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spk09: I'd like to welcome everyone today to First Bank's first quarter 2023 earnings call. I'm joined today by Andrew Hibschman, our Chief Financial Officer, Darlene Gillespie, our Chief Retail Banking Officer, and Peter Cahill, our Chief Lending Officer. Before we begin, Andrew will read the Safe Harbor Statement.
spk03: The following discussion may contain forward-looking statements concerning the financial condition, results of operations, and business of First Bank. We caution that such statements are subject to a number of uncertainties, and actual results could differ materially, and therefore, you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties are described under Item 1A, Risk Factors, in our annual report on Form 10-K for the year ended December 31st, 2022, filed with the FDIC. Pat, back to you.
spk09: Thank you, Andrew. I'll provide some high-level thoughts and observations on the quarter and then turn it over to the team to provide a little more detail. And as always, we'll have some time for question and answer at the end. Overall, I'm very proud of the resiliency displayed by our relationship-driven community banking model. Deposit outflows were there, but they weren't too bad, and they were largely driven by higher-yielding investment opportunities. Our NIM, our net interest margin, held up pretty well despite the heightened deposit competition and the inclusion of additional borrowings we took out just to provide some excess liquidity. Asset quality remained very good with minimal charge-offs and low levels of non-performing assets and delinquencies. Our expenses were up, and some of that increase is related to inflationary factors, but the bigger driver of the increase relates to key hires tied to strategic initiatives. Specifically, we added a group of great bankers from Investors Bank to help us continue to build and grow our presence in northern New Jersey. We built on a small team to help grow our small business lending units, and we hired a team to build out a new asset-based C&I lending group. The important point here is that these expenses will drive earnings and profits into the future. It is not simply a function of higher overhead. As a result of the elevated expenses, the return on assets was down, but it remained above 1 percent, and that's even after including the merger-related costs that were incurred during the quarter. Regarding the merger, we're very excited about the opportunity to meaningfully grow our presence in Pennsylvania. Plus, this deal gives us unique balance sheet management options. Specifically, the combined company could end up being leaner, maybe even smaller, but more profitable. As always, we'll be reviewing all options related to the size and makeup of the balance sheet of the combined companies, and we'll follow the path that will drive the best profitability and shareholder value. Also during Q1, we saw a meaningful increase in our allowance as a result of implementing CECL. Quick points on deposits and lending before we turn it over to the team for more detail. Overall, the deposit outflows during the quarter were manageable, with most of the decline coming prior to March 9th, a sign that alternative investment options, not concerns about banking industry stability, were driving the deposit declines. In Q1, our non-interest bearing balance is to continue to move lower, but the pace has slowed. and non-interest-bearing balances are flat so far in April. We believe our strategic investments and key hires, our growth of our small business and C&I lending units will help drive quality deposit growth moving forward. On the lending side, we saw $55 million in loan growth during the quarter, with over 80 percent of that growth coming in C&I and CREO. Those two categories are up approximately $100 million in outstanding in the past two quarters. Importantly, C&I loans provide diversification benefits, along with shorter durations, better yields, and more deposits. Our disciplined loan pricing and a focus on the most attractive segments helped drive a 33 basis point improvement in loan yields during the quarter. As I mentioned, asset quality and delinquency numbers were good. And overall, on the lending front, we saw continued evolution from a historically CRE-focused community bank to a evolving lower middle market commercial bank. In summary, I've renewed excitement and faith in the community bank model, and I'm even more optimistic about First Bank's ability to thrive as one of the top players in the community banking space. Once again, during periods of stress, the relationship-driven community bank model showed its resiliency and its value. When we look back over recent history, we saw that community banks made it through the Great Recession relatively unscathed, We showed tremendous value to our communities and our customers during the pandemic and PPP. And in March of 2023, we showed the stickiness of our deposits when others saw large outflows. At First Bank, our follow-through on important strategic investments, despite near-term profit headwinds, shows our commitment to being a leader in the community banking field and our commitment to creating lasting and sustaining value. Lastly, as I pointed out in our shareholder letter, we are in the midst of a gradual strategic transformation. Our business is evolving and diversifying in meaningful ways, both geographically and across lines of business. Our franchise will be more profitable, more valuable, and more attractive as a result of these strategic investments. At this time, I'd like Andrew to discuss the financial results in a little bit more detail.
