PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

The Company is a multi-state bank holding company headquartered in Bluefield, Virginia with total assets of $1.7 billion at March 31, 2004. Through the Bank, FCBI provides financial and trust and investment advisory services to individuals and commercial customers through 51 full-service banking locations in West Virginia, Virginia and North Carolina as well as investment advisory services through Stone Capital, with offices in Beckley and Bluefield, West Virginia.

At March 31, 2004, the Company also engaged in mortgage brokerage and origination through a wholly-owned subsidiary of the Bank, UFM, which has 8 offices throughout Virginia and North Carolina. However, as mentioned in this report, the Company's plans are to exit the mortgage brokerage and origination business. The Company has entered into a letter of intent with certain present executive officers of UFM and hopes to close the transaction in the second quarter of 2004, subject to execution of a definitive agreement and satisfaction of the conditions which will be set forth therein.

FORWARD LOOKING STATEMENTS

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

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

Estimates, assumptions, and judgments are necessary principally when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third party sources, when available. When third party information

is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal modeling techniques and/or appraisal estimates.

First Community's accounting policies are fundamental to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of First Community's more subjective and complex "critical accounting policies." In addition, the disclosures presented in the Notes to the Consolidated Financial Statements and in management's discussion and analysis, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, the valuation of loans held for sale and the valuation of derivative instruments utilized in mortgage banking and hedging activity to be the accounting areas that require the most subjective or complex judgments.

ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established and maintained at levels management deems adequate to cover losses inherent in the portfolio as of the balance sheet date and is based on management's evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. Estimates for loan losses are determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, the opinions of FCBI's regulators, changes in the size and composition of the loan portfolio and industry information. Also included in management's estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain. These events may include, but are not limited to, a general slowdown in the economy, fluctuations in overall lending rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographic areas in which First Community conducts business.

As more fully described in the Notes to the Consolidated Financial Statements and in the discussion included in the Allowance for Loan Losses section of Management's Discussion and Analysis, the Company determines the allowance for loan losses by making specific allocations to impaired loans and loan pools that exhibit inherent weaknesses and various credit risk factors. Allocations to loan pools are developed giving weight to risk ratings, historical loss trends and management's judgment concerning those trends and other relevant factors. These factors may include, among others, actual versus estimated losses, regional and national economic conditions, business segment and portfolio concentrations, industry competition and consolidation, and the impact of government regulations. The foregoing analysis is performed by the Company's credit administration department to evaluate the portfolio and calculate an estimated valuation allowance through a quantitative and qualitative analysis that applies risk factors to those identified risk areas.

This risk management evaluation is applied at both the portfolio level and the individual loan level for commercial loans and credit relationships while the level of consumer and residential mortgage loan allowance is determined primarily on a total portfolio level based on a review of historical loss percentages and other qualitative factors including concentrations, industry specific factors and economic conditions. The commercial and commercial real estate portfolios require more specific analysis of individually significant loans and the borrower's underlying cash flow, business conditions, capacity for debt repayment and the valuation of secondary sources of payment (collateral). This analysis may result in specifically identified weaknesses and corresponding specific impairment allowances.

The use of various estimates and judgments in the Company's ongoing evaluation of the required level of allowance can significantly impact the Company's results of operations and financial condition and may result in either greater provisions against earnings to increase the allowance or reduced provisions based upon management's current view of portfolio and economic conditions and the application of revised estimates and assumptions.

LOANS HELD FOR SALE, DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: UFM provides a distribution outlet for the sale of loans produced by UFM's wholesale and retail operations. It originates residential mortgage loans through its production offices located in Eastern Virginia and sells the majority of its loans through pooled commitments to national investors on a servicing released basis. In addition, UFM acquires loans from a network of wholesale brokers for subsequent resale to these national investors. UFM originates all loans with the positive intent to sell. Loans held for sale are stated at the lower of cost or market ("LOCOM"). The LOCOM analysis on pools of homogeneous loans is applied on a net aggregate basis. Interest income with respect to loans held for sale is accrued on the principal amount outstanding. LOCOM valuation techniques applicable to loans held for sale are based on estimated market price indications for similar loans. Pricing estimates are established by participating mortgage purchasers and prevailing economic conditions. The majority of the loans held for sale have established market pricing indications. The loans held for sale portfolio at March 31, 2004 was $28.7 million compared to $18.2 million at December 31, 2003.

Risks associated with this lending function include interest rate risk, which is mitigated through the utilization of financial instruments (commonly referred to as derivatives) to assist in offsetting the effect of changing interest rates. The Company accounts for these instruments in accordance with FASB Statement No. 133, as amended "Accounting for Derivative Instruments and Hedging Activity." This Statement established accounting and reporting standards for derivative instruments

and for hedging activities. UFM uses forward mortgage contracts and options (short position sales and options) to manage interest rate risk in the pipeline of loans and interest rate lock commitments ("RLCs") from the point of the loan commitment to the subsequent allocation and delivery to outside investors. As a result of the timing from origination to sale, and the likelihood of changing interest rates, forward commitments and options are placed with counter-parties to attempt to counter the effect of changing interest rates. The options and forward commitments to sell securities are considered to be derivatives and, as such, are recorded on the consolidated balance sheets at fair value. The changes in the fair value of derivatives are reflected in the consolidated statements of income as gain or loss.

