Executive Summary / Key Takeaways

• Strategic Acquirer with Clear Vision: First Community Bankshares is a regional banking institution executing a disciplined, long-term M&A strategy to expand its footprint and enhance earnings power, exemplified by its recent agreement to acquire Hometown Bancshares.
• Resilient Financial Performance: Despite a challenging interest rate environment impacting loan income, FCBC demonstrated solid financial performance in Q2 2025, driven by strong noninterest income growth and a recovery in its provision for credit losses.
• Robust Capital and Liquidity: The company maintains a well-capitalized position and ample liquidity, providing a strong foundation for continued strategic growth initiatives and mitigating market risks.
• Technology as an Enabler: FCBC leverages its advanced Jack Henry technology platform to drive operational efficiencies, enhance customer experience, and provide a scalable infrastructure for seamless integration of acquired entities.
• Focused Competitive Edge: FCBC differentiates itself through a community-centric approach and personalized service, strategically investing in lending staff and core deposit retention to compete effectively against larger, more diversified regional banks.

A Regional Banking Powerhouse Forging Ahead

First Community Bankshares, Inc. (NASDAQ:FCBC) stands as a deeply rooted financial institution, tracing its origins back to 1874 with the founding of First Community Bank, and later reincorporated as a financial holding company in 1989. Operating across Virginia, West Virginia, North Carolina, and Tennessee with 53 branches as of June 30, 2025, FCBC's core business revolves around community banking. This encompasses a comprehensive suite of commercial and consumer banking services, lending activities, and specialized wealth management offerings through its Trust Division and First Community Wealth Management. The company's overarching strategy is clear: to achieve disciplined growth through strategic mergers and acquisitions, expanding its branch presence, and bolstering future earnings power, particularly in a market environment conducive to consolidation.

The broader banking industry currently operates within a dynamic landscape characterized by fluctuating interest rates, persistent inflation, and intense competition for both loans and deposits. While a low-rate environment historically provided borrowers with improved cash flow, the current Federal Open Market Committee benchmark federal funds rate of 425 to 450 basis points (as of June 30, 2025) introduces new dynamics. FCBC's strategic response to these trends emphasizes balance sheet quality, stability, and positioning for future interest rate cycles, while actively seeking consolidation opportunities in the Virginias and Carolinas.

A foundational strength underpinning FCBC's strategy is its investment in technological infrastructure. In the second half of 2012, the company undertook a significant upgrade, converting all systems to a new Jack Henry platform. This advanced technology platform consolidated data and operations, substantially enhancing online and mobile banking capabilities. Furthermore, it enabled the implementation of new front-line technologies designed to improve customer service and is expected to yield improved cost structures in key processing contracts. For investors, this technological differentiation translates into a more efficient operational backbone, a superior customer experience, and a scalable platform that facilitates the seamless integration of acquired entities. This allows FCBC to reinvest cost savings into strategic areas like expanding its lending staff, thereby strengthening its competitive moat against smaller, less integrated regional players.

Strategic Growth Through Prudent Acquisitions

FCBC's history is marked by strategic expansion, with 2012 serving as a transformative year. Within an eight-day span, the company completed two significant acquisitions: Peoples Bank of Virginia and the FDIC-assisted acquisition of Waccamaw Bank. These deals collectively added over $600 million in assets, representing a 30% increase to the balance sheet and bringing total resources to over $2.8 billion (as of Q2 2012), all achieved without additional capital requirements. Management noted that these acquired operations performed "better than planned and well ahead of our modeled results," contributing "smooth transitions" and "strong contributions."

This disciplined M&A approach continues to be a cornerstone of FCBC's growth strategy. On July 19, 2025, the company announced an agreement to acquire Hometown Bancshares, Inc. for approximately $41.5 million, with the transaction expected to close in Q1 2026. This planned acquisition further solidifies FCBC's commitment to consolidation within its regional markets, leveraging its established systems and management expertise to drive future earnings power.

Financial Performance: Resilience in a Shifting Landscape

FCBC's financial performance in the second quarter of 2025 reflects a resilient operational model amidst a dynamic interest rate environment. For the three months ended June 30, 2025, the company reported net income of $12.25 million, translating to $0.67 per diluted common share. This resulted in an annualized return on average assets (ROAA) of 1.53% and an annualized return on average common equity (ROAE) of 9.84%.

