidated assets of approximately $1.7 billion at
December 31, 2003 and conducts commercial and mortgage banking business through
the 47 branches of FCBNA and 8 mortgage brokerage offices.

In January 2003, the Bank completed the acquisition of Stone Capital, based
in Beckley, West Virginia. This acquisition expanded the Bank's operations to
include a broader range of financial services, including wealth management,
asset allocation, financial planning and investment advice. Stone Capital at
December 31, 2003 had total assets of $59 million under management and continues
to operate under its name. Stone Capital was acquired through the issuance of
8,409 shares of Company common stock, which represents 50% of the total
consideration. In 2003, Stone Capital exceeded the annual revenue requirement
outlined in the acquisition agreement and another 2,541 shares were paid to the
original shareholders subsequent to December 31, 2003. The balance of the
remaining consideration ($175,000) is payable over the next two years in the
form of Company common stock subject to revenue minimums outlined in the
acquisition agreement.

On June 6, 2003, the Company acquired The CommonWealth Bank, a
Virginia-chartered commercial bank ("CommonWealth") for total consideration of
approximately $23.2 million. CommonWealth's four branch facilities located in
the Richmond, Virginia metro area were simultaneously merged with and into the
Bank. The completion of this transaction resulted in the addition of $136.5
million in assets, including $120.0 million in loans and added an additional
$105.0 million in deposits to the Bank. As a result of the preliminary purchase
price allocation, the $14.1 million excess of purchase price over the fair
market value of the net assets acquired and identified intangibles was recorded
as goodwill.

On December 31, 2003, the Company announced the signing of a definitive
merger agreement pursuant to which the Company will acquire PCB Bancorp, Inc., a
Tennessee-chartered bank holding company ("PCB Bancorp"). This acquisition will
expand First Community Bank's commercial banking operations into East Tennessee,
the Company's first entry into the Tennessee market. PCB Bancorp has five full
service branch offices located in Johnson City, Kingsport and surrounding areas
in Washington and Sullivan Counties in East Tennessee. PCB Bancorp, which is
headquartered in Johnson City, Tennessee, had total assets of $172 million,
total deposits of $149 million and total stockholders' equity of $13.6 million
as of December 31, 2003.

Under the terms of the merger agreement, shares of PCB Bancorp common stock
will be purchased for $40.00 per share in cash. The total deal value, including
the cash-out of outstanding stock options, is approximately $36.0 million.
Concurrent with the PCB Bancorp merger, Peoples Community Bank, the wholly-
owned subsidiary of PCB Bancorp, will be merged into the Bank. The merger is
expected to close late in the first quarter of 2004, pending the receipt of all
requisite regulatory approvals and the approval of PCB Bancorp's shareholders.

Currently, the Registrant is a bank holding company and the banking
operations are expected to remain the principal business and major source of
revenue. The Registrant provides a mechanism for ownership of the subsidiary
banking operations, provides capital funds as required and serves as a conduit
for distribution of dividends to stockholders. The Registrant also considers and
evaluates options for growth and expansion of the existing subsidiary banking
operations. The Registrant currently derives substantially all of its revenues
from dividends paid by its subsidiary bank. Dividend payments by the Bank are
determined in relation to earnings, asset growth and capital position and are
subject to certain restrictions by regulatory agencies as described more fully
under Regulation and Supervision of this item.

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At December 31, 2003, the principal assets of FCBI included all of the
outstanding shares of common stock of the Bank. FCBNA is a nationally chartered
bank organized under the banking laws of the United States. FCBNA engages in
general commercial and retail banking business in West Virginia, Virginia and
North Carolina through 47 branch facilities. It provides safe deposit services
and makes all types of loans, including commercial, mortgage and personal loans.
FCBNA also provides trust services and its bank deposits are insured by the
FDIC. FCBNA is a member of the Federal Reserve System and is a member of the
Federal Home Loan Bank (FHLB) of Atlanta. Regulatory oversight of the banking
subsidiary is conducted by the Office of the Comptroller of the Currency (OCC).
FCBNA, through its wholly owned subsidiary, UFM, provides for the origination
and sale of mortgages to secondary sources. With the addition of Stone Capital
in January, 2003, FCBNA's range of financial services was expanded to include
wealth management, asset allocation, financial planning and investment advice.
The required information concerning reportable segments and the required
disclosures are set forth in Note 18 of the Consolidated Financial Statements
included herein.

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 Securities
and Exchange Commission ("SEC") (including this Annual Report on Form 10-K 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.

RISK FACTORS

FCBI AND ITS SUBSIDIARY'S BUSINESS ARE SUBJECT TO INTEREST RATE RISK AND
VARIATIONS IN INTEREST RATES MAY NEGATIVELY AFFECT ITS FINANCIAL
PERFORMANCE. We are unable to predict actual fluctuations of market interest
rates with complete accuracy. Rate fluctuations are affected by many factors,
including:

- inflation;

- recession;

- a rise in unemployment;

- tightening money supply; and

- domestic and international disorder and instability in domestic and
foreign financial markets.
4

Changes in the interest rate environment may reduce profits. We expect that
the Company and FCBNA will continue to realize income from the differential or
"spread" between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. Net interest spreads are affected by the
difference between the maturities and repricing characteristics of interest-
earning assets and interest-bearing liabilities. The Company is vulnerable to
continued declines in interest rates because of its slightly asset-sensitive
balance sheet profile, in which its assets will reprice downward at rates
exceeding the repricing characteristics of liabilities. As a result, material
and prolonged declines in interest rates would decrease the Company's net
interest income and corresponding net interest margin. Conversely, an increase
in the general level of interest rates may adversely affect the ability of some
borrowers to pay the interest on and principal of their obligations.
Accordingly, changes in levels of market interest rates could materially and
adversely affect the Company's net interest spread, asset quality, levels of
prepayments and cash flows as well as the market value of its securities
portfolio and overall profitability.

Changes in interest rates affect the net interest income earned on the
Company's debt securities portfolios as well as the value of the securities
portfolio. In addition, changes in interest rates affect the net interest income
FCBNA and UFM earn on loans held for investment and loans held for sale. To the
extent UFM pools loans in the future and is not adequately hedged, its interest
rate and market risk with respect to its loans held for sale may increase.
Consequently, changes in the levels of market interest rates could materially
and adversely affect the Company's net interest spread, the market value of the
loans and securities and the overall profitability.

FCBNA'S ABILITY TO PAY DIVIDENDS IS SUBJECT TO REGULATORY LIMITATIONS
WHICH, TO THE EXTENT FCBI REQUIRES SUCH DIVIDENDS IN THE FUTURE, MAY AFFECT
FCBI'S ABILITY TO PAY ITS OBLIGATIONS AND PAY DIVIDENDS. FCBI is a separate
legal entity from FCBNA and its subsidiaries and does not have significant
operations of its own. FCBI currently depends on FCBNA's cash and liquidity as
well as dividends from the subsidiary to pay FCBI's operating expenses and
dividends to shareholders. No assurance can be made that in the future FCBNA
will have the capacity to pay the necessary dividends and that the Company will
not require dividends from FCBNA to satisfy FCBI's obligations. The availability
of dividends from FCBNA is limited by various statutes and regulations. It is
possible, depending upon the financial condition of the Company and other
factors that the OCC could assert that payment of dividends or other payments by
FCBNA are an unsafe or unsound practice. In the event FCBNA is unable to pay
dividends sufficient to satisfy FCBI's obligations and FCBNA is unable to pay
dividends to the Company, FCBI may not be able to service its obligations as
they become due, including payments required to be made to the FCBI Capital
Trust, a business trust subsidiary of FCBI, or pay dividends on the Company's
common stock. Consequently, the inability to receive dividends from FCBNA could
adversely affect FCBI's financial condition, results of operations, cash flows
and prospects.

FCBI'S ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL
LOSSES. Like all financial institutions, we maintain an allowance for loan
losses to provide for probable loan defaults and non-performance. FCBI's
allowance for loan losses may not be adequate to cover actual loan losses, and
future provisions for loan losses could materially and adversely affect FCBI's
operating results. FCBI's allowance for loan losses is determined by analyzing
historical loan losses, current trends in delinquencies and charge-offs, plans
for problem loan resolution, the opinions of our regulators, changes in the size
and composition of the loan portfolio and industry information. Also included in
management's estimates for loan losses are considerations with respect to the
impact of economic events, the outcome of which are uncertain. The amount of
future losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates that may be beyond FCBI's
control, and these losses may exceed current estimates. Federal regulatory
agencies, as an integral part of their examination process, review FCBI's loans
and allowance for loan losses. While we believe that FCBI's allowance for loan
losses is adequate to provide for probable losses, we cannot assure you that we
will not need to increase FCBI's allowance for loan losses or that regulators
will not require us to increase this allowance. Either of these occurrences
could materially and adversely affect FCBI's earnings and profitability.

FCBI'S BUSINESS IS SUBJECT TO VARIOUS LENDING AND OTHER ECONOMIC RISKS THAT
COULD ADVERSELY IMPACT FCBI'S RESULTS OF OPERATIONS AND FINANCIAL
CONDITION. Changes in economic conditions, particularly an economic slowdown,
could hurt FCBI's business. FCBI's business is directly affected by political
and market conditions, broad trends in industry and finance, legislative and
regulatory changes, and changes in governmental monetary and fiscal policies and
inflation, all of which are beyond FCBI's control. A deterioration in economic
5

conditions, in particular an economic slowdown within the Company's geographic
region, could result in the following consequences, any of which could hurt
FCBI's business materially:

- loan delinquencies may increase;

- problem assets and foreclosures may increase;

- demand for FCBI's products and services may decline; and

- collateral for loans made by the Company may decline in value, in turn
reducing a client's borrowing power, and reducing the value of assets and
collateral associated with FCBI's loans held for investment.

A DOWNTURN IN THE REAL ESTATE MARKET COULD HURT FCBI'S BUSINESS. FCBI's
business activities and credit exposure are concentrated in West Virginia,
Virginia, North Carolina and the surrounding mid-Atlantic region. A downturn in
this regional real estate market could hurt FCBI's business because of the
geographic concentration within this regional area. If there is a significant
decline in real estate values, the collateral for FCBI's loans will provide less
security. As a result, FCBI's ability to recover on defaulted loans by selling
the underlying real estate would be diminished, and we would be more likely to
suffer losses on defaulted loans.

THE COMPANY'S LEVEL OF CREDIT RISK IS INCREASING DUE TO THE EXPANSION OF
ITS COMMERCIAL LENDING, AND THE CONCENTRATION ON MIDDLE MARKET CUSTOMERS WITH
HEIGHTENED VULNERABILITY TO ECONOMIC CONDITIONS. At December 31, 2003, this
portfolio was $386.8 million, an increase of $26.8 million since December 2002.
Although the total loan portfolio increased, the level of credit risk remained
relatively consistent as the commercial lending percentage mix was little
changed. Commercial real estate loans generally are considered riskier than
single-family residential loans because they have larger balances to a single
borrower or group of related borrowers. Commercial business loans involve risks
because the borrower's ability to repay the loan typically depends primarily on
the successful operation of the business or the property securing the loan. Most
of the commercial business loans are made to middle market customers who may
have a heightened vulnerability to economic conditions. Moreover, a portion of
these loans have been made by the Company in the last several years and the
borrowers may not have experienced a complete business or economic cycle.

FCBNA MAY SUFFER LOSSES IN ITS LOAN PORTFOLIO DESPITE ITS UNDERWRITING
PRACTICES. FCBNA seeks to mitigate the risks inherent in FCBNA's loan portfolio
by adhering to specific underwriting practices. These practices include analysis
of a borrower's prior credit history, financial statements, tax returns and cash
flow projections, valuation of collateral based on reports of independent
appraisers and verification of liquid assets. Although FCBNA believes that its
underwriting criteria are appropriate for the various kinds of loans it makes,
FCBNA may incur losses on loans that meet its underwriting criteria, and these
losses may exceed the amounts set aside as reserves in FCBNA's allowance for
loan losses.

THE COMPANY AND ITS SUBSIDIARIES ARE SUBJECT TO EXTENSIVE REGULATION WHICH
COULD ADVERSELY AFFECT THEM. FCBI and its subsidiaries' operations are subject
to extensive regulation by federal, state and local governmental authorities and
are subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of FCBI's operations. FCBI believes
that it is in substantial compliance in all material respects with applicable
federal, state and local laws, rules and regulations. Because FCBI's business is
highly regulated, the laws, rules and regulations applicable to it are subject
to regular modification and change. There are currently proposed various laws,
rules and regulations that, if adopted, would impact FCBI's operations,
including, among other things, matters pertaining to corporate governance,
requirements for listing and maintenance on national securities exchanges and
over the counter markets, SEC rules pertaining to public reporting disclosures
and banking regulations governing the amount of loans that a financial
institution, such as FCBNA, can acquire for investment from an affiliate, such
as UFM. In addition, the Financial Accounting Standards Board, or FASB, is
considering changes which may require, among other things, the expensing of the
costs relating to the issuance of stock options. There can be no assurance that
these proposed laws, rules and regulations, or any other laws, rules or
regulations, will not be adopted in the future, which could make compliance more
difficult or expensive, restrict FCBI's ability to originate, broker or sell
loans, further limit or restrict the amount of commissions, interest or other
charges earned on loans originated or sold by FCBNA or UFM or otherwise
adversely affect FCBI's business, financial condition or prospects.

6

FCBI FACES STRONG COMPETITION FROM OTHER FINANCIAL INSTITUTIONS, FINANCIAL
SERVICE COMPANIES AND OTHER ORGANIZATIONS OFFERING SERVICES SIMILAR TO THOSE
OFFERED BY THE COMPANY AND ITS SUBSIDIARIES, WHICH COULD HURT FCBI'S
BUSINESS. FCBI's business operations are centered primarily in West Virginia,
Virginia, North Carolina and the surrounding mid-Atlantic region. Increased
competition within this region may result in reduced loan originations and
deposits. Ultimately, we may not be able to compete successfully against current
and future competitors. Many competitors offer the types of loans and banking
services that we offer. These competitors include other savings associations,
national banks, regional banks and other community banks. FCBI also faces
competition from many other types of financial institutions, including finance
companies, brokerage firms, insurance companies, credit unions, mortgage banks
and other financial intermediaries. In particular, FCBNA's competitors include
other state and national banks and major financial companies whose greater
resources may afford them a marketplace advantage by enabling them to maintain
numerous banking locations and mount extensive promotional and advertising
campaigns.

Additionally, banks and other financial institutions with larger
capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the credit
needs of larger clients. These institutions, particularly to the extent they are
more diversified than FCBI, may be able to offer the same loan products and
services that FCBI offers at more competitive rates and prices. If FCBI is
unable to attract and retain banking clients, FCBI may be unable to continue
FCBNA's loan and deposit growth and the Company's business, financial condition
and prospects may be negatively affected.

EMPLOYEES

The Registrant and its subsidiary, FCBNA, employed 591 full time equivalent
employees at December 31, 2003, while UFM employed 75 people. Management
considers employee relations to be excellent.

REGULATION AND SUPERVISION

The following discussion sets forth the material elements of the regulatory
framework applicable to the Company and the Bank. This regulatory framework
primarily is intended for the protection of depositors and the deposit insurance
funds that insure deposits of banks, and not for the protection of security
holders. To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to those
provisions. A change in the statutes, regulations or regulatory policies
applicable to the Company or its subsidiaries may have a material effect on its
business.

Regulation of the Company

General. The Company is a bank holding company within the meaning of the
Bank Holding Act of 1956, as amended ("BHCA"), and is registered as such with
the Board of Governors of the Federal Reserve System. The registrant is required
to file with the Board of Governors quarterly reports of the Company and the
Bank and such other information as the Board of Governors may require. The
Federal Reserve makes periodic examinations of the Company, typically on an
annual basis.

BHCA Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve Board.

The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.

7

The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities
including land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.

Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighting system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics. At December 31, 2003, the Company's Tier I
capital and total capital ratios were 13.26% and 14.55%, respectively.

In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies are expected to maintain Tier I leverage capital ratios of at least
4.0% to 5.0% or more, depending on their overall condition. The Company's
leverage ratio, at December 31, 2003, was 8.83%.

Trust Preferred Securities. Historically, issuer trusts that issued trust
preferred securities have been consolidated by their parent companies and the
accounts of such issuer trusts have been included in the consolidated financial
statements of such parent companies. However, in January 2003, the FASB issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", or
FIN 46, which provides guidance for determining when an entity should
consolidate another entity that meets the definition of a variable interest
entity. FIN 46 was effective immediately for interests in variable interest
entities acquired after January 31, 2003, and, as originally issued, was
effective in the first interim period after June 15, 2003 to interests in
variable interest entities acquired before February 1, 2003. As of October 9,
2003, the FASB deferred compliance with FIN 46 from July 1, 2003 to the first
period ending after December 15, 2003 for variable interest entities created
prior to February 1, 2003. However, the Company followed the guidance on FIN 46
on the formation of the Company's trust, FCBI Capital Trust, in September, 2003.
The Company reports the aggregate principal amount of the junior subordinated
debentures it issues to the trust as a liability, records offsetting assets for
the cash and common

8

securities received from the trust in its consolidated balance sheet, and
reports interest payable on the junior subordinated debentures as an interest
expense in its consolidated statements of operations.

The Company is required by the Federal Reserve to maintain certain levels
of capital for bank regulatory purposes. Since 1996, it has been the position of
the Federal Reserve that certain qualifying amounts of cumulative preferred
securities having the characteristics of preferred securities could be included
as Tier 1 regulatory capital for bank holding companies; however, capital
received from the sale of such cumulative preferred securities, including the
preferred securities, cannot constitute, as a whole, more than 25% of Tier 1
regulatory capital (the "25% capital limitation.") Amounts in excess of the 25%
capital limitation would constitute Tier 2 or supplementary capital. However,
the de-consolidation required by FIN 46 could result in a change to the
regulatory capital treatment of trust preferred securities issued by the Company
and other bank holding companies. Specifically, it is possible that since the
Company's trust will not be consolidated by the Company pursuant to FIN 46, the
trust preferred securities issued by such trust would not be considered a
minority interest in equity accounts of a consolidated subsidiary and therefore
not be accorded Tier 1 regulatory capital treatment by the Federal Reserve.
Although the Federal Reserve has indicated in Supervision and Regulation Letter
No. 03-13 (July 2, 2003) that trust preferred securities will by treated as Tier
1 regulatory capital until notice is given to the contrary, the supervisory
letter also indicates that the Federal Reserve will review the regulatory
implications of any accounting treatment changes and will provide further
guidance if necessary or warranted. If Tier 1 regulatory capital treatment were
disallowed, there would be a reduction in the Company's consolidated capital
ratios.

