Executive Summary / Key Takeaways

• Robust Net Interest Margin Expansion: First Bancorp is demonstrating significant profitability growth, driven by a 48 basis point increase in Net Interest Margin (NIM) to 3.32% in Q2 2025. This expansion stems from effective asset-liability management, including strategic securities portfolio adjustments and disciplined deposit cost control following Federal Reserve rate shifts.
• Strong Asset Quality and Capital Position: The company maintains a strong credit profile, with nonperforming assets (NPAs) decreasing to 0.28% of total assets and a robust Common Equity Tier 1 ratio of 14.64%. Prudent provisioning for credit losses, even amidst external challenges like Hurricane Helene, underscores a resilient balance sheet.
• Community-Centric Growth Strategy: First Bancorp's deep-rooted community focus and established branch network in North and South Carolina foster strong customer loyalty and organic deposit growth, providing a stable funding base and a competitive moat against larger, more generalized institutions.
• Strategic Adaptability in a Dynamic Rate Environment: Management's proactive approach to capitalizing on market interest rates, evidenced by recent securities loss-earnback transactions, positions the company to enhance future earnings and return on equity through ongoing asset repricing.
• Positive Earnings Outlook: Analyst consensus points to strong earnings per share (EPS) growth for 2025, with estimates ranging from $3.36 to $3.54, reflecting optimism about the company's operational efficiency and ability to leverage its asset-sensitive balance sheet.

The Enduring Strength of Local Banking: First Bancorp's Strategic Foundation

First Bancorp, founded in 1934, has cultivated a legacy as a community-oriented financial institution, serving individuals and businesses across North and South Carolina through its wholly-owned subsidiary, First Bank. Its core business revolves around delivering a comprehensive suite of loan and deposit products, complemented by financial advisory services. This foundational commitment to local markets has shaped its strategic responses to evolving industry dynamics, emphasizing personalized service and deep community ties as key differentiators.

The banking industry landscape is characterized by intense competition from both large national players and agile fintech innovators. First Bancorp operates within this environment, leveraging its regional focus to maintain relevance. Its strategic initiatives, including a disciplined approach to asset-liability management and a measured adoption of digital capabilities, are designed to enhance profitability while preserving its community-centric identity.

Technological Edge: Empowering Customers and Mitigating Risk

While First Bancorp may not boast the cutting-edge R&D budgets of global tech giants, its technological differentiation lies in its practical application of financial instruments to serve customer needs and manage its own risk. A prime example is the back-to-back interest rate swap program implemented in 2023. This program allows the company to execute interest rate swaps with commercial loan customers, facilitating their risk management strategies by offering fixed-rate options for their variable-rate loans.

Crucially, First Bancorp simultaneously hedges these customer-facing derivatives with offsetting positions to third-party dealers. This "back-to-back" approach minimizes the company's net risk exposure from such transactions, effectively acting as a pass-through mechanism. The tangible benefit for customers is access to sophisticated risk management tools typically reserved for larger corporations, while for First Bancorp, it means enhanced customer relationships and fee income without taking on significant interest rate risk. This operational detail highlights a strategic use of financial technology to deepen client relationships and offer value-added services, contributing to its competitive moat by catering to specific commercial client needs that might be underserved by larger, less flexible institutions.

Competitive Landscape and Market Positioning

First Bancorp occupies a distinct position as a mid-sized regional bank, balancing the broad offerings of national players with the localized intimacy of smaller community banks. Its direct competitors include larger regional banks with significant Southeastern presence, such as Truist Financial (TFC), PNC Financial Services Group (PNC), Regions Financial (RF), and Fifth Third Bancorp (FITB).

Compared to Truist Financial, a behemoth formed from significant mergers, First Bancorp's strength lies in its localized adaptability and personalized customer service. While TFC benefits from vast scale and advanced digital tools, its standardized approach can sometimes lack the tailored touch that First Bancorp provides to small and medium-sized businesses. Similarly, against PNC, First Bancorp's community relationships offer a unique value proposition, allowing for quicker decision-making and a more entrenched local presence, even if PNC leads in overall technological investment and product breadth.