The net interest margin remained strong at 4.37%. However, interest income on loans decreased by $2.05 million year-over-year, primarily due to a $134.85 million decrease in the average loan balance and a 6 basis point reduction in loan yield. This headwind was partially offset by a $0.84 million increase in interest income from interest-bearing deposits with banks. Interest expense on interest-bearing liabilities saw a modest decrease of $0.15 million, attributed to a lower average balance and a 3 basis point decrease in yield.

Noninterest income emerged as a significant growth driver, increasing by approximately $0.998 million, or 10.68%, year-over-year to $10.34 million. This was largely propelled by a $0.692 million (20.19%) surge in service charges on deposits. Noninterest expense increased by $0.558 million (2.24%) to $25.46 million, with salaries and employee benefits accounting for a notable $1.86 million (14.87%) of this increase. The company also reported a recovery of provision for credit losses of $0.285 million, a favorable shift compared to a provision of $0.144 million in the prior year, driven by a $0.553 million decrease in net charge-offs and a reduction in the overall loan balance.

For the first six months of 2025, net income stood at $24.06 million, or $1.31 per diluted common share. Net interest income decreased by $2.59 million (4.07%) year-over-year, while noninterest income increased by $1.97 million (10.58%). Noninterest expense rose by $2.12 million (4.38%), and the company recorded a recovery of provision for credit losses of $0.036 million, a substantial improvement from a $1.155 million provision in the same period of 2024. These figures underscore FCBC's ability to generate consistent earnings and manage its cost structure, even as interest rate dynamics influence its core lending income. The company's TTM Gross Profit Margin of 64.18%, Operating Profit Margin of 36.00%, and Net Profit Margin of 28.17% further highlight its solid profitability.

Asset Quality and Risk Management: A Prudent Approach

FCBC maintains a robust approach to asset quality and risk management, which is critical for stability in the banking sector. The company has observed a declining trend in non-performing assets since September 30, 2024. As of June 30, 2025, total non-performing assets stood at $19.17 million, representing a 6.97% decrease from December 31, 2024. Nonaccrual loans decreased by 8.98% to $18.08 million, while other real estate owned (OREO) saw a 12.67% reduction to $0.455 million. The allowance for credit losses to total loans was a healthy 1.40% as of June 30, 2025.

The company mitigates credit risk through stringent underwriting practices, including thorough analysis of borrower financials and collateral valuation, coupled with ongoing loan portfolio monitoring. For interest rate risk, the Asset-Liability Management Committee (ALCO) actively manages the mix of assets and liabilities to limit exposure and ensure adequate liquidity. While FCBC does make concessions for borrowers experiencing financial difficulty, total modified loans were manageable at $2.13 million as of June 30, 2025, with only a small portion ($0.058 million) being 90+ days past due. This proactive and disciplined risk management framework is fundamental to FCBC's stability and long-term value proposition.

Liquidity and Capital Strength: Fueling Future Growth

A strong liquidity and capital position is paramount for any financial institution, and FCBC demonstrates ample capacity. As of June 30, 2025, the company reported unencumbered cash totaling $395.06 million. Complementing this, FCBC has significant available borrowing capacity, including $326.43 million from the FHLB, $5.84 million from the Federal Reserve Bank Discount Window, and $100.00 million in available lines from correspondent banks. Additionally, it holds $104.22 million in unpledged available-for-sale securities, providing further financial flexibility.

Total stockholders' equity stood at $502.83 million as of June 30, 2025. This represents a 4.48% decrease from December 31, 2024, primarily due to the payment of a special cash dividend of $2.07 per share, totaling approximately $37.93 million, in Q1 2025, alongside regular cash dividends. This was partially offset by net income of $24.06 million. Book value per share decreased to $27.46 from $28.73 at year-end 2024.

Despite the impact of the special dividend, FCBC's capital ratios remain robust, meeting all capital adequacy requirements and classifying the company as "well-capitalized" under regulatory frameworks, exceeding Basel III minimums. The company also actively manages its share count, repurchasing 50,338 common shares at a cost of $1.85 million in Q2 2025. This robust liquidity and capital base provides FCBC with the necessary resources to pursue its strategic growth initiatives and navigate potential market volatility.

