first bank (NASDAQ:FBNC) is a regional bank from Southern Pines, North Carolina, between Fayetteville and Charlotte. Like many regional banks, First Bancorp flies under the radar. For example, the article you are reading now is the first detailed article on the bench in looking for alpha since 2017.
However, despite going five years without primary coverage on this website, this is no small operation. The bank has a market capitalization of nearly $1.7 billion and its total asset base topped $10 billion in 2021. Admittedly, the company’s name could limit interest. By my count, there are at least nine different US banks with some spin-off from publicly traded First Bank or First Bancorp. What makes the North Carolina iteration stand out?
Strong metrics and long-term performance
When I look at a bank that I haven’t previously done due diligence on, the first thing I look at is its long-term track record. Specifically, it’s a great filter to see if a bank has generated strong full-cycle total returns and whether or not it survived 2008 in one piece. A bank that destroyed shareholder value in 2008 may also not be able to successfully weather the next recession. Meanwhile, a bank that generates low long-term returns may be too conservative or may not have strong enough profitability metrics to justify its investment capital.
In the case of First Bank, however, it has passed both tests with ease. Here is a long-term chart. If you had invested $10,000 in FBNC stock 30 years ago today, this is how it turned out:
Based on capital gains alone, the stock is up almost 15 times, and that initial $10,000 becomes $141,670 today. With dividends, however, that initial investment jumped more than 30 times to $329,730. And, as the chart shows, the 2008 financial crisis didn’t destroy shareholder profits. Yes, the stock was virtually flat between 2005 and 2015, but there was no permanent deterioration in capital, and the stock has continued to deliver another string of strong returns in recent years.
What has driven this strong performance?
It’s a combination of above-average loan spreads and steady growth. Until 2020, First Bancorp earned a net interest margin of at least 4% and sometimes even more. This was well above the national banking average which was in the low 3.
On top of that, the bank has had a history of steady asset growth. It has increased lending at 10% per year compounded over the past decade and deposits at nearly 13% per year. Grow your operations at a double-digit rate and earn above-average loan returns, and good things tend to happen.
However, the less encouraging sign is that the bank’s net interest margin has plummeted in recent years, falling from 4% in 2019 to 2.7% in the first quarter of this year. Not surprisingly, this has significantly reduced the bank’s return on equity “ROE”, falling below the 10% mark in some recent quarters. However, the bank’s recent stumbles appear to be coming to an end.
Are past returns repeatable?
It is important to realize that First Bancorp has changed its strategy somewhat over the years. The company started out as a more rural-focused nature bank and largely avoided the larger cities of North Carolina and South Carolina. However, the company acquired two other failed banks after the 2008 financial crisis through FDIC-assisted transactions. This put the bank on a path to more competition in larger urban areas. The bank also brought on a new CEO, Richard Moore, in 2012.
While First Bancorp’s stock returns were disappointing during this transition period, the bank appears to have successfully adapted to its more growth-focused business outlook. Today, it is the fourth largest bank based in North Carolina.
There are several levers for further growth in the future. One is that the company has a strong deposit base and currently has many more deposits than loans. As of last quarter, it’s at $9.2 billion of deposits versus just $6.5 billion of loans. This gives you plenty of room to make additional loans in this environment of more favorable interest rates.
First Bancorp also continues to use mergers and acquisitions to bolster its outlook. The latest move is to acquire GrandSouth Bancorporation. GrandSouth is a wholly South Carolina company with eight locations throughout the state. Until now, First Bancorp’s branches in South Carolina were right next to the border. This acquisition will give them a footprint that will reach as far as Charleston. The combined bank will serve the ten largest metropolitan areas in the Carolinas and will have a branch within reach of 61% of the population of the Carolinas.
The valuation of the operation seems fair, although it depends on your point of view on the valuation of a bank. First Bancorp is paying 1.8 times the tangible book value of GrandSouth, which may seem high. However, that translates to only 7x the bottom line profits (cost savings), which isn’t too aggressive. First Bancorp generally sees this as a single-digit earnings increase while having a three-year payback period on tangible book value.
Third Quarter Earnings: Pretty Impressive
After two years of rather disappointing results from First Bancorp, things returned to normal in the third quarter. The bank’s net income increased 37% year over year to $37.9 million. Return on average common equity rose to 13.8%, up 191 basis points year-over-year, and brought the bank back to its historically above-average results. Net interest margin also increased 37 basis points year over year to 3.4% as the bank started to really get a boost from higher interest rates.
The bank’s historically strong deposit base was important in making these improvements possible. First Bancorp had a cost of funds of just 0.12% for the quarter. This is an incredibly strong result in the current interest rate environment. First Bancorp will eventually have to pay higher interest rates to satisfy depositors, but it clearly has a loyal deposit base that is willing to accept lower interest rates than many rival banks.
The business efficiency ratio, which measures a bank’s expenses against revenue, has improved markedly in recent years, rising from 69% in 2015 to just 48% in the last quarter (lower scores are better ). A typical US bank tends to operate in the 55-60% range, so First Bancorp has gone from relatively inefficient to best-in-class operator in recent years. This greatly improves the bank’s benchmark profitability and could lead to unexpectedly strong results going forward, as higher interest rates really start to boost the bank’s operations.
Final result of the actions of FBNC
North Carolina is a good place to do business as a bank. The state was the sixth fastest growing of the 50 US states between 2010 and 2020 based on census data. CNBC has ranked the state best in the nation to do business, and enjoy a corporate tax rate of just 2.5%.
First Bancorp appears to be taking full advantage of this favorable operating environment. It has historically posted strong growth numbers. And his current moves, like the GrandSouth merger, seem to continue that trend. Meanwhile, thanks to the strong low-cost deposit base, First Bancorp should be able to greatly improve its net interest margin in the coming quarters thanks to the current environment of higher interest rates.
The potential problem here is that FBNC stock is already up significantly; shares are up 27% in the past six months. In a bear market, it’s not that exciting to chase stocks after they’ve already risen. That said, the stock has 11x earnings by 2022 and it’s likely to be less than 10x future earnings as the GrandSouth merger and higher interest rates add another element to the company’s earnings outlook.
I rate the stock here as a “buy” rather than a “strong buy” simply because of relative valuation. There are so many stocks that have absolutely taken a beating over the past year. First Bancorp, by contrast, is flat from 2022 to date and is less than 10% off its all-time highs. Both in banks and in the market as a whole, there are more opportune opportunities to buy bargains.
That said, 11x earnings is not a steep price to pay for a proven growth bank like this, and management is making the right moves to keep things going. I hope that shareholders will be satisfied with the bank’s performance in the coming years.