The fair value of the RLCs is based on prevailing interest rates, and the assumed probability of closing (pull-through). The assumption of a given pull-through percentage also enters into the determination of the volume of derivative contracts. Pull-through assumptions are continually monitored for changes in the interest rate environment and characteristics of the pool of RLCs. Differences between pull-through assumptions and actual pull-through could result in a mismatch in the volume of security contracts corresponding to RLCs and lead to volatility in profit margins on the loan products ultimately delivered. As more fully described in Note 8, to the Notes to Consolidated Financial Statements under Recent Accounting Developments, effective January 1, 2004, the Company adopted the valuation techniques used to measure loan commitments in a recent guidance issued by the SEC in Staff Accounting Bulletin ("SAB") 105. SAB 105 indicates that the value of internally generated loans has little or no value at inception separate from the servicing intangible that is created upon subsequent sale of the loan. Management applied SAB 105 in the first quarter of 2004 through the elimination of the servicing component of the sales price for the RLC valuation, which had a negative impact of $252,000 on the market value of the commitments outstanding.

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

At March 31, 2004, UFM held an investment in forward mortgage contracts with a notional value of $80.0 million and mortgage-backed security put options totaling $3.0 million. These instruments are collectively referred to as hedging instruments or securities. These contracts hedge interest rate risk associated with RLCs and closed loans not allocated to a forward commitment of $89.1 million. At March 31, 2004, the fair value of the securities was a liability of $194,000, which represents a $22,000 decrease in the fair value of the liability since December 31, 2003. The fair value of the RLCs at March 31, 2004 declined from the fair value at December 31, 2003.

For the three months ended March 31, 2004, the Company incurred $695,000 in the cost of forward mortgage derivative contracts to originate and sell $111.4 million in loans, compared to the first three months of the prior year in which $223.2 million in loans were originated for sale with underlying forward mortgage contracts that cost $2.5 million. The lower cost of forward mortgage contracts between the two periods is reflective of the volatility of the pricing of these types of contracts during times of significant interest rate volatility. Although the pricing of the contracts was favorable to the Company in the current period, UFM's pricing and margin on loans sold were substantially less favorable as a result of the market pricing dynamics and significant competitive forces. The significant decrease in hedging cost as well as the market price of loans sold, demonstrate the potential volatility to earnings and the sensitivity to pull-through assumptions. The cost of these derivative contracts is included as a component of mortgage banking income in the consolidated statements of income, which represents the net revenues associated with the origination, holding and sale of mortgage loans.

RECENT ACQUISITIONS AND BRANCHING ACTIVITY

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

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

In June 2003, the Company acquired CommonWealth, a Virginia-chartered commercial bank for total consideration of approximately $23.2 million. The merger was accomplished through the exchange of .9015 shares of the Company's common stock valued at $30.50, cash, or a combination of the Company's stock and cash equivalent to $30.50 for each share of CommonWealth common stock. At acquisition, CommonWealth had total assets of $136.5 million, net loans of $120.0 million and total deposits of $105.0 million.

In the second and third quarters of 2003, the Company opened three de novo branches in Winston-Salem, North Carolina. The Company does not anticipate that these branches will be profitable until market development has proven successful and adequate loan balances and corresponding loan revenue are established to support the added facilities, infrastructure and other operating costs of these branches.

As part of the Company's planned expansion into the Central Piedmont area of North Carolina, the Company also opened two loan production offices in Charlotte and Mount Airy, North Carolina in February 2004.

In January 2003, the Bank completed the acquisition of Stone Capital, based in Beckley, West Virginia. This acquisition expanded the Bank's operations to include a broader range of financial services, including wealth management, asset allocation, financial planning and investment advice. Stone Capital at March 31, 2004 had total assets of $61 million under management and continues to operate under its name. Stone Capital was acquired through the issuance of 8,409 shares of Company common stock, which represents 50% of the total consideration. In 2003, Stone Capital exceeded the annual revenue requirement outlined in the acquisition agreement and another 2,541 shares were paid to the original shareholders subsequent to December 31, 2003. The balance of the remaining consideration ($175,000) is payable over the next two years in the form of Company common stock, subject to the achievement of minimum revenue requirements set forth in the acquisition agreement.