spk03: Andrew? Thanks, Pat. For the three months ended March 31st, 2023, we earned $7.0 million in net income, or $0.36 per diluted share. which translates to a 1.03% return on average assets. Excluding merger-related expenses and losses on investment sales, diluted EPS would have been $0.38, or a 1.11% return on average assets. During the quarter, we had solid loan growth, improved our liquidity position, maintained strong credit quality metrics, and made investments to help drive future growth. The current interest rate environment and the steps we took in the first quarter to increase on-balance sheet liquidity led to a decline in our margin. In addition, the investments we made in people and new locations led to increased non-interest expenses. The combination of these factors led to a decline in net income of 2.1 million from the linked fourth quarter and a decline of 1.2 million compared to the first quarter of 2022. Strong commercial loan growth continued in the quarter. Loans increased 55 million compared to an increase in loans of 74 million in the fourth quarter of 2022, and $40 million in the first quarter of 2022. Growth during the quarter was primarily driven by C&I lending, as Pat mentioned. Total deposits were down $52 million during the first quarter of 2023, with non-interest-bearing deposits down $40 million and interest-bearing deposits down $12. Darlene and Peter will expand on lending and deposit activity in their remarks. Primarily due to the increase in deposit costs, offset somewhat by the increase in the average rate on loans, our tax equivalent net interest margin decreased to 3.52% for the quarter ended March 31st, 2023, compared to 3.69% in the fourth quarter of 2022. Our asset liability management approach continues to be conservative, but we have taken steps and plan to continue to shift our balance sheet to a more liability sensitive gap position. In the current rate environment, we do expect continued pressure, on the margin. Liquidity levels increased during the first quarter, primarily due to increased borrowings, which were used to support our loan growth, replace the losses and deposits, and increase on-balance sheet liquidity. We have also enhanced our contingent sources of liquidity by adding additional borrowing capacity at the FHLB and pledging securities at the Federal Reserve Bank. We also sold some lower yielding securities for a small loss during the first quarter and reinvested the funds into higher yielding overnight cash accounts. We have also reduced some of the risk in our deposit portfolio by reducing uninsured deposits through both adding customers to reciprocal deposit products and some small reductions in balances of some of our largest customers. The actions taken during the first quarter led to a significantly improved available liquidity to adjusted uninsured deposit ratio, of approximately 100% as of March 31, 2023. We define available liquidity as cash and due from banks, the market value of our investment securities, currently available funding sources, minus pledged securities and restricted cash. Estimated adjusted uninsured deposits are uninsured deposits minus deposits of state and political subdivisions, which are separately collateralized. We are already seeing signs in April of deposit generation improvement. Based on the deposit growth to date in April, we have improved our liquidity position further, and our available liquidity to adjusted uninsured deposit ratio is currently approximately 106%. As Pat mentioned, we adopted CECL on January 1, 2023, and based on our updated methodology, we increased our allowance for credit losses on loans to 1.25% of total loans. Based on a modest level of net charge-offs during the quarter and a strong asset quality profile, we maintained our allowance for loan losses as a percentage of loans at 1.25% at March 31st, 2023, compared to that same percentage at adoption of CECL. This was supported by only a slight increase in non-performing loans, as our non-performing loans are only 33 basis points of total loans at 3-31-2023, compared to 27 basis points at the end of the year. We also established a small reserve of approximately $225,000 on our HCM securities. In the first quarter of 2023, total non-interest income decreased to $964,000 from $1.4 million in the fourth quarter of 2022. The decrease from the fourth quarter of 2022 was primarily due to a decrease in loan fees, losses on the sale of securities, and a decline in gains on recovery of acquired loans. This was offset somewhat by an increase in gains on sale of loans, primarily SBA loans. Our SBA loan activity and pipelines continue to be strong. However, sale activity had been slow, primarily due to the rising rate environment, which has reduced the premiums earned on sales, and in most cases, we're retaining the loans on our balance sheet. Going forward, we expect SBA sale activity to be more active. Loan swap activity continues to be slow, and we don't expect any significant change in the short term. While non-interest income levels may continue to fluctuate, we do not expect a significant increase in non-interest income over the next several quarters. Annualized first quarter 2023 non-interest expenses were 1.99% of average assets or 1.93% excluding merger-related expenses. This was an increase, but if you compare this to a peer levels of 2.15%, we still feel good about our expense management. In total, non-assisted expenses were $13.5 million in the first quarter of 2023, up $1 million, or 8.3%, compared to the fourth quarter of 2023. The increase was primarily due to higher salaries and employee benefits and occupancy expenses. The increase in salaries and occupancy were primarily related to our new Northern New Jersey Regional Center and branch, as well as the upgraded space in Westchester, Pennsylvania. We also continued to add lending staff, in particular, our asset-based lending team, and some of the other teams that Pat mentioned. With deposit pricing pressures persisting, we are refocusing our efforts on expense control. We have already identified some cost savings opportunities on a standalone basis and associated with the Malvern acquisition that we will be initiating in the back half of this year. For example, we recently announced that our Cranberry branch location will be closing on June 30th of this year, The Cranberry location is within four miles of our Monroe branch, and we expect a seamless transition of our customers to the Monroe location. While we believe the current interest rate environment will continue to put pressure on our margin, we are excited about the opportunities that lie ahead in 2023. Our recent hires and new locations, coupled with the expected closing of the Malvern acquisition, will help us continue to generate core loan and deposit growth, and combined with very strong credit quality metrics, and efficiency gains, we are well positioned to maintain strong core profitability. At this time, I'll turn it over to Darlene Gillespie, our Chief Retail Bank Officer, for her remarks. Darlene?
