10-K 1 j9345901e10-k.txt FIRST COMMUNITY BANCSHARES, INC. 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, 2001 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. ___ State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 14, 2002. $242,739,718 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 14, 2002. Common Stock, $1 par value - 9,951,592 (Adjusted for a 10% stock dividend declared February 19, 2002, payable March 28, 2002, to shareholders of record March 1, 2002). DOCUMENTS INCORPORATED BY REFERENCE Portions of the First Community Bancshares, Inc. 2001 Annual Report to Security Holders are incorporated by reference in Part I and II hereof. Portions of the Proxy Statement for the annual meeting of shareholders to be held April 16, 2002 are incorporated by reference in Part III of this Form 10-K. Form 10-K Information Table of Contents 2001 Form 10-K Annual Report

Part I. Page Item 1. Business .......................................................................... 3 Item 2. Properties ........................................................................ 18 Item 3. Legal Proceedings ................................................................. 18 Item 4. Submission of Matters to a Vote of Security Holders ............................... 18 Part II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............. 19 Item 6. Selected Financial Data ........................................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................... 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 19 Item 8. Financial Statements and Supplementary Data ....................................... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................... 19 Part III. Item 10. Directors and Executive Officers of the Registrant ................................ 19 Item 11. Executive Compensation ............................................................ 19 Item 12. Security Ownership of Certain Beneficial Owners and Management .................... 19 Item 13. Certain Relationships and Related Transactions .................................... 20 Part IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................... 20 Signatures......................................................................... 21