RESULTS OF OPERATIONS

GENERAL

Net income for the first quarter of 2004 totaled $4.2 million as compared with $6.7 million in the first quarter of 2003. Basic and diluted earnings per share for the first quarter were $0.37, down from $0.62 in the first quarter of 2003. When comparing the first quarter 2004 earnings with that of 2003, the reduction in the Company's earnings was largely attributable to a $1.9 million decline in net income from the mortgage-banking segment. Reduced loan production and margins in the segment, combined with an impairment charge of $651,000, produced the decline in mortgage banking net income. The community-banking segment reported segment net income of $5.7 million, which represents a decrease from the community banking segment net income of $6.4 million in the first quarter of 2003. The decrease is attributed, in part, to increased overhead and operating expense relative to the development and growth of the Company into new markets.

The mortgage banking segment losses led the Board to pursue alternative strategies including the exit of the mortgage banking business. In the first quarter, the Company entered into negotiations with certain present executive officers of UFM which led to a letter of intent for the sale of the mortgage subsidiary being signed April 16, 2004. As a result, in the first quarter 2004, the aforementioned $651,000 impairment loss related to the planned disposal of that subsidiary was recorded. Plans are to close this transaction in the second quarter of 2004, subject to execution of a definitive agreement and the satisfaction of the conditions set forth therein.

NET INTEREST INCOME (SEE TABLE I)

Net interest income, the largest contributor to earnings, was $16.0 million for the three months ended March 31, 2004 compared to $15.2 million for the corresponding period in 2003. For purposes of the following discussion, comparison of net interest income is done on a tax equivalent basis, which provides a common basis for comparing yields on earning assets exempt from federal income taxes to those which are fully taxable. As indicated in Table I, tax equivalent net interest income totaled $16.9 million for the three months ended March 31, 2004, an increase of $0.8 million from the $16.1 million reported in the first three months of 2003. This $0.8 million increase was based on a $6.6 million increase in volume as earning assets were added to the portfolio at declining replacement rates, which was partially offset by a $5.8 million reduction due to rate changes on the underlying assets as asset yields fell in the declining rate environment. Management was able to help counter the effect of the declining asset yield through aggressive management of deposit rates. Average earning assets increased $134.4 million while interest-bearing liabilities increased $109.6 million. As indicated in Table I, the yield on average earning assets decreased 68 basis points from 6.76% for the three months ended March 31, 2003 to 6.08% for the three months ended March 31, 2004. However, this decrease was largely offset by a 52 basis point decline in the cost of funds during the same period leaving the net interest rate spread (the difference between interest income on earning assets and expense on interest bearing liabilities) lower at 4.10% compared to 4.24% the same period last year. The Company's tax equivalent net interest margin of 4.41% for the three months ended March 31, 2004 decreased 23 basis points from 4.64% in 2003.

The largest contributor to the decrease in the yield on average earning assets in 2004, on a volume-weighted basis, was the decrease in the overall tax equivalent yield on loans held for investment of 78 basis points from the prior year to 6.79%, as loans repriced downward in response to the declining rate environment while the average balance increased $109.5 million. The decline in asset yield is attributable to the current interest rate environment which creates refinancing or repricing incentives for fixed rate borrowers to lower their current borrowing costs. In addition, due to the volume of loans directly tied to prime and other indices that are either adjustable incrementally or are variable rate advances, asset yields have declined in response to rate cuts and drops in the prime loan rate which began in 2001 and remain at a level not seen since 1959.

The balance of average loans held for sale decreased by $34.5 million while the yield increased 25 basis points to 5.40%. The yield on loans held for sale is much more sensitive to interest rate change since these loans are only held for 30 to 60 days and are replenished with new loan volume at the then prevailing rates. The change in rate on this pool of loans is reflective of the volatility experienced in mortgage rates and the underlying mortgage-backed securities into which they are delivered.

During the three months ended March 31, 2004, the taxable equivalent yield on securities available for sale decreased 64 basis points to 4.79% while the average balance increased by $60.3 million. Consistent with the current rate environment, the Company and the securities industry as a whole have experienced rapid turnover in securities as higher yielding securities are either called or prepaid as the refinancing opportunity presents itself. Although the total portfolio grew by $60.3 million from March 31, 2003, the relative rate on securities acquired since that time has declined substantially. The increasing average security balance is the result of continued reinvestment of available funds largely created by higher average deposit levels. The first quarter 2004 average balance of investment securities held to maturity decreased by $3.0 million to $37.6 million while the yield decreased 40 basis points to 7.65% compared to the first quarter 2003.

Compared to the first three months of 2003, average interest-bearing balances with banks of $63.2 million increased $4.6 million while the yield decreased 18 basis points to 1.27%. This average balance increase was largely the result of funds received from new deposit growth in existing markets and deposits obtained in the acquisition of CommonWealth in the second quarter of 2003 as well as the continued cash flow roll-off experience in the loan and investment portfolio.

