10-K 1 fc-10k.txt SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission File Number: 0-19618 FIRST COMMUNITY BANCSHARES, INC. (Exact name of registrant as specified in its charter) Indiana 35-1833586 (State or other jurisdiction of incorporation (IRS Employer Identification No.) or organization) 136 East Harriman Bargersville, Indiana 46106 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (317) 422-5171 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K [ ]. Aggregate market value of common stock held by non-affiliates computed by reference to the sale price of such stock as of March 1, 2002 $10,481,000 Shares of common stock outstanding as of March 1, 2002: 1,042,926 DOCUMENT INCORPORATED BY REFERENCE. The Registrant's definitive proxy statement for the 2002 annual meeting of shareholders to be filed within 120 days of the close of the Registrant's fiscal year is incorporated by reference into Part III of this report. FORM 10-K TABLE OF CONTENTS Page Forward Looking Statement....................................................3 PART I Item 1. Business...........................................................3 Item 2. Properties........................................................12 Item 3. Legal Proceedings.................................................13 Item 4. Submission of Matters to a Vote of Security Holders...............13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........................................................13 Item 6. Selected Financial Data...........................................14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........22 Item 8. Financial Statements and Supplementary Data.......................22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................................22 PART III Item 10. Directors and Executive Officers of the Registrant................22 Item 11. Executive Compensation............................................22 Item 12. Security Ownership of Certain Beneficial Owners and Management....22 Item 13. Certain Relationships and Related Transactions....................22 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...23 Signatures..................................................................25 2 FORWARD LOOKING STATEMENT This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Registrant (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Registrant. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates; loss of deposits and loan demand to other financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; unemployment rates in areas serviced by First Community; and changes in monetary policy or regulatory changes. PART I Item 1. Business General First Community Bancshares, Inc. (the "Registrant") is primarily a one-bank holding company and was incorporated in 1991. The Registrant's primary asset is its wholly-owned banking subsidiary, First Community Bank & Trust ("First Community"), an Indiana-chartered commercial bank formerly known as Bargersville Federal Savings Bank. The Registrant is also the sole shareholder of First Community Real Estate Management, Inc. ("FCREMI"), which owns and leases branch offices to First Community. At December 31, 2001, the Registrant had approximately $147.4 million of assets, net loans of approximately $126.1 million, deposits of approximately $117.7 million and stockholders' equity of approximately $10.2 million. First Community has offices located in Bargersville, Greenwood, Franklin, Indianapolis, Trafalgar, Whiteland, Edinburgh, and North Vernon, Indiana. As of December 31, 2001, First Community had 91 full time equivalent employees. Neither the Registrant nor FCREMI has any employees. In November 1999, the Registrant signed a definitive agreement to acquire Blue River Federal Savings Bank ("Blue River"), Edinburgh, Indiana. This agreement was subsequently terminated in November 2000. The process for obtaining regulatory approval had become prolonged and the Registrant had other priorities to which it wanted to give attention. First Community's deposits are insured to the maximum extent permitted by law by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). First Community is a member of the Federal Home Loan Bank ("FHLB") of Indianapolis. First Community is subject to comprehensive regulation, examination and supervision by the Indiana Department of Financial Institutions ("DFI") and the FDIC. The Registrant is subject to regulation by the Federal Reserve Board. The Federal Reserve Board, as a condition of the acquisition of First Community, required the Registrant to make a commitment not to incur debt in excess of a 30% debt-to-equity ratio on an unconsolidated basis. As of December 31, 2001, the Registrant's debt-to-equity ratio on an unconsolidated basis was 9.8%. The business of First Community consists primarily of attracting deposits from the general public, originating residential real estate, commercial and consumer loans and purchasing other types of investments. In addition, First Community originates first mortgage income-producing property real estate loans, second mortgage one-to-four family home loans, secured home improvement loans, and savings deposit secured loans. Consumer loans include, among others, new and used automobile and other secured and unsecured personal loans. First Community offers commercial loans to area businesses in addition to new home construction loans and business lines of credit. First Community also invests in various US Treasury, federal agency, state, municipal and other investment securities permitted by applicable laws and regulations. The principal sources of funds for First Community's lending activities include deposits received from the general public, amortization and repayment of loans, sales of residential mortgages to the Federal National Mortgage Association ("FNMA"), maturity and sale of investment securities and FHLB advances. 3 First Community's primary sources of income are interest on loans, investment securities and interest-bearing deposits in other financial institutions and service charges on deposit accounts. Its principal expenses are interest paid on deposit accounts and borrowings, salaries and employee benefits, premises and equipment expenses and other overhead expenses incurred in the operation of First Community. Lending Activities First Community's loans, before adjusting for direct loan origination costs and the allowance for loan losses, totaled $127.1 million at December 31, 2001. Of this amount, approximately $74.5 million or 58.6% represented fixed rate loans and adjustable rate loans comprised $52.6 million or 41.4%. The following table sets forth information concerning the composition of First Community's loan portfolio in dollar amounts and percentages.

The following table sets forth certain information at December 31, 2001, regarding the dollar amount of loans maturing in First Community's loan portfolio based on contractual maturities. Demand loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter. Certain mortgage loans such as construction loans and second mortgage loans are included in the commercial and installment loan totals below. In addition, commercial real estate loans are included in mortgage loans below. 4

The following table sets forth, as of December 31, 2001, the dollar amount of all loans maturing after December 31, 2002 showing those having a fixed interest rate and floating or adjustable interest rates.

