FORM 10-Q

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


(Mark One)
x þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~For the Quarterly Period Ended: September 30, 2004~~


		For the Quarterly Period Ended: March 31, 2005

		OR

o		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 of ~~incorporation or organization)~~		~~55-0694814~~ (I.R.S. Employer Identification No.)
incorporation or organization)

~~One Community Place, Bluefield, Virginia 24605~~

~~(Address of principal executive offices) (Zip~~


One Community Place, Bluefield, Virginia		24605
(Address of principal executive offices)		(Zip Code)

(276) 326-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 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.

Yesxþ Noo

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

Yesxþ Noo

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


Class	Outstanding at ~~October 31, 2004~~April 30, 2005
Common Stock, $1 Par Value		~~11,243,991~~	11,272,051

~~PART I. ITEM 1. Financial Statements~~

PART I.

~~PART I.~~ ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

September 30, December 31,
2004 2003
(Unaudited)
(Note 1)
Assets

Cash and due from banks
$ 37,400 $ 37,173
Interest-bearing balances with banks
17,678 22,136

Total cash and cash equivalents
55,078 59,309
Securities available for sale (amortized cost of $386,024 at September 30, 2004; $435,912 at December 31, 2003)
391,623 444,194
Securities held to maturity (fair value of $36,334 at September 30, 2004; $40,060 at December 31, 2003)
34,719 38,020
Loans held for sale
1,163 424
Loans held for investment, net of unearned income
1,229,270 1,026,191
Less allowance for loan losses
16,233 14,624

Net loans held for investment
1,213,037 1,011,567
Premises and equipment
36,499 29,816
Other real estate owned
1,636 2,091
Interest receivable
8,770 8,327
Other assets
22,302 17,266
Goodwill
59,121 37,978
Other intangible assets
2,594 1,363
Assets related to discontinued operations
— 22,372

Total Assets
$ 1,826,542 $ 1,672,727

Liabilities

Deposits:

Noninterest-bearing
$ 218,818 $ 194,046
Interest-bearing
1,143,735 1,031,490

Total Deposits
1,362,553 1,225,536
Interest, taxes and other liabilities
14,616 11,897
Securities sold under agreements to repurchase
111,481 97,651
FHLB borrowings and other indebtedness
142,060 129,616
Junior subordinated debt related to issuance of trust preferred securities
15,000 15,000
Liabilities related to discontinued operations
— 17,992

Total Liabilities
1,645,710 1,497,692

Stockholders’ Equity

Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued and outstanding in 2004 and 2003
— —
Common stock, $1 par value; 15,000,000 shares authorized ; 11,470,142 and 11,442,348 issued in 2004 and 2003, and 11,243,991 and 11,242,443 outstanding in 2004 and 2003
11,470 11,442
Additional paid-in capital
108,280 108,128
Retained earnings
64,752 56,894
Treasury stock, at cost
(7,029 ) (6,407 )
Accumulated other comprehensive income
3,359 4,978

Total Stockholders’ Equity
180,832 175,035

Total Liabilities and Stockholders’ Equity
$ 1,826,542 $ 1,672,727


	March 31,			December 31,
	2005			2004
	(Unaudited)			(Note 1)
Assets
Cash and due from banks	$	34,328		$	37,294
Interest-bearing balances with banks		48,942			17,452

Total cash and cash equivalents		83,270			54,746
Securities available for sale (amortized cost of $372,760 at March 31, 2005; $384,746 at December 31, 2004)		372,585			388,678
Securities held to maturity (fair value of $33,132 at March 31, 2005; $35,610 at December 31, 2004)		32,009			34,221
Loans held for sale		1,182			1,194
Loans held for investment, net of unearned income		1,282,546			1,238,756
Less allowance for loan losses		16,543			16,339

Net loans held for investment		1,266,003			1,222,417
Premises and equipment		35,869			37,360
Other real estate owned		1,389			1,419
Interest receivable		9,124			8,554
Other assets		23,895			20,923
Goodwill		61,510			61,310

Total Assets	$	1,886,836		$	1,830,822


Liabilities
Deposits:
Noninterest-bearing	$	220,741		$	221,499
Interest-bearing		1,181,131			1,137,565

Total Deposits		1,401,872			1,359,064
Interest, taxes and other liabilities		15,625			14,313
Federal funds purchased		—			32,500
Securities sold under agreements to repurchase		128,244			109,857
FHLB borrowings and other indebtedness		156,822			131,855

Total Liabilities		1,702,563			1,647,589


Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued and outstanding in 2005 and 2004		—			—
Common stock, $1 par value; 15,000,000 shares authorized ; 11,490,835 and 11,472,311 issued in 2005 and 2004, and 11,271,835 and 11,250,927 outstanding in 2005 and 2004		11,491			11,472
Additional paid-in capital		108,576			108,263
Retained earnings		71,116			68,019
Treasury stock, at cost		(6,804	)		(6,881	)
Accumulated other comprehensive income		(106	)		2,360

Total Stockholders’ Equity		184,273			183,233

Total Liabilities and Stockholders’ Equity	$	1,886,836		$	1,830,822

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except Share and ~~Per~~per Share Data) (Unaudited)

Nine Months Ended
Three Months Ended
September 30 September 30 September 30 September 30
2004
2003
2004
2003
Interest Income:

Interest and fees on loans held for investment
$ 56,195 $ 52,465 $ 19,953 $ 18,591
Interest on securities-taxable
9,659 9,589 2,960 3,070
Interest on securities-nontaxable
4,985 4,851 1,642 1,552
Interest on federal funds sold and deposits in banks
395 482 94 124

Total interest income
71,234 67,387 24,649 23,337

Interest Expense:

Interest on deposits
13,830 15,393 4,702 4,934
Interest on short-term borrowings
5,449 4,203 2,020 1,485
Interest on other debt
643 447 226 150

Total interest expense
19,922 20,043 6,948 6,569

Net interest income
51,312 47,344 17,701 16,768
Provision for loan losses
2,407 2,679 1,152 782

Net interest income after provision for loan losses
48,905 44,665 16,549 15,986

Noninterest Income:

Fiduciary income
1,429 1,275 499 462
Service charges on deposit accounts
6,722 5,905 2,461 2,098
Other service charges, commissions and fees
2,000 1,877 728 640
Other operating income
1,435 881 530 340
Gain on sale of securities
1,509 1,191 60 1,038

Total noninterest income
13,095 11,129 4,278 4,578

Noninterest Expense:

Salaries and employee benefits
19,582 15,097 6,807 5,631
Occupancy expense of bank premises
2,659 2,208 913 752
Furniture and equipment expense
2,108 1,427 735 532
Core deposit amortization
287 178 112 64
Other operating expense
10,737 8,769 3,670 3,203

Total noninterest expense
35,373 27,679 12,237 10,182

Income from continuing operations before income taxes
26,627 28,115 8,590 10,382
Income tax expense
6,817 8,133 1,968 3,164

Income from continuing operations
19,810 19,982 6,622 7,218
Loss from discontinued operations before income tax
(5,531 ) (64 ) (1,266 ) (1,621 )
Income tax benefit
(2,006 ) (26 ) (1,054 ) (632 )

Loss from discontinued operations
$ (3,525 ) $ (38 ) $ (212 ) $ (989 )

Net income
$ 16,285 $ 19,944 $ 6,410 $ 6,229

Basic earnings per common share
$ 1.45 $ 1.81 $ 0.57 $ 0.55

Diluted earnings per common share
$ 1.44 $ 1.79 $ 0.57 $ 0.55

Basic earnings per common share from continuing operations
$ 1.76 $ 1.81 $ 0.59 $ 0.64

Diluted earnings per common share from continuing operations
$ 1.75 $ 1.79 $ 0.58 $ 0.64

Weighted average basic shares outstanding
11,235,462 11,047,199 11,231,973 11,262,180

Weighted average diluted shares outstanding
11,331,718 11,143,175 11,326,999 11,383,941


	Three Months Ended
	March 31			March 31
	2005			2004
Interest Income
Interest and fees on loans held for investment	$	20,728		$	17,130
Interest on securities-taxable		2,296			3,266
Interest on securities-nontaxable		1,949			1,636
Interest on federal funds sold and deposits in banks		215			197

Total interest income		25,188			22,229
Interest Expense
Interest on deposits		4,962			4,315
Interest on short-term borrowings		2,473			1,930

Total interest expense		7,435			6,245

Net interest income		17,753			15,984
Provision for loan losses		691			532

Net interest income after provision for loan losses		17,062			15,452

Noninterest Income
Fiduciary income		538			418
Service charges on deposit accounts		2,148			1,960
Other service charges, commissions and fees		810			559
Other operating income		204			295
Gain on sale of securities		22			11

Total noninterest income		3,722			3,243

Noninterest Expense
Salaries and employee benefits		7,318			6,113
Occupancy expense of bank premises		943			852
Furniture and equipment expense		784			626
Core deposit amortization		110			64
Other operating expense		3,341			3,255

Total noninterest expense		12,496			10,910

Income from continuing operations before income taxes		8,288			7,785
Income tax expense		2,237			2,183

Income from continuing operations		6,051			5,602

Loss from discontinued operations before income tax		(131	)		(1,891	)
Income tax benefit		(51	)		(450	)

Loss from discontinued operations	$	(80	)	$	(1,441	)

Net income	$	5,971		$	4,161


Basic earnings per common share	$	0.53		$	0.37

Diluted earnings per common share	$	0.53		$	0.37


Basic earnings per common share from continuing operations	$	0.54		$	0.50

Diluted earnings per common share from continuing operations	$	0.53		$	0.49


Dividends declared per common share	$	0.255		$	0.25


Weighted average basic shares outstanding		11,259,494			11,245,465
Weighted average diluted shares outstanding		11,339,136			11,347,748

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands) (Unaudited)

Nine Months Ended
September 30
2004
2003
Cash flows from operating activities:

Net income from continuing operations
$ 19,810 $ 19,982
Adjustments to reconcile net income from continuing operations to net cash (used in) provided by operating activities:

Provision for loan losses
2,407 2,679
Depreciation of premises and equipment
2,008 1,352
Core deposit amortization
287 178
Purchase price accounting accretion
(149 ) (157 )
Net investment amortization and accretion
1,880 2,179
Net gain on the sale of assets
(1,763 ) (1,203 )
Mortgage loans originated for sale
(18,994 ) (26,296 )
Proceeds from sale of mortgage loans
18,255 26,955
Decrease (increase) in interest receivable
489 (238 )
Increase in other assets
(1,082 ) (2,727 )
Increase (decrease) in other liabilities
1,418 (3,014 )

Net cash provided by operating activities from continuing operations
24,566 19,690

Cash flows from investing activities:

Proceeds from sales of securities available for sale
49,951 9,375
Proceeds from maturities and calls of securities available for sale
105,065 113,224
Proceeds from maturities and calls of securities held to maturity
3,834 1,653
Purchase of securities held to maturity
— (75 )
Purchase of securities available for sale
(78,012 ) (220,859 )
Net (increase) decrease in loans made to customers
(59,880 ) 67,846
Purchase of premises and equipment
(5,077 ) (5,315 )
Sale of equipment
359 59
Net cash (used in) provided by acquisitions
(26,325 ) 1,562

Net cash used in investing activities from continuing operations
(10,085 ) (32,530 )

Cash flows from financing activities:

Net increase (decrease) in demand and savings deposits
10,619 (1,269 )
Net decrease in time deposits
(22,325 ) (11,154 )
Net increase in FHLB and other indebtedness
2,629 16,263
Issuance of trust preferred securities
— 14,560
Repayment of other borrowings
(13 ) (8,013 )
Acquisition of treasury stock
(1,195 ) (4,319 )
Dividends paid
(8,427 ) (8,038 )

Net cash used in financing activities from continuing operations
(18,712 ) (1,970 )

Net cash used in discontinued operations
— (577 )

Cash and Cash Equivalents:

Net decrease in cash and cash equivalents
(4,231 ) (15,387 )
Cash and cash equivalents at beginning of period
59,309 124,585

Cash and cash equivalents at end of period
$ 55,078 $ 109,198

Cash and cash equivalents consist of the following:

Cash and cash equivalents from continuing operations
$ 55,078 $ 107,224
Cash and cash equivalents from discontinued operations
— 1,974

$ 55,078 $ 109,198


	Three Months Ended
	March 31
	2005			2004
Cash flows from operating activities-continuing operations:
Net income from continuing operations	$	6,051		$	5,602
Adjustments to reconcile net income from continuing operations to net cash (used in) operating activities:
Provision for loan losses		691			532
Depreciation and amortization of premises and equipment		797			700
Core deposit amortization		110			64
Net investment amortization and accretion		456			619
Net loss (gain) on the sale of assets		124			(75	)
Mortgage loans originated for sale		(7,010	)		(2,521	)
Proceeds from sale of mortgage loans		7,022			2,688
Deferred income tax (benefit) expense		(310	)		114
Increase in interest receivable		(570	)		(107	)
Increase in other assets		(619	)		(2,156	)
Increase in other liabilities		1,452			771

Net cash provided by operating activities from continuing operations		8,194			6,231


Cash flows from investing activities-continuing operations:
Proceeds from sales of securities available for sale		2,994			1
Proceeds from maturities and calls of securities available for sale		13,199			46,315
Proceeds from maturities and calls of securities held to maturity		2,211			455
Purchase of securities available for sale		(4,643	)		(43,424	)
Net (increase) decrease in loans made to customers		(44,258	)		5,271
Purchase of premises and equipment		(807	)		(1,370	)
Proceeds from sale of equipment		760			34

Net cash (used in) provided by investing activities from continuing operations		(30,544	)		7,282


Cash flows from financing activities-continuing operations:
Net (decrease) increase in demand and savings deposits		(16,771	)		16,360
Net increase in time deposits		59,580			760
Net increase (decrease) in short-term debt		10,860			(10,453	)
Repayment of long-term debt		(6	)		(5	)
Issuance of common stock		169			35
Acquisition of treasury stock		(4	)		(159	)
Dividends paid		(2,874	)		(2,814	)

Net cash provided by financing activities from continuing operations		50,954			3,724


Net increase in cash and cash equivalents from continuing operations	$	28,604		$	17,237

Net cash used in discontinued operations	$	(80	)	$	(150	)

Cash and cash equivalents at beginning of period-continuing operations	$	54,746		$	59,309
Cash and cash equivalents at beginning of period-discontinued operations		—			2,243

Cash and cash equivalents at beginning of period	$	54,746		$	61,552


Cash and cash equivalents at end of period-continuing operations	$	83,270		$	76,546
Cash and cash equivalents at end of period-discontinued operations		—			2,093

Cash and cash equivalents at end of period	$	83,270		$	78,639

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in Thousands, Except Share and Per Share Information) (Unaudited)

Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive
Stock
Capital
Earnings
Stock
(Loss) Income
Total
Balance January 1, 2003
$ 9,957 $ 58,642 $ 79,084 $ (1,982 ) $ 6,761 $ 152,462
Comprehensive income:

Net income
— — 19,944 — — 19,944
Other comprehensive income, net of tax:

Net unrealized loss on securities available for sale
— — — — (2,433 ) (2,433 )
Common dividends declared ($.73 per share)
— — (8,038 ) — — (8,038 )
Purchase 135,000 treasury shares at $31.99 per share
— — — (4,319 ) — (4,319 )
Acquisition of Stone Capital 8,409 shares issued
8 236 244
Acquisition of CommonWealth Bank 389,609 shares issued
390 12,904 13,294
Effect of 10% Stock Dividend
1,035 35,392 (36,427 ) -
Option exercises 40,291 shares
40 259 335 634
10% Stock Dividend & Fractional Adjustment
1,038 35,994 (36,583 ) (476 ) (27 )
Issuance of treasury shares to ESOP
43 680 723