The Company actively manages its product pricing by staying abreast of the current economic climate and competitive forces in order to enhance repricing opportunities available with respect to the liability side of its balance sheet. In doing so, the cost of interest-bearing liabilities decreased by 52 basis points from 2.51% for the three months ended March 31, 2003 to 1.99% for the same period of 2004 while the average volume increased $109.6 million. Active deposit liability pricing management is performed weekly.

When comparing the three months ended March 31, 2004 to the corresponding period of the prior year, the 2004 average balance of FHLB and other short-term convertible and callable borrowings increased by $45.8 million in 2004 to $145.8 million while the rate decreased 151 basis points to 4.39%, the result of additional FHLB borrowings (at lower rates) in addition to balances acquired with the CommonWealth Bank acquisition. The average balance of all other borrowings increased $7 million for the first three months of 2004 vs. 2003 as a result of the issuance of $15 million in trust preferred securities and the repayment of an $8 million FHLB advance while the rate paid decreased 106 basis points.

Average fed funds and repurchase agreements increased $3.1 million at March 31, 2004, while the average rate decreased 67 basis points compared to the same period in 2003. In addition, the average balances of interest-bearing demand and savings deposits increased $34.6 and $11.5 million, respectively, for the first quarter 2004 while the corresponding average rate paid on these deposit categories declined 18 and 21 basis points, respectively. Average time deposits increased $7.7 million while the average rate paid decreased 65 basis points from 3.14% in 2003 to 2.49% in 2004. The level of average non-interest-bearing demand deposits increased $28.6 million to $186.1 million at March 31, 2004 compared to the corresponding period of the prior year. Average interest bearing deposits and non-interest bearing demand deposits for the former CommonWealth Bank branches totaled $60 million and $23.3 million at March 31, 2004.

TABLE I                                               AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
                                                                      (DOLLARS IN THOUSANDS)
                                                      THREE MONTHS ENDED                   THREE MONTHS ENDED
                                                        MARCH 31, 2004                       MARCH 31, 2003
                                                AVERAGE     INTEREST    YIELD/RATE     AVERAGE   INTEREST  YIELD/RATE
                                                BALANCE       (1)           (1)        BALANCE      (1)        (1)
                                              ----------------------- ------------------------------------ -----------
Earning Assets:
Loans (2):
Held for Sale                                  $    15,110   $   203        5.40%    $   49,560   $   629       5.15%
Held for Investment:
  Taxable                                        1,011,752    17,084        6.79%       900,732    16,814       7.57%
  Tax-Exempt                                         4,557        70        6.18%         6,124       120       7.95%
                                              ----------------------- ------------------------------------ -----------
     Total                                       1,016,309    17,154        6.79%       906,856    16,934       7.57%
Allowance for Loan Losses                          (14,728)                             (14,331)
                                              -----------------------             ------------------------
  Net Total                                      1,001,581    17,154                    892,525    16,934
Securities Available for  Sale:
  Taxable                                          323,887     3,265        4.05%       271,864     3,135       4.68%
  Tax-Exempt                                       101,718     1,806        7.14%        93,464     1,753       7.61%
                                              ----------------------- ------------------------------------ -----------
  Total                                            425,605     5,071        4.79%       365,328     4,888       5.43%
Securities Held to Maturity:
  Taxable                                              495         5        4.06%           657        10       6.17%
  Tax-Exempt                                        37,146       711        7.69%        39,959       797       8.09%
                                              ----------------------- ------------------------------------ -----------
  Total                                             37,641       716        7.65%        40,616       807       8.05%
Interest Bearing Deposits                           63,220       199        1.27%        58,627       209       1.45%
Fed Funds Sold                                           -         -        0.00%         2,093         6       1.16%
                                              ----------------------- ------------------------------------ -----------
  Total Earning Assets                           1,543,157    23,343        6.08%     1,408,749    23,473       6.76%
Other Assets                                       130,428                              106,151
                                              -------------                       --------------
  Total                                        $ 1,673,585                           $1,514,900
                                              =============                       ==============
Interest-Bearing  Liabilities:
Demand Deposits                                $   238,163     $ 326        0.55%    $  203,547   $   365       0.73%
Savings Deposits                                   192,636       239        0.50%       181,175       317       0.71%
Time Deposits                                      606,177     3,750        2.49%       598,520     4,634       3.14%
                                              ----------------------- ------------------------------------ -----------
  Total Deposits                                 1,036,976     4,315        1.67%       983,242     5,316       2.19%
Fed Funds Purchased & Repurchase
  Agreements                                        97,316       292        1.21%        94,251       438       1.88%
FHLB Convertible and Callable Advances             145,787     1,591        4.39%       100,000     1,456       5.90%
Other Borrowings                                    17,033       208        4.91%        10,048       148       5.97%
                                              ----------------------- ------------------------------------ -----------
  Total Interest-bearing liabilities             1,297,112     6,406        1.99%     1,187,541     7,358       2.51%
Demand Deposits                                    186,056                              157,504
Other Liabilities                                   12,380                               14,633
Stockholders' Equity                               178,037                              155,222
                                              -------------                       --------------
  Total                                        $ 1,673,585                           $1,514,900
                                              =============                       ==============
Net Interest Income, tax equivalent                          $16,937                              $16,115
                                                           ==========                           ==========
Net Interest Rate Spread (3)                                                4.10%                               4.24%
                                                                      ============                         ===========
Net Interest Margin (4)                                                     4.41%                               4.64%
                                                                      ============                         ===========