As of December 31, 2003, $15 million in trust preferred securities issued
by FCBI Capital Trust were outstanding and are treated as Tier 1 capital for
bank regulatory purposes. If FCBI's outstanding trust preferred securities at
December 31, 2003 were not treated as Tier 1 capital at that date, FCBI's Tier 1
leverage capital ratio would have declined from 8.83% to 7.91%, its Tier 1
risk-based capital ratio would have declined from 13.26% to 11.88%, and its
total risk-based capital ratio would have declined from 14.55% to 13.17% as of
December 31, 2003. These reduced capital ratios would continue to meet the
applicable "well capitalized" Federal Reserve capital requirements.

Financial Support of Affiliated Institutions. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances when it might
not do so absent such policy. In addition, any capital loans by a bank holding
company to a subsidiary bank are subordinate in right of payment to deposits and
to certain other indebtedness of such subsidiary bank. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.

Regulation of the Bank

General. The Bank is a nationally chartered bank organized under the
banking laws of the United States and is subject to extensive regulation and
examination by the OCC and the FDIC. The federal laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the aforementioned regulatory
authorities to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the OCC, the FDIC or the U.S. Congress could have a
material adverse impact on the Company and its operations.

FDIC Insurance Assessments. The deposits of the Bank are insured up to
regulatory limits by the FDIC, and, accordingly, are subject to deposit
insurance assessments to maintain the Bank Insurance Fund (the "BIF"), which is
administered by the FDIC. The FDIC has adopted regulations establishing a
permanent risk-related

9

deposit insurance assessment system. Under this system, the FDIC places each
insured bank in one of nine risk categories based on (1) the bank's
capitalization and (2) supervisory evaluations provided to the FDIC by the
institution's primary Federal regulator. Each insured bank's insurance
assessment rate is then determined by the risk category in which it is
classified by the FDIC. The annual insurance premiums on bank deposits insured
by the BIF currently vary between $0.00 per $100 of deposits for banks
classified in the highest capital and supervisory evaluation categories to $0.27
per $100 of deposits for banks classified in the lowest capital and supervisory
evaluation categories.

The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Act,
as amended ("FDICIA"), among other things, requires the federal banking agencies
to take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." An FDIC-insured bank will
be "well capitalized" if it has a total capital ratio of 10% or greater, a Tier
1 capital ratio of 6% or greater and a leverage ratio of 5% or greater and is
not subject to any order or written directive by any such regulatory authority
to meet and maintain a specific capital level for any capital measure. A
depository institution's capital tier will depend upon where its capital levels
compare to various relevant capital measures and certain other factors, as
established by regulation. As of December 31, 2003, the Bank had capital levels
that qualify it as being "well capitalized" under such regulations.

Capital Requirements. The Bank is subject to capital requirements adopted
by the OCC similar to the capital requirements for the Company. The capital
ratios of the Bank are set forth in Note 13 to the Consolidated Financial
Statements included herewith.

Payment of Dividends and Borrowings. The Bank is subject to certain
restrictions which limit the amounts and the manner in which it may loan funds
to the Company. The Bank is further subject to restrictions on the amount of
dividends that can be paid to the Company in any one calendar year without prior
approval by primary regulators. Payment of dividends by the Bank to the Company
cannot exceed net profits, as defined, for the current year combined with net
profits for the two preceding years. In addition, any distribution that might
reduce the Bank's equity capital to unsafe levels or which, in the opinion of
regulatory agencies, is not in the best interests of the public, could be
prohibited. For additional information, see Note 13 to the Consolidated
Financial Statements included herewith.

Community Reinvestment Act and the Fair Lending Laws. The Bank has a
responsibility under the Community Reinvestment Act and related regulations to
help meet the credit needs of its community, including low and moderate income
neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act prohibit lenders from discriminating in their lending practices on
the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of the Community Reinvestment Act could,
at a minimum, result in regulatory restrictions on its activities and the denial
of applications. In addition, an institution's failure to comply with the Equal
Credit Opportunity Act and the Fair Housing Act could result in the applicable
federal regulatory agencies and/or the Department of Justice taking enforcement
actions against the institution. Based on its most recent examination, the Bank
received an outstanding rating with respect to its performance pursuant to the
Community Reinvestment Act.

Federal Home Loan Bank System. The Bank is a member of the FHLB system.
Among other benefits, each FHLB serves as a reserve or central bank for its
members within its assigned region. Each FHLB is financed primarily from the
sale of consolidated obligations of the FHLB system. Each FHLB makes available
loans or
10

advances to its members in compliance with the policies and procedures
established by the board of directors of the individual FHLB. As an FHLB member,
the Bank is required to own capital stock in the FHLB of Atlanta. At December
31, 2003, the Bank had $7.2 million of FHLB Atlanta stock.

Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain noninterest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non personal time deposits. At December 31, 2002, the
Bank was in compliance with these requirements.

RECENT BANKING AND OTHER LEGISLATION

The International Capital Accord, adopted by the Committee on Banking
Supervision of the Bank for International Settlements in 1988, established the
current risk-based capital standards for banking firms. The modifications to the
original Basel Accord, after a thorough review, have resulted in a complete
overhaul. The Committee has issued a number of Consultative Papers on this
subject and intends to finalize the new Accord (Basel II) by mid 2004 for full
implementation in later years.

The Committee envisions this new Accord based on three "Pillars." The First
Pillar is a revised risk-based capital ratio requirement that uses independent
rating agency risk assessments and banks' internal risk models. The Second
Pillar includes standards for official supervisory review of capital adequacy.
The Third Pillar pursues market discipline and public disclosure to supplement
supervisory review.

The intended result of Basel II is a process that will significantly
improve the current capital standards applied to banking institutions and a more
appropriate allocation of capital to support the risks inherent in the balance
sheets of these financial institutions. The implementation of the new Accord
will be first applied to the largest financial institutions but will ultimately
be directed throughout the industry on a global basis. The impact of the Accord
on the industry has resulted in a new focus on the processes, methodologies and
systems used to measure and monitor portfolio credit risks. In addition, it is
intended to expand the scope of the risk-based capital standard to encompass all
of the risks within a banking group and their subsidiaries as well as bank
holding companies. Implementation of the new capital standards throughout the
industry is anticipated to take several years, which will allow for systems
processes and procedures to be developed.

Sarbanes-Oxley Act of 2002. In July 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002 (the "SOA") implementing legislative reforms
intended to address corporate and accounting improprieties. The SOA includes
very specific additional disclosure requirements and new corporate governance
rules, requires the SEC and securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules and mandates further
studies of certain issues by the SEC and the Comptroller General. The SOA
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees.

The SOA addresses, among other matters: audit committees for all reporting
companies; certification of financial statements by the chief executive officer
and the chief financial officer; the forfeiture of bonuses or other
incentive-based compensation and profits from the sale of an issuer's securities
by directors and senior officers in the twelve month period following initial
publication of any financial statements that later require restatement; a
prohibition on insider trading during pension plan black out periods; disclosure
of off-balance sheet transactions; a prohibition on personal loans to directors
and officers; expedited filing requirements for Form 4's; disclosure of a code
of ethics and filing a Form 8-K for a change or waiver of such code; "real time"
filing of periodic reports; the formation of a public accounting oversight
board; auditor independence; and various increased criminal penalties for
violations of securities laws.

WEBSITE ACCESS TO COMPANY REPORTS

The Company makes available free of charge on its website at www.fcbinc.com
its annual report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, and all amendments thereto, as soon as reasonably
practicable after the Company files such reports with, or furnishes them to, the
Securities and

11

Exchange Commission. Investors are encouraged to access these reports and the
other information about the Company's business on its website.

ITEM 2. PROPERTIES

The principal offices of the Corporation and FCBNA are located at One
Community Place, Bluefield, Virginia, where the Company owns and occupies
approximately 36,000 square feet of office space. The Bank operates with 47
full-service branches throughout Virginia, West Virginia and North Carolina and
two trust and investment management offices. The Bank also owns UFM, based in
Richmond, Virginia, which operates 8 leased offices from Virginia Beach to
Harrisonburg, Virginia, as well as Stone Capital, an investment advisory firm
based in West Virginia. The Corporation's banking subsidiary owns in fee 37
banking offices while others are leased or are located on leased land. There are
no mortgages or liens against any property of the Bank or the Corporation. The
Bank operates 45 Automated Teller Machines ("ATMs").

First Community Bank, N. A.

1001 Mercer Street
Princeton, West Virginia
24740-5939
(304) 487-9000 or (304) 327-5175
Pine Plaza Branch (304) 431-2225

211 Federal Street
Bluefield, West Virginia 24701-0950
(304) 325-7151
Mercer Mall Branch (304) 327-0431

Highway 52
Bluefield, West Virginia 24701-3068
(304) 589-3301

101 Vermillion Street
Athens, West Virginia 24712
(304) 384-9010

Corner of Bank & Cedar Streets
Pineville, West Virginia 24874-0249
(304) 732-7011
East Pineville Branch
(304) 732-7011

Mullens Shopping Plaza
Route 54
Mullens, West Virginia 25882
(304) 294-0700

Route 10, Cook Parkway
Oceana, West Virginia 24870-1680
(304) 682-8244

2 West Main Street
Buckhannon, West Virginia 26201-0280
(304) 472-1112

100 Market Street
Man, West Virginia 25635
(304) 583-6525

Corner of Main & Latrobe Streets
Grafton, West Virginia 26354-0278
(304) 265-1111

216 Lincoln Street
Grafton, West Virginia 26354-1442
(304) 265-5111

Main Street
Rowlesburg, West Virginia 26425
(304) 454-2431

16 West Main Street
Richwood, West Virginia 26261
(304) 846-2641

Railroad and White Avenue
Richwood, West Virginia 26261
(304) 846-2641

874 Broad Street
Summersville, West Virginia 26651
(304) 872-4402

Route 20 & Williams River Road
Cowen, West Virginia 26206
(304) 226-5924

Route 55, Red Oak Plaza
Craigsville, West Virginia 26205
(304) 742-5101

111 Citizens Drive
Beckley, West Virginia 25801-2970
(304) 252-9400

50 Brookshire Lane
Beckley, West Virginia 25801-6765
(304) 254-9041

298 Stokes Drive
Hinton, West Virginia 25951
(304) 466-5502

U. S. 219 North
Lindside, West Virginia 24951
(304) 753-4311

101 Sanders Lane
Bluefield, Virginia 24605
(276) 322-5487

643 E. Riverside Drive
Tazewell, Virginia 24651
(276) 988-5577

302 Washington Square
Richlands, Virginia 24641
(276) 964-7454

12

Chase Street & Alley 7
Clintwood, Virginia 24228
(276) 926-4671

747 Fort Chiswell Road
Max Meadows, Virginia 24360
(276) 637-3122

8044 Main Street
Pound, Virginia 24279
(276) 796-5431

910 East Main Street
Wytheville, Virginia 24382
(276) 228-1901

431 South Main Street
Emporia, Virginia 23847-2313
(434) 634-8866

4677 Main Street
Drakes Branch, Virginia 23937
(434) 568-3301

125 West Atlantic Street
Emporia, Virginia 23847
(434) 634-6555

511 Main Street
Clifton Forge, Virginia 24422
(540) 862-4251

9310 Midlothian Turnpike
Richmond, Virginia 23235
(804) 323-4100

707 East Main Street
Richmond, Virginia 23219
(804) 649-8030

900 North Parham Road
Richmond, Virginia 23229
(804) 741-4600

12410 Gayton Road
Richmond, Virginia 23233
(804) 754-8140

101 Brookfall Dairy Road
Elkin, North Carolina 28621
(336) 835-2265

5519 Mountain View Road
Hays, North Carolina 28635
(336) 696-2265

57 N. Main Street
Sparta, North Carolina 28675
(336) 372-2265

150 N. Center Street
Taylorsville, North Carolina 28681
(828) 632-2265

5610 University Parkway
Winston-Salem, North Carolina 27105
(336) 776-9262

3001 Waughtown Street
Winston-Salem, North Carolina 27107
(336) 788-2005

2000 W. First Street, Suite 102
Winston-Salem, NC 27104
Ph: 336-723-0375

SUBSIDIARIES OF FIRST COMMUNITY BANK, N. A.

UNITED FIRST MORTGAGE, INC.

(Wholly owned subsidiary of First Community Bank,
N. A.)
1503 Santa Rosa Road, Suite 109
P. O. Box K-177
Richmond, Virginia 23288
(804) 282-5631

STONE CAPITAL MANAGEMENT, INC.
(Wholly owned subsidiary of First Community Bank, N. A.)

207 Brookshire Lane
Beckley, West Virginia 25801
(304) 256-3982

CORPORATE HEADQUARTERS

One Community Place
P.O. Box 989
Bluefield, Virginia 24605-0989
(276) 326-9000
(276) 326-9010 Fax

STOCK REGISTRAR AND TRANSFER AGENT

Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948

Financial Contact *
Robert L. Schumacher
Chief Financial Officer
First Community Bancshares, Inc.
P. O. Box 989
Bluefield, Virginia 24605-0989
Phone: (276) 326-9000

* Copies of this annual report on Form 10K will be provided free of charge upon
written request.

INTERNET ACCESS

Website: www.fcbinc.com
E-mail: [email protected]
FCBNA Banking Resources:
Website: www.fcbresource.com
E-mail: [email protected]

13

ITEM 3. 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 of the Company.

In November, 2003 the Company was sued in U.S. District Court for the
Eastern District of Virginia by two former employees of The CommonWealth Bank,
alleging among other things, violation of employment law and breach of contract,
stemming from the two former employees being terminated from employment. The
Company and counsel believe that the lawsuit, which seeks damages of more than
$180,000 and punitive damages for each of the two former employees of The
CommonWealth Bank, is without merit, and intends to vigorously defend this
matter.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS

In August 2003, the Company distributed a 10% stock dividend to
shareholders. All share and per share amounts included in this Management's
Discussion and in the following Consolidated Financial Statements have been
adjusted to reflect the impact of the stock dividend.

The number of common stockholders of record on December 31, 2003 was 3,948
and outstanding shares totaled 11,242,443.

The Company's common stock trades on the NASDAQ National Market under the
symbol FCBC. On December 31, 2003, the Company's year-end common stock price was
$33.16, an 18.6% increase over the $27.96 closing price on December 31, 2002.

Book value per common share was $15.57 at December 31, 2003, compared with
$14.02 at December 31, 2002, and $12.17 at the close of 2001. The year-end
market price for the Company's common stock of $33.16 represents 213% of the
Company's book value as of the close of the year and reflects total market
capitalization of $372.8 million. Utilizing the year-end market price and 2003
diluted earnings per share, First Community common stock closed the year trading
at a price/earnings multiple of 14.7 times diluted earnings per share.

Cash dividends for 2003 totaled $0.98 per share, up $0.07 or 7.7% from the
$0.91 paid in 2002. The 2003 dividends resulted in a cash yield on the year-end
market value of 2.96%. Total dividends paid for the current and prior year
totaled $10.8 million and $9.9 million, respectively.

14

The following table sets forth the high and low bid prices and dividends
paid per share of the Company's common stock during the periods indicated.

ITEM 6. SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

FIVE-YEAR SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included throughout this report. All
statements other than statements of historical fact included in this report,
including statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are, or may be deemed to be, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Exchange Act.

EXECUTIVE OVERVIEW

2003 has been a year of significant opportunities and challenges.
Opportunities have been substantial as the Company expanded its business
presence into new markets and will enter a new state during 2004. The Company's
presence will expand from its current three-state region to four as it enters
Tennessee upon consummation of the PCB Bancorp acquisition announced in December
2003. The acquisition of PCB Bancorp was, as all transactions are evaluated,
within the context of FCBC's commitment to its shareholders and the value that
this transaction will create in terms of earnings and earnings potential for the
Company's shareholders. In addition, the Company added market presence and depth
with the completed acquisitions of Stone Capital Management, a registered
investment advisory firm, in January 2003, as well as The CommonWealth Bank
acquisition in June 2003.

Economy The interest rate environment continues to present a challenge to
the Company's earnings as net interest margins and asset yields have declined in
response to the historically low interest rate environment. Net interest margin
is managed, to the extent possible, by securing lower funding cost and passing a
portion of the reductions to depositors. The impact of the current economic
cycle and interest rate environment is not anticipated to continue its current
trend. Nonetheless, the timing and extent of changes is impacted by many
variables and is currently unknown. However, the Federal Reserve has indicated
its willingness to be patient in removing policy accommodation in setting the
Federal Reserve's current monetary policy.

Mortgage Industry Although the low interest rate environment in 2003
fueled unprecedented mortgage origination volume, it also came at a time when
mortgage and mortgage-backed index rates were very volatile. The first half of
the year was favorable as rates remained relatively stable. However, the latter
half of 2003 saw fluctuations in mortgage rates which caused many borrowers to
lock, unwind and relock positions or not act at all pending hopes for further
rate reductions. The impact of the rate swings was significant on the volume of
rate locks outstanding at year end 2003 in comparison to 2002 and resulted in
increased hedging costs at a time when the value of loans began to decline. The
industry forecast and economic outlook for 2004 mortgage originations is
substantially lower than 2003. As a result, the Company is evaluating the
operations of the mortgage subsidiary of

16

the Bank and preparing for the anticipated reduction in origination volume.
Other actions may include reducing the overhead of UFM, curtailing hedging
activity and developing more efficient delivery channels and mechanisms.