Balance June 30, 2003
$ 11,430 $ 107,476 $ 54,563 $ (5,286 ) $ 4,328 $ 172,484

Balance January 1, 2004
$ 11,442 $ 108,128 $ 56,894 $ (6,407 ) $ 4,978 $ 175,035
Comprehensive income:

Net income
— — 16,285 — 16,285
Other comprehensive income, net of tax:

Net unrealized losses on securities available for sale
— — — — (1,619 ) (1,619 )
Common dividends declared ($.75 per share)
— — (8,427 ) — — (8,427 )
Purchase 44,400 treasury shares at $26.87 per share
— — — (1,195 ) — (1,195 )
2,541 shares issued on Stone Capital acquisition
3 85 88
Option exercises 47,950 shares
25 67 573 665

Balance September 30, 2004
$ 11,470 $ 108,280 $ 64,752 $ (7,029 ) $ 3,359 $ 180,832


											Accumulated
			Additional								Other
	Common		Paid-in		Retained			Treasury			Comprehensive
	Stock		Capital		Earnings			Stock			(Loss) Income			Total
Balance January 1, 2004	$	11,442	$	108,128	$	56,894		$	(6,407	)	$	4,978		$	175,035
Comprehensive income:
Net income		—		—		4,161			—			—			4,161
Other comprehensive income, net of tax:
Net unrealized gain on securities available for sale		—		—		—			—			1,695			1,695
Less reclassification adjustment for gains realized in net income, net of tax												(7	)		(7	)

Comprehensive income						4,161						1,688			5,849

Common dividends declared ($.25 per share)		—		—		(2,814	)		—			—			(2,814	)
Purchase 5,000 treasury shares		—		—		—			(159	)		—			(159	)
Acquisition of Stone Capital 8,409 shares issued		3		85											88
Option exercise 4,953 shares		5		30		—			—			—			35

Balance March 31, 2004	$	11,450	$	108,243	$	58,241		$	(6,566	)	$	6,666		$	178,034


Balance January 1, 2005	$	11,472	$	108,263	$	68,019		$	(6,881	)	$	2,360		$	183,233
Comprehensive income:
Net income		—		—		5,971			—			—			5,971
Other comprehensive income:
Unrealized loss on securities available for sale, net of tax		—		—		—			—			(2,453	)		(2,453	)
Less reclassification adjustment for gains realized in net income, net of tax												(13	)		(13	)

Comprehensive income						5,971						(2,466	)		3,505

Common dividends declared ($.255 per share)		—		—		(2,874	)		—			—			(2,874	)
Net acquisition of 303 treasury shares		—		—		—			(4	)		—			(4	)
Acquisition of Stone Capital 2,447 shares issued		2		85		—			—			—			87
Stock awards		2		18		—						—			20
Tax benefit from exercise of non- qualified stock options				137											137
Option exercises 17,197 shares		15		73		—			81			—			169

Balance March 31, 2005	$	11,491	$	108,576	$	71,116		$	(6,804	)	$	(106	)	$	184,273

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

Unaudited Financial Statements

The unaudited consolidated balance sheet as of ~~September 30, 2004,~~March 31, 2005, the unaudited consolidated statements of income for the ~~nine and~~ three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ and the consolidated statements of cash flows and changes in stockholders’ equity for the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ have been prepared by the management of First Community Bancshares, Inc. (“FCBI” or the “Company”). In the opinion of management, all adjustments (including normal recurring accruals) necessary to present fairly the financial position of FCBI and subsidiary at ~~September 30, 2004~~March 31, 2005 and its results of operations, cash flows, and changes in stockholders’ equity for the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ have been made. These results are not necessarily indicative of the results of consolidated operations that might be expected for the full calendar year.

The consolidated balance sheet as of December 31, ~~2003~~2004 has been ~~extracted~~derived from the audited financial statements included in the Company’s ~~2003~~2004 Annual Report to Stockholders on Form ~~10-K and has been revised to reflect the discontinued operations of the Company’s mortgage subsidiary, United First Mortgage, which was sold during the third quarter 2004.~~10-K. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with standards for the preparation of interim financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the ~~2003~~2004 Annual Report of FCBI on Form 10-K.

A more complete and detailed description of FCBI’s significant accounting policies is included within Footnote 1 to the Company’s Annual Report on Form 10-K for December 31, ~~2003. In addition,~~2004. Further discussion of the Company’s ~~required disclosure of the~~ application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Part I, Item 2.2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

The following is an update of certain required disclosures pursuant to the requirements of Financial Accounting Standards Board (“FASB”) Statement 148.

~~Summary of Significant Accounting Policy Update for Certain Required Disclosures: Stock Options~~Stock-Based Compensation

The Company has a stock option ~~plan~~plans 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.

The following table illustrates the effect ~~of option shares~~ on net income and earnings per share ~~relates~~if the Company had applied the fair value recognition provisions of FASB Statement No. 123R, “Accounting for Stock-Based Compensation,” 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~~stock-based employee compensation for the ~~shares to be exercised~~three month periods ended March 31, 2005 and ~~an increase in the dilutive effect on earnings per share results.~~

A new Omnibus Stock Option Plan (“Stock Option Plan”) was approved by shareholders at the annual 2004 meeting of shareholders to be used in conjunction with retention, recruitment and hiring of employees. Options to acquire 42,000 shares of the Company’s common stock and an additional 5,000 stock awards were granted and reserved for future issuance in May 2004 subject to acceptance of agreements by the optionees. The maximum number of grants and awards under this Stock Option Plan is limited to 200,000 shares.2004.

Assuming use of the fair value method of accounting for stock options, pro forma net income and earnings per share for the nine and three month periods ended September 30, 2004 and 2003 would have been estimated as follows:


													Three Months			Three Months
	Nine Months			Nine Months			Three Months			Three Months			Ended			Ended
	Ended			Ended			Ended			Ended			March 31			March 31
	September 30,			September 30,			September 30,			September 30,			2005			2004
	2004			2003			2004			2003			(Amounts in Thousands,
	(Amounts in Thousands)												Except Per Share Data)
Net income as reported	$	16,285		$	19,944		$	6,410		$	6,229		$	5,971		$	4,161
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(145	)		(113	)		(60	)		(39	)		(44	)		(39	)

Pro forma net income													$	5,927		$	4,122
	$	16,140		$	19,831		$	6,350		$	6,190

Income from continuing operations	$	19,810		$	19,982		$	6,622		$	7,218		$	6,051		$	5,602
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(145	)		(113	)		(60	)		(39	)		(44	)		(39	)

Pro forma income from continuing operations													$	6,007		$	5,563
	$	19,665		$	19,869		$	6,562		$	7,179

Earnings per share:

Basic as reported	$	1.45		$	1.81		$	0.57		$	0.55		$	0.53		$	0.37
Basic pro forma	$	1.44		$	1.80		$	0.57		$	0.55		$	0.53		$	0.37

Diluted as reported	$	1.44		$	1.79		$	0.57		$	0.55		$	0.53		$	0.37
Diluted pro forma	$	1.42		$	1.78		$	0.56		$	0.54		$	0.52		$	0.36

Earnings per share from continuing operations:

Basic as reported	$	1.76		$	1.81		$	0.59		$	0.64		$	0.54		$	0.50
Basic pro forma	$	1.75		$	1.80		$	0.58		$	0.64		$	0.53		$	0.49

Diluted as reported	$	1.75		$	1.79		$	0.58		$	0.64		$	0.53		$	0.49
Diluted pro forma	$	1.74		$	1.78		$	0.58		$	0.63		$	0.53		$	0.49

On August 18, 2004, the Company sold its United First Mortgage, Inc. (“UFM”) subsidiary headquartered in Richmond, Virginia. The transaction resulted in the sale of 100% of the stock of UFM for cash consideration of approximately $250,000. The transaction produced a third quarter after-tax gain of approximately $380,000. This sale ~~completes~~completed the previously announced plan to exit the mortgage banking business segment.

In connection with the exit from the mortgage banking business and as previously reported, the Company recorded impairment charges of $1,385,000 in the first half of 2004, reducing the carrying value of UFM to its estimated fair value less costs to sell. The loss from discontinued operations was $212,000 for the three months ended September 30, 2004 and $3.5 million for the nine months ended September 30, 2004. Exiting the mortgage banking business eliminated the Company’s exposure to risk associated with the large fluctuations previously experienced in the volume-driven, wholesale mortgage business and its hedged interest rate lock commitments and loans. This change in strategic direction and exit from the mortgage banking business will permit the Company to focus its resources on its core community banking business, which has continued to grow and perform.

The business related to UFM is accounted for as discontinued operations and, therefore, the results of operations and cash flows have been removed from the Company’s results of continuing operations in accordance with Financial Accounting Standard (“~~FAS’~~FAS”) 144 for all periods presented in this report. The results of UFM are presented, along with the after-tax gain on sale, as discontinued operations in a separate category on the income statement following results from continuing operations. The results of discontinued operations for the ~~nine months and~~ three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ are as follows:

All assets and liabilities of UFM were disposed of in the third quarter of 2004. Accordingly, ~~these~~there were no assets ~~and~~or liabilities ~~were not~~related to discontinued operations included in the ~~September 30, 2004 interim condensed,~~March 31, 2005, consolidated balance ~~sheet. UFM assets and liabilities for~~sheet, or the ~~prior period are classified as discontinued in this report. The major asset and liability categories of discontinued operations for the prior period are presented as follows:~~

December 31,
2003
Assets

Cash and due from banks $ 2,243
Securities available for sale 297
Loans held for sale 17,728
Bank premises and equipment 205
Interest receivable 18
Other assets 496
Goodwill & other intangibles 1,385

Total Assets
$ 22,372

Liabilities

Non-interest bearing deposits 81
Other liabilities 140
Borrowings 17,771

Total Liabilities
17,992

Stockholders’ Equity

Common stock 305
Additional paid-in capital 4,914
Retained earnings (848 )
Accumulated other comprehensive income 9

Total Equity
4,380

Total Liabilities & Stockholders’ Equity
$ 22,372

~~Note 3. Reclassifications~~

Certain Stone Capital fees reflected as fiduciary revenues in the September 30, 2003 income statement were reclassified from fiduciary revenues to “Other Service charges, Commissions and Fees” to conform to the income statement presentation used in preparation of the September 30,December 31, 2004 financial statements that are included in this periodic report on Form 10Q. Fiduciary revenues reported for the three and nine month periods ended September 30, 2003 included $87,000 and $255,000, respectively, which related to asset management services provided by Stone Capital. The reclassification had no effect on net income or stockholders equity.consolidated balance sheet.

Note 4.3. Mergers, Acquisitions and Branch Development

In December 2004, First Community Bank, NA (the “Bank”) opened its newest full-service branch in Princeton, West Virginia. The Company opened two additional loan production offices during the first quarter of 2004 in Mount Airy and Charlotte, North Carolina. The Charlotte office has since been converted to a full-service branch although it does not currently exercise paying and receiving privileges. Also in the second quarter of 2004, two new loan production offices were opened in Blacksburg and Norfolk, Virginia.

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

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

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 $105.0 million in deposits to the Bank. As a result of the purchase price allocation, approximately $14.1 million of goodwill was recorded.

In the second and third quarters of 2003, the Company opened three de novo branches in Winston-Salem, North Carolina. The Company also opened two additional loan production offices during the first quarter of 2004 in Mount Airy and Charlotte, North Carolina. The Charlotte office has since been converted to a full-service branch although it does not exercise paying and

109

~~receiving privileges. Also in the second quarter of 2004, two new loan production offices were opened in Blacksburg and Norfolk, Virginia.~~

In January 2003, the Bank completed the acquisition of Stone Capital Management, Inc. (“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 total assets of $59 million under management and today continues to operate as a separate subsidiary under the name of Stone Capital Management Inc. Stone Capital was acquired through the issuance of 8,409 shares of Company common stock, which represented 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 the achievement of minimum requirements set forth in the acquisition agreement. As a result of the purchase price allocation, approximately $360,000 of goodwill was recorded.

Note 5.4. Securities

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


	September 30, 2004
	(Amounts in Thousands)
	Available for Sale				Held to Maturity				March 31, 2005
	Amortized		Fair		Amortized		Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Value		Cost		Value		Cost		Gains		Losses			Value
	(Amounts in Thousands)										(Amounts in Thousands)
U.S. Government agency securities	$	221,642	$	222,464	$	38	$	39	$	45,972	$	5	$	(1,374	)	$	44,603
States and political subdivisions		108,317		111,352		34,306		35,920		141,609		2,145		(1,127	)		142,627
Other securities		56,065		57,807		375		375
Corporate Notes										37,570		389		—			37,959
Mortgage-backed securities										130,636		602		(1,874	)		129,364
Equities										16,973		1,160		(101	)		18,032

Total	$	386,024	$	391,623	$	34,719	$	36,334	$	372,760	$	4,301	$	(4,476	)	$	372,585

11At March 31, 2005, the combined depreciation in value of the individual securities in an unrealized loss position for more than 12 months was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of March 31, 2005 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 at March 31, 2005 and December 31, 2004. There were no securities in a continuous unrealized loss position for 12 or more months for which the Company does not have the ability to hold until the security matures or recovers in value.


	March 31, 2005
	Less than 12 Months					12 Months or longer					Total
			Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
						(Amounts in Thousands)
U. S. Government agency securities	$	16,499	$	(403	)	$	27,636	$	(971	)	$	44,135	$	(1,374	)
States and political subdivisions		56,172		(1,073	)		1,853		(54	)	$	58,025		(1,127	)
Other Securities		—		—			—		—			—		—
Mortgage-backed securities		93,848		(1,573	)		14,295		(301	)		108,143		(1,874	)
Equity securities		1,244		(85	)		158		(16	)		1,402		(101	)

Total	$	167,763	$	(3,134	)	$	43,942	$	(1,342	)	$	211,705	$	(4,476	)


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

Total	$	160,732	$	(814	)	$	30,400	$	(570	)	$	191,132	$	(1,384	)

Note 6.5. Loans

~~As of September 30, 2004, loans~~Loans net of unearned income consist of the following:


	Loan Portfolio Overview
	(Dollars in Thousands)										March 31, 2005					December 31, 2004
	September 30, 2004					December 31, 2003					Amount		Percent			Amount		Percent
	Amount		Percent			Amount		Percent					(Dollars in Thousands)
Loans Held for Investment:
Commercial and agricultural	$	97,539		7.93	%	$	69,395		6.76	%	$	99,669		7.77	%	$	99,303		8.02	%
Commercial real estate		439,486		35.76	%		317,421		30.94	%		486,701		37.95	%		453,899		36.64	%
Residential real estate		450,266		36.63	%		421,288		41.05	%		471,829		36.79	%		457,386		36.92	%
Construction		124,165		10.10	%		98,510		9.60	%		112,340		8.76	%		112,732		9.10	%
Consumer		115,720		9.41	%		118,585		11.56	%		110,141		8.59	%		113,424		9.16	%
Other		2,094		0.17	%		992		0.10	%		1,866		0.14	%		2,012		0.16	%

Total	$	1,229,270		100.00	%	$	1,026,191		100.00	%	$	1,282,546		100.00	%	$	1,238,756		100.00	%


Loans Held for Sale	$	1,163				$	424				$	1,182				$	1,194

Loans Held for Sale Included in Assets Related to Discontinued Operations	$	—				$	17,728

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

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

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

Financial instruments whose contract amounts represent credit risk at March, 31, 2005 are commitments to extend credit (including availability of lines of credit) of $188.7 million and standby letters of credit and financial guarantees written of $11.1 million.