The original contractual loan payment period for adjustable interest rate residential loans originated by First Community normally ranges from 15 to 30 years. Current fixed rate mortgage originations may not exceed a 30-year term. Because borrowers may refinance or prepay their loans, however, such loans normally remain outstanding for a substantially shorter period of time. Origination, Purchase and Sale of Loans. Interest rates charged by First Community on its loans are affected primarily by loan demand and the supply of funds available for lending. These factors are in turn affected by general economic conditions and monetary policies of the federal government, including the Federal Reserve Board, the general supply of money in the economy, legislative tax policies and governmental budgetary matters. Loan originations are derived from a number of sources. Residential loan originations are attributable primarily to solicitation by First Community's staff, referrals from real estate brokers, builders and walk-in customers. Multifamily and other commercial real estate loan originations are obtained from previous borrowers and direct contact with First Community. All property securing real estate loans made by First Community is appraised in accordance with applicable regulations of the FDIC and includes an actual inspection of such property by designated fee appraisers. First Community has also purchased participations in tax-exempt leases. First Community has sold commercial real estate loans, from time to time, to other participating financial institutions. This type of activity is intended to reduce credit risk, enable additional credit extensions to large borrowers and for general liquidity needs of First Community. First Community retains servicing rights on these participations and receives servicing fees ranging from .125% to .375%. There were eleven commercial real estate loan participations with an aggregate outstanding principal balance of $3.2 million as of December 31, 2001, as compared to three participations with an aggregate outstanding principal balance of approximately $522,000 as of December 31, 2000. The largest outstanding loan participation of this type was $500,000 at December 31, 2001. 5 Residential Mortgage Loans. Residential mortgage loans have been predominantly secured by single-family homes. To reduce its exposure to changes in interest rates, First Community currently originates both adjustable rate mortgages ("ARMs") and fixed-rate mortgages for the loan portfolio. In addition, First Community began selling residential fixed-rate mortgages to FNMA with servicing retained during the year ended December 31, 2001. First Community offers residential construction mortgage loans with maturities of six months or less at interest rates which vary with current market rates. The application process includes the same items which are required for other residential mortgage loans and includes a submission of accurate plans, specifications and costs of the property to be constructed. These items are used as a basis to determine the appraised value of the subject property. Appraisal reports are completed by designated fee appraisers, and loans are based on the current appraised value. Loans of up to 80% of the appraised value may be offered for a maximum period of six months for the construction of the properties securing the loans. Extensions are permitted, when circumstances warrant, if construction has continued satisfactorily and the loan is current. As was previously mentioned, First Community began selling residential fixed-rate mortgages to FNMA during the year ended December 31, 2001. This decision was made in order to offer competitive fixed rate mortgages without exposing First Community to interest rate risk, provide mortgage banking income and to enhance liquidity at times. First Community retains servicing rights on these mortgage sales and receives servicing fees ranging from .250% to .375% on the outstanding principal balances of these loans. As of December 31, 2001, First Community was servicing 32 residential mortgage loans for FNMA with outstanding principal balances of approximately $2.6 million. All mortgage loans in excess of $300,000 are approved by the full Board of Directors or the loan committee of the Board. Loan limits are reviewed and changed from time to time to reflect current market conditions. Fire and casualty insurance is required on all mortgage loans as well as abstracts of title or title insurance. Installment and Commercial Lending. First Community makes various types of installment loans including loans to depositors secured by pledges of their deposit accounts, new and used automobile loans, both direct and indirect, and secured and unsecured personal loans. Although installment and commercial loans are considered by management to involve more risk than residential mortgage loans, such loans have shorter maturities and typically have higher yields than mortgage loans. Commercial loans include loans secured by commercial real estate or deposits, single-payment loans, construction loans and loans for business purchases, operations, inventory and lines of credit. All non-residential mortgage loans are at a greater interest rate than single-family residential loans. All installment and commercial loans in excess of $300,000 are approved by the full Board of Directors or the loan committee of the Bank. A loan officer's approval is required for installment or commercial loans up to certain amounts. First Community has established policies regarding financial statement requirements, credit verification procedures and other matters intended to minimize underwriting risk. The most recent loan approval limits were adopted by the Board of Directors in 2001 and are reviewed annually. The limits vary from officer to officer with a range of $1,500 to $70,000 for unsecured, and a range of $7,500 to $200,000 for secured. Loans in excess of the above-mentioned limits must be approved by a committee of loan officers or the board of directors loan committee. Installment Loan Underwriting. First Community has adopted underwriting guidelines that apply to all loans made by First Community. However, the underwriting policies and practices are particularly important in the installment lending area. Installment loans present risks beyond those presented by other types of loans because the collateral is usually movable and subject to rapid depreciation. Such factors increase the importance of properly documenting such loans and assessing the risks associated with each loan based upon such documentation. The documentation required by First Community's underwriting guidelines includes an application, employment income verified by pay stubs, and direct verification with employers when deemed necessary, and may include tax returns or audited financial statements and evidence of security. The application must include the minimum loan amount requested, the term requested, monthly payment, purpose of loan, job history, income, financial statement, and security offered if applicable. The application must be signed by all borrowers obligated for the loan. First 6 Community also requires current credit reports from credit bureaus as part of the underwriting procedure for all loans including indirect automobile lending. First Community also reviews the applicant's ability to maintain a stable monthly income and other required monthly payments. Other monthly payments generally may not exceed forty percent (40%) of the applicant's stable gross income. Single-pay loans are normally not renewed without at least a 10% reduction in principal. Income from Lending Activities. First Community realizes interest income from its lending activities. Interest on loans comprised approximately 95.5% of First Community's total interest income for the year ended December 31, 2001. Nonperforming Assets and Allowance for Loan Losses Nonperforming assets consist of nonaccrual loans, restructured loans, past-due loans, real estate owned (acquired in foreclosure), and other repossessed assets. Nonaccrual loans are loans on which interest recognition has been suspended because they are 90 days past due as to interest or principal or because there is a question about First Community's ability to collect all principal and interest. First Community experienced an increase in nonaccrual loans between December 31, 2000 and December 2001 primarily due to three loans in bankruptcy status. Reserves have been allocated towards any expected losses on these loans. Restructured loans of which there were none at either December 31, 2001 or December 31, 2000, are loans where the terms have been modified to provide a reduction or deferral of interest or principal because of deterioration in the borrower's financial position. Past-due loans are accruing loans that are contractually past due 90 days or more as to interest or principal payments, and the amount of the loan is no greater than 80% of the fair market value of the collateral securing the loan or First Community has a reasonable expectation of collecting all past-due interest and principal. The following table summarizes nonperforming assets as of the dates indicated.

At December 31, 2001, loans of $1,358,000 were identified as impaired by management. Loans are considered to be impaired when it becomes probable that First Community will be unable to collect all amounts due according to the contractual terms of the loan agreement. First Community has reserved $137,000 on its impaired loans. In banking, loan losses are one of the costs of doing business. Although First Community's management emphasizes the early detection and chargeoff of loan losses, it is inevitable that at any time certain losses exist in the portfolio which have not been specifically identified. Accordingly, the provision for loan losses is charged to earnings on an anticipatory basis, and recognized loan losses are deducted from the allowance so established. Over time, all net loan losses must be charged to earnings. During the year, an estimate of the loss experience for the year serves as a starting point in determining the appropriate level for the provision. However, the amount actually provided in any period may be greater or less than net loan chargeoffs, based on management's judgment as to the appropriate level of the allowance for loan losses. The determination of the adequacy of the allowance for loan loss is based on management's continuing review and evaluation of the loan portfolio, and its judgment as to the impact 7 of current economic conditions on the portfolio. The evaluation by management includes consideration of past loan loss experience, changes in the composition of the loan portfolio and the current condition and amount of loans outstanding. The allowance for loan losses increased during the year ended December 31, 2001 compared to the year ended December 31, 2000 both due to additional loan balances outstanding in the portfolio and because of specific reserves allotted towards loans in non-accrual status. During 2001, First Community made a $289,000 provision for loan losses due primarily to growth in loans and a change in the mix of the loan portfolio. Allocation of the Allowance for Loan Losses:

Summary of Loan Loss Experience:

8 Investment Activities The following table sets forth the carrying value of First Community's investment portfolio and FHLB stock as of the dates indicated:

At December 31, 2001, the amortized cost of securities available for sale was $3,966,000 and the related gross unrealized gains and losses were $24,000 and $21,000, respectively. There were no securities classified as held to maturity at December 31, 2001. As of December 31, 2001, there were no individual investments representing more than 10% of stockholders' equity included in securities. The following table sets forth the maturities of investment securities at December 31, 2001 and the weighted-average yield (on a tax equivalent basis) on such securities.