spk01: Thanks, Andrew. Considering all that has been happening in the industry, we continue to remain focused on our key strategic objectives related to the deposit side of our business. That focus includes deposit acquisition and growing our existing deposit base. It has been a challenging start to the year, but we are optimistic. We remain diligent in working towards our deposit growth goals with seasoned bankers and a sales team that understands the mission. We rolled out deposit campaigns to promote and drive activity into our new location in Fairfield, New Jersey, and the relocation of our Westchester PA branch. We also expanded the campaign to assist in our effort to mitigate deposit outflows as a result of funds moving into higher yield money market funds and treasuries. After the recent bank failures, our branch team members and relationship managers went to work assuring our customers of the quality of our business model and the strength of our bank. Our quick action helped us to retain deposits, but we did experience some outflows. Total deposits decreased $52 million in the first quarter. However, we remain true to our core belief of growing the relationships we maintain with our clients, noting that very few of our clients have left the bank but have reduced their balances and or shifted funds into interest-bearing vehicles. We began the first quarter with an approximately $61 million decline in total deposits in January. as we allowed some higher-cost funds to leave the bank. We saw an increase of approximately $35 million in deposits in February, and deposit balances were relatively flat from February month end through March 9th. After the Silicon Valley and signature closures, we experienced some declines, but attribute most of those declines to seasonal outflows and continued movement of customer funds to higher-yielding brokerage accounts. Total deposits declined approximately 26 million in March. But so far in April, we are now slightly positive in a year-to-date deposit growth. We saw an increase this quarter in our cost of deposits, 48 basis points from Q4 as a result of the rising interest rates the Fed has been using to combat inflation. And clients simply have become more rate sensitive, and we continue to evaluate our pricing accordingly. We also had approximately $30 million move into our reciprocal deposit program in Q1 compared to minimal activity in Q4. Now, I'll notate some of the key factors of our deposit performance. As mentioned, total deposits decreased $52 million during Q1 as a result of a number of factors, rate competition, uncertainty in the market, and normal business activity and fluctuation. Nine interest-bearing demand deposits as a percentage of total deposits decreased to 20.7 percent compared to prior quarter at 22 percent. Time deposits as a percentage of total deposits increased to 24.7 percent as compared to 23.1 percent at December 31, 2022, driven primarily by promotional CDs. Combined money market and savings balances as a percentage of total deposits were flat at 40.8%, and interest checking remained relatively flat at 13.8%, compared to 14.1% at Q4 quarter end. As noted earlier, our cost of deposits has increased 48 basis points, resulting from the competitive landscape. We continue to remain mindful of this when considering future pricing adjustments. Our deposit mix has shifted towards interest-bearing products, but we have some great initiatives in conjunction with our marketing team with a balanced approach between NID, non-interest-bearing, and interest-bearing products. Although we experienced some deposit outflows, we've actually generated approximately $80 million in new commercial deposits which is evidence of our success of growing our commercial portfolio. Overall, we remain optimistic as we are seeing deposit activity normalized in the second quarter. Our deposits remain solid. We are onboarding new clients that are taking advantage of our cash management services, reflecting their commitment to growing with our banks. Our small business banking group has hit the ground running with enhanced service offerings to the small business segment, which is adding significant value to our deposit activity. Our branch team members are benefiting from some enhanced training, which is helping to encourage quality conversations with our clients, resulting in uncovering deposit opportunities. And lastly, we have a healthy deposit pipeline with active campaigns out in the market to drive in new customers and new deposits All of these initiatives are positioning us for a positive trajectory through the remainder of this year. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?