Note 7.6. Borrowings

Federal Home Loan Bank (“FHLB”) borrowings and other indebtedness ~~are comprised of $107.5~~include $132.4 million in convertible and callable advances and ~~$34.6~~$9.4 million of noncallable term advances from the FHLB of Atlanta. The callable advances may be redeemed at quarterly intervals after various lockout periods. These call options may substantially shorten the lives of these instruments. If these advances are called, the debt may be paid in full, converted to another FHLB credit product, or converted to an adjustable rate advance. Prepayment of the advances may result in substantial penalties based upon the differential between contractual note rates and current advance rates for similar remaining time periods. Advances from the FHLB are secured by stock in the FHLB of Atlanta, qualifying first mortgage loans, mortgage-backed securities, and certain other securities.

The following schedule details the contractual terms of outstanding FHLB advances, rates and corresponding final maturities at ~~September 30, 2004.~~March 31, 2005. Also ~~included~~ in the table are the fair value adjustments related to debt obligations acquired in the CommonWealth Bank and People’s Community Bank acquisitions. The unamortized premium of approximately ~~$390,000~~$194,000 is being amortized as interest expense over the anticipated life of the borrowings and is reflected as an adjustment to the effective rate paid.


	March 31, 2005
	Principal Amount									Next Call
	of Advance				Rate			Maturity		Date
	(Dollars in Thousands)
Callable advances:

	$	1,283				4.14	%		05/02/07		05/02/05
		25,000				5.71	%		03/17/10		06/17/05
		25,000				6.11	%		05/05/10		05/05/05
		25,000				6.02	%		05/05/10		05/05/05
		25,000				5.47	%		10/04/10		04/04/05
		25,000				2.29	%		02/14/08		02/14/06
		6,125				4.75	%		01/31/11		04/30/05

			$	132,408


Noncallable advances:		917				4.55	%		11/23/05		N/A
		413				5.01	%		12/11/06		N/A
		5,000				2.73	%		01/30/07		N/A
		2,000				6.27	%		09/22/08		N/A
		1,071				2.95	%		07/01/13		N/A

				9,401


Total advances			$	141,809

September 30, 2004
Principal Amount Next Call
of Advance
Rate
Maturity
Date
(Amounts in Thousands)
Callable advances:
$ 1,297 4.14 % 05/02/07 05/02/05
25,000 5.71 % 03/17/10 12/17/04
25,000 6.11 % 05/05/10 11/05/04
25,000 6.02 % 05/05/10 11/05/04
25,000 5.47 % 10/04/10 01/04/05
6,188 4.75 % 01/31/11 10/30/04

$ 107,485

Noncallable advances: 930 4.55 % 11/23/05 N/A
431 5.01 % 12/11/06 N/A
5,000 1.68 % 01/30/07 N/A
2,000 6.27 % 09/22/08 N/A
25,000 1.90 % 06/30/06 N/A
1,192 2.95 % 07/01/13 N/A

34,553

Total advances $ 142,038

~~UFM maintained a warehouse line of credit (maximum available $15 million) with a third party which was entered into~~Also included in the third quarter of 2003 and used to fund mortgage loan inventory. Following the decision to sell UFM, this line was paid off and then terminated with the sale of UFM. Other various debt obligations of the Company were approximately $22,000 at September 30, 2004.

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

~~On May 6, 2004,~~The Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions 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 including all accrued and unpaid distributions or the amount of assets of the trust remaining available for distribution.

In March 2005, the Federal Reserve Board (“FRB”) issued a ~~notice of proposed rulemaking in regards to~~final rule regarding trust preferred securities and the definition of capital. In general, the FRB ~~proposed to~~will allow the continued inclusion of outstanding and prospective issuances of trust preferred securities as Tier 1 capital of bank holding companies, subject to stricter quantitative limits and qualitative standards. The quantitative limits would become effective after a ~~three-year~~five-year transition period.

Note 8.7. 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 effect on the financial condition, results of operations or cash flows of the Company.

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

Financial instruments whose contract amounts represent credit risk at September 30, 2004 are commitments to extend credit (including availability of lines of credit) of $150.0 million and standby letters of credit and financial guarantees written of $8.0 million.

In September 2003, the Company issued, through the 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 the 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 including all accrued and unpaid distributions or the amount of assets of the trust remaining available for distribution.

~~Throughout 2004 the Company has been~~ engaged in a state tax audit involving state income, franchise and sales tax in one of ~~the states whose~~its state tax jurisdictions. While the Company ~~operates. During the third quarter of fiscal 2004, the Company~~has received early indications of the state tax department’s ~~position on various income and franchise tax matters and ultimately received~~ estimates ~~from the state tax representatives~~ of potential additional state income and franchise tax ~~liabilities. The~~liabilities, the Company’s review of the potential assessments revealed a position which favors the Company and which, if sustained, could result in state income and franchise tax ~~refunds.~~refunds to the Company. The Company and tax counsel continue to evaluate possible exposure under the state tax audit as well as the advancement of the ~~more~~referenced favorable tax ~~positions~~position and believe that the Company has established appropriate provisions for state income and franchise taxes, ~~within a range of possible outcomes, given~~consistent with the uncertainty of the state tax audit and changes in the Company’s state tax filings.

Pursuant to the August 2004 sale of UFM, the ~~Bank~~Company agreed to indemnify the purchaser of UFM from various losses or claims arising from ~~redemption of service release premiums (through January 2005),~~ certain defaults on loans sold through August 2005, and upas to ~~a maximum of $1.25 million,~~ specific litigation and certain contracts, pursuant to indemnification agreements with national investors and the Department of Housing and Urban Development and as to certain employment related claims, if any, ~~(up to a maximum of $1.0 million),~~ all as more specifically set forth in ~~a Stock Purchase Agreement dated August 17, 2004 and previously filed as an exhibit to Form 8-K filed with~~ the ~~Securities and Exchange Commission (“SEC”) on August 18, 2004.~~

~~Note 9. Other Comprehensive Income~~

stock purchase agreement. The Company ~~currently has one component of other comprehensive income, which is comprised of unrealized gains and losses on securities available for sale, detailed as follows:~~

Nine Months Ended
Three Months Ended
September 30, September 30, September 30, September 30,
2004
2003
2004
2003
(Amounts in Thousands)
(Amounts in Thousands)
Other Comprehensive Income:

Unrealized (losses) gains arising during the period $ (1,205 ) $ (2,876 ) $ 8,944 $ (5,935 )
Related income tax benefit (expense) 482 1,151 (3,578 ) 2,374

Unrealized (losses) gains arising during the period, net of tax (723 ) (1,725 ) 5,366 (3,561 )
Reclassification adjustment for gains realized in net income (1,493 ) (1,180 ) (52 ) (1,037 )
Tax expense of reclassification 597 472 21 415

Other comprehensive (loss) gain (1,619 ) (2,433 ) 5,335 (4,183 )
Beginning accumulated other comprehensive gain (loss) 4,978 6,761 (1,976 ) 8,511

Ending accumulated other comprehensive income $ 3,359 $ 4,328 $ 3,359 $ 4,328

estimates that its obligations under this agreement will not materially impact its financial statements.

Note ~~10.~~8. Recent Accounting Developments

In ~~March~~December 2004, the ~~Emerging Issue Task Force reached~~FASB issued SFAS No. 123R, “Share-Based Payment,” which is an amendment of SFAS No. 123. SFAS No. 123R changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period, and will be re-measured subsequently at each reporting date through settlement date. In April 2005, the SEC announced that it would provide for a ~~consensus opinion on Issue~~phased-in implementation process for FASB Statement No. ~~03-1, “The Meaning~~123R, and require registrants to adopt the standard’s fair-value method of ~~Other-Than-Temporary Impairment~~accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after December 15, 2005.

The changes in accounting will replace existing requirements under SFAS No. 123, “Accounting for Stock-Based Compensation,” and ~~its Application~~will eliminate the ability to ~~Certain Investments” regarding~~account for share-based compensation transactions using APB Opinion No, 25, “Accounting for Stock Issued to Employees,” which does not require companies to expense options if the ~~determination~~exercise price is equal to the trading price at the date of ~~whether an investment is considered impaired, whether~~grant. The accounting for similar transactions involving parties other than employees or the ~~identified impairment is considered other-than-temporary, how to measure other-than-temporary impairment, and how to disclose unrealized losses on investments~~accounting for stock ownership plans that are ~~not other-than-temporarily impaired. Adoption~~subject to American Institute of ~~the new measurement requirements has been delayed by the FASB pending reconsideration~~Certified Public Accounts (“AICPA”) Statement of ~~implementation guidance relating to debt securities that are impaired solely due to market interest rate fluctuations.~~Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans,” would remain unchanged. The ~~contractual cashflows~~expected impact of this standard on options issued under the Company’s ~~mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Because a decline~~1999 Plan and options currently issued under the 2004 Plan will be realized in the fair value is attributable to changes in rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.periods beginning after December 15, 2005.

On March 9, 2004, the SEC issued SAB 105, “Application of Accounting Principles to Loan Commitments” to inform registrants of the SEC Staff’s view that the fair value of the recorded loan commitments, that are required to follow derivative accounting under Statement 133,Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. Though the Company sold its loans through the discontinued segment on a servicing released basis, the Company adopted the provisions of SAB 105 on January 1, 2004 and this had the impact of reducing the fair value of such instruments by $252,000 at March 31, 2004.

In December 2003, the AICPA issued Statement of Position (“SOP”) 03-3“Accounting for Certain Loans or Debt Securities Acquired in a ~~Transfer"~~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~~allowance for loans losses will be permitted to be transferred on loans acquired in a transfer that are within the scope of SOP 03-3. The impact of the ~~Standard~~statement is prospective and will require new recognition and measurement techniques upon adoption.

~~In July 2003,~~ Management does not expect the ~~Board~~adoption of ~~Governors of the Federal Reserve System issued~~this statement to have a supervisory letter instructing bank holding companies to continue to include 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. On May 6, 2004, the Federal Reserve issued a proposed rule that would continue to allow trust preferred securities, such as the Trust, to constitute Tier 1 capital for bank holding companies. The proposed rules would impose stricter quantitative and qualitative limitsmaterial impact on the Tier 1 treatment of trust preferred securities. Currently, trust preferred securities and qualifying perpetual preferred stock are limited in the aggregate to no more than 25% of a holding company’s core capital elements. The proposed rule would amend the existing limit by providing that restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) can be no more than 25% of core capital, net of goodwill. It is possible that the Federal Reserve rules will not be adopted as proposed and that the Federal Reserve will conclude that trust preferred securities should no longer be treated as Tier 1 regulatory capital. At June 30, 2004, $15 million in trust preferred securities issued by FCBI Capital Trust were outstanding and treated as Tier 1 capital for bank regulatory purposes. If FCBI’s outstanding trust preferred securities at September 30, 2004 were not treated as Tier 1 capital at that date, FCBI’s Tier 1 leverage capital ratio would have declined from 7.40% to 6.55%, its Tier 1 risk-based capital ratio would have declined from 10.44% to 9.24%, and its total risk-based capital ratio would have declined from 11.72% to 10.52% as of September 30, 2004. These reduced capital ratios would continue to meet the applicable “well capitalized” Federal Reserve capital requirements.Company’s consolidated financial statements.

Note ~~11.~~9. Earnings per Share

The following schedule details earnings and shares used in computing basic and diluted earnings per share for the ~~nine and~~ three months ended ~~September 30, 2004~~March 31, 2005 and ~~2003.~~2004.


													For the Three Months Ended
	For the Nine Months Ended						For the Three Months Ended						March 31			March 31
	September 30,			September 30,			September 30,			September 30,			2005			2004
	2004			2003			2004			2003			(Amounts in Thousands, Except Per Share Data)
Basic:
Income (in thousands) continuing operations	$	19,810		$	19,982		$	6,622		$	7,218		$	6,051		$	5,602
Loss (in thousands) discontinued operations		(3,525	)		(38	)		(212	)		(989	)		(80	)		(1,441	)

Net income (in thousands)	$	16,285		$	19,944		$	6,410		$	6,229		$	5,971		$	4,161


Weighted average shares outstanding		11,235,462			11,047,199			11,231,973			11,262,180			11,259,494			11,245,465
Dilutive shares for stock options		93,715			91,479			92,485			117,264			78,418			97,786
Contingently issuable shares for acquisition		2,541			4,497			2,541			4,497			1,224			4,497
Weighted average dilutive shares outstanding		11,331,718			11,143,175			11,326,999			11,383,941			11,339,136			11,347,748

Basic:
Earnings per share continuing operations	$	1.76		$	1.81		$	0.59		$	0.64		$	0.54		$	0.50
(Loss) earnings per share discontined operations		(0.31	)		(0.00	)		(0.02	)		(0.09	)
(Loss) earnings per share discontinued operations														(0.01	)		(0.13	)
Earnings per share		1.45			1.81			0.57			0.55			0.53			0.37

Diluted:
Diluted earnings per share continuing operations	$	1.75		$	1.79		$	0.58		$	0.64		$	0.53		$	0.49
Diluted (loss) earnings per share discontined operations		(0.31	)		(0.00	)		(0.01	)		(0.09	)
Diluted (loss) earnings per share discontinued operations														—			(0.12	)
Diluted earnings per share		1.44			1.79			0.57			0.55			0.53			0.37

Note ~~12.~~10. Provision and Allowance for Loan Losses

The ~~Company’s lending strategy stresses quality growth diversified by product, geography, and industry. All loans made by~~following table details the Company are subject to common credit standards and a uniform underwriting system. Loans are also subject to an annual review process which varies based on the loan size and type. The Company utilizes this ongoing review process to evaluate loans for changes in credit risk. This process serves as the primary means by which the Company evaluates the adequacy of the loan loss allowance. The total loan loss allowance is divided into the following categories: i) specifically identified losses on loan relationships which are on non-accrual status, ninety days past due or more and loans with elements of credit weakness, and ii) formula allowances and special allocations addressing other qualitative factors including industry concentrations, economic conditions, staffing and other conditions.

Specific allowances are established to cover loan relationships, which are identified as having significant cash flow weakness and for which a collateral deficiency may be present. The allowances established under the specific identification method are judged based upon the borrower’s estimated cash flow and projected liquidation value of related collateral.

Formula allowances, based on historical loss experience, are available to cover homogeneous groups of loans not individually evaluated. The formula allowance is developed and evaluated against loans in general by specific category (commercial, mortgage, and consumer). The allowance is developed for each loan category based upon a review of net historical loss percentages for the Company and other qualitative factors. The calculated percentage is considered in determining the estimated allowance excluding any relationships specifically identified and individually evaluated. While consideration is given to credit weaknesses for specific loans and classifications within the various categories of loans, the allowance is available for all loan losses.

~~In developing the~~Company’s allowance for loan ~~losses,~~loss activity for the ~~Company also considers various inherent risk factors, such as current economic conditions, the level of delinquencies~~three month periods ended March 31, 2005 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. In addition, management continually evaluates the adequacy of the allowance for loan losses and makes specific adjustments to the allowance based on the results of risk analysis in the credit review process, the recommendation of regulatory agencies, and other factors, such as loan loss experience and prevailing economic conditions.2004:


	For the Three Months Ended
	March 31,
	2005			2004
	(Amounts in Thousands)
Beginning balance	$	16,339		$	14,624
Provision		691			532
Charge-offs		(844	)		(911	)
Recoveries		357			291

Ending balance	$	16,543		$	14,536

1615

Report of Independent Registered Public Accounting Firm

The ~~Audit Committee of the~~ Board of Directors
First Community Bancshares, Inc.

