Executive Summary / Key Takeaways

• First Community Bankshares (FCBC) operates a community banking model across four states, leveraging a recent core system upgrade and strategic acquisitions to drive efficiency and enhance its market presence.
• Despite a challenging interest rate environment impacting net interest income and margin in Q1 2025 compared to the prior year, the company demonstrated resilience with growth in noninterest income, particularly service charges on deposits and other operating income.
• Asset quality metrics remained generally stable, with manageable nonperforming loan levels and a robust allowance for credit losses coverage, although nonperforming loans saw a slight increase quarter-over-quarter.
• The company maintains strong capital ratios, exceeding regulatory requirements and classified as well-capitalized, providing a solid foundation for future growth and risk absorption, despite a decrease in company-level capital due to a significant special dividend payment in Q1 2025.
• FCBC faces competition from larger regional banks and agile fintechs, positioning itself through community focus, diversified services including wealth management, and operational efficiency gains from technology integration.

Setting the Scene: A Community Bank's Foundation and Strategic Evolution

First Community Bankshares, Inc. (FCBC), established in 1989 as a financial holding company, traces its roots back to the founding of First Community Bank in 1874. Operating across Virginia, West Virginia, North Carolina, and Tennessee through 53 branches, FCBC has built a business centered on traditional community banking – taking deposits and originating loans for individuals and businesses. This core function is supplemented by vital service lines, including wealth management and investment advisory through its Trust Division and First Community Wealth Management subsidiary, and insurance products via a strategic partnership.

The company's trajectory was significantly shaped by strategic expansion, notably the two acquisitions completed in quick succession in 2012: Peoples Bank of Virginia and the FDIC-assisted acquisition of Waccamaw Bank. These deals were transformative, adding substantial scale to the balance sheet – approximately $600 million in assets, over $400 million in loans, and about $500 million in deposits, representing roughly a 30% increase in total resources. Beyond mere size, these acquisitions were strategically aimed at deepening presence in key markets like Richmond, Virginia, and establishing new footprints in the Carolinas, leveraging the company's existing infrastructure and management expertise to drive efficiency and future earnings power. The integration process included a major technology conversion to a new core system, consolidating operations and enhancing digital capabilities, a foundational step intended to support operational efficiency and improved customer service across the expanded network.

In the competitive landscape, FCBC operates alongside larger regional players like United Bankshares (UBSI), F.N.B. Corporation (FNB), and Truist Financial Corporation (TFC), as well as facing pressure from indirect competitors like fintech firms. While FCBC's scale is considerably smaller than these rivals – TFC's branch network, for instance, is vastly larger – it seeks to differentiate through its deep community ties and a diversified service offering. The company's investment in its core banking system and digital platforms, while not detailed with specific performance metrics, is strategically important for enhancing efficiency and customer experience to compete in an increasingly digital banking environment. However, larger competitors like UBSI and FNB often possess greater resources for technology investment, potentially leading to faster innovation cycles and lower operating costs per transaction or loan originated, posing a challenge to FCBC's relative efficiency. FCBC's competitive advantages appear rooted in its local brand loyalty and specialized services like wealth management, which may offer higher customer retention in niche areas compared to the broader offerings of larger institutions.

Financial Performance and Operational Resilience

The first quarter of 2025 presented a mixed financial picture for FCBC, reflecting the ongoing dynamics of the current interest rate environment. Net income for the quarter stood at $11.82 million, or $0.64 per diluted common share, a decrease from $12.85 million, or $0.71 per diluted common share, in the same period of 2024. This decline was primarily driven by a decrease in net interest income, which fell by $1.33 million on a GAAP basis.

The net interest margin on a fully taxable equivalent (FTE) basis was 4.34% in Q1 2025, down 13 basis points from 4.47% in Q1 2024. This compression stemmed from a 5 basis point decrease in the yield on earning assets and an 11 basis point increase in the yield on interest-bearing liabilities. Interest income from loans and available-for-sale securities decreased by $2.74 million and $470 thousand, respectively, largely due to lower average balances in these portfolios. The average loan portfolio decreased by $154.04 million (6.04%), and the average available-for-sale securities portfolio decreased by $89.74 million (37.55%). While the yield on loans decreased by 8 basis points, the overall yield on earning assets was partially supported by a significant increase in interest income from interest-bearing deposits with banks, where average balances surged by $229.46 million (345.13%). On the funding side, the increase in interest expense was mainly attributable to a higher yield paid on time deposits, despite a slight decrease in total average interest-bearing liabilities. The average loan to deposit ratio decreased to 90.45% from 95.51%, indicating a shift in asset mix towards higher cash balances.

Despite the pressure on net interest income, noninterest income provided a positive offset, increasing by $970 thousand (10.48%) compared to Q1 2024. This growth was primarily fueled by a $526 thousand (15.89%) increase in service charges on deposits and a $491 thousand (35.07%) rise in other operating income. Wealth management revenue also saw a modest increase of $63 thousand (5.73%), with assets under management and administration totaling $1.62 billion as of March 31, 2025.