(1) Available for sale amounts shown in the maturity distribution table are at amortized cost for computation of yields. Sources of Funds Savings deposits are the primary source of First Community's funds for use in lending and for other general business purposes. In addition to savings deposits, certificates of deposit obtained on a bid basis and FHLB advances represent a significant source of funds to First Community, as well as funds derived from loan repayments. Loan repayments are a relatively stable source of funds, while savings inflows and outflows are significantly influenced by general interest rates and money market conditions. As was discussed earlier, First Community began underwriting and selling fixed rate mortgages to FNMA during the year ended December 2001, which represents yet another source of funds. Borrowings are the primary source of funds for the Registrant and FCREMI. 9 Deposit Activities. First Community offers several types of deposit programs designed to attract both short-term and long-term savings by providing a wide assortment of accounts and rates. See the average balance sheet included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a breakdown of the average amount and average rate paid on First Community's deposit categories. First Community does not rely on brokered deposits as funding sources. The following table indicates the amount of certificates of deposit of $100,000 or more by time remaining until maturity at December 31, 2001 (in 000's). Maturity Period Three months or less $ 1,253 Greater than three months through six months 7,434 Greater than six months through twelve months 2,459 Over twelve months 2,718 ------------- Total $ 13,864 ============= Interest earned on statement savings accounts is paid from the date of deposit to the date of withdrawal, compounded and credited monthly. Interest earned on money market demand deposit accounts is compounded and credited monthly. The interest rate on these accounts is established by First Community. In recent years, many deposits in long-term fixed-rate accounts have been withdrawn prior to maturity or such certificates have not been renewed at maturity due to the more attractive rates offered on various money market accounts. Early withdrawal penalties are 30 days' interest on accounts maturing in one year or less and 90 days interest on accounts maturing in greater than one year. Borrowings. The FHLB of Indianapolis functions as a central credit facility providing credit for member financial institutions. As a member, First Community is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its home mortgages and other assets (principally, securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the amounts of advances. Acceptable uses prescribed by the FHLB have included expansion of residential mortgage lending and meeting short-term liquidity needs. Depending on the program, limitations on the amounts of advances are based either on a fixed percentage of a member's net worth or on the FHLB's assessment of the member's creditworthiness. The FHLB is required to review its credit limitations and standards at least once every six months. First Community had outstanding borrowings of $15.5 million from the FHLB as of December 31, 2001. As discussed in detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", FCREMI has borrowings with financial institutions other than First Community. The total outstanding balance of these borrowings as of December 31, 2001 was $1.6 million. As also further discussed in Item 7, the Registrant has borrowings as of December 31, 2001 of $1.0 million from the sale of unsecured convertible notes. Service Area First Community's primary service areas are Johnson County and Jennings County, Indiana. These areas are believed to be among the most affluent and rapidly growing areas of Indiana. The major portion of First Community's customers reside in Johnson County, particularly in the Bargersville, Franklin and Greenwood areas, which collectively account for about one-half of the county's population, according to the 2000 U.S. Census. First Community has branches in Bargersville, Trafalgar, Franklin, Whiteland and Greenwood, Johnson County Indiana, two branches in North Vernon, Jennings County Indiana, a branch at a retirement center in Indianapolis, Indiana, and a branch in Edinburgh, Bartholomew County Indiana. 10 Competition The banking business is highly competitive especially in Johnson County, where First Community competes with 11 commercial banks, 4 savings banks, and 2 credit unions. In Jennings County, First Community competes with 4 commercial banks, one savings bank and 2 credit unions. In Bartholomew County, First Community competes with 6 commercial banks, 1 savings bank, and 3 credit unions. First Community also competes with mortgage banking companies, consumer finance companies, and certain governmental agencies. Regulation and Supervision of the Registrant The Registrant is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is registered as such with the Board of Governors of the Federal Reserve System ("Federal Reserve"). The Registrant is examined, regulated and supervised by the Federal Reserve and is required to file annual reports and other information regarding its business and operations and the business and operations of its subsidiaries with the Federal Reserve. The BHCA prohibits any person from acquiring control, directly or indirectly, of the Registrant without the approval of the Federal Reserve. The Federal Reserve has the authority to issue cease and desist orders against a bank holding company if it determines that its activities represent an unsafe and unsound practice or a violation of law. Under the BHCA, a bank holding company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of voting stock of any company which is not a bank and from engaging in any activity other than managing or controlling banks. A bank holding company may, however, own shares of a company engaged in activities which the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Acquisitions by the Registrant of banks and savings associations are also subject to regulation. Any acquisition by the Registrant of direct or indirect control of more than five percent of the voting stock of any bank or bank holding company requires prior approval of the Federal Reserve. Acquisitions of savings associations are also subject to the approval of the Office of Thrift Supervision ("OTS"). A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with the extension of credit, the lease or sale of property or the provision of any service. With certain exceptions, a bank holding company, a bank, and a subsidiary or affiliate thereof, may not extend credit, lease or sell property or furnish any services or fix or vary the consideration for the foregoing on the condition that (i) the customer must obtain or provide some additional credit, property or services from, or to, any of them, or (ii) the customer may not obtain some other credit, property or service from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of credit extended. Under the BHCA, bank holding companies may acquire savings associations without geographic restrictions. However, under the Home Owners' Loan Act ("HOLA"), the OTS is prohibited from approving any acquisition that would result in the formation of a multiple savings and loan holding company controlling savings institutions in more than one state, except under specified conditions. Although the conditions imposed upon acquisitions in those states which have enacted such legislation vary, most such statutes are of the "regional reciprocity" type which require that the acquiring holding company be located (as defined by the location of its subsidiary savings institutions) in a state within a defined geographic region and that the state in which the acquiring holding company is located has enacted reciprocal legislation allowing savings institutions in the target state to purchase savings institutions in the acquirer's home state on terms no more restrictive than those imposed by the target state on the acquirer. Indiana law permits reciprocal interstate savings institution acquisitions within a region consisting of Indiana and contiguous states. Financial Services Modernization Act On November, 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The general effect of the Financial Services Modernization Act is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the existing BHCA. Under this legislation, bank holding companies are permitted to conduct any activities determined by the Federal Reserve Board to be financial in nature or related to financial services. As a result, the Registrant is able to provide securities and insurance 11 services. Furthermore, under this legislation, the Registrant is able to acquire, or be acquired by, brokerage and securities firms and insurance companies. In addition, the Financial Services Modernization Act broadens the activities that may be conducted by national banks through the formation of financial subsidiaries. The Financial Services Modernization Act also modifies the laws governing the implementation of the Community Reinvestment Act and addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Finally, the law contains significant limitations on a bank's ability to share its customers' personal financial information, including requirements that each bank clearly disclose its privacy policies to consumers and, if the bank intends to disclose personal information to non-affiliated third parties other than in connection with servicing or processing a financial product or service that a consumer requests or authorizes, the bank must permit consumers to opt-out of any information sharing by the bank with unaffiliated third parties. The Registrant does not believe that the legislation has had a material adverse effect on its operations and does not anticipate significant changes in its products or services as a result of this legislation. However, to the extent that this legislation permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation and may increase the amount of competition that the Registrant faces from larger institutions and other types of companies offering financial products. Regulation and Supervision of First Community First Community is supervised, regulated and examined by the DFI and, as a state nonmember bank, by the FDIC. A cease and desist order may be issued by the DFI and FDIC against First Community if the respective agency finds that the activities of First Community represent an unsafe and unsound banking practice or violation of law. The deposits of First Community are insured by the SAIF of the FDIC. The FDIC also has authority to appoint a conservator or receiver for undercapitalized institutions, adopt safety and soundness standards on matters such as loan underwriting and documentation, interest rate risk exposure, compensation and other employee benefits, and establish risk-based deposit insurance premiums. Branching by banks in Indiana is subject to the jurisdiction, and requires the prior approval of, the bank's primary federal regulatory authority and the DFI. Under Indiana law, First Community may branch anywhere in the state. The Registrant is a legal entity separate and distinct from First Community. There are various legal limitations on the extent to which First Community can supply funds to the Registrant. The principal source of the Registrant's funds consists of dividends from First Community. State and federal laws restrict the amount of dividends which may be paid by banks. In addition, the Registrant is subject to certain restrictions imposed by the Federal Reserve on obtaining extensions of credit to the Registrant or any of its subsidiaries from First Community, or using the stock or other securities of First Community as collateral for loans. The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include the discount rate on member bank borrowing and changes in reserve requirements against member bank deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Registrant and First Community. Capital Requirements First Community must meet certain minimum capital requirements mandated by the FDIC and the DFI. These regulatory agencies require financial institutions to maintain certain ratios of primary capital to total assets. Specifically, First Community must maintain a tier one leverage ratio of at least 4%, and a total capital to risk-based assets ratio of at least 8%. As of December 31, 2001, First Community had a tier one leverage ratio of 7.2%, based on tier one capital of approximately $10,726,000. As of the same date, First Community had a total capital to risk-based assets ratio of 10.3%, based on eligible capital of approximately $11,840,000 for the determination of this ratio. At this time, the Registrant is not required to comply with the Federal Reserve capital adequacy guidelines applicable to large bank holding companies because it has consolidated assets of less than $150,000,000. The 12 Registrant is, however, currently subject to the Federal Reserve's Small Bank Holding Company Policy Statement, which sets guidelines for the operation of small bank holding companies related to the reduction of holding company debt, capital adequacy and dividend restrictions. In the event that the Registrant's consolidated assets exceed $150,000,000, the Registrant will be required to maintain a minimum ratio of Tier 1 capital to total assets of between 3-4%, and to maintain a minimum ratio of qualifying capital to risk weighted assets of 8%. Item 2. Properties First Community leases its home office at 136 East Harriman, Bargersville, Indiana, and its branch offices in Greenwood, Indiana, North Vernon, Indiana, and one of its branches in Franklin, Indiana from FCREMI. First Community also leases branches in Indianapolis, Franklin, and its operations center in Franklin from third parties. First Community owns its branch offices in Whiteland, Indiana, Trafalgar, Indiana and Edinburgh, Indiana. The leases on branch offices with third parties expire between 2002 and 2015 and the lease on its operations center expires in 2015. The lease that expires in 2002 is automatically renewable from year to year and no party has given notice of an intent to terminate the lease. The Registrant plans for FCREMI to eventually own substantially all of the branch properties and lease them to First Community. At December 31, 2001, the net carrying values of First Community's and FCREMI's properties, including land, building, improvements, furniture, fixtures and equipment were $2.7 million and $1.8 million, respectively. Item 3. Legal Proceedings The Registrant and First Community are from time to time, a party to certain lawsuits arising in the ordinary course of their business. The Registrant and First Community believe that none of their current lawsuits would, if adversely determined, have a material adverse effect on the Registrant and First Community. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise, during the quarter ended December 31, 2001. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The following table sets forth the high and low prices for the Registrant's common stock for the quarters during the years indicated, based upon information obtained by management of the Registrant from the Nasdaq web site and on other information made available to management of the Registrant. Management of the Registrant has not verified the accuracy of the following information. There is no established public trading market for the Registrant's common stock. The common stock is traded on a limited basis, quoted on the OTC Bulletin Board and many trades have involved privately negotiated transactions. As a result, the Registrant is not always aware of the price at which trades occur. The referenced prices may not reflect an actual trading range and may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Price Per Share ------------------------------- 2001 2000 ------------------------------- High Low High Low ------------------------------- Quarter First Quarter $8.00 $6.50 $8.75 $6.38 Second Quarter 7.25 5.85 8.25 5.25 Third Quarter 8.00 6.52 8.75 6.00 Fourth Quarter 8.15 7.10 8.50 6.00 The Registrant declared dividends of $.04 per share for each quarter in 2000 each paid during the following quarter. In addition, the Registrant declared dividends of $.04 per share for the first three quarters of 2001 each paid during the following quarter. The Registrant did not declare a dividend during the fourth quarter of 2001, but subsequently declared an increased dividend of $.05 per share in January 2002 payable in January 2002. Any future dividend 13 payments by the Registrant will be dependent upon dividends paid by First Community and subject to regulatory limitations. The dividends which the Registrant may pay are restricted by Federal Reserve Bank capital requirements. The ability of the Registrant to pay dividends to shareholders is dependent on dividends received from First Community. First Community is restricted by regulations of the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation as to the maximum amount of dividends it may pay to the net profits for the current year plus those for the previous two years and by the Office of Thrift Supervision for the amount of the liquidation account established at the time of its stock conversion. As a practical matter, dividends are ordinarily restricted to a lesser amount because of the need to maintain an adequate regulatory capital structure. At December 31, 2001, the stockholder's equity of First Community was $10.9 million, of which a minimum of $1,110,000 was available for dividends. The number of record holders of the Registrant's common stock as of March 1, 2002 was 265. Item 6. Selected Financial Data (dollars in thousands, except per share data)