We have reviewed the ~~accompanying~~ condensed consolidated balance sheet of First Community Bancshares, Inc. and subsidiary (the Company) as of ~~September 30, 2004,~~March 31, 2005, and the related condensed consolidated statements of income for the three month ~~and nine month~~ periods ended ~~September 30,~~March 31, 2005 and 2004 and ~~2003 and~~ the condensed consolidated statements of cash flows and changes in stockholders’ equity for the ~~nine~~three month periods ended ~~September 30, 2004~~March 31, 2005 and ~~2003.~~2004. These financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheet of the Company as of December 31, ~~2003,~~2004, and the related consolidated statements of income, cash flows and changes in stockholders’ equity for the year then ended (not presented herein) and in our report dated March ~~9, 2004,~~11, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, ~~2003,~~2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Charleston, West Virginia
May 5, 2005

~~November 5, 2004~~

1716

First Community Bancshares, Inc.

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

The following discussion and analysis is provided to address information about the Company’s financial condition and results of operations. This discussion and analysis should be read in conjunction with the ~~2003~~2004 Annual Report to Shareholders on Form 10-K and the other financial information included in this report.

The Company is a multi-state bank holding company headquartered in Bluefield, Virginia with total assets of ~~$1.83~~$1.89 billion at ~~September 30, 2004. FCBI~~March 31, 2005. Through its community bank subsidiary, First Community Bank, NA, the company provides financial, trust and investment advisory services to individuals and commercial customers through 5253 full-service banking locations, ~~four~~six loan production offices and two trust and investment management offices located in the four states of Virginia, West Virginia, North Carolina and Tennessee. The First Community Bank, NA is the parent of Stone Capital, , a SEC registered investment advisory firm that offers wealth management and investment advice. The Company’s common stock is traded on the ~~NASDAQ~~Nasdaq National ~~market~~Market under the symbol “FCBC”.

FORWARD LOOKING STATEMENTS

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

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

Estimates, assumptions, and judgments are necessary principally when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal modeling techniques and/or appraisal estimates.

1817

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

Allowance for Loan ~~Losses:~~Losses

The allowance for loan losses is established and maintained at levels management deems adequate to cover 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 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 the ~~Notes to the Consolidated Financial Statements and in the discussion included in this~~ management’s discussion and analysis, the Company determines the allowance for loan losses by making specific allocations to impaired loans and loan pools that exhibit inherent weaknesses and various credit risk factors. Allocations to loan pools are developed giving weight to risk ratings, historical loss trends and management’s judgment concerning those trends and other relevant factors. These factors may include, among others, actual versus estimated losses, regional and national economic conditions, business segment and portfolio concentrations, industry competition and consolidation, and the impact of government regulations. The foregoing analysis is performed by 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 to increase the allowance or reduced provisions based upon management’s current view of portfolio and economic conditions and the application of revised estimates and assumptions.

~~In connection with the sale~~Acquisitions and Intangible Assets

As part of ~~UFM in August 2004,~~its growth plan, the Company ~~ceased its practice~~engages in business combinations with other companies. The acquisition of ~~hedging mortgage banking~~a business is generally accounted for under purchase accounting rules promulgated by the FASB. Purchase accounting requires the recording of underlying assets and liabilities of the entity acquired at their fair market value. Any excess of the purchase price of the business over the net assets acquired and any identified intangibles is recorded as goodwill. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisal by qualified independent parties for relevant asset and liability categories. Financial assets and liabilities are typically valued using discount models which apply current discount rates to streams of cash flow. All of these valuation methods require the use of assumptions which can result in alternate valuations and varying levels of goodwill and, in some cases, amortization expense or accretion income.

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

Goodwill is recorded as the excess of the purchase price, if any, over the fair value of the revalued net assets. ~~Although~~Goodwill is tested at least annually in the month of November for possible impairment. This testing again uses a discounted cash flow model applied to the anticipated stream of cash flows from operations of the business or segment being tested. Impairment

testing necessarily uses estimates in the form of growth and attrition rates and anticipated rates of return. These estimates have a direct bearing on the results of the impairment testing and serve as the basis for management’s conclusions as to impairment.

Income Taxes

The establishment of provisions for federal and state income taxes is a complex area of accounting which also involves the use of judgments and estimates in applying relevant tax statutes. The Company ~~originates loans~~operates in multiple state tax jurisdictions and this requires the appropriate allocation of income and expense to ~~be sold~~each state based on a ~~best efforts basis,~~variety of apportionment or allocation bases. Management strives to keep abreast of changes in tax law and the ~~amount~~issuance of regulations which may impact tax reporting and volume of such loans is not material to the Company’s operations as of September 30, 2004. Accordingly, the Company no longer employs derivative securities to hedge interest rate risk on loans originatedprovisions for ~~sale. A complete discussion of derivatives and hedging accounting policies is included in the Company’s first and second quarter reports and its 2003 annual report on Form 10-K.~~

~~CORPORATE DEVELOPMENT, GROWTH, AND STRATEGIC PLANNING~~

income tax expense. The Company ~~has positioned itself as~~is also subject to audit by federal and state tax authorities. Results of these audits may produce indicated liabilities which differ from Company estimates and provisions. The Company continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of possible exposure based on current facts and circumstances.

EXECUTIVE OVERVIEW

First Community Bancshares is a ~~community~~full service commercial bank ~~and financial services alternative to larger regional banks~~holding company which ~~often provide less emphasis on personal relationships and smaller community banks which lack capital and resources to efficiently serve customer needs. In recent years,~~operates within the ~~Company has implemented its strategic plan through the pursuit~~four state region of ~~growth in new markets, including strategically targeted metro markets within~~ Virginia, West Virginia, North Carolina and Tennessee. ~~While the Company’s mission to serve as a~~The Company operates through its community bank ~~has remained unchanged, management believes that entry into new markets~~subsidiary, First Community Bank, N.A. and offers a wide range of financial services. The Company presently reports total assets of $1.89 billion and operates through ~~acquisitions~~53 full service banking offices and ~~de novo offices will accelerate the Company’s historical growth rate and better position it for future growth by building its network in areas offering more~~six commercial ~~growth, by diversifying the demographics of its customer base and customer prospects and by generally increasing its sales and service network.~~

~~As part of its strategic plan, the Company has set long-term goals for growth through acquisitions, through new branches and~~ loan production offices in addition to its two Trust and Wealth Management offices.

The Company funds its lending activities primarily through ~~internally generated growth within~~the retail deposit operations of its ~~established~~ branch banking network. ~~During~~At March 31, 2005 total customer deposits and repurchase agreements were $1.53 billion, an increase of 4.17% from December 31, 2004. Borrowings from the ~~implementation~~Federal Home Loan Bank provide additional funding and totaled $156.8 million at March 31, 2005, up from $131.9 million at year end 2004.

The Company invests its funds primarily in loans to retail and commercial customers. Total loans held for investment, net of unearned income, at March 31, 2005 were $1.28 billion, an increase of 3.53% from December 31, 2004. In addition to loans, the Company also invests a portion of its funds in various debt securities, including those of United States agencies and state and political subdivisions. Total securities available for sale at March 31, 2005 were $372.6 million. The Company also maintains overnight interest-bearing balances with the FHLB and correspondent banks totaling $48.9 million and other securities held to maturity of $32.0 million at March 31, 2005.

Consolidated net income for the first quarter of 2005 was $6.0 million, a 43.5% increase over the corresponding quarter in 2004. The significant increase in net income between the two quarters relates primarily to the reduction in the Company’s loss from discontinued operations between the two quarters. The discontinued operations stem from the Company’s ownership of a mortgage banking subsidiary which was sold in August 2004. The loss from discontinued operations was reduced from $1.44 million in the first quarter of 2004 to $80,000 in the first quarter of 2005. The 2005 quarterly loss from discontinued operations includes residual costs of remaining leases and trailing personnel costs associated with the divested mortgage subsidiary.

Net interest income, the Company’s primary source of earnings, increased $1.77 million between the first quarter of 2004 and 2005. This 11.06% increase includes the effect of the ~~early phases~~Company’s acquisition of People’s Community Bank (PCB) on March 31, 2004. PCB contributed an additional $128 million in loans held for investment and substantially increased average earning assets over the comparable periods.

Basic and diluted earnings per share for the first quarter of 2005 were $0.53 per share compared with $0.37 per share in the first quarter of 2004. Basic earnings per share from continuing operations for the first quarter of 2005 were $0.54 per share, up from $0.50 per share in the first quarter of 2004. Diluted earnings per share from continuing operations also increased to $0.53 per share, up from $0.49 per share for the corresponding quarter of 2004. Return on equity for the first quarter of 2005 was 13%, up from 9.4% in the corresponding quarter of 2004. Return on equity from continuing operations also increased to 13.17% in the first quarter of 2005, up from 12.66% in the corresponding quarter of 2004.

Other improvements during the first quarter of 2005 relate to stronger net revenues and fee income, including the effect of the ~~strategic plan,~~PCB acquisition. Non-interest expense increased at a higher rate between the ~~Company has achieved significant successes~~two quarters due to a $1.2 million increase in salaries and ~~like most growth oriented companies, encountered challenges along~~benefits, which included not only the ~~way. The more significant challenges include: strong competition from~~addition of PCB salaries, but also the costs of office expansion in Virginia and North Carolina as well as increases in support salaries and increased health care costs.

bank and non-bank competitors within and outside its regional market, aggressive pricing by competitors in the commercial and commercial real estate loan arena, and slow internal deposit growth resulting from the historically low interest rate environment.

Despite these challenges, the Company has succeeded in establishing new offices in seven new market areas including four new loan production offices in the last three quarters and three new full service offices since the second quarter of 2003. The Company has completed two bank acquisitions and one wealth management acquisition since January 2003 and has grown total resources by almost 20% over the last six quarters and almost 50% in the past 3 -1/2 years. Along with these successes, the Company has also experienced slower than planned internal deposit growth in legacy markets and, in August of this year, exited the once lucrative, but highly volatile, mortgage banking segment. As a proximate result of these recent events and in conjunction with its ongoing strategic planning process, the Company has revised its growth targets from $4 billion in total assets to approximately $3 billion through the end of the 2007 planning period. The reductions will be made primarily in the area of internal growth, reflecting lower rates of deposit generation in legacy markets. Otherwise, the Company will continue its planned expansion with attention to growth in wealth management services and continued focus on new offices and bank acquisitions as the market allows. See Note 4 to the Consolidated Financial Statements and the following discussion for a summary of the most recent expansion activities of the Company.

RECENT ACQUISITIONS AND BRANCHING ACTIVITY

In December 2004, First Community Bank, NA opened its newest full-service branch in Princeton, West Virginia. The new branch is the first of its type for the Company, and is designed to deliver retail and commercial financial services in a comfortable atmosphere. The branch also houses offices of the Trust and Financial Services Division and Stone Capital Management.

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

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

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.

RESULTS OF OPERATIONS

General

Net income for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 was ~~$16.3~~$6.0 million or ~~$1.45~~$0.53 per basic and ~~$1.44 per~~ diluted share, compared with ~~$19.9~~$4.2 million or ~~$1.81~~$0.37 per basic and ~~$1.79 per~~ diluted share for the ~~nine~~three months ended ~~September 30, 2003.~~March 31, 2004. Return on average equity for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 was ~~12.3%~~13.00% compared to ~~16.23%~~9.40% for the ~~nine~~three months ended ~~September 30, 2003.~~March 31, 2004. Return on average assets was ~~1.21%~~1.30% for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 compared to ~~1.67%~~1.00% for the ~~nine~~three months ended ~~September 30, 2003.~~March 31, 2004. Income from continuing operations for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 was ~~$19.8~~$6.1 million, versus ~~$20.0~~$5.6 million for the ~~nine~~three months ended ~~September 30, 2003.~~March 31, 2004. Return on average equity from continuing operations for the first ~~nine~~three months of ~~2004~~2005 was ~~14.97%~~13.17% compared to ~~16.26%~~12.66% for the first ~~nine~~three months of last year. Return on average assets from continuing operations was ~~1.49%~~1.32% compared to ~~1.74%~~1.36% for the first ~~nine~~three months of ~~2003.~~2004.

OnIn August ~~18,~~ 2004, the Company sold its UFM subsidiary. The transaction resulted in the sale of 100% of the stock of UFM for cash consideration of approximately $250,000. ~~The transaction produced a third quarter after tax gain of approximately $380,000.~~ In connection with the exit from the mortgage banking business and as previously reported, the Company recorded impairment charges of ~~$1,385,000~~$452,000 in the first ~~half~~quarter of 2004, ~~reducing~~and $933,000 in the ~~carrying value~~second quarter of ~~the subsidiary to its estimated fair value less costs to sell.~~2004. Exiting the mortgage business eliminated the Company’s exposure to risk associated with the large fluctuations previously experienced in the volume-driven, wholesale business and its hedged interest rate lock commitments and closed loans. The change in strategic direction and exit of the mortgage business permitted the Company to focus its resources on its core community banking ~~business, which has continued to grow and perform.~~business. The loss from discontinued operations was ~~$212,000~~$80,000 for the first quarter of 2005, compared to $1.4 million or ~~$0.02~~$0.13 per basic and ~~$0.01~~$0.12 per diluted share, respectively, for the ~~third quarter of 2004 and $3.5 million or $0.31 per diluted share for the nine~~three months ended ~~September 30,~~March 31, 2004.

Net Interest Income ~~— Year-to-date Comparison~~ (See Table I)

Net interest income, the largest contributor to earnings, was ~~$51.3~~$17.8 million for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 compared to ~~$47.3~~$16.0 million for the corresponding period in ~~2003.~~2004. 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 ~~$54.1~~$18.8 million for the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, an increase of ~~$4.0~~$1.9 million from the ~~$50.1~~$16.9 million reported in the first ~~nine~~three months of ~~2003.~~2004. This ~~$4.0~~$1.9 million increase ~~was based on~~reflects a ~~$8.9~~$3.1 million increase indue to increased volume, ~~as earning assets were added to the portfolio~~ which was partially offset by a ~~$4.9~~$1.2 million ~~reduction~~decrease due to rate changes on the underlying assets ~~as asset yields fell in~~and liabilities. In comparing the ~~declining rate environment. Management was able to help counter~~periods, assets were added during the ~~effect~~first quarter of 2005 at slightly lower rates while liabilities were added or replaced at slightly higher rates than were paid at the end of the ~~declining asset yield through aggressive management~~first quarter 2004.

During the first quarter of ~~deposit rates. Average~~2005, average earning assets increased ~~$201.7~~$165.1 million while interest-bearing liabilities increased ~~$192.1 million.~~$154.5 million over the comparable period. As indicated in Table I, the yield on average earning assets ~~decreased 51~~increased 21 basis points from ~~6.59%~~6.03% for the ~~nine~~three months ended ~~September 30, 2003~~March 31, 2004 to ~~6.08%~~6.24% for the ~~nine~~three months ended ~~September 30, 2004.~~March 31, 2005. However, this ~~decrease~~increase was ~~largely~~partially offset by a 3214 basis point ~~decline~~increase in the cost of funds during the same period leaving the net interest rate spread (the difference between interest income on earning assets and expense on interest bearing liabilities) ~~lower~~7 basis points higher at ~~4.16%~~4.14% compared to ~~4.33%~~4.07% for the same period last year. The Company’s tax equivalent net interest margin of ~~4.45%~~4.47% for the ~~nine~~three months ended ~~September 30, 2004 decreased 25~~March 31, 2005 increased 7 basis points from ~~4.70 %~~4.40% in ~~2003.~~2004.