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

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

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

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

PROVISION AND ALLOWANCE FOR LOAN LOSSES

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

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

The allowance for loan losses was $14.5 million on March 31, 2004, compared to $14.6 million at December 31, 2003 and $13.8 million on March 31, 2003. The allowance for loan losses represents 405% of non-performing loans at March 31, 2004, versus 488.6% and 343% at December 31, 2003 and March 31, 2003, respectively. When other real estate is combined with non-performing loans, the allowance equals 236% of non-performing assets at March 31, 2003 versus 288% and 210% at December 31, 2003 and March 31, 2003, respectively. The increase in the allowance since March 2003 is primarily attributable to the acquisition of CommonWealth Bank and the application of risk factors specific to this portfolio. The allowance attributable to the CommonWealth Bank portfolio at the date of acquisition was $1.6 million.

FCBI's allowance for loan loss activity for the three month periods ended March 31, 2004 and 2003 are as follows:

                                            FOR THE THREE MONTHS ENDED
                                                     MARCH 31,
                                             2004                 2003
                                           --------             --------
                                               (DOLLARS IN THOUSANDS)

Beginning balance                          $ 14,624             $ 14,410
Provision                                       532                  589
Charge-offs                                    (911)              (1,668)
Recoveries                                      291                  451
                                           --------             --------
Ending Balance                             $ 14,536             $ 13,782
                                           ========             ========

Based on the allowance for loan losses of approximately $14.5 million, $14.6 million and $13.8 million at March 31, 2004, December 31, 2003 and March 31, 2003, respectively, the allowance to loans held for investment ratio was 1.43 at both March 31, 2004 and December 31, 2003 vs. 1.54 for March 31, 2003. Management considers the allowance adequate based upon its analysis of the portfolio as of March 31, 2004.

The provision for loan losses for the three month period ended March 31, 2004 decreased slightly to $532,000 when compared to the three month period ending March 31, 2003 at $589,000. The decrease is largely attributable to improving asset quality and loan loss history, changes in risk factors assigned and a decline in volume within certain portfolio segments. Net charge-offs for the first three months of 2004 and the corresponding period of 2003 were $620,000 and $1.2 million, respectively. Expressed as a percentage of average loans held for investment, net charge-offs decreased from 0.13% for the three month period of 2003 to 0.06% for the same period of 2004. The decrease in net charge-offs is primarily attributable to an approximate $1 million charge-off that occurred during the first quarter 2003.

NON-INTEREST INCOME

Non-interest income consists of all revenues which are not included in interest and fee income related to earning assets. Total non-interest income decreased approximately $2.3 million, or 37.8%, from $6.0 million for the three months ended March 31, 2003 to $3.8 million for the corresponding period in 2004. While service charges on deposit accounts and other service

charges, commissions and fees reflected gains of 7.6% and 9%, respectively, the non-interest income category decreased because of the decrease of $2.5 million in mortgage banking income.

Non-interest income in the mortgage banking subsidiary, UFM, declined from $3.0 million in 2003 to $507,000 in 2004. The end of unprecedented refinance activity in the latter half of 2003, coupled with rate volatility and changes in price expectations by national investors who buy these loans and brokers who provide wholesale production, as well as the impact of SAB 105, caused a decline in the fair value of the mortgage pipeline, related securities and mortgage earnings.

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

                                                                       MARCH 31,
                                                                   2004        2003
                                                                ---------    --------
                                                                (AMOUNTS IN THOUSANDS)
   Other Service Charges, Commissions & Fees                     $   131      $   360
   Gain on Sale of Loans                                             952        4,752
   Fee Income                                                        334          620
   Loss on Derivatives Settled                                      (637)      (2,520)
   Option Expense                                                    (58)           -
                                                                 -------      -------
                                                                     722        3,212
Mark-to-Market Component:
   Mark to Market Losses on Loan Commitments(1)                     (238)        (578)
   Mark to Market on Securities                                       23          330
                                                                 -------      -------
                                                                    (215)        (248)
                                                                 -------      -------
   TOTAL MORTGAGE BANKING INCOME                                 $   507      $ 2,964
                                                                 =======      =======

                                                                       MARCH 31,
                                                                   2004        2003
                                                                ---------    --------
                                                                (AMOUNTS IN THOUSANDS)
Interest Rate Lock Commitments:
   Notional Value                                                $82,609      $85,536
   Fair Value(1)                                                      60        1,805
Securities:
   Notional Value                                                 83,000       80,000
   Fair Value                                                       (194)        (375)

(1) Reflects the adoption of SAB 105, effective January 1, 2004.