Competitive Forces and Market Expansions The Company entered new markets
in 2003 (Richmond, Virginia and Winston-Salem, North Carolina). The Richmond and
Winston-Salem markets provide great opportunities for expansion but also include
the presence of a great number of competitive forces. Competition throughout the
banking industry has grown as companies attempt to hold onto and grow market
share as the number and type of participating institutions (banks, insurance
companies, brokerage houses, etc.) increase. The Richmond branch network is well
developed and is known to the community in which it serves, which provides a
competitive advantage for serving the customer needs of that market. The
Winston-Salem market is a new market for the Company and will be a challenge to
the de novo branches established there to develop lasting relationships, expand
the loan portfolio and other components of profitability. The new Richmond
operations are mature and are producing positive returns; however, projected
profitability of the Winston-Salem market is not anticipated until late in the
fourth quarter of 2004.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

First Community's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America and conform to general practices within the banking industry. First
Community'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 First
Community'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 is not available,
valuation adjustments are estimated in good faith by management primarily
through the use of internal and external modeling techniques and/or appraisal
estimates.

First Community'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 First Community'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 the determination of the
allowance for loan losses, the valuation of loans held for sale and the
valuation of derivative instruments utilized in mortgage banking and hedging
activity to be the accounting areas that require the most subjective or complex
judgments.

ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established
and maintained at levels management deems adequate to cover probable losses
inherent in the portfolio as of the balance sheet date and is based on
management's evaluation of the risks in the loan portfolio and changes in the
nature and volume of loan activity. Estimates for loan 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 loan 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

17

overall lending rates, political conditions, legislation that may directly or
indirectly affect the banking industry and economic conditions affecting
specific geographic areas in which First Community conducts business.

As more fully described in Note 6 to the Notes to the Consolidated
Financial Statements and in the discussion included in the Allowance for Loan
Losses section of this discussion, the Company determines the allowance for loan
losses by making specific allocations to impaired loans, loans that exhibit
inherent weaknesses and loan pools that possess common 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 the
Company's credit administration department 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 (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 (reducing net income and earnings per share)
to increase the allowance or reduced provisions (increasing net income and
earnings per share). These estimates and judgments are based upon management's
current view of portfolio and economic conditions and the application of revised
estimates and assumptions.

LOANS HELD FOR SALE, DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: UFM
provides a distribution outlet for the sale of loans produced by UFM's wholesale
and retail operations. It originates residential mortgage loans through its
production offices located in Eastern Virginia and sells the majority of its
loans through pooled commitments to national investors on a servicing released
basis. In addition, UFM acquires loans from a network of wholesale brokers for
subsequent resale to these national investors. UFM originates all loans with the
intent to sell. Loans held for sale are stated at the lower of cost or market
("LOCOM"). The LOCOM analysis on pools of homogeneous loans is applied on a net
aggregate basis. Interest income with respect to loans held for sale is accrued
on the principal amount outstanding. LOCOM valuation techniques applicable to
loans held for sale are based on estimated market price indications for similar
loans. Pricing estimates are established by participating mortgage purchasers
and prevailing economic conditions. The majority of the loans held for sale have
established market pricing indications. The loans held for sale portfolio at
December 31, 2003 was $18.2 million compared to $66.4 million at December 31,
2002.

Risks associated with this lending function include interest rate risk,
which is mitigated through the utilization of financial instruments (commonly
referred to as derivatives) to assist in offsetting the effect of changing
interest rates. The Company accounts for these instruments in accordance with
FASB Statement No. 133, as amended "Accounting for Derivative Instruments and
Hedging Activity." This Statement established accounting and reporting standards
for derivative instruments and for hedging activities. UFM uses forward mortgage
contracts and options (short position sales and options) to manage interest rate
risk in the pipeline of uncommitted loans and interest rate lock commitments
("RLCs") from the point of the loan commitment to the subsequent allocation
(commitment) and delivery to outside investors. As a result of the timing from
origination to sale, and the likelihood of changing interest rates, forward
commitments and options (collectively referred to as hedging instruments or
securities) are placed with counter-parties to attempt to counter the effect of
changing interest rates. The options and forward commitments to sell securities
are considered to be derivatives and, as

18

such, are recorded on the consolidated balance sheets at fair value. The changes
in fair value of derivatives are reflected in the consolidated statements of
income as gain or loss.

The fair value of the RLCs is based on prevailing interest rates and the
assumed probability of closing (pull-through). The assumption of a given
pull-through percentage also enters into the determination of the volume of
derivative contracts. Pull-through assumptions are continually monitored for
changes in the interest rate environment and characteristics of the pool of
RLCs. Differences between pull-through assumptions and actual pull-through could
result in a mismatch in the volume of security contracts corresponding to RLCs
and lead to volatile or reduced profit margins on the loan products ultimately
delivered. As more fully described in Note 1 to the Financial Statements
("Summary of Significant Accounting Policies"), under Recent Accounting
Developments, the valuation techniques used to measure loan commitments is very
likely to change in the near future as a result of a pending proposal by the SEC
to create conformity within the industry or how to account for RLC's. The
valuation proposed by the SEC would result in the recognition of a liability and
expense associated with an option written. This would constitute a significant
change from the current practice which results in the recognition of an asset
and associated revenue recognition.

The valuation of RLCs is considered critical because of the impact of
borrower behavior and the impact that this behavior pattern will have on the
pull-through ratio during times of significant rate volatility. Customer
behavior is modeled by a mathematical tool based upon historical pull-through
experience; however, substantial volatility can be experienced, as has been the
case over the last two quarters, as a result of the general movement in mortgage
rates. As a result daily pull-through has varied significantly over this time
period. Customer behavior is difficult to model. However, the mathematical tool
utilized by UFM incorporates volatility derived from market data in an attempt
to anticipate borrower reaction to market rate movements.

RECENT ACQUISITIONS AND BRANCHING ACTIVITY

In January 2003, the Bank completed the acquisition of Stone Capital, based
in Beckley, West Virginia. This acquisition expanded the Bank's operations to
include a broader range of financial services, including wealth management,
asset allocation, financial planning and investment advice. At December 31,
2003, Stone Capital had a total market value of assets under management of $59
million. Stone Capital was acquired through the issuance of 8,409 shares of
Company common stock, which represents 50% of the total consideration. In 2003,
Stone Capital exceeded the annual revenue requirement outlined in the
acquisition agreement and another 2,541 shares were paid to the original
shareholders subsequent to December 31, 2003. The balance of the remaining
consideration is payable over the next two years in the form of Company common
stock subject to revenue minimums outlined in the acquisition agreement.

In June 2003, the Company acquired CommonWealth, a Virginia-chartered
commercial bank for total consideration of approximately $23.2 million. The
merger was accomplished through the exchange of .9015 shares of the Company's
common stock valued at $30.50, cash, or a combination of the Company's stock and
cash equivalent to $30.50 for each share of CommonWealth common stock. At
acquisition, CommonWealth had total assets of $136.5 million, net loans of
$120.0 million and total deposits of $105.0 million. As a result of the
preliminary purchase price allocation, the $14.1 million excess of purchase
price over the fair market value of the net assets acquired and identified
intangibles was recorded as goodwill.

In the second, third and fourth quarters of 2003, the Company opened three
de novo branches in Winston-Salem, North Carolina. It is anticipated that these
branches will not be profitable until market development has proven successful
and adequate loan balances and corresponding loan revenues are established to
support the added facilities, infrastructure and other operating costs of these
branches. However, based upon loan production indicators and given the current
level of demand, it is anticipated that these branches will begin to break even
in the latter half of 2004.

In February 2004, the Company also established loan production offices in
Charlotte and Mount Airy, North Carolina. These offices are not involved in
deposit gathering activities. However, they will assist in commercial real
estate loan origination.

19

On December 31, 2003, the Company announced the signing of a definitive
merger agreement pursuant to which the Company will acquire PCB Bancorp, Inc.
This acquisition will expand First Community Bank's commercial banking
operations into East Tennessee, the Company's first entry into the Tennessee
market. PCB Bancorp has five full service branch offices presently in operation
and in the process of construction located in Johnson City, Kingsport and
surrounding areas in Washington and Sullivan Counties in East Tennessee. PCB
Bancorp, which is headquartered in Johnson City, Tennessee, had total assets of
$172 million, total deposits of $149 million and total stockholders' equity of
$13.6 million as of December 31, 2003.

Under the terms of the merger agreement, shares of PCB Bancorp common stock
will be purchased for $40.00 per share in cash. The total deal value, including
the cash-out of outstanding stock options, is approximately $36.0 million.
Concurrent with the PCB Bancorp merger, Peoples Community Bank, the wholly-
owned subsidiary of PCB Bancorp, will be merged into the Bank. The merger is
expected to close late in the first quarter of 2004, pending the receipt of all
requisite regulatory approvals and the approval of PCB Bancorp's shareholders.

RESULTS OF OPERATIONS

Net income for 2003 was $25.2 million, up $0.5 million from $24.7 million
in 2002 and up $6.1 million from 2001 net income of $19.1 million. Basic and
diluted earnings per share for 2003 were $2.27 and $2.25, respectively, compared
to basic and diluted earnings per share of $2.26 and $2.25, respectively, in
2002 and $1.75 basic and diluted in 2001. The June 6, 2003 acquisition of
CommonWealth and the opening of three de novo branches combined with a $1.5
million net loss in the mortgage banking segment were the major factors
impacting the Company's 2003 earnings performance. After absorbing additional
costs associated with the opening of the new branches, the Community Banking
segment generated an increase in net income of $2.2 million, or 9.3% in 2003
compared to the prior year. This improvement, however, was largely offset by the
decline in earnings in the Mortgage Banking segment. Net income from the
mortgage banking segment of the Company dropped from $489,000 for 2002 to a loss
of $1.48 million for 2003. The impact of the mark to market valuation for 2003
reduced the mortgage banking segment net income by $957,000 as outstanding
unfunded interest rate lock commitments, adjusted for fallout ("RLC's") declined
by $51.5 million from $82.3 million at December 31, 2002 to $30.8 million at
December 31, 2003. The mortgage banking segment is discussed more fully later in
this management's discussion.

The Company's key profitability ratios of Return on Average Assets (ROA)
and Return on Average Equity (ROE) compare favorably with the average of the
Company's national peer ratios of 1.20% and 14.00%, respectively, based on the
September 2003 Bank Holding Company Performance Report. ROA, which measures the
Company's stewardship of assets, was at 1.56%, compared to 1.68% in 2002 and
1.49% in 2001. ROE for the Company was 15.13% in 2003, compared to 17.16% in
2002 and 14.8% in 2001.

NET INTEREST INCOME

CURRENT YEAR COMPARISON (2003 VS. 2002)

The primary source of the Company's earnings is net interest income, the
difference between income on earning assets and the cost of funds supporting
those assets. Significant categories of earning assets are loans and securities
while deposits and short-term borrowings represent the major portion of
interest-bearing liabilities.

Net interest income, the largest contributor to earnings, was $64.7 million
for the year ended December 31, 2003 compared to $61.2 million for the
corresponding period in 2002. For purposes of the following discussion,
comparison of net interest income is done 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. As indicated in Table I,
tax equivalent net interest income totaled $68.3 million for 2003, an increase
of $3.2 million from the $65.1 million reported in 2002. This $3.2 million
increase includes a $4.8 million increase in earning assets, which were added to
the portfolio at declining replacement rates. This increase was partially offset
by a $1.6 million reduction in rate changes on the underlying assets as asset
yields fell in the declining rate environment. Management was able to help
offset the effect of the declining asset yield through aggressive management of
deposit rates. Average earning assets increased $126 million while
interest-bearing liabilities

20

increased $101 million. As indicated in Table I, the yield on average earning
assets decreased 84 basis points from 7.32% for the year ended December 31, 2002
to 6.48% for the year ended December 31, 2003. However, this decrease was
largely offset by a 77 basis point decline in the cost of funds during the same
periods leaving the net interest rate spread (the difference between interest
income on earning assets and expense on interest bearing liabilities) at
December 31, 2003 slightly lower at 4.22% compared to 4.29% for the same period
last year. The Company's tax equivalent net interest margin of 4.58% for the
year ended December 31, 2003 decreased 18 basis points from 4.76% in 2002.

The largest contributor to the decrease in the yield on average earning
assets in 2003, on a volume-weighted basis, was the decrease in the overall tax
equivalent yield on loans held for investment of 68 basis points from the prior
year to 7.23%, as loans repriced downward in response to the declining rate
environment while the average balance increased $58.7 million. The decline in
asset yield is attributable to the recent interest rate environment which
created refinancing or repricing incentives for fixed rate borrowers to lower
their current borrowing costs. In addition, due to the volume of loans directly
tied to prime and other indices that are either adjustable incrementally or are
variable rate advances, asset yields have declined in response to rate cuts and
drops in the prime loan rate which began in 2001, continued in 2003 and
continues to remain at lows not seen in over 45 years.

The balance of average loans held for sale decreased by $13.1 million while
the yield decreased 89 basis points to 5.38%. The yield on loans held for sale
is much more sensitive to interest rate change since these loans are only held
for 30 to 60 days and are replenished with new loan volume at the then
prevailing rates. The change in rate on this pool of loans is reflective of the
volatility experienced in mortgage rates and the underlying mortgage-backed
securities into which they are delivered. The average secondary market loan
delivered to investors through the Company's mortgage subsidiary varied in rate
during the current year from a high in January 2003 of 6.625% to a low of 4.75%
in June 2003.

During 2003, the taxable equivalent yield on securities available for sale
decreased 105 basis points to 4.87% while the average balance increased by $67.9
million. Consistent with the current rate environment, the Company and the
securities industry as a whole have experienced rapid turnover in securities as
higher yielding securities are either called or prepaid as the refinancing
opportunity presented itself. The increasing average security balance is the
result of continued reinvestment of available funds largely created by higher
average deposit levels. Both the average balance and tax equivalent yield on
investment securities held to maturity remained relatively stable with a slight
increase in yield of 7 basis points to 8.23% and a $1.4 million decrease in
average balance from 2002. Securities held to maturity are largely comprised of
tax-free municipal securities.

Compared to 2002, average interest-bearing balances with banks increased
$14 million while the yield increased 3 basis points. This average balance
increase was largely the result of funds received from new deposit growth in
existing markets and deposits obtained in the acquisition of Greenville in the
fourth quarter of 2002 and CommonWealth in June 2003 as well as the continued
cash flow roll-off experienced in the loan and investment portfolio.

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 decreased by 77 basis
points from 3.03% in 2002 to 2.26% for the same period of 2003 while the average
volume increased $101 million. Active deposit liability review and pricing
management is performed weekly. Average short-term borrowings, increased $16.2
million in 2003 when compared to 2002, because of additional borrowings assumed
in the acquisition of CommonWealth and a general increase in the level of retail
repurchase agreements. The average rate paid on these borrowings decreased 87
basis points to 3.45% in 2003 versus 4.32% in 2002. Average long-term borrowings
increased $1.8 million because of the September 2003 issuance of $15 million in
trust preferred securities and the payment of an $8 million advance from the
FHLB. The average rate paid on these borrowings decreased 46 basis points in
2003 compared to 2002.

In addition, the average balances of interest-bearing demand and savings
deposits increased $34.4 and $15.1 million, respectively, during 2003 while the
corresponding average rate paid on these deposit categories declined 38 and 50
basis points, respectively. Average time deposits increased $33.4 million while
the average rate paid
21

decreased 89 basis points from 3.74% in 2002 to 2.85% in 2003. Likewise, average
Fed Funds and repurchase agreements increased $13.2 million while the average
rate decreased 59 basis points. The level of average non-interest-bearing demand
deposits increased $21.7 million to $179.1 million in 2003 compared to 2002.
Approximately $58.4 million of the $82.9 million increase in average
interest-bearing deposit growth is attributable to the acquisitions of
Greenville ($22.5 million) in the fourth quarter of 2002 and CommonWealth ($35.9
million) in June 2003, respectively. CommonWealth also contributed significant
non-interest bearing deposit balances with its high balance deposit product for
title companies and real estate settlement firms.

PRIOR YEAR COMPARISON (2002 VS. 2001)

On a tax equivalent basis, net interest income increased $11.1 million, or
20.5% in 2002 compared to an increase of $4.1 million, or 8.3% in 2001, in each
case, over the prior year. The increase in 2002 was the net result of an $8.7
million increase due to the higher volume of interest-earning assets and
interest-bearing liabilities and a $2.3 million increase due to changes in rates
on these assets and liabilities. The increase in net interest income in 2002 was
primarily due to a $180.3 million or 15.2% increase in average earning assets
over 2001. The increase in 2002 average earning assets was the result of an
$89.0 million increase in average total loans, an $89.8 million increase in
average investment securities and a $3.2 million increase in other interest
yielding deposits. The cost of all interest bearing liabilities decreased to
3.03% in 2002, compared to 4.21% in 2001 reflecting the steadily declining
interest rate environment throughout the year.

The combined increase in average earning assets in 2002 of $180.3 million
was attributable in large part to the fourth quarter 2001 acquisition of four
branches in Virginia. The balance of earning asset growth came in the form of
internal or "organic" growth in existing branches, along with increased
wholesale borrowings ($17.5 million) and growth in average equity ($14.8
million).

Average interest-bearing liabilities increased $148.7 million in 2002,
which included a $131.3 million increase in interest-bearing deposits.
Additionally, there was a $22.6 million increase in average non-interest bearing
demand deposits compared to the prior year. The acquisition of Bank of
Greenville in the fourth quarter of 2002 accounted for only $2.0 million of the
average interest-bearing deposit balance increase in 2002 while the branch
acquisitions in the fourth quarter of 2001 accounted for approximately $94.0
million. Organic growth in 2002 was enhanced by significant merger activity in
competing banks which assisted in customer acquisition and market share growth
primarily in Southern West Virginia.

22

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES AND
INTEREST DIFFERENTIAL
AVERAGE BALANCE SHEETS-NET INTEREST INCOME ANALYSIS
(AMOUNTS IN THOUSANDS, EXCEPT %)

- ---------------

(1) Fully Taxable Equivalent at the rate of 35%.

(2) Non-accrual loans are included in average balances outstanding but with no
related interest income during the period of non-accrual.

(3) Represents the difference between the yield on earning assets and cost of
funds.