spk05: Thanks, Darlene. I'll try to provide some additional information not already covered by the team. After a strong fourth quarter, I think we had another very good quarter in the first quarter of 2023, As you've heard, loan growth was $55 million, which puts us at an annual growth rate of right around 9%. You'll recall last year, loans grew by $260 million, but the fourth quarter showed slower growth than did the other three. Last year, we closed and funded, on average, during the first three quarters, $126 million in new loans. In the fourth quarter, we closed $83 million in new loans. Reasons for this slower growth then were first, we were a good deal ahead of plan throughout 2022, which meant we could be more selective. And through the first six months, loan growth was weighted towards investor real estate loans. So again, we were selective about what we pursued in the second half. And lastly, the impact of the economy on interest rates was helping cool loan demand on the investor real estate side. And that also led to a reduction in loan payoffs during the quarter. which again are normally centered in investor real estate. The first quarter kind of mirrored the fourth quarter of last year. We are still being very selective about new business. We prescreen prospective loans a lot more than we did in the past, and we're focusing on loan type and the degree of overall relationship we think we can get. New loans closed and funded in Q1 totaled $86 million, up slightly from Q4. Loan payoffs were $35 million in Q1, up a bit from Q4, but well below the average level of payoffs for 2022, which was around $48 million per quarter on average. The other factors impacting net loan growth for any period are normal term loan amortization and line of credit changes, borrowings and repayments. Like the fourth quarter of last year, all this resulted in good growth in the CNI side of the portfolio, which is what we talked about a number of quarters, brings with it floating rate interest rates on loans, as well as higher relationship deposits. Last year, for example, CNI loans closed and funded were under 50% of all new loans. In the fourth quarter of 2022, the percentage of new loans falling into the CNI bucket rose to 70%. of total new loans. Now in Q1, as you heard Pat mention, C&I loans comprised almost 80% of new loans closed and funded. So we're seeing good results there. At this point, I'll describe our loan pipeline, which continues to look good. The numbers we discuss here are based upon probable funding, which means we project first year usage and multiply that by a probability factor. based upon where in the approval process the loan request is. That means, for example, that a loan that's already approved will have a higher probability of closing than one that just went into underwriting, for example. At March 31st, our loan pipeline stood at $218 million, down 6% from $233 million at the end of Q4. However, the total number of individual loans in the pipeline rose slightly, from 222 at year end to 227 at March 31st. So the activities there on average are a little smaller. Overall, I'm satisfied with the pipeline. With the rising rates and economic uncertainty, things have slowed a bit, but we're still seeing good activity. We're taking a very cautious approach, as I mentioned, to underwriting new business, especially in investor real estate and construction lending. as well as with any new prospective customer we look to bring into the bank. We set a loose target a few years ago, no more than 50% of loans in the pipeline being from the investor real estate sector. Investor real estate loans on the pipeline at the end of 2022 were just below 50% of total loans on the pipeline. We were happy to see at March 31st that investor real estate loans were only 31% of the pipeline in terms of dollars. and 22% in terms of the number of loans in the pipeline. And related to deposits, we continue to track on our pipeline anticipated deposits as a percentage of loan buy-in. An interesting point we've seen is that as C&I business in the pipeline has grown overall, so has the amount of expected deposits. Expected deposits to probable funding at March 31, 2023, was 34%. This compares very favorably to a year ago when the same ratio was 10%. Regarding asset quality, Andrew's comments on the earnings release lay out where we are. Net charge-offs were low in Q1, non-performing loans up only slightly. Delinquent loans at March 31st were low, around 35 basis points. This figure for us includes workout loans and administrative delinquencies where A harder maturity was hit. There's no credit problem, and we're in the process of renewing it, but for some reason it drags on and is on the past due loans report. To provide a frame of reference regarding delinquencies, last year on March 31st, the delinquency number was 46 basis points, and in March 2021, it was 37 basis points. Overall, things from my perspective continue to look very good, and credit metrics are solid. Obviously, there are certain sectors within the industry that are more susceptible to current economic challenges. I can tell you that we are doing all the things we can around setting and monitoring concentration limits and stress testing portfolio. We continue to be very well diversified within investor real estate portfolio itself. The segment getting most of the attention in all markets is office space. Office exposure for us makes up 4% of our loans. The average size of our loan in this segment is a million and a half dollars. Our weighted average loan to value in this segment is 65% and debt service coverage is close to two, two times. No serious delinquencies in this segment, none on non-accrual, none criticized or classified. And it's important to note that all of our exposure is within our geographical market