At March 31, 2004, UFM held an investment in forward mortgage contracts with a notional value of $80 million and mortgage-backed security put options totaling $3 million. These contracts are used in an attempt to hedge interest rate risk associated with RLCs and closed loans not allocated to a forward commitment of $89.1 million. At March 31, 2004, the fair value of the securities was a liability of $194,000, which represents a $22,000 reduction in the fair value of the liability since December 31, 2003. In addition, the fair value of the RLCs at March 31, 2004 was recorded in accordance with recent guidance issued by the SEC under SAB 105 was recorded as $60,000. The market valuation of RLCs at March 31, 2004 assumes a 63.81% RLC pull-through. If actual pull-through in succeeding months proves to be more or less than 63.81%, the full market value of RLCs may or may not be realized and/or the valuation of RLCs may change.

For the period ended March 31, 2004, the Company incurred $695,000 in the cost of forward mortgage derivative contracts and options to originate and sell $111.4 million in loans compared to the prior year in which $223.2 million in loans were originated for sale with underlying forward mortgage contracts that cost $2.5 million. The cost of forward mortgage contracts between the two periods is reflective of the volatility of the pricing of these types of contracts during times of significant interest rate volatility. Although the pricing of the contracts was favorable to the Company in the current year, UFM's pricing and margin on loans sold were substantially less favorable as a result of the market pricing dynamics and significant competitive forces. The significant decrease in hedging cost, as well as the market price of loans sold, demonstrates the potential volatility to earnings and the sensitivity to pull-through assumptions. The cost of these derivative contracts is included as a component of mortgage banking income in the consolidated statements of income, which represents the net revenues associated with the origination, holding and sale of mortgage loans.

NON-INTEREST EXPENSE

Non-interest expense totaled $13.4 million for 2004, increasing $2.2 million, or 20% over the first quarter of 2003. This increase is primarily attributable to an $880,000 increase in salaries and benefits as a result of the addition of CommonWealth Bank in June 2003 ($431,000), the salaries and benefits associated with three North Carolina de novo branches opened in 2003 as well as the opening of two new North Carolina loan production offices in the first quarter of 2004 ($255,000) as well as a general increase in salaries and benefits as staffing needs at several locations were satisfied in order to support added corporate services and continued branch growth.

In 2004, occupancy and furniture and equipment expense increased by $245,000 compared to 2003. The general level of occupancy cost grew largely as a result of the CommonWealth Bank acquisition ($90,000) as well as increases in depreciation and insurance costs associated with new de novo branches ($51,000) and depreciation associated with a significant investment in operating equipment and technology infrastructure.

All other operating expense accounts increased $1.1 million, compared to 2003. This increase included the previously discussed $651,000 impairment charge related to the mortgage banking segment and increases in other operating expenses largely related to the additional costs and other operating expenses associated with the opening of three new branches in Winston-Salem and two loan production offices in Charlotte and Mount Airy, North Carolina, the acquisition of The CommonWealth Bank in Richmond, Virginia.

INCOME TAX

The effective income tax rate continues to benefit from the utilization of tax-exempt municipal securities. Municipal securities, which have offered an attractive tax equivalent yield, have assisted in countering the effect of the declining interest rate environment. The Company's effective tax rate was 29.4% for the three months ended March 31, 2004 and 28.9% for the three months ended March 31, 2003.

FINANCIAL POSITION

SECURITIES

Securities held to maturity totaled $37.4 million at March 31, 2004, a slight decrease of $595,000 from December 31, 2003, the result of paydowns, maturities and calls within the portfolio during the first three months of 2004. The market value of investment securities held to maturity was 105.9% and 105.4% of book value at March 31, 2004 and December 31, 2003, respectively. Recent trends in interest rates have had little effect on the underlying market value since December 31, 2003.
Securities available for sale were $443.8 million at March 31, 2004 compared to $444.5 million at December 31, 2003, a decrease of $647,000. This change reflects the purchase of $43.4 million in securities, $46.4 million in maturities and calls, and a market value increase of approximately $2.8 million, along with the continuation of larger pay-downs on mortgage-backed securities and collateralized mortgage obligations triggered by the low interest rate environment. Securities available for sale are recorded at their estimated fair market value. The unrealized gain or loss, which is the difference between amortized cost and estimated market value, net of related deferred taxes, is recognized in the stockholders' equity section of the balance sheet as either accumulated other comprehensive income or loss. The unrealized gains after taxes of $6.7 million at March 31, 2004, represent an increase of $1.7 million from the $5.0 million gain at December 31, 2003 due to market value increases in the first three months of 2004.