(4) Represents tax equivalent net interest income divided by average interest
earning assets.

23

RATE AND VOLUME ANALYSIS OF INTEREST

The following table summarizes the changes in interest earned and paid
resulting from changes in volume of earning assets and paying liabilities and
changes in their interest rates. In this analysis, the change in interest due to
both rate and volume has been allocated to the volume and rate columns in
proportion to absolute dollar amounts. This table will assist you in
understanding the changes in the Company's principal source of revenues, net
interest income ("NII"). The principal themes or trends which are evident in
this table include:

- The significant increase in NII in 2002 resulting largely from branch
growth

- Downward repricing of liabilities in 2002 which exceeded declining loan
and investment yields

- The resulting higher margin and net revenues in 2002

- The beneficial effects of falling rates in 2002

- Lower growth in 2003 (roughly half the 2002 rate of growth)

- The limiting effect of low rates in 2003 as deposit rates hit floor
levels and loan and investment rates continued to reprice downward

- The resulting shrinkage in margin which was overcome only by growth in
average earning assets

- ---------------

(1) Fully taxable Equivalent using a rate of 35%.

NON-INTEREST INCOME

CURRENT YEAR COMPARISON (2003 VS. 2002)

Non-interest income consists of all revenues which are not included in
interest and fee income related to earning assets. Total non-interest income
increased approximately $1.7 million, or 8.27%, from $20.0 million for the year
ended December 31, 2002 to $21.7 million for 2003. Gains on the sale of
securities of $1.2 million were

24

the largest contributor to this increase, almost entirely due to the sale of
certain short-term equity investments in the third quarter of 2003.

In addition, along with the increase in deposits created by new market
areas served by the Company, service charges on deposit accounts increased $1.0
million, or 14.4% primarily as the result of the Company's overdraft program
that allows well-managed customer deposit accounts flexibility in managing
overdrafts to their accounts. Other service charges, commissions and fees also
increased $1.0 million in 2003 compared to 2002. These fees are dependent upon
customer behaviors and usage of the various products and services of the Company
and are transaction oriented. Revenues in this category include, among others,
commissions on sales of credit life insurance and other fee sources of revenue
including the revenues of Stone Capital and ATM service charge revenues created
in the newer market areas.

Fiduciary earnings representing asset management fees on trust and agency
accounts of $1.8 million were consistent with the prior year. All other
operating income increased $305,000.

Non-interest income in the mortgage banking subsidiary United First
Mortgage, Inc. ("UFM") declined from $9.4 million in 2002 to $7.2 million in
2003. The end of unprecedented refinance activity in the latter half of the
year, coupled with rate volatility and changes in price expectations by national
investors who buy these loans and brokers who provide wholesale production,
caused a decline of $1.6 million in the fair value mark-to-market of the
mortgage pipeline and related securities.

The following table details the components of UFM's mortgage banking income
included in non-interest income for the years ended December 31, for the periods
indicated.

At December 31, 2003, UFM held an investment in forward mortgage contracts
with a notional value of $34.5 million and mortgage-backed security put options
totaling $5.0 million. These contracts are used in an attempt to hedge interest
rate risk associated with RLCs and closed loans not allocated to a forward
commitment of $30.8 million. At December 31, 2003, the fair value of the
securities was a liability of $216,000, which represents a $490,000 increase
from the fair value at December 31, 2002. In addition, the fair value of the
RLCs at December 31, 2003 was $252,000, which represents a $1.98 million decline
from the fair value at December 31, 2002. The market valuation of RLCs at
December 31, 2003 assumes a 65.82% RLC pull-through.

25

If actual pull-through in succeeding months proves to be more or less than
65.82%, the full market value of RLCs may or may not be realized and/or the
valuation of RLCs may change.

For the year-ended December 31, 2003, the Company incurred $1.5 million in
the cost of forward mortgage derivative contracts and options to originate and
sell $874.0 million in loans compared to the prior year in which $740.5 million
in loans were originated for sale with underlying forward mortgage contracts
that cost $8.1 million. The lower cost of forward mortgage contracts between the
two years is reflective of the volatility of the pricing of these types of
contracts during times of significant interest rate volatility. Although the
pricing of the contracts was favorable to the Company in the current year, UFM's
pricing and margin on loans sold was substantially less favorable as a result of
the market pricing dynamics and significant competitive forces. The significant
decrease in hedging cost, as well as the market price of loans sold,
demonstrates the potential volatility to earnings and the sensitivity to
pull-through assumptions. The cost of these derivative contracts is included as
a component of mortgage banking income in the consolidated statements of income,
which represents the net revenues associated with the origination, holding and
sale of mortgage loans.

The shift to a loss in mortgage banking operations in 2003 stems from the
aforementioned interest rate volatility and other factors that began late in the
third quarter of 2003, and in turn led to lower margins. These losses, coupled
with the expectation for lower volumes in 2004, also led to an impairment charge
of $397,000 relating to goodwill with respect to the mortgage banking segment
during the fourth quarter of 2003.

PRIOR YEAR COMPARISON (2002 VS. 2001)

Non-interest income totaled $20.0 million in 2002, which is substantially
unchanged from the $20.3 million recognized in 2001. 2002 reflected changes in
various categories of non-interest income items in comparison to 2001. While
service charges on deposit accounts increased $1.1 million or 18.3%, this was
largely offset by declines in securities gains and losses ($572,000) and a
reduction in other operating income ($500,000).

The Company's mortgage banking segment recognized $9.4 million in mortgage
banking income in 2002. The level of mortgage banking income declined slightly
from the prior year level of $9.6 million. The decrease, despite increased loan
applications, was attributable to lower margins recognized on loan sales in the
third and fourth quarters of 2002. The reduction in margin was attributable to
lower than anticipated pull through rates (closings versus commitments) as
mortgage rates fell to record lows and the earnings on a portion of the loan
commitments outstanding were not realized. Higher than anticipated hedging cost
reduced the margin on loan sales by approximately $900,000 in 2002 due to the
increased cost of mortgage derivative commitments used to hedge the price
volatility of loan commitments. The inability of the mortgage company's hedge
model to accurately predict loan fallout percentages experienced in the third
and early in the fourth quarter 2002 resulted in higher than predicted fallout.
This fallout was due to loan applicants who "opted out" of the mortgage
company's process prior to closing and, instead, reapplied elsewhere or simply
waited on the sidelines for more declines in mortgage rates, as they continued
to decline to historically unprecedented lows. The hedge model, which predicted
the need to invest at a specified level based upon historic information, failed
to predict the sudden increase in fallout, and in turn, hedge volume was
elevated when measured against the loan commitments which ultimately closed.

UFM originated $791.8 million in loans during 2002 compared to the 2001
volume of $621.6 million. The corresponding sale of loans resulted in gains on
the sale of loans during 2002 and 2001 of $12.9 million and $7.3 million,
respectively. Elevated hedge costs in 2002 and increased expense associated with
the higher volume of origination resulted in a drop in mortgage banking pre-tax
earnings from $2.0 million in 2001 to $798,000 in 2002. Pretax earnings for 2002
were further reduced by a $400,000 payment to a former mortgage company
executive to settle employment obligations and to acquire a non-compete
agreement on his termination of employment.

Fiduciary income continued at the $1.8 million level in 2002 as it did in
2001. The level of trust and estate revenues remained relatively consistent in
2002 even though the total market value of the assets managed declined during
2002.

26

Other service charges, commissions and fees of approximately $1.4 million
also remained relatively consistent in 2002 and 2001. Other service charges,
commissions and fees declined by $55,000 in 2002 compared to 2001.

During 2002, the Company experienced a net loss from available for sale
securities of $391,000. The loss included an other-than-temporary $576,000
write-down of a municipal issue, losses from the sale of securities of $313,000
and gains resulting from securities sold and called of $496,000. During 2001, a
net gain of $181,000 was realized as a result of the sale of available for sale
securities with gains of $209,000 and losses of $28,000.

NON-INTEREST EXPENSE

CURRENT YEAR COMPARISON (2003 VS. 2002)

Non-interest expense totaled $47.4 million for 2003 increasing $5.1
million, or 12.02% over year-end 2002. This increase is primarily attributable
to a $3.5 million increase in salaries and benefits as a result of the addition
of Greenville in late 2002 ($349,000), the addition of CommonWealth in June 2003
($854,000) as well as a general increase in salaries and benefits as staffing
needs at several locations were satisfied in order to support added corporate
services and continued branch growth, including three newly established branches
in Winston-Salem, North Carolina ($342,000).

In 2003, occupancy and furniture and equipment expense increased by
$640,000 compared to 2002. The general level of occupancy cost grew largely as a
result of the Greenville ($145,000) and CommonWealth acquisitions ($251,000) as
well as increases in depreciation and insurance costs associated with new de
novo branches ($63,000) and depreciation associated with a significant
investment in operating equipment and technology infrastructure.

During the fourth quarter of 2003, the Company performed its annual
impairment test on goodwill. The results of the impairment tests indicated a
charge of approximately $400,000 was appropriate for the mortgage banking
segment. This charge was included in the non-interest expense category and as a
reduction to goodwill on the balance sheet.

All other operating expense accounts increased $555,000, or 4.02% in 2003
compared to 2002. Again, this increase was largely attributable to the Monroe
Financial, Inc. ("Monroe" or "Greenville") acquisition in late 2002 and the
CommonWealth acquisition along with the three de novo branches opened in the
second, third and fourth quarters of 2003.

The Company's net overhead ratio (non-interest expense less non-interest
income excluding security gains and non-recurring gains divided by average
earning assets) is a measure of its ability to manage and control costs. As this
ratio decreases, more of the net interest income earned is realized as net
income. The net overhead ratios for 2003, 2002, and 2001 were 1.66%, 1.48%, and
1.39%, respectively. The increase in the overhead ratio for 2003 and 2002
reflects the additional costs associated with the aforementioned expansion
efforts as part of the Company's strategic plan for the development of its
banking network in metro markets and the added infrastructure cost necessary to
support the growth of the Company.

The Company's efficiency ratio also measures management's ability to
control costs and maximize net revenues. The efficiency ratio is computed by
dividing non-interest expense by the sum of net interest income plus
non-interest income (excluding security gains and losses, amortization of
intangibles and impairment charges). The efficiency ratios for 2003, 2002, and
2001 were 51.9%, 48.6%, and 47.8%, respectively. Increases in the current and
prior year are reflective of the higher direct costs associated with the
acquisitions and new branches in late 2002 and in 2003 and added Corporate
overhead required to support Company expansion.

PRIOR YEAR COMPARISON (2002 VS. 2001)

Non-interest expense totaled $42.3 million in 2002, compared with $38.0
million in 2001. The increase in non-interest expense in 2002 of $4.3 million is
primarily attributable to a $3.4 million increase in salaries and benefits, $1.0
million of which was due to the acquisition of the four branches in the fourth
quarter of 2001, along with a $700,000 increase in salaries and commissions in
the mortgage operations of UFM (primarily attributable

27

to increased loan production) and a general increase in salaries as staffing
needs at several locations were satisfied in order to support added corporate
services and continued branch growth. In addition, the combined impact of
increases in other non-interest expense categories of $2.8 million is
attributable to increased operating expenses from the branch acquisitions
($380,000), increased operations of UFM ($820,000) and additional increases of
$1.6 million in other non-interest expense categories including costs associated
with occupancy and facilities maintenance, data communications and marketing
campaigns. These expenses were offset by the decline in goodwill amortization of
$2.0 million.

Occupancy expense increased $259,000 or 9.9% between 2001 and 2002. The
2002 increase primarily consists of $160,000 related to the full year's
occupancy costs of the branch facilities purchased in fourth quarter 2001, and
additional costs of $70,000 associated with UFM.

With the adoption of FASB Statement No. 142, the Company ceased
amortization of certain goodwill beginning January 1, 2002 as required by the
Statement and with the adoption of Statement 147 in October 2002, amortization
of remaining goodwill associated with branch acquisitions was discontinued.
Cessation of such amortization decreased goodwill expense in 2002 by $2.04
million compared to 2001. This resulted in an additional $1.9 million in after
tax net income in comparison to the prior year.

Other operating expense increased by $2.3 million in 2002 compared to 2001.
These accounts include increases in other operating costs associated with UFM of
$700,000 (tied to increased loan production and the payment of a $400,000
contract settlement with the retiring president of UFM in connection with his
departure). Other increased expenses, largely due to the acquisition of the new
branches, included an increase in telephone and data communications expense of
$237,000, an increase in ATM service fees of $162,000 and an increase in courier
and travel expense of $214,000. Advertising expense was also up $114,000 in
comparison to 2001 due to ad campaigns for new products and branch promotions.
In 2001, a litigation settlement led to reimbursement of legal costs which
reduced legal fees by $150,000 in 2001.

INCOME TAX EXPENSE

Income tax expense totaled $10.4 million in 2003, compared with $10 million
in 2002 and $8.4 million in 2001. The $0.4 million increase in 2003 is
reflective of the higher level of pre-tax earnings in 2003 as is the $1.6
million increase between 2001 and 2002. Pre-tax earnings increased $0.8 million
between 2002 and 2003 and $7.2 million between 2001 and 2002.

The major difference between the statutory tax rate and the effective tax
rate (income tax expense divided by pre-tax income) results from income not
taxable for federal income tax purposes. The primary category of non-taxable
income is that of state and municipal securities and industrial revenue bonds
and tax-free loans. The effective tax rate for 2003 was 29.1% compared with
28.9% for 2002 and 30.5% in 2001. The reduction in the Company's effective tax
rate in 2002 was partially attributable to the cessation of amortization of
non-deductible goodwill while the slight increase in 2003 is the result of a
decline in tax-free revenue sources as a percentage of total net revenues.

FINANCIAL POSITION

SECURITIES HELD TO MATURITY

Investment securities held to maturity are comprised largely of U.S. Agency
obligations and state and municipal bonds. Obligations of States and Political
Subdivisions represent the largest portion of the held to maturity portfolio and
totaled $37.5 million at December 31, 2003. These are comprised of high-grade
municipal securities generally carrying AAA bond ratings, most of which also
carry credit enhancement insurance by major insurers of investment obligations.

The average final maturity of the investment portfolio decreased from 9.06
years in 2002 to 8.11 years in 2003 with the tax equivalent yield increasing
from 8.62% at year-end 2002 to 8.66 % at the close of 2003. The average maturity
of the investment portfolio, based on market assumptions for prepayment, is 2.8
years and

28

3.3 years at December 2003 and 2002, respectively. The average maturity data
differs from final maturity data because of the use of assumptions as to
anticipated prepayments.

SECURITIES AVAILABLE FOR SALE

At December 31, 2003, the Company had $444.5 million in securities
available for sale, compared with $300.9 million at year-end 2002, an increase
of $143.6 million or 47.7%. During the year $307.9 million in securities were
purchased. However, these increases were offset by maturities, calls, and
mortgage-backed security principal payments and prepayments of $150.8 million,
and sales of $10.2 million.

The fair value of securities available for sale exceeded book value at
year-end 2003 by $8.3 million, compared with $11.3 million at year-end 2002. The
market value appreciation reflects changes (declines) in interest rates on
comparable securities since acquisition. The market value appreciation declined
by $3.0 million between 2002 and 2003 as a result of changes in rates during
2003 and changes in the composition of the portfolio. Fueled by calls and
mortgage-backed security principal payments and prepayments of higher yielding
securities throughout the year, a reduction in the appreciated value of the
portfolio occurred as the balances of higher yielding securities declined.
Reinvestment in comparable securities resulted in lower yields with prices
closer to current market rates. The tax equivalent purchase yield on securities
available for sale was 5.23% in 2003 and 6.32% in 2002.

The average final maturity of the available for sale portfolio was 15.2
years and 13.5 years at December 31, 2003 and 2002, respectively. The change in
average final maturity was the result of the $150.8 million in calls, principal
payments and prepayments that occurred as a result of the declining interest
rate environment while reinvestment in comparable securities resulted in
extending the average contractual maturity of the portfolio by 1.7 years. The
average maturity of the portfolio, based on market assumptions for prepayment,
was 4.2 years and 2.9 years, respectively, at December 31, 2003 and 2002,
substantially shorter than the average final maturity.

Securities available for sale are used as part of management's
asset/liability strategy. These securities may be sold in response to changes in
interest rates, changes in prepayment risk, for liquidity needs and other
factors. These securities are carried at market value.

LOAN PORTFOLIO

LOANS HELD FOR SALE:

The relative size of the portfolio of loans originated by the Company's
mortgage banking division, UFM, and held for sale, was impacted significantly by
the refinancing activity that occurred during 2002 and 2003 as a result of the
low interest rate environment. Loans held for sale fluctuate on a daily basis
reflecting retail originations, wholesale purchases and sales to investors. At
December 31, 2003, loans held for sale were $18.2 million compared to $66.4
million at December 31, 2002. Average loans held for sale (which is a better
indicator of volume maintained) decreased $13.1 million in 2003.

LOANS HELD FOR INVESTMENT:

Total loans held for investment increased $98.6 million from $927.6 million
at December 31, 2002 to $1.03 billion at December 31, 2003. The increase is
attributable to the CommonWealth acquisition (approximately $131.2 million at
June 30, 2003) net of several large payoffs during 2003. Considering an $85.9
million increase in deposits and the increase in loans during 2003, the loan to
deposit ratio increased slightly at December 31, 2003 compared to the December
31, 2002 level. The loan to deposit ratio, using only loans held for investment
(excluding loans held for sale), was 83.7% on December 31, 2003 and 81.4% on
December 31, 2002. Intense competition for loans in the face of low interest
rates and what appears to be slower loan demand continue to impact this measure
of loan production. Resulting liquidity during the period has been reinvested in
the available for sale securities portfolio.

The average balance of loans held for investment increased $58.7 million
when comparing 2003 to 2002. This increase includes approximately $14 million in
average loans acquired in the Monroe acquisition in the

29

fourth quarter of 2002 and $71.5 million in average loans from the CommonWealth
acquisition on June 6, 2003 net of the large commercial loan payoffs mentioned
earlier and regular amortization in 2003.

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 at year-end 1999 through 2003.

LOAN PORTFOLIO SUMMARY:

The Company maintained no foreign loans in the periods presented.