2 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. First Community Bancshares, Inc. and its wholly-owned subsidiary have total assets of approximately $1.48 billion at December 31, 2001 and conduct commercial and mortgage banking business throughout the three-state area of Virginia, West Virginia and North Carolina through the 38 branches of FCBNA and 11 mortgage brokerage offices which are located throughout the state of Virginia. On December 7, 2001, the Company completed the acquisition of several branch facilities of Branch Banking and Trust Company of Virginia (BB&T) and F & M Bank - Southern Virginia (F&M) located in Clifton Forge, Emporia, and Drakes Branch, Virginia. The completion of this transaction resulted in $77 million in cash, an additional $114 million in deposits to the Bank, and added $31 million to the loan portfolio. Forward-Looking Statements This report contains forward-looking statements with respect to the financial condition, results of operations and business of FCBI. This Annual Report on Form 10-K should be read in conjunction with the consolidated financial statements, notes and tables included throughout this report and the First Community Bancshares, Inc. (the "Company" or "First Community") Annual Report to shareholders. All statements other than statements of historical fact included in this Annual Report, including statements in the Letter to Shareholders and in 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 of 1934. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future -- including statements relating to growth, share of revenues and earnings per share growth and statements expressing general optimism about future operating results -- are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made. Many factors could cause the Company's actual results to differ materially from the results contemplated by the forward-looking statements. Some factors, which could negatively affect the results, include: (1) general economic conditions, either nationally or within the Company's markets, could be less favorable than expected, (2) changes in market interest rates could affect interest margins and profitability, (3) competitive pressures could be greater than anticipated, (4) legal or accounting changes could affect the Company's results, (5) acquisition cost savings may not be realized or the anticipated income may not be achieved, and (6) adverse changes could occur in the securities and investments markets. The foregoing list of important factors is not exclusive. 3 Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist stockholders, and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 Supervision and Regulation of this item. FIRST COMMUNITY BANK, N. A. (A NATIONAL ASSOCIATION) ---------------------------------------------------- At December 31, 2001, the principal assets of FCBI included all of the outstanding shares of common stock of FCBNA, Bluefield, Virginia. 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 38 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 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. The required information concerning reportable segments and the required disclosures are incorporated herein by reference to Note 18 of the financial statements included in the Annual Report to Shareholders. Competition The financial services industry is highly competitive and dramatic change continues to occur. FCBI's banking subsidiary competes actively with national and state banks, savings and loan associations, securities dealers, mortgage bankers, finance companies and insurance companies. Competition for financial products and services continues to grow as clients select from a variety of traditional and nontraditional alternatives. The industry continues to rapidly consolidate which affects competition by eliminating some regional and local institutions. Market Area As described above, the market region served by the Company and its subsidiary consists of West Virginia, Virginia and North Carolina. The area's economic base is diverse and primarily consists of manufacturing, mining, general services, agricultural, wholesale/retail trade, and financial services. Due to the diverse geographic region and industries served, FCBI believes its current market area is economically strong and will support consistent growth in assets and deposits into the future. Management feels that its community bank approach to providing personalized client service offers a competitive advantage, 4 which strengthens the Corporation's ability to serves its markets and effectively provide products and services to the businesses and individuals in these markets. Lending Activities The Company's banking subsidiary generates revenues primarily through the investment of borrowed and deposited funds in earning assets. These assets are comprised of securities available for sale, investment securities, short-term investment vehicles and loans to businesses and individuals. Average loans held for investment represent approximately 70% of average earning assets and present a higher level of credit risk to the Company when contrasted with investment securities. The principal lending activities of the bank are concentrated primarily within its market areas in West Virginia, Virginia, North Carolina and the surrounding mid-Atlantic area. These are areas with which bank personnel are most acquainted and are within reasonable distances of the bank that allows for timely communications with customers as well as periodic inspections of collateral. The held for investment loan portfolio total of $904.5 million at December 31, 2001 and is comprised of commercial, real estate and consumer loans including home equity loans. Commercial and commercial real estate loans comprise 46.6% 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, real estate developers, automobile dealers, and retail and wholesale merchants. Collateral securing these loans includes equipment, machinery, inventory, receivables, vehicles and commercial real estate. Commercial loans are considered to contain a higher level of risk than other loan types although care is taken to minimize these risks. Underwriting standards require a comprehensive review and independent evaluation of virtually all commercial loans by Credit Administration and Loan Committees prior to approval with updates to these credit reviews performed periodically on a quarterly or annual basis depending on the size of the loan relationship. The mortgage offices of UFM provide a distribution outlet for origination and sale of loans to wholesale and retail purchasers. UFM originates residential mortgage loans through its production offices located in eastern Virginia and, consequently, the loans held for sale portfolio at December 31, 2001 was $65.5 million. Risks associated with this lending function include interest rate risk, which is mitigated or hedged through the utilization of financial instruments to offset and equalize the effect of changing interest rates. As of December 31, 2001, UFM held an investment in the underlying notional value of investments in securities ("forwards") of $21 million and interest rate lock commitments of $32 million. The combined market value of the commitments on forwards and loan commitments as of December 31, 2001 is $480,000. This hedging strategy is managed through a series of mathematical tools that are used to quantify the exposure to changes in interest rates and UFM simultaneously enters into forward transactions to minimize the potential volatility of losses as rates change. Employees The Registrant and its subsidiary, FCBNA, employed 498 full time equivalent employees at December 31, 2001. Additionally, UFM employed 109 people in the mortgage subsidiary. Management considers employee relations to be excellent. Supervision and Regulation General The Registrant is a bank holding company within the meaning of the Bank Holding Act of 1956 (Act), as 5 amended, 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 Registrant and the subsidiary and such other information as the Board of Governors may require. The Federal Reserve makes periodic examinations of the Registrant typically on an annual basis. The Act requires every bank holding company to obtain prior approval of the Board of Governors before acquiring substantially all the assets or direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned. The Act also prohibits a bank holding company, with certain exceptions, from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities. Bank holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the CRA, the Federal Reserve Board is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the communities served by that bank, including low and moderate-income neighborhoods. Further, such assessment is also required of any bank holding company which has applied to (i) charter a National bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office, or (v) merge or consolidate with, or acquire the assets or assume the liabilities of a federally-regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve Board will assess the record of each subsidiary of the applicant bank holding company, and such records may be the basis for denying the application or imposing conditions in connection with approval of the application. On July 1, 1995, the federal bank regulators amended the CRA regulations to simplify enforcement of the CRA by substituting the prior twelve assessment categories with three performance categories for use in calculating CRA ratings. The federal bank regulators will evaluate banks under the lending, investment, and service tests. Additional data collection and reporting requirements under the Home Mortgage Disclosure Act are imposed on institutions that accept mortgage loan applications within metropolitan statistical areas. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") was enacted by Congress on August 9, 1989. Among the more significant consequences of FIRREA with respect to bank holding companies is the impact of the "cross-guarantee" provision and the significantly expanded enforcement powers of bank regulatory agencies. Under the cross-guarantee provision, if one depository institution subsidiary of a multi-unit holding company fails or requires FDIC assistance, the FDIC may assess a commonly controlled depository institution for the estimated losses suffered by the FDIC. While the FDIC's claim is junior to the claims of non-affiliated depositors, holders of secured liabilities, general creditors, and subordinated creditors, it is superior to the claims of shareholders. Among the significantly expanded enforcement powers of the bank regulatory agencies are the powers to (i) obtain cease and desist orders, (ii) remove officers and directors, (iii) approve new directors and senior executive officers of certain depository institutions, and (iv) assess criminal and civil money penalties for violations of law, regulations. or conditions imposed by, or agreements with, regulatory agencies. The earnings of the Corporation's subsidiary, and therefore the earnings of the Corporation, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including the Federal Reserve Board, the OCC and the FDIC. In addition, there are numerous governmental requirements and regulations that affect the activities of the Corporation and its subsidiary. Payment of Dividends The Corporation is a legal entity separate and distinct from its banking subsidiary. A major portion of the revenues of the Corporation result from amounts paid as dividends to the Corporation by its national bank subsidiary. The prior approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year will exceed the sum of such bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank's undivided profits 6 after deducting statutory bad debts in excess of the bank's allowance for loan losses. Capital Adequacy In addition, the Corporation and its banking subsidiary are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsound and unsafe banking practice and that banking organizations should generally pay dividends only out of current operating earnings. Under the risk-based capital requirements for bank holding companies, the minimum requirement for the ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) is eight percent. At least half of the total capital is to be composed of common stockholders' equity, retained earnings, a limited amount of qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles ("tier 1 capital" and together with tier 2 capital "total capital"). The remainder of total capital may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and loan loss allowance ("tier 2 capital"). At December 31, 2001, the Corporation's tier 1 capital and total capital ratios were 10.82 percent and 12.10 percent, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These requirements provide for a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets less certain amounts ("leverage ratio") equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a leverage ratio of from at least four to five percent. The Corporation's leverage ratio at December 31, 2001, was 7.93 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible tier 1 leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity. The Corporation's subsidiary bank is subject to similar capital requirements adopted by the Comptroller of the Currency. The capital ratios of the bank subsidiary of the Corporation are set forth in Note 14 in the Annual Report and are incorporated herein by reference. 7 Support of Subsidiary Bank The Federal Deposit Insurance Corporation Improvement Act, as amended ("FDICIA"), among other things, imposes liability on an institution the deposits of which are insured by the FDIC, such as the Corporation's subsidiary bank, for certain potential obligations to the FDIC incurred in connection with other FDIC-insured institutions under common control with such institution. Under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the Comptroller is authorized to require payment of the deficiency by assessment upon the bank's stockholders, pro rata, and to the extent necessary, if any such assessment is not paid by any stockholder after three months notice, to sell the stock of such stockholder to make good the deficiency. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary. This support may be required at times when, absent such Federal Reserve Board policy, the Corporation may not find itself able to provide it. Any capital loans by a bank holding company to its 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. Depositor Preference Statute Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. Borrowings by the Corporation The banking subsidiary of the Registrant is subject to certain restrictions by regulatory bodies which limit the amounts and the manner in which it may loan funds to the Registrant. The bank is further subject to restrictions on the amount of dividends that can be paid to the Registrant in any one calendar year without prior approval by primary regulators. Payment of dividends by the subsidiary bank to the Registrant 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 concerning these restrictions, see Note 14 of the Notes to the 2001 Consolidated Financial Statements incorporated herein by reference.) Prompt Corrective Action The 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". 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. Federal regulatory authorities have adopted regulations establishing relevant capital measures and relevant capital levels applicable to FDIC-insured banks. The relevant capital measures are the total capital ratio, the tier 1 capital ratio and the leverage ratio. Under the regulations, an FDIC-insured bank will be: (i) "well capitalized" if it has a total capital ratio of ten percent or greater, a tier 1 capital ratio of six percent or greater and a leverage ratio of five percent or greater and is not subject to any order or written directive by 8 any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total capital ratio of eight percent or greater, a tier 1 capital ratio of four percent or greater and a leverage ratio of four percent or greater (three percent in certain circumstances) and is not "well capitalized"; (iii) "undercapitalized" if it has a total capital ratio of less than eight percent, a tier 1 capital ratio of less than four percent or a leverage ratio of less than four percent (three percent in certain circumstances); (iv) "significantly undercapitalized" if it has a total capital ratio of less than six percent, a tier 1 capital ratio of less than three percent or a leverage ratio of less than three percent; and (v) "critically undercapitalized" if its tangible equity is equal to or less than two percent of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 2001, the Corporation's deposit-taking subsidiary bank had capital levels that qualify it as being "well capitalized" under such regulations. The FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be "undercapitalized". "Undercapitalized" depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to five percent of the depository institution's total assets at the time it became "undercapitalized", and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized". "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized", requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. A bank that is not "well capitalized" is subject to certain limitations relating to so-called "brokered" deposits. Recent Legislation Update on The Gramm-Leach-Bliley Act of 1999 The Gramm-Leach-Bliley Act of 1999 added important new consumer protections related to financial privacy. The law, which modernized financial services by allowing commercial banks, securities firms and insurance industries to compete with each other, also requires banks and other financial institutions to create and disclose privacy policies to their customers. These policies, which institutions began mailing this year, spelled out how each bank collects, uses and safeguards customer information. To the extent any bank may share information with an unaffiliated company, such as to offer you related products that may be of interest to you, in some cases customers have the right to "opt out." The policies explain how to opt out by providing a response form or special phone number consumers may call. The protection of personal identifying information is an ongoing challenge for consumers, the government and the private sector. Like other businesses, banks are using technologies to make their products and 9 services more convenient than ever. At the same time, banks are working to ensure their policies and practices are in sync with our customers' expectations of privacy. Additionally, the GLB Act also protects consumers by directing regulators to establish standards that ensure the security and confidentiality of customer information; prohibit the transfer of credit card or other account numbers to third-party marketers; and outlawing pretext calling (which involves information brokers calling banks to obtain customer information with the intent to defraud the bank or customer). First Community, as well as the industry, supported these provisions in the GLB Act and remain committed to continuing its tradition of safeguarding confidential financial information. Basel Committees Capital Accord The Basel Committee continues to work toward the development of the "New Basel Accord." The Accord provides the conceptual framework for assessing capital adequacy in a bank through three mutually reinforcing "pillars". The pillars address the adequate capitalization of a bank through risk assessment capital charges for risk inherent in the balance sheet and off balance sheet positions held, the strength of the control environment operated by the institution and market discipline of the bank to adequately disclose the risk and capital positions of the bank in such a way that these positions are more transparent. The proposed implementation of the Basel Committee's new Capital Accord (final document anticipated in 2002) is not until 2005. However, financial institutions affected by the Accord are preparing to make systems and process changes much sooner. The Accord, that is intended to provide banks with incentives to evolve toward an advanced Internal Risk Based framework while ensuring that banking organizations remain competitive and adequately capitalized. However, the proposals are complex and are not fully developed; therefore, the full impact of this legislation is not entirely understood at this time but will be studied in great detail to understand the necessary preplanning and implementation concerns and their overall impact. Additionally, continued consultations and lobbying relating to the issues are anticipated as well as subsequent proposals from the Basel Committee. Anti-Terrorism Legislation and Developments as a Result of September 11, 2001 Although there were a number of rules and proposals that were introduced subsequent to September 11, 2001, two that have a more significant impact upon the banking industry include House Resolutions (H.R.) 3004 and 3162. Banks strongly support the legislative developments embodied within H. R. 3004, the "Financial Anti-Terrorism Act of 2001" that cracks down on money launderers and terrorists. The Nation's war on terrorism has had a major impact on the urgency placed on understanding and knowing customers. Importantly, H.R. 3004 extends the reach of current laws applicable to banks to other sectors of the financial system. In order to assist identification of certain transactions, the Federal Bureau of Investigation has developed a new model, which is intended to spot suspicious activity and money laundering schemes. H.R. 3004 is currently under consideration in the U.S. Senate after being passed in the House. Rule 3162 entitled "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001," or the USA Patriot Act, provides a number of provisions including enhanced domestic security against terrorism, enhanced surveillance procedures, an act entitled "International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001", provisions for protecting the border, removing obstacles to investigating terrorism, providing for victims of terrorism and their families, the requirement for increased information sharing for critical infrastructure protection, strengthening the criminal laws against terrorism and improved intelligence, among other provisions. 10 Governmental Monetary Policies and Economic Controls The earnings of the Registrant and its subsidiary are affected by the monetary policies of the Federal Reserve System. An important function of the Federal Reserve System is to regulate the National supply of credit in order to deal with economic conditions. The instruments employed by the Federal Reserve are open market operations of U.S. Government securities, changes in the discount rate on member bank borrowings, changes in Federal Funds rates and changes in reserve requirements. These policies influence, in various ways, the level of the company's investments, loans and deposits and rates earned on its earning assets and interest rates paid on liabilities. 11