Noninterest expense rose by $1.56 million (6.66%) in Q1 2025. The largest contributors to this increase were salaries and employee benefits ($754 thousand, 5.99%), other operating expense ($295 thousand, 8.76%), and advertising and public relations ($259 thousand, 32.54%). These increases reflect ongoing operational costs and investments.

Profitability ratios softened compared to the prior year, with annualized ROAA at 1.49% (down from 1.60%) and annualized ROAE at 9.49% (down from 10.18%) for Q1 2025.

Asset quality metrics showed relative stability. Total loans held for investment decreased slightly by $33.39 million (1.38%) from year-end 2024. Non-performing loans saw a marginal increase of $105 thousand (0.53%) from December 31, 2024, bringing the ratio of non-performing loans to total loans to 0.85% at March 31, 2025, up from 0.83% at year-end 2024. Non-performing assets to total assets remained stable at 0.63%. Nonaccrual loans were concentrated in single family owner occupied, non-farm non-residential, and commercial and industrial segments. Net charge-offs for the quarter were $1.39 million, or 0.24% of annualized average loans, a slight decrease from $1.74 million (0.27%) in the prior year period. The allowance for credit losses (ACL) decreased by $1.04 million from year-end 2024, primarily reflecting net charge-offs, resulting in an ACL to total loans ratio of 1.42% (down from 1.44%) and an ACL to non-performing loans ratio of 168.15% (down from 173.97%). The provision for credit losses decreased significantly to $321 thousand from $1.01 million in Q1 2024.

Total deposits decreased slightly by $6.77 million (0.25%) from year-end 2024, mainly due to decreases in interest-bearing demand and time deposits, partially offset by growth in noninterest-bearing demand and savings deposits. The company maintained robust liquidity, with cash and cash equivalents increasing by $37.23 million (9.86%) quarter-over-quarter. Available borrowing capacity from the FHLB, FRB Discount Window, and correspondent banks, along with unpledged securities, provided substantial liquidity resources.

Capital levels remained strong relative to regulatory requirements. While total stockholders' equity decreased by $29.98 million (5.69%) primarily due to the payment of a special cash dividend ($2.07 per share, totaling approximately $37.93 million) in addition to the regular dividend, both the Company and the Bank remained classified as well-capitalized. The Bank's risk-based capital ratios actually increased due to a decrease in risk-weighted assets. Book value per share decreased to $27.09 from $28.73 at year-end 2024, reflecting the impact of the special dividend.

Outlook and Risks

FCBC's outlook, as framed by management commentary in past periods and recent performance, centers on leveraging the operational efficiencies gained from past integrations and technology investments to navigate the current economic environment. While specific quantitative guidance for future periods was not provided in the Q1 2025 filing, the company's strategy continues to focus on building capital internally through core earnings, managing asset quality diligently, and positioning the balance sheet for potential shifts in interest rates. The increase in cash balances and maintenance of significant borrowing capacity suggest a cautious approach, prioritizing liquidity and flexibility.

The company acknowledges several key risks that could impact its performance. Interest rate risk remains significant, as evidenced by the sensitivity analysis showing potential impacts on net interest income from rate changes. While the model suggests asset sensitivity in down-rate scenarios, actual outcomes depend on the timing and magnitude of rate movements and behavioral responses. Credit risk is inherent in lending activities, and while current asset quality metrics are manageable, economic downturns or specific industry pressures could lead to increased non-performing assets and charge-offs, requiring higher provisions. The company's exposure to commercial real estate and single-family owner-occupied loans, as highlighted by nonaccrual concentrations, warrants close monitoring. Competition from both traditional banks and fintechs continues to pressure margins and necessitate ongoing investment in technology and service delivery. Broader economic uncertainties, including potential changes in trade policies and inflation, could also affect loan demand, credit quality, and operating costs.

Conclusion

First Community Bankshares demonstrates a resilient community banking model, underpinned by a strategic history of expansion and operational integration. While the current interest rate environment presents challenges to net interest income and profitability metrics compared to the prior year, the company's ability to grow noninterest income and maintain stable asset quality provides a degree of offset. The significant special dividend payment in Q1 2025, while impacting company-level equity, underscores a commitment to returning capital to shareholders from past earnings strength, while the Bank's capital ratios remain robust.

The investment thesis for FCBC appears to rest on its ability to continue extracting efficiency gains from its integrated operations, maintain strong asset quality in a potentially uncertain economic climate, and leverage its community presence and diversified service offerings to drive core earnings. The strategic positioning, supported by a solid capital base and ample liquidity, provides flexibility to navigate market headwinds and potentially pursue future growth opportunities. Investors should weigh the pressures on net interest margin against the company's operational stability, capital strength, and efforts to enhance noninterest revenue streams and efficiency.