Maturities and Rate Sensitivity of Loan Portfolio at December 31, 2003:

30

- ---------------

* Amounts are net of $621 unearned income; $11 in the Real Estate-Mortgage
category and $610 in Consumer.

ALLOWANCE AND PROVISION FOR LOAN LOSSES

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

Management performs monthly 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 the 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,
maturity, composition, delinquencies, and non-accruals. While management has
attributed the allowance for loan losses to various portfolio segments, the
allowance is available for the entire portfolio.

The allowance for loan losses was $14.6 million on December 31, 2003,
compared to $14.4 million at December 31, 2002 and $14 million on December 31,
2001. The allowance for loan losses represents 488.6% of non-performing loans at
December 31, 2003, versus 455% and 280% at December 31, 2002 and 2001,
respectively. When other real estate is combined with non-performing loans, the
allowance equals 288% of non-performing assets at December 31, 2003 versus 239%
and 174% at December 31, 2002 and December 31, 2001, respectively. The increase
in the allowance since year-end 2002 is primarily attributable to the
acquisition of CommonWealth and the application of risk factors specific to this
portfolio. The allowance attributable to the CommonWealth portfolio at the date
of acquisition was $1.6 million.

The provision for loan losses for the year ended December 31, 2003
decreased $789,000 when compared to the year ended December 31, 2002. The
decrease is largely attributable to improving asset quality and loan loss
history, changes in risk factors assigned and a decline in volume within certain
portfolio segments. Net charge-offs for 2003 and 2002 were $4.8 million and $4.1
million, respectively. Although net charge-offs increased in 2003 compared to
2002, expressed as a percentage of average loans held for investment, net
charge-offs decreased from 0.49% for 2002, to 0.45% for 2003 due to the increase
in average loans of $58.7 million.

The provision for loan losses was $4.2 million in 2002, $5.1 million in
2001 and $4.0 million in 2000. The 2002 provision of $4.2 million decreased by
more than $900,000 from 2001 in response to continuing improvements in asset
quality and only modest growth in the loan portfolio year over year. The decline
in the provision was consistent with the noted improvements in all categories of
non-performing loans and other real estate owned. The 2001 provision of $5.1
million was elevated in response to charge-offs in 2001 coupled with larger
charge-offs of commercial credits in 2001 as the Company pursued workout and
resolution of two commercial loans in non-accrual status.

Based on the allowance for loan losses of approximately $14.6 million and
$14.4 million at December 31, 2003 and 2002, respectively, the allowance to
loans held for investment ratio was 1.43% in 2003 vs. 1.55% for 2002. Management
considers the allowance adequate based upon its analysis of the portfolio as of
December 31, 2003.

Net loan charge-offs were $4.8 million in 2003, compared with $4.1 million
in 2002 and $4.0 million in 2001, respectively. Although net charge-offs
increased in 2003 compared to 2002, expressed as a percentage of average loans
held for investment, net charge-offs decreased from 0.49% for 2002, to 0.45% for
2003 due to the

31

increase in average loans of $58.7 million. The following table details loan
charge-offs and recoveries by loan type for the five years ended December 31,
1999 through 2003.

SUMMARY OF LOAN LOSS EXPERIENCE:

For additional information regarding the Allowance for Loan Losses, also
see Note 6 of the Financial Statements included herein under Item 8.

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES:

The percentages in the table above represent the percent of loans in each
category of total loans.

32

NON-PERFORMING ASSETS

Non-performing assets include loans on which interest accruals have ceased,
loans contractually past due 90 days or more and still accruing interest, and
other real estate owned (OREO) pursuant to foreclosure proceedings. The levels
of non-performing assets for the last five years are presented in the following
table.

Total non-performing assets were $5.1 million at December 31, 2003 compared
to $6.0 million at December 31, 2002, a decrease of $937,000. Every component of
non-performing assets improved with other real estate owned having the greatest
impact, decreasing $764,000, or 26.7%. The decrease in non-accrual loans
resulted from the resolution of a number of loan relationships through payment,
repossession, or foreclosure and write-down of the loan balances to reflect the
net realizable value of the assets. The decrease in loans 90 days or more past
due is a result of movement of these credits to non-accrual status and a more
aggressive approach in collecting loans past due 90 days or more.

Certain loans included in the non-accrual category have been written down
to the estimated realizable value or have been assigned specific reserves within
the allowance for loan losses based upon management's estimate of loss upon
ultimate resolution.

During 2003, 2002 and 2001, $1,581,000, $2,168,000, and $2,116,000 of
assets were acquired through foreclosure and transferred to other real estate
owned.

In addition to non-performing loans reflected in the foregoing table, the
Company has identified certain performing loans as impaired based upon
management's evaluation of credit strength, projected ability to repay in
accordance with the contractual terms of the loans and varying degrees of
dependence on the sale of related collateral for liquidation of the loans. These
loans were current under loan terms and were classified as performing at
year-end 2003.

The following table presents the Company's investment in loans considered
to be impaired and related information on those impaired loans:

33

Included in the table above is a loan relationship in the amount of $4.7
million which is secured by a hotel property which has suffered declines in
levels of occupancy. The allowance for loan losses related to this loan was $1.5
million at December 31, 2003. This was the Company's largest impaired loan at
December 31, 2003.

The Company has considered all impaired loans in the evaluation of the
adequacy of the allowance for loan losses at December 31, 2003. Additional
information regarding nonperforming loans can be found in Note 6 included in the
Financial Statements under Item 8 of this report.

NONPERFORMING LOANS:

Potential Problems Loans -- In addition to loans which are classified as
non-performing and impaired, the Company closely monitors certain loans which
could develop into problem loans. These potential problem loans present
characteristics of weakness or concentrations of credit to one borrower. Among
these loans at December 31, 2003 was a loan of $12.8 million which warrants
close monitoring to a borrower within the hospitality industry. The loan
represents the retained portion of a $16 million total loan shared with a
participating bank. As with other hospitality industry firms, the borrower has
experienced reduced cash flow associated with declines in the level of hotel
occupancy. The loan is secured by real estate improved with a national franchise
hotel and parking building in a major southeast city. The loan is further
secured by the guarantee of the principals of the borrowing entity. This loan,
which was originated in 1999, performed according to terms until it displayed
delinquency in February and March 2003 and was subsequently brought current. The
loan remains current as to principal and interest at December 31, 2003. The loan
has not been converted to non-accrual status based upon its secured position,
historical performance and strength of guarantors. This loan does, however,
represent one of the Company's largest credits and is within an industry which
has suffered from declining performance in 2003.

There were no specific allocations of the allowance for loan losses for any
of the foregoing potential problem loans as of December 31, 2003.

The company is also monitoring a $3.1 million loan to a hospitality
borrower for a new property opened in 2003. The construction and opening of the
hotel, which secures this loan was delayed and occupancy has not reached
projected levels necessary to adequately fund current debt service requirements.
The loan is guaranteed by the principals and is senior to a $900,000 loan by the
SBA. The $3.1 million senior loan became 30 days delinquent in February 2004 and
the borrower has requested conversion to interest only payments for one year to
allow time for stabilization of occupancy and cash flow for the property. The
company has delayed consideration of the modification request until the
principals restore the loan to current status and pending the company's request
for additional collateral. The ultimate resolution of the issues dealing with
the modification is not expected to have a material adverse effect on the
consolidated financial statements.

The Company had no foreign outstanding loans at December 31, 2003.

Although the Company's loans are made primarily in the three state region
in which it operates, the Company had no concentrations of loans to one borrower
or industry representing 10% or more of outstanding loans at December 31, 2003.

34

DEPOSITS

Total deposits have grown $85.9 million or 7.5% since year-end 2002 as a
result of the acquisition of CommonWealth. Deposits in the acquired CommonWealth
branches at year-end 2003 totaled $82.6 million. In terms of composition,
non-interest-bearing deposits increased $28.6 million or 17.3% while
interest-bearing deposits grew $57.3 million or 5.8% from December 31, 2002.

Average total deposits increased to $1.2 billion for 2003 versus $1.1
billion in 2002, an increase of 9.57%. Average savings deposits increased by
$15.1 million while time deposits increased by $33.4 million. Average
interest-bearing demand and non-interest bearing demand deposits increased by
$34.4 million and $21.7 million, respectively. In 2003, the average rate paid on
interest bearing liabilities was 2.26%, down from the 3.03% in 2002.

FUNDING, LIQUIDITY AND CAPITAL RESOURCES:

The Company's short-term borrowings consist primarily of overnight Federal
Funds purchased from the FHLB, securities sold under agreements to repurchase
and callable term FHLB borrowings. This category of liabilities represents
wholesale sources of funding and liquidity for the Company. Short-term
borrowings increased on average approximately $16.2 million in comparison to the
prior year. The increase in average short-term borrowings in 2003, along with
the increase in average deposits of $104.6 million, was accompanied by an
increase in total loans as these funds were used to finance the average loans
held for investment portfolio growth ($58.7 million) and the average increase in
available for sale securities ($67.9 million). The price sensitivity of funding
cost is managed by the Company's "Product Group", which monitors product and
pricing initiatives including, among other things, the management of the overall
cost of funds to assist in maintaining an acceptable net interest margin, and to
act as a resource in developing new products and establishing pricing
guidelines.

Other indebtedness includes structured term borrowings from the FHLB of
$136.3 million and $100 million at December 31, 2003 and 2002, respectively, in
the form of convertible and callable advances. The callable advances may be
called (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. At December 31, 2003
and 2002, respectively, the Company also held non-callable term advances of $8.3
million and $10.0 million. In 2003, the Company borrowed an additional $25
million from the FHLB. In addition, FCBI issued trust preferred securities in
September 2003 of $15.0 million. The debentures sold by the Company to FCBI
Capital Trust are included in the total borrowings of the Company.

The Company's short-term borrowings include securities sold under
repurchase agreements. These agreements are sold to customers as an alternative
to available deposit products. The underlying securities included in repurchase
agreements remain under the Company's control during the effective period of the
agreements. Rates paid are summarized as follows:

For further discussion of FHLB borrowings, see Note 8 to the Notes to the
Consolidated Financial Statements included in this report.

Liquidity represents the Company's ability to respond to demands for funds
and is primarily derived from maturing investment securities, overnight
investments, periodic repayment of loan principal, and the Company's ability to
generate new deposits. The Company also has the ability to attract short-term
sources of funds and draw on credit lines that have been established at
financial institutions to meet cash needs.

35

Total liquidity of $862.2 million at December 31, 2003 is comprised of the
following: cash on hand and deposits with other financial institutions of $61.6
million; securities available for sale of $444.5 million; securities held to
maturity due within one year of $830,000; and Federal Home Loan Bank credit
availability of $355.3 million.

Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally used to pay down short-term
borrowings. On a longer-term basis, the Company maintains a strategy of
investing in securities, mortgage-backed obligations and loans with varying
maturities. The Company uses sources of funds primarily to meet ongoing
commitments, to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain a portfolio of securities. At December 31, 2003,
approved loan commitments outstanding amounted to $116.8 million. Certificates
of deposit scheduled to mature in one year or less totaled $400.7 million.
Management believes that the Company has adequate resources to fund outstanding
commitments and could either adjust rates on certificates of deposit in order to
retain or attract deposits in changing interest rate environments or replace
such deposits with advances from the FHLB or other funds providers if it proved
to be cost effective to do so.

The following tables present contractual cash obligations, contingent
liabilities, commercial commitments and off-balance sheet arrangements as of
December 31, 2003.

CASH OBLIGATIONS:

- ---------------

1. Excludes Interest.

2. Includes interest on both fixed and variable rate obligations. The interest
associated with variable rate obligations is based upon interest rates in
effect at December 31, 2003. The interest to be paid on variable rate
obligations is affected by changes in market interest rates, which materially
affect the contractual obligation amounts to be paid.

3. Excludes carrying value adjustments such as unamortized premiums or
discounts.

4. Acquisition of PCB Bancorp in the second quarter of 2004.

36

OFF-BALANCE SHEET ARRANGEMENTS:

Lines of credit with no stated maturity date are included in commitments
for less than one year.

In addition to amounts listed in the foregoing table and as more fully
described in Application of Critical Accounting Policies and Note 5 to the
Financial Statements, UFM had option-adjusted commitments to fund mortgage loans
of $46.7 million.

STOCKHOLDERS' EQUITY

Risk-based capital ratios are a measure of the Company's capital adequacy.
At December 31, 2003, the Company's Tier I capital ratio was 13.26% compared
with 12.06% in 2002. Federal regulatory agencies use risk-based capital ratios
and the leverage ratio to measure the capital adequacy of banking institutions.
Risk-based capital guidelines, risk weighted balance sheet assets, and
off-balance sheet commitments are used in determining capital adequacy. The
Company's total risk-based capital-to-asset ratio was 14.55% at the close of
2003 compared with 13.33% in 2002. Both of these ratios are well above the
current minimum level of 8% prescribed for bank holding companies. The leverage
ratio is the measurement of total tangible equity to total assets. The Company's
leverage ratio at December 31, 2003 was 8.83% versus 8.10% at December 31, 2002,
both of which are well above the minimum levels prescribed by the Federal
Reserve. (See Note 13 of the Notes to Consolidated Financial Statements.)

TRUST AND INVESTMENT MANAGEMENT SERVICES

As part of its community banking services, the Company offers trust
management and estate administration services through its Trust and Financial
Services Division (Trust Division). The Trust Division reported market value of
assets under management of $471 million and $433 million at December 31, 2003
and 2002, respectively. The Trust Division manages intervivos trusts and trusts
under will, develops and administers employee benefit plans and individual
retirement plans and manages and settles estates. Fiduciary fees for these
services are charged on a schedule related to the size, nature and complexity of
the account.

The Trust Division employs 19 professionals and support staff with a wide
variety of estate and financial planning, investing and plan administration
skills. The Trust Division is located within the Company's banking offices in
Bluefield, West Virginia. Services and trust development activities to other
branch locations and primary markets are offered through the Bluefield-based
division.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Bank'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 Bank, like
other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank 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.

37

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
called 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 Bank seeks to control its interest rate risk (IRR) exposure to
insulate net interest income 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 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. 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 Bank's interest-earning assets and monitoring
the term structure of liabilities to maintain a balanced mix of maturity and
repricing structures to mitigate the potential exposure. 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. 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 as short-term rates are anticipated to move upward in the
latter half of 2004.

The following table summarizes the impact on NII and the EVE as of December
31, 2003 and 2002, respectively, 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 flat rate simulation. The results of the rate shock analysis
depicted below differ from the results in quarterly simulations, in that all
changes are assumed to take effect immediately; whereas, in the quarterly income
simulations, changes in interest rates are assumed to take place over a 24-month
horizon simulating a more likely scenario for a changing rate environment. This
table, which illustrates the prospective effects of hypothetical interest rate
changes, is based upon numerous assumptions including relative and estimated
levels of key interest rates over a twelve-month time period. This type of
modeling technique, although useful, does not take into account all strategies
that management might undertake in response to a sudden and sustained rate shock
as depicted. Also, as market conditions vary from those assumed in the
sensitivity analysis, actual results will also differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate change caps or floors on adjustable rate assets, the
potential

38

effect of changing debt service levels on customers with adjustable rate loans,
depositor early withdrawals and product preference changes, and other
internal/external variables.

RATE SENSITIVITY ANALYSIS

When comparing the impact of the rate shock analysis between 2003 and 2002,
the 2003 changes in NII reflect the impact of the balance sheet composition of
assets and liabilities as the profile continues to reflect asset sensitivity in
a falling rate environment as more assets prepay and net interest income
declines. The change results in heightened asset prepayment levels experienced
in light of the interest rate environment modeled. The asset sensitivity is
reflected in on-hand liquidity of $69.1 million (Federal Funds sold and
interest-bearing balances held with other banks). The Company continues to
reinvest excess funds into new assets (loans and securities) to support net
interest income. The Company began to experience a shift in the balance sheet
toward greater asset sensitivity in 2000 which was attributed to the reduced
lives of certain assets and the control measures taken in prior years, and
continuing throughout 2003, to reduce deposit cost and identify opportunities
for product and net interest income enhancement in response to the current rate
environment.

The market value of equity is a measure which reflects the impact of
changing rates on the underlying value of the Company in a hypothetical scenario
analysis. The value of equity within this analysis is favorably responsive to
the impact of rising rates. The Company changed modeling tools in 2003 and the
result provided more accurate measures of non-maturity deposits and the results
for 2003 give greater weight to the value of these deposits as rates rise.

39

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets................................. 41
Consolidated Statements of Income........................... 42
Consolidated Statements of Cash Flow........................ 43
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 44
Notes to Consolidated Financial Statements.................. 45
Report of Independent Auditors.............................. 77
Report of Management's Responsibilities..................... 78

40

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements.
41

CONSOLIDATED STATEMENTS OF INCOME

See Notes to Consolidated Financial Statements
42

CONSOLIDATED STATEMENTS OF CASH FLOW

See Notes to Consolidated Financial Statements
43

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

See Notes to Consolidated Financial Statements.
44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accounting and reporting policies of First Community Bancshares, Inc.
and subsidiaries ("First Community" or the "Company") conform to accounting
principles generally accepted in the United States and to predominant practices
within the banking industry. In preparing financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those estimates.
Assets held in an agency or fiduciary capacity are not assets of the Company and
are not included in the accompanying consolidated balance sheets.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of First Community include the
accounts of all wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. First Community operates
in the community banking and mortgage banking segments.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and due from banks, time deposits
with other banks, federal funds sold, and interest-bearing balances on deposit
with the Federal Home Loan Bank that are available for immediate withdrawal.
Interest and income taxes paid were as follows:

Pursuant to agreements with the Federal Reserve Bank, the Company maintains
a cash balance of approximately $1 million in lieu of charges for check clearing
and other services.

TRADING SECURITIES

At December 31, 2003 and 2002, no securities were held for trading purposes
and no trading account was maintained.

