10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

xAnnual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2002

OR

oTransition Report Pursuant to Section 13 or 15 (d) or the Securities Exchange Act of 1934

For the transition period from to

Commission file number: 0-11671

FIRST CENTURY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

West Virginia
(State or other jurisdiction of
incorporation or organization)
55-0628089
(IRS Employer
Identification No.)

500 Federal Street, Bluefield, WV
(Address of principal executive offices)
24701
(Zip Code)

Registrant’s telephone number, including area code: (304) 325-8181

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

Title of each class
NONE
Name of each exchange on
which registered
NONE

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

First Century Bankshares, Inc.: $1.25 Par Value - Common Stock
(Title of class)

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

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. o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 14, 2003 was $25,686,470 and the number of shares outstanding of the registrant’s common stock was 1,991,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the annual shareholders report for the fiscal year ended
December 31, 2002 are incorporated by reference into Part II.

Portions of the proxy statement for the annual shareholders meeting to be
held April 15, 2003, are incorporated by reference into Part III.

Total number of pages, including cover page and exhibits - 81

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FIRST CENTURY BANKSHARES, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

PART I
	ITEM 1.	BUSINESS	3
	ITEM 2.	PROPERTIES	7
	ITEM 3.	LEGAL PROCEEDINGS	7
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	7
PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	7
	ITEM 6.	SELECTED FINANCIAL DATA	8
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS	8
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	8
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	8
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	8
PART III
	ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	9
	ITEM 11.	EXECUTIVE COMPENSATION	9
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	9
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	9
	ITEM 14.	CONTROLS AND PROCEDURES	9
PART IV
	ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K	9 - 10

SIGNATURES AND CERTIFICATIONS 11 - 14

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PART I

ITEM1. BUSINESS

FIRST CENTURY BANKSHARES, INC.

First Century Bankshares, Inc. (“Corporation” or “Registrant”), formerly Pocahontas Bankshares Corporation, was organized under the laws of West Virginia in 1983 at the direction of the Board of Directors of The First National Bank of Bluefield (“Bluefield”). On March 1, 1984, the effective date of the corporate reorganization, the shareholders of Bluefield became the shareholders of the Corporation, and Bluefield became a wholly-owned subsidiary of the Corporation. On March 11, 1988, the Registrant acquired control of the Bank of Oceana, Oceana, WV (“Oceana”). On May 24, 1991, the Registrant formed First Century Bank, Roanoke, Virginia. During 1993, the main office of First Century Bank was redesignated to Wytheville, Virginia. Effective November 28, 1994, the merger of Bank of Oceana into The First National Bank of Bluefield was completed and the name of the resulting entity was changed to First Century Bank, National Association (“FCBNA”), with its main office in Bluefield, West Virginia. Effective May 7, 1999, First Century Bank was merged into FCBNA.

During 2001, the Corporation formed a financial subsidiary, First Century Financial Services, LLC, (“FCFSLLC”). This entity conducts the Corporation’s insurance activities through its investment in the Banker’s Insurance Corporation, a relationship with 67 community banks, which offers a full range of insurance products and services. This entity was formed with a minimal capital investment which is carried at cost and eliminates upon consolidation.

Substantially, all of the operations of the Corporation are carried on through FCBNA which is the Registrant’s only banking subsidiary. The officers and directors of the Corporation, who are also officers and directors of FCBNA, receive their entire compensation from FCBNA. The Corporation’s executive offices are located at 500 Federal Street, Bluefield, West Virginia.

The Registrant’s principal business and major source of revenue is, and is expected to remain, commercial banking. The Registrant currently derives substantially all its revenues from dividends paid by the subsidiary bank. The earnings, asset growth and current capital position of the subsidiary influence dividend payments by FCBNA. In addition, various regulatory agencies control the payment of dividends. For additional information regarding the payment of dividends, see Note 16 of the Notes to the Consolidated Financial Statements in the Registrant’s 2002 Annual Report to the Stockholders attached as Exhibit 13 to this report.

FIRST CENTURY BANK, N.A.

First Century Bank, N.A., a national banking association, was organized and chartered in 1891 as The First National Bank of Bluefield, under the laws of the State of West Virginia and the National Bank Act. FCBNA offers customary banking services, including commercial, real estate, installment, and other loans; interest-bearing and non-interest bearing transaction accounts, savings and time deposit accounts including certificates and other deposit accounts, featuring various maturities and market rates; Individual Retirement Accounts; Visa and MasterCard services under an arrangement with a correspondent bank; safe deposit facilities; personal and corporate trust services; and various cash management services.

In addition to the main office, FCBNA currently operates ten additional branches in Mercer, Summers and Wyoming counties in southern West Virginia and Tazewell and Wythe Counties in southwestern Virginia. As of December 31, 2002, FCBNA had 162 full-time employees and 13 part-time employees. FCBNA is not a party to any collective bargaining agreements, and, in the opinion of management, enjoys satisfactory relations with its employees.

COMPETITION

Vigorous and intense competition exists in all areas where the Registrant and its subsidiaries are engaged in business, generally from other banks located in southern West Virginia and southwestern Virginia. However, this competition is not only limited to other commercial banks. The subsidiaries also compete for certain lines of business with savings and loan associations, mortgage companies, credit unions, consumer finance companies, leasing companies, insurance companies, mutual funds and brokerage firms. Significant competition also exists from state-wide and nation-wide bank holding companies located in West Virginia and Virginia, which have offices in the communities the Registrant serves. These institutions are larger in terms of capital, resources and personnel. This requires that the

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Registrant place a high emphasis on quality service, with a significant amount of personal attention, in order to effectively compete with these larger institutions. Management feels that this competitive environment will continue in the markets in which the Registrant currently operates.

FUTURE ACQUISITIONS AND EXPANSION

The Registrant may from time to time consider expansion of its banking operations through acquisition of or formation of other banks and/or bank related businesses. In addition to traditional banking products and services, with the passage of the Graham-Leach-Bliley Financial Modernization Act, the registrant will evaluate the potential of offering new financial services allowed under the Act.

SUPERVISION AND REGULATION

The Corporation is under the jurisdiction of the United States Securities and Exchange Commission and the State of West Virginia’s Secretary of State with respect to matters relating to the offer and sale of its securities and matters relating to financial reporting and disclosure to these regulators and to the Corporation’s shareholders. The business in which the Corporation and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies in the states where the Corporation and its subsidiaries operate. The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are intended primarily for the protection of depositors or are aimed at carrying out broad public policy goals, rather than for the protection of security holders.

Several of the more significant regulatory provisions applicable to the Corporation and its subsidiaries are discussed below. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Corporation and its subsidiaries.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”). The Act contains a number of provisions that dramatically change the reporting and corporate governance obligations of public companies and their directors and officers. The Act also creates new and enhanced criminal and civil liability provisions related to securities fraud. In order to comply with certain provisions of the Act, the Corporation has taken steps to enhance its controls over financial reporting and disclosures including, but not limited to, the formation of a disclosure review committee that will be utilized to evaluate the accuracy and completeness of the Corporation’s reporting to the U.S. Securities and Exchange Commission and to shareholders of the Corporation.

The Corporation is a financial holding company under the Bank Holding Company Act of 1956 (“BHCA”), as amended, and is regulated by the Federal Reserve. As a financial holding company, the Corporation is required to file with the Federal Reserve an Annual Report and such additional information as the Federal Reserve may require pursuant to the Bank Holding Company Act. The Federal Reserve may also conduct examinations of the Corporation and each subsidiary. The Bank Holding Company Act requires every financial holding company to obtain prior approval from the Federal Reserve before acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank which is not already majority owned or controlled by that bank holding company.

In addition to having the right to acquire ownership and control of other banks, the Corporation is authorized to acquire ownership and control of non-banking companies, provided the activities of such companies are so closely related to banking or managing or controlling banks that the Federal Reserve considers such activities to be proper to the operation and control of banks. Regulation Y, promulgated by the Federal Reserve, sets forth those activities which are regarded as closely related to banking or managing or controlling banks and thus are permissible activities for bank holding companies, subject to the approval by the Federal Reserve in individual cases.

The BHCA permits the Corporation to purchase or redeem its own securities. However, Regulation Y provides that prior notice must be given to the Federal Reserve if the gross consideration for such purchase or consideration, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months is equal to 10 percent or more of the company’s consolidated net worth. Prior notice is not required if (i) both before and immediately after the redemption, the financial holding company is well-capitalized; (ii) the financial holding company is well-managed and (iii) the financial holding company is not the subject of any unresolved supervisory issues.

The BHCA further provides that the Federal Reserve will not approve any acquisition, merger or consolidation (i) which would result in a monopoly, (ii) which would be in furtherance of any combination or conspiracy to monopolize or attempt to

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monopolize the business of banking in any part of the United States, (iii) the effect of which may be to substantially lessen competition or to tend to create a monopoly in any section of the country or (iv) which in any other manner would be in restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in the probable effect of the transaction meeting the convenience and needs of the community to be served.

Subsidiary banks of a financial holding company are subject to certain restrictions imposed by the BHCA on any extension of credit to the bank holding company or any of its subsidiaries, on investment in the stock or other securities thereof, and on the taking of such stock or securities for loans to any borrower. Further, under Section 106 of the 1970 amendments to the Bank Holding Company Act and the regulations of the Federal Reserve, a financial holding company through its banking subsidiaries is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services. The Federal Reserve possesses cease and desist powers over financial holding companies and their non-bank subsidiaries if their actions are unsafe or unsound practices or violations of law.

In November 1999, Congress passed the “Gramm-Leach-Bliley” Financial Services Modernization Act (the “GLB Act”) which repealed two provisions of the Glass-Stegall Act that previously separated banking, insurance, and securities activities. The GLB Act creates a new financial services structure, the financial holding company, under the BHCA. Financial holding companies will be able to engage in any activity that is deemed (i) financial in nature, (ii) incidental to any such financial activity, or (iii) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The GLB Act specifies certain activities that are deemed to be financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwriting, dealing in or making a market in, securities; and any activity currently permitted for bank holding companies by the Federal Reserve Board under Section 4(c)(8) of the BHCA. The GLB Act does not authorize banks or their affiliates to engage in commercial activities that are not financial in nature.

The GLB Act also contains a number of other provisions that will affect the Corporation’s operations and the operations of all financial institutions. One of the new provisions, which became effective on July 1, 2000, relates to the financial privacy of consumers. Federal banking regulators issued final regulations in November 2000 related to consumer privacy which limit the ability of banks and other financial entities to disclose non-public information about consumers to non-affiliated entities. These limitations will require more disclosure to consumers, and in some circumstances, to require consent by the consumer before information is allowed to be provided to a third party.

The GLB Act adopts a system of functional regulation where the nature of the activity rather than the type of institution determine the primary regulator. Although the Federal Reserve Board (the “FRB”) is the umbrella supervisor of financial holding companies, the GLB Act limits the FRB’s power to supervise and conduct examinations of affiliated companies of the financial holding company. Rather, under the provisions of the GLB Act, the securities activities would be regulated by the SEC and other securities regulators, insurance activities by the state insurance authorities, and banking activities by the appropriate bank regulator.

As a financial holding company doing business in Virginia and West Virginia, the Corporation is also subject to regulation by the Virginia State Corporation Commission and the West Virginia Board of Banking and Financial Institutions and must submit annual reports to the Virginia Bureau of Financial Institutions and to the West Virginia Division of Banking. Under West Virginia banking law, an acquisition or merger is not permitted if the resulting depository institution or its holding company, including any depository institutions affiliated therewith, would assume additional deposits to cause it to control deposits in the State of West Virginia in excess of twenty five percent (25%) of such total amount of all deposits held by insured depository institutions in West Virginia. This limitation may be waived by the Commissioner of Banking for good cause shown.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), requires that a financial holding company guarantee that any “undercapitalized” (as defined in the statute) insured depository institution subsidiary will comply with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would be necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

On August 2, 1995, the Federal Reserve and other banking agencies issued their final rule to implement the portion of Section 305 of FDICIA that requires the banking agencies to revise their risk-based capital standards to ensure that those standards take adequate account of interest rate risk. This final rule amends the capital standards to specify that the banking agencies will include, in their evaluations of a bank’s capital adequacy, an assessment of the exposure to declines in the

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economic value of the bank’s capital due to changes in interest rates.

Failure to meet applicable capital guidelines could subject the financial holding company to a variety of enforcement remedies available to the federal regulatory authorities, including limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital and termination of deposit insurance by the FDIC, as well as to the measures described under FDICA as applicable to undercapitalized institutions.

As of December 31, 2002, the regulatory capital ratios of the Corporation and FCBNA are set forth in the table in Note 16 of the notes of the accompanying consolidated financial statements.

FCBNA operates as a national banking association subject to examination by the Office of the Comptroller of the Currency (the “OCC”). The OCC regulates all areas of a national bank’s operations, both commercial and trust, including loans, deposits, mergers, branches and payments of dividends. FCBNA, by means of its national charter, is also a member of the Federal Reserve System, and as such, is affected by the monetary policies of the Federal Reserve System, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. The instruments of monetary policy employed by the Federal Reserve include open market operations in U. S. Government securities, changes in the reserve requirement for member banks, and changes in the discount rate for member bank borrowings. FCBNA is also insured and regulated by the Federal Deposit Insurance Corporation (the “FDIC”). The major function of the FDIC with respect to insured member banks is to pay depositors, to the extent provided by law, in the event an insured bank is closed without adequately providing for payment of the claims of the depositors.

The OCC also administers a number of federal statutes that apply to national banks such as the Depository Institution Management Interlocks Act, the International Lending Supervision Act of 1983 and the Community Reinvestment Act of 1977 (“CRA”). CRA requires that, in connection with their examinations of financial institutions, the OCC shall evaluate the record of FCBNA in meeting the credit needs of the local community, including low and moderate income neighborhoods, consistent with the safe and sound operation of the bank. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch facility. The federal banking agencies, including the OCC, issued a new joint rule which became effective for FCBNA in 1997 related to evaluating an institution’s CRA performance. The new rule evaluates institutions based on their actual performance (rather than efforts) in meeting community credit needs. Subject to certain exceptions, the OCC assesses the CRA performance of a national bank by applying lending, investment, and service tests. The OCC assigns a rating to a national bank based on the bank’s performance under the tests. To evaluate compliance with the lending, investment and service tests, subject to certain exceptions, FCBNA is required to collect and report to the OCC extensive demographic and loan data. FCBNA received a “satisfactory” rating in its most recent CRA examination.

The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) increased the ability of financial holding companies and banks to operate across state lines. Under the Riegle-Neal Act, with the approval of the Board of Governors of the Federal Reserve System, and subject to nationwide and statewide concentration limits, the Corporation and any other bank holding company located in West Virginia may acquire or merge with a bank located in any other state and a bank holding company located outside of West Virginia may acquire or merge with any West Virginia-based bank, provided the acquirer is adequately capitalized and adequately managed, as defined in the Riegle-Neal Act. The Interstate Banking Act also permits de novo branching. The legislation preserves the state laws which require that a bank must be in existence for a minimum period of time before being acquired, as long as the requirement is five years or less. FCBNA, under the provisions of the Riegle-Neal Act, is headquartered in West Virginia and operates branches in both West Virginia and Virginia.

FCBNA is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”) which provides a central credit facility primarily for member institutions. Members of the FHLB are required to acquire and hold shares of capital stock in, and may obtain advances from, the FHLB. The amount of stock owned is based on the member’s balance of residential mortgages and the balance of outstanding advances from the FHLB. The FHLB makes advances to members in accordance with policies and procedures established by its Board of Directors. FCBNA is authorized to borrow funds from the FHLB to meet demands for withdrawals of deposit accounts, to meet seasonal requirements, to fund expansion of the loan portfolio, or for general asset/liability management. Advances may be made on a secured or unsecured basis depending on a number of factors, including the purpose for which the funds are being borrowed and existing advances. Collateral on secured advances may be in the form of first mortgages on 1-4 family real estate, government securities, or other assets acceptable to the FHLB. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB, and general market conditions.

In addition to banking laws, regulations and regulatory agencies, the Corporation and its subsidiary, FCFSLLC, are subject to supervision and regulation by state insurance authorities. FCFSLLC, a limited liability company organized under

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the laws of West Virginia, is a minority owner of a multi-bank owned insurance agency located in Virginia. Although FCFSLLC does not engage in the insurance business directly, it is, nevertheless, subject to supervision, regulation and examination by the Insurance Commissions of Virginia and West Virginia.

STATISTICAL DISCLOSURE

The statistical and other financial data disclosures required pursuant to Guide 3 of the Preparation and Filing of Reports and Registration Statements under the Securities Exchange Act of 1934 are contained within Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 3 through 22 of the accompanying 2002 Annual Report to Stockholders, incorporated herein by reference in this Form 10-K Annual Report as Exhibit 13.

ITEM2. PROPERTIES

The executive offices of the Registrant are located at 500 Federal Street, Bluefield, West Virginia. There are eleven properties owned or leased by FCBNA consisting of modern single purpose facilities that house all the amenities to comfortably conduct the full range of financial services provided by the Registrant and its subsidiaries. Eight of these offices are owned and three are leased.

ITEM3. LEGAL PROCEEDINGS

Neither the Registrant nor any of its subsidiaries are presently involved in any material legal proceedings other than ordinary routine litigation incidental to its business.

ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to security holders for a vote during the fourth quarter ended December 31, 2002.

PART II

ITEM5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

No established public market presently exists for the common stock of the Registrant. Quotations may be obtained through the OTC Bulletin Board under the trading symbol FCBS. Management does not expect that a more active trading market will develop in the near future for the common stock of the Registrant.

Page 20 of the 2002 Annual Report to Stockholders (incorporated herein by reference) describes further the information for market, stockholders, and dividends. The payment of dividends is subject to the restrictions described in Note 16 of the Notes to Consolidated Financial Statements. The Board of Directors evaluates the dividend payment on the Registrant’s common stock after the conclusion of each calendar quarter.

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ITEM6. SELECTED FINANCIAL DATA

The selected financial data required by this item is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 22 of the Registrant’s 2002 Annual Report to Stockholders (Exhibit 13), incorporated herein by reference.

ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 3 through 22 of the accompanying 2002 Annual Report to Stockholders is incorporated by reference in this Form 10-K annual report as Exhibit 13. Management’s discussion and analysis should be read in conjunction with the related financial statements and notes thereto.

ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information for this item can be found in the Asset and Liability Management and Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 12 through 13; and Note 15, Financial Instruments, Concentrations of Credit and Fair Values, appearing on pages 43 through 44 of the accompanying 2002 Annual Report to Stockholders, and is incorporated by reference in this Form 10-K.

ITEM8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and report of independent accountants for the years ended December 31, 2002, 2001, and 2000, which are included in the Corporation’s 2002 Annual Report to Stockholders (Exhibit 13), are incorporated herein by reference.

The report of independent accountants on page 48 of the Registrant’s 2002 Annual Report to Stockholders reflects an unqualified opinion on the 2002 and 2001 consolidated statements of financial condition and the related consolidated statements of income and comprehensive income, of changes in stockholders’ equity, and of cash flows for each of the years in the three-year period ended December 31, 2002, issued by PricewaterhouseCoopers LLP, Greensboro, North Carolina, the Registrant’s independent accountant for those years.

	Reference to 2002 Annual Report
Consolidated Statements of Financial Condition	Page 23
Consolidated Statements of Income and Comprehensive Income	Page 24
Consolidated Statements of Cash Flows	Page 25
Consolidated Statements of Changes in Stockholders’ Equity	Page 26
Notes to Consolidated Financial Statements	Pages 27 through 47
Report of Independent Accountants	Page 48

The supplementary financial information required by this item is set forth in Note 17 of “Notes to Consolidated Financial Statements” on Page 46 of the Corporation’s 2002 Annual Report to Stockholders (Exhibit 13), incorporated herein by reference

ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements with the independent accountants on accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

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PART III

ITEM10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the directors and executive officers of the Registrant has been omitted in accordance with General Instruction G since the Registrant has filed its definitive proxy statement with the Commission on or about March 20, 2003 (which is not later than 120 days after December 31, 2002, the close of the fiscal year of the Registrant) and such information is incorporated herein by reference to such proxy statement.