The largest contributor to the ~~decrease~~increase in the yield on average earning assets in ~~2004,~~2005, on a volume-weighted basis, was the ~~decrease~~$244.0 million increase in ~~the overall tax equivalent yield on~~ loans held for investment ~~of 72~~($126.3 million attributable to PCB). The loan portfolio contributed

approximately $3.6 million to the change in net interest income even though the average yield decreased 11 basis points from the prior year to ~~6.63%, as loans repriced downward in response to the declining rate environment while the average balance increased $176.8 million.~~6.68%. The ~~decline in asset yield is attributable to the~~ current interest rate environment ~~which creates~~continues to create 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~~certain loan yields have declined in response to the current ~~low~~ rate environment.

During the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, the taxable equivalent yield on securities available for sale ~~decreased 28~~increased 10 basis points to ~~4.62%~~4.89% while the average balance ~~increased~~decreased by ~~$39.3~~$41.8 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 presents itself. Although the total portfolio ~~grew~~at March 31, 2005 decreased from March 31, 2004, the average tax equivalent yield increased because of the addition of approximately $41.8 million in tax free municipal securities while taxable securities in the portfolio decreased by ~~$39.3 million~~$83.5 million. Funds received from ~~September 30, 2003,~~ the ~~relative rate on~~paydowns, maturities and calls of investment securities ~~acquired since that time has declined substantially.~~ helped fund the loan growth.

The ~~increasing average security balance is the result of continued reinvestment of available funds largely through bank acquisitions. The September 30, 2004~~March 31, 2005 average balance of investment securities held to maturity decreased by ~~$3.3~~$4.8 million to ~~$36.5~~$32.8 million as a result of maturities and calls, while the yield ~~decreased 14~~increased 60 basis points to ~~7.96% compared to the September 30, 2003 year-to-date average~~8.25% versus March 31, 2004 yield of ~~8.10%~~7.65%.

Compared to ~~the September 30, 2003,~~March 31, 2004 average interest-bearing balances with banks decreased ~~$8.4~~$32.5 million to ~~$31.8~~$30.8 million at ~~September 30, 2004~~March 31, 2005 while the yield increased 8156 basis points to ~~1.65%~~2.81%.

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~~increased slightly by 3214 basis points from ~~2.25%~~1.96% for the ~~nine~~three months ended ~~September 30, 2003~~March 31, 2004 to ~~1.93%~~2.10% for the same period of ~~2004~~2005 while the average volume increased ~~$192.1~~$154.5 million.

~~When comparing the nine months ended September 30, 2004 to the corresponding period of the prior year, the 2004~~The average balance of ~~FHLB and other~~ short-term ~~convertible and callable~~ borrowings ~~increased~~decreased slightly by ~~$62.7~~$2.8 million in ~~2004~~2005 to ~~$128.7~~$127.6 million, while the rate increased 83 basis points. These changes were due ~~primarily~~ to the combined effects of the addition of balances added from the PCB acquisition, the allocation of FHLB borrowings to the discontinued segment ~~while~~in 2004, the ~~rate decreased 127 basis points to 4.63%,~~call of a $25.0 million advance at the ~~result~~end of the ~~addition~~fourth quarter of ~~balances acquired with the CommonWealth and PCB acquisitions~~2004 and the ~~addition~~subsequent take-down of ~~new advances at lower rates which partially funded~~an additional $25.0 million FHLB advance mid first quarter 2005.

Compared to the ~~PCB acquisition. The~~same period in 2004, average balance of all other borrowings increased $6.9 million for the first nine months of 2004 vs. 2003 as a result of the issuance of $15 million in trust preferred securities late in the third quarter of 2003, while the rate paid decreased 89 basis points.

~~Average~~ fed funds and repurchase agreements increased ~~$8.5~~$32.0 million at ~~September 30, 2004,~~March 31, 2005, while the average rate ~~decreased 52~~increased 55 basis ~~points compared to the same period in 2003.~~points. In addition, the average balances of interest-bearing demand and savings deposits increased ~~$74.6~~$17.0 million and ~~$30.2~~$81.8 million, respectively, for the ~~nine~~three months ended ~~September 30, 2004.~~March 31, 2005, again, largely due to the PCB acquisition. While the average rate paid on demand deposits ~~increased 8~~remained consistent increasing only 2 basis points, ~~as a result of money market deposits acquired in the PCB purchase,~~ the average rate paid on savings ~~declined 9~~increased 27 basis ~~points.~~points due in part to the higher rate paid on certain money market accounts acquired with PCB. Average time deposits increased ~~$9.3~~$26.5 million (almost entirely attributable to PCB) while the average rate paid ~~decreased 50~~increased 7 basis points from ~~2.94%~~2.49% in ~~2003~~2004 to ~~2.44%~~2.56% in ~~2004.~~2005. The level of average non-interest-bearing demand deposits increased ~~$34.3~~$33.7 million ($17.5 million attributable to ~~$208.9~~PCB) to $219.7 million at ~~September 30, 2004~~March 31, 2005 compared to the corresponding period of the prior year. Average interest bearing deposits and non-interest bearing demand deposits for the acquired CommonWealth Bank branches totaled $65.2 million and $27.0 million, respectively, at September 30, 2004 and $25.7 million and $14.8 million, respectively, at September 30, 2003. Included in the September 30, 2004 average balances related to the PCB acquisition for interest-bearing and non-interest bearing deposits were $89.2 million and $12.1 million at September 30, 2004, respectively.

~~Net Interest Income — Quarterly Comparison (See Table II)~~

Net interest income for the quarter ended September 30, 2004 was $17.7 million compared to $16.8 million for the same period in 2003, an increase of $933,000. Likewise, tax equivalent net interest income increased $680,000 from $17.6 million for the quarter ended September 30, 2003, to $18.3 million for the quarter ended September 30, 2004 (refer to Table II). A 6 basis point decrease in the rate paid on interest-bearing liabilities partially offset a 29 basis point decline in the average rate earned on interest-earning assets, resulting in a decrease in the net interest margin of 28 basis points to 4.38% for the quarter ended September 30, 2004. While the net interest margin decreased, average earning assets increased $163.2 million in the third quarter of 2004 compared to the third quarter of 2003 resulting in the improvements in net interest income. The largest increases in average earning assets included increases in average loans held for investment of $182.0 million and securities available for sale increased $2.8 million. In the third quarter of 2004, investment securities held to maturity decreased $4.2 million, average interest-bearing deposits with banks decreased $16.6 million and Fed Funds Sold decreased $113,000. The $680,000 increase in net interest income was achieved through the combined effect of changes in volume and corresponding rates on the underlying assets and liabilities. Earnings attributable to the net volume increase in earning assets over paying liabilities was approximately $8.2 million while the effect of declining rates represented an offsetting net reduction of approximately $7.6 million for a combined effect on net interest income of an additional $680,000. The volume driven increase in net interest income is largely attributable to the PCB acquisition which contributed $1.3 million in net interest income in the third quarter of 2004.

As previously mentioned, the impact of the declining interest rate environment continued to reduce asset yields as assets repriced into lower interest rate products and as securities were replaced with lower yielding instruments reflecting the lower rate environment. This refinancing/repricing scenario is reflected in all categories of interest earning assets. Management continues to focus on margin enhancement by funding the balance sheet growth with lower priced deposits and borrowings without significantly extending balance sheet duration (the weighted average maturity) in anticipation of future rate increases.

Similar to the decline in asset yields created by the current interest rate cycle, deposit and borrowing costs also have been adjusted when possible to obtain this benefit on the liability side of the balance sheet. As previously mentioned, management continues to strive for lower cost funding in light of falling asset yields. Management monitors the overall performance of assets and interest-bearing liabilities through the Company’s product management group. Total interest-bearing liabilities increased $171.4 million with average interest-bearing deposits increasing $114.5 million. The average rate on interest-bearing liabilities dropped 6 basis points. The rate paid on interest-bearing deposits decreased by 16 basis points from 1.87% in 2003 to 1.71% in 2004. Average Fed Funds purchased and repurchase agreements increased $6.2 million while the average rate decreased 26 basis points. Average short-term borrowings increased $43.9 million while the rate decreased 18 basis points and long-term borrowings increased $6.8 million while the rate decreased 59 basis points.

Table I AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS


	AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
	(Dollars in Thousands)																Three Months Ended							Three Months Ended
	Nine Months Ended								Nine Months Ended								March 31, 2005							March 31, 2004
	September 30, 2004								September 30, 2003								Average		Interest		Yield/Rate			Average		Interest		Yield/Rate
	Average			Interest		Yield/Rate			Average			Interest		Yield/Rate			Balance		(1)		(1)			Balance		(1)		(1)
	Balance			(1)		(1)			Balance			(1)		(1)							(Dollars in Thousands)
Earning Assets:
Loans (2):
Held for Investment:
Taxable	$	1,128,762		$	56,047		6.64	%	$	951,996		$	52,264		7.35	%	$	1,256,095	$	20,673		6.67	%	$	1,011,915	$	17,084		6.79	%
Tax-Exempt		4,918			227		6.17	%		5,530			311		7.52	%		4,426		83		7.60	%		4,557		70		6.18	%

Total		1,133,680			56,274		6.63	%		957,526			52,575		7.35	%		1,260,521		20,756		6.68	%		1,016,472		17,154		6.79	%
Allowance for Loan Losses		(15,883	)							(14,717	)

Net Total		1,117,797			56,274					942,809			52,575
Securities Available for Sale:
Taxable		331,158			9,638		3.89	%		306,613			9,555		4.17	%		240,158		2,295		3.88	%		323,609		3,261		4.05	%
Tax-Exempt		107,318			5,513		6.86	%		92,563			5,079		7.34	%		143,419		2,333		6.60	%		101,718		1,806		7.14	%

Total		438,476			15,151		4.62	%		399,176			14,634		4.90	%		383,577		4,628		4.89	%		425,327		5,067		4.79	%
Securities Held to Maturity:
Taxable		422			21		6.65	%		602			33		7.33	%		406		4		4.00	%		495		5		4.06	%
Tax-Exempt		36,114			2,157		7.98	%		39,274			2,383		8.11	%		32,439		664		8.31	%		37,146		711		7.70	%

Total		36,536			2,178		7.96	%		39,876			2,416		8.10	%		32,845		668		8.25	%		37,641		716		7.65	%
Interest-Bearing Deposits		31,812			394		1.65	%		40,162			473		1.57	%		30,767		213		2.81	%		63,220		197		1.25	%
Fed Funds Sold		80			1		0.90	%		950			9		1.27	%

Total Earning Assets		1,624,701			73,998		6.08	%		1,422,973			70,107		6.59	%		1,707,710		26,265		6.24	%		1,542,660		23,134		6.03	%
Other Assets		153,704								113,004
Other Assets (5)																		149,935							111,459
Assets Related to Discontinued Operations		19,969								58,223								—							19,466

Total	$	1,798,374							$	1,594,200							$	1,857,645						$	1,673,585

Interest-Bearing Liabilities:
Demand Deposits	$	294,024		$	1,621		0.74	%	$	219,463		$	1,088		0.66	%	$	153,323	$	92		0.24	%	$	136,360	$	76		0.22	%
Savings Deposits		214,065			896		0.56	%		183,859			891		0.65	%
Savings Deposits (6)																		376,218		869		0.94	%		294,439		489		0.67	%
Time Deposits		618,758			11,313		2.44	%		609,488			13,413		2.94	%		632,689		4,001		2.56	%		606,177		3,750		2.49	%

Total Deposits		1,126,847			13,830		1.64	%		1,012,810			15,392		2.03	%		1,162,230		4,962		1.73	%		1,036,976		4,315		1.67	%
Fed Funds Purchased & Repurchase Agreements		107,977			987		1.22	%		99,520			1,292		1.74	%		129,352		561		1.76	%		97,316		292		1.21	%
FHLB Convertible and Callable Advances		128,652			4,462		4.63	%		65,977			2,911		5.90	%
Short-term Borrowings (7)																		127,598		1,648		5.24	%		130,403		1,430		4.41	%
Other Borrowings		17,012			643		5.05	%		10,080			448		5.94	%		17,015		261		6.22	%		17,012		208		4.92	%

Total Interest-Bearing liabilities		1,380,488			19,922		1.93	%		1,188,387			20,043		2.25	%		1,436,195		7,432		2.10	%		1,281,707		6,245		1.96	%
Demand Deposits		208,905								174,591								219,699							185,995
Other Liabilities		14,472								15,069								15,419							12,318
Liabilities Related to Discontinued Operations		17,693								58,223								—							19,466
Stockholders’ Equity		176,816								157,930								186,332							174,099

Total	$	1,798,374							$	1,594,200							$	1,857,645						$	1,673,585

Net Interest Income, Tax Equivalent				$	54,076							$	50,064						$	18,833						$	16,889

Net Interest Rate Spread (3)							4.16	%							4.33	%						4.14	%						4.07	%

Net Interest Margin (4)							4.45	%							4.70	%						4.47	%						4.40	%


(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.

(5)		In previous years, the Allowance for Loan Losses was netted against loans in the earning asset section. In 2005, the Allowance was netted against other assets and prior periods were adjusted accordingly.

(6)		In previous years, certain interest-bearing Money Market Demand accounts were included in the interest-bearing demand category in the earning asset section. In 2005, these accounts were reclassified to savings and prior periods were adjusted accordingly.

(7)		FHLB advances are included in short-term borrowings due to quarterly call options.

~~Table II~~

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in Thousands)
Three Months Ended Three Months Ended
September 30, 2004
September 30, 2003
Average Interest Yield/Rate Average Interest Yield/Rate
Balance
(1)
(1)
Balance
(1)
(1)
Earning Assets:
Loans (2):
Held for Investment:
Taxable $ 1,208,446 $ 19,899 6.55 % $ 1,026,606 $ 18,533 7.17 %
Tax-Exempt 5,236 82 6.23 % 5,077 91 7.11 %

Total 1,213,682 19,981 6.55 % 1,031,683 18,624 7.17 %
Allowance for Loan Losses (16,535 ) (15,807 )

Net Total 1,197,147 19,981 1,015,876 18,624
Securities Available for Sale:
Taxable 309,742 2,957 3.80 % 327,106 3,067 3.72 %
Tax-Exempt 109,133 1,839 6.70 % 88,991 1,591 7.09 %

Total 418,875 4,796 4.55 % 416,097 4,658 4.44 %
Securities Held to Maturity:
Taxable 411 3 3.16 % 553 8 5.74 %
Tax-Exempt 34,684 688 7.89 % 38,699 789 8.09 %

Total 35,095 691 7.90 % 39,252 797 8.06 %
Interest Bearing Deposits 13,330 94 2.81 % 29,901 123 1.63 %
Fed Funds Sold — — 0.00 % 113 1 3.51 %

Total Earning Assets 1,664,447 25,562 6.11 % 1,501,239 24,203 6.40 %
Other Assets 167,149 130,805
Assets Related to Discontinued Operations 9,315 64,603

Total $ 1,840,911 $ 1,696,647

Interest-Bearing Liabilities:
Demand Deposits $ 319,331 $ 938 1.17 % $ 237,931 $ 356 0.59 %
Savings Deposits 224,298 327 0.58 % 186,503 280 0.60 %
Time Deposits 617,251 3,737 2.41 % 621,930 4,297 2.74 %

Total Deposits 1,160,880 5,002 1.71 % 1,046,364 4,933 1.87 %
Fed Funds Purchased & Repurchase Agreements 114,670 362 1.26 % 108,484 416 1.52 %
FHLB Convertible and Callable Advances 131,728 1,658 5.01 % 87,837 1,069 4.83 %
Other Borrowings 17,016 226 5.28 % 10,209 151 5.87 %

Total Interest-Bearing Liabilities 1,424,294 7,248 2.02 % 1,252,894 6,569 2.08 %
Demand Deposits 218,073 194,949
Other Liabilities 13,344 15,259
Liabilities Related to Discontinued Operations 8,831 64,603
Stockholders’ Equity 176,369 168,942

Total $ 1,840,911 $ 1,696,647

Net Interest Income, Tax Equivalent $ 18,314 $ 17,634

Net Interest Rate Spread (3) 4.09 % 4.32 %

Net Interest Margin (4) 4.38 % 4.66 %

~~(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.~~

Provision and Allowance 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 allowance to a level, which, according to a systematic process of measurement, reflects the amount management ~~believes~~estimates is needed to absorb probable losses within the portfolio.