Competitive Landscape: Niche Strength Amidst Giants

FCBC operates within a competitive regional banking landscape, positioning itself as a community-focused institution that prioritizes personalized service and strong local relationships. This approach allows FCBC to differentiate itself from larger, more diversified players, particularly in the rural and mid-sized markets it serves.

When compared to larger direct competitors like Truist Financial Corporation (TFC) and PNC Financial Services Group (PNC), FCBC operates at a smaller scale. TFC and PNC benefit from broader geographic footprints, greater economies of scale, and more extensive digital infrastructures, which often translate into lower operating costs and faster innovation cycles. For instance, while FCBC's TTM Net Profit Margin of 28.17% is notably higher than TFC's 20% and PNC's 17%, the larger banks often achieve higher revenue growth through diversified streams and broader market access. FCBC's strength lies in its ability to foster deeper customer loyalty through its community brand and personalized service, particularly in niche areas like estate administration and local trust management, where its high-touch approach exploits the relative weaknesses of larger, more generalized competitors.

Against regional peers like United Bankshares, Inc. (UBSI), FCBC is more closely matched in its relationship-banking focus. UBSI's TTM Net Profit Margin of 23% is lower than FCBC's, suggesting FCBC's operational efficiency in its chosen segments. However, UBSI may exhibit a slight edge in certain operational executions, such as loan origination processes, due to its established regional network. FCBC's strategic investment in its Jack Henry technology platform provides a scalable and efficient backbone, allowing it to consolidate data and streamline operations, which is crucial for integrating acquisitions and maintaining cost discipline against rivals. This technological foundation helps FCBC compete on efficiency and service delivery, even as it focuses on its core strengths.

Indirect competitors, such as fintech companies like PayPal (PYPL) or Square (SQ) (now Block) and non-bank wealth management firms, pose a different challenge. These entities offer alternative, often more digitally streamlined, financial solutions that can attract tech-savvy customers, potentially impacting FCBC's deposit and loan market share. FCBC's strategic response involves leveraging its strong community brand and regulatory licenses to access underserved markets, while continuously enhancing its digital offerings to meet evolving customer expectations. The company's focus on "beefing up the lending staff" in acquired geographies and its emphasis on core deposit retention (achieving a 98% retention level post-Waccamaw/Peoples acquisitions) are direct strategic responses to competitive pressures in loan origination and funding.

Outlook: Sustained Growth and Strategic Evolution

FCBC's outlook is anchored in its continued pursuit of strategic growth and operational excellence. The announced acquisition of Hometown Bancshares, expected to close in Q1 2026, signals management's confidence in further consolidating its regional presence and leveraging its scalable platform. Management remains focused on achieving "consistent levels of core earnings" and "positioning the company for the next interest rate cycle" by "building capital, balance sheet strength, and forward earnings momentum."

While loan growth remains competitive, particularly for larger commercial loans, FCBC anticipates "level to slightly increasing balances" in its loan portfolio. This growth is expected to be driven by robust retail mortgage activity and a pickup in small business loan applications, supported by strategic investments in lending staff. Accretion income from previously acquired portfolios, while having been "lumpy" and "front-end loaded," is expected to continue its declining trend. The company's strong core deposit retention, evidenced by a 98% retention level after the 2012 acquisitions, further underpins its stable funding base. FCBC's commitment to disciplined capital management, including share repurchases, and its well-capitalized status provide the flexibility needed to execute its strategic roadmap in a dynamic market.

Conclusion

First Community Bankshares presents a compelling investment thesis as a resilient regional bank adeptly executing a strategic growth plan. Its history of prudent acquisitions, most recently highlighted by the planned Hometown Bancshares merger, demonstrates a clear commitment to expanding its market footprint and enhancing shareholder value. Underpinned by a robust capital structure, strong liquidity, and a disciplined approach to asset quality, FCBC is well-positioned to navigate the complexities of the current economic and interest rate environment.

The company's strategic investment in its Jack Henry (JKHY) technology platform provides a tangible operational advantage, driving efficiencies and enabling seamless integration of acquired entities, which is critical for its M&A-driven growth. While facing intense competition from both larger regional banks and agile fintechs, FCBC leverages its deep community ties and personalized service to maintain a competitive edge. By focusing on core deposit growth, targeted loan origination, and continuous operational improvements, FCBC is not merely adapting to market changes but actively shaping its future, offering investors a compelling narrative of sustained growth and strategic evolution in the regional banking sector.