I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL A.& B. AVERAGE BALANCE SHEETS-NET INTEREST INCOME ANALYSIS (AMOUNTS IN THOUSANDS, EXCEPT %) 2001 2000 1999 ------------- ------------- ----------- AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE BALANCE (1) (1) BALANCE (1) (1) BALANCE (1) (1) ------------------------------------------------------------------------------------------------------------ Earning Assets: Loans: Held for Sale $ 41,511 $ 2,956 7.12% $ 3,503 $ 281 8.02% $ 700 $ 58 8.29% Held for Investment (2) Taxable 836,807 72,120 8.62% 736,519 67,568 9.17% 626,168 57,288 9.15% Tax-Exempt 7,118 711 9.99% 8,051 869 10.79% 10,043 1,062 10.57% ------------- ----------- ---------- ----------- ------------ -------- ------------ ---------- ------- 843,925 72,831 8.63% 744,570 68,437 9.19% 636,211 58,350 9.17% Reserve for Loan Losses (12,753) (12,195) (11,239) ------------- ----------- ---------- ----------- ------------ -------- ------------ ---------- ------- Net Total 831,172 72,831 8.76% 732,375 68,437 9.34% 624,972 58,350 9.34% Securities Available For Sale: Taxable 167,672 10,094 6.02% 172,079 11,228 6.52% 186,379 11,417 6.13% Tax-Exempt 81,507 6,269 7.69% 36,171 2,464 6.81% 35,627 2,769 7.77% ------------- ----------- ---------- ----------- ------------ -------- ------------ ---------- ------- Total 249,179 16,363 6.57% 208,250 13,692 6.57% 222,006 14,186 6.39% Investment Securities: Taxable 2,511 165 6.57% 4,467 314 7.03% 6,782 465 6.86% Tax-Exempt 39,755 3,253 8.18% 70,213 6,113 8.71% 73,938 5,983 8.09% ------------- ----------- ---------- ----------- ------------ -------- ------------ ---------- ------- Total 42,266 3,418 8.09% 74,680 6,427 8.61% 80,720 6,448 7.99% Interest Bearing Deposits 22,197 842 3.79% 6,075 393 6.47% 9,866 482 4.89% Fed Funds Sold - - - 330 20 6.06% 8,800 403 4.58% ------------- ----------- ---------- ----------- ------------ -------- ------------ ---------- ------- Total Earning Assets 1,186,325 $ 96,410 8.13% 1,025,213 $ 89,250 8.71% 947,064 $ 79,927 8.44% Other Assets 99,989 102,466 95,119 ------------- ----------- ------------ Total $ 1,286,314 $ 1,127,679 $ 1,042,183 ============= =========== ============ Interest-Bearing Liabilities: Demand Deposits $ 145,107 2,150 1.48% $ 131,432 2,936 2.23% $ 137,816 2,974 2.16% Savings Deposits 131,699 1,698 1.29% 135,417 2,905 2.15% 145,526 3,257 2.24% Time Deposits 528,267 28,036 5.31% 461,813 24,878 5.39% 451,079 22,912 5.08% Short-term Borrowings 191,660 9,913 5.17% 149,193 8,050 5.40% 58,365 2,326 3.99% Long-term Borrowings 10,171 612 6.02% 10,204 611 5.99% 12,905 781 6.05% ------------- ----------- ---------- ----------- ------------ -------- ------------ ---------- ------- Total Interest-bearing Liabilities 1,006,904 42,409 4.21% 888,059 39,380 4.43% 805,691 32,250 4.00% Demand Deposits 134,726 117,165 119,576 Other Liabilities 15,401 13,788 13,070 Stockholders' Equity 129,283 108,667 103,846 ------------- ----------- ------------ Total $ 1,286,314 $ 1,127,679 $ 1,042,183 ============= ----------- =========== ------------ ============ ---------- Net Interest Income $ 54,001 $ 49,870 $ 47,677 =========== ============ ========== Net Interest Rate Spread (3) 3.91% 4.27% 4.44% ========== ======== ===== Net Interest Margin (4) 4.55% 4.86% 5.03% ========== ======== =====