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

The allowance for loan losses was ~~$16.2~~$16.5 million on ~~September 30, 2004,~~March 31, 2005, compared to ~~$14.6~~$16.3 million at December 31, ~~2003~~2004 and ~~$15.7~~$14.5 million at ~~September 30, 2003.~~March 31, 2004. The allowance for loan losses represents ~~441%~~258% of non-performing loans at ~~September 30, 2004,~~March 31, 2005, versus ~~489%~~316% and ~~653%~~405% at December 31, ~~2003~~2004 and ~~September 30, 2003,~~March 31, 2004, respectively. When other real estate and repossessions are combined with non-performing loans, the allowance equals ~~303%~~211% of non-performing assets at ~~September 30, 2004~~March 31, 2005 versus ~~283%~~248% and ~~318%~~234% at December 31, ~~2003~~2004 and ~~September 30, 2003,~~March 31, 2004, respectively. The increase in the allowance since ~~September 2003 and December 2003~~March 2004 is primarily attributable to the acquisition of PCB, ~~Bancorp,~~ new loan volume and changes in various qualitative risk factors ~~specific to that portfolio.~~reflecting current portfolio and market conditions. The allowance attributable to the PCB ~~Bancorp~~ portfolio at the date of acquisition was $1.8 million.

~~FCBI’s~~The Company’s allowance for loan loss activity for the ~~nine and~~ three month periods ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ are as follows:


	For the Nine Months Ended						For the Three Months Ended						For the Three Months Ended
	September 30,						September 30,						March 31,
	2004			2003			2004			2003			2005			2004
	(Dollars in Thousands)						(Dollars in Thousands)						(Amounts in Thousands)
Beginning balance	$	14,624		$	14,410		$	16,160		$	15,708		$	16,339		$	14,624
Provision		2,407			2,679			1,152			782			691			532
Balance acquired in acquisitions		1,786			1,584			—			—
Charge-offs		(3,456	)		(4,100	)		(1,312	)		(991	)		(844	)		(911	)
Recoveries		872			1,107			233			181			357			291

Ending balance	$	16,233		$	15,680		$	16,233		$	15,680		$	16,543		$	14,536

~~Based on the allowance for loan losses of approximately $16.2 million, $14.6 million and $15.7 million at September 30, 2004, December 31, 2003, and September 30, 2003, respectively, the~~The allowance to loans held for investment ratio was ~~1.32%~~1.29% at ~~September 30, 2004, 1.43%~~March 31, 2005, 1.32% at December 31, ~~2003~~2004 and ~~1.53%~~1.43% for ~~September 30, 2003.~~March 31, 2004. Management considers the allowance adequate based upon its analysis of the portfolio as of ~~September 30, 2004.~~March 31, 2005.

The provision for loan losses for the ~~nine~~three month period ended ~~September 30, 2004 decreased~~March 31, 2005 increased to ~~$2.4 million~~$691,000 when compared to the ~~nine~~three month period ending ~~September 30, 2003~~March 31, 2004 of ~~$2.7 million.~~$532,000. The ~~decrease~~increase in loss provisions between the periods is ~~largely~~primarily attributable to ~~stable asset quality~~new, or increased, specific allocations, including several in the new PCB portfolio, new loan volume, and ~~improving loan loss history,~~ changes in various qualitative risk ~~factors assigned in certain portfolio segments, offset by an increase in volume within certain portfolio segments.~~factors. Net charge-offs for the first ~~nine months~~quarter of ~~2004~~2005 were ~~$2.6 million,~~$487,000, down ~~13.7%~~21.5% from ~~$3.0 million~~$620,000 for the corresponding period in ~~2003.~~2004. Expressed as a percentage of average loans held for investment, net charge-offs decreased from ~~0.30%~~0.06% for the ~~nine~~three months ended ~~September 30, 2003~~March 31, 2004 to ~~0.22%~~0.04% for the same period of 2004. The decrease in net charge-offs is primarily attributable to an approximate $1.0 million charge-off that occurred during the first quarter 2003. Net charge-offs for the quarters ended September 30, 2004 and September 30, 2003 were $1.1 million, or 0.09%, and $810,000 or 0.08%, respectively, of average loans held for investment.2005.

Non-interest Income

Non-interest income consists of all revenues which are not included in interest and fee income related to earning assets. ~~Total non-interest~~Non-interest income ~~increased approximately $2.0 million, or 17.7%,~~ from ~~$11.1 million~~continuing operations for the nine months ended September 30, 2003 to $13.1 million for the corresponding period in 2004. Along with an increase in deposits stemming from bank acquisitions, service charges on deposit accounts increased $817,000first quarter of 2005 improved by $479,000 or ~~13.8% while other service charges, commissions and fees reflected gains of $378,000 or 23.3%.~~

~~During the three month period ended September 30, 2004, the Company realized a gain on sale of securities of approximately $1.4 million due~~14.8% compared to the sale of $25.0 million of corporate bonds held in the Company’s available-for-sale investment portfolio, the market value of which had declined in step with the flattening of the Treasury yield curve. The proceeds from the sale of these securities in the secondfirst quarter of 2004, ~~provided sufficient liquidity to pay-off overnight borrowings and assisted the Company in funding increased loan demand. These gains, along with smaller gains on securities called, compared to those~~$237,000 of ~~the same period of 2003 reflect a year over year gain of $318,000.~~

~~Fiduciary revenues,~~ which include fees for trust services, increased $37,000 for the third quarter of 2004 versus the corresponding quarter in 2003. These revenues were up $154,000 for the nine months ended September 30, 2004 versus 2003. Fiduciary revenues reported for the three and nine months ended September 30, 2003 included $87,000 and $255,000, respectively, which related to asset management services provided by Stone Capital. These fees have been reclassified to “Other Service charges, Commissions and Fees” in this report to conformis attributable to the ~~classification of Stone Capital fees~~PCB acquisition in 2004. The remaining increase in ~~fiduciary revenues in 2004 relates~~non-interest income was due to both account and asset growth within the trust division which came under new management in early 2004. The increase in fiduciary revenues also includes an increase of $73,000 in mutual fund shareholder service fees which were previously retained by an outsourced investment advisor. The trust division terminated the relationship with the service provider in early 2003. Stone Capital asset management fees also grew from $255,000 in 2003 to $358,000 in 2004 for the nine month periods. This growth reflects the initial stages of expansion of the retail asset management services under SCM and its addition of 2 Investment Advisors and the licensing of a number of Investment Associates within the bank branches. Asset management fees under Stone Capital increased from $87,000continued improvement in the ~~third quarter~~areas of ~~2003 to $152,000 in the current quarter, up 74%, reflecting good early results from the addition of Investment Associates and related annuity sales.~~

Total non-interest income for the third quarter of 2004 was $4.3 million a decrease of $300,000 compared to the third quarter of 2003. Contributing to this decrease was the aforementioned security gains of approximately $1.0 million realized in the third quarter of 2003 while only $60,000 were realized in the third quarter of 2004. Servicetrust services, service charges on deposit accounts, and other service charges, commissions and ~~fees~~fees.

Trust services income increased ~~$363,000 and $175,000, respectively;~~$120,000, or 28.7%, as a result of growth in ~~2004 consistent with the nine-month trend~~trust accounts, trust assets and the ~~impact~~related fees generated by such growth in all areas, including estates, employee benefits and investment related accounts. Service charges on deposit accounts increased $188,000, or 9.6%, $117,000 of which was attributable to the PCB acquisition. ~~Other operating income~~All other service charges, commissions and fees increased ~~$190,000 for the three month period ended September 30, 2004~~$251,000, or 44.9%, compared to the ~~same period~~first quarter of ~~2003 between the two quarters largely due~~2004, of which $57,000 can be attributed to the ~~$150,000 recovery~~PCB acquisition, while ATM service charges increased $98,000. Also included in other service charges commissions and fees were additional fees of ~~escrow funds from~~$66,000 generated by Stone Capital, the ~~terminated UFM buyout.~~Company’s investment advisory service, which has added investment representatives and expanded its offices.

During the first quarter of 2005, the Company completed the planned sale of a tract of land to a charitable foundation, reducing its overall land cost by approximately $750,000. The sale resulted in a pre-tax loss of $232,000, or $.01 per share on an after-tax basis, and allowed the Bank to acquire a prime branch location in a southern West Virginia market. Without this charge, all other operating income would have increased $141,000 for the first quarter of 2005 compared to the first quarter of 2004 ($63,000 attributable to PCB.)

Non-interest Expense

Non-interest expense totaled ~~$35.4~~$12.5 million for the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, increasing ~~$7.7~~$1.6 million or ~~27.8%~~14.5% over the same period of ~~2003.~~2004. This increase is primarily attributable to a ~~$4.5~~$1.2 million increase in salaries and benefits as a result of the ~~addition of CommonWealth Bank in June 2003 ($869,000), the~~ acquisition of PCB in the second quarter of 2004, ($1.2 million), the salaries and benefits associated with three North Carolina de novo branches opened in late 2003, the opening of two new North Carolina loan production offices in the first quarter of 2004 ($1.0 million), and two new loan production offices in Virginia ($98,000), as well as a general increase in salaries and benefits as well as staffing ~~needs at several locations were satisfied in order~~ to support added corporate services and continued branch growth. Other increases included in the overall increase in salaries and benefits included $120,000 in employee health benefits and $278,000 in retirement savings and profit-sharing plans.

For the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, year-to-date occupancy and furniture and equipment expense increased by ~~$1.1 million~~$249,000, or 16.8%, compared to ~~2003.~~2004. The general level of occupancy cost grew largely as a result of the ~~CommonWealth acquisition ($143,000), the~~ PCB Bancorp acquisition ~~($317,000), increases in depreciation and insurance costs associated with new de novo branches ($188,000)~~ and depreciation associated with continued investment in operating equipment and technology infrastructure.

~~For the nine months ended September 30, 2004, all~~ All other operating expense accounts ~~increased $2.0~~remained stable at $3.3 million compared to the same period of 2003. The most significant increases were related to the additional costs associated with the opening of three new branches in Winston-Salem and two loan production offices in Charlotte and Mount Airy, North Carolina ($265,000), the opening of two loan production offices in Virginia ($55,000), the acquisition of CommonWealth in Richmond, Virginia ($109,000) and the Tennessee acquisition of PCB Bancorp ($387,000). Other operational and data processing expenses also increased as a result of the acquisition and branching activity, such as correspondent bank fees ($131,000) and telephone and network charges ($193,000). Also, legal fees ($295,000) and consulting fees ($150,000) increased for the ~~nine months ended 2004 compared to 2003.~~

~~As mentioned in the year-to-date discussion, non-interest expenses for the~~first quarter ended September 30, 2004 compared to the same period of 2003 were significantly impacted by the Company’s acquisition and branching activity. Total non-interest expense for the quarter ended September 30, 2004 increased $2.1 million over the same period in 2003. $1.2 million of this increase was an increase in salaries and benefits. For the three months ended September 30, 2004, occupancy and furniture and fixtures increased $364,000 in aggregate, and amortization of intangibles increased $48,000. For the three months ended September 30, 2004, all other operating expenses increased $467,000, primarily related to acquisition and expansion related expenses.2005.

Income ~~Taxes~~Tax Expense

Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax earnings of the Company. Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the calculation of taxable income. These items are commonly referred to as permanent differences. The most significant permanent differences for the Company include i) income on state and municipal securities which are exempt from federal income tax, ii) certain dividend payments which are deductible by the ~~company,~~Company, iii) tax credits generated by investments in low income housing and iv) for ~~2003 and~~ 2004, goodwill impairment expense which is not ~~deductible, and iv) for the third quarter of 2004, the loss on the sale of the UFM subsidiary which had a significant tax basis over and above its book carrying value.~~deductible.

~~State and municipal income and the dividends deduction are permanent differences that occur on a regular basis.~~ Goodwill impairment expense is infrequent and has historically been related to the UFM subsidiary, which ~~has been sold. The difference related to the excess tax over book basis of the UFM subsidiary~~ was ~~a one time event linked to the sale of the mortgage subsidiary. This item resulted~~sold in ~~a substantial reduction in the effective income tax rate for the three and nine-month periods ended September 30,~~August 2004. ~~This difference arose due to the non-deductible goodwill impairment charges associated with the sale of the UFM subsidiary.~~ Because those charges (expenses) were not deductible, they resulted in permanent differences which increased the effective tax rate in 2003 and the first ~~three~~two quarters of 2004. Goodwill expense, by ~~its very~~ nature, is a permanent difference. ~~These~~As a result, these expenses ~~did, however, reduce~~reduced the carrying basis of the mortgage subsidiary and ~~resulted in~~created a permanent difference tax benefit of approximately $950,000 in the third quarter of 2004 ~~which~~realized upon the sale of the entity. This benefit reduced the combined effective tax ~~for the quarter~~rate in 2004 to ~~12.5%. This compares with a combined effective tax rate of 28.9% for the third quarter of~~25.6% from 29.1% in 2003. ~~The effective tax rate for the nine months ended September 30, 2004 was 22.8% compared with 28.9% for the corresponding period in 2003.~~

Income tax expense is classified according to continuing operations and discontinued operations. The ~~$950,000~~company continues to incur costs related to the UFM subsidiary in the form of non-cancelable leases. These leases created a loss from discontinued operations of approximately $130,000 and an associated tax benefit ~~associated with the loss on the sale~~ of ~~UFM~~$51,000.

The Company is ~~included in Income Tax Benefit — Discontinued Operations on the income statement.~~

~~Throughout 2004 the Company has been~~ engaged in a state tax audit involving state income, franchise and sales tax in one of its state tax jurisdictions. ~~During~~While the ~~third quarter of this year, the company began to receive early~~Company has received indications of the state tax department’s ~~position on various income and franchise tax matters and ultimately received~~ estimates ~~by the state tax representatives,~~ of potential additional state income and franchise tax ~~liabilities. The~~liabilities, the Company’s review of the potential assessments revealed a position which favors the ~~company~~Company and which, if sustained, could result in the Company receiving state income and franchise tax refunds. The Company and tax counsel continue to evaluate possible exposure under the state tax audit as well as the advancement of the ~~more~~referenced favorable tax ~~positions~~position and believe that the Company has established appropriate provisions for state income and franchise taxes ~~within a range of possible outcomes, given~~consistent with the uncertainty of the state tax audit and the potential for changes in the ~~company’s~~Company’s state tax filings.

FINANCIAL POSITION

Total assets At ~~September 30, 2004 total assets~~March 31, 2005 increased ~~by $153.8~~$56.0 million ~~since~~from December 31, ~~2003.~~2004. The increase was primarily driven by the acquisition of PCB Bancorp in April 2004 which added $171.0 million in total assets. Included with the acquisition, which also represents the primary components of other changes to line items of the balance sheet, were the addition of ~~$128.0~~$43.8 million in loans, ~~$21.3 million in goodwill, $4.0 million in premises~~largely generated by the recently established loan production offices, and ~~equipment, $150.0~~increases of $42.8 million in deposits, and ~~$7.1~~$18.4 million in ~~borrowings. In addition, the sale of UFM resulted in a $22.4 million reduction in assets related to the discontinued mortgage banking segment.~~customer repurchase agreements.