ITEM11. EXECUTIVE COMPENSATION

Management remuneration has been omitted in accordance with General Instruction G since the Registrant has filed its definitive proxy statement with the Commission on or about March 20, 2003, (which is not later than 120 days after December 31, 2002, the close of the fiscal year of the Registrant) and such information is incorporated herein by reference to such proxy statement.

ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security ownership of certain beneficial owners and management has been omitted in accordance with General Instruction G since the Registrant has filed its definitive proxy statement with the Commission on or about March 20, 2003, (which is not later than 120 days after December 31, 2002, the close of the fiscal year of the Registrant) and such information is incorporated herein by reference to such proxy statement.

ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain relationships and related transactions has been omitted in accordance with General Instruction G since the Registrant has filed its definitive proxy statement with the commission on or about March 20, 2003, (which is not later than 120 days after December 31, 2002, the close of the fiscal year of the Registrant) and is incorporated herein by reference to such proxy statement.

ITEM14. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures:

Within 90 days prior to the date of this report, the Company’s Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures in accordance with Rule 13a-14 under the Exchange Act. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures (i) enable the Company to record, process, summarize and report in a timely manner the information that the Company is required to disclose in its Exchange Act reports, and (ii) are designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

Changes in internal controls:

There were not significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above.

PART IV

ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)1. Financial Statements.

See Item 8 on Page 8 of this document for a listing of all Financial Statements, Report of Independent Accountants, and Supplementary Data.

2. Financial Statement Schedules

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All schedules are omitted, as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes.

(b)Reports on Form 8-K.

On November 6, 2002, the Corporation filed a current report on Form 8-K announcing its earnings for the period ended September 30, 2002.

(c)Exhibits

3.Articles of incorporation and bylaws.

Articles of amendment to articles of incorporation and restated articles of incorporation were filed with the Annual Report on Form 10-K for the year ended December 31, 1999 and are incorporated herein by reference. (Bylaws were previously filed in a Registration Statement on Form S-14, Registration No. 2-85126, and are incorporated herein by reference.)

10.Material Contracts

a.Sample agreement pertaining to a split-dollar life insurance arrangement between FCBNA and Messrs. Wilkinson, Satterfield, Kennett and Albert.

b.Employment agreement between the Corporation and Byron K. Satterfield.

11.Statement regarding computation of per share earnings.

(These statements are included in the notes to the consolidated financial statements which are incorporated herein by reference.)

13.Annual report to security holders.

22.Subsidiaries of the registrant.

(This disclosure is included in the notes to the consolidated financial statements which are incorporated herein by reference.)

99.1Certification Pursuant to 18 U.S.C. Section 1350

99.2Certification Pursuant to 18 U.S.C. Section 1350

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant)	First Century Bankshares, Inc.
By:	/s/ J. RONALD HYPES
	J. Ronald Hypes, Treasurer (Principal Accounting & Financial Officer)
	DATE: March 20, 2003

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

By:	/s/ B. L. JACKSON	Date:	March 18, 2003
	B. L. Jackson, Jr., Chairman of the Board and Director

By:	/s/ R. W. WILKINSON	Date:	March 18, 2003
	R. W. Wilkinson, President & Chief Executive Officer & Director (Principal Executive Officer)

By:	/s/ CHARLES A. PETERS	Date:	March 18, 2003
	Charles A. Peters, Secretary and Director

By:	/s/ PAUL COLE,JR	Date:	March 18, 2003
	Paul Cole, Jr., Director

By:	/s/ EUSTACE FREDERICK	Date:	March 18, 2003
	Eustace Frederick, Director

By:	/s/ ROBERT M. JONES, JR.	Date:	March 18, 2003
	Robert M. Jones, Jr., M.D., Director

By:	/s/ MARSHALL S. MILLER	Date:	March 18, 2003
	Marshall S. Miller, Director

By:	/s/ BYRON K. SATTERFIELD	Date:	March 18, 2003
	Byron K. Satterfield, Director

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By:	/s/ JOHN H. SHOTT	Date:	March 18, 2003
	John H. Shott, Director

By:		Date:
	Scott H. Shott, Director

By:		Date:
	Walter L. Sowers, Director

By:	/s/ WM.CHANDLER SWOPE	Date:	March 18, 2003
	Wm. Chandler Swope, Director

By:	/s/ J. BROOKINS TAYLOR, M. D.	Date:	March 18, 2003
	J. Brookins Taylor, M. D., Director

By:	/s/ FRANK W. WILKINSON	Date:	March 18, 2003
	Frank W. Wilkinson, Director

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CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

Certification:

I, R. W. Wilkinson, certify that:

1.I have reviewed this annual report on Form 10-K of First Century Bankshares, Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements are made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b.evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c.presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date  March 20, 2003
	/s/ R. W. WILKINSON
	R. W. Wilkinson, President and Chief Executive Officer

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Certification:

I, J. Ronald Hypes, certify that:

1.I have reviewed this annual report on Form 10-K of First Century Bankshares, Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements are made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b.evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c.presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date  March 20, 2003
	/s/ J. RONALD HYPES
	J. Ronald Hypes, Treasurer (Chief Financial Officer)

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EX-10.A

Exhibit 10(a)

THE FIRST NATIONAL BANK OF BLUEFIELD

EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT

This EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT is made as of the 1^st day of April, 1988, by and between The First National Bank of Bluefield, a West Virginia corporation (the “Company”) and __________________________, an executive employed by the Company (the “Executive”).

1.Definitions. Where indicated by initial capital letters, the following terms shall have the following meaning:

(a)Agreement: The Executive Split Dollar Life Insurance Agreement (including Schedules and attachments) entered into between the Company and Executive pursuant to the Plan.

(b)Amount: The level of insurance specified by Executive in Schedule A which shall not be more than 5 times Executive’s Compensation.

(c)Beneficiary: The person or persons designated in writing by Executive to receive the Amount.

(d)Cause: Cause means, but is not limited to, a determination by the Company that Executive may have been guilty of criminal conduct (regardless of whether proven or admitted), gross negligence or willful misconduct in the performance of his duties or otherwise, or has engaged in conduct which, if generally known, would bring discredit to or give rise to adverse publicity to the Company.

(e)Compensation: Compensation means the Executive’s annual rate of total cash compensation as in effect on January 1 of any year of an election to increase the Amount.

(f)Insurer: Crown Life Insurance Company, or any other insurance company issuing a life insurance contract on Executive’s life.

(g)Plan: The First National Bank of Bluefield Executive Split Dollar Life Insurance Plan.

(h)Policy: One or more life insurance contracts issued on the life of Executive pursuant to the Plan as identified on Schedule A.

(i)Recoverable Amount: The Company’s annual premium, exclusive of any rating, less any amount received from the Executive, compounded at 6% interest (compounded annually).

(j)Company Cumulative Outlay: The Company’s cumulative total premiums paid to the Insurer, exclusive of ratings, less all amounts received from the Executive for the Policy.

(k)Roll-out: Division of the policy into two separate policies, one to be retained by the Company, and the other to be transferred to the Executive.

(l)Retirement: Termination of employment (except for Cause) after attainment of age 55 with at least ten years of service.

2.Application of Insurance. The Company will apply to the Insurer for a Policy with a face amount at least equal to the amount of insurance to which the Executive is entitled under the Plan. The Company may apply for additional insurance to insure payment to the Company of the Recoverable Amount. The Company and the Executive agree to take any action necessary to cause the Insurer to issue the Policy. The Policy shall be subject to the terms of this Agreement.

3.Amount or Insurance. Executive shall have the right to specify initially the Amount, which shall not be more than 5 times Executive’s Compensation. Executive may thereafter increase the Amount as of April 1 of any subsequent year. If Executive is not then insurable at standard rates, the additional rating shall be paid by the Company. Any increase in the Amount shall be not less than $50,000.

4.Ownership. The Company shall be the owner of the Policy, and it may exercise all ownership rights granted to the owner by the terms of the Policy except as otherwise provided in this Agreement. The Company shall keep possession of the Policy.

5.Dividend Option. All dividends declared by the Insurer on the Policy shall be applied to purchase additional paid-up life insurance on the life of the Executive. The dividend option will not be changed without Executive’s written consent.

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6.Payment of Premiums.

(a)The Company agrees to pay the total amount of each annual Policy premium on or before the due date of such premium, or within the grace period provided, if any.

(b)Thirty (30) days prior to the due date of each annual Policy premium, the Company shall notify the Executive of the exact amount due from the Executive to the Company as a premium payment. The amount due shall be equal to the lesser of (a) the annual cost of the term life insurance protection on the life of the Executive as measured by the PS-58 rate (or substitute table) published from time to time by the Internal Revenue Service, and (b) the term rates published from time to time by the Insurer, as determined by the Insurer. The annual amount payable by Executive may be deducted ratably from Executive’s Compensation.

7.Death Benefits.

(a)Upon the Executive’s death, the Company will promptly take the appropriate action to obtain the death benefits provided under the Policy, and

(i)The Company shall be entitled to receive the excess of the total Policy proceeds over the Amount specified by Executive pursuant to Section 3. The receipt by the Company of the excess over the amount shall constitute satisfaction of the Executive’s obligation to the Company under this Agreement; and

(ii)the beneficiary or beneficiaries named under the Policy shall be entitled to receive the Amount which shall be paid in accordance with the settlement option elected by the Company at the Executive’s request.

(b)If at the time the Amount becomes payable because of Executive’s death there is no effective beneficiary designation, the Amount shall be paid to the Executive’s estate.

(c)If any beneficiary who is entitled to receive a payment from the Company pursuant to this Agreement is a minor, the Company, in its discretion, may dispose of such amount in any one or more of the following ways:

(i) By payment of the Amount directly to the minor;

(ii)By application of the Amount for the benefit of the minor;

(iii)By payment of the Amount to a parent of the minor or to any adult person with whom the minor is living at the time or to any person who is legally qualified and is acting as guardian of the minor or of the property of the minor, provided that the parent or adult person to whom any amount is to be paid had advised the Company in writing that he or she will hold or use the Amount for the benefit of the minor.

(iv)By payment of the Amount to a custodian selected by the Company under the appropriate Uniform Transfers to Minors Act.

(d)If a beneficiary who is entitled to receive a payment from the Company under this Agreement is physically or mentally incapable of personally receiving and giving a valid receipt for any payment due, the payment may be made to the beneficiary’s legal representative, the person’s spouse, son, daughter, parent, brother, sister or other person deemed by the Company to have incurred expense for the person otherwise entitled to payment.

(e)The selection of a method of distribution under this Section shall be in the discretion of the Company, and the Company may not be compelled to select any method it does not deem to be in the best interest of the distributee.

8.Policy loans.

(a)The Company has the right to obtain loans secured by the Policy from the Insurer or from others. The Company also has the right to assign the Policy as security for the repayment of such loans. The amount of such loans together with interest thereon shall at no time exceed the Company Cumulative Outlays. All interest charges with respect to any loans shall be paid by the Company.

(b)If the Policy is assigned or encumbered in any way, other than a Policy Loan, on the date of the Executive’s death, the Company shall secure a release or discharge of the assignment or encumbrance to ensure the prompt payment of death proceeds under the Policy to the Executive’s beneficiary or beneficiaries.

9.Timing of Roll-Out. Roll-out shall occur no later than the first policy anniversary on which:

(1)the Company may retain a policy with cash surrender value equal to the Company Cumulative Outlays and with death benefits at least equal to the Recoverable Amount, and

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(2)the Executive may receive a policy with death benefits at least equal to the Amount of coverage specified by the Executive, with no outlays required to sustain this Amount based on the Dividend schedule in effect on the Roll-out date, and with no loans.

The Executives may elect an earlier Roll-out date provided that the Company receives a policy with cash surrender value equal to Company Cumulative Outlays and with death benefits at least equal to the Recoverable Amount.

10.Amendment and Termination of Agreement.

(a)This Agreement may not be amended, altered, or modified except in writing and signed by the Company and the Executive.

(b)This Agreement shall terminate upon the earliest to occur of any of the following events:

(i)Roll-out

(ii)termination of the Executive’s employment other than by reason of the death, retirement, or disability (unless the Company determines that Executive shall be treated as an active employee after a termination of employment);

(iii)cessation of the Company’s business or the bankruptcy, receivership or dissolution of the Company, unless the Company’s business is continued by a successor corporation or business entity;

(iv)termination of the Agreement by Executive upon written notice to the Company; or

(v)termination of the Plan by the Company.

(c)If the Executive’s termination of employment with the Company is by reason of disability (as determined by the Company) or by reason of Retirement, this Agreement shall remain in full force and effect.

11.Disposition of Policy on Termination of Agreement.

(a)As of the Executive’s Roll-out date, the Company shall provide the Policy into two policies, retaining one policy with a cash surrender value equal to the Company Cumulative Outlays and a death benefit at least equal to the Recoverable Amount. The Company shall transfer the remaining policy to the Executive.

(b)If this Agreement is terminated because of the Executive’s termination of employment for cause (as determined by the Company), the Executive shall have no rights to the Policy and shall not be permitted to effectuate a Roll-out at any time.

(c)If this Agreement is terminated because of the Executive’s termination of employment for a reason other than cause, retirement, or a disability, or pursuant to Section 10 (b) (iii) or (v) of this Agreement, the Executive, at any time within thirty (30) days after his termination of employment (or longer period as allowed by the Company) shall have the absolute right to purchase all of the Company’s right, title and interest in the Policy free and clear of all liens, claims or encumbrances (including any Policy loans) for cash, by tendering to the Company an amount equal to the Company’s Recoverable Amount. The Executive may direct the Company to borrow against the cash value of the Policy or surrender any paid-up additions to the Policy and purchase the Policy, subject to any such Policy loan, for an amount equal to the Company’s Recoverable Amount less such borrowed or cashed-in values.

12.Miscellaneous.

(a)This Agreement shall not affect any rights the Executive may otherwise have under any pension, profit sharing or other employee benefit plan established by the Company.

(b)This Agreement shall be binding on the Company, its successors and assigns, and it shall be interpreted in accordance with the laws of West Virginia.

(c)Except as permitted by law or by the Company’s written consent, any benefits to which the Executive or his beneficiaries may become entitled under this Agreement shall not be subject to anticipation, alienation, sale, transfer, assignment, or pledge. The Company shall not be liable for, or subject to, the debts, contracts, liabilities, or torts of any person entitled benefit under this Agreement.

(d)This Agreement shall not confer upon the Executive any legal or equitable right against the Company except as expressly provided in this Agreement, the Plan and the Policy.

(e)Neither this Agreement, the Plan nor the Policy shall constitute an inducement or consideration for the employment of the Executive and shall not give the Executive any right to be retained in the employ of the Company, and the Company hereby retains the right to discharge the Executive at any time, with or without cause.

(f)The Executive’s interest under this Agreement, the Plan and the Policy, may be assigned by the Executive upon written notice to the Company.

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(g)If a provision of this Agreement is not valid or enforceable, that fact in no way affects the validity of enforceability of any other provision.

In consideration of the foregoing, the Company and the Executive have executed this Agreement in duplicate, all as of the day and year first written above.

THE FIRST NATIONAL BANK OF BLUEFIELD

By: 

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EX-10.B

Exhibit 10(b)

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”) dated as of January 10, 2002, between First Century Bankshares, Inc. (the “Company”), and Byron K. Satterfield (the “Executive”), provides:

1.Employment and Term.

(a)The Company shall employ the Executive part-time to perform for First Century Bank, National Association (the “Bank”) various banking services similar and related to those he has performed heretofore with the title and duties set forth in Section 2 below beginning on the date set forth above and continuing through April 1, 2004, subject to Section 1(c) below (the “Term”).

(b)Subject to Section 1(c) below, beginning on April 2, 2004 and continuing until April 1, 2009 (the “Consulting Period”), the Company shall retain Executive part-time as a consultant for the Bank performing tasks as set forth in Section 2(c) below.

(c)Notwithstanding the foregoing, the Term or Consulting Period shall be immediately terminated by the first to occur of the following: (i) Executive’s death, (ii) resignation by Executive, (iii) fraudulent or criminal conduct of a material nature by Executive, (iv) Executive’s wilful material malfeasance or material neglect of duties assigned by the Bank, provided such willful malfeasance or neglect is not cured by Executive within seven (7) days after written notice thereof by the Company, (v) Executive moving his primary domicile outside of the Bluefield, West Virginia area (vi) failure by Executive to support Bank’s or Company’s strategic plans or any other management policies after such plans or policies have been approved by the Bank’s or Company’s Board of Directors as appropriate, or (vii) the incapacity of Executive by reason of a physical or mental condition that prevents Executive from performing his duties as set forth herein for either (a) a period of 180 consecutive days or (b) a total of 180 days out of any 360-day period. To the extent the parties may disagree as to the nature and/or extent of whether Executive is incapacitated by a physical or mental condition as set forth above, the parties shall defer to the opinion of a physician selected by mutual agreement of the Bank and Executive or Executive’s guardian, as the case may be.

(d)In the event the Term or the Consulting Period shall be terminated under subsections (c)(ii-vi) above, no further compensation shall accrue or benefits of any kind shall be payable to Executive hereunder except for any vested benefits or other benefits payable to Executive under any employee benefit plan.

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(e)Company hereby guarantees Bank’s obligations and duties under this Agreement.

2.Duties.

(a)During the Term, the Executive agrees to use his best efforts to serve as Executive Vice President of Bank, Chairman of the Bank’s Trust Investment Committee, member of the Bank’s Administrative Committee and to perform such other reasonable duties and assignments relating to the business of the Bank as the Bank may request, except that the Executive shall not be required to hold any office or to perform any duties or assignments inconsistent with the Executive’s experience and qualification.

(b)During the Term, the Executive shall, except during periods of illness, devote reasonable time, attention and energies to the diligent performance of his duties hereunder.

(c)During the Consulting Period, the Executive shall perform such consulting tasks on a part-time basis relating to the business of the Bank as the Bank and Executive agree.

(d)Executive may (i) invest his personal assets and provide services to other business interests, provided they are not competitive with the Bank in its normal trade areas, and (ii) devote such time as may be reasonably required for him to continue to maintain his current level of participation in and for various civic and charitable activities and organizations. Notwithstanding the foregoing, Executive may not provide services in the Bank’s normal trade areas to any other financial institution during the term and/or Consulting Period. Executive acknowledges that the Bank’s business relationship with these various civic and charitable activities and organizations is significant. Accordingly, Executive agrees to use his reasonable best efforts in good faith and commensurate with his fiduciary duty, to take, or cause to be taken, all actions, and to do or cause to be done, all things necessary, proper or desirable so as to support and promote the Bank’s continuing business relationships.

3.Compensation.

(a)Term Compensation. The Bank shall pay to Executive as compensation for his services during the Term hereunder an annual salary equal to his current salary with the Bank, which annual salary shall be paid in regular installments in accordance with the Bank’s general payroll practices, including those related to withholding for taxes, insurance and similar items. In no event shall Executive’s annual salary for any year be less than his annual salary in effect for the year 2001.

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(b)Consulting Period Compensation. During the Consulting Period, Bank shall pay Executive compensation in the amount of $50,000 per year, payable in substantially equal monthly installments and consistent with general payroll practices of the Company.

(c)Additional Compensation in the Event of Death or Disability. In the event of the death or disability of Executive during the Term, Executive or his estate shall be entitled to compensation in the amount of $250,000 to be paid in five equal annual installments of $50,000 each. In the event of the death or disability of the Executive during the Consulting Period, Executive or his estate shall be entitled to the difference between $250,000 and the gross amount of compensation paid to Executive pursuant to Section 3(b) above. The first annual installment of payments hereunder shall be due no later than six (6) months after the date of Executive’s death or disability.

(d)Withholding Taxes. The Bank may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling.

(e)Satisfaction of Obligations Under Split Dollar Insurance Agreement. Executive and Bank agree that Bank’s compliance with the terms of Paragraph 4 of Exhibit A hereto and the compensation provided for in this Paragraph 3 fully satisfy the Bank’s obligations under the Executive Split Dollar Life Agreement and Plan.

4.Benefits.

(a)Fringe Benefits. During the Term, the Executive shall continue to receive or participate in all “fringe benefits” and employee benefit plans, including any retirement plans, health insurance plans and disability insurance plans, now or hereafter provided or made available to Executive and the Bank’s executives or management personnel generally in similar positions, subject to the terms and conditions of such plans. In addition to any plans described in the preceding sentence, Executive shall continue to receive the fringe benefits listed on Exhibit A attached hereto and incorporated herein by reference, subject to the limitations set forth therein.