(1) Fully Taxable Equivalent-Using the Federeal statuatory rate of 35%. (2) Non-accrual loans are included in average balances outstanding but with no related interest income. (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. 12 C. RATE AND VOLUME ANALYSIS OF INTEREST (1)

(Amounts in Thousands) 2001 Compared to 2000 2000 Compared to 1999 $ Increase/(Decrease) due to $ Increase/(Decrease) due to -------------------------------------- -------------------------------------- Volume Rate Total Volume Rate Total ----------- ----------- ---------- ------------ ---------- ----------- Interest Earned On: Loans $ 11,430 $ (4,361) $ 7,069 $ 10,160 $ 150 $ 10,310 Investment securities available for sale 3,168 (497) 2,671 (865) 371 (494) Investement securities held to maturitiy (2,642) (367) (3,009) (473) 452 (21) Interest-bearing deposits with other banks 670 (221) 449 (218) 129 (89) Federal funds sold (10) (10) (20) (482) 99 (383) ----------- ----------- ---------- ------------ ---------- ----------- Total interest-earning assets 12,616 (5,456) 7,160 8,122 1,201 9,323 ----------- ----------- ---------- ------------ ---------- ----------- Interest Paid On: Demand deposits 281 (1,067) (786) (141) 103 (38) Savings deposits (78) (1,129) (1,207) (220) (132) (352) Time deposits 3,532 (374) 3,158 555 1,411 1,966 Short-term borrowings 2,483 (615) 1,868 4,663 1,061 5,724 Long-term debt (2) (2) (4) (162) (8) (170) ----------- ----------- ---------- ------------ ---------- ----------- Total interest-bearing liabilitites 6,216 (3,187) 3,029 4,695 2,435 7,130 ----------- ----------- ---------- ------------ ---------- ----------- Change in net interest income $ 6,400 $ (2,269) $ 4,131 $ 3,427 $ (1,234) $ 2,193 =========== =========== ========== ============ ========== ===========