Although substantial investment has been made in the available for sale security portfolio, the Company has attempted to maintain a shorter portfolio duration (the cash-weighted term to maturity of the portfolio) to reduce the sensitivity of the bonds price to changes in interest rates and lessen interest rate risk. The longer the duration, the greater the impact of changing market rates for similar instruments. At March 31, 2004, the average estimated life of the investment portfolio was 4.6 years (reflective of currently anticipated prepayments). This compares to 4.2 years at December 31, 2003. The approximate 4 month increase in average duration reflects the substantial amount of portfolio replacement over the last twelve months and investment in longer-term municipal securities.

LOAN PORTFOLIO

LOANS HELD FOR SALE: The relative size of the portfolio of loans originated by the Company's mortgage brokerage division, UFM, and held for sale, was impacted significantly by the refinancing activity that occurred during 2003 and continues into 2004 as a result of the low interest rate environment. Loans held for sale fluctuate on a daily basis reflecting retail originations, wholesale purchases and sales to investors. At March 31, 2004, loans held for sale were $28.7 million compared to $18.2

million at December 31, 2003. Average loans held for sale (which is a better indicator of volume maintained) for the first quarter 2004, was down by 17%, when comparing the first quarter 2004 average of $15.1 million to the trailing quarter average of $18.2 million and down 70% compared to the first quarter 2003 average of $49.6 million.

LOANS HELD FOR INVESTMENT: Total loans held for investment decreased $6.4 million to $1.02 billion at March 31, 2004 because of several large payoffs, but increased $122.6 million compared to March 31, 2003 as a result of the CommonWealth Bank acquisition. Considering a $17.1 million increase in deposits along with the decrease in loans during the first three months of 2004, the loan to deposit ratio decreased slightly at March 31, 2004 compared to the December 31, 2003 level. The loan to deposit ratio, using only loans held for investment (excluding loans held for sale), was 82.1% on March 31, 2004, 83.7% on December 31, 2003 and 77.8% on March 31, 2003. Intense competition for loans in the face of low interest rates and what appears to be slower loan demand continue to impact this measure of loan production. Resulting liquidity during the period has been reinvested in the available for sale securities portfolio.

2004 first quarter average loans held for investment of $1.02 billion decreased by $18.5 million compared to the trailing quarter 2003 average of $1.03 billion but increased $109.5 million when compared to the first quarter average of 2003. This increase compared to the first quarter 2003, was due to the CommonWealth Bank acquisition; as the branches acquired reflected approximately $120 million in average loans held for investment.

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

                                                                LOAN PORTFOLIO OVERVIEW
                                                                 (DOLLARS IN THOUSANDS)

                                       MARCH 31, 2004               DECEMBER 31, 2003               MARCH 31, 2003
                                 -------------------------      -------------------------      -------------------------
                                   AMOUNT         PERCENT         AMOUNT        PERCENT          AMOUNT        PERCENT
                                 ----------     ----------      ----------     ----------      ----------     ----------
LOANS HELD FOR INVESTMENT:
 Commercial and Agricultural     $   63,322           6.21%     $   69,395           6.76%     $   59,724           6.66%
 Commercial Real Estate             320,032          31.39%        317,421          30.94%        270,004          30.10%
 Residential Real Estate            412,373          40.44%        421,288          41.05%        361,883          40.33%
 Construction                       106,219          10.42%         98,510           9.60%         78,576           8.76%
 Consumer                           115,631          11.34%        118,585          11.56%        126,241          14.07%
 Other                                2,252           0.22%            992           0.10%            766           0.09%
                                 ----------     ----------      ----------     ----------      ----------     ----------
 Total                           $1,019,829         100.00%     $1,026,191         100.00%     $  897,194         100.00%
                                 ==========     ==========      ==========     ==========      ==========     ==========

 LOANS HELD FOR SALE             $   28,656                     $   18,152                     $   50,753
                                 ==========                     ==========                     ==========

NON-PERFORMING ASSETS

Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or more and still accruing interest and other real estate owned ("OREO"). Non-performing assets were $6.2 million at March 31, 2004, $5.1 million at December 31, 2003 and $6.6 million at March 31, 2003, or 0.6%, 0.5% and 0.7% of total loans and OREO, respectively. The following schedule details non-performing assets by category at the close of each of the last five quarters:

(IN THOUSANDS OF DOLLARS)               MARCH 31    DECEMBER 31   SEPTEMBER 30    JUNE 30       MARCH 31
                                          2004          2003          2003          2003          2003
                                         ------        ------        ------        ------        ------

Nonaccrual                               $3,588        $2,993        $2,277        $2,547        $3,997
Ninety Days Past Due and Accruing             -             -           124            86            21
Other Real Estate Owned                   2,571         2,091         2,403         2,787         2,544
                                         ------        ------        ------        ------        ------
                                         $6,159        $5,084        $4,804        $5,420        $6,562
                                         ======        ======        ======        ======        ======

Restructured loans
 performing in accordance
 with modified terms                     $  392        $  356        $  362        $  368        $  341
                                         ======        ======        ======        ======        ======