(b)Reimbursement of Expenses. During the Term and the Consulting Period, the Executive shall be entitled to reimbursement for all expenses, including travel, promotion and entertainment expenses, which are reasonably incurred by the Executive in furtherance of the Bank’s business in accordance with policies from time to time adopted by the Bank; provided that Executive maintains records thereof, and submits vouchers therefor, in form reasonably satisfactory to Bank. In addition to any expenses described in the preceding sentence, during the Term the

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Bank shall pay any and all expenses incurred by Executive and his spouse to attend the annual National Trust Conference and annual West Virginia State Banker’s Conference.

5.Position as Director of Bank. During the Term, the Company shall promptly take all reasonable steps to enable Executive to continue to serve as a voting director on the Board of Directors of the Bank and of the Company.

6.Office. During the Term, the Bank shall continue to provide Executive with reasonable office space at the Bank’s offices at Bluefield, West Virginia. Bank shall provide Executive with secretarial assistance sufficient to permit Executive to perform his duties as set forth above during the Term.

7.Covenants of Executive.

(a)Bank Property. Upon termination of the Term or the Consulting Period, Executive, or his guardian or estate, as the case may be, shall deliver promptly to the Bank all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or copies thereof that relate in any way to the business, products, practices or techniques of the Bank, and all other property, trade secrets and confidential information of the Bank, including, but not limited to, all documents that in whole or in part contain any trade secrets or confidential information of the Bank, which in any of these cases are in Executive’s possession or under Executive’s control.

(b)Confidential Information. Except as permitted or directed by the Bank’s Board of Directors, during the Term or at any time thereafter, Executive shall not divulge, furnish or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Bank) any confidential or secret knowledge or information of the Bank that Executive has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of his employment by the Bank, whether developed by himself or by others, concerning any trade secrets, any customer or supplier lists of the Bank or any other confidential information or secret aspects of the business of the Bank. The foregoing obligations of confidentiality shall not apply to any knowledge or information that is now published or which subsequently becomes generally publicly known, other than as a direct or indirect result of the breach of this Agreement by Executive.

8.Bank’s Representations. Bank hereby represents and warrants to Employee that (i) the execution, delivery and performance of this Agreement by the Bank does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which the Bank is a party or by which the Bank is bound, and (ii) upon the execution and delivery of this Agreement by Employee, this Agreement shall be the valid and binding obligation of the Bank, enforceable in accordance with its terms.

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9.Miscellaneous.

(a)Governing Law: Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of West Virginia, without regard to choice of law rules. Any action at law, suit in equity or judicial proceeding arising directly, indirectly or otherwise in connection with, out of, related to or from this Agreement, or any provision hereof, shall be litigated only in the courts of the State of West Virginia. Each party to this Agreement hereby consents to the jurisdiction of such courts over the subject matter hereof and waives any right to transfer or change the venue of any litigation brought against such party.

(b)Expenses. Should any party breach this Agreement, in addition to all other remedies available at law or in equity, such party shall pay all of any other party’s costs and expenses resulting therefrom and/or incurred in enforcing this Agreement, including legal fees awarded by a court of competent jurisdiction.

(c)Binding Upon Successors. This Agreement shall be binding on the parties, their assigns and successors in interest.

(d)Entire Agreement. This instrument contains the entire Agreement of the parties and shall supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. No modification or revocation hereof shall be effective unless in writing, referring to this Agreement and signed by both parties hereto.

(e)Notices. All notices given hereunder shall be in writing and shall be sent by registered or certified mail or delivered by hand and, if intended for the Bank, shall be addressed to the Company at its Bluefield office at Post Office Box 1559, Bluefield, West Virginia 24701, for the attention of R.W. “Buz” Wilkinson. If intended for the Executive, notices shall be delivered personally or shall be addressed (if sent by mail) to the Executive’s then current residence address on file with the Bank, or to such other address as the Executive directs in a notice to the Bank. All notices shall be deemed to be given on the date received at the address of the addresses or, if delivered personally, on the date delivered.

(f)Severability and Reformation. This Agreement is intended to be performed in accordance with, and only to the extent permitted by, all applicable laws, ordinances, rules and regulations. In the event any provision of this Agreement shall be judged unenforceable to the full extent as written, the parties hereby consent and agree that the scope of such clause or provision may be modified in any enforcement proceeding to the extent necessary

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to permit the broadest enforcement permitted in equity or law as most nearly effectuates the understanding of the parties as set forth in the language herein agreed upon. If any provision is adjudged void or unenforceable, or is modified as provided herein, all other clauses and provisions shall, in any case, be deemed severable and shall remain in full force and effect.

(g)Headings. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.

FIRST CENTURY BANKSHARES, INC.

By: 

Its:

Byron K. Satterfield

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EXHIBIT A

1.Bank Car. Simultaneously with the execution of this Agreement, the Bank will sign over the title of the automobile presently used by Executive to Executive at a value of $14,668.28.

2.Dues. During the Term, the Bank shall continue to pay Executive’s dues for the Rotary Club, the University Club, and Fincastle Country Club.

3.Defined Pension Benefit Plan. Executive shall continue to be eligible for and participate in the Bank’s Defined Pension Benefit Plan, subject to the terms and conditions of the plan. During the Term, Executive shall be allowed to work such number of hours or time during each plan year of any employee benefit plan so as to remain eligible to participate in the Bank’s Defined Pension Benefit Plan and 401(k) Plan.

4.Life Insurance. During the Term and the Consulting Period, the Bank shall take all steps to maintain the Executive Split Dollar Life Insurance Agreement and Plan (the “Agreement and Plan”) in compliance with the terms of the Agreement and Plan. During the Term, Company agrees to pay a bonus to the Executive equal to the cost of the premium for such policy as set forth on Internal Revenue Service Table PS-58 (the “PS-58 Premium”). During the Consulting Period, Executive shall be solely responsible for payment of the PS-58 Premium. After the Consulting Period, the Bank shall take all steps to maintain in force the policy(ies) of life insurance in place on the last date of the Consulting Period so long as Executive pays the PS-58 Premium. At any time during the Term or the Consulting Period, Executive or his designee shall have the right to purchase the Executive Split Dollar Life Insurance Agreement and Plan for its cash surrender value and Company shall have no further rights to payment thereunder. Without in any way limiting the Bank’s express obligations under this paragraph, Executive and Bank agree that it is the intent of this paragraph that Bank shall be responsible for the administration of the Agreement and Plan under the terms thereof. Bank’s obligation hereunder does not include responsibility or liability for the investment performance of the Executive Split Dollar Life Insurance policy purchased under the Agreement and Plan.

5.Other Benefits. During the Term, Executive shall continue to be eligible to participate in the Bank’s 401(k) Plan and receive the benefit of matching contributions, if any, under such Plan pursuant to the normal provisions of said Plan.

6.Medical Physicals. During the Term, the Bank shall continue to provide Executive with an annual medical physical with a doctor of his choice (less any such expenses payable by health insurance), a free checking account at the Bank similar to the one presently provided Executive, and a free safety deposit box at the Bank’s branch office in Bluefield, West Virginia, identical to or similar in quality and size to that presently provided Executive.

7.Participation in Flexible Spending Plan. Executive shall continue during the Term to participate in the Flexible Spending Plan (Section 125 Plan) of Bank as he presently does.

8.Health Insurance. As stated above, the Executive shall continue to be covered under all health insurance plans of the Bank during the Term. During the Consulting Period, Bank shall take all reasonable steps to allow Executive to elect to participate in such health insurance coverage as is made available to retired employees of the Bank, including but not limited to continued health insurance and/or insurance supplemental to Medicare for Executive’s wife. In the event that Executive dies during the Term, the Bank shall provide Executive’s wife with coverage comparable to that available to spouses of retired employees, under applicable terms and conditions.

9.Stock Option Plan. Nothing in this Agreement shall amend or modify Executive’s rights and obligations under the Company’s Stock Option Plan and/or the Executive’s Stock Option Agreement with the company.

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EX-13

 

Common Shares

Common shares are not traded on any stock exchange. Quotations may be obtained through the OTC Bulletin Board under the trading symbol FCBS.

Stockholder Inquiries

Communications regarding transfer requirements and lost certificates should be directed to the transfer agent.

Transfer Agent/Registrar

First Century Bank, N.A., Stock Transfer Department, Trust Division, P.O. Box 1559, Bluefield, WV 24701.

Form 10-K Information

Copies of the First Century Bankshares, Inc. Annual Report to the Securities and Exchange Commission, Form 10-K, may be obtained by writing J. Ronald Hypes, Treasurer, First Century Bankshares, Inc., P.O. Box 1559, Bluefield, WV 24701.

Annual Meeting

The annual meeting of the stockholders will be held at 11:00 AM, Tuesday, April 15, 2003, at Fincastle Country Club, Bluefield, Virginia. All stockholders are cordially invited to attend.

Table of Contents

Financial Highlights	1
Letter to the Stockholders	2
Management’s Discussion and Analysis of Financial Condition and Results of Operation	3
Consolidated Statements of Financial Condition	23
Consolidated Statements of Income and Comprehensive Income	24
Consolidated Statements of Cash Flows	25
Consolidated Statements of Changes in Stockholders’ Equity	26
Notes to Consolidated Financial Statements	27
Report of Independent Accountants	48
Boards of Directors	49
Corporate and Bank Officers	51
First Century Bankshares, Inc. Subsidiary Locations	52

Financial Highlights

	2002		2001		2000
	(Dollars in Thousands, Except Per Share Data)
FOR THE YEAR
Total operating income	$	25,785	$	29,373	$	31,266
Total operating expense	20,435		26,104		26,520
Net income	3,375		2,145		3,081
Cash dividends declared	1,694		1,700		1,700
AT YEAR END
Assets	$	361,264	$	369,203	$	374,176
Deposits	307,947		317,373		327,336
Loans	236,460		244,068		244,727
Securities	88,949		87,519		92,770
Stockholders’ equity	33,818		32,967		31,682
PER COMMON SHARE
Net income, basic and diluted	$	1.69	$	1.07	$	1.54
Cash dividends declared	0.85		0.85		0.85
Book value	16.99		16.48		15.84

First Century Bankshares, Inc.  Page  1

Letter to the Stockholders

To Our Stockholders, Customers, and Friends:

The directors, officers, and employees of First Century Bankshares, Inc. and its wholly owned subsidiary, First Century Bank, N.A., are pleased to present this Annual Report to our stockholders for the year 2002.

First Century Bankshares, Inc. had earnings of $3,375,000 for the year, which was an increase of 57.3% from the previous years earnings of $2,145,000. On a per share basis, net income increased to $1.69 from $1.07. This equated to a return on average assets of 0.92 percent, and a return on average equity of 10.27 percent.

Total assets for the corporation decreased by 2.2% last year, and this reflects management’s focus on enhancing credit quality and managing funding sources in the historically low interest rate environment during the year. We continue to look for opportunities to expand our presence in West Virginia and Virginia, particularly in markets that demonstrate growth potential. We will achieve this either through new branch expansion or through mergers or acquisitions with prospects that have a similar mission to our own.

We believe that we have accomplished many things throughout the past year. Non-performing assets, including nonaccrual loans, loans past-due over 90 days and other real estate owned, showed continued improvement during 2002. Non-performing loans as a percentage of total loans improved from 2.2% at year-end 2001 to 1.8% at year-end 2002. Credit quality continues to be our primary focus, and management is committed to ensuring policies and procedures are in place to achieve our goals.

We are in the process of finalizing our plans for branch expansions in Princeton, West Virginia, as well as, a new facility for our Bluefield,Virginia operations. We will be constructing a 6,300 square foot facility on Springhaven Drive (just west of Princeton Community Hospital) in Princeton during 2003. Management anticipates this facility will be completed by late fall, and will compliment our office on Stafford Drive. Also we have purchased a branch facility on Spring Street in Bluefield, Virginia to move our location presently on Virginia Avenue. This office will offer more lobby space, better customer parking and ATM accessibility. We anticipate this relocation during the spring of 2003.

We believe that we are well positioned for the future to continue to provide quality financial services to the customers of our region. If you feel that we could better serve you please let us know. We ask for your continued support of First Century Bankshares, Inc., as we are “Looking Forward, Reaching Higher” to meet your expectations as a full service financial provider. Your confidence and continued support are greatly appreciated.

Sincerely,

R. W. “Buz” Wilkinson
President & CEO

First Century Bankshares, Inc.  Page  2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

AVERAGE STATEMENTS OF FINANCIAL CONDITION AND NET INTEREST DIFFERENTIAL

	2002							2001							2000
	(Dollars in Thousands)
	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
ASSETS:
Interest-bearing deposits with banks	$	4,407		$	68	1.54	%	$	6,462		$ 243		3.76	%	$	3,063		$	183	5.97	%
Securities available for sale and other equity securities:
U. S. Government securities	2,802			157		5.60	%	3,200			212		6.63	%	8,751			539		6.16	%
U. S. Government agency securities	66,642			3,458		5.19	%	62,994			4,120		6.54	%	72,249			4,720		6.53	%
Other securities	10,390			597		5.75	%	8,691			524		6.03	%	1,996			124		6.21	%
Total securities available for sale	79,834			4,212		5.28	%	74,885			4,856		6.48	%	82,996			5,383		6.49	%
Securities held to maturity:
U. S. Government agency securities	34			1		2.94	%	98			5		5.10	%	178			10		5.62	%
State and municipal securities	9,942			499		5.02	%	10,784			545		5.05	%	9,598			486		5.06	%
Other securities	150			10		6.67	%	150			10		6.67	%	150			10		6.67	%
Total securities held to maturity	10,126			510		5.04	%	11,032			560		5.08	%	9,926			506		5.10	%
Federal funds sold	4,255			69		1.62	%	3,646			119		3.26	%	1,251			76		6.08	%
Loans	236,130			16,675		7.06	%	245,606			19,829		8.07	%	242,533			21,775		8.98	%
Total interest—earning assets	334,752			21,534		6.43	%	341,631			25,607		7.50	%	339,769			27,923		8.22	%
Allowance for loan losses	(3,108		)					(3,132		)					(3,102		)
Cash and due from banks—demand	13,723							13,368							12,468
Premises and equipment—net	10,423							10,686							10,514
Other assets	12,153							12,755							12,227
TOTAL ASSETS	$	367,943						$	375,308						$	371,876
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest—bearing demand deposits	$	73,357		$	513	0.70	%	$	69,942		$	890	1.27	%	$	70,026		$	1,692	2.42	%
Savings deposits	74,264			1,065		1.43	%	77,464			1,773		2.29	%	79,665			2,493		3.13	%
Time deposits	130,469			4,149		3.18	%	141,322			7,187		5.09	%	138,953			7,260		5.22	%
Total interest—bearing deposits	278,090			5,727		2.06	%	288,728			9,850		3.41	%	288,644			11,445		3.97	%
Short-term debt	17,366			159		0.92	%	18,077			536		2.97	%	16,595			777		4.68	%
Total interest—bearing liabilities	295,456			5,886		1.99	%	306,805			10,386		3.39	%	305,239			12,222		4.00	%
Demand deposits	37,461							34,361							33,063
Other liabilities	2,156							2,321							2,593
TOTAL LIABILITIES	335,073							343,487							340,895
Stockholders’ equity	32,870							31,821							30,981
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	367,943						$	375,308						$	371,876
Average rate paid to fund earning assets						1.76	%						3.04	%						3.60	%
NET INTEREST DIFFERENTIAL				$	15,648	4.67	%				$	15,221	4.46	%				$	15,701	4.62	%

For purposes of this schedule, interest on nonaccrual loans have been included only to the extent reflected in the income statement. However, the nonaccrual loan balance is included in the average amount outstanding. Income on loans includes loan fees of’$394,000 in 2002, $254,000 in 2001, and $228,000 in 2000. Average balances of securities available for sale are reported at amortized cost; excludes pretax unrealized gains of $1,488,000 in 2002, and $1,337,000 in 2001, and unrealized losses of $1,628,000 in 2000. Interest income on tax exempt securities is shown based on the actual yield.

VOLUME/RATE ANALYSIS

	Increase (Decrease) in Interest
	2002 VS. 2001									2001 VS. 2000									2000 VS. 1999
	(Dollars in Thousands)
	Due to Change in (1)									Due to Change in (1)									Due to Change in (1)
	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
Interest income on:
Loans	$	(717	)	$	(2,437	)	$	(3,154	)	$	262		$	(2,208	)	$	(1,946	)	$	1,755		$	320		$	2,075
Securities available for sale and other equity securities	291			(935		)	(644		)	(526		)	(1		)	(527		)	1,101			356			1,457
Securities held to maturity	(46		)	(4		)	(50		)	56			(2		)	54			(46		)	(5		)	(51		)
Federal funds sold	15			(65		)	(50		)	112			(69		)	43			(316		)	51			(265		)
Interest-bearing deposits with banks	(54		)	(121		)	(175		)	165			(105		)	60			(110		)	42			(68		)
TOTAL INTEREST INCOME	(511		)	(3,562		)	(4,073		)	69			(2,385		)	2,316			2,384			764			3,148
Interest expense on:
Interest-bearing demand deposits	34			(411		)	(377		)	(2		)	(800		)	(802		)	69			(294		)	(225		)
Savings deposits	(60		)	(648		)	(708		)	(60		)	(660		)	(720		)	143			(199		)	(56		)
Time deposits	(449		)	(2,589		)	(3,038		)	122			(195		)	(73		)	982			288			1,270
Short-term borrowings	(14		)	(363		)	(377		)	57			(298		)	(241		)	34			145			179
TOTAL INTEREST EXPENSE	(489		)	(4,011		)	(4,500		)	117			(1,953		)	(1,836		)	1,228			(60		)	1,168
NET INTEREST INCOME	$	(22	)	$	449		$	427		$	(48	)	$	(432	)	$	(480	)	$	1,156		$	824		$	1,980

(1)Changes due to a combination of volume and rate have been allocated proportionally to volume and rate.

First Century Bankshares, Inc.  Page  3

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion is to focus and expand on certain information about the Corporation’s financial condition and results of operations which is not otherwise apparent from the audited consolidated financial statements included in this Annual Report. Reference should be made to those statements and the selected financial data presented elsewhere in this report for a thorough understanding of the following discussion and analysis. Management is not aware of any market or institutional trends, events or uncertainties that will have or are reasonably likely to have a material effect on the liquidity, capital resources or operations of the Corporation, except as discussed herein. Management is also not aware of any current recommendations by any regulatory authorities, which would have such a material effect if implemented.

This report may contain certain forward-looking statements, including certain plans, expectations, goals and projections, which are subject to numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by such statements for a variety of factors including: changes in economic conditions which may affect the Corporation’s primary market area; rapid movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving financial industry standards.

Corporate Structure and Acquisitions

First Century Bankshares, Inc. (“Corporation”) is chartered under the laws of West Virginia and operates as a financial holding company, headquartered in Bluefield, WV. The Corporation began active operations in March 1984, in a business combination with its then sole subsidiary, The First National Bank of Bluefield. Through a series of acquisitions and consolidations, the Corporation now operates one subsidiary bank, First Century Bank, N.A., Bluefield, WV (“FCBNA”). FCBNA is engaged in commercial banking activities that provide financial services to individuals and businesses. FCBNA operates 11 branch offices and 14 ATM locations throughout southern West Virginia and southwestern Virginia.

During 2001, the Corporation formed a financial subsidiary, First Century Financial Services, LLC, (“FCFSLLC”). This entity conducts the Corporation’s insurance activities through its investment in the Banker’s Insurance Corporation, a relationship with 67 community banks, which offers a full range of insurance products and services. Management believes the expansion of nontraditional financial service offerings to its customers will enhance the Corporation’s performance, and ultimately, shareholder value. FCFSLLC was formed with a minimal capital investment, which is carried at cost and eliminates upon consolidation.