SECURITIES AVAILABLE FOR SALE

Securities to be held for indefinite periods of time including securities
that management intends to use as part of its asset/liability management
strategy, and that may be sold in response to changes in interest rates, changes
in prepayment risk, or other similar factors are classified as available for
sale and are recorded at estimated fair value. Unrealized appreciation or
depreciation in fair value above or below amortized cost is included in
stockholders' equity net of income taxes and is entitled "Other Comprehensive
Income." Premiums and discounts are amortized to expense or accreted to income
over the life of the security. Gain or loss on sale is based on the specific
identification method. Other than temporary losses on available for sale
securities are included in net securities losses and gains. All securities
including securities held to maturity are evaluated for indications of
impairment in accordance with the latest guidance issued by the Emerging Issues
Task Force ("EITF") of the Financial Accounting Standards Board ("FASB"). For
debt securities available for sale with unrealized losses, management has the
intent and ability to hold these securities until such time as the value
recovers or the securities mature.

45

SECURITIES HELD TO MATURITY

Investments in debt securities that management has the ability and intent
to hold to maturity are carried at cost. Premiums and discounts are amortized to
expense and accreted to income over the lives of the securities. Gain or loss on
the call or maturity of investment securities, if any, is recorded based on the
specific identification method.

LOANS HELD FOR SALE AND DERIVATIVE FINANCIAL INVESTMENTS

Loans held for sale primarily consist of one to four family residential
loans originated for sale in the secondary market and carried at the lower of
cost or estimated fair value determined on an aggregate basis. Gains and losses
on sales of loans held for sale are included in mortgage banking income in the
Consolidated Statements of Income.

For loans to be sold, the Company enters into forward commitments and
options or derivatives to manage the risk inherent in interest rate lock
commitments made to potential borrowers. The inventory of loans and loan
commitments (both retail and wholesale) is hedged to reduce the interest rate
risk and any corresponding fluctuation in cash flows derived upon settlement of
the loans with secondary market purchasers, and consequently, to achieve a
desired margin upon delivery. The hedge transactions are used for risk
mitigation and are not for trading purposes. The derivative financial
instruments stemming from these hedging transactions are recorded at fair value
in Other Assets and Liabilities on the Consolidated Balance Sheets and the
changes in fair value are reflected in Mortgage Banking Income on the
Consolidated Statements of Income. For the year ended December 31, 2003, the net
derivative expense reflected in the Consolidated Statements of Income, was $3.14
million which is comprised of a $490,000 increase in the fair value of the
forward mortgage contracts, a $1.5 million expense associated with the contract
settlements including option expense, and a $2.1 million decline in the value of
rate lock commitments. Forward mortgage contracts are settled at fair value upon
expiration of the contract and result in either the payment or receipt or funds
while option contracts are paid for in advance and amortized to expense over
their useful life. UFM's accumulated net derivative position was $83,000 and
$1.7 million as of December 31, 2003 and 2002, respectively.

Loans transferred to the held for sale classification are transferred at
fair value. Any write-down recorded at the point of transfer is charged to the
allowance for loan losses. Subsequent write-downs in fair value are recorded in
non-interest expense while further appreciation in fair value is not recorded.
No loans were transferred from held for investment to the held for sale category
in 2003. During the fourth quarter of 2002, the Company transferred $6.0 million
in loans held for investment to loans held for sale and recognized a write-down
through the allowance for loan losses of $246,000.

In December 2003, the Securities and Exchange Commission ("SEC") issued
informal guidance on the methods that the SEC feels Companies should use to
account for and record interest rate lock commitments ("IRLC"). The guidance
which will be formalized in a forthcoming staff accounting bulletin is expected
to indicate that IRLC's should be valued as a liability and expensed and remain
as a liability until the expiration or culmination of the contract. The SEC
staff emphasized that this accounting treatment should be applied to all loan
commitments originated in the first reporting period beginning after March 15,
2004. This will result in a change in practice for many mortgage banking firms
since there are a number of valuation methods currently employed throughout the
industry resulting in a number of divergent practices. The impact of adopting
this standard beginning April 1, 2004 will shift a portion of the expense
recognition into periods preceding the actual revenue recognition.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level deemed adequate to
absorb probable losses inherent in the loan portfolio. The Company consistently
applies a monthly review process to continually evaluate loans for changes in
credit risk. This process serves as the primary means by which the Company
evaluates the adequacy of the allowance for loan losses. The allowance is
maintained by making specific allocations to impaired loans and loan pools that
exhibit inherent weaknesses and various credit risk factors. Allocations to loan
pools are

46

developed giving weight to risk ratings, historical loss trends and management's
judgment concerning those trends and other relevant factors.

The allowance is allocated to specific loans to cover loan relationships
identified with significant cash flow weaknesses and for which a collateral
deficiency may be present. The allowance established under the specific reserve
method is based upon the borrower's estimated cash flow and projected
liquidation value of related collateral. The allowance is allocated to pools of
loans based on historical loss experience to cover the homogeneous and
nonhomogeneous loans not individually evaluated. Pools of loans are grouped by
specific category and risk characteristics. To determine the amount of allowance
needed for each loan category, an estimated loss percentage is developed based
upon historical loss experience. The historical loss experience is weighted for
various risk factors including macro and micro economic conditions, qualitative
assessments relative to the composition of the loan portfolio, the level of
delinquencies and non-accrual loans, trends in the volume and term of loans,
anticipated impact from changes in lending policies and procedures, and any
concentration of credits in certain industries or geographic areas. The
calculated percentage is used to determine the estimated allowance excluding any
relationships specifically identified and evaluated. While allocations are made
to specific loans and classifications within the various categories of loans,
the reserve is available for all loan losses.

The allowance for loan losses related to impaired loans is based upon the
discounted estimated cash flows or fair value of collateral when it is probable
that all amounts due pursuant to contractual terms of the loan will not be
collected and the recorded investment in the loan exceeds the fair value.
Certain smaller balance, homogeneous loans, such as consumer installment loans
and residential mortgage loans, are evaluated for impairment on an aggregate
basis in accordance with the Company's policy.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over estimated useful
lives. Maintenance and repairs are charged to current operations while
improvements that extend the economic useful life of the underlying asset are
capitalized. Disposition gains and losses are reflected in current operations.
In addition, any material excess of the carrying value over the fair value is
recorded as an impairment loss.

LOAN INTEREST INCOME RECOGNITION

Accrual of interest on loans is based generally on the daily amount of
principal outstanding. It is the Company's policy to discontinue the accrual of
interest on loans based on the payment status and evaluation of the related
collateral and the financial strength of the borrower. The accrual of interest
income is normally discontinued when a loan becomes 90 days past due as to
principal or interest. Management may elect to continue the accrual of interest
when the loan is well secured and in process of collection. When interest
accruals are discontinued, interest accrued and not collected in the current
year is reversed and interest accrued and not collected from prior years is
charged to the reserve for possible loan losses. Interest income realized on
impaired loans is recognized upon receipt if the impaired loan is on a
non-accrual basis.

LOAN FEE INCOME

Loan origination and underwriting fees are recorded as a reduction of
direct costs associated with loan processing, including salaries, review of
legal documents, obtainment of appraisals, and other direct costs. Fees in
excess of those related direct costs are deferred and amortized over the life of
the related loan. Loan commitment fees are deferred and amortized over the
related commitment period.

OTHER REAL ESTATE OWNED

Other real estate owned and acquired through foreclosure is stated at the
lower of cost or fair value less estimated costs to sell. Loan losses arising
from the acquisition of such properties are charged against the allowance for
possible loan losses. Expenses incurred in connection with operating the
properties, subsequent write-downs and gains or losses upon sale are included in
other non-interest income and expense.

47

STOCK DIVIDEND

On June 17, 2003, the Company's Board of Directors declared a 10% stock
dividend to shareholders of record as of August 1, 2003, which was distributed
on August 15, 2003. Average shares outstanding and per share amounts included in
the consolidated financial statements have been adjusted to reflect the impact
of the stock dividend.

STOCK OPTIONS

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

In 2003, with the acquisition of CommonWealth, the Company assumed
additional stock options on 120,155 shares, (adjusted by the merger conversion
factor of .9015 and the 10% stock dividend in 2003). These options were issued
by CommonWealth in 12 grants beginning in 1994 and ending in 2002 and, following
the merger, reflect adjusted exercise prices ranging from $4.75 to $17.40. These
options are fully vested and are exercisable for up to ten years following the
grant date.

In December 2002, the FASB issued FAS 148, "Accounting for Stock-Based
Compensation." This standard provided alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
compensation. In addition, the Statement requires prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the underlying effect of the method used on
reported results until exercised.

The effect of option shares on earnings per share relates to the dilutive
effect of the underlying options outstanding. To the extent the granted exercise
share price is less than the current market price, ("in the money"), there is an
economic incentive for the shares to be exercised and an increase in the
dilution effect on earnings per share.

Assuming the use of the fair value method of accounting for stock options,
pro forma net income and earnings per share would have been as follows:

The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model and the following assumptions: i) risk-free
interest rate of 4.03%, 5.15% and 5.12% for 2003, 2002 and 2001, respectively;
ii) a dividend yield of 2.96%, 3.20% and 3.40% for 2003, 2002 and 2001,
respectively; iii) volatility factors for the expected market price of the
Company's common stock of 22.8%, 24.5% and 31.2% for 2003, 2002 and 2001,
respectively; and iv) a weighted-average expected life of the option of 11.97,
10.4 and 12.2 years, for 2003, 2002 and 2001, respectively.

48

INTANGIBLE ASSETS

The excess of the cost of an acquisition over the fair value of the net
assets acquired is recorded as goodwill. The net carrying amount of goodwill was
$39.4 million and $25.8 million at December 31, 2003 and 2002, respectively. The
net carrying amount of goodwill at December 31, 2003 and 2002 related to the
mortgage banking segment was $1.4 million and $1.8 million, respectively, while
the net carrying amount of goodwill related to the community banking segment at
December 31, 2003 and 2002 was $38.0 million and $24.0 million, respectively. A
portion of the purchase price in certain transactions has been allocated to
values associated with the future earnings potential of acquired deposits and is
being amortized over the estimated lives of the deposits, ranging from seven to
ten years while the weighted average remaining life of these core deposits is
slightly greater than 3.8 years. As of December 31, 2003 and 2002, the balance
of core deposit intangibles was $3.07 million and $2.9 million, respectively,
while the corresponding accumulated amortization was $1.7 million and $1.2
million, respectively. The current year acquisition of CommonWealth added an
additional $13.6 million of goodwill and $471,000 in other intangibles, while
the 2002 acquisition of Monroe added an additional $441,000 in deposit
intangible. The net unamortized balance of identified intangibles associated
with acquired deposits was $1.4 million and $1.3 million at December 31, 2003
and 2002, respectively. Amortization expense of intangibles for each of the next
five years is approximately $225,000 annually.

With the adoption of FAS No. 142 and FAS No. 147 in 2002, the Company
ceased amortization of certain goodwill subject to an annual impairment test.
The impairment test involves identifying separate reporting units based on the
reporting structure of the Company, then assigning all assets and liabilities,
including goodwill, to these units. Each reporting segment (community and
mortgage banking) is then tested for goodwill impairment by comparing the fair
value of the unit with its book value, including goodwill. If the fair value of
the reporting unit is greater than its book value, no goodwill impairment
exists. However, if the book value of the reporting unit is greater than its
determined fair value, goodwill impairment may exist and further testing is
required to determine the amount, if any, of the actual impairment loss. Through
the results of impairment tests, management has concluded that an impairment
charge of approximately $400,000 was appropriate for the mortgage banking
segment in the fourth quarter of 2003.

The progression of the Company's goodwill and intangible assets for the
year ended December 31, 2003 is detailed in the following table:

RECENT ACCOUNTING DEVELOPMENTS

In December 2003, the AICPA issued Statement of Position ("SOP") 03-3
"Accounting for Certain Loans or Debt Securities Acquired in a Transfer". This
statement, which is effective for loans acquired in fiscal years beginning after
December 15, 2004, addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor's initial
investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. This standard
will require a fair value measure of loans acquired and as such no corresponding
loss reserve will be permitted on all loans acquired in a transfer that are
within the scope of SOP 03-3. The impact of the Standard is prospective to
adoption but require new recognition and measurement techniques.

In May 2003 the FASB issued Statement 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which established standards for classification and measurement

49

of certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this standard did not materially
impact the financial statements of the Company.

In April 2003, the FASB issued Statement 149, "Amendment of FASB Statement
133 on Derivative and Hedging Transactions," which amended and clarified
accounting for derivative instruments, including certain derivatives embedded in
other instruments and for hedging activities under Statement 133. Statement 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement 133. The
provisions of Statement 149 were effective for contracts entered into or
modified after June 30, 2003. The adoption of this Statement did not have a
material adverse affect on the financial condition, results of operation or cash
flows of the Company.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities which provides guidance on how to
identify a variable interest entity (VIE) and determine when the assets,
liabilities, non-controlling interests, and results of operations of a VIE need
to be included in a company's consolidated financial statements. A company that
holds variable interests in an entity is required to consolidate the entity if
the company's interest in the VIE is such that the company will absorb a
majority of the VIE's expected losses and/or receive a majority of the entity's
expected residual returns, if they occur. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders. The provisions of this interpretation became effective upon issuance.
In December 2003, the FASB reissued FIN 46. This guidance was effective for
interests in certain VIE's as of December 31, 2003. The adoption of this
Statement did not have a material adverse affect on the financial condition,
results of operation or cash flows of the Company.

In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of any accounting treatment changes and, if
necessary or warranted, provide further appropriate guidance. There can be no
assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. At December 31, 2003, $15 million in trust preferred securities issued
by FCBI Capital Trust were outstanding that are treated as Tier 1 capital for
bank regulatory purposes. If FCBI's outstanding trust preferred securities at
December 31, 2003 were not treated as Tier 1 capital at that date, FCBI's Tier 1
leverage capital ratio would have declined from 8.83% to 7.91%, its Tier 1
risk-based capital ratio would have declined from 13.26% to 11.88%, and its
total risk-based capital ratio would have declined from 14.55% to 13.17% as of
December 31, 2003. These reduced capital ratios would continue to meet the
applicable "well capitalized" Federal Reserve capital requirements.

INCOME TAXES

The Company and its subsidiary file a consolidated federal income tax
return. The provision for income tax expense and the underlying effective rate
are determined based upon a combination of the enacted statutory federal and
state rates and is reduced or increased by any corresponding nontaxable income
or nondeductible expenses, respectively.

Deferred income taxes, which are included in other assets, are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates to the differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. The book versus
tax basis difference is created by the timing of expense and/or income
recognition required for financial accounting reporting purposes as opposed to
what is required statutorily by enacted federal and state tax laws, as well as
differences assigned to the underlying asset and liability values at
acquisition.

50

EARNINGS PER SHARE

Basic earnings per share is determined by dividing net income by the
weighted average number of shares outstanding. Diluted earnings per share is
determined by dividing net income by the weighted average shares outstanding
increased by the dilutive effect of stock options. Basic and diluted net income
per common share calculations follow:

NOTE 2. MERGER AND ACQUISITIONS

On December 31, 2003, the Company announced the signing of a definitive
merger agreement pursuant to which the Company will acquire PCB Bancorp, Inc., a
Tennessee-chartered bank holding company ("PCB Bancorp"). PCB Bancorp has five
full service branch offices located in Johnson City, Kingsport and surrounding
areas in Washington and Sullivan Counties in East Tennessee. PCB Bancorp, which
is headquartered in Johnson City, Tennessee, had total assets of $172 million,
total deposits of $150 million and total stockholders' equity of $13.8 million
as of September 30, 2003.

Under the terms of the merger agreement, shares of PCB Bancorp common stock
will be purchased for $40.00 per share in cash. The total deal value, including
the cash-out of outstanding stock options, is approximately $36.0 million.
Concurrent with the PCB Bancorp merger, Peoples Community Bank, the wholly-
owned subsidiary of PCB Bancorp, will be merged into First Community Bank, N.A.,
a wholly-owned subsidiary of First Community Bancshares, Inc. The merger is
expected to close late in the first quarter of 2004, pending the receipt of all
requisite regulatory approvals and the approval of PCB Bancorp's shareholders.

On June 6, 2003, the Company acquired The CommonWealth Bank, a
Virginia-chartered commercial bank ("CommonWealth"). CommonWealth's four branch
facilities located in the Richmond, Virginia metro area were simultaneously
merged with and into the Bank. The completion of this transaction resulted in
the addition of $136.5 million in assets, including $120.0 million in loans and
added an additional $105.0 million in deposits to the Bank. As a result of
allocation, the $14.1 million excess of purchase price over the fair market
value of the net assets acquired and identified intangibles was recorded as
goodwill.

In January 2003, the Bank acquired Stone Capital Management, Inc. ("Stone
Capital"), with an office in Beckley, West Virginia. This acquisition expanded
the Bank's operations into wealth management, asset allocation, financial
planning and investment advice. Stone Capital was acquired through the issuance
of 8,409 shares of Company common stock, which represents 50% of the total
consideration. The balance of the consideration is payable over three years,
beginning in 2004, in the form of Company common stock subject to revenue
minimums outlined in the acquisition agreement.

51

NOTE 3. SECURITIES AVAILABLE FOR SALE

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

Securities available for sale with estimated fair values of $243,076,746
and $207,391,813 at December 31, 2003 and 2002, respectively, were pledged to
secure public deposits, securities sold under agreements to repurchase and other
short-term borrowings and for other purposes. Pledging of securities is
accomplished through the use of an intermediary where securities pledged are
recorded for the benefit of the depositor, public agency or to secure other
short-term borrowings.

As a condition to membership in the Federal Home Loan Bank ("FHLB") system,
FCBNA is required to subscribe to a minimum level of stock in the FHLB of
Atlanta. At December 31, 2003, FCBNA owned approximately $7.2 million in stock
which is classified as available for sale.

The amortized cost and estimated fair value of securities available for
sale by contractual maturity, at December 31, 2003, are shown below. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties. In 2003, net gains on the sale of securities were $1.2 million,
almost entirely due to the sale of certain short-term equity investments in the
third quarter of 2003. Gross gains were $1.2 million while gross losses were
only $5,000 during 2003.