* Net income per share has been restated to reflect the stock dividend declared in 1997. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General First Community is a subsidiary of the Registrant and operates as an Indiana commercial bank. In May 1998, the Registrant formed a new subsidiary, First Community Real Estate Management, Inc. whose sole purpose is to own and lease branch facilities to First Community. In July 1998, FCREMI borrowed $800,000 at a rate of 1.125% under prime, adjustable every 5 years for a term of 30 years, from another financial institution in order to purchase the land and building of First Community's Bargersville branch office at 136 E. Harriman Ave. in Bargersville, Indiana and the land and building of its Banta Street office at 597 Banta Street in Franklin, Indiana. In December 1998, FCREMI borrowed $416,000 at a rate of 7.25% with payments due in monthly installments through November 2003 with a final balloon payment due in December 2003, from another financial institution in order to purchase the land and building of First Community's Greenwood branch office at 298 State Road 135 North in Greenwood, Indiana. In August 1999, FCREMI borrowed $422,800 from another financial institution at a rate of 7.50% with payments of principal and interest due monthly for 5 years based on a 20 year amortization schedule. The balance is due at the end of 5 years or may be renewed at a variable interest rate. These loan proceeds were used to purchase the land and buildings of First Community's North Vernon branch offices at 21 Madison Avenue and 521 N. State Street, North Vernon, Indiana. First Community is making monthly lease payments to FCREMI as lessee of these locations. These lease payments are sufficient to service the debt. As a bank holding company, the Registrant depends upon the operations of its subsidiaries for all revenue and reports its results of operations on a consolidated basis with its subsidiaries. First Community's profitability depends primarily upon the difference between the income on its loans and investments and the cost of its deposits and borrowings. This difference is referred to as the spread or net interest margin. The difference between the amount of interest earned on loans and investments and the interest incurred on deposits and borrowings is referred to as net interest income. Interest income from loans and investments is a function of the amount of loans and investments outstanding during the period and the interest rates earned. Interest expense related to deposits and borrowings is a function of the amount of deposits and borrowings outstanding during the period and the interest rates paid. Results of Operations The following discussion of Results of Operations is for the years ended December 31, 2001, 2000 and 1999. Net income for the year ended December 31, 2001 was $918,000, compared to $421,000 and $642,000 for the years ended December 31, 2000 and 1999, respectively. Basic earnings per share was $.88 for the year ended December 31, 2001 compared to $.41 and $.63 for the years ended December 31, 2000 and 1999, respectively. Diluted earnings per share was $0.85 for the year ended December 31, 2001 compared to $0.41 and $.62 for the years ended December 31, 2000 and 1999, respectively. Net income increased from 2000 to 2001 both as a result of the Registrant's improved net interest income of $5.5 million compared to $4.9 million and the increase in other income from $749,000 to $1.1 million between the same periods. Earnings decreased from 1999 to 2000 primarily due to expenses incurred in relation to new key man life insurance of $143,000 and after tax expenses in relation to the now-terminated definitive agreement to acquire Blue River Federal Savings Bank of approximately $57,000. The increase in net interest income of $641,000 in 2001, as compared to 2000, resulted primarily from a decrease in interest expense due to a reduction in interest rates from 5.1% during 2000 to 4.6% in 2001. This decrease in interest expense can be attributed to both management's successful efforts at changing the funding mix and the lower rate environment during 2001 as compared to 2000. The provision for loan losses of $289,000 was recorded in 2001 as a result of an increase in net loan dollars outstanding and the risk profile of the loan portfolio. The increase in other income of $352,000 in 2001 resulted from management continuing to focus on non-interest income. The results included $144,000 of additional NSF fees being collected due to an increase in per item charges and an increase in the number of demand accounts being serviced and $59,000 of additional interchange and surcharge income collected from noncustomers on ATM operations. Due to the interest rate environment and liquidity needs at different times during 2001, securities were sold with gains recognized in the amount of $50,000 as compared to losses on the sale of securities of $25,000 during the year ended December 31, 2000. The Registrant had an increase of $107,000 in other expenses during the year ended December 31, 2001 as compared to the year 15 ended December 31, 2000. The primary increases were both to salaries and employee benefits with an increase of $174,000 and data processing fees with an increase of $144,000 between these time frames. These increases were partially offset by decreases to printing and office supplies of $89,000 and decreases in life insurance expenses of $145,000. The Registrant's consolidated effective tax rate was 27.8% in 2001 as compared to 7.4% in 2000. This stark increase reflects both the Registrant's improved pre-tax earnings of $1.3 million during the year ended December 31, 2001 as compared to $454,000 of pre-tax earnings during the comparable period in 2000 and a decrease in tax-exempt income between the two periods. The increase in net interest income of $388,000 in 2000, as compared to 1999, resulted primarily from an increase in lending and the associated income from this activity. Net loans outstanding increased $12.7 million in 2000 with commercial and commercial real estate seeing the primary growth, but all other lending areas seeing increases as well. The provision for loan losses of $219,000 was recorded in 2000 as a result of an increase in the loan portfolio. The increase in non-interest income of $288,000 in 2000 resulted from management focusing heavily on service fee income. The results included $92,000 of additional interchange and surcharge income collected from noncustomers on ATM operations and $86,000 of additional NSF fees being collected due to an increase in per item charges and an increase in number of demand accounts being serviced. The Registrant also had $66,000 in increases to cash surrender values on key man life insurance policies owned, and an increase of $22,000 in fees from an off-line debit card program. The increases in non-interest income were partially offset by losses on sales of available for sale securities. The Registrant sold several available for sale securities prior to maturity at an aggregate loss of $25,000 during the year ended December 31, 2000. The Registrant's growth has been facilitated by and resulted in the increase of additional personnel, facilities as well as other general expenses. Data processing expense increased $160,000 in 2000 both as a result of First Community switching its statement rendering process from manual rendering in-house to laser printed imaged statements being outsourced through its primary service bureau and the number of accounts being serviced increasing dramatically over the past several years. Income taxes decreased $130,000 because of a decrease in overall taxable income. The Registrant's consolidated effective tax rate was 7.4% in 2000 as compared to 20.4% in 1999. For both 2000 and 1999, the primary difference between the effective tax rate and the statutory tax rate relates to tax-exempt interest. Quarterly Results of Operations The following table sets forth certain quarterly results for the years ended December 31, 2001 and 2000. (Dollars in thousands except for per share data)