Balance Sheet Analysis

Loans

The Corporation’s primary goal is to meet the credit needs of the retail and commercial customers in the Corporation’s primary markets of southern West Virginia and southwestern Virginia. Total loans decreased approximately $7,608,000, or 3.1% in 2002, following a year where loans had remained essentially unchanged in 2001. Competition in the Corporation’s market is very aggressive for the acquisition of new loans. Loan demand was relatively strong

First Century Bankshares, Inc.  Page  4

during most of 2001; however, with the events of the terrorist attacks of September 11, 2001, which further weakened an unstable economy, loan demand became very weak during the last part of 2001. This weakness remained throughout 2002, coupled with management’s philosophy of not offering long-term fixed-rate commitments in this low trough in the interest cycle. At December 31, 2002, the loan portfolio comprised 72.3% of total interest-earning assets as compared to 73.0% of total interest-earning assets at December 31, 2001, and contributed 77.4% of total interest income in 2002 and 2001, and 78.0% of total interest income in 2000. Management began to see signs of revitalized demand for loans by the end of 2002.

AMOUNTS OF LOANS OUTSTANDING

	December 31,
	2002	2001	2000	1999	1998
	(Dollars in Thousands)
Commercial, financial and agricultural	$43,725	$49,056	$49,883	$52,872	$42,584
Real estate-construction	12,268	7,755	5,990	5,353	10,369
Real estate-mortgage	159,233	161,074	158,828	149,121	119,076
Installment loans to individuals	21,234	26,183	30,026	36,631	30,185
TOTAL LOANS OUTSTANDING	$236,460	$244,068	$244,727	$243,977	$202,214

MATURITY SCHEDULE OF LOANS

	Remaining maturity at December 31, 2002
	(Dollars in Thousands)
	1 Year or Less		1 to 5 Years		After 5 Years		Total
Commercial, financial and agricultural	$	22,254	$	15,586	$	5,885	$	43,725
Real estate-construction	11,701		567		0		12,268
Real estate-mortgage	29,784		59,979		69,470		159,233
Installment loans to individuals	4,349		14,592		2,293		21,234
TOTAL	$	68,088	$	90,724	$	77,648	$	236,460
Predetermined interest rates	$	28,428	$	59,889	$	40,155	$	128,472
With floating interest rates	39,660		30,835		37,493		107,988
TOTAL	$	68,088	$	90,724	$	77,648	$	236,460

First Century Bankshares, Inc.  Page  5

NONPERFORMING ASSETS AND LOAN LOSS ANALYSIS

	Years Ended December 31,
	2002			2001			2000			1999			1998
	(Dollars in Thousands)
Average amount of loans outstanding	$	236,130		$	245,606		$	242,533		$	222,837		$	201,059
Allowance for loan losses:
Balance at beginning of the year	$	3,180		$	3,180		$	3,050		$	2,533		$	2,370
Additions from acquisitions	—			—			—			497			—
Loans charged off
Commercial, financial and agricultural	532			780			372			84			66
Real estate–mortgage	1,157			1,199			274			150			58
Installment loans to individuals	477			659			536			480			316
TOTAL LOANS CHARGED OFF	2,166			2,638			1,182			714			440
Loan recoveries
Commercial, financial and agricultural	86			32			12			7			26
Real estate–mortgage	63			239			44			116			—
Installment loans to individuals	57			33			47			56			33
TOTAL LOAN RECOVERIES	206			304			103			179			59
Net loans charged off	(1,960		)	(2,334		)	(1,079		)	(535		)	(381		)
Provision for loan losses	1,785			2,334			1,209			555			544
BALANCE AT END OF THE YEAR	$	3,005		$	3,180		$	3,180		$	3,050		$	2,533
Ratio of net loans charged off to average loans outstanding	0.83		%	0.95		%	0.44		%	0.24		%	0.19		%
Allowance at year end as a percent of loans	1.27		%	1.30		%	1.30		%	1.25		%	1.25		%
Provision for loan losses as a percent of loans	0.76		%	0.95		%	0.50		%	0.25		%	0.27		%
Nonperforming assets (at year end)
Nonaccrual	$	2,819		$	3,045		$	5,887		$	2,390		$	1,728
Past–due ninety days or more and still accruing	612			1,140			3,320			2,818			273
Restructured loans	—			—			—			—			637
Other real estate owned	793			1,279			1,001			104			678
TOTAL NONPERFORMING ASSETS	$	4,224		$	5,464		$	10,208		$	5,312		$	3,316
Nonperforming assets/total loans	1.8		%	2.2		%	4.2		%	2.2		%	1.6		%
Nonperforming assets/total assets		1.2	%	1.5		%	2.7		%	1.4		%		1.1	%

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	2002					2001					2000					1999					1998
	(Dollars in Thousands)
	Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans
Commercial, financial and agricultural	$	1,083	18.49		%	$	1,143	20.10		%	$	343	20.38		%	$	568	21.67		%	$	621	21.06		%
Real estate–construction	—		5.19		%	—		3.18		%	—		2.45		%	—		2.19		%	—		5.13
Real estate–mortgage	1,493		67.34		%	1,485		65.99		%	1,654		64.90		%	834		61.13		%	332		58.88		%
Installment loans to individuals	429		8.98		%	546		10.73		%	469		12.27		%	698		15.01		%	274		14.93		%
Unallocated	—		N/A			6		N/A			714		N/A			950		N/A			1,306		N/A
TOTAL	$	3,005		100.00	%	$	3,180		100.00	%	$	3,180		100.00	%	$	3,050		100.00	%	$	2,533		100.00	%

During 2002, the Corporation’s emphasis continued to be on strong local companies with known local management and excellent financial stability. Most of the commercial loans in the portfolio were made at variable rates of interest. Additionally, the Corporation continued to make loans available in an expanding retail marketplace. Consistent with management’s philosophy on relationship banking, most borrowers are also depositors and utilize other banking services. The average yield of the loan portfolio decreased to 7.06% in 2002 compared to 8.07% in 2001. This reflected the historically low interest rate environment during 2002, further compounded by aggressive competition and weaker demand for loans in the Corporation’s primary market area.

First Century Bankshares, Inc.  Page  6

The commercial loan portfolio is generally diversified and geographically dispersed within the region. At December 31, 2002, the Corporation had a concentration of $10,940,000, or 32.4% of stockholders’ equity in loans to borrowers in the hospitality industry. This concentration is diversified by geography throughout the Mid-Atlantic region. There are no other concentrations of lines of business or industry that represent greater than 25% of the Corporation’s equity. Within each specific industry, borrowers are diversified as to specialty, service or other unique feature of the overall industry. A substantial portion of the customers’ ability to honor their contractual commitment is largely dependent upon the economic conditions of the respective industry and overall economic conditions of southern West Virginia and southwestern Virginia, which is somewhat less volatile than many areas of the country.

The consumer portion of the loan portfolio consists of both secured and unsecured loans made to individuals and families for various reasons including the purchase of automobiles, home improvements, educational expenses and other worthwhile purposes. The Corporation continues to carefully monitor the consumer sector during this period of economic weakness. As recessionary pressures result in higher levels of unemployment, the likelihood for increased volatility arises in the consumer sector.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total amount of commitments does not necessarily represent future cash requirements. FCBNA had outstanding commitments to extend credit of approximately $42,956,000 at December 31, 2002, and $40,662,000 at December 31, 2001. These commitments consisted of unfunded loan commitments and unused lines of credit totaling $37,951,000 at December 31, 2002 and $36,951,000 at December 31, 2001. Additionally, standby letters of credit totaled $5,005,000 at December 31, 2002, and $3,711,000 at December 31, 2001.

Nonperforming assets, including nonaccrual loans, loans past-due 90 days or more, restructured loans and other real estate owned, decreased $1,240,000, or approximately 23%, from December 31, 2001 to December 31, 2002, following a decrease of $4,744,000, or approximately 46% in 2001. The 2002 decrease occurred primarily as a result of management’s ongoing efforts to enhance the quality of the loan portfolio. This improvement was further enhanced by the Corporation adhering to a stricter set of criteria in the determination of granting renewals and extensions. The Corporation’s policy is to discontinue the accrual of interest on loans that are past due more than 90 days, unless such loans are well collateralized and in process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment of principal or interest is in doubt. The Corporation’s holdings of other real estate owned decreased approximately $486,000 in 2002, following an increase of approximately $278,000 in 2001.

The Corporation maintains, through its provision, an allowance for loan losses believed by management to be adequate to absorb probable credit losses inherent in the portfolio. Management continues to enhance the methodology and procedures for determining the adequacy of the allowance for loan losses. The procedures that are utilized entail preparation of a loan “watch” list and assigning each loan a classification. For those individually significant loans where it is determined that it is not probable that the borrower will make all payments in accordance with the original loan agreement, management performs an impairment analysis. Specific reserves of $663,000 and $848,000 are recorded on impaired loans at December 31, 2002 and 2001, respectively. Other classified loans are categorized and

First Century Bankshares, Inc.  Page  7

allocated appropriate reserves. Other loans more than 90 days past due that have not been considered in the aforementioned procedures are assigned a classification of Substandard and are reserved for accordingly. The remaining portfolio is segregated into consumer, commercial, and residential real estate loans, and the historical net charge off percentage of each category is applied to the current amount outstanding in that category. Also, a review of concentrations of credit, classes of loans and pledged collateral is performed to determine the existence of any deterioration. In addition, volume and trends in delinquencies and nonaccrual loans, off-balance sheet credit risks, the loan portfolio composition, loan volume and maturity of the portfolio, national and local economic conditions and the experience, ability and depth of lending management and staff are given consideration.

The allowance for loan losses was 1.27% of year-end loans at December 31, 2002 and 1.30% at December 31, 2001. The estimation of the adequacy of the allowance for loan losses is the most significant estimate determined by management. Different amounts could result under different conditions or assumptions.

The Corporation uses an outsourcing arrangement for its loan review function with an independent third-party firm. This process includes a thorough evaluation of the credit administration systems and personnel. The objective is to have an effective loan review system that provides management with information that will produce a more focused and effective approach in managing credit risk inherent in the loan portfolio. As a part of this process, a system of loan grades is utilized to further support the adequacy of the loan loss allowance.

Securities

Securities, the second largest asset of the Corporation, increased by $1.4 million or 1.6% during 2002. At December 31, 2002, securities comprised 27.2% of total interest-earning assets compared to 26.2% of total interest-earning assets at December 31, 2001. The composition of the Corporation’s securities portfolio reflects management’s investment strategy of maximizing portfolio yields subject to risk and liquidity considerations. The primary objective of the Corporation’s investment strategy is to maintain an appropriate level of asset liquidity and provide management a tool to assist in controlling and managing the Corporation’s interest rate position while at the same time producing appropriate levels of interest income. Management of the maturity of the portfolio is necessary to ensure adequate liquidity and manage interest rate risk. During 2002, in order to maintain liquidity and flexibility, management continued categorizing most investments in the available for sale portfolio. Management believes that the potential for increased loan demand requires maintaining the liquidity of the securities portfolio.

The remaining securities, primarily state, county and municipal obligations comprise the held to maturity portfolio. Net unrealized gains in the held to maturity portfolio amounted to approximately $405,000 at December 31, 2002, compared to net unrealized gains of $151,000 at December 31, 2001. This indicates the effects of the declining interest rate environment during 2002 and 2001. The held to maturity portfolio decreased from $10,708,000 at December 31, 2001, to $9,566,000 at December 31, 2002, primarily due to decreases in state and municipal obligations. State and municipal securities contained no individual issues in excess of 10% of stockholders’ equity.

As of December 31, 2002, the investment portfolio contained approximately $9,668,000 of corporate debt obligations in the available for sale portfolio. These obligations have an average remaining life of 2.6 years and are primarily in the financial services sector. No investment with an individual issuer is in excess of 10% of stockholders’ equity.

First Century Bankshares, Inc.  Page  8

Realized losses from the sale of available for sale securities were approximately $13,000 in 2001. These losses resulted from the liquidation of the Corporation’s final position in a mutual fund that had been in the portfolio for several years. Also, during 2001, the Corporation had an investment in a municipal obligation that was downgraded below investment grade. This security was sold during the fourth quarter of 2001 resulting in the recognition of a loss of approximately $30,000.

SECURITIES

The following table shows the carrying values of securities at the respective periods, which is market value for available for sale securities and amortized cost for securities held to maturity:

	December 31,
	2002	2001	2000
	(Dollars in Thousands)
Securities available for sale:
U.S. Government securities	$3,052	$2,081	$4,024
U.S. Government agency securities	65,911	64,065	76,471
Other securities	9,668	9,439	772
TOTAL SECURITIES AVAILABLE FOR SALE	$78,631	$75,585	$81,267
Securities held to maturity:
U.S. Government agency securities	$9	$64	$140
State, county and municipal securities	9,407	10,494	10,033
Other securities	150	150	150
TOTAL SECURITIES HELD TO MATURITY	$9,566	$10,708	$10,323

MATURITIES OF SECURITIES

The following table shows the contractual maturities of debt securities at December 31, 2002 and the weighted average yields of such securities:

	Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(Dollars in Thousands)
Securities available for sale:
U.S. Treasury securities	$	1,992	6.55	%	$	997	3.23	%	$	—	—		$	—	—		$	2,989	5.44	%
U.S. Government agency securities	2,993		3.97	%	60,497		4.09	%	1,465		6.43	%	—		—		64,955		4.14	%
Other Debt Securities	—		—		9,188		5.98	%	—		—		—		—		9,188		5.98	%
TOTAL SECURITIES AVAILABLE FOR SALE	$	4,985	5.00	%	$	70,682	4.32	%	$	1,465	6.43	%	$	—	—		$	77,132	4.41	%
Securities held to maturity:
U.S. Government agency securities	$	9	5.13	%	$	—	—		$	—	—		$	—	—		$	9	5.13	%
State, county and municipal securities	673		4.66	%	4,990		5.22	%	3,404		5.22	%	340		5.44	%	9,407		5.19	%
Other securities	50		6.20	%	100		7.35	%	—		—		—		—		150		6.97	%
TOTAL SECURITIES HELD TO MATURITY	$	732	4.77	%	$	5,090	5.26	%	$	3,404	5.22	%	$	340	5.44	%	$	9,566	5.21	%

Yields on tax-exempt obligations have been computed based on tax equivalent yield.

During the year ended December 31, 2001, the Corporation had in securities held to maturity, an investment in a municipal obligation that was downgraded below investment grade. This security was sold during the fourth quarter of 2001 resulting in the recognition of a loss of approximately $30,000.

Deposits

Deposits, the Corporation’s major source of funds, decreased approximately $9.4 million or 3.0% in 2002, following a decrease of $10.0 million or 3.0% in 2001. These decreases occurred primarily in interest-bearing deposits as management aggressively monitored

First Century Bankshares, Inc.  Page  9

interest rate reductions by the Federal Reserve and, coupled with weaker loan demand, certain price-sensitive certificates of deposit were not retained. The average rate paid on interest-bearing deposits in 2002 was 2.06% and 3.41% in 2001. Strong competition for deposits exists in the Corporation’s primary market among commercial banks, savings banks, thrift institutions, credit unions, mutual funds, brokerage houses, insurance companies, and certain national retailers. Despite this intense competition, management continues to evaluate pricing strategies that will insure the Corporation’s long-term benefit of maintaining market share without sacrificing the Corporation’s profitability.

AVERAGE DEPOSITS

	2002 Average			2001 Average			2000 Average
	Amount	Rate		Amount	Rate		Amount	Rate
	(Dollars in Thousands)
Noninterest-bearing demand deposits	$37,461	N/A		$34,361	N/A		$33,063	N/A
Interest-bearing demand deposits	73,357	0.70	%	69,942	1.27	%	70,026	2.42	%
Savings deposits	74,264	1.43	%	77,464	2.29	%	79,665	3.13	%
Time deposits	130,469	3.18	%	141,322	5.09	%	138,953	5.22	%
TOTAL AVERAGE DEPOSITS	$315,551	1.81	%	$323,089	3.05	%	$321,707	3.56	%

There are no foreign offices. Average balances are computed on daily balances.

MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE

	December 31, 2002
	(Dollars in Thousands)
Under 3 months	$9,249
3 to 6 months	6,922
6 to 12 months	7,622
Over 12 months	6,095
TOTAL CERTIFICATES OF DEPOSIT OF $100,000 OR MORE	$29,888

SHORT-TERM BORROWED FUNDS

	December 31,
	2002	2001	2000
	(Dollars in Thousands)
Securities sold under agreements to repurchase	$16,719	$16,994	$13,461
Other borrowed funds	26	26	26
TOTAL BORROWED FUNDS	$16,745	$17,020	$13,487

The approximate average interest rates, average amounts outstanding, and maximum amounts outstanding at any month-end for securities sold under agreements to repurchase are as follows:

	2002		2001		2000
Average interest rates at December 31	0.56	%	0.88	%	4.38	%
Maximum amounts outstanding at any month-end	$20,880		$22,506		$21,433
Average daily amount outstanding	$17,340		$18,051		$16,539
Weighted average interest rates	0.91	%	2.96	%	4.64	%

The weighted average interest rates are calculated by dividing the annual interest expense by the related average daily amounts outstanding.

Capital Resources

Cash dividends paid to stockholders during 2002 totaled $1,694,000, and for 2001 and 2000 amounted to $1,700,000. This represents a dividend pay out ratio (dividends divided by net income) of 50% in 2002, 79% in 2001 and 55% in 2000. Cash dividends per share equaled $0.85 per share in 2002, 2001 and 2000. The Corporation is dependent upon dividends paid by its subsidiary bank to fund dividends to the stockholders and to cover

First Century Bankshares, Inc.  Page  10

other operating costs. The Corporation’s board of directors considers historical financial performance, future prospects, and anticipated needs for capital in formulating the dividend payment policy. Future dividends are dependent upon the Corporation’s financial results, capital requirements and general economic conditions.

One of management’s primary objectives is to maintain a strong capital position. Stockholders’ equity increased $851,000 or 2.6% in 2002. This increase was most affected by an increase in retained earnings of $1,681,000, offsetting reductions in accumulated other comprehensive income of $683,000. Additionally, management utilized capital of $147,000 to acquire 9,000 shares of treasury stock at an average purchase price of $16.34 per share. Management currently has approval to repurchase an additional 11,000 shares of the Corporation’s common stock. The percentage of earnings reinvested in the Corporation (net income less dividends as a percentage of net income) for the years 2002, 2001 and 2000 was 50%, 21% and 45%, respectively. The internal capital formation rate (net income less dividends as a percentage of average stockholders’ equity) indicates the rate at which assets can grow while maintaining the current ratio of stockholders’ equity to assets. The internal capital formation rate was 5.1% in 2002, 1.4% in 2001 and 4.5% in 2000.

REGULATORY CAPITAL

Entity	Tier 1		Combined Capital (Tier 1 and Tier 2)		Leverage
Consolidated	10.94	%	12.12	%	7.75	%
First Century Bank, N.A.	10.62	%	11.81	%	7.53	%

Risk-based capital regulations require all banks and bank holding companies to have a minimum total risk-based capital ratio of 8% with half of the capital composed of core capital. Conceptually, risk-based capital requirements assess the risk of a financial institution’s balance sheet and off-balance sheet commitments in relation to its capital. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets in determining the risk-based capital ratios. The Corporation’s Tier I capital, which consists of stockholders’ equity, adjusted for certain intangible assets, amounted to $27,843,000 at December 31, 2002, or 10.94% of total risk-weighted assets, compared to $26,668,000 at December 31, 2001, or 10.29% of total risk-weighted assets. Tier II capital, or supplementary capital, includes capital components such as qualifying allowance for loan losses, and can equal up to 100% of an institution’s Tier I capital with certain limitations. The Corporation’s Tier II capital amounted to $3,005,000 at December 31, 2002, or 1.18% of total risk-weighted assets, compared to $3, 180,000 at December 31, 2001, or 1.23% of total risk-weighted assets. The Corporation’s total consolidated risk-based capital was $30,848,000 at December 31, 2002, or 12.12% of total risk-weighted assets, compared to $29,848,000, or 11.52% of total risk-weighted assets as of December 31, 2001. Additionally, risk-based capital guidelines require a minimum leverage ratio (Tier I capital divided by average adjusted total consolidated assets) of 4%, which may be increased for institutions with higher levels of risk or that are experiencing or anticipating significant growth. The Corporation has not been advised by any regulatory agency of any specific minimum leverage ratio applicable to it. As of December 31, 2002 and 2001, the Corporation’s leverage ratio was 7.75% and 7.20%, respectively; therefore, the Corporation exceeded all current minimum capital requirements.