During 2002, the recognized net security losses in the available for sale
securities portfolio were $393,000. The net loss included gross losses of
$576,000 resulting from an other-than-temporary write-down of a municipal issue
within the portfolio, losses from the sale of securities of $313,000 and
offsetting gross gains of $496,000 resulting from securities sold and called.

52

At December 31, 2003, the combined depreciation in value of the individual
securities in an unrealized loss position for less than 12 months was less than
1% of the combined reported value of the aggregate securities portfolio.
Management does not believe any individual unrealized loss as of December 31,
2003 represents an 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.

The following table reflects those investments in a continuous unrealized
loss position for less than 12 months. There are currently no securities in a
continuous unrealized-loss position for 12 or more months.

53

NOTE 4. SECURITIES HELD TO MATURITY

The following table presents amortized cost and approximate fair values of
investment securities held to maturity at December 31:

Various investment securities classified as held to maturity with an
amortized cost of approximately $4,457,779 and $4,454,299 were pledged at
December 31, 2003 and 2002, respectively, to secure public deposits and for
other purposes required by law.

NOTE 5. LOANS

Loans held for investment, net of unearned income consist of the following
at December 31:

FCBNA 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.

55

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 financial guarantees written 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 at December 31, 2003.

Financial instruments whose contract amounts represent credit risk at
December 31, 2003 are commitments to extend credit (including availability of
lines of credit) -- $93.3 million, and standby letters of credit and financial
guarantees written -- $10.7 million. At December 31, 2003, FCBNA's subsidiary,
United First Mortgage, Inc. (UFM), had commitments to originate loans of $46.7
million. Loan commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
deemed necessary by the Company is based on management's credit evaluation and
underwriting guidelines for the particular loan. Commitments outstanding,
excluding the aforementioned mortgage loan commitments originated by UFM of
$46.7 million, at December 31, 2003 are summarized in the following table:

Management analyzes the loan portfolio regularly for concentrations of
credit risk, including concentrations in specific industries and geographic
location. At December 31, 2003, commercial real estate loans comprised 30.9% of
the total loan portfolio. Commercial loans include loans to small to mid-size
industrial, commercial and service companies that include but are not limited to
coal mining companies, manufacturers, automobile dealers, and retail and
wholesale merchants. Commercial real estate projects represent several different
sectors of the commercial real estate market, including residential land
development, single family and apartment building operators, commercial real
estate lessors, and hotel/motel developers. Underwriting standards require
comprehensive reviews and independent evaluations be performed on credits
exceeding predefined market limits on commercial loans. Updates to these loan
reviews are done periodically or on an annual basis depending on the size of the
loan relationship.
56

The majority of the loans in the current portfolio, other than commercial
and commercial real estate, were made and collateralized in West Virginia,
Virginia, North Carolina and the surrounding mid-Atlantic area. Although
sections of the West Virginia and Southwestern Virginia economies are closely
related to natural resource production, they are supplemented by service
industries. The Company's presence in three states, West Virginia, Virginia, and
North Carolina, provides additional diversification against geographic
concentrations of credit risk.

In the normal course of business, FCBNA has made loans to directors and
executive officers of the Company and its subsidiary. All loans and commitments
made to such officers and directors and to companies in which they are officers,
or have significant ownership interest, have been made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. The aggregate dollar amount of
such loans was $7.8 million and $6.0 million at December 31, 2003 and 2002,
respectively. During 2003, $5.0 million of new loans were made, repayments
totaled $2.9 million, and other changes due to the change in composition of
FCBNA's board members and executive officers approximated $0.4 million.

NOTE 6. ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses was as follows:

During 2003, 2002 and 2001, $1,581,000, $2,168,000, and $2,116,000 of
assets were acquired through foreclosure and transferred to other real estate
owned.

In addition to non-performing loans reflected in the foregoing table, the
Company has identified certain performing loans as impaired based upon
management's evaluation of credit strength, projected ability to repay in
accordance with the contractual terms of the loans and varying degrees of
dependence on the sale of related collateral for liquidation of the loans. These
loans were current under loan terms and were classified as performing at
year-end 2003.

The following table presents the Company's investment in loans considered
to be impaired and related information on those impaired loans:

Impaired loans include a relationship in the amount of $4.7 million which
is secured by a hotel property which has suffered declines in levels of
occupancy. The allowance for loan losses related to this loan was $1.5 million
at December 31, 2003.

57

The Company has considered all impaired loans in the evaluation of the
adequacy of the allowance for loan losses at December 31, 2003.

NOTE 7. PREMISES AND EQUIPMENT

Premises and equipment are comprised of the following as of December 31:

NOTE 8. OTHER INDEBTEDNESS

Other indebtedness includes structured term borrowings from the FHLB of
$136.3 million and $100 million at December 31, 2003 and 2002, respectively, in
the form of convertible and callable advances. The callable advances may be
called (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. At December 31, 2003
and 2002, respectively, the Company also held non-callable term advances of $8.4
million and $10.0 million.

FCBNA is a member of the FHLB which provides credit in the form of
short-term and long-term advances collateralized by various mortgage assets. At
December 31, 2003, credit availability with the FHLB totaled approximately
$355.3 million. Advances from the FHLB are secured by stock in the FHLB of
Atlanta, qualifying first mortgage loans of $373 million, mortgage-backed
securities, and certain other investment securities. The FHLB advances are
subject to restrictions or penalties in the event of prepayment.

Other various debt obligations of the Company, excluding the borrowings of
UFM mentioned below, approximated $30,000 at December 31, 2003 and $50,000 at
December 31, 2002.

The following schedule details the outstanding FHLB advances, rates and
corresponding final maturities at December 31, 2003.

58

In addition to the amounts listed in the foregoing table, the Company
issued $15.0 million Trust Preferred Securities in September 2003 at a variable
rate indexed at the 3 Month LIBOR rate + 2.95%. The securities mature on October
8, 2033 and are continuously callable beginning October 8, 2008.

The Company's wholly owned mortgage subsidiary, United First Mortgage
("UFM"), maintains a warehouse line of credit used to fund mortgage loan
inventory with a third party which was entered into in the third quarter of
2003. The maximum line available under this credit facility is $15 million;
however, only $2.6 million was outstanding at December 31, 2003. This line
matures August 10, 2004 and carries an interest rate of New York Prime,
adjusting as the prime rate changes.

NOTE 9. DEPOSITS

At December 31, 2003, the scheduled maturities of certificates of deposit
are as follows:

Time deposits, including certificates of deposit issued in denominations of
$100,000 or more, amounted to $194.8 million and $176.8 million at December 31,
2003 and 2002, respectively. Interest expense on these certificates was $5.7
million, $6.1 million, and $6.7 million for 2003, 2002, and 2001, respectively.

59

At December 31, 2003, the scheduled maturities of certificates of deposit
of $100,000 or more are as follows:

NOTE 10. INCOME TAXES

60

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
versus tax purposes. The tax effects of significant items comprising the
Company's net deferred tax assets as of December 31, 2003 and 2002 are as
follows:

The reconciliation between the federal statutory tax rate and the effective
income tax rate is as follows:

NOTE 11. EMPLOYEE BENEFITS

EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN

The Company maintains an Employee Stock Ownership and Savings Plan
("KSOP"). Coverage under the plan is provided to all employees meeting minimum
eligibility requirements.

Employer Stock Fund: Annual contributions to the stock portion of the plan
are made at the discretion of the Board of Directors, and are allocated to plan
participants on the basis of relative compensation. Substantially all plan
assets are invested in common stock of the Company. Total expense recognized by
the Company related to the Employer Stock Fund within the KSOP was $825,000,
$675,000 and $948,000 in 2003, 2002 and 2001, respectively. The Company reports
the contributions to the plan as a component of employee compensation and
benefits. The 2003 contribution rate was 5.5% of eligible employee compensation.

Employee Savings Plan: The Company provides a 401(k) Savings feature
within the KSOP that is available to substantially all employees meeting minimum
eligibility requirements. The cost of Company

61

contributions under the Savings Plan component of the KSOP was $680,000,
$563,000, and $216,000 in 2003, 2002 and 2001, respectively. The Company's
matching contributions are at the discretion of the Board up to 100% of elective
deferrals of no more than 6% of compensation. The Company matching rate was 100%
for 2003, 100% for 2002, and 50% for 2001. The employee participants have
various investment alternatives available in the 401(k) Savings feature, but
Company securities are not permitted as an investment alternative.

EMPLOYEE WELFARE PLAN

The Company provides various medical, dental, vision, life, accidental
death and dismemberment and long-term disability insurance benefits to all
full-time employees who elect coverage under this program (basic life,
accidental death and dismemberment, and long-term disability coverage are
automatic). The health plan is managed by a third party administrator ("TPA").
Monthly employer and employee contributions are made to a tax-exempt employer
benefits trust, against which the TPA processes and pays claims. Stop loss
insurance coverage limits the Company's funding requirements and risk of loss to
$60,000 and $2.52 million for individual and aggregate claims, respectively.
Total Company expenses under the plan were $2.0 million, $1.9 million, and $1.4
million in 2003, 2002 and 2001, respectively.

DEFERRED COMPENSATION PLAN

FCBNA has deferred compensation agreements with certain current and former
officers providing for benefit payments over various periods commencing at
retirement or death. The liability at December 31, 2003 and 2002 was
approximately $601,000 and $700,000, respectively. The annual expenses
associated with this plan were $42,000 for 2003 and $91,000 for both 2002 and
2001. The obligation is based upon the present value of the expected payments
and estimated life expectancies of the individuals.

The Company maintains a life insurance contract on the life of one of the
participants covered under this plan. Proceeds derived from death benefits are
intended to provide reimbursement of plan benefits paid over the post employment
lives of the participants. Premiums on the insurance contract are currently paid
through policy dividends on the cash surrender values of $720,000 and $598,000
at December 31, 2003 and 2002, respectively.

EXECUTIVE RETENTION PLAN

The Company maintains an Executive Retention Plan for key members of senior
management. This Plan provides for a benefit at normal retirement (age 62)
targeted at 35% of final compensation projected at an assumed 3% salary
progression rate. Benefits under the Plan become payable at age 62. Actual
benefits payable under the Retention Plan are dependent on an indexed retirement
benefit formula which accrues benefits equal to the aggregate after-tax income
of associated life insurance contracts less the Company's tax-effected cost of
funds for that plan year. Benefits under the Plan are dependent on the
performance of the insurance contracts and are not guaranteed by the Company.
Additionally, during 2001, the Company entered into a similar retirement plan
arrangement as described below with non-employee board members of the Company.

The Company funded the contracts through the purchase of bank-owned life
insurance, ("BOLI"), which is anticipated to fully fund the projected benefit
payout after retirement. The total amount invested in BOLI for the Executive
Retention Plan during 2000 and the corresponding cash surrender value at
December 31, 2003 was $4.1 million and $6.1 million, respectively. The
associated projected benefit obligation accrued as of year-end 2003 and 2002 was
$1.4 million and $775,000, respectively, while the associated obligation expense
incurred in connection with the Executive Plan was $170,000, $177,000 and
$156,000 for 2003, 2002 and 2001, respectively. The income derived from policy
appreciation was $234,000, $157,000 and $240,000 in 2003, 2002 and 2001,
respectively.

In conjunction with the CommonWealth merger, the Company assumed the
obligations of the CommonWealth BOLI plan and added assets of $1.4 million which
is reflected in the growth of the BOLI assets, income and corresponding expense.

In connection with the Executive Retention Plan, the Company has also
entered into Life Insurance Endorsement Method Split Dollar Agreements (the
"Agreements") with the individuals covered under the Plan.

62

Under the Agreements, the Company shares 80% of death benefits (after recovery
of cash surrender value) with the designated beneficiaries of the plan
participants under life insurance contracts referenced in the Plan. The Company
as owner of the policies retains a 20% interest in life proceeds and a 100%
interest in the cash surrender value of the policies.

The Plan also contains provisions for change of control, as defined, which
allow the participants to retain benefits, subject to certain conditions, under
the Plan in the event of a change in control. Benefits under the Executive Plan,
which begin to accrue with respect to years of service under the Plan, vest 25%
after five years, 50% after ten years, 75% after 15 years and 5% per year
thereafter, with vesting accelerated to 100% upon attainment of age 62.

DIRECTORS SUPPLEMENTAL RETIREMENT PLAN

In the fourth quarter of 2001, the Company established a Directors
Supplemental Retirement Plan for its non-employee Directors. This Plan provides
for a benefit upon retirement from service on the Board at specified ages
depending upon length of service or death. Benefits under the Plan become
payable at age 70, 75, and 78 depending upon the individual director's age and
original date of election to the Board. Actual benefits payable under the Plan
are dependent on an indexed retirement benefit formula that accrues benefits
equal to the aggregate after-tax income of associated life insurance contracts
less the Company's tax-effected cost of funds for that plan year. Benefits under
the Plan are dependent on the performance of the insurance contracts and are not
guaranteed by the Company.

In connection with the Directors Supplemental Retirement Plan, the Company
has also entered into Life Insurance Endorsement Method Split Dollar Agreements
(the "Agreements") with certain directors covered under the Plan. Under the
Agreements, the Company shares 80% of death benefits (after recovery of cash
surrender value) with the designated beneficiaries of the executives under life
insurance contracts referenced in the Retention Plan. The Company, as owner of
the policies, retains a 20% interest in life proceeds and a 100% interest in the
cash surrender value of the policies. Because the Plan was designed to retain
the future services of Board members, no benefits are payable under the Plan in
the event of termination of service prior to retirement age as defined in the
Plan document.

The Plan also contains provisions for change of control, as defined, which
allow the Directors to retain benefits under the Plan in the event of a
termination of service, other than for cause, during the 12 months prior to a
change in control or anytime thereafter, unless the Director voluntarily
terminates his service within 90 days following the change in control.

The Plan expenses associated with the Directors Supplemental Retirement
Plan for 2003, 2002 and 2001 were $155,000, $217,000 and $32,000, respectively.
The level of expense in 2001 is reflective of the fourth quarter implementation
of the Plan.

STOCK OPTIONS

In 1999, the Company instituted a Stock Option Plan to encourage and
facilitate investment in the common stock of the Company by key executives and
to assist in the long-term retention of service by those executives. The Plan
covers key executives as determined by the Company's Board of Directors from
time to time. Options under the Plan were granted in the form of non-statutory
stock options with the aggregate number of shares of common stock available for
grant under the Plan set at 332,750 (adjusted for 10% stock dividends paid in
2002 and again in 2003). The options granted under the Plan represent the rights
to acquire the option shares with deemed grant dates of January 1 for each year
beginning with the initial year granted and the following four anniversaries.
All stock options granted pursuant to the Plan vest ratably on the first through
the seventh anniversary dates of the deemed grant date. The option price of each
stock option is equal to the fair market value (as defined by the Plan) of the
Company's common stock on the date of each deemed grant during the five-year
grant period. Vested stock options granted pursuant to the Plan are exercisable
for a period of five years after the date of the grantee's retirement (provided
retirement occurs at or after age 62), and at disability, or death. If
employment is terminated other than by retirement, disability, or death, vested
options must be exercised within

63

90 days after the effective date of termination. Any option not exercised within
such period will be deemed cancelled.

In the fourth quarter of 2001, the Company also granted stock options to
non-employee directors. The Director Option Plan was implemented to facilitate
and encourage investment in the common stock of the Company by non-employee
directors whose efforts, solely as directors, are expected to contribute to the
Company's future growth and continued success. The options granted pursuant to
the Plan expire at the earlier of 10 years from the date of grant or two years
after the optionee ceases to serve as a director of the Company. Options not
exercised within the appropriate time shall expire and be deemed cancelled. The
Plan covers non-employee directors as determined by the Company's Board of
Directors. Options under the Plan were granted in the form of non-statutory
stock options with the aggregate number of shares of common stock available for
grant under the Plan set at 108,900 shares (adjusted for the 10% stock dividends
paid in 2002 and 2003).

In 2003, with the acquisition of CommonWealth, the Company acquired
additional stock options of 120,155 shares (adjusted by the merger conversion
factor of .9015 and the 10% stock dividend in 2003). These options were issued
by CommonWealth in 12 grants beginning in 1994 and ending in 2002 and, following
the merger, reflect adjusted exercise prices ranging from $4.75 to $17.40. These
options were fully vested at the point of grant and are exercisable for up to
ten years following the original grant date.

A summary of the Company's stock option activity, and related information
for the years ended December 31 is as follows:

Additional information regarding stock options outstanding and exercisable
at December 31, 2003 is provided in the following table:

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NOTE 12. LITIGATION, 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 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, singly or in the aggregate, should not
have a material adverse affect on the financial condition, results of operations
or cash flows of the Company.

In November, 2003 the Company was sued by two former employees of The
CommonWealth Bank, alleging among other things, violation of employment law and
breach of contract, stemming from their termination. The Company and counsel
believe that the lawsuit, which seeks damages of more than $180,000 and punitive
damages for each of the two former employees of The CommonWealth Bank is without
merit, and intends to vigorously defend this matter.

The Company conducts mortgage banking operations through UFM. The majority
of loans originated by UFM are sold to larger national investors on a service
released basis. Loans are sold under loan sales agreements which contain various
repurchase provisions. These repurchase provisions give rise to a contingent
liability for loans which could subsequently be submitted to UFM for repurchase.
The principal events which could result in a repurchase obligation are i.) the
discovery of fraud or material inaccuracies in a sold loan file and ii.) a
default on the first payment due after a loan is sold to the investor, coupled
with a ninety day delinquency in the first year of the life of the loan. Other
events and variations of these events could result in a loan repurchase under
terms of other loan sales agreements. The volume of contingent loan repurchases,
if any, is largely dependent on the quality of loan underwriting and systems
employed by UFM for quality control in the production of mortgage loans. UFM may
remarket these loans to alternate investors after repurchase and cure of the
borrowers' defects. To date, loans submitted for repurchase have not been
material and have not had a material adverse effect on the results of
operations, financial condition or liquidity of UFM or the Company.