16 The Registrant made significant progress in reducing its cost of funds on interest-bearing liabilities without losing proportionate yields on its interest-earning assets during the last three quarters of 2001. The results included the Registrant's net interest income increasing to $1.3 million during the quarter ended June 30, 2001, and $1.5 million during the quarters ended September 30, 2001 and December 31, 2001. This compares to the Registrant's net interest income of approximately $1.2 million during the quarter ended March 31, 2001 and all four quarters ended 2000. These improvements coupled with continued increases in non-interest income from service charges on accounts, mortgage banking activity, and other income propelled the Registrant to a record net income level of $918,000 for the year ended December 31, 2001. The Registrant had a net loss during the quarter ending December 31, 2000, as compared to net income in the three other quarters during 2000. The quarter ending December 31, 2000 had two non-recurring expenses included in non-interest expense. The first was a $143,000 up-front charge in relation to a new key man life insurance policy that the Registrant acquired during the fourth quarter. The Registrant believes that this initial expense will be recovered over the term of the key man life insurance. There was also an aggregate pre-tax expense of $94,000 in relation to the termination of the definitive agreement to acquire Blue River Federal Savings Bank, as was discussed earlier. Net income was $103,000 during the quarter ending March 31, 2000, as compared to $226,000 and $157,000 in the quarters ending June 30, 2000 and September 30, 2000, respectively. The quarter ending March 31, 2000 was the first full quarter that the Registrant had 10 full-service branches and an operations center open. First Community opened full-service branches in Whiteland, Indiana and Edinburgh, Indiana in September 1999 and January 2000, respectively. As a result of these two fixed asset investments in a short period of time, the following expense categories rose sharply: premises and equipment, salaries, printing and office supplies, telephone, and other operating expense. These expenses were offset in the third and fourth quarters of 2000 by the increases in non-interest income. The following table sets forth the average balance sheet amounts, the related interest income or expense and average rates earned or paid for the years ended December 31, 2001 and 2000. 17

-------- (1) The average balances of investment securities, including available for sale securities, are computed based on historical cost and do not include any fair value adjustments. (2) Nonaccruing loans have been included in the average balances. (3) Net interest income divided by total earning assets. 18 Changes in Interest Income and Expense Comparing December 31, 2001 and 2000 and December 31, 2000 and 1999. The following tables analyze the changes in interest income and interest expense comparing the years ended December 31, 2001 and 2000 and December 31, 2000 and 1999. It distinguishes between the changes due to differences in volume (outstanding balances), the changes due to changes in interest rates, and changes attributable to both rate and volume, which cannot be separately identified and have been allocated proportionately to the change due to volume and the change due to rate.

Asset/Liability Management One of the actions undertaken by First Community's management has been to adopt asset/liability management policies in an attempt to reduce the susceptibility of First Community's net interest spread to the adverse impact of volatile interest rates by attempting to match maturities (or time-to-repricing) of assets with maturities or repricing of liabilities and then actively managing any mismatch. Accomplishing this objective requires attention to both the asset and liability sides of the balance sheet. The balance between maturity of assets and maturity of liabilities is measured by the interest-rate gap. 19 First Community's one-year cumulative interest-rate gap as a percent of total assets was a negative 18.2% and a negative 11.1% at December 31, 2001 and 2000, respectively. This interest-rate gap represents substantial risk for First Community in an environment of rising interest rates. A negative interest-rate gap means First Community's earnings are vulnerable during periods of rising interest rates because during such periods the interest expense paid on liabilities will generally increase more rapidly than the interest income earned on assets. Conversely, in a falling interest-rate environment, the total expense paid on liabilities will generally decrease more rapidly than the interest income earned on assets. A positive interest-rate gap would have the opposite effect. Asset management goals have been directed toward obtaining a suitable balance of asset quality, liquidity and diversification in order to stabilize and improve earnings. The asset management strategy has concentrated on shortening the maturity of its loan portfolio by increasing adjustable-rate loans and short-term installment and commercial loans. To this end, at December 31, 2001, First Community had $73.7 million or 58.5% of its total loan portfolio invested in installment and commercial loans as compared to $72.4 million or 58.6% of total loans invested in installment and commercial loans at December 31, 2000. Increasing short-term installment and commercial loans increases the overall risk of the loan portfolio. Such risk relates primarily to collection and to the loans that often are secured by rapidly depreciating assets. At December 31, 2001, First Community's ratio of non-performing assets to total assets was 1.37% compared to .46% at December 31, 2000. The primary goal in the management of liabilities has been to extend the maturities and improve the stability of deposit accounts. Management has attempted to combine a policy for controlled growth with a strong, loyal customer base to control interest expense. The following tables illustrate the interest-rate sensitivity of interest-earning assets and interest-bearing liabilities at December 31, 2001 and 2000. Mortgages which have adjustable or renegotiable interest rates are shown as subject to change every one to three years based upon the contracted-for adjustment period. This schedule does not reflect the effects of possible prepayments on enforcement of due-on-sale clauses.