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Asset and Liability Management and Interest Rate Sensitivity

The income stream of the Corporation is subject to risk resulting from interest rate fluctuations to the extent there is a difference between the amount of the Corporation’s interest-earning assets and the amount of interest-bearing liabilities that are prepaid, withdrawn, mature or reprice in specified periods. The goal of asset and liability management is to maintain high quality and consistent growth of net interest income with acceptable levels of risk to changes in interest rates.

Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds, on which rates change daily, and loans that are tied to the prime rate differ considerably from long-term securities and fixed rate loans. Similarly, time deposits of $100,000 and over, now accounts and money market deposit accounts are much more interest sensitive than passbook savings accounts and other interest-bearing liabilities. The Corporation uses a number of tools to measure interest rate risk, including simulating net interest income under various rate scenarios, monitoring the change in present value of the asset and liability portfolios under the same rate scenarios and monitoring the difference or gap between rate sensitive assets and liabilities over various time periods.

Management continues its efforts to generate variable rate loans. However, with strong competition for loans, and in an historically low interest rate environment, customers are requiring more fixed rate commitments. The results of management’s efforts to balance interest-earning assets against interest-bearing liabilities can be seen in the Analysis of Interest Rate Sensitivity table.

Management continues to monitor the Corporation’s asset/liability gap positions, while incorporating more sophisticated risk measurement tools, including simulation modeling which calculates expected net interest income based on projected interest-earning assets, interest-bearing liabilities and interest rates. Utilizing simulation modeling allows the Corporation to evaluate earnings and capital at risk due to significant changes in interest rates. The Corporation monitors exposure to the effect of an instantaneous change in rates of 200 basis points up or down over the same period. As of December 31, 2002, simulation indicated the impact of a 200 basis point increase in rates would approximate a 6.0% increase in net interest income, while a 200 basis point decline in rates would approximate a 8.1% decrease from an unchanged rate environment. These changes are within the Corporation’s policy limits for the maximum negative impact on net interest income from a change in interest rates.

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ANALYSIS OF INTEREST RATE SENSITIVITY

	Months									Years
	Less Than 3			3 - 6			6 - 12			1 - 5			Over 5			Totals
	(Dollars in thousands)
Investment securities	$	1,013		$	1,601		$	3,203		$	77,886		$	5,246		$	88,949
Federal funds sold and interest-bearing balances with banks	1,871			—			—			—			—			1,871
Loans	116,156			5,841			11,683			65,459			37,321			236,460
Interest-earning assets	$	119,040		$	7,443		$	14,885		$	143,345		$	42,567		$	327,280
Time deposits	$	34,871		$	22,749		$	45,498		$	21,696		$	—		$	124,814
Other interest-bearing deposits	73,228			—			—			70,703			—			143,931
Other interest-bearing liabilities	14,251			422			843			1,203			26			16,745
Interest-bearing liabilities	$	122,350		$	23,171		$	46,341		$	93,602		$	26		$	285,490
Interest sensitivity gap	$	(3,310	)	$	(15,728	)	$	(31,456	)	$	49,743		$	42,541		$	41,790
Cumulative interest sensitivity gap	$	(3,310	)	$	(19,038	)	$	(50,494	)	$	(751	)	$	41,790
Ratio of interest-earning assets to interest-bearing liabilities	0.97		x	0.32		x	0.32		x	1.53		x	1637.19		x
Ratio of cumulative interest sensitivity gap to total earning assets	(1.01		)%	(5.82		)%	(15.43		)%	(0.23		)%	12.77		%

Liquidity Management

Liquidity management involves the ability to meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. To ensure the Corporation is positioned to meet immediate and future cash demands, management relies on liquidity analysis, knowledge of business trends over past economic cycles and forecasts of future conditions.

Liquidity can best be demonstrated by an analysis of the Corporation’s cash flows. The primary source of cash flows for the Corporation is operating activities. Operating activities provided $7,118,000 of liquidity for the year ended December 31, 2002, compared to $8,252,000 and $4,501,000 in 2001 and 2000, respectively. The principal elements of these operating flows are net income, increased for significant non-cash expenses for the provision for loan losses and depreciation and amortization. In 2002, these funds were utilized primarily for withdrawals of deposits, aggregating $9,426,000. Management decided to not retain certain price sensitive certificates of deposit in an environment of weakened loan demand and interest rate volatility.

A secondary source of liquidity for the Corporation comes from investing activities, principally the maturities of investment securities. During 2002, due to the rapidly declining interest rate environment, maturities and calls of investment securities amounted to $57,122,000, compared to $64,490,000 in 2001 and $13,896,000 in 2000. As of December 31, 2002, the Corporation had approximately $44,885,000 of investment securities that mature in 36 months. It is anticipated that interest rates will begin to stabilize and the rapidity of calls in investment securities will decline. For the year ended December 31, 2002, $59,260,000 of cash was redeployed in investment securities. Weaker loan demand resulted in a net decrease in loans of $5,296,000 for 2002.

Additional sources of liquidity are available to FCBNA through the Federal Reserve System and through membership in the Federal Home Loan Bank system. As of December 31, 2002, FCBNA had a maximum borrowing capacity exceeding $70,000,000 through the Federal Home Loan Bank of Pittsburgh. These funds can be made available with various maturities and interest rate structures. Borrowings cannot exceed twenty times the amount of Federal Home Loan Bank stock owned by the borrowing bank. During 2002,

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the Federal Home Loan Bank changed its capitalization structure, reducing the amount of stock FCBNA is required to own for membership. At December 31, 2002, FCBNA owned $368,900 of stock, which would allow FCBNA to borrow up to $7,378,000 without acquiring additional stock. Borrowings are collateralized by a blanket lien by the Federal Home Loan Bank on its member’s qualifying assets. As of December 31, 2002, there were no outstanding advances from the Federal Home Loan Bank of Pittsburgh. As a member of the Federal Reserve System, FCBNA has access to funding through the Federal Reserve Bank of Richmond. The Federal Reserve requires its members to exhaust other sources of liquidity before seeking advances, therefore, unless FCBNA would leave the Federal Home Loan Bank of Pittsburgh, borrowing from the Federal Reserve Bank of Richmond would be very unlikely. Any borrowings from the Federal Reserve Bank of Richmond would require assets of FCBNA to be pledged as collateral, and advances would be expected to be repaid as soon as possible.

Income Statement Analysis

Earnings Overview

Net income for 2002 was $3,375,000 or $1.69 per diluted share, an increase of $1,230,000 or 57.3% from the $2,145,000 or $1.07 per diluted share earned in 2001, and $294,000 more than the $3,081,000 or $1.54 per diluted share earned in 2000. This increase occurred primarily as a result of a decrease in the provision for loan losses and enhanced net interest income due to the reductions in interest expense from repricing time deposits exceeding the decline in interest income from loans and investment securities. Additional noninterest income and reductions in noninterest expense further enhanced earnings.

Earnings Per Share

The Earnings Per Share Table summarizes the principal sources of changes in earnings per share for 2002. For further details on the computation of earnings per share, refer to Note 10 of the Notes to Consolidated Financial Statements, presented elsewhere in this report.

EARNINGS PER SHARE

Net income per share — 2001	$	1.07
Increase (decrease) due to change in:
Net interest income	0.22
Provision for loan losses	0.28
Other operating income	0.24
Personnel expense	(0.22		)
Other expense	0.10
Net income per share — 2002	$	1.69

Net Interest Income

The major portion of the Corporation’s earnings is derived from net interest income, which is the interest income on interest-earning assets less the interest expense on interest-bearing liabilities. During 2002 net interest income increased $427,000 or 2.8%. This followed a 3.1 % decrease in 2001, and a 14.4% increase in 2000. For the year ended

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December 31, 2002, interest income decreased $4,073,000, or approximately 15.9%, compared to a decrease of $2,316,000, or 8.3% for 2001, and an increase of $3,148,000, or 12.7% for 2000. Interest on loans, which decreased $3,154,000 or 15.9%, contributed to the decrease for 2002, along with interest on securities, which decreased $644,000, or 13.3%. The decrease in interest income was accompanied by a decrease in interest expense of $4,500,000 or 43.3% for 2002. This followed a decrease in interest expense of $1,836,000, or 15.0% for 2001, and an increase of $1,168,000, or 10.6% for 2000.

Net interest income is affected by many factors, but most significantly by the prevailing interest rates during the period, the spread between the various sources and uses of funds, and by changes in the volume of various assets and liabilities. The performance for 2002 is indicative of the historically low interest rate environment that followed the rapid decline in interest rates that prevailed throughout 2001. This is further supported through volume/rate analysis that shows most changes in net interest income were due to changes in interest rate and not due to the mix of loans, investments or interest-bearing liabilities. For 2000, the increases in interest income and expense are primarily attributable to having a full year of operations from the Hinton, West Virginia office compared to approximately six months of operations in 1999.

Provision for Loan Losses

The Corporation experienced a 23.5% decrease in the provision for loan losses during 2002. The provision for loan losses was $1,785,000 for 2002, compared to $2,334,000 for 2001 and $1,209,000 for 2000. Factors contributing to the decreased provision in 2002 included decreased charge-offs of approximately $472,000, primarily in certain commercial and commercial mortgage loans, along with fewer charge-offs in the retail sector. In evaluating the loan portfolio at December 31, 2002, with the improved level of nonaccrual and past-due loans, it is anticipated that loan losses will show continued improvement in 2003.

Noninterest Income and Expense

Noninterest income increased $485,000 or 12.9% in 2002, following a $423,000 or 12.7% increase in 2001, and a $151,000 or 4.7% increase in 2000. The most significant factor contributing to this increase was a $475,000 recovery that resulted from the settlement of certain litigation surrounding a check-kiting scheme and is reflected in other noninterest income. The largest component of noninterest income is fees from fiduciary activities. Fees from fiduciary activities increased approximately $7,000 in 2002 after being unchanged in 2001, which followed an increase of $175,000 or 14.3% for 2000. The second largest component of non-interest income is service charges on deposit accounts. These fees increased approximately $85,000 or 6.8% in 2002, after a decrease of approximately $25,000 or 2.0% in 2001, and an increase of approximately $130,000 or 11.4% in 2000.

Noninterest expense, excluding the provision for loan losses, decreased 4.6% in 2002, following a 2.3% increase in 2001 and a 17.9% increase in 2000. Personnel expense is the largest component of noninterest expense. Personnel expense increased 6.7% in 2002, following an increase of 9.1% in 2001, and 9.6% in 2000. The additional staff required for a full year of operations of the Hinton, West Virginia branch acquisition contributed to the 2000 increase. In addition to salaries, employee benefits, which included increased costs for health care benefits and net periodic pension cost, contributed to the increase in personnel expense for 2002 and 2001. For a complete discussion of the Corporation’s

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employee benefits, refer to Note 12 of the Notes to Consolidated Financial Statements, presented elsewhere in this report. Management remains committed to improving operational efficiency throughout the organization while keeping personnel expense at an adequate level to attract and retain competent staff.

The primary factor contributing to the decrease in noninterest expense for 2002 was the discontinuance of goodwill amortization of approximately $425,000 upon the adoption of Financial Accounting Standards Board Statement No. 142 “Goodwill and Other Intangible Assets,” (SFAS 142). Refer to Note 2 of the Notes to Consolidated Financial Statements, presented elsewhere in this report for a complete discussion of the effects of adopting SFAS 142.

Income Taxes

Applicable income taxes for 2002 increased $851,000 or 75.7%. This followed a $541,000 or 32.5% decrease for 2001, and a $173,000 or 9.4% decrease for 2000. Income taxes computed at the statutory rate are reduced primarily by interest earned on state and municipal obligations. For a complete discussion of the Corporation’s tax position, refer to Note 13 of the Notes to Consolidated Financial Statements, presented elsewhere in this report.

RETURN ON EQUITY AND ASSETS

	December 31,
	2002		2001		2000
Percentage of net income to:
Average stockholders’ equity	10.27	%	6.74	%	9.94	%
Average total assets	0.92	%	0.57	%	0.83	%
Percentage of dividends declared per common share to net income per common share	50.30	%	79.44	%	55.19	%
Percentage of average stockholders’ equity to average total assets	8.93	%	8.48	%	8.33	%

The Effects of Inflation and Changing Prices

Inflation affects the Corporation in several ways, but not to the same extent that it does a company that makes large capital expenditures or has a large investment in inventory. The Corporation’s asset and liability structure is primarily monetary in nature and, therefore, its financial results are more affected by changes in interest rates than by inflation. However, the actions of the Federal Reserve Board indicate that interest rate management will continue to be the primary tool used to curtail inflationary pressures. Inflation does affect noninterest expense, such as personnel expense and the cost of services and supplies. These increases must be offset to the extent possible, by increases in noninterest income and by control of noninterest expense.

Accounting, Legislative and Regulatory Matters

Effective January 1, 2002, the Corporation adopted the provisions of Financial Accounting Standards Board Statement No. 14 1, “Business Combinations” (SFAS 141). SFAS 141requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. The implementation of SFAS 141 did not have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

First Century Bankshares, Inc.  Page  16

Effective January 1, 2002, the Corporation adopted the provisions of Financial Accounting Standards Board Statement No. 142 “Goodwill and Other Intangible Assets,” (SFAS 142). As of January 1, 2002, the Corporation had approximately $5,183,000 in unamortized goodwill from previous acquisitions. SFAS 142 required a transitional impairment test be performed within six-months of adoption. The initial valuation of the Corporation’s goodwill pursuant to this pronouncement resulted in no write-downs for impairment. Refer to Note 2 of the Notes to Consolidated Financial Statements, presented elsewhere in this report for a complete discussion of the effects of adopting SFAS 142.

Effective January 1, 2002, the Corporation adopted the provisions of Financial Accounting Standards Board Statements No. 143 “Accounting for Asset Retirement Obligations” (SFAS 143), and No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144).

SFAS 143 requires that obligations associated with the retirement of tangible long-lived assets be recorded as a liability when those obligations are incurred, with the amount of liability initially measured at fair value. SFAS 143 is effective for financial statements beginning after June 15, 2002, though early adoption is encouraged. The implementation of this statement did not have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

SFAS 144 supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” SFAS 144 applies to all long-lived assets including discontinued operations, and amends Accounting Principle Board Opinion No. 30, “Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book or fair value less cost to sell. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and its provisions are generally expected to be applied prospectively. The implementation of this statement did not have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

The Financial Accounting Standards Board has issued SFAS 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS 145). This Statement rescinds SFAS No.4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds SFAS 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends SFAS 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the rescission of SFAS 4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. Early application of the provisions of this Statement related to the rescission of SFAS 4 is encouraged. The provisions in paragraphs 8 and 9(c) of SFAS 145 related to SFAS 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. All other provisions of SFAS 145 shall be effective for financial statements issued on

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or after May 15, 2002, with early application encouraged. Management does not anticipate the implementation of this statement to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

In June 2002 the Financial Accounting Standards Board issued FAS 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Management does not anticipate the implementation of this statement to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

The Financial Accounting Standards Board has issued FAS 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9” (SFAS 147). FASB Statement No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions,” and FASB Interpretation No. 9, “Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method,” provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS 147.

In addition, SFAS 147 amends FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS 144 requires for other long-lived assets that are held and used. Paragraph 5 of SFAS 147, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted. Management does not anticipate the implementation of this statement to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148). In light of recent switches by a number of companies to the recognition and measurement provisions of SFAS 123, “Accounting for Stock-Based Compensation,” (and of

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announcements by other entities of their intentions to switch), the FASB has amended SFAS 123 to add two new transitional approaches when changing from the APB Opinion 25 intrinsic value method of accounting for stock-based employee compensation to the SFAS 123 fair value method. In addition, SFAS 123 has been amended to require disclosure of additional information concerning the effects of stock-based employee compensation on earnings. Finally, SFAS 148 amends APB Opinion 28, “Interim Financial Reporting,” to call for disclosure of SFAS 123 pro forma information on a quarterly basis. Management does not anticipate the implementation of this statement to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

On November 25, 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34).” FIN 45 clarifies the requirements of FASB Statement No. 5 (FAS 5), “Accounting for Contingencies,” relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. For guarantees that fall within the scope of FIN 45, the Interpretation requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The Corporation’s primary guarantees included within the scope of FIN 45 relates to financial standby letters of credit issued to commercial customers. FIN 45 requires the liability recognized in standalone arm’s-length transactions to be the premium received or receivable by the guarantor. Management does not anticipate the implementation of this interpretation to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

In January 2003 the Financial Accounting Standards Board issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities (an interpretation of ARB No. 51).” FIN 46 addresses the consolidation by business enterprises of certain variable interest entities. Management does not anticipate the implementation of this interpretation to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”). The Act contains a number of provisions that dramatically change the reporting and corporate governance obligations of public companies and their directors and officers. The Act also creates new and enhanced criminal and civil liability provisions related to securities fraud. In order to comply with certain provisions of the Act, the Corporation has taken steps to enhance its controls over financial reporting and disclosures including, but not limited to, the formation of a disclosure review committee that will be utilized to evaluate the accuracy and completeness of the Corporation’s reporting to the U.S. Securities and Exchange Commission and to shareholders of the Corporation.

Additional due diligence procedures have been developed to assist the Chief Executive and Chief Financial officers in their certification of the financial statements. The Act also enhances the responsibilities of the Corporation’s Audit Committee in the selection of the Corporation’s external auditors and in the approval of the scope of services the external auditors will be allowed to perform for the Corporation. The Act further expedites the reporting of transactions by directors and officers in the Corporation’s common stock. The Corporation will continue to monitor developments and new regulations that will be promulgated pursuant to the Act to provide enhanced transparency of reporting so that our stockholders or potential stockholders will be able to make informed investment decisions.

First Century Bankshares, Inc.  Page  19

Per Share Data by Quarter

The common stock of the Corporation is quoted on the NASD OTC Bulletin Board under the trading symbol FCBS. The per share data by quarter table shows the approximate high and low bid as reported by the transfer agent and market makers for 2002 and 2001. Also presented below are the dividends paid for those respective years. The number of stockholders of record on December 31, 2002, was 574 and outstanding shares totaled 1,991,000.

PER SHARE DATA BY QUARTER

			Market Quotations
	Dividends		2002		2001
Quarter	2002	2001	High	Low	High	Low
First Quarter	$0.20	$0.20	$16.10	$14.75	$14.00	$11.62
Second Quarter	0.20	0.20	18.00	15.60	15.00	13.12
Third Quarter	0.20	0.20	18.25	17.25	18.50	14.25
Fourth Quarter	0.25	0.25	18.50	17.10	16.50	14.05

First Century Bankshares, Inc.  Page  20

Trust Asset Responsibility

Assets managed by the Trust Division are presented at market value. These assets are not included in the financial statements contained elsewhere in this report. Trust responsibility, as measured by market value, is substantially greater than book value, which is the Federal income tax basis of the assets.

Trust account administration and investment management are linked through the talents of a skilled professional and support staff. Their education and experience through decades of service results in specialization in personal and retirement relationships, foundations and charitable and endowment purposes.