Securities

Securities held to maturity totaled $34.7 million at September 30, 2004, a decrease of $3.3 million from December 31, 2003. The decrease is due primarily to paydowns, maturities and calls within the portfolio during the first nine months of 2004. The market value of investment securities held to maturity was 104.7% and 105.4% of book value at September 30, 2004 and December 31, 2003, respectively. Recent trends in interest rates have the effect of reducing the portfolio market value since December 31, 2003 since the market value of debt securities reacts inversely to rate movements.

Securities available for sale were ~~$391.6~~$372.6 million at ~~September 30, 2004~~March 31, 2005 compared to ~~$444.2~~$388.7 million at December 31, ~~2003,~~2004, a decrease of ~~$52.5~~$16.1 million. This change reflects the purchase of ~~$78.0~~$4.6 million in securities, ~~$38.0~~$1.7 million in maturities and calls, proceeds from sales of ~~$48.5~~$3.0 million, ~~the acquisition of $28 million with the PCB Bancorp purchase,~~ a market value decrease of approximately ~~$2.7~~$4.1 million, the continuation of larger pay-downs of ~~$67.1~~$11.5 million on mortgage-backed securities and collateralized mortgage obligations triggered by the low interest rate environment and approximately ~~$1.9~~$456,000 million in bond premium amortization. Securities available for sale are recorded at their estimated fair market value. The unrealized gain or loss, which is the difference between amortized cost and estimated market value, net of related deferred taxes, is recognized in the stockholders’ equity section of the balance sheet as either accumulated other comprehensive income or loss. The unrealized ~~gains~~loss after taxes of ~~$3.4 million~~$106,000 at ~~September 30, 2004, represent~~March 31, 2005, represents a decrease of ~~$1.6~~$2.5 million from the ~~$5.0~~$2.4 million gain at December 31, ~~2003,~~2004, the result of market value ~~adjustments~~changes in reaction to rate movements on similar ~~instruments as well as gains realized on sales completed in the first nine months of 2004.~~instruments.

Although substantial reinvestment has been made in the available for sale security portfolio, the Company has attempted to maintain a shorter portfolio duration (the cash-weighted term to maturity of the portfolio) to reduce the sensitivity of the ~~bond’s~~portfolio’s price to changes in interest rates and lessen interest rate risk. The longer the duration, the greater the impact of changing market rates for similar instruments. At ~~September 30, 2004,~~March 31, 2005, the average estimated life of the investment portfolio was ~~4.0~~4.5 years (reflective of currently anticipated prepayments)~~. This compares to~~ up slightly from 4.2 years at December 31, ~~2003. The approximate 2 month decrease in average duration reflects the focus on investing in shorter duration instruments given the current interest rate environment.~~2004.

The ~~Registrant’s~~Company’s available-for-sale securities portfolio is reported at fair value. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Available-for-sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of each individual investment such as the length of time the fair value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and the ~~Registrant’s~~Company’s intent and ability to hold the security to recovery or maturity. ~~A decline~~

Securities held to maturity totaled $32.0 million at March 31, 2005, a decrease of $2.2 million from December 31, 2004. The decrease is due primarily to paydowns, maturities and calls within the portfolio during the first quarter of 2005. The market value of investment securities held to maturity was 103.5% and 104.1% of book value at March 31, 2005 and December 31, 2004, respectively. Recent trends in interest rates have had little effect on the portfolio market value ~~that is considered~~since December 31, 2004, due to ~~be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements~~its larger percentage of ~~Income.~~municipal securities which display less price sensitivity to rate changes.

Loan Portfolio

Loans Held for Sale:As mentioned previously in this report, UFM was sold during the third quarter 2004. The loans held for sale by UFM in prior periods are carried as assets related to discontinued operations on the balance sheet and have been removed from continuing operations. The ~~remaining~~ $1.2 million balance of loans held for sale at ~~September 30, 2004~~March 31, 2005 is held by the Bank, largely through the newly acquired branches in Tennessee.

~~The process employed by the Tennessee branches acquired from PCB Bancorp is to sell these~~ These longer-term loans are sold to ~~an investor~~investors on a best efforts basis, ~~such that~~accordingly, the Company does not ~~absorb~~retain the interest rate risk involved in the commitment. The gross notional amount of outstanding commitments at ~~September 30, 2004~~March 31, 2005 was ~~$2.7~~$5.8 million on 2162 loans. ~~The underlying value of this pipeline is immaterial to the Company's financial statements as a whole but will continue to be evaluated for significant changes.~~

Loans Held for Investment:Total loans held for investment increased ~~$203.1~~$43.8 million to ~~$1.23~~$1.28 billion at ~~September 30, 2004~~March 31, 2005 from the ~~$1.03~~$1.24 billion level at ~~both~~ December 31, ~~2003~~2004 and ~~September 30, 2003,~~increased $262.7 million from March 31, 2004, largely the result of the PCB ~~Bancorp~~ acquisition ~~($130.0 million)~~ and increased loan production. Considering the ~~$137.0~~$42.8 million increase in deposits ~~($144.2 million from the PCB Bancorp acquisition) along with the $203.1 million increase in loans~~ during the first ~~nine months~~quarter of ~~2004,~~2005, the loan to deposit ratio increased slightly to 91.5% at ~~September 30, 2004~~March 31, 2005 compared to ~~the~~91.2% at December 31, ~~2003 level.~~2004. The 91.5% loan to deposit ratio ~~was 90.2% at September 30,~~for the first quarter of 2005 reflected increased loans and deposits of $262.7 million and $159.2 million, respectively, compared to the first quarter of 2004 ~~83.4% on December 31, 2003 and 83.4% at September 30, 2003.~~ratio of 82.1%.

~~2004 year to date~~2005 year–to-date average loans held for investment of ~~$1.13~~$1.26 billion increased ~~$176.2~~$244.2 million when compared to the average for the first ~~nine months~~quarter of ~~2003~~2004 of ~~$957.5 million. This~~$1.02 billion. The increase was largely due to the ~~June 6, 2003 CommonWealth~~PCB acquisition ~~(approximately $89 million) as well as~~and loan growth from the ~~PCB Bancorp acquisition (approximately $68 million).~~new branch and loan production offices.

The held for investment loan portfolio continues to be diversified among loan types and industry segments. The following table presents the various loan categories and changes in composition as of ~~September 30, 2004,~~March 31, 2005, December 31, ~~2003~~2004 and ~~September 30, 2003.~~March 31, 2004.

2825

Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or more and still accruing interest, other real estate owned (“OREO”) and repossessions. Non-performing assets were ~~$5.4~~$7.8 million at ~~September 30, 2004, $5.2~~March 31, 2005, $6.6 million at December 31, ~~2003~~2004, and ~~$4.9~~$6.2 million at ~~September 30, 2003.~~March 31, 2004. The percentage of non-performing assets to total loans, OREO and repossessions was ~~0.4%~~0.6% for the first quarter 2005, consistent with the third and fourth quarters ~~ended September 30,~~of 2004 at 0.5% and ~~June 30, 2004 compared to 0.5% for the quarter ended September 30, 2003.~~0.6%, respectively.

The following schedule details non-performing assets by category at the close of each of the last five quarters:

At ~~September 30, 2004,~~March 31, 2005, non-accrual loans increased ~~$1.0~~$1.3 million from ~~June 30,~~December 31, 2004, while ninety day past due and accruing loans remained at zero. The increase in non-accrual is primarily attributable to the acquisition of PCB. Ongoing activity within the classification and categories of non-performing loans continues to include collections on delinquencies, foreclosures and movements into or out of the non-performing classification as a result of changing customer business conditions. ~~The $1.0~~OREO of $1.4 million ~~increase in non-accrual loans during~~remained consistent with the ~~third~~fourth quarter of 2004 ~~is largely the result of two credits~~but was down $1.2 million or 46.0% from the ~~Tennessee market. The addition~~March 31, 2004 level of ~~the two credits from the Tennessee market aggregated $1.4 million. The first credit in the amount of $728,000 is secured by commercial real estate~~$2.6 million and the Bank is in the process of resolution and liquidation. The second credit in the amount of $645,000 was secured by inventory. The inventory was destroyed by fire. The Bank is pursuing collection from the insurance company. Full collection of this credit is anticipated. OREO decreased $530,000 at September 30, 2004 from June 30, 2004 as a result of liquidation of real estate or write-down to fair market value. Other real estate owned is carried at the lesser of estimated net realizable ~~fair market~~ value or cost.

In addition to loans which are classified as non-performing, 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 ~~September 30, 2004~~March 31, 2005 was a loan of $12.2 million which warrants close

monitoring of a borrower within the hospitality industry. The loan represents the retained portion of a $16 million total loan shared with a participating bank. 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.~~entity certain of which are considered to be substantial. 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 ~~September 30, 2004.~~March 31, 2005. This loan does, however, represent one of the Company’s largest credits and is within an industry which has suffered from declining performance in recent years.

~~The Company is also monitoring a $3.1 million~~ This 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 $1.3 million loan by the SBA. The $3.1 million senior loan experienced delinquency during the second quarter. The borrower requested conversion to interest only payments for a period of one year to allow for stabilization of occupancy and cash flow for the property. The Company delayed consideration of the modification request until the principals restored the loan to current status. Subsequent payments of principal and interest were made by the borrower which brought the loan current. The loan has remained current since modification. Quarterly monitoring of the credit indicates that the occupancy and cash flow has improved.

~~These loans were~~ appropriately considered in evaluating the adequacy

of the allowance for loan ~~losses.~~losses and there were no specific allocations of the allowance for loan losses for the foregoing potential problem loan as of March 31, 2005.

Deposits and Other Borrowings

Total deposits grew by ~~$137.1~~$42.8 million or ~~11.2%~~3.2% during the ~~nine months ended September 30, 2004, largely as a result~~first quarter of ~~the PCB acquisition in April, 2004 ($144.2 million). Non-interest-bearing~~2005. Non interest-bearing demand deposits ~~increased $24.8 million ($19.3 million PCB Bancorp acquisition) or 12.77%. Interest-bearing~~remained stable, decreasing slightly by $758,000 while interest-bearing demand deposits increased ~~$78.1~~$4.2 million. Savings decreased $20.2 million ~~($73.3 million PCB Bancorp), savings deposits increased $31.7 million ($30.0 million PCB Bancorp)~~ and time deposits increased ~~$2.4~~$59.6 million, ~~during~~or 9.9%. The attrition from savings and the ~~nine months ended September 30, 2004. Although PCB Bancorp contributed $21.5 million~~increase in time deposits reflect migration of customer funds in response to the upward movement in time deposit interest rates.

An additional advance in the ~~third~~first quarter of ~~2004, that increase was largely offset by time deposit portfolio attrition in existing portfolios due to strong rate competition and~~2005 increased the Company’s focus on lower cost non-maturity deposits. The Company has attempted to control the cost of the time deposit portfolio which resulted in attrition of time deposits. Total interest-bearing deposits grew $112.2 million during the nine months ended September 30, 2004 including $124.8 million from the PCB Bancorp acquisition resulting in a 10.9% increase from December 31, 2003.

~~During 2004, the Company paid off a line of credit used to fund mortgages held by UFM and acquired an additional $7.1 million in borrowed funds from the~~ FHLB ~~with the acquisition of PCB Bancorp bringing the Company’s borrowings at September 30, 2004 to $107.5 million in~~ convertible and callable ~~advances and $34.6 million of noncallable~~borrowings at March 31, 2005 to $132.4 million. Noncallable term advances ~~from~~remained the ~~FHLB of Atlanta.~~same at $9.4 million. For further discussion of FHLB borrowings, see the Borrowings Note 7 to the unaudited consolidated financial statements included in this report. ~~In addition, FCBI issued trust preferred securities in September 2003 of $15.0~~Securities sold under repurchase agreements increased $18.4 million ~~which are also included~~ in the ~~total borrowings~~first quarter of 2005. There were no federal funds purchased outstanding at March 31, 2005, as the ~~Company.~~Company experienced increased liquidity in the first quarter of 2005.

Stockholders’ Equity

Total stockholders’ equity ~~was $180.8 million at September 30, 2004, increasing $5.8~~increased $1.0 million from ~~the $175.0 million reported at~~ December 31, ~~2003 through~~2004 as the Company continued to balance capital adequacy and returns to stockholders. The increase in equity was due mainly to net earnings of ~~$16.3 million less dividends paid of $8.4~~$6.0 million, a decrease in other comprehensive income of ~~$1.6~~$2.5 million, ~~increases~~and dividends paid to stockholders of ~~$88,000 due to Stone Capital payments, a $665,000 increase due to stock option exercises and a net decrease due to treasury share transactions of $1.2~~$2.9 million.

The FRB’s risk based capital guidelines and leverage ratio measure capital adequacy of banking institutions. Risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. At ~~September 30, 2004,~~March 31, 2005, the Company’s total risk adjusted capital-to-asset ratio was ~~11.72%~~11.63% versus ~~14.55%~~12.09% at December 31, ~~2003.~~2004. The Company’s leverage ratio at ~~September 30, 2004~~March 31, 2005 was ~~7.40%~~7.70% compared with ~~8.83%~~7.62% at December 31, ~~2003.~~2004. Both the risk adjusted capital-to-asset ratio and the leverage ratio exceed the current well-capitalized levels prescribed for banks of 10% and 5%, respectively.

PART I. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Liquidity and Capital Resources

The Company maintains a significant level of liquidity in the form of cash and cash equivalent balances ~~($55.1 million),~~of $83.3 million, investment securities available for sale ~~($391.6 million)~~of $372.6 million, and FHLB credit availability of approximately ~~$404.3~~$421.6 million. Cash and cash equivalents as well as advances from the FHLB are immediately available for satisfaction of deposit withdrawals, customer credit needs and operations of the Company. Investment securities available for sale represent a secondary level of liquidity available for conversion to liquid funds in the event of extraordinary needs. The Company also maintains approved lines of credit with correspondent banks as backup liquidity sources.

The Company maintains a liquidity policy as a means to manage the liquidity risk process and associated risk. The policy includes a Liquidity Contingency Plan (“Liquidity Plan”) that is designed as a tool for the Company to detect liquidity issues promptly in order to protect depositors, creditors and shareholders. The Liquidity Plan includes monitoring various internal and external indicators such as changes in core deposits and changes in market conditions. It provides for timely responses to a wide variety of funding scenarios ranging from changes in loan demand to a decline in the Company’s quarterly earnings to a decline in the market price of the Company’s stock. The Liquidity Plan calls for specific responses designed to meet a wide range of liquidity needs based upon assessments on a recurring basis by management and the Board of Directors.

Interest Rate Risk (IRR) and Asset/Liability Management

While the Company continues to strive to decrease its dependence on net interest income, the Bank’s profitability is dependent to a large extent upon its ability to manage its net interest margin. 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. Specific strategies for management of IRR have included shortening the amortized maturity of fixed-rate loans and increasing the volume of adjustable rate loans to reduce the average maturity of the Bank’s interest-earning assets.