UFM also originates government guaranteed FHA and VA loans that are also
sold to third party investors. The Department of Housing and Urban Development
("HUD") periodically audits loan files of government guaranteed loans and may
require UFM to execute indemnification agreements on loans which do not meet
certain predefined underwriting guidelines or may require the repurchase of the
underlying loan. To date, the number of required indemnification agreements, or
loan repurchases have not been material and no subsequent losses have been
incurred. Loan indemnifications and repurchases under the FHA and VA and VHDA
loan programs have not had a material adverse effect on the financial condition,
results of operations or cash flows of UFM or the Company.

UFM is subject to net worth requirements issued by HUD. Failure to meet
these minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions that, if undertaken, could have a direct
material effect on UFM's operations. UFM was in compliance with HUD's minimum
net worth requirement at December 31, 2003 and 2002. UFM's adjusted tangible net
worth was $2.7 million at December 31, 2003, which exceeded the HUD requirement.

The Bank 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

65

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
December 31, 2003 are commitments to extend credit (including availability of
lines of credit) of $93.3 million and standby letters of credit and financial
guarantees written of $10.7 million. In addition, at December 31, 2003, UFM had
commitments to originate loans of $46.7 million. Of these commitments, the
fallout/pullthrough model employed by UFM identified $30.8 million that are
anticipated to close.

In September 2003, the Company issued, through FCBI Capital Trust, $15.0
million of trust preferred securities in a private placement. In connection with
the issuance of the preferred securities, 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 FCBI Capital Trust has not made such payments or distributions
and has the funds therefore: (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.

NOTE 13. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS

The primary source of funds for dividends paid by the Company is dividends
received from FCBNA. Dividends paid by FCBNA are subject to restrictions by
banking regulations. The most restrictive provision of the regulations requires
approval by the Office of the Comptroller of the Currency if dividends declared
in any year exceed the year's net income, as defined, plus retained net profit
of the two preceding years. During 2004, subsidiary accumulated earnings
available for distribution as dividends to the Company without prior approval
are $36.7 million plus net income for the interim period through the date of
dividend declaration.

The Company and FCBNA are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under the capital
adequacy guidelines and the regulatory framework for prompt corrective action,
which applies only to the Bank, the Bank must meet specific capital guidelines
that involve quantitative measures of the entity's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The entity's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company and FCBNA to maintain minimum amounts and ratios
for total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). As of December 31, 2003, the Company and banking subsidiary met all
capital adequacy requirements to which they are subject. As of December 31, 2003
and 2002, the most recent notifications from the Federal Reserve Board
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below. There are no conditions or events since those
notifications that management believes have changed the institution's category.

At December 31, 2003, $15 million in trust preferred securities issued by
FCBI Capital Trust were outstanding that are treated as Tier 1 capital for bank
regulatory purposes. If FCBI's outstanding trust preferred securities at
December 31, 2003 were not treated as Tier 1 capital at that date, FCBI's Tier 1
leverage capital ratio would have declined from 8.83% to 7.91%, its Tier 1
risk-based capital ratio would have declined from 13.26% to
66

11.88%, and its total risk-based capital ratio would have declined from 14.55%
to 13.17% as of December 31, 2003. These reduced capital ratios would continue
to meet the applicable "well capitalized" Federal Reserve capital requirements.

The tangible common equity ratio excludes goodwill and other intangible
assets from both the numerator and denominator.

Tier 1 capital consists of total equity plus qualifying capital securities
and minority interests, less unrealized gains and losses accumulated in other
comprehensive income, certain intangible assets, and adjustments related to the
valuation of mortgage servicing assets and certain equity investments in
non-financial companies (principal investments).

Total risk-based capital is comprised of Tier 1 capital plus qualifying
subordinated debt and allowance for loan losses and a portion of unrealized
gains on certain equity securities.

Both the Tier 1 and the total risk-based capital ratios are computed by
dividing the respective capital amounts by risk-weighted assets, as defined.

The leverage ratio reflects Tier 1 capital divided by average total assets
for the period. Average assets used in the calculation exclude certain
intangible and mortgage servicing assets.

67

NOTE 14. OTHER OPERATING EXPENSES

Included in other operating expenses are certain costs, the total of which
exceeds one percent of combined interest income and non-interest income.
Following are such costs for the years indicated:

>
- ---------------

* Cost did not exceed the one percent requirement for the reported period.

NOTE 15. LEASES

The following is a schedule by years of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 2003:

NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practical to estimate the value
is based upon the characteristics of the instruments and relevant market
information. Financial instruments include cash, evidence of ownership in an
entity, or contracts that convey or impose on an entity that contractual right
or obligation to either receive or deliver cash for another financial
instrument. Fair value is the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price if
one exists.

The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments presented below.
The information used to determine fair value is highly subjective and judgmental
in nature and, therefore, the results may not be precise. Subjective factors
include, among other things, estimates of cash flows, risk characteristics,
credit quality, and interest rates, all of which are

68

subject to change. Since the fair value is estimated as of the balance sheet
date, the amounts that will actually be realized or paid upon settlement or
maturity on these various instruments could be significantly different.

FINANCIAL INSTRUMENTS WITH BOOK VALUE EQUAL TO FAIR VALUE

The book values of cash and due from banks, federal funds sold and
purchased, interest receivable, and interest, taxes and other liabilities are
considered to be equal to fair value as a result of the short-term nature of
these items.

SECURITIES AVAILABLE FOR SALE

For securities available for sale, fair value is based on current market
quotations, where available. If quoted market prices are not available, fair
value has been based on the quoted price of similar instruments.

SECURITIES HELD TO MATURITY

For investment securities, fair value has been based on current market
quotations, where available. If quoted market prices are not available, fair
value has been based on the quoted price of similar instruments.

DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are recorded at estimated fair value based
upon current market pricing for similar instruments.

LOANS

The estimated value of loans held for investment is measured based upon
discounted future cash flows and using the current rates for similar loans.
Loans held for sale are recorded at lower of cost or estimated fair value. The
fair value of loans held for sale is determined based upon the market sales
price of similar loans.

69

DEPOSITS AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Deposits without a stated maturity, including demand, interest-bearing
demand, and savings accounts, are reported at their carrying value in accordance
with FAS No. 107. No value has been assigned to the franchise value of these
deposits. For other types of deposits with fixed maturities, fair value has been
estimated by discounting future cash flows based on interest rates currently
being offered on deposits with similar characteristics and maturities.

OTHER INDEBTEDNESS

Fair value has been estimated based on interest rates currently available
to the Company for borrowings with similar characteristics and maturities.

COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES

The amount of off-balance sheet commitments to extend credit, standby
letters of credit, and financial guarantees is considered equal to fair value.
Because of the uncertainty involved in attempting to assess the likelihood and
timing of commitments being drawn upon, coupled with the lack of an established
market and the wide diversity of fee structures, the Company does not believe it
is meaningful to provide an estimate of fair value that differs from the given
value of the commitment.

NOTE 17. PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information related to First Community Bancshares, Inc.
as of December 31, 2003 and 2002, and for each of the years ended December 31,
2003, 2002 and 2001 is as follows:

CONDENSED BALANCE SHEETS

70

CONDENSED STATEMENTS OF INCOME

71

CONDENSED STATEMENTS OF CASH FLOWS

NOTE 18. SEGMENT INFORMATION

The Company operates two business segments: community banking and mortgage
banking. These segments are primarily identified by the products or services
offered and the channels through which they are offered. The community banking
segment consists of the Company's full-service bank which offers customers
traditional banking products and services through various delivery channels. The
mortgage banking segment consists of mortgage brokerage facilities that
originate, acquire, and sell mortgage products. The accounting policies for each

72

of the business segments are the same as those of the Company described in Note
1. Information for each of the segments is included below:

DECEMBER 31, 2003:

December 31, 2002:

73

December 31, 2001:

NOTE 19. SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)

Quarterly earnings for the years ended December 31, 2003, 2002 and 2001 are
as follows:

FIRST COMMUNITY BANCSHARES, INC.
QUARTERLY EARNINGS SUMMARY

- ---------------

* Goodwill amortization on branch acquisitions ceased October 1, 2002 in
accordance with FAS 147. Goodwill amortization on all other purchase business
combinations ceased on January 1, 2002. The effect of the application of the
non-amortization provisions of FAS Statements 142 and 147 on net income and
earnings per share for 2001 is presented above.

76

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of First Community Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of First
Community Bancshares, Inc. and subsidiary as of December 31, 2003 and 2002, and
the related consolidated statements of income, cash flow and changes in
stockholders' equity for each of the three years in the period ended December
31, 2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Community
Bancshares, Inc. and subsidiary at December 31, 2003 and 2002, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill as required by
Financial Accounting Standards Board Statement No. 142, Goodwill and Other
Intangible Assets, and Statement No. 147, Acquisitions of Certain Financial
Institutions.

/s/ Ernst & Young, LLP

Charleston, West Virginia
March 9, 2004

77

REPORT OF MANAGEMENT'S RESPONSIBILITIES

The management of First Community Bancshares, Inc. is responsible for the
integrity of its financial statements and their preparation in accordance with
accounting principles generally accepted in the United States. To fulfill this
responsibility requires the maintenance of a sound accounting system supported
by strong internal controls. The Company believes it has a high level of
internal control which is maintained by the recruitment and training of
qualified personnel, appropriate divisions of responsibility, the development
and communication of accounting and other procedures, and comprehensive internal
audits.

Our independent auditors, Ernst & Young LLP, are engaged to audit, and
render an opinion on, the fairness of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States.
Our independent auditors obtain an understanding of our internal accounting
control systems, review selected transactions and carry out other auditing
procedures before expressing their opinion on our consolidated financial
statements.

The Board of Directors has appointed an Audit Committee, composed of
outside directors, that periodically meets with the independent auditors, bank
examiners, management and internal auditors to review the work of each. The
independent auditors, bank examiners and the Company's internal auditors have
free access to meet with the Audit Committee without management's presence.

/s/ John M. Mendez
--------------------------------------
John M. Mendez
President & Chief Executive Officer

/s/ Kenneth P. Mulkey
--------------------------------------
Kenneth P. Mulkey
Controller

/s/ Robert L. Schumacher
--------------------------------------
Robert L. Schumacher
Chief Financial Officer

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. 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 design and
operation of the Company's disclosure controls and procedures pursuant to the
Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(b). Based upon 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

78

subsidiaries) required to be included in the Company's periodic SEC filings.
There have not been any changes in the Company's internal controls over
financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect the Company's internal
controls over financial reporting.

Disclosure controls and procedures are Company controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The required information concerning directors has been omitted in
accordance with General Instruction G. Such information regarding directors
appears on pages 2, 3, and 4 of the Proxy Statement relating to the 2004 Annual
Meeting of Stockholders and is incorporated herein by reference.

A portion of the information relating to compliance with Section 16(a) of
the Exchange Act has been omitted in accordance with General Instruction G. Such
information appears on pages 6 of the Proxy Statement relating to the 2004
Annual Meeting of Stockholders and is incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. A copy of the Company's Code
of Ethics is available on the Company's website at http:/www.fcbinc.com and is
also filed as Exhibit 14.1 to this Annual Report on Form 10K. Since its
adoption, there have been no amendments to or waivers of the code of ethics
related to any of the above officers.

A portion of the information relating to Audit Committee Financial Expert
has been omitted in accordance with General Instruction G. Such information
regarding executive officers appears on page 6 of the Proxy Statement relating
to the 2004 Annual Meeting of Stockholders and is incorporated herein by
reference.

79

BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.

HAROLD V. GROOME, JR.
Chairman, Groome Transportation, Inc.; Chairman
Groome Transportation of Georgia, Inc.

ALLEN T. HAMNER
Professor of Chemistry, West Virginia Wesleyan
College; Member Executive Committee and Audit
Committee; Member Compensation Committee;
Member Nominating Committee

B. W. HARVEY
President, Highlands Real Estate Management, Inc.;
Member Executive Committee and Audit
Committee; Member Nominating Committee

I. NORRIS KANTOR
Partner, Katz, Kantor & Perkins,
Attorneys-at-Law

JOHN M. MENDEZ
President and Chief Executive Officer, First
Community Bancshares, Inc.; Executive Vice
President, First Community Bank, N. A.; Member
Executive Committee

A. A. MODENA
Past Executive Vice President and Secretary, First
Community Bancshares, Inc.; Past President & Chief
Executive Officer, The Flat Top National Bank of
Bluefield; Member Executive Committee; Member
Compensation Committee; Chairman, Nominating
Committee

ROBERT E. PERKINSON, JR.
Past Vice President-Operations, MAPCO Coal, Inc. -
Virginia Region; Chairman, Audit Committee

WILLIAM P. STAFFORD
President, Princeton Machinery Service, Inc.;
Chairman, First Community Bancshares, Inc.;
Member Executive Committee

WILLIAM P. STAFFORD, II
Attorney-at-Law, Brewster, Morhous, Cameron,
Mullins, Caruth, Moore, Kersey & Stafford, PLLC;
Member Executive Committee; Chairman,
Compensation Committee

OFFICERS, FIRST COMMUNITY BANCSHARES, INC.

JOHN M. MENDEZ
President and Chief Executive Officer

ROBERT L. SCHUMACHER
Chief Financial Officer

ROBERT L. BUZZO
Vice President and Secretary

E. STEPHEN LILLY
Chief Operating Officer

KENNETH P. MULKEY
Controller

80

BOARD OF DIRECTORS, FIRST COMMUNITY BANK, N. A.

DR. JAMES P. BAILEY
Veterinarian, Veterinary Associates, Inc.
Chairman Emeritus, First Community Bank, N. A.

W. C. BLANKENSHIP, JR.
Agent, State Farm Insurance

D. L. BOWLING, JR.
President, True Energy, Inc.

JUANITA G. BRYAN
Homemaker

ROBERT L. BUZZO
Vice President and Secretary, First Community
Bancshares, Inc.
President, First Community Bank, N. A.

SAM CLARK
Agent, State Farm Insurance
Owner, Country Junction Company, Inc.

C. WILLIAM DAVIS
Attorney-at-Law, Richardson & Davis

HAROLD V. GROOME, JR.
Chairman, Groome Transportation, Inc.; Chairman,
Groome Transportation of Georgia, Inc.

FRANKLIN P. HALL
Businessman; Senior Partner, Hall & Family
Law Firm

ALLEN T. HAMNER, PH.D.
Professor of Chemistry, West Virginia
Wesleyan College

B. W. HARVEY
President, Highlands Real Estate Management, Inc.;
Chairman, First Community Bank, N. A.

I. NORRIS KANTOR
Partner, Katz, Kantor & Perkins, Attorneys-at-Law

JOHN M. MENDEZ
President and Chief Executive Officer, First
Community Bancshares, Inc.; Executive Vice
President, First Community Bank, N. A.

A. A. MODENA
Past Executive Vice President and Secretary, First
Community Bancshares, Inc.; Past President and
Chief Executive Officer, The Flat Top National Bank
of Bluefield

ROBERT E. PERKINSON, JR.
Past Vice President-Operations, MAPCO Coal,
Inc. -- Virginia Region

CLYDE B. RATLIFF
President, Gasco Drilling, Inc.

RICHARD G. RUNDLE
Attorney-at-Law, Rundle and Rundle, LC

WILLIAM P. STAFFORD
President, Princeton Machinery Service, Inc.

WILLIAM P. STAFFORD, II
Attorney at Law, Brewster, Morhous, Cameron,
Mullins, Caruth, Moore, Kersey & Stafford, PLLC

DALE F. WOODY
President, Woody Lumber Company

ITEM 11. EXECUTIVE COMPENSATION

The required information concerning management remuneration has been
omitted in accordance with General Instruction G. Such information appearing on
pages 10 through 14 of the Proxy Statement relating to the 2004 Annual Meeting
of Stockholders is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The required information concerning security ownership of certain
beneficial owners and management has been omitted in accordance with General
Instruction G. Such information appearing on pages 7 and 8 of the Proxy
Statement relating to the 2004 Annual Meeting of Stockholders is incorporated
herein by reference.

81

The following table presents information for all equity compensation plans
with individual compensation arrangements (whether with employees or
non-employees such as directors), in effect as of December 31, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The required information concerning certain relationships and related
transactions has been omitted in accordance with General Instruction G. Such
information appears on page 6 in the Proxy Statement relating to the 2004 Annual
Meeting of Stockholders and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The required information concerning principal accountant fees and services
has been omitted in accordance with General Instruction G. Such information
appears on page 20 in the Proxy Statement relating to the 2004 Annual Meeting of
Stockholders is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

The Consolidated Financial Statements of First Community Bancshares,
Inc. and subsidiaries together with the independent Auditors' Report dated
March 9, 2004 are incorporated by reference to Item 8 hereof.

(2) Financial Statement Schedules

All applicable financial statement schedules required by Regulation S-X are
included in the Notes to the 2003 Consolidated Financial Statements and are
incorporated by reference to Item 8 herein.

(b) Reports on Form 8-K filed during the last quarter of the period covered
by this report were as follows:

On October 23, 2003 a report on Form 8-K was filed in conjunction with
announcement of the Company's third quarter operating results.

On November 18, 2003 a report on Form 8-K was filed announcing the
Company's fourth quarter 2003 cash dividend.

On December 31, 2003 a report on Form 8-K was filed announcing that
the Company entered into an Agreement and Plan of Merger dated December 31,
2003 with PCB Bancorp, Inc., a Tennessee chartered bank holding company.

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(c) Exhibits

- ---------------

* Furnished herewith.

(1) Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Form 8-K filed with the Commission on January 28, 2003
and February 26, 2003.

(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, 1999 filed on March 30, 2000 as amended April 13,
2000.

(4) The options 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.

(5) First Community Bancshares, Inc. has entered into substantially identical
agreements with Messrs. Buzzo and Lilly, with the only differences being
with respect to titles, salary and the use of a vehicle.

83

(6) Incorporated by reference from Footnote 1 of the Notes to Consolidated
Financial Statements included herein.

(7) 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.

(8) Incorporated by reference from S-4 Registration Statement filed on March
28, 2003.

(9) Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Form 8-K filed with the Commission on December 31, 2003.

(10) 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.

84

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

BY /s/ JOHN M. MENDEZ
------------------------------------
John M. Mendez
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

BY /s/ ROBERT L. SCHUMACHER
------------------------------------
Robert L. Schumacher
Principal Accounting Officer