First Century Bankshares, Inc.  Page  21

CONDENSED STATEMENTS OF FINANCIAL CONDITION

Statistical Summary, 2002 – 1998

	December 31,
	2002			%		2001			%		2000			%		1999			%		1998			%
	(Dollars in Thousands, Except Per Share Data)
Loans	$	236,460		65		$	244,068		66		$	244,727		65		$	243,977		66		$	202,214		69
Securities		88,949		25			87,519		24			92,770		25			85,131		23			60,936		21
Federal funds sold		—		—			2,000		1			—		—			—		—			4,000		1
Interest-bearing deposits with banks		1,871		1			862		—			1,627		—			3,239		1			3,275		1
INTEREST-EARNING ASSETS		327,280		91			334,449		91			339,124		90			332,347		90			270,425		92
Cash and due from banks		14,947		4			15,427		4			14,118		4			15,372		4			10,473		4
Premises and equipment		10,500		3			10,651		3			10,487		3			10,712		3			9,199		3
Other assets		11,542		3			11,856		3			13,627		4			12,197		4			7,015		2
Allowance for loan losses		(3,005	)	(1	)		(3,180	)	(1	)		(3,180	)	(1	)		(3,050	)	(1	)		(2,533	)	(1	)
TOTAL ASSETS	$	361,264		100		$	369,203		100		$	374,176		100		$	367,578		100		$	294,579		100
Savings deposits	$	143,931		40		$	145,130		39		$	148,572		40		$	152,088		41		$	123,353		42
Time deposits		124,814		34			135,252		37			143,253		38			136,064		37			100,528		34
Other interest-bearing liabilities		16,745		5			17,020		5			13,487		4			16,958		5			13,046		4
INTEREST BEARING LIABILITIES		285,490		79			297,402		81			305,312		82			305,110		83			236,927		80
Demand deposits		39,202		11			36,991		10			35,511		10			31,743		9			27,847		10
Other liabilities		2,754		1			1,843		—			1,671		—			1,851		—			1,302		—
TOTAL LIABILITIES		327,446		91			336,236		91			342,494		92			338,704		92			266,076		90
STOCKHOLDERS’ EQUITY		33,818		9			32,967		9			31,682		8			28,874		8			28,503		10
TOTAL LIABILITIES & EQUITY	$	361,264		100		$	369,203		100		$	374,176		100		$	367,578		100		$	294,579		100
TOTAL DEPOSITS	$	307,947				$	317,373				$	327,336				$	319,895				$	251,728
BOOK VALUE PER SHARE	$	16.99				$	16.48				$	15.84				$	14.44				$	14.25

SUMMARY OF OPERATIONS

Statistical Summary, 2002 – 1998

	Years Ended December 31,
	2002			2001			2000			1999			1998
	(Dollars in Thousands, Except Per Share Data)
Interest income	$	21,534		$	25,607		$	27,923		$	24,775		$	22,535
Interest expense	5,886			10,386			12,222			11,054			9,863
NET INTEREST MARGIN	15,648			15,221			15,701			13,721			12,672
Provision for loan losses	1,785			2,334			1,209			555			544
Net credit margin	13,863			12,887			14,492			13,166			12,128
Noninterest income	4,251			3,766			3,343			3,192			2,704
Noninterest expense	12,764			13,384			13,089			11,104			9,816
INCOME BEFORE INCOME TAXES	5,350			3,269			4,746			5,254			5,016
Provision for income taxes	1,975			1,124			1,665			1,838			1,815
NET INCOME	$	3,375		$	2,145		$	3,081		$	3,416		$	3,201
EARNINGS PER COMMON SHARE:
Basic	$	1.69		$	1.07		$	1.54		$	1.71		$	1.60
Diluted	$	1.69		$	1.07		$	1.54		$	1.71		$	1.60
Dividends per common share	$	0.85		$	0.85		$	0.85		$	0.80		$	0.75
Payout ratio	50		%	79		%	55		%	47		%	47		%

First Century Bankshares, Inc.  Page  22

Consolidated Statements of Financial Condition

	December 31,
	2002			2001
	(Dollars in Thousands)
ASSETS
Cash and due from banks	$	14,947		$	15,427
Interest-bearing balances with banks	1,871			862
Securities available for sale	78,631			75,585
Securities held to maturity (estimated market value of $9,971 in 2002 and $10,859 in 2001)	9,566			10,708
Federal Home Loan Bank and Federal Reserve Bank Stock	752			1,226
Federal funds sold	—			2,000
Loans	236,460			244,068
Less allowance for loan losses	3,005			3,180
Net loans	233,455			240,888
Premises and equipment, net	10,500			10,651
Other assets	11,542			11,856
TOTAL ASSETS	$	361,264		$	369,203
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	39,202		$	36,991
Interest-bearing	268,745			280,382
Total deposits	307,947			317,373
Short-term borrowings	16,745			17,020
Other liabilities	2,754			1,843
TOTAL LIABILITIES	327,446			336,236
Commitments and contigencies (see Notes 14 and 15)
STOCKHOLDERS’ EQUITY
Common stock - $1.25 par value; 10,000,000 shares authorized and 2,000,000 shares issued at December 31, 2002 and 2001; 1,991,000 shares outstanding at December 31, 2002 and 2,000,000 shares outstanding at December 31, 2001:	2,500			2,500
Paid-in capital	785			785
Retained earnings	30,247			28,566
Treasury stock, at cost; 9,000 shares	(147		)	—
Accumulated other comprehensive income, net of tax	433			1,116
TOTAL STOCKHOLDERS’ EQUITY	33,818			32,967
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	361,264		$	369,203

The accompanying notes are an integral part of the consolidated financial statements.

First Century Bankshares, Inc.  Page  23

Consolidated Statements of Income and Comprehensive Income

	Years Ended December 31,
	2002			2001			2000
	(Dollars in Thousands, Except Per Share Data)
INTEREST INCOME
Interest and fees on loans	$	16,675		$	19,829		$	21,775
Interest on balances with banks	68			243			183
Interest and dividends from securities available for sale: Taxable	4,212			4,856			5,383
Interest and dividends from securities held to maturity: Taxable	78			69			54
Tax-exempt	432			491			452
Interest on federal funds sold	69			119			76
TOTAL INTEREST INCOME	21,534			25,607			27,923
INTEREST EXPENSE
Interest on time certificates of $100,000 or more	1,082			1,877			1,938
Interest on other deposits	4,645			7,973			9,507
Interest on federal funds purchased and securities sold under agreements to repurchase	157			534			768
Interest on demand notes to U. S. Treasury and other indebtedness	2			2			9
TOTAL INTEREST EXPENSE	5,886			10,386			12,222
Net interest income	15,648			15,221			15,701
Provision for loan losses	1,785			2,334			1,209
Net interest income after provision for loan losses	13,863			12,887			14,492
NONINTEREST INCOME
Income from fiduciary activities	1,407			1,400			1,400
Service charges on deposit accounts	1,330			1,245			1,270
Other noninterest income	1,514			1,164			713
Securities gains (losses)	—			(43		)	(40		)
TOTAL NONINTEREST INCOME	4,251			3,766			3,343
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits	6,960			6,523			5,978
Premises and equipment expense	1,869			1,768			1,709
Data processing expense	788			781			716
Advertising and public relations	205			277			319
Postage	258			290			283
Intangible amortization	—			444			448
Supplies and printing	344			407			337
Other noninterest expense	2,340			2,894			3,299
TOTAL NONINTEREST EXPENSE	12,764			13,384			13,089
Income before income taxes	5,350			3,269			4,746
Provision for income taxes	1,975			1,124			1,665
NET INCOME	3,375			2,145			3,081
Other comprehensive income (loss), net of tax	(683		)	840			1,427
COMPREHENSIVE INCOME	$	2,692		$	2,985		$	4,508
NET INCOME PER COMMON SHARE:
Basic	$	1.69		$	1.07		$	1.54
Diluted	$	1.69		$	1.07		$	1.54
AVERAGE SHARES OUTSTANDING:
Basic	1,994,648			2,000,000			2,000,000
Diluted	1,994,648			2,000,000			2,000,000

The accompanying notes are an integral part of the consolidated financial statements.

First Century Bankshares, Inc.  Page  24

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2002			2001			2000
	(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before adjustments to reconcile net income to net cash provided by operating activities:	$	3,375		$	2,145		$	3,081
Provision for loan losses	1,785			2,334			1,209
Depreciation and amortization	828			1,289			1,291
Deferred income tax expense (benefit)	214			(88		)	56
Securities losses	—			43			40
(Increase) decrease in interest receivable	426			969			(807		)
Net investment amortization and (accretion)	95			(124		)	(9		)
Net (increase) decrease in other assets	480			1,536			(60		)
Net increase (decrease) in interest payable and other liabilities	(85		)	148			(300		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	7,118			8,252			4,501
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity	(1,013		)	(2,657		)	(1,779		)
Purchases of securities available for sale	(58,247		)	(60,266		)	(24,374		)
Redemptions (purchases) of Federal Home Loan Bank stock	474			(46		)	(25		)
Proceeds from maturities and calls of securities held to maturity	2,176			1,891			865
Proceeds from maturities and calls of securities available for sale	54,946			62,599			13,031
Proceeds from sales of securities available for sale	—			1,862			4,967
Proceeds from sales of securities held to maturity	—			313			—
Net (increase) decrease in loans	5,296			(317		)	(1,703		)
Acquisition of premises and equipment	(679		)	(1,161		)	(621		)
Proceeds from disposal of premises and equipment	—			204			2
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES	2,953			2,422			(9,637		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits	1,012			(1,962		)	251
Net increase (decrease) in time deposits	(10,438		)	(8,001		)	7,190
Net increase (decrease) in short-term borrowings	(275		)	3,533			(3,471		)
Purchase of treasury stock	(147		)	—			—
Cash dividends paid	(1,694		)	(1,700		)	(1,700		)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES	(11,542		)	(8,130		)	2,270
Net increase (decrease) in cash and cash equivalents	(1,471		)	2,544			(2,866		)
Cash and cash equivalents at beginning of year	18,289			15,745			18,611
Cash and cash equivalents at end of year	$	16,818		$	18,289		$	15,745
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest	$	6,020		$	10,547		$	12,242
Income taxes	$	2,004		$	1,013		$	2,091

The accompanying notes are an integral part of the consolidated financial statements.

First Century Bankshares, Inc.  Page  25

Consolidated Statements of Changes in Stockholders’ Equity

	Common Stock		Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss), Net of tax
	(Dollars in Thousands, Except Per Share Data)
YEAR ENDED DECEMBER 31, 2000
Balance at January 1, 2000	$	2,500	$	785	$	26,740		$	—		$	(1,151	)
Net income	—		—		3,081			—			—
Other comprehensive income, net of tax	—		—		—			—			1,427
Cash dividends declared - $0.85 per share	—		—		(1700		)	—			—
Balance at December 31, 2000	2,500		785		28,121			—			276
YEAR ENDED DECEMBER 31, 2001
Net income	—		—		2,145			—			—
Other comprehensive income, net of tax	—		—		—			—			840
Cash dividends declared - $0.85 per share	—		—		(1,700		)	—			—
Balance at December 31, 2001	2,500		785		28,566			—			1,116
YEAR ENDED DECEMBER 31, 2002
Net income	—		—		3,375			—			—
Purchase 9,000 shares of treasury stock	—		—		—			(147		)	—
Other comprehensive loss, net of tax	—		—		—			—			(683		)
Cash dividends declared - $0.85 per share	—		—		(1,694		)	—			—
Balance at December 31, 2002	$	2,500	$	785	$	30,247		$	(147	)	$	433

The accompanying notes are an integral part of the consolidated financial statements.

First Century Bankshares, Inc.  Page  26

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting and Reporting Policies

First Century Bankshares, Inc. (the “Corporation”), and its wholly owned subsidiaries, First Century Bank, N.A. and First Century Financial Services, LLC, operate eleven branches in southern West Virginia and southwestern Virginia. The Corporation’s primary source of revenue is derived from loans to customers who are predominately small to medium size businesses and middle income individuals. The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practices within the banking industry. Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year’s financial statements. The following is a summary of the more significant accounting and reporting policies:

Management Estimates — The preparation of financial statements in conformity with generally accepted accounting principles 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.

Principles of Consolidation — The consolidated financial statements include the accounts of First Century Bankshares, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and cash equivalents — For purposes of reporting cash flows, cash equivalents include cash on hand and amounts due from banks (including cash items in process of collection); interest-bearing balances with banks and federal funds sold. To comply with Federal Reserve regulations, the subsidiary bank is required to maintain reserve balances with the Federal Reserve Bank of Richmond. The amount of those reserve balances at December 31, 2002, was approximately $5,024,000.

Securities — Securities are classified as either held to maturity, available for sale or trading. Classification of securities is determined on the date of purchase. In determining such classification, debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. All other securities are classified as available for sale and are carried at fair value with unrealized gains and losses included in comprehensive income. The Corporation has no securities classified as trading.

Realized gains and losses, determined using the specific identification method, and declines in value judged to be other than temporary are included in noninterest income. Premiums and discounts are amortized into interest income using a level yield method.

Loans —Loans are reported at their principal outstanding balance net of charge-offs and certain other deferred or unearned income. Interest income is recognized as earned using the interest method.

Allowance for loan losses —The adequacy of the allowance for loan losses is periodically evaluated by the Corporation in order to maintain the allowance at a level that is sufficient to absorb probable credit losses. Management’s evaluation of the adequacy of the allowance

First Century Bankshares, Inc.  Page  27

1. Summary of Significant Accounting and Reporting Policies (continued)

is based on a review of the Corporation’s historical loss experience, known and inherent risks in the loan portfolio, including adverse circumstances that may affect the ability of the borrower to repay interest and/or principal, the estimated value of collateral, and an analysis of the levels and trends of delinquencies, charge-offs, and the risk ratings of the various loan categories. Such factors as the level and trend of interest rates and the condition of the national and local economies are also considered. Estimates may change at some point in the future.

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance due to changes in the measurement of impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable.

A loan is considered impaired, based on current information and events, if it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans that are collateral dependent is based on the fair value of the collateral. The measurement of other impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate.

The Corporation uses several factors in determining if a loan is impaired. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment status, borrowers’ financial data and borrowers’ operating factors such as cash flows, operating income or loss, etc.

When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

Income recognition on impaired and nonaccrual loans — Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-collateralized and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt.

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms of interest and principal.

While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is

First Century Bankshares, Inc.  Page  28

1. Summary of Significant Accounting and Reporting Policies (continued)

limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

Other Real Estate Owned — Other real estate owned includes properties on which the Corporation’s subsidiary has foreclosed and taken title. Real estate properties acquired as a result of foreclosures are carried at the lower of the recorded investment in the loan or the fair value less estimated selling costs. Any excess of the outstanding principal loan balance over the fair value less estimated selling costs of the foreclosed property is charged to the allowance for loan losses. Any subsequent fair value adjustments and net operating expenses are charged to noninterest expense.

Premises and Equipment — Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based upon the estimated useful lives of the assets. Buildings and improvements have estimated useful lives of 20 to 40 years. Equipment and fixtures have estimated useful lives of 3 to 10 years. The cost of major improvements is capitalized. The expenditures for maintenance and repairs are charged to expense as incurred. Gains or losses on assets sold are included in other operating income.

Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — The Corporation applies a financial-components approach that focuses on control when accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This approach provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.

Goodwill And Other Intangibles — Prior to December 31, 2001, the cost of the investments in acquired institutions in excess of amounts attributable to tangible and identified intangible assets at dates of acquisition was recorded as goodwill and amortized to operations over periods from 15 - 25 years using the straight-line method. A portion of the cost of purchased subsidiaries represented the value associated with the future earnings potential of the acquired core deposit base and was being amortized over eight years through December 31, 2000, the estimated life of the deposit base. The unamortized balance of intangibles totaled approximately $5,183,000 at December 31, 2001, representing only goodwill and unidentified intangibles, net of accumulated amortization of $1,555,000 and is included in other assets. In 2002, under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill and unidentified intangible assets are no longer amortized, but are reviewed at least annually for impairment using the discounted cash flow method. Impaired goodwill or unidentified intangible assets are written down to fair value, calculated using the discounted cash flow method. The unimpaired balance of intangibles totaled approximately $5,542,000 at December 31, 2002.

Income Taxes — The Corporation files a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of

First Century Bankshares, Inc.  Page  29

1. Summary of Significant Accounting and Reporting Policies (continued)

existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

Segment Information — Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Corporation has determined that it has one significant operating segment, the providing of general commercial financial services to customers located in the geographic areas of southern West Virginia and southwestern Virginia. The various products are those generally offered by community banks, and the allocation of resources is based on the overall performance of the institution, versus the individual branches or products.

Comprehensive Income — The Company classifies items of other comprehensive income by their nature in the financial statements and displays accumulated other comprehensive income separately from retained earnings in the equity section of the balance sheet. Unrealized gains and losses on available for sale securities and net accrued pension benefit liability are the components of the Company’s other comprehensive income.

New Accounting Pronouncements — Effective January 1, 2002, the Corporation adopted the provisions of Financial Accounting Standards Board Statement No. 141, “Business Combinations” (SFAS 141). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. The implementation of SFAS 141 did not have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

Effective January 1, 2002, the Corporation adopted the provisions of Financial Accounting Standards Board Statements No. 143 “Accounting for Asset Retirement Obligations” (SFAS 143), and No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144).

SFAS 143 requires that obligations associated with the retirement of tangible long-lived assets be recorded as a liability when those obligations are incurred, with the amount of liability initially measured at fair value. SFAS 143 is effective for financial statements beginning after June 15, 2002, though early adoption is encouraged. The implementation of this statement did not have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

SFAS 144 supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” SFAS 144 applies to all long-lived assets including discontinued operations, and amends Accounting Principle Board Opinion No. 30, “Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book or fair value less cost to sell. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and its provisions are generally expected to be applied prospectively. The implementation of this statement did not have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

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1. Summary of Significant Accounting and Reporting Policies (continued)

The Financial Accounting Standards Board has issued SFAS 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS 145). This Statement rescinds SFAS No.4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds SFAS 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends SFAS 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the rescission of SFAS 4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. Early application of the provisions of this Statement related to the rescission of SFAS 4 is encouraged. The provisions in paragraphs 8 and 9(c) of SFAS 145 related to SFAS 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. All other provisions of SFAS 145 shall be effective for financial statements issued on or after May 15, 2002, with early application encouraged. Management does not anticipate the implementation of this statement to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

In June 2002 the Financial Accounting Standards Board issued FAS 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Management does not anticipate the implementation of this statement to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

The Financial Accounting Standards Board has issued FAS 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9” (SFAS 147). FASB Statement No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions,” and FASB Interpretation No. 9, “Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method,” provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” Thus, the requirement in paragraph 5 of Statement 72 to recognize (and

First Century Bankshares, Inc.  Page  31

1. Summary of Significant Accounting and Reporting Policies (continued)

subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS 147.

In addition, SFAS 147 amends FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS 144 requires for other long-lived assets that are held and used. Paragraph 5 of SFAS 147, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002.Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted. Management does not anticipate the implementation of this statement to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148). In light of recent switches by a number of companies to the recognition and measurement provisions of SFAS 123, “Accounting for Stock-Based Compensation,” (and of announcements by other entities of their intentions to switch), the FASB has amended SFAS 123 to add two new transitional approaches when changing from the APB Opinion 25 intrinsic value method of accounting for stock-based employee compensation to the SFAS 123 fair value method. In addition, SFAS 123 has been amended to require disclosure of additional information concerning the effects of stock-based employee compensation on earnings. Finally, SFAS 148 amends APB Opinion 28, “Interim Financial Reporting,” to call for disclosure of SFAS 123 pro forma information on a quarterly basis. Management does not anticipate the implementation of this statement to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

On November 25, 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34).” FIN 45 clarifies the requirements of FASB Statement No. 5 (FAS 5), “Accounting for Contingencies,” relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. For guarantees that fall within the scope of FIN 45, the Interpretation requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The Corporation’s primary guarantees included within the scope of FIN 45 relates to financial standby letters of credit issued to commercial customers. FIN 45 requires the liability recognized in standalone arm’s-length transactions to be the premium received or receivable by the guarantor. Management does not anticipate the implementation of this interpretation to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

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1. Summary of Significant Accounting and Reporting Policies (continued)

In January 2003 the Financial Accounting Standards Board issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities (an interpretation of ARB No. 51).” FIN 46 addresess the consolidation by business enterprises of certain variable interest entities. Management does not anticipate the implementation of this interpretation to have a material impact on the Corporation’s consolidated financial position or consolidated results of operations.

2. Goodwill and Other Intangible Assets - Adoption of Statement 142

Effective January 1, 2002, the Corporation adopted the provisions of Financial Accounting Standards Board Statement No. 142 “Goodwill and Other Intangible Assets,” (SFAS 142). As of January 1, 2002, the Corporation had approximately $5,183,000 in unamortized goodwill from previous acquisitions. SFAS 142 requires a transitional impairment test be performed within six-months of adoption. The initial valuation of the Corporation’s goodwill pursuant to this pronouncement resulted in no write-downs for impairment. Additionally, SFAS 142 requires a reconciliation of previously reported net income and earnings per share, adjusted for changes pursuant to this statement. Following is the pro forma effect of adoption of SFAS 142.

