First Bancorp

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

First Bancorp operates as a community bank focused on lending and deposit services within North and South Carolina.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

First Bancorp operates primarily through its wholly-owned bank subsidiary, First Bank. The bank provides a range of financial services, including:

Commercial Lending: This includes commercial real estate loans, commercial and industrial loans, and construction loans, catering to businesses of varying sizes.
Retail Lending: This segment offers residential mortgage loans, home equity lines of credit, and other consumer loans to individuals.
Deposit Services: First Bank provides a range of deposit accounts, including checking, savings, and money market accounts, as well as certificates of deposit (CDs).
Wealth Management: The bank also offers wealth management and trust services to individuals and families.

First Bancorp’s revenue generation is primarily driven by net interest income (NII), which is the difference between the interest earned on loans and the interest paid on deposits. The bank also generates non-interest income from sources such as service charges, wealth management fees, and other miscellaneous fees.

Industry and Market Trends:

Consolidation: The banking industry is experiencing continued consolidation, with larger banks acquiring smaller community banks. This trend is driven by the desire for greater scale, efficiency, and market share.
Regulatory Environment: Banks operate in a highly regulated environment, and changes in regulations can significantly impact their operations and profitability.
Interest Rate Sensitivity: Banks’ earnings are sensitive to changes in interest rates. Rising interest rates can boost NII, but also increase funding costs and potentially dampen loan demand.
Technological Advancements: Digital banking, mobile payments, and fintech innovations are transforming the banking landscape, requiring banks to invest in technology and adapt to changing customer preferences.
Economic Conditions: Overall economic conditions, such as GDP growth, unemployment, and inflation, impact loan demand, credit quality, and deposit growth.

Impact of Inflation According to their latest 10Q, the prolonged high inflationary environment coupled with the Federal Reserve’s actions to combat inflation has resulted in rising interest rates and increased competition for deposits and has negatively impacted net interest margin

Competitive Landscape:

The banking industry is highly competitive, with numerous players ranging from large national banks to smaller community banks and credit unions. Competition for loans and deposits is intense, and banks must differentiate themselves through factors such as:

Pricing: Interest rates, fees, and other pricing terms are important competitive factors.
Service: The quality of customer service and the convenience of banking channels can attract and retain customers.
Product Offerings: Offering a comprehensive suite of products and services can appeal to a broader customer base.
Technology: Investing in digital banking and mobile technologies can enhance the customer experience and improve efficiency.
Reputation Their last 10k mentioned that their ability to attract and retain customers is impacted by their reputation so it seems like they are trying to build up their brands to gain more customers.

How FBNC Differentiates Itself:

First Bancorp focuses on serving local communities in North and South Carolina. It emphasizes building relationships with its customers and providing personalized service. The bank also aims to differentiate itself through its:

Local Market Expertise: Deep understanding of the local markets and economic conditions.
Relationship-Based Approach: Focus on building long-term relationships with customers.
Community Involvement: Active participation in local community events and initiatives.

Financials:

Latest information taken from the 10Q document:

Net Income: Net income was $22.4 million, a decrease of $10.6 million, or 32.2%, as compared to the three months ended June 30, 2023.
Net interest income was $66.7 million, a decrease of $11.4 million, or 14.6%,
Noninterest income increased to $16.1 million for the three months ended September 30, 2023, compared to $14.8 million for the three months ended June 30, 2023, and $13.9 million for the three months ended September 30, 2022.
Net Interest Margin The prolonged high inflationary environment coupled with the Federal Reserve’s actions to combat inflation has resulted in rising interest rates and increased competition for deposits and has negatively impacted net interest margin
Return on Average Assets (ROAA) They ended the quarter at 0.92% compared to 1.29% in Q2 of 2023.
Return on Average Equity (ROAE) Was 7.65% this quarter compared to 11.20% in Q2 of 2023.

First Bancorp’s Q3 performance showed decline compared to the prior quarter due to a drop in net interest income, and that has been negatively impacted by rising interest rates and increased competition for deposits.

They expect for economic growth to continue, but at a slower pace, with a modest recession possible in the next 12 months.

Revenue Distribution:

The main source of revenues was from the Core banking segment.

In their latest 10Q the company stated that the amount of commercial loans in the company’s portfolio have decreased. Also the competition for deposits has recently increased.

Moat Assessment:

Switching Costs (Low - 2/5):
- While banks generally benefit from some level of customer stickiness, the switching costs aren’t particularly high, especially given the rise of online banking and mobile banking, which make it easier for customers to switch institutions.
- As interest rates rise, there is even less reason for customers not to shop around.
Network Effect (None - 1/5): Community banks do not offer considerable network effects, meaning that the value of their services doesn’t drastically increase with new users.
Cost Advantages (Weak - 2/5): Community banks rarely have the cost advantages seen in larger banks that profit from economies of scale (FBNC has been making acquisitions in the past few years to potentially improve economies of scale).
Intangible Assets (Moderate - 3/5): Local brands can provide some level of customer loyalty and premium pricing, but a local brand does not have a wide recognition.
Economic Moat Overall Rating (2/5): While First Bancorp has some presence in banking with some brand equity, it doesn’t offer great competitive advantages in comparison to larger banking companies.

Risks to the Moat and Business Resilience:

Rising interest rates The high interest rate environment may cause credit losses and liquidity risks.

Increased Competiton The increased competition to get deposits may also increase the costs which in turn will impact profits
Economic Downturn: An economic downturn could significantly impact loan demand, credit quality, and deposit growth.
Regulatory Changes: New banking regulations could increase compliance costs and limit certain activities.
Technological Disruption: Fintech companies and other tech-driven innovations could disrupt traditional banking models.

First Bancorp possesses high resilience because of its relatively good understanding of the local markets and its active role in initiatives and community activities to increase business. The management also tries to diversify its portfolio to different sectors and customers, which allows it to maintain its strength in the longer term.

Understandability: 2 / 5

The business is simple, it is banking at its core, however you have to carefully understand a banks financials in order to understand its performance and future projections. Valuing a bank involves understanding a complex set of financial metrics and regulations.

Balance Sheet Health: 4 / 5

Capitalization ratios appear to be strong and are well within what’s required of them.