area, and we don't have any exposure in any urban or city area, which seem to be more prone to having a continued impact from COVID-19 and work from home. From the standpoint of underwriting, it's natural that areas with low opportunities for deposits are now low on our priority list. I've mentioned the shift to a greater focus on CNI, Investor real estate loans in the office segment, speculative construction loans, et cetera, are very difficult to get done. Sensitivity analyses are done ahead of time, showing much higher rising interest rate scenarios than we ever did in the past. As one would expect under these economic conditions, we're anticipating a greater level of scrutiny by our regulators. That's only natural. We've always received good grades in this area, and we expect to continue to do so. We've been expanding our credit administration area. One new project recently finished and up and running is a more robust monitoring of credit policy exceptions. We brought in an outside vendor, and instead of monitoring and reporting on the top six key policy exceptions, we now monitor and report to the board all policy exceptions, however minor. So in summary, in 2023, we are planning on continued growth and meeting goals and objectives. From the lending side, we talked previously about a number of new priorities. Obviously, the pending merger with Malvern Bank is a top priority. Things are going well there. From my perspective, we continue to meet with our lending counterparts there very frequently, every week or two. In northern New Jersey, as you heard, we opened our new northern regional office in Fairfield, Essex County, and have a relationship management team in place there. Our new regional office in Westchester, Pennsylvania is open. In fact, the official grand opening celebration is this afternoon, and there's a relationship management team there as well. Late last fall, we announced our equity fund banking initiative. This team has closed a number of loans, generated solid deposits, and has a strong pipeline. And last quarter, we announced the hiring of a seasoned banker to build out and develop an asset-based lending team. I'm happy to report that Mike Marino now has his team in place and is building its pipeline. We're excited about all these projects. Each in its own way will enable us to continue to grow the bank successfully in the coming years. That's my report for lending for the first quarter. I'll turn things back over now to Pat for final comments. Pat?
spk09: Great. Thank you, Peter. And thanks, Darlene and Andrew. Appreciate the additional insight there. And at this point, I would like to turn it back to the moderator to open things up for Q&A.
spk02: Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on your telephone keypad. If you'd like to explore your question, you may press star followed by two. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Nick Cuccarale from Hofty Group. Nick, your line is now open. Please go ahead.
spk04: Good morning, everyone. How are you? Good, good.
spk07: How are you, Nick?
spk04: Good, thank you. So I wanted to start with the CNI initiatives and the strong growth there again this quarter. I know you've addressed this in your annual shareholder letter in the past, but longer term, can you share your vision for the composition of the loan portfolio over time?
spk09: Yeah, sure, Nick. It's a good question. And, you know, there's no magic number. And as you can appreciate, um, portfolio mix shifts tend to be a little more gradual, although, um, you know, mergers can create opportunities to impact that, that change over time. But, you know, we've, we've kind of been in the 50, 55% range on investor real estate and, uh, I think we'd like to see that move down closer to 50% and then maybe even between 40% and 45% over time. But I don't want to be beholden to a number that in and of itself isn't critical. We want to continue to take the best opportunities that are available to us across all the business segments where we operate. And while doing that, we also want to see a gradual shift to a little more C&I and owner-occupied I think step one is getting to the point where C&I and owner-occupied together are roughly equal to the investor real estate portfolio. We're not there yet, so that would be kind of the near to medium-term target. And from there, we'll have to see what the best opportunities are moving forward. But I think if we can do that, Nick, we can continue to keep our overall CRE to capital ratio low. down close enough to the guidance where we can continue to be effective players in that space, while at the same time, I think, enhancing franchise value and enhancing the deposit franchise by being more active on the CNI side.
spk04: That's very helpful. From a geographic perspective, where are you seeing the most opportunity right now, or is it pretty broad-based across the footprint?
spk09: Yeah, I mean, we have things broken up into sort of four regions, right? We've got a team in North Jersey, we've got a Central Jersey team, we have a South Jersey team, and we have our Southeastern PA team. And I can tell you the pipelines and the activity in all the markets are good. So, you know, we're not seeing any significant differences in either volume of opportunities or quality across those segments. Everybody's... performing well, the pipelines are active, and while we may be a little more selective, there's plenty of good opportunities in each of those markets.
spk04: Great news. Then in terms of expenses, I appreciate the commentary on the new hires and the reinvestment in the business. I know you mentioned some opportunities in the back half of the year, but in the near term, is there some relief expected in the second quarter, or is this a good standalone run rate for the next few periods?