	Years Ended December 31,
	2002		2001		2000
	(Dollars in Thousands, except per share amounts)
Reported net income	$	3,375	$	2,145	$	3,081
Goodwill amortization, net of tax	—		280		280
Adjusted net income	$	3,375	$	2,425	$	3,361
Basic earnings per share:
Reported net income	$	1.69	$	1.07	$	1.54
Goodwill amortization, net of tax	—		0.14		0.14
Adjusted net income	$	1.69	$	1.21	$	1.68
Diluted earnings per share:
Reported net income	$	1.69	$	1.07	$	1.54
Goodwill amortization, net of tax	—		0.14		0.14
Adjusted net income	$	1.69	$	1.21	$	1.68

First Century Bankshares, Inc.  Page  33

3. Securities

Securities available for sale at December 31, 2002 and 2001 are summarized as follows:

	2002
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
	(Dollars in Thousands)
U.S. Government obligations	$	2,989	$	63	$	—	$	3,052
U.S. Government agency obligations	62,058		905		1		62,962
Mortgage-backed securities	2,897		52		—		2,949
Other debt securities	9,188		499		19		9,668
TOTAL SECURITIES AVAILABLE FOR SALE	$	77,132	$	1,519	$	20	$	78,631

	2001
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
	(Dollars in Thousands)
U.S. Government obligations	$	1,971	$	110	$	—	$	2,081
U.S. Government agency obligations	60,678		1,417		88		62,007
Mortgage-backed securities	2,007		51		—		2,058
Equity securities	9,239		221		21		9,439
TOTAL SECURITIES AVAILABLE FOR SALE	$	73,895	$	1,799	$	109	$	75,585

Securities held to maturity at December 31, 2002 and 2001 are summarized as follows:

	2002
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
	(Dollars in Thousands)
Mortgage-backed securities	$	9	$	—	$	—	$	9
State and municipal obligations	9,407		451		46		9,812
Other debt securities	150		—		—		150
TOTAL SECURITIES HELD TO MATURITY	$	9,566	$	451	$	46	$	9,971

	2001
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
	(Dollars in Thousands)
Mortgage-backed securities	$	64	$	—	$	—	$	64
State and municipal obligations	10,494		248		97		10,645
Other debt securities	150		—		—		150
TOTAL SECURITIES HELD TO MATURITY	$	10,708	$	248	$	97	$	10,859

Securities with an aggregate value of $40,597,000 at December 31, 2002 and $41,688,000 at December 31, 2001, were pledged to secure public and trust deposits and for other purposes required or permitted by law, including approximately $18,571,000 at December 31, 2002 and $15,276,000 at December 31, 2001 pledged to secure repurchase agreements.

Gross gains of $17,000 and gross losses of $30,000 were recognized on sales of available for sale securities for the year ended December 31, 2001. Additionally, during the year ended December 31, 2001, approximately $343,000 in held to maturity securities were sold as the result of significant deterioration in the issuer’s creditworthiness. Gross losses

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3. Securities (continued)

of $30,000 were recognized on this sale. Gross losses of $40,000 were recognized on sales of available for sale securities for the year ended December 31, 2000. There were no sales of securities for the year ended December 31, 2002.

The amortized cost and estimated market value for securities available for sale and securities held to maturity by contractual maturities at December 31, 2002 are shown in the following tables. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

	Amortized Cost		Estimated Market Value		Net Unrealized Gains
	(Dollars in Thousands)
Due in one year or less	$	4,985	$	5,084	$	99
Due after one year through five years	70,682		72,045		1,363
Due after five years through ten years	1,465		1,502		37
TOTAL SECURITIES AVAILABLE FOR SALE	$	77,132	$	78,631	$	1,499

	Amortized Cost		Estimated Market Value		Net Unrealized Gains
	(Dollars in Thousands)
Due in one year or less	$	732	$	742	$	10
Due after one year through five years	5,090		5,288		198
Due after five years through ten years	3,404		3,570		166
Due after ten years	340		371		31
TOTAL SECURITIES HELD TO MATURITY	$	9,566	$	9,971	$	405

4. Loans

Loans at December 31, 2002 and 2001 consisted of the following:

	December 31,
	2002		2001
	(Dollars in Thousands)
Commercial, financial and agricultural	$	43,725	$	49,056
Real estate-construction	12,268		7,755
Real estate-mortgage (residential and commercial)	159,233		161,074
Installment loans to individuals	21,234		26,183
Total loans	236,460		244,068
Less: allowance forloan losses	3,005		3,180
NET LOANS	$	233,455	$	240,888

The Corporation’s subsidiary has had and can be expected to have in the future various banking transactions with directors, executive officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties). The total amount of these loans was $13,796,000 and $14,924,000 at December 31, 2002 and 2001, respectively. During 2002, $14,332,000 in loan advances or reclassifications were made and repayments were $15,460,000.

First Century Bankshares, Inc.  Page  35

5. Allowance for Loan Losses

An analysis of changes in the allowance for loan losses for 2002, 2001 and 2000 is as follows:

	Years Ended December 31,
	2002			2001			2000
	(Dollars in Thousands)
Balance at beginning of year	$	3,180		$	3,180		$	3,050
Provision for loan losses	1,785			2,334			1,209
Recoveries on loans previously charged off	206			304			103
Loans. charged off	(2,166		)	(2,638		)	(1,182		)
BALANCE AT END OF YEAR	$	3,005		$	3,180		$	3,180

The following is a summary of loans considered impaired:

	December 31,
	2002		2001
	(Dollars in Thousands)
Gross impaired loans	$	3,375	$	5,699
Valuation allowance for impaired loans	663		848
Recorded investment in impaired loans	$	2,712	$	4,851

The average recorded investment in impaired loans for the years ended December, 31, 2002, 2001 and 2000 was $2,959,000, $5,586,000 and $4,817,000, respectively. There was no interest income recognized on impaired loans (during the portion of the year they were impaired) for the years ended December 31, 2002, 2001 and 2000. At December 31, 2002, 2001 and 2000, the Corporation had nonaccrual loans of $2,819,000, $3,045,000 and $5,887,000, respectively. Interest income of $157,000, $46,000 and $91,000 was recognized on these loans in 2002, 2001 and 2000, respectively. Had these loans performed in accordance with their original terms, additional interest income of $184,000, $484,000 and $527,000 would have been recorded in 2002, 2001 and 2000, respectively.

At December 31, 2002, 2001 and 2000, the Corporation had loans past-due 90 days or more and still in accrual status of $612,000, $1,140,000 and $3,320,000, respectively.

Additionally, at December 31, 2002, 2001 and 2000, the Corporation had other real estate owned of $793,000, $1,279,000 and 1,001,000, respectively.

6. Premises and Equipment

Premises and equipment at December 31, 2002 and 2001 consisted of the following:

	December 31,
	2002		2001
	(Dollars in Thousands)
Land	$	1,856	$	1,466
Buildings and improvements	10,005		9,892
Equipment and fixtures	5,627		5,735
Total	17,488		17,093
Less accumulated depreciation	6,988		6,442
NET PREMISES AND EQUIPMENT	$	10,500	$	10,651

Depreciation charged to operating expense amounted to $828,000 in 2002, $844,000 in 2001, and $843,000 in 2000.

First Century Bankshares, Inc.  Page  36

7. Deposits

Deposits at December 31, 2002 and 2001 were as follows:

	December 31,
	2002		2001
	(Dollars in Thousands)
Individuals, partnerships and corporations:
Demand deposits	35,097		$	33,995
Time and savings deposits	261,403		270,289
U.S. Government	307		97
States and political subdivisions	8,865		11,128
Certified and official checks	2,275		1,864
TOTAL DEPOSITS	$	307,947	$	317,373

The scheduled maturities of time deposits at December 31, 2002 were as follows:

(Dollars in Thousands)
2003	$	103,118
2004	12,241
2005	4,645
2006	1,166
Thereafter	3,644
TOTAL TIME DEPOSITS	$	124,814

Time deposits included certificates of deposit issued in amounts of $100,000 or more totaling approximately $29,888,000 and $33,107,000 at December 31, 2002 and 2001, respectively.

8. Short-term Borrowings

Short-term borrowings consist of securities sold under agreements to repurchase. Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Information concerning securities sold under agreements to repurchase at December 31, 2002 and 2001 is summarized as follows:

	2002			2001
	(Dollars in Thousands)
Average balance during the year	$	17,340		$	18,051
Average interest rate during the year	0.91		%	2.96		%
Maximum month-end balance during the year	$	20,880		$	22,506

9. Other Comprehensive Income

Other comprehensive income is defined as comprehensive income exclusive of net income. Other comprehensive income (loss) consists of the following:

	Years Ended December 31,
	2002			2001			2000
Unrealized gains (losses) on available for sale securities arising during the year	$	(192	)	$	1,203		$	2,108
Reclassification adjustment for (gains) losses included in net income	—			43			40
Minimum pension liability adjustment	(890		)	—			—
Other comprehensive income (loss) before tax	(1,082		)	1,246			2,148
Income tax (expense) benefit related to other comprehensive income	399			(406		)	(721		)
Other comprehensive income (loss), net of tax	$	(683	)	$	840		$	1,427

First Century Bankshares, Inc.  Page  37

10. Earnings Per Share

The following table reconciles the numerator and denominator of the basic and diluted computations for net income per common share for the years ended December 31, 2002, 2001 and 2000:

	2002
	Income (Numerator)		Weighted Average Shares (Denominator)		Per-Share Amount
Basic EPS:
Income available to common shareholders	$	3,375,000	1,994,648		$	1.69
Diluted EPS:
Effect of dilutive securities — Stock options	—		—
Income available to common shareholders and assumed conversions	$	3,375,000		1,994,648	$	1.69

	2001
	Income (Numerator)		Weighted Average Shares (Denominator)		Per-Share Amount
Basic EPS:
Income available to common shareholders	$	2,145,000	2,000,000		$	1.07
Diluted EPS:
Effect of dilutive securities — Stock options	—		—
Income available to common shareholders and assumed conversions	$	2,145,000		2,000,000	$	1.07

	2000
	Income (Numerator)		Weighted Average Shares (Denominator)		Per-Share Amount
Basic EPS:
Income available to common shareholders	$	3,081,000	2,000,000		$	1.54
Diluted EPS:
Effect of dilutive securities — Stock options	—		—
Income available to common shareholders and assumed conversions	$	3,081,000		2,001,907	$	1.54

11. Stock Option Plans

The Corporation’s 1998 Officer Stock Option Plan (the “Officer Plan”) provides for the issuance of 170,000 options to purchase shares of the Corporation’s common stock to officers of the Corporation. The options can have an original term of up to ten years with an exercise price equal to the market price of the common stock on the date of grant, as defined by the Officer Plan. The options vest 20% per year after their date of grant. At December 31, 2002, the weighted average remaining contractual life of the outstanding options was 72 months. At December 31, 2002, options for 81,780 shares of common stock were reserved for future issuance for the Officer Plan.

The Corporation’s 1998 Director Stock Option Plan (the “Director Plan”) provides for the issuance of 30,000 options to purchase shares of the Corporation’s common stock to directors of the Corporation and its subsidiaries. The options can have an original term of up to ten years with an exercise price equal to the market price of the common stock on the date of grant, as defined by the Director Plan. The options are fully vested upon their

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11.Stock Option Plans (continued)

date of grant. At December 31, 2002, the weighted average remaining contractual life of the outstanding options was 71 months. At December 31, 2002, options for 10,000 shares of common stock were reserved for future issuance for the Director Plan.

The Corporation accounts for the Officer Plan and the Director Plan under the provisions of SFAS No. 123, “Accounting for Stock Based Compensation.” As permitted by SFAS No. 123, the Corporation has chosen to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for options granted under the plans. Had compensation cost for the Corporation’s plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method of SFAS No. 123, the Corporation’s net income and net income per share for the years ended December 31, 2002, 2001 and 2000, would have been decreased to the pro forma amounts indicated below.

	2002
	As Reported		Pro Forma
Net income	$	3,375,000	$	3,329,000
Net income per share-Basic and diluted	$	1.69	$	1.67

	2001
	As Reported		Pro Forma
Net income	$	2,145,000	$	2,131,000
Net income per share-Basic and diluted	$	1.07	$	1.06

	2000
	As Reported		Pro Forma
Net income	$	3,081,000	$	3,067,000
Net income per share-Basic and diluted	$	1.54	$	1.53

The fair value of each option grant is estimated on the date of grant using the BlackScholes option pricing model with the following weighted-average assumptions used for the 2002 grants: 5% dividend growth rate; expected volatility of 26.41%; risk-free interest rate of 3.84%; and expected life of seven years.

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11.Stock Option Plans (continued)

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

	2002				2001				2000
	Option Shares		Weighted- Average Exercise Price		Option Shares		Weighted- Average Exercise Price		Option Shares		Weighted- Average Exercise Price
Officer stock options:
Outstanding, beginning of year	52,220		$	20.25	52,220		$	20.25	52,220		$	20.25
Granted	36,000		18.00		—		—		—		—
Exercised	—		—		—		—		—		—
Forfeited	—		—		—		—		—		—
Outstanding, end of year	88,220		$	19.33	52,220		$	20.25	52,220		$	20.25
Exercisable at end of year	41,776		$	20.25	31,332		$	20.25	20,888		$	20.25
Weighted-average fair value of options granted during the year	$	2.51			$	—			$	—
Director stock options:
Outstanding, beginning of year	13,000		$	20.25	14,000		$	20.25	18,000		$	20.25
Granted	7,000		18.00		—		—		—		—
Exercised	—		—		—		—		—		—
Forfeited	—		—		1,000		20.25		4,000		20.25
Outstanding, end of year	20,000		$	19.46	13,000		$	20.25	14,000		$	20.25
Exercisable at end of year	20,000		$	19.46	13,000		$	20.25	14,000		$	20.25
Weighted-average fair value of options granted during the year	$	2.51			$	—			$	—

12.Post Employment Benefits

The Corporation has a noncontributory pension plan covering all eligible employees with six months of service who have attained the age of twenty and one-half. Contributions to the plan are based on computations by independent actuarial consultants. The plan’s assets include common stock, fixed income securities, short-term investments and cash.

The Corporation sponsors two defined benefit post retirement plans that cover both salaried and nonsalaried employees. One plan provides medical benefits, and the other provides life insurance benefits. The post retirement health care plan is contributory and the life insurance plan is noncontributory. The health plan has an annual limitation (a “cap”) on the dollar amount of the employer’s share of the cost of covered benefits incurred by a plan participant. The retiree is responsible, therefore, for the amount by which the cost of the benefit coverage under the plan incurred during a year exceeds that cap. No health care cost increases have been factored into the health plan’s actuarial calculations due to this cap.

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12. Post Employment Benefits (continued)

The following table outlines the changes in the Corporation’s postemployment benefit plan obligations, assets and funded status for the years ended December 31, 2002 and 2001, and the assumptions and components of net periodic benefit costs for the three years in the period ended December 31, 2002.

	Pension Benefits						Other Postretirement Benefits
	2002			2001			2002			2001
	(Dollars in Thousands)
Change in benefit obligation
Benefit obligation at beginning of year	$	8,577		$	7,720		$	864		$	1,412
Service cost	429			418			14			13
Interest cost	549			493			54			54
Actuarial (gain) loss	(117		)	242			(42		)	(551		)
Benefits paid	(117		)	(296		)	(50		)	(64		)
Benefit obligation at end of year	9,321			8,577			840			864
Change in plan asset
Fair value of plan assets at beginning of year	8,314			9,098			—			—
Actual return on plan assets	(1,187		)	(488		)	—			—
Employer contribution	240			—			50			64
Benefits paid	(117		)	(296		)	(50		)	(64		)
Fair value of plan assets at end of year	7,250			8,314			—			—
Funded status	2,071			(263		)	(840		)	(864		)
Unrecognized net actuarial (gain) loss	2,923			1,134			(668		)	(668		)
Unrecognized prior service cost	359			403			—			—
Unrecognized transition obligation	(194		)	(259		)	553			609
Net amount recognized	$	1,017		$	1,015		$	(955	)	$	(923	)
Amounts recognized in the statement of financial position consist of:
Prepaid (accrued) benefit cost	$	1,017		$	1,015		$	(955	)	$	(923	)
Accrued benefit liability	(1,249		)	—			—			—
Intangible asset	359			—			—			—
Accumulated other comprehensive income	890			—			—			—
Net amount recognized	$	1,017		$	1,015		$	(955	)	$	(923	)

	Pension Benefits									Other Postretirement Benefits
	2002			2001			2000			2002			2001			2000
Weighted-average assumptions as of 12/31
Discount rate	6.50		%	6.50		%	6.50		%	6.50		%	6.50		%	6.50		%
Expected return on plan assets	8.00		%	9.00		%	9.00		%	N/A			N/A			N/A
Rate of compensation increase	3.00		%	3.00		%	3.00		%	N/A			N/A			N/A
.
Components of net periodic benefit cost
Service cost	$	429		$	417		$	346		$	14		$	13		$	24
Interest cost	549			493			445			54			54			86
Expected return on plan assets	(736		)	(806		)	(844		)	—			—			—
Amortization of prior service cost	44			44			44			—			—			—
Amortization of transition obligation	(65		)	(65		)	(65		)	56			56			56
Recognized net actuarial (gain) loss	17			—			(41		)	(43		)	(43		)	(3		)
Net periodic (benefit) cost	$	238		$	83		$	(115	)	$	81		$	80		$	163

First Century Bankshares, Inc.  Page  41

12. Post Employment Benefits (continued)

The Corporation maintains a qualified 401(k) retirement savings plan. All full time employees are eligible to participate on a voluntary basis, after completing their first year of service. All employees may elect to make pretax contributions up to a maximum of fifteen percent (15%) of their salary, which are matched fifty percent (50%) by the Corporation. Total amounts charged to operating expense for payments pursuant to this plan were approximately $128,000 in 2002, $127,000 in 2001 and $124,000 in 2000.

13. Income Taxes

The provision for income taxes consisted of the following:

	Years Ended December 31,
	2002		2001			2000
	(Dollars in Thousands)
Tax provision attributed to income from operations:
Current:
Federal	$	1,340	$	897		$	1,291
State	421		315			318
Deferred expense (benefit)	214		(88		)	56
PROVISION FOR INCOME TAX	$	1,975	$	1,124		$	1,665

The components of deferred tax assets and liabilities at December 31, 2002 and 2001 were as follows:

	2002			2001
	(Dollars in Thousands)
Allowance for loan losses	$	696		$	726
Retirement plans	323			—
Marketable equity securities and capital loss carryforwards	48			243
Other reserves	47			73
Gross deferred tax assets	1,114			1,042
Valuation allowance	(48		)	(243		)
Deferred tax assets	1,066			799
Depreciation	(289		)	(279		)
Goodwill	(159		)	—
Retirement plans	—			(22		)
Unrealized gains on securities available for sale	(510		)	(575		)
Gross deferred tax liabilities	(958		)	(876		)
NET DEFERRED TAX ASSET (LIABILITY)	$	108		$	(77	)

A valuation allowance was established for the writedowns of marketable equity securities and capital loss carryforwards because their recognition is limited to future capital gains generated by the Corporation. No tax benefit has been recognized in the financial statements for the writedowns or capital loss carryforwards.

The principal differences between the effective tax rate and the federal statutory rate were as follows:

	Years Ended December 31,
	2002						2001						2000
	(Dollars in Thousands)
	Amount			%			Amount			%			Amount			%
Provision at statutory rate	$	1,819		34			$	1,112		34			$	1,614		34
Tax-exempt interest income from certain investment securities and loans	(168		)	(3		)	(178		)	(6		)	(171		)	(3		)
State income tax expense, net of federal benefit	287			5			199			6			208			4
Other, net	37			1			(9		)	—			14			—
PROVISION FOR INCOME TAXES	$	1,975			37		$	1,124			34		$	1,665			35

First Century Bankshares, Inc.  Page  42

14. Commitments and Contingencies

In the normal course of business, the Corporation is involved in various legal suits and proceedings. In the opinion of management, based on the advice of legal counsel, these suits are without substantial merit and should not result in judgments which in the aggregate would have a material adverse effect on the Corporation’s financial statements.