Deposit/Asset Base. First Community has experienced significant growth in deposits in three of the past five years and assets in four out of the past five years. Management believes this growth can be attributed to several factors, none of which can be singled out as the predominant reason for the growth, but each of which is believed to have contributed to the increase in the Registrant's consolidated assets from $98.7 million at December 31, 1997 to $147.4 million at December 31, 2001 and deposits from $87.7 million at December 31, 1997 to $117.7 million at December 31, 2001. These factors include: (i) increased population in the geographic area serviced; (ii) increased per-household disposable income in the geographic area serviced; (iii) an increase in the number of branch offices; and (iv) the preference of certain individuals in the service area for dealing with a locally owned institution. Due to management's efforts to control asset growth and restructure the deposit mix in the years ended December 31, 2000 and December 31, 2001, consolidated assets only grew $2.1 million or 1.5% and deposits decreased $10.6 million or 8.3% between the year ended December 31, 1999 and the year ended December 31, 2001. These efforts were being made to increase net interest margin and to strengthen First Community's capital ratio's. The results were evident as the Registrant recorded record net interest income of $5.5 million during the year ended December 31, 2001 as compared to $4.9 million for the year ended December 31, 2000, an increase of 12.2%. First Community's tier one capital and total capital to risk-weighted assets ratios reached 7.2% and 10.3%, respectively at December 31, 2001. These comparable ratios were 6.7% and 9.5% at December 31, 2000. Liquidity and Capital Resources Liquidity refers to the ability of a financial institution to generate sufficient cash to fund current loan demand, meet savings deposit withdrawals and pay operating expenses. The primary sources of liquidity are cash, interest-bearing deposits in other financial institutions, marketable securities, loan repayments and sales, increased deposits and total institutional borrowing capacity. 21 Cash and interest-bearing deposits, when combined with investments, declined during 2001. As investments matured or were sold, the dollars were used to both fund new loans and to fund higher costing time deposit outflows. Management's goal is to maintain cash, interest-bearing deposits and investments at a level sufficient to satisfy needs for liquidity and other short-term obligations. Management believes it has adequate liquidity for long-term needs. Short-term liquidity needs resulting from normal deposit/withdrawal functions are provided by retaining a portion of cash generated from operations in a FHLB daily investment account. This account acts as the short-term liquidity source while providing interest income. Liquidity, represented by cash and cash equivalents, is a result of its operating, investing and financing activities. These activities are discussed below for the years ended December 31, 2001 and December 31, 2000. During 2001 and 2000, cash and cash equivalents which are defined as cash and due from banks and interest-bearing time deposits increased $1.8 million and increased $283,000, respectively. During 2001 and 2000, investment securities decreased $6.6 million and decreased $10.5 million, respectively. Cash was used both to fund net loan increases of $2.6 million and fund net deposit outflows of $5.3 million in 2001. Cash was used primarily in 2000 to fund net increases in loans of $12.7 million. At December 31, 2001 and 2000, commitments to fund loan originations were approximately $16.3 million and $11.4 million, respectively. In the opinion of management, First Community has sufficient cash flow and borrowing capacity to meet funding commitments and to maintain proper liquidity levels based upon First Community's favorable liquidity ratio, the ability to borrow from the FHLB, and proceeds from the sale of residential mortgages to FNMA. First Community is a member of the FHLB of Indianapolis. Through that affiliation, First Community has the ability to borrow up to $25.0 million as of December 31, 2001 from the FHLB. The balance of its borrowings at December 31, 2001 was $15.5 million, an increase of $2.5 million from outstanding borrowings at December 31, 2000. In addition to proceeds from the sale and maturities of securities, these new advances were primarily used to fund net deposit outflows of $5.3 million. New Accounting Standards Accounting for a Business Combination: -------------------------------------- Statement of Financial Accounting Standards ("SFAS") No. 141 requires that all business combinations should be accounted for using the purchase method of accounting; use of the pooling method is prohibited. This Statement requires that goodwill be initially recognized as an asset in the financial statement and measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. In addition, SFAS No. 141 requires all other intangibles, such as core deposit intangibles for a financial institution, to be identified. The provisions of Statement No. 141 are effective for any business combination that is initiated after June 30, 2001. Accounting for Goodwill: ------------------------ Under the provisions of SFAS No. 142, goodwill should not be amortized but should be tested for impairment at the reporting unit level. Impairment test of goodwill should be done on an annual basis unless events or circumstances indicate impairment has occurred in the interim period. The annual impairment test can be performed at any time during the year as long as the measurement date is used consistently from year to year. Impairment testing is a two step process, as outlined within the statement. If the fair value of the goodwill is less than its carrying value, then the goodwill is deemed impaired and a loss recognized. Any impairment loss recognized as a result of completing the transitional impairment test should be treated as a change in accounting principle and recognized in the first interim period financial statements. 22 The provisions of Statement No. 142 are effective for fiscal years beginning after December 15, 2001. Early adoption is permitted for companies with a fiscal year beginning after March 15, 2001 provided that the first quarter financial statements have not been previously issued. In all cases, the Statement must be adopted as of the beginning of a fiscal year. Goodwill and intangible assets acquired in a transaction completed after June 30, 2001 but before this Statement is initially applied would be accounted for in accordance with the amortization and nonamortization provisions of the Statement. The useful economic life of previously recognized intangible assets should be reassessed upon adoption of the Statement, and remaining amortization periods should be adjusted accordingly. Intangible assets deemed to have an indefinite life would no longer be amortized. Since the Company has no legacy goodwill and is not currently in the process of acquiring another company, the adoption of SFAS Nos. 141 and 142 will have no impact on the Company's financial statements. Impact of Inflation and Changing Prices The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Registrant are monetary in nature. Consequently, interest rates generally have a more significant impact on performance than the effects of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services. In a period of rapidly rising interest rates, the liquidity and the maturity structure of the Registrant's assets and liabilities are critical to the maintenance of acceptable performance levels. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Although the Registrant files a Form 10-K in lieu of a Form 10-KSB, the Registrant qualifies as a small business issuer. Therefore, Item 7A is not required under Section 229.305 of Regulation S-K. Item 8. Financial Statements and Supplementary Data. The Registrant's Financial Statements are included in a separate section of this Annual Report beginning on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None PART III The information required by Part III is hereby incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2001. 23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements. The following information appears elsewhere in this Annual Report on Form 10-K on the pages indicated