(1) Fully taxable Equivalent using the federal statutory rate of 35%. The preceding table sets forth a summary of the changes in interest earned and paid resulting from changes in volume of earning assets and paying liabilities and changes in rates thereon. For purposes of this analysis, the change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts. 13 II. INVESTMENT PORTFOLIO A. Amortized Cost of Investment Securities Held to Maturity:

December 31, (Amounts in Thousands) 2001 2000 1999 ---------- ----------- ---------- U. S. Treasury Securities $ - $ - $ 100 U. S Government Agencies and Corporations 743 2,103 3,663 States and Political Subdivisions 39,768 72,264 73,640 Other Securities 1,373 1,369 1,365 ---------- ----------- ---------- $ 41,884 $ 75,736 $ 78,768 ========== =========== ==========

Market Value of Securities Available for Sale:

December 31, (Amounts in Thousands) 2001 2000 1999 ---------- ----------- ---------- U. S Government Agencies and Corporations $ 196,203 $ 134,157 $ 143,636 States and Political Subdivisions 97,449 34,648 33,355 Other Securities 60,355 38,757 35,114 ---------- ----------- ---------- $ 354,007 $ 207,562 $ 212,105 ========== =========== ==========

B. Maturity and Yields: The required information is incorporated by reference to pages 37 through 40 of the 2001 Annual Report. C. There are no issues included in obligations of states and political subdivisions or other securities that exceed ten percent of stockholders' equity. III. HELD FOR INVESTMENT LOAN PORTFOLIO

A. Loan Summary: December 31, --------------------------------------------------------------------------------------- (Amounts in Thousands) 2001 2000 1999 1998 1997 ------------ ---------- ---------- ----------- ---------- Commercial, Financial and Agricultural $ 162,173 $ 86,887 $ 92,739 $ 77,233 $ 82,445 Real Estate-Commercial 259,717 222,571 208,228 170,683 202,625 Real Estate-Construction 77,402 73,087 24,684 8,988 9,612 Real Estate-Residential 267,139 293,732 248,952 228,540 227,465 Consumer 138,426 135,692 128,541 127,169 151,429 Other 961 649 62 894 1,185 ----------- ---------- ---------- ----------- ---------- Total 905,818 812,618 703,206 613,507 674,761 Less Unearned Income 1,322 1,362 1,490 2,014 2,944 ----------- ---------- ---------- ----------- ---------- 904,496 811,256 701,716 611,493 671,817 Less Reserve for Loan Losses 13,952 12,303 11,900 11,404 11,406 ----------- ---------- ---------- ----------- ---------- Net Loans $ 890,544 $ 798,953 $ 689,816 $ 600,089 $ 660,411 =========== ========== ========== =========== ==========

14 B. Maturities and Rate Sensitivity of Loan Portfolio at December 31, 2001:

(Amounts in Thousands) Remaining Maturities ------------------------------------------------ Over One One Year to Over Five and Less Five Years Years Total Percent ------------ ------------ ------------ ------------- ------------- Commercial, Financial and Agricultural $ 110,311 $ 37,928 $ 13,934 $ 162,173 17.93% Real Estate-Commercial 104,184 74,176 81,357 259,717 28.71% Real Estate-Construction 45,260 15,748 16,394 77,402 8.56% Real Estate-Mortgage 44,023 65,484 157,632 267,139 29.53% Consumer 22,644 103,248 11,212 137,104 15.16% Other 356 587 18 961 0.11% ------------ ------------ ------------ ------------- ------------- $ 326,778 $ 297,171 $ 280,547 $ 904,496 100.00% ============ ============ ============ ============= ============= Rate Sensitivity: Pre-determined Rate $ 105,166 $ 244,513 $ 271,470 $ 621,149 68.67% Floating or Adjustable Rate 221,612 52,658 9,077 283,347 31.33% ------------ ------------ ------------ ------------- ------------- $ 326,778 $ 297,171 $ 280,547 $ 904,496 100.00% ============ ============ ============ ============= ============= 36.13% 32.85% 31.02% 100.00%

C. Risk Elements: The required information for risk elements is included below and incorporated by reference to pages 19, 20 and 43 of the 2001 Annual Report. Nonperforming Assets:

December 31, (Amounts in Thousands) 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------- ------------- Non-accruing Loans $ 3,633 $ 5,397 $ 7,889 $ 7,763 $ 9,988 Loans Past Due Over 90 Days 1,351 1,208 1,259 377 4,391 Restructured Loans Performing in Accordance with Modified Terms 518 502 505 509 534 Gross Interest Income Which Would Have Been Recorded Under Original Terms of Non-Accruing and Restructured Loans 291 409 436 Actual Interest Income During the Period 97 105 78

15 IV. SUMMARY OF LOAN LOSS EXPERIENCE

A. 1. Summary of Loan Loss Experience: Years Ended December 31, -------------------------------------------------------------------------- (Amounts in Thousands, Except Percent Data) 2001 2000 1999 1998 1997 ------------ ------------ ------------ ----------- ------------ Balance of reserve at beginning of period $ 12,303 $ 11,900 $ 11,404 $ 11,406 $ 8,987 Acquisition balances 484 1,051 - 1,981 Charge-offs: Commercial, financial and agricultural 1,979 2,911 562 3,602 2,052 Real estate-residential 720 629 268 367 385 Installment 2,181 1,996 2,178 3,019 2,761 ------------ ------------ ------------ ----------- ------------ Total Charge-offs 4,880 5,536 3,008 6,988 5,198 ------------ ------------ ------------ ----------- ------------ Recoveries: Commercial, financial and agricultural 155 267 74 190 130 Real estate-residential 298 82 60 31 31 Installment 458 553 477 515 512 ------------ ------------ ------------ ----------- ------------ Total Charge-offs 911 902 611 736 673 ------------ ------------ ------------ ----------- ------------ Net charge-offs 3,969 4,634 2,397 6,252 4,525 Provision charged to operations 5,134 3,986 2,893 6,250 4,963 ------------ ------------ ------------ ----------- ------------ Balance of reserve at end of period $ 13,952 $ 12,303 $ 11,900 $ 11,404 $ 11,406 ============ ============ ============ =========== ============ Ratio of net charge-offs to average loans held for investment 0.47% 0.62% 0.38% 0.97% 0.73% Ratio of reserve to loans held for investment 1.54% 1.52% 1.70% 1.86% 1.70%

16 A. 2. The required information is incorporated by reference to pages 18, 33 & 34 of the 2001 Annual Report. B. Allocation of Reserve for Loan Losses:

(Amounts in Thousands, Except Percent Data) December 31, ------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------- ------------------ ----------------- ----------------- --------------------- Commercial, Financial and Agricultural $ 8,399 47.00% $ 6,798 38.00% $ 4,919 43.00% $ 4,054 40.00% $ 4,795 42.00% Real Estate-Mortgage 3,543 38.00% 3,289 46.00% 2,578 39.00% 2,297 39.00% 2,819 35.00% Consumer 2,010 15.00% 1,861 16.00% 1,413 18.00% 1,378 21.00% 1,979 23.00% Unallocated - 0.00% 355 0.00% 2,990 0.00% 3,675 0.00% 1,813 0.00% ---------------- ------------------ ----------------- ----------------- --------------------- Total $13,952 100.00% $ 12,303 100.00% $ 11,900 100.00% $ 11,404 100.00% $ 11,406 100.00% ======= ====== ======== ====== ======== ====== ======== ====== ======== ======

The percentages in the table above represent the percent of loans in each category of total loans. V. Deposits A. The required information for average deposits and rates paid by type is included on page 12 of this report. B. Not applicable. C. Not applicable. D. The required information is incorporated by reference to page 45 of the 2001 Annual Report. E. Not applicable. VI. Return on Equity and Assets A. The required information is incorporated by reference to page 8 of the 2001 Annual Report. 17 VII. Short-Term Borrowings A. Securities Sold Under Agreements to Repurchase and Other Short-Term Borrowings: The Company uses various short-term funding sources including term repurchase agreements, structured term borrowings from the FHLB, customer repurchase agreements and Federal funds purchased. The Company's short-term borrowings and rates paid are summarized as follows (Amounts in Thousands, Except Percent Data):

2001 2000 1999 ----------------------- ---------------------- ----------------------- Amount Rate Amount Rate Amount Rate ----------------------- ---------------------- ----------------------- At year-end $ 240,918 5.78% $ 174,016 5.52% $ 127,762 3.99% Average during the year 191,660 5.17% 149,193 5.40% 58,365 3.26% Maximum month-end balance 240,918 182,187 127,762