15. Financial Instruments, Concentrations of Credit and Fair Values

The subsidiary of the Corporation is party to various financial instruments with off-balance sheet risk arising in the normal course of business to meet the financing needs of its customers. Those financial instruments include commitments to extend credit and standby letters of credit. These commitments include standby letters of credit of approximately $5,005,000 at December 31, 2002 and $3,711,000 at December 31, 2001. These instruments contain various elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Additionally, certain off-balance sheet items of approximately $37,951,000 at December 31, 2002, and $36,951,000 at December 31, 2001, comprised primarily of unfunded loan commitments, have an estimated fair value that is not materially different from the notional amount.

The subsidiary’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is the contractual amount of those instruments. The subsidiary uses the same credit policies in making commitments and conditional obligations that it does for on-balance sheet instruments.

The Corporation’s subsidiary grants various types of credit including, but not limited to, agriculture, commercial, consumer, and residential loans to customers primarily located throughout southern West Virginia and southwestern Virginia. Each customer’s creditworthiness is examined on a case by case basis. The amount of collateral obtained, if any, is determined by management’s credit evaluation of the customer. Collateral held varies, but may include property, accounts receivable, inventory, plant and equipment, securities, or other income producing property. The loan portfolio is generally well diversified and geographically dispersed within the region. Within each specific industry, borrowers are well diversified as to specialty, service, or other unique feature ofthe overall industry. A substantial portion of the customers’ ability to honor their contractual commitment is largely dependent upon the economic conditions of the respective industry and overall economic conditions of the region. At December 31, 2002, the Corporation had a concentration of $10,940,000, or 32.4% of stockholders’ equity in loans to borrowers in the hospitality industry. This concentration is diversified by geography throughout the Mid-Atlantic region.

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires the disclosure of the estimated fair value of on and off-balance sheet financial instruments. For the Corporation, as for most financial institutions, approximately 95% of its assets and liabilities are considered financial instruments as defined by SFAS 107. Most of the Corporation’s financial instruments, however, lack an available trading market characterized by a willing buyer and a willing seller engaging in an exchange transaction. It is also the Corporation’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities. Therefore, significant estimations and present value calculations were used by the Corporation for the purposes of this disclosure.

First Century Bankshares, Inc.  Page  43

15. Financial Instruments, Concentrations of Credit and Fair Values (continued)

Estimated fair values have been determined by the Corporation using the best available data and an estimation methodology suitable for each category of financial instruments.

The estimated fair value and the recorded book balances at December 31, 2002 and 2001were as follows:

	2002				2001
	Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount
	(Dollars in Thousands)				(Dollars in Thousands)
Assets:
Cash and due from banks	$	16,818	$	16,818	$	16,289	$	16,289
Securities available for sale	78,631		78,631		75,585		75,585
Securities held to maturity	9,971		9,566		10,859		10,708
Federal Home Loan Bank and Federal Reserve Bank stock	752		752		1,226		1,226
Federal funds sold	—		—		2,000		2,000
Net loans	243,589		233,455		248,093		240,888
Liabilities:
Deposits with no stated maturities	183,133		183,133		182,121		182,121
Deposits with stated maturities	126,258		124,814		137,146		135,252
Short-term borrowings		16,745		16,745		17,020		17,020

The estimation methodologies used to determine fair value are as follows: For those loans and deposits with floating interest rates it was presumed that the estimated fair value generally approximated the recorded book balances. Securities actively traded in a secondary market have been valued using quoted available market prices. Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market rates for similar assets and liabilities. Deposits with no stated maturities have an estimated fair value equal to the amount payable on demand which is the recorded book balance. The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is the federal funds sold rate adjusted for noninterest operating costs, credit losses, and assumed prepayment risk. Fair values for nonperforming loans are estimated using discounted cash flow analysis, or underlying collateral values, where applicable. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

16. Regulatory Matters

The Corporation’s principal source of funds for dividend payment and debt service is dividends received from the subsidiary bank.

Under applicable Federal laws, the Comptroller of the Currency, the primary regulator of First Century Bank, N.A., restricts the total dividend payments of a national bank in any calendar year to the net profits of that year, as defined, combined with the retained net profits of the two preceding years. At December 31, 2002, retained net profits for the years 2002and 2001, which were free of such regulatory restrictions, aggregated approximately $1,611,000.

The Corporation and its subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by

First Century Bankshares, Inc.  Page  44

16. Regulatory Matters (continued)

regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its subsidiary must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and its subsidiary to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined). Management believes, as of December 31, 2002, that the Corporation and its subsidiary meet all capital adequacy requirements to which they are subject.

As of December 31, 2002, First Century Bank, N.A. has received notification from the Office of the Comptroller of the Currency that it is well-capitalized under the regulatory framework for prompt corrective action. To be adequately capitalized, minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table must be maintained. There are no conditions or events since the recent notification that management believes have changed the institution’s category.

	Actual				For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2002:
Total Capital (to Risk Weighted Assets):
Consolidated	$	30,848	12.12	%	> $20,369	> 8.00	%
First Century Bank, N.A.	$	30,012	11.81	%	> $20,335	> 8.00	%	> $25,419		> 10.00	%
Tier I Capital (to Risk Weighted Assets):
Consolidated	$	27,843	10.94	%	> $10,185	> 4.00	%
First Century Bank, N.A.	$	27,007	10.62	%	> $10,168	> 4.00	%	> $15,252	> 6.00		%
Tier 1 Capital (to Average Assets):
Consolidated	$	27,843	7.75	%	> $14,368	> 4.00	%
First Century Bank, N.A.	$	27,007	7.53	%	> $14,350	> 4.00	%	> $17,937		> 5.00	%

	Actual				For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2001:
Total Capital (to Risk Weighted Assets):
Consolidated	$	29,848	11.52	%	> $20,728	> 8.00	%
First Century Bank, N.A.	$	29,024	11.22	%	> $20,699	> 8.00	%	> $25,874		> 10.00	%
Tier I Capital (to Risk Weighted Assets):
Consolidated	$	26,668	10.29	%	> $10,364	> 4.00	%
First Century Bank, N.A.	$	25,844	9.99	%	> $10,350	> 4.00	%	> $15,525	> 6.00		%
Tier 1 Capital (to Average Assets):
Consolidated	$	26,668	7.20	%	> $14,809	> 4.00	%
First Century Bank, N.A.	$	25,844	6.99	%	> $14,786	> 4.00	%	> $18,483		> 5.00	%

First Century Bankshares, Inc.  Page  45

17. Quarterly Financial Data (Unaudited)

The summary financial data by quarter for the years ended December 31, 2002, 2001 and 2000 was as follows:

	Quarter Ended
	Mar. 31		June 30			Sept. 30		Dec. 31
	(Dollars in Thousands, Except Per Share Data)
2002
Interest income	$	5,463	$	5,563		$	5,338	$	5,170
Net interest income	3,750		4,086			3,909		3,903
Provision for possible loan losses	263		743			439		340
Securities gains (losses)	—		—			—		—
Income before taxes	1,301		1,695			1,272		1,082
Net income	832		1,042			813		688
NET INCOME PER SHARE	$	0.42	$	0.52		$	0.41	$	0.34
2001
Interest income	$	6,613	$	6,547		$	6,398	$	6,049
Net interest income	3,594		3,770			3,912		3,945
Provision for possible loan losses	195		842			915		382
Securities gains (losses)	—		—			1		(44		)
Income before taxes	1,149		533			503		1,084
Net income	755		366			329		695
NET INCOME PER SHARE	$	0.38	$	0.18		$	0.16	$	0.35
2000
Interest income	$	6,789	$	6,936		$	7,179	$	7,019
Net interest income	3,870		3,965			4,045		3,821
Provision for possible loan losses	174		334			491		210
Securities gains (losses)	—		(40		)	—		—
Income before taxes	1,472		1,356			1,513		405
Net income	953		872			979		277
NET INCOME PER SHARE	$	0.48	$	0.43		$	0.49	$	0.14

First Century Bankshares, Inc.  Page  46

18. Parent Company Financial Data

Condensed financial information of First Century Bankshares, Inc. (parent company only) is presented below:

STATEMENTS OF FINANCIAL CONDITION

	December 31,
	2002			2001
	(Dollars in Thousands)
Assets:
Cash	$	95		$	113
Investment in subsidiaries at equity	33,382			32,543
Other assets	364			621
TOTAL ASSETS	$	33,841		$	33,277
Liabilities:
Other liabilities	$	23		$	310
TOTAL LIABILITIES	23			310
Stockholders’ Equity:
Common stock–$1.25 par value; 10,000,000 shares authorized and 2,000,000 shares issued at December 31, 2002 and 2001; 1,991,000 shares outstanding at December 31, 2002, and 2,000,000 shares outstanding at December 31, 2001;	2,500			2,500
Paid-in capital	785			785
Retained earnings	30,680			29,682
Treasury stock, at cost	(147		)	—
TOTAL STOCKHOLDERS’ EQUITY	33,818			32,967
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	33,841		$	33,277

STATEMENTS OF INCOME

	Years Ended December 31,
	2002			2001			2000
	(Dollars in Thousands)
Income:
Dividends from subsidiary bank	$	1,900		$	2,100		$	1,800
TOTAL INCOME	1,900			2,100			1,800
Expenses:
Other	73			67			59
TOTAL EXPENSES	73			67			59
Applicable income taxes (benefits)	(25		)	(23		)	(22		)
Income before equity in undistributed net income of subsidiaries	1,852			2,056			1,763
Equity in undistributed net income of subsidiaries	1,523			89			1,318
NET INCOME	$	3,375		$	2,145		$	3,081

STATEMENT OF CASH FLOWS

	Years Ended December 31,
	2002			2001			2000
	(Dollars in Thousands)
Cash flows from operating activities
Net income	$	3,375		$	2,145		$	3,081
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiary	(1,523		)	(89		)	(1,318		)
Other adjustments, net	(29		)	6			(16		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	1,823			2,062			1,747
Cash flows from investing activities
Investment in subsidiary	—			(400		)	—
NET CASH USED BY INVESTING ACTIVITIES	—			(400		)	—
Cash flows from financing activities
Purchase of treasury stock	(147		)	—			—
Cash dividends paid	(1,694		)		(1,700	)		(1,700	)
NET CASH USED BY FINANCING ACTIVITIES	(1,841		)		(1,700	)		(1,700	)
Net increase (decrease) in cash	(18		)	(38		)	47
Cash at January 1,	113			151			104
Cash at December 31,	$	95		$	113		$	151

First Century Bankshares, Inc.  Page  47

Report of Independent Accountants

January 31, 2003

The Board of Directors and Stockholders
First Century Bankshares, Inc.:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income and comprehensive income, of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of First Century Bankshares, Inc. (formerly Pocahontas Bankshares Corporation) and Subsidiary (the “Corporation”) at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Corporation’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets.

Greensboro, North Carolina

First Century Bankshares, Inc.  Page  48

Boards of Directors

FIRST CENTURY BANKSHARES, INC.
W. Paul Cole, Jr. President, Cole Motor & Cole Chevrolet-Cadillac	Marshall S. Miller President, Marshall Miller & Associates	John H. Shott Attorney	Frank W. Wilkinson Executive Vice President & Chief Operating Officer First Century Bank, N.A.
Eustace Frederick Retired, Senior Vice President- Mining, Consolidation Coal Co., Southern Appalachia Region	Charles A. Peters President, Peters Equipment, Inc. Secretary, First Century Bankshares, Inc.	Scott H. Shott Shott Foundation	R. W. Wilkinson President & Chief Executive Officer, First Century Bankshares, Inc., First Century Bank, N.A.
B. L. Jackson, Jr. Chairman of the Board First Century Bankshares, Inc.	Byron K. Satterfield Executive Vice President & Chairman of the Trust Investment Committee	Walter L. Sowers President, Pemco Corporation
Robert M. Jones, Jr., M.D. Physician		William Chandler Swope President, Swope Construction Services, Inc.
		J. Brookins Taylor, M.D. Physician
FIRST CENTURY BANK, N.A
J. J. Booker, III, M.D. Physician	Robert M. Jones, Jr., MD Physician	Byron K. Satterfield Executive Vice President & Chairman of the Trust Investment Committee	Frank W. Wilkinson Executive Vice President & Chief Operating Officer First Century Bank, N.A.
C. Scott Briers President, Briers, Inc.	Marshall S. Miller President, Marshall Miller & Associates	John H. Shott Attorney	R. W. Wilkinson President & Chief Executive Officer, First Century Bankshares, Inc., First Century Bank, N.A.
W. Paul Cole, Jr. President, Cole Motor & Cole Chevrolet-Cadillac	Charles A. Peters President, Peters Equipment, Inc. Secretary, First Century Bankshares, Inc.	Walter L. Sowers President, Pemco Corporation
Eustace Frederick Retired, Senior Vice President- Mining, Consolidation Coal Co., Southern Appalachia Region		William Chandler Swope President, Swope Construction Services, Inc.
B. L. Jackson, Jr. Chairman of the Board First Century Bankshares, Inc.		J. Brookins Taylor, M.D. Physician
FIRST CENTURY BANK, N.A. WYOMING COUNTY OPERATIONS ADVISORY BOARD
Michelle Brown, DDS Oceana Dental Clinic	Debra L. Brunty Assistant VicePresident-Loans Wyoming County Operations, First Century Bank, N.A.	Frank W. Wilkinson Executive Vice President & Chief Operating Officer, First Century Bank, N.A.	Dennis Worrell Partner, Worrell Exxon & Owner, D & T Car Wash
Tom Evans, Jr. President, Evans Funeral Home		R. W. Wilkinson President & Chief Executive Officer, First Century Bankshares, Inc., First Century Bank, N.A.

First Century Bankshares, Inc.  Page  49

Board of Directors

FIRST CENTURY BANK, N.A. WYTHE COUNTY OPERATIONS ADVISORY BOARD
J. J. Booker, III, M.D. Physician	Samuel V. Jones, CPA Hodges, Jones & Mabry, PC	W. Edward Smith Vice President, Wythe County Operations First Century Bank, N.A.	R. W. Wilkinson President & Chief Executive Officer, First Century Bankshares, Inc., First Century Bank, N.A.
James W. Caudill President, R.P. Johnson & Sons	Stephen A. Lester Ewald-Lester Insurance Agency, Inc.	Frank W. Wilkinson Executive Vice President & Chief Operating Officer First Century Bank, N.A.	.
Robert T. Dupuis President, P & T Products, Inc.
FIRST CENTURY BANK, N.A. SUMMERS COUNTY OPERATIONS ADVISORY BOARD
C. Scott Briers President, Briers, Inc.	David L. Parmer Attorney at Law	Bob F. Richmond Vice President, Summers County Operations First Century Bank, N.A.	R. W. Wilkinson President & Chief Executive Officer First Century Bankshares, Inc., First Century Bank, N.A.
James S. Kerr Owner Kerr Realty		Frank W. Wilkinson Executive Vice President & Chief Operating Officer First Century Bank, N.A.

First Century Bankshares, Inc.  Page  50

0fficers

FIRST CENTURY BANKSHARES, INC.
B. L. Jackson, Jr. Chairman of the Board	Robert M. Jones, Jr., MD Vice Chairman of the Board	W. E. Albert Assistant Secretary	J. Ronald Hypes Treasurer
R. W. Wilkinson President & Chief Executive Officer	Charles A. Peters Secretary
FIRST CENTURY BANK, N.A.
ADMINISTRATION	Jean F. Stanley Assistant Cashier, Princeton Office	Randall D. Price Vice President, Loans	Sharon K. Cole Assistant Cashier
R. W. Wilkinson President & Chief Executive Officer	Brenda G. Davidson Branch Manager & Loan Officer, Bluefield Virginia Office	Hal L. Absher Director of Secondary Mortgage Lending	Janet L. Whitten Assistant Cashier
Frank W. Wilkinson Executive Vice President & Chief Operating Officer	Sandra K. Taylor Branch Manager, Pineville Office	Debra L. Brunty Assistant Vice President-Loans, Wyoming County Operations	OPERATIONS
J. Ronald Hypes Senior Vice President & Chief Financial Officer	Rebecca Lynn Daniels Branch Manager, Oceana Office	Gregory Shupe Assistant Vice President, Princeton Office	W. E. Albert Senior Vice President & Cashier
Kenneth W. Beard Vice President & Compliance Officer	Stephanie Bailey Assistant Branch Manager, Oceana Office	Randy N. Bowles Assistant Vice President, Summers County Office	Lonnie E. Cochran Vice President, Operations
John D. Lay Vice President & Controller	Zerna A. Felts Branch Manager & Security Officer, Fort Chiswell Office	Bill J. Keaton Assistant Vice President, Summers County Office	Martha B. Cooper Assistant Vice President, Operations
Wayne L. Blevins Assistant Controller	Michelle L. Thompson Customer Service Manager	Marshall V. Lytton Assistant Vice President, Loans Bluefield Office	Harold A. Mitchell Assistant Vice President, Item Processing
Barbara Moore-Ray Community Development Officer	Kathy L. Peters Teller Manager	Barry W. Whitt Assistant Vice President, Loans	Judy A. Cecil Assistant Cashier
Cynthia L. Higgins Auditor	Linda C. Rider IRA Coordinator	Linda C. Hamer Loan Officer, Princeton Office	TRUST
Lisa A. Huff Director of Human Resources	Ronnie M. Hamlin Facilities Manager & Assistant Security Officer	Wanda Blair Loan Officer, Wytheville Office	John P. Beckett, Jr. Senior Vice President & Trust Officer
David W. Albert IT Manager	Cathy M. Laxton Bank Security Officer	Louise S. Bowen Loan Officer Secondary Mortage Lending	Patsy R. Sykes Vice President & Trust Officer
Deborah L. Bowman Marketing Director	Nancy M. Cales Assistant Cashier	Sheila D. Fortner Consumer Loan Officer, Pineville Office	Elizabeth M. Pruett Vice President & Trust Officer
BRANCH ADMINISTRATION	LOANS	Charlene R. Maynard Consumer Loan Officer, Oceana Office	Julie H. Johnson Vice President & Trust Officer
Christina H. Naylor Vice President, Deposit Operations	Jeffrey L. Forlines Senior Vice President, Chief Credit Officer	Vicky C. Egglestion Consumer Loan Officer, Bluefield Office	Angela M. James Trust Officer, Employee Benefits
Bob F. Richmond Vice President, Summers County Operations	Garnett L. Little Vice President, Loans	Charles E. Lester Collection Officer	Carol A. Oliver Trust Operations Officer
W. Edward Smith Vice President, Wythe County Operations	L. Mori Williams Vice President & City Executive	Rick D. Blevins Consumer Loan Officer/Collection	Yvonne M. Hurst Trust Administrative Officer
Karen R. Kidd Branch Manager/ Assistant Cashier, College Avenue Office			Byron K. Satterfield Executive Vice President & Chairman of the Trust Investment Committee

First Century Bankshares, Inc.  Page  51

First Century Bankshares, Inc.

First Century Bank, N.A.
Locations

500 Federal Street
Bluefield, WV 24701
(304) 325-8181

525 Federal Street
Bluefield, WV 24701
(304) 325-6600

2020 College Avenue
Bluefield, WV 24701
(304) 327-5660

1223 Stafford Drive
Pine Plaza, Princeton, WV 24740
(304) 425-0856

230 New Hope Road
Princeton, WV 24740
(304) 431-7617

427 Virginia Ave.
Bluefield, VA 24605
(276) 326-2606

Rt. 10, Cook Parkway
Oceana, WV 24870
(304) 682-6221

Rt. 10, East Pineville
Pineville, WV 24874
(304) 732-8850

321 Temple Street
Hinton, WV 25951
(304) 466-2311

200 Pepper’s Ferry Road
Wytheville, VA 24382
(276) 223-1115

148 Ivanhoe Road
Max Meadows, VA 24360
(276) 637-3100

First Century Bankshares, Inc.  Page  52

EX-99.1

Exhibit 99.1

Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

Certification

Pursuant to 18 U.S.C. § 1350, the undersigned officer of First Century Bankshares, Inc. (the “Company”) hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  March 20, 2003

/s/ RICHARD W. WILKINSON

Richard W. Wilkinson
President and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

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EX-99.2

Exhibit 99.2

Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

Certification

Pursuant to 18 U.S.C. § 1350, the undersigned officer of First Century Bankshares, Inc. (the “Company”) hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  March 20, 2003

/s/ J.RONALD HYPES

J. Ronald Hypes, Treasurer
(Chief Financial Officer)

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

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