Regions Financial and Fifth Third Bancorp present closer parallels, both operating with a regional focus. First Bancorp's deep market knowledge and targeted approach to niche lending segments allow it to compete effectively, fostering strong local brand loyalty. However, these larger peers often demonstrate more advanced digital integration and greater revenue diversification, which could pose challenges for First Bancorp in broader market share capture and innovation speed.

Indirect competitors, including fintech companies and online banks, offer streamlined digital solutions that could attract tech-savvy customers. While these players can exert pressure on deposit and loan markets through lower overheads, First Bancorp's established branch network and human-centric approach provide a counter-balance, particularly for customers valuing in-person service and complex financial advice. The company's competitive advantages, such as its strong community focus and local expertise, translate into enhanced customer loyalty and stable revenue streams. Its established branch network offers unique distribution channels, fostering better access and potentially faster adaptation of local product offerings. However, its limited geographic scope and potential technological gaps remain vulnerabilities, restricting revenue diversification and exposing it to regional economic shifts, while also making it challenging to match the digital innovation pace of larger rivals.

Financial Performance: A Story of Margin Expansion and Resilient Growth

First Bancorp's financial performance in the first half of 2025 paints a compelling picture of strategic execution in a dynamic interest rate environment. For the six months ended June 30, 2025, the company reported net income of $74.97 million, a substantial 38.88% increase from $53.98 million in the comparable 2024 period. Diluted EPS followed suit, rising to $1.81 from $1.31. This impressive growth was primarily fueled by a significant expansion in Net Interest Income (NII).

NII for the six months ended June 30, 2025, reached $189.56 million, an 18.19% increase from $160.39 million in the prior year. This NII growth was a direct result of a lower cost of funds and higher yields on interest-earning assets. The Net Interest Margin (NIM) expanded by a notable 48 basis points to 3.29% for the period, reflecting management's focused efforts to increase loan yields and effectively manage deposit costs following the Federal Reserve's rate cuts in late 2024. The fourth quarter 2024 securities loss-earnback transaction alone contributed 69 basis points to the increase in interest-earning assets' yield in Q2 2025.

Total assets grew by 3.8% to $12.61 billion at June 30, 2025, from $12.15 billion at December 31, 2024. This growth was largely driven by an increase in interest-bearing cash, available-for-sale (AFS) securities, and loans. Total loans increased by 1.6% to $8.23 billion, reflecting organic growth without significant shifts in portfolio mix or notable concentrations in specific industries like commercial office or hospitality. Deposit growth was equally robust, with total deposits rising by 2.8% to $10.83 billion, primarily from organic increases in noninterest-bearing checking and money market accounts. This diversified and granular deposit base provides a stable and cost-effective funding source.

Credit quality remains strong, with nonperforming assets (NPAs) decreasing to 0.28% of total assets at June 30, 2025, down from 0.30% at December 31, 2024. The provision for credit losses for the six months ended June 30, 2025, was $3.3 million, influenced by loan growth and net charge-offs of $4.5 million, but partially offset by a $5.5 million reduction in reserves related to Hurricane Helene. The Allowance for Credit Losses (ACL) stood at 1.47% of total loans, with $7.5 million specifically allocated to loans impacted by Hurricane Helene, adding 10 basis points to the overall ACL.

Noninterest income saw a slight decrease of $0.3 million for the six months ended June 30, 2025, primarily due to lower SBA loan sale gains and other income, partially offset by an increase in other service charges and fees. Noninterest expense decreased by $0.6 million, reflecting management's cost control efforts, despite a $1.5 million increase in personnel costs driven by higher incentives and commissions tied to improved performance.