2. Exhibit Index. The following exhibits are included as part of this Annual Report: 3.1 Articles of Incorporation of First Community Bancshares, Inc. (Incorporated herein by reference to the Registration Statement on Form S-4 of First Community Bancshares, Inc. with Registration No. 33-47691 declared effective July 30, 1992). 3.2 Amended Bylaws of First Community Bancshares, Inc. (Incorporated herein by reference to the Form 10-K of First Community Bancshares, Inc. for the fiscal year ended December 31, 1992 and filed with the Securities and Exchange Commission on March 31, 1993)(Commission File No. 0-19618). 10.6 First Community Bancshares, Inc. 1992 Stock Option Plan, as amended and approved by Shareholders on May 19, 1993 (Incorporated herein by reference to the Form 10-K of First Community Bancshares, Inc. for the fiscal year ended December 31, 1993 and filed with the Securities and Exchange Commission on March 30, 1994)(Commission File No. 0-19618). 10.8* Deferred Director Fee Agreement by and between First Community Bank & Trust Company and Merrill M. Wesemann Dated November 23, 1994 (Incorporated herein by reference to the Form 10-K of First Community Bancshares, Inc. for the fiscal year ended December 31, 1994 and filed with the Securities and Exchange Commission on March 13, 1995). 10.9 First Community Bancshares, Inc. 1996 Stock Option Plan (Incorporated herein by reference to the First Community Bancshares, Inc. proxy statement for the 1996 annual shareholders meeting filed with the Securities and Exchange Commission on March 13, 1996). 10.10 Amendment to the First Community Bancshares, Inc. 1992 Stock Option Plan, as amended and approved by Shareholders on March 13, 1996 (Incorporated herein by reference to the First Community Bancshares, Inc. proxy statement for the 1996 annual 24 shareholders meeting filed with the Securities and Exchange Commission on March 13, 1996). 10.11* Deferred Director Fee Agreement by and between First Community Bank & Trust and Frank D. Neese dated October 29, 1999 (Incorporated herein by reference to the Form 10-Q of First Community Bancshares, Inc. for the quarter ended September 30, 1999 and filed with the Securities and Exchange Commission on November 15, 1999). 10.12* Deferred Director Fee Agreement by and between First Community Bank & Trust and Roy Martin Umbarger dated October 29, 1999 (Incorporated herein by reference to the Form 10-Q of First Community Bancshares, Inc. for the quarter ended September 30, 1999 and filed with the Securities and Exchange Commission on November 15, 1999). 10.13* First Amendment to the Deferred Fee Agreement by and between First Community Bank & Trust and Merrill M. Wesemann, M. D. dated October 29, 1999 (Incorporated herein by reference to the Form 10-Q of First Community Bancshares, Inc. for the quarter ended September 30, 1999 and filed with the Securities and Exchange Commission on November 15, 1999). 10.14 First Amendment to 1996 Stock Option Plan, as approved by the Board of Directors November 17, 1999 (Incorporated herein by reference to the Form 10-K of First Community Bancshares, Inc. for the fiscal year ended December 31, 1999 and filed with the Securities and Exchange Commission on March 30, 2000). 10.15* First Community Bank & Trust Supplemental Executive Retirement Plan, as approved by the Board of Directors July 12, 2000. 10.16* Form of Deferred Compensation Agreement. (a) Agreement between First Community Bank & Trust and Albert R. Jackson, Jr. dated December 31, 2001, for the deferral of Director fees (omitted). (b) Agreement between First Community Bank & Trust and Albert R. Jackson, III, dated December 31, 2001, for the deferral of compensation paid to Mr. Jackson as President of First Community (omitted). 21 Subsidiaries of First Community Bancshares, Inc. (Incorporated herein by reference to the Registration Statement on Form SB-2 of First Community Bancshares, Inc., Registration No. 333-63239, declared effective October 30, 1998). ---------------------- * Compensatory plan or arrangement 25 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 29h day of March, 2001. FIRST COMMUNITY BANCSHARES, INC. By: /s/ Albert R. Jackson , III --------------------------------------- Albert R. Jackson, III, Chief Executive Officer, Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signatures and Title(s) Date /s/ Albert R. Jackson , III ------------------------------------------------ Albert R. Jackson, III, Chief Executive March 29, 2002 Officer, Chief Financial Officer and Director /s/ Merrill M. Wesemann March 29, 2002 ------------------------------------------------ Merrill M. Wesemann, MD, Director and Chairman /s/ Albert R. Jackson, Jr. March 29, 2002 ------------------------------------------------ Albert R. Jackson, Jr., Director and President /s/ Roy Martin Umbarger March 29, 2002 ------------------------------------------------ Roy Martin Umbarger, Director and Vice President /s/ Frank D. Neese March 29, 2002 ------------------------------------------------ Frank D. Neese, Director and Secretary 26 Independent Accountants' Report To the Stockholders and Board of Directors First Community Bancshares, Inc. Bargersville, Indiana We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements described above present fairly, in all material respects, the consolidated financial position of First Community Bancshares, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ BKD, LLP Indianapolis, Indiana February 15, 2002 First Community Bancshares, Inc. Consolidated Balance Sheets December 31, 2001 and 2000

See Notes to Consolidated Financial Statements F-2 First Community Bancshares, Inc. Consolidated Statements of Income Years Ended December 31, 2001, 2000 and 1999

See Notes to Consolidated Financial Statements F-3 First Community Bancshares, Inc. Consolidated Statements of Comprehensive Income Years Ended December 31, 2001, 2000 and 1999

See Notes to Consolidated Financial Statements F-4 First Community Bancshares, Inc. Consolidated Statements of Stockholders' Equity Years Ended December 31, 2001, 2000 and 1999

See Notes to Consolidated Financial Statements F-5 First Community Bancshares, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000 and 1999

See Notes to Consolidated Financial Statements F-6 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Note 1: Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of First Community Bancshares, Inc. (Company) and its wholly owned subsidiaries, First Community Bank and Trust (Bank) and First Community Real Estate Management, Inc. (FCREMI), conform to generally accepted accounting principles and reporting practices followed by the banking industry. The more significant of the policies are described below. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is a bank holding company whose principal activity is the ownership and management of the Bank. The Bank operates under a state bank charter and provides full banking services, including trust services. As a state bank, the Bank is subject to regulation by the Department of Financial Institutions, State of Indiana and the Federal Deposit Insurance Corporation. Description of business - The Bank generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in Johnson and Jennings Counties, Indiana and surrounding counties. The Bank's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. FCREMI was incorporated on May 26, 1998 to hold and manage the real estate used by the Company and the Bank. Consolidation - The consolidated financial statements include the accounts of the Company, the Bank and FCREMI after elimination of all material intercompany transactions. Cash equivalents - The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Investment Securities - Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately through accumulated other comprehensive income (loss), net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. F-7 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Forward commitments to sell mortgage loans are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid and considering a normal servicing rate. Fees received from borrowers to guarantee the funding of mortgage loans held for sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used. Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially delinquent loans may be considered to be impaired. The Bank considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual lives of the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income. Allowance for loan losses is maintained to absorb potential loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loan loss experience, changes in the composition of the portfolio, and the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 2001, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Company operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. F-8 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank (FHLB) system. The required investment in the common stock is based on a predetermined formula. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. When foreclosed assets are acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for and will continue to account for stock option grants in accordance with Accounting Principle Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Income tax in the consolidated statements of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiaries. Earnings per share have been computed based upon the weighted-average common shares outstanding during each year. Note 2: Restriction on Cash and Due From Banks The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank (FRB). The reserve required at December 31, 2001, was $799,000. Note 3: Investment Securities

F-9 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data)

The amortized cost and fair value of securities held to maturity and available for sale at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

No securities were pledged at December 31, 2001 and 2000. Proceeds from sales of securities available for sale during 2001 and 2000 were $5,452,000 and $2,435,000. Gross gains of $50,000 were realized on the 2001 sales and gross losses of $25,000 were realized on the 2000 sales. There were no sales of securities available for sale in 1999. Also during 2001, the Company sold $126,000 of securities classified as held to maturity. Subsequent to the transaction, the Company transferred the remaining portfolio of securities held to maturity to securities available for sale. Proceeds from the sale were $126,000 with a negligible gain. F-10 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Note 4: Loans and Allowance

Information on impaired loans is summarized below.

F-11 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Note 5: Premises and Equipment

Note 6: Deposits

Certificates and other time deposits maturing in: 2002 $ 45,914 2003 5,666 2004 1,077 2005 1,032 2006 4,290 Thereafter 1,372 ------------- $ 59,351 ============= F-12 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Note 7: FHLB Advances

The Bank has an available line of credit with the FHLB totaling $2,000,000. The line of credit expires May 8, 2002 and bears interest at a rate equal to the then current variable advance rate. The FHLB advances and drawings on the available line of credit are secured by a blanket collateral agreement on first mortgage loans eligible as collateral totaling $36,870,000. Advances are subject to restrictions or penalties in the event of prepayment. FHLB advances totaling $10,500,000 are subject to various options for the FHLB to convert the rates. If the FHLB exercises its option, the advance will be prepayable at the Bank's option, at par and without a penalty fee. Note 8: Other Borrowings

The convertible notes are unsecured and bear an interest rate of 7%. The notes were issued from December 31, 1998 through March 31, 1999 and are convertible at the option of the holder into shares of common stock of the Company at the rate of $11.00 per share. F-13 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Notes payable include a note dated July 15, 1998 with an original balance of $800,000 with an interest rate of 1.125% under prime, adjustable every five years for a term of 30 years, a note dated December 18, 1998 with an original balance of $416,000 at a fixed interest rate of 7.25% with monthly installments due through November 2003 with a final balloon payment due in December 2003, and a note dated July 28, 1999 with an original balance of $422,800 at a fixed interest rate of 7.50% with monthly installments due through July 2004 with a final balloon payment due in August 2004 if not renewed. The notes are secured by real estate of the Company. Maturities in 2002 $ 33 2003 396 2004 387 2005 12 2006 13 Thereafter 1,715 ------------ $ 2,556 ============ Note 9: Income Tax