B. Long-Term Advances From the FHLB and Long-Term Debt The required information is incorporated by reference to pages 20 and 44 of the 2001 Annual Report. 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. Additional details regarding the physical location and number of banking offices is located on pages 65 - 66 in the 2001 Annual Report and incorporated herein by reference. The Corporation's banking subsidiary owns in fee 38 offices while others are leased or are located on leased land. United First Mortgage, Inc., a wholly-owned subsidiary of FCBNA, maintains 11 leased office facilities in eastern Virginia throughout a geographic area ranging from Virginia Beach, Virginia to Harrisonburg, Virginia. Item 3. Legal Proceedings In the normal course of business, the Company is a defendant in various legal actions and asserted claims most of which involve lending and collection activities. 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. 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 2001. 18 PART II. Item 5. Market for Registrant's Common Equity and Related Matters The number of common stockholders of record on December 31, 2001 was 2,439 and outstanding shares (adjusted for the 10% stock dividend) totaled 9,951,592. The required information is incorporated by reference to page 9 of the 2001 Annual Report. Item 6. Selected Financial Data The required information is incorporated by reference to page 8 of the 2001 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The required information is incorporated by reference to pages 4 through 25 of the 2001 Annual Report. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The required information is incorporated by reference to pages 21 through 23 of the 2001 Annual Report. Item 8. Financial Statements and Supplementary Data The required information is incorporated by reference to pages 26 through 60 of the 2001 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 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 3, 4, 5, and 6 of the Proxy Statement relating to the 2002 Annual Meeting of Stockholders and is incorporated herein by reference. A portion of the information relating to executive officers has been omitted in accordance with General Instruction G. Such information regarding executive officers appears on pages 7, 8, 10 and 11 of the Proxy Statement relating to the 2002 Annual Meeting of Stockholders and is incorporated herein by reference. Item 11. Executive Compensation The required information concerning management remuneration has been omitted in accordance with General Instruction G. Such information appearing on pages 8 and 10 through 14 of the Proxy Statement relating to the 2002 Annual Meeting of Stockholders is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management 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 page 6 of the Proxy Statement relating to the 2002 Annual Meeting of Stockholders is incorporated herein by reference. 19 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 appearing on pages 5 and 6 of the Proxy Statement relating to the 2002 Annual Meeting of Stockholders is incorporated herein by reference. PART IV Item 14. 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 February 8, 2002 are incorporated by reference to pages 26 through 62 of the 2001 Annual Report which is included herein as Exhibit 13. (2) Financial Statement Schedules All applicable financial statement schedules required by Regulation S-X are included in the Notes to the 2001 Consolidated Financial Statements. (b) Reports on Form 8-K filed during the last quarter of the period covered by this report were as follows: On October 17, 2001 a report on Form 8-K was filed in conjunction with announcement of the Companies third quarter operating results. (c) Exhibits: (3) Articles of Incorporation and Bylaws The Registrant's Articles of Incorporation and By-laws were previously filed as exhibits (3)(i) and (3)(ii), respectively, with the Annual Report on Form 10-K for the year ending 12/31/97 in connection with the change of corporate domicile to a Nevada corporation. (11) Statement Regarding Computation of Per Share Earnings The statement regarding computation of per share earnings is included as Note 1 of the Notes to Consolidated Financial Statements in the 2001 Annual Report to Stockholders and is incorporated herein by reference. (12) Computation of Ratios (13) Annual Report to Security Holders (21) Subsidiary of Registrant: First Community Bank, N.A. (a National Association organized under the laws of the United States) (23)(a) Independent Auditors' Consent - Ernst & Young LLP (23)(b) Independent Auditors' Consent - Deloitte & Touche LLP (99) Report of Deloitte & Touche LLP, Independent Auditors 20 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 ------------------------------------------ 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/ Kenneth P. Mulkey ------------------------------------------ Principal Accounting Officer

Signature Title Date /s/ Sam Clark Director 03/26/2002 ------------------------------------- (Sam Clark) /s/ Allen T. Hamner Director 03/26/2002 ------------------------------------- (Allen T. Hamner) /s/ B. W. Harvey Director 03/26/2002 ------------------------------------- (B.W. Harvey) /s/ I. Norris Kantor Director 03/26/2002 ------------------------------------- (I. Norris Kantor) /s/ John M. Mendez President, Chief Executive 03/26/2002 ------------------------------------- Officer and Director (Principal (John M. Mendez) Executive Officer) /s/ A. A. Modena. Director 03/26/2002 ------------------------------------- (A. A. Modena) /s/ Robert E. Perkinson, Jr. Director 03/26/2002 ------------------------------------- (Robert E. Perkinson, Jr.) /s/ William P. Stafford Chairman of the Board and Directors 03/26/2002 ------------------------------------- (William P. Stafford) /s/ William P. Stafford, II Director 03/26/2002 ------------------------------------- (William P. Stafford, II) /s/ W. W. Tinder, Jr. Director 03/26/2002 ------------------------------------- (W. W. Tinder, Jr.)

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