Liquidity and Capital Strength

First Bancorp maintains a robust liquidity profile, essential for a financial institution. Its on-balance sheet liquidity ratio stood at 20.0% at June 30, 2025, an increase from 17.6% at December 31, 2024. Including available lines of credit, the total liquidity ratio reached 36.1%. The company benefits from diverse funding sources, including a $1.3 billion line of credit with the FHLB, $265 million in federal funds lines, and an approximately $761.1 million line through the Federal Reserve's discount window. Furthermore, 66.3% of total deposits were either insured or collateralized, underscoring the stability of its funding.

Capital strength is another cornerstone of First Bancorp's financial health. The company remains "well-capitalized" by all regulatory standards, with a Common Equity Tier 1 ratio of 14.64%, a Tier 1 risk-based capital ratio of 15.45%, and a Total risk-based capital ratio of 16.90% at June 30, 2025. These ratios have improved due to strong earnings retention and a favorable shift in asset mix towards lower risk-weighted assets. The Tangible Common Equity (TCE) ratio, a key non-GAAP metric, also improved to 8.83% from 8.22% at year-end 2024, signaling enhanced tangible capital.

Outlook and Forward-Looking Initiatives

The outlook for First Bancorp appears positive, with analysts projecting strong earnings growth for 2025. The Zacks Consensus Estimate for 2025 EPS ranges from $3.36 to $3.54, representing a significant year-over-year increase. This optimism is underpinned by the company's asset-sensitive balance sheet and ongoing asset repricing, which are expected to drive further NIM expansion and higher return on equity.

Management's proactive stance on capitalizing on market conditions is evident in a subsequent event disclosed in the 10-Q. During the third quarter of 2025, First Bancorp executed another strategic securities loss earnback transaction. This involved selling $194.3 million of AFS securities yielding 1.63% at a loss of approximately $27.9 million, and concurrently reinvesting $167.4 million into AFS securities bearing a significantly higher yield of 4.79%. This move is designed to enhance future interest income and further boost NIM, demonstrating a clear strategic initiative to optimize its investment portfolio for current yields.

Key Risks and Challenges

Despite a strong performance and positive outlook, First Bancorp faces several pertinent risks. Interest rate risk remains significant, as changes in market rates can impact net interest income due to differences in asset and liability repricing characteristics. While the company is currently asset-sensitive, indicating a benefit from rising rates, a sharp decline in rates could negatively affect earnings. The company's Economic Value of Equity (EVE) generally declines in rising rate scenarios, reflecting the composition of fixed-rate assets versus variable-rate deposits.

The loan portfolio, with approximately 88% secured by real estate, is susceptible to fluctuations in real estate valuations. Although management reports no notable concentrations in specific geographies or industries, a broad downturn in real estate markets could impact asset quality. The ongoing recovery from Hurricane Helene also presents a continued, albeit managed, risk, with $703 million in outstanding loans in affected areas and $7.5 million in ACL specifically for these loans. While management has reserved accordingly, the full economic impact of such events can evolve over time. Finally, the unrealized loss of $298.9 million on AFS securities, though deemed temporary and interest-rate driven, highlights exposure to market value fluctuations.

Conclusion

First Bancorp stands as a compelling investment proposition, rooted in its robust community banking model and demonstrating impressive financial agility. The company's strategic focus on local markets, coupled with a proactive approach to asset-liability management, has translated into significant Net Interest Margin expansion and strong earnings growth in the first half of 2025. Its disciplined management of credit quality and solid capital position provide a resilient foundation against potential economic headwinds.

The strategic use of financial technology, such as the back-to-back interest rate swap program, underscores a commitment to customer value and risk mitigation, enhancing its competitive standing. Furthermore, the recent securities portfolio optimization in Q3 2025 signals a clear intent to capitalize on favorable market yields, promising continued tailwinds for net interest income. While the regional banking sector faces ongoing competitive pressures and interest rate sensitivities, First Bancorp's blend of local strength, prudent financial management, and strategic adaptability positions it for sustained profitability and an attractive long-term outlook for discerning investors.