The Company’s risk profile continues to reflect a position that is asset sensitive. The substantial level of prepayments and calls on loans and securities are consistent with the extended low rate environment that ~~prevailed over the past year.~~has prevailed. In addition, the success of deposit funding campaigns has led to a strong liquidity position as reflected in the level of cash reserves and due

from balances of approximately ~~$55.1~~$34.3 million at ~~September 30, 2004.~~March 31, 2005. The Company continues to reinvest the funds generated from asset paydowns and prepayments within a framework that attempts to maintain an acceptable net interest margin in the current interest rate environment.

The Company’s earnings sensitivity measurements completed on a quarterly basis indicate that the performance criteria, against which sensitivity is measured, are currently within the Company’s defined policy ~~limits.~~limits, which are triggered at a 10% reduction in projected net interest income. A more complete discussion of the overall interest rate risk is included in the Company’s Annual Report on Form 10-K for December 31, ~~2003.~~2004.

PART I. ITEM 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the 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 subsidiaries) required to be included in the Company’s periodic SEC filings.

~~As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and associated rules, the Company will be required to include~~ There have not been any changes in ~~its Annual Report on Form 10-K for the year ending December 31, 2004 a report on management’s assessment of the effectiveness of~~ the Company’s internal ~~control~~controls over financial ~~reporting. As part of~~reporting during the process of preparing for compliance with the Section 404 requirements, the Company has conducted, under the supervision of senior management, a review of its internal control over financial reporting. As a result, management has made improvementsmost recent fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control through the date of filing of this report as part of its normal review process. The Company’s management believes that these changes in internal control will only serve to improve the Company’s internal control through the addition of added processes to enhance controlcontrols over ~~general ledger access and certain approvals for additions to payroll and payroll master files for one division within the Company.~~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

PART II. OTHER INFORMATION

~~Item~~ITEM 1. Legal Proceedings

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

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

(a)   Not Applicable
(b)   Not Applicable
(c)   Issuer Purchases of Equity Securities

~~(b) Not Applicable~~

~~(c) Issuer Purchases of Equity Securities~~ The following table sets forth purchases by the Company (on the open market) of its equity securities during the ~~three months~~quarter ended ~~September 30, 2004.~~March 31, 2005.

��
Maximum
Number of
Total Number of Shares that
Total # of Average Shares Purchased May yet be
Shares Price Paid as Part of Publicly Purchased
Purchased
per Share
Announced Plan
Under the Plan
July 1-31, 2004 — $ — — 314,411
August 1-31, 2004 — — — 319,957
September 1-30, 2004 80 31.38 80 323,849

Total 80 $ 31.38 80


							Maximum
							Number of
					Total Number of		Shares that
	Total # of		Average		Shares Purchased		May yet be
	Shares		Price Paid		as Part of Publicly		Purchased
	Purchased		per Share		Announced Plan		Under the Plan
January 1-31, 2005		303	$	32.63		303		281,000
February 1-28, 2005		—	$	—		—		281,000
March 1-31, 2005		—	$	—		—		281,000

Total		303	$	32.63		303

The Company’s stock repurchase plan allowing the purchase of up to 436,000 shares was announced September 18, 2001, amended by the Board of Directors to 500,000 shares on March 18, 2003 and again on May 18, 2004 to purchase up to 550,000 shares. The plan has no expiration date and ~~no plans have expired during the reporting period. No determination has been made to terminate the plan or to stop making purchases.~~remains open.

~~Item~~ITEM 3. Defaults Upon Senior Securities

Not Applicable

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

Not Applicable

~~Item~~ITEM 5. Other Information

Not Applicable

3229

Item 6. Exhibits ~~and Reports on Form 8-K~~

(a) Exhibits


~~Exhibit No.~~		~~Exhibit~~

	Exhibit No.		Exhibit
	3(i)		Articles of Incorporation of First Community Bancshares, Inc., as amended. (1)
	3(ii)
~~3(ii)~~		Bylaws of First Community Bancshares, Inc., as amended. (1)
	4.1
~~4.1~~		Specimen stock certificate of First Community Bancshares, Inc. (6)
	4.2
~~4.2~~		Indenture Agreement dated September 25, 2003. (10)
	4.3
~~4.3~~		Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. (10)
	4.4
~~4.4~~		Preferred Securities Guarantee Agreement dated September 25, 2003. (10)*
	10.1
~~10.1~~		First Community Bancshares, Inc. 1999 Stock Option Contracts (1) and Plan. (2)*
	10.1.1
~~10.1.1~~		Amendment to the First Community Bancshares, Inc. 1999 Stock Option Plan (11)*
	10.2
~~10.2~~		First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (3)*
	10.3
~~10.3~~		Employment Agreement dated January 1, 2000 and amended October 17, 2000, between First Community Bancshares, Inc. and John M. Mendez. (1)(4)*
	10.4
~~10.4~~		First Community Bancshares, Inc. 2000 Executive Retention Plan. (2)*
	10.5
~~10.5~~		First Community Bancshares, Inc. Split Dollar Plan and Agreement. (2)*
	10.6		First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second Amendment (B. W. Harvey, Sr.-October 19, 2004). (1)*
~~10.6~~	10.6.1		First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. (1)*
	10.7
~~10.7~~		First Community Bancshares, Inc. Wrap Plan. (6)*
	10.8
~~10.8~~		Employment Agreement between First Community Bancshares, Inc. and J. E. Causey Davis. (7)*
	10.9
~~10.9~~		Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors and Certain Executive Officers. (8)*
	10.10
~~10.10~~		Form of Indemnification Agreement between First Community Bank, N. A., its Directors and Certain Executive Officers. (8)*

~~10.11~~		First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan. (9)*
	10.12
~~10.12~~		First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan-Stock Award Agreement (12)*
	11.0
~~11.0~~		Statement regarding computation of earnings per share. (5)
	15.0
~~15.0~~		Acknowledgement of Independent ~~Auditors.~~Registered Public Accounting Firm.
	31.1
~~31.1~~		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
	31.2
~~31.2~~		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
	32
32		Certification of Chief Executive and Chief Financial Officer Section 1350.

Management contract or compensatory plan or arrangement.

3330

(1)    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002 filed on August 14, 2002.

(2)    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.

(3)    The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002 filed on August 14, 2002.

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

(5)    Incorporated by reference from Footnote 119 of the Notes to Consolidated Financial Statements included herein.

(6)    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.

(7)    Incorporated by reference from S-4 Registration Statement filed on March 28, 2003. The Company has entered into a substantially identical contract with Phillip R. Carriger dated March 31, 2004.

(8)    Form of indemnification agreement entered into by the Corporation and by First Community Bank, N. A. with their respective directors and certain officers of each including, for the registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, Kenneth P. Mulkey, E. Stephen Lilly and at the Bank level: Samuel L. Elmore. Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002 filed on March 25, 2003, as amended on March 31, 2003.

(9)    Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 19, 2004.

(10)    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003 filed on November 10, 2003.

(11)    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March 31, 2004 filed on May 7, 2004.

(12)    Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2004 filed on August 6, 2004.
(13)   Amendments in substantially similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford and Stafford II but are not filed herewith.

3431


/s/ John M. Mendez

John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)

DATE: May 10, 2005

/s/ Robert L. Schumacher

Robert L. Schumacher
Chief Financial Officer
(Principal Accounting Officer)


			REFERENCE
PART I.	FINANCIAL INFORMATION
	~~Item 1. Financial Statements~~
	Item 1. Financial Statements

	Consolidated Balance Sheets as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003~~2004			3
	Consolidated Statements of Income for the Three ~~and Nine~~ Month Periods Ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~			4
	Consolidated Statements of Cash Flows for the ~~Nine~~Three Month Periods Ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~			5
	Consolidated Statements of Changes in Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~			6
	Notes to Consolidated Financial Statements			~~7-16~~7-15
	Report of Independent Registered Public Accounting Firm			1716

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		~~18-30~~17-27

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		3127

	Item 4.	Controls and Procedures		3128

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings		3229

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3229

	Item 3.	Defaults Upon Senior Securities		3229

	Item 4.	Submission of Matters to a Vote of Security Holders		3229

	Item 5.	Other Information		3229

	Item 6.	Exhibits		3330

SIGNATURES				3532
Exhibit 15
Exhibit 31.1
Exhibit 31.2
Exhibit 32


	Nine Months Ended						Three Months Ended
	September 30			September 30			September 30			September 30
	2004			2003			2004			2003
Interest Income:
Interest and fees on loans held for investment	$	56,195		$	52,465		$	19,953		$	18,591
Interest on securities-taxable		9,659			9,589			2,960			3,070
Interest on securities-nontaxable		4,985			4,851			1,642			1,552
Interest on federal funds sold and deposits in banks		395			482			94			124

Total interest income		71,234			67,387			24,649			23,337

Interest Expense:
Interest on deposits		13,830			15,393			4,702			4,934
Interest on short-term borrowings		5,449			4,203			2,020			1,485
Interest on other debt		643			447			226			150

Total interest expense		19,922			20,043			6,948			6,569

Net interest income		51,312			47,344			17,701			16,768
Provision for loan losses		2,407			2,679			1,152			782

Net interest income after provision for loan losses		48,905			44,665			16,549			15,986

Noninterest Income:
Fiduciary income		1,429			1,275			499			462
Service charges on deposit accounts		6,722			5,905			2,461			2,098
Other service charges, commissions and fees		2,000			1,877			728			640
Other operating income		1,435			881			530			340
Gain on sale of securities		1,509			1,191			60			1,038

Total noninterest income		13,095			11,129			4,278			4,578

Noninterest Expense:
Salaries and employee benefits		19,582			15,097			6,807			5,631
Occupancy expense of bank premises		2,659			2,208			913			752
Furniture and equipment expense		2,108			1,427			735			532
Core deposit amortization		287			178			112			64
Other operating expense		10,737			8,769			3,670			3,203

Total noninterest expense		35,373			27,679			12,237			10,182

Income from continuing operations before income taxes		26,627			28,115			8,590			10,382
Income tax expense		6,817			8,133			1,968			3,164

Income from continuing operations		19,810			19,982			6,622			7,218
Loss from discontinued operations before income tax		(5,531	)		(64	)		(1,266	)		(1,621	)
Income tax benefit		(2,006	)		(26	)		(1,054	)		(632	)

Loss from discontinued operations	$	(3,525	)	$	(38	)	$	(212	)	$	(989	)

Net income	$	16,285		$	19,944		$	6,410		$	6,229

Basic earnings per common share	$	1.45		$	1.81		$	0.57		$	0.55

Diluted earnings per common share	$	1.44		$	1.79		$	0.57		$	0.55

Basic earnings per common share from continuing operations	$	1.76		$	1.81		$	0.59		$	0.64

Diluted earnings per common share from continuing operations	$	1.75		$	1.79		$	0.58		$	0.64

Weighted average basic shares outstanding		11,235,462			11,047,199			11,231,973			11,262,180

Weighted average diluted shares outstanding		11,331,718			11,143,175			11,326,999			11,383,941


	Nine Months Ended
	September 30
	2004			2003
Cash flows from operating activities:
Net income from continuing operations	$	19,810		$	19,982
Adjustments to reconcile net income from continuing operations to net cash (used in) provided by operating activities:
Provision for loan losses		2,407			2,679
Depreciation of premises and equipment		2,008			1,352
Core deposit amortization		287			178
Purchase price accounting accretion		(149	)		(157	)
Net investment amortization and accretion		1,880			2,179
Net gain on the sale of assets		(1,763	)		(1,203	)
Mortgage loans originated for sale		(18,994	)		(26,296	)
Proceeds from sale of mortgage loans		18,255			26,955
Decrease (increase) in interest receivable		489			(238	)
Increase in other assets		(1,082	)		(2,727	)
Increase (decrease) in other liabilities		1,418			(3,014	)

Net cash provided by operating activities from continuing operations		24,566			19,690

Cash flows from investing activities:
Proceeds from sales of securities available for sale		49,951			9,375
Proceeds from maturities and calls of securities available for sale		105,065			113,224
Proceeds from maturities and calls of securities held to maturity		3,834			1,653
Purchase of securities held to maturity		—			(75	)
Purchase of securities available for sale		(78,012	)		(220,859	)
Net (increase) decrease in loans made to customers		(59,880	)		67,846
Purchase of premises and equipment		(5,077	)		(5,315	)
Sale of equipment		359			59
Net cash (used in) provided by acquisitions		(26,325	)		1,562

Net cash used in investing activities from continuing operations		(10,085	)		(32,530	)

Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits		10,619			(1,269	)
Net decrease in time deposits		(22,325	)		(11,154	)
Net increase in FHLB and other indebtedness		2,629			16,263
Issuance of trust preferred securities		—			14,560
Repayment of other borrowings		(13	)		(8,013	)
Acquisition of treasury stock		(1,195	)		(4,319	)
Dividends paid		(8,427	)		(8,038	)

Net cash used in financing activities from continuing operations		(18,712	)		(1,970	)

Net cash used in discontinued operations		—			(577	)

Cash and Cash Equivalents:
Net decrease in cash and cash equivalents		(4,231	)		(15,387	)
Cash and cash equivalents at beginning of period		59,309			124,585

Cash and cash equivalents at end of period	$	55,078		$	109,198

Cash and cash equivalents consist of the following:
Cash and cash equivalents from continuing operations	$	55,078		$	107,224
Cash and cash equivalents from discontinued operations		—			1,974

	$	55,078		$	109,198


	September 30		June 30		March 31		December 31		September 30		March 31		December 31		September 30		June 30		March 31
(In Thousands)	2004		2004		2004		2003		2003
											2005		2004		2004		2004		2004
											(Amounts in Thousands)

Non-accrual	$	3,679	$	2,630	$	3,588	$	2,993	$	2,277	$	6,419	$	5,168	$	3,679	$	2,630	$	3,588
Ninety days past due and accruing		—		—		—		—		124		—		—		—		—		—
Other real estate owned		1,636		2,166		2,571		2,091		2,403		1,389		1,419		1,636		2,166		2,571
Repossessions		40		92		60		75		125		26		1		40		92		60

	$	5,355	$	4,888	$	6,219	$	5,159	$	4,929	$	7,834	$	6,588	$	5,355	$	4,888	$	6,219

Restructured loans performing in accordance with modified terms	$	368	$	382	$	392	$	356	$	362	$	344	$	354	$	368	$	382	$	392

	(a)	Not Applicable

	(b)	Not Applicable

	(c)	Issuer Purchases of Equity Securities

			��
							Maximum
							Number of
					Total Number of		Shares that
	Total # of		Average		Shares Purchased		May yet be
	Shares		Price Paid		as Part of Publicly		Purchased
	Purchased		per Share		Announced Plan		Under the Plan
July 1-31, 2004		—	$	—		—		314,411
August 1-31, 2004		—		—		—		319,957
September 1-30, 2004		80		31.38		80		323,849

Total		80	$	31.38		80

(1)		Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002 filed on August 14, 2002.

(2)		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.

(3)		The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002 filed on August 14, 2002.

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

(5)		Incorporated by reference from Footnote 119 of the Notes to Consolidated Financial Statements included herein.

(6)		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.

(7)		Incorporated by reference from S-4 Registration Statement filed on March 28, 2003. The Company has entered into a substantially identical contract with Phillip R. Carriger dated March 31, 2004.

(8)		Form of indemnification agreement entered into by the Corporation and by First Community Bank, N. A. with their respective directors and certain officers of each including, for the registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, Kenneth P. Mulkey, E. Stephen Lilly and at the Bank level: Samuel L. Elmore. Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002 filed on March 25, 2003, as amended on March 31, 2003.

(9)		Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 19, 2004.

(10)		Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003 filed on November 10, 2003.

(11)		Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March 31, 2004 filed on May 7, 2004.

(12)		Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2004 filed on August 6, 2004.

(13)	Amendments in substantially similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford and Stafford II but are not filed herewith.