At March 31, 2004, non-accrual loans increased $595,000 from December 31, 2003, while ninety day past due and accruing loans outstanding remained at zero for both periods. Ongoing activity within the classification and categories of non-performing loans continues to include collections on delinquencies, foreclosures and movements into or out of the non-performing classification as a result of changing customer business conditions. The $595,000 increase in non-accrual loans during the first quarter of 2004 is largely the result of an addition of a commercial real estate loan in the amount of $903,000, while certain non-accrual loans were paid, moved to a current status as a result of improved performance, or were liquidated through foreclosure or repossession. OREO increased $480,000 during the first quarter of 2004 from December 31, 2003 as a result of foreclosure on a commercial real estate loan previously on non-accrual, in the amount of $500,000. Other real estate owned is carried at the lesser of estimated net realizable fair market value or cost.

In addition to loans which are classified as non-performing and impaired, the Company closely monitors certain loans which could develop into problem loans. These potential problem loans present characteristics of weakness or concentrations of credit to one borrower. Among these loans at March 31, 2004 was a loan of $12.8 million which warrants close monitoring of a borrower within the hospitality industry. The loan represents the retained portion of a $16 million total loan shared with a participating bank. As with other hospitality industry firms, the borrower has experienced reduced cash flow associated with declines in the level of hotel occupancy. The loan is secured by real estate improved with a national franchise hotel and parking building in a major southeast city. The loan is further secured by the guarantee of the principals of the borrowing entity. This loan, which was originated in 1999, performed according to terms until it displayed delinquency in February and March 2003 and was subsequently brought current. The loan remains current as to principal and interest at March 31, 2004. This loan does, however, represent one of the Company's largest credits and is within an industry which has suffered from declining performance in recent years.

The Company is also monitoring a $3.1 million loan to a hospitality borrower for a new property opened in 2003. The construction and opening of the hotel which secures this loan was delayed and occupancy has not reached projected levels necessary to adequately fund current debt service requirements. The loan is guaranteed by the principals and is senior to a $1.3 million loan by the SBA. The $3.1 million senior loan was 79 days delinquent on April 30, 2004. A subsequent payment brought the loan to 57 days delinquent as of the filing date of this report. The borrower has requested conversion to interest only payments for one year to allow time for stabilization of occupancy and cash flow for the property. Management does not consider this loan impaired. The Company has delayed consideration of the modification request until the principals restore the loan to current status and pending the Company's request for additional collateral. The ultimate resolution of the issues dealing with the modification is not expected to have a material adverse effect on consolidated financial statements.

There were no specific allocations of the allowance for loan losses for the $12.8 million loan; however, a $300,000 allocation was assigned to the $3.1 million loan as of March 31, 2004. These loans were appropriately considered in evaluating the adequacy of the allowance for loan losses.

DEPOSITS AND OTHER BORROWINGS

Total deposits have grown $17.1 million or 1.4% since year-end 2003. In terms of composition, non-interest-bearing deposits increased $3.2 million or 1.7% while interest-bearing deposits grew $13.9 million or 1.4% from December 31, 2003. Since March 31, 2003, non-interest bearing deposits grew $34.3 million and interest-bearing deposits grew $54.7 million, largely the result of the CommonWealth Bank acquisition in June 2003.

The Company acquired an additional $17.5 million in borrowed funds from the FHLB with the acquisition of CommonWealth Bank and borrowed an additional $25 million from the FHLB in June 2003. These increases together with a decrease due to the repayment of a line of credit used to fund mortgages held by UFM brought the Company's borrowings at March 31, 2003 to $136.3 million in convertible and callable advances and $8.3 million of noncallable term advances from the FHLB of Atlanta. For further discussion of FHLB borrowings, see Note 4 to the unaudited consolidated financial statements included in this report. In addition, FCBI issued trust preferred securities in September 2003 of $15.0 million which is also included in the total borrowings of the Company.

STOCKHOLDERS' EQUITY

Total stockholders' equity reached $178.0 million at March 31, 2004, increasing $3 million from the $175.0 million reported at December 31, 2003 through earnings of $4.2 million less dividends paid of $2.8 million, an increase in other comprehensive income of $1.7 million, increases of $87,000 due to Stone Capital payments, a $34,000 increase due to stock option exercises and a net decrease due to treasury share transactions of $161,000.

The Federal Reserve's risk based capital guidelines and leverage ratio measure capital adequacy of banking institutions. Risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. At March 31, 2004, the Company's total risk adjusted capital-to-asset ratio was 14.71% versus

14.55% at December 31, 2003. The Company's leverage ratio at March 31, 2004 was 8.98% compared with 8.83% at December 31, 2003. Both the risk adjusted capital-to-asset ratio and the leverage ratio exceed the current well-capitalized levels prescribed for banks of 10% and 5%, respectively.