F-14 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) A cumulative net deferred tax asset is included in other assets. The components of the asset are as follows:

Note 10: Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets. Financial instruments whose contract amount represents credit risk as of December 31 were as follows:

F-15 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Commitments to extend credit are agreements to lend to a customer as long as there is no 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 Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Company and Bank are also subject to claims and lawsuits, which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. In connection with the approval of its bank holding company application, the Company must obtain Federal Reserve approval prior to incurring debt, which would cause its debt to equity ratio to exceed 30 percent. The Company is in compliance with this restriction at December 31, 2001. Note 11: Stockholders' Equity On July 15, 1998, the Board of Directors approved the issuance of the following securities: Rights to stockholders to purchase one share for every ten shares owned as of October 29, 1998, the record date, subject to a minimum offer and purchase of 100 shares of common stock, at a purchase price of $10.00 per share. The rights were exercisable for a ninety (90) day period that expired on March 30, 1999. Warrants to stockholders to purchase one share for every ten shares owned on October 29, 1998, the record date, subject to a minimum offer and purchase of 100 shares of common stock, with an exercise price of $10.00 per share. On September 15, 1999, the exercise price was reduced to $8.75 per share. The warrants were exercisable for a 90 day period commencing on September 15, 1999 and expired on December 13, 1999. F-16 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) The dividends which the Company may pay are restricted by FRB capital requirements and by Indiana law to the amount of retained earnings. The ability of the Company to pay dividends to stockholders is dependent on dividends received from the Bank. Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net profits (as defined) for the current year plus those for the previous two years. The Bank is also restricted by the Office of Thrift Supervision for the amount of the liquidation account established at the time of its stock conversion. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. At December 31, 2001, stockholder's equity of the Bank was $10,871,000, of which a minimum of $1,110,000 was available for payment of dividends. Note 12: Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 2001, the Bank is categorized as well capitalized for the three ratios and met all subject capital adequacy requirements. At December 31, 2000, the Bank was categorized as well capitalized for two of the ratios and met all subject capital adequacy requirements; the Bank was categorized as adequately capitalized for the total risk-adjusted capital ratio. There are no conditions or events since December 31, 2001 that management believes have changed the Bank's classification. The Bank's actual and required capital amounts and ratios are as follows:

F-17 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data)

Note 13: Employee Benefits The Bank has a retirement savings 401(k) plan in which substantially all employees may participate. The Bank matches employees' contributions as determined each year by the Bank's Board of Directors. The Bank's expense for the plan was $52,000, $30,000 and $24,000 for 2001, 2000 and 1999. The Bank has a supplemental retirement plan implemented in 2000 which provides retirement benefits to directors and executive officers. The Bank's obligations under the plan have been funded via the purchase of key man life insurance policies, for which the Bank is the beneficiary. Expense recognized under the supplemental retirement plan totaled approximately $47,000 and $12,000 for the years ended December 31, 2001 and 2000. The Company adopted a stock option plan in 1992 whereby 46,921 shares of common stock, after restatement for stock dividends, were reserved for the granting of options to certain officers, directors and key employees. The options were exercisable within five years from the date of grant, and the right to purchase shares under such options vested at a rate of 40% after the first year and 20% each year thereafter with the options being fully vested after four years. Additional options to purchase common shares may be granted not to exceed 10% of the Company's outstanding shares of common stock, less previously granted options. On February 15, 1993, the 1992 stock option plan, which is accounted for in accordance with APB No. 25, Accounting for Stock Issued to Employees, and related interpretations, was amended to increase the aggregate number of shares under the plan from 46,921 to 66,771 shares. In addition, the amendment provided for immediate vesting of all outstanding stock options and stock options granted pursuant to the agreement. On May 15, 1996, the 1992 stock option plan was amended to extend the exercise period from five years to ten years from the date of grant. F-18 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) On May 15, 1996, the stockholders approved the 1996 stock option plan, reserving 105,000 shares of Company stock for the granting of options to certain key employees, directors and advisors. The exercise price of the shares may not be less than the fair market value of the shares upon the grant of the option. Options granted to key employees and advisors require approval of the Compensation Committee of the Board of Directors (Committee). Options granted to key employees and advisors become 25% exercisable one year from the date of the grant and continue to vest 25% each year thereafter until fully vested unless the Committee provides otherwise in the Option Agreement. The options granted during 1998 and 1999 vested at the date of grant. Without any action by the Committee, each outside director will be automatically granted an option to purchase 1,000 shares of Company stock on each anniversary date of service on the Board of Directors beginning with their 1997 anniversary. These options vest at the date of grant. Each option granted under the plan shall expire no later than ten years from the date the option is granted. Although the Company has elected to follow APB No. 25, Standard Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions:

F-19 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement are as follows:

The following is a summary of the status of the Company's stock option plans and changes in the plans as of and for the years ended December 31, 2001, 2000 and 1999.

As of December 31, 2001, options outstanding and exercisable of 11,000 have exercise prices ranging from $5.75 to $8.00 and weighted-average remaining contractual lives of 8.2 years; options outstanding of 23,750 have exercise prices ranging from $9.13 to $11.50 and weighted-average remaining contractual lives of 6.2 years. F-20 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Note 14: Related Party Transactions The Bank has entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows: Balances, January 1, 2001 $ 1,660 New loans, including renewals 1,249 Payments, etc., including renewals (1,346) ---------- Balances, December 31, 2001 $ 1,563 ========== Deposits from related parties held by the Bank at December 31, 2001 and 2000 totaled $854,000 and $1,262,000. Note 15: Earnings Per Share Earnings per share (EPS) were computed as follows:

Options to purchase 27,750 shares of common stock at prices ranging from $8.00 to $11.50 per share were outstanding at December 31, 2001, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. F-21 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data)

Options to purchase 23,750 shares of common stock at prices ranging from $9.125 to $11.50 per share were outstanding at December 31, 2000, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. In addition, the Company had convertible debt outstanding at December 31, 2000 that was not included in the computation of diluted EPS because the convertible debt was not dilutive.

Options to purchase 25,750 shares of common stock at prices ranging from $9.125 to $11.50 per share were outstanding at December 31, 1999, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. Note 16: Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents - The fair value of cash and cash equivalents approximates carrying value. F-22 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Investment Securities - Fair values are based on quoted market prices. Mortgage Loans Held for Sale - Fair values are based on quoted market prices. Loans - The fair value for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values. Cash Surrender Value of Life Insurance - The fair values of cash surrender value of life insurance approximate carrying values. Deposits - The fair values of noninterest-bearing and interest-bearing demand accounts are equal to the amount payable on demand at the balance sheet date. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. FHLB Advances - The fair value of advances is estimated using a discounted cash flow calculation, based on current rates for similar debt. Other Borrowing - The fair value of the borrowing is estimated using a discounted cash flow calculation based on the prime interest rate. The estimated fair values of the Company's financial instruments are as follows:

F-23 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data) Note 17: Business Combinations On November 10, 1999, the Company signed a definitive agreement to acquire Blue River Federal Savings Bank, Edinburgh, Indiana. Under provisions of the agreement, the transaction was terminated in 2000. Expenses related to the proposed business combination are included in other expenses for the year ended December 31, 2000. Note 18: Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:

F-24 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data)

F-25 First Community Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Table Dollar Amounts in Thousands, Except Per Share Data)

F-26

FIRST COMMUNITY BANCSHARES INC /IN 10-K