spk09: Yeah. I mean, listen, there's certainly things in the quarter that are non-recurring. Obviously the merger related is, is the most obvious and, you know, the security sales piece. And then you got, um, you know, some expenses that were tied to the build out of the, uh, you know, fit out of the new locations. But, you know, we also had new hires that came along during the quarter. So, you know, Q2 will be a full quarter's worth as opposed to a partial quarter. Um, You know, as Andrew mentioned, we've got a number of things we're looking at. You know, we've already highlighted an opportunity on the branch side. We've got a number of things we're looking at on kind of the non-interest expense, non-personnel side. And then, obviously, over time, we have to see how much further we need to go on the expense side to make sure that we can meet our return hurdles. So it's always that balancing act between – reinvesting in the franchise, operating not too lean so that, you know, you're doing everything you need to do from a safety and soundness perspective. But at the same time, we got to meet, you know, the critical return hurdles that our shareholders have. So the point, I guess, Nick, is we're keeping an eye on all that. We're trying to strike the right balance. I think in the short run, you're going to see expenses run a bit higher than you've seen in the past for us, partly because as a result of the new strategic initiatives, partly as a result of some inflationary pressure. And then the third piece is, you know, we were operating in a couple years where there was just kind of a standard amount of open position vacancy, if I can call it that, where the tight labor market just made it harder, took longer to fill positions. You know, we're seeing some loosening there, and so positions are getting filled faster, which is kind of another component. You know, we're obviously looking closely at our standalone expense base. We're obviously very focused on making sure that the combination with Malvern is done, you know, optimizing efficiency there. So I think the good news is there's opportunities. None of it's going to, you know, wave a magic wand, but certainly I think as we look towards the back half of this year, you know, as a result of better revenue from some of these initiatives as well as tighter contracts, expense control, I think we'll start to see those operating metrics improve a bit.
spk04: I appreciate the color. And lastly, I wanted to touch base on share buybacks. I believe you're limited with the deal pending, but given the projected close at the end of June, could you remind us how many shares are remaining on your authorization and your appetite for a purchase at this level?
spk09: Yeah, I don't have the exact numbers. Andrews might have them, but I think the short answer is there's plenty of capacity to um you know one of the things we'll need to look hard at when i mentioned balance sheet flexibility tied to the merger right you've got a couple of unique things that happen when you're combining two franchises one of which is you got to mark the market all the assets so in a world where you know we don't currently mark everything to market you sometimes have assets with lower yields but you know you can live with them and there's no sense crystallizing the losses but in a world where you're crystallizing losses, all of a sudden you start thinking about, well, would it make sense to reposition some of the assets and, you know, in essence, deliver a little bit to, you know, both improve earnings, but also improve capital and potentially even improve capacity for buybacks. So that's one of the things, excuse me, that I think is interesting as we look at the various options related to the combination
spk02: um you know depending on how we end up putting things together um yep as a reminder if you'd like to ask a question you can press star followed by one on your telephone keypad our next question for today comes from manuel navas from da davidson your line is now open please go ahead hey i think you were cut off there um
spk08: you were talking about some possible, uh, repositioning with, uh, Malvern transaction that could be lever of the bank, um, could potentially increase capacity for buybacks. Could you kind of finish that thought?
spk09: Yeah. Sorry. I, I wasn't sure where, uh, where you lost me, but yeah, no, I guess, I guess the point is, uh, you know, given the current rate environment and the requirements under the mark to market accounting, I think it, uh, you know, uh, at the time of a transaction, there's, uh, flexibility to reconsider the different options around balance sheet composition. And I guess the point is we're glad to see that we've got flexibility. I think there's a few different ways we can put the combined banks together. And to the extent that one potential scenario involves potentially uh, selling off any non-core assets. And as a result, you know, boosting capital and the ability to do buybacks. That's, that's a scenario. I think we need to look, uh, look long and hard at no, no definitive decisions have been made. I guess the point is, um, you know, we have some flexibility leading up to the closing and we're going to look at all those options because, uh, obviously, uh, with the stock trading where it is, we want to have the ability to, uh, do buybacks if it makes sense.
spk03: So just to add to that, we have a currently approved plan. 1.2 million pairs are still available to be repurchased. We have been kind of tied up because of the acquisition, but we are probably going to free up here to be able to be at least a little bit more active. And as Pat mentioned, we'll analyze all our options here at couple months, but we do have a large chunk of shares that are approved.
spk08: Just a quick question on timing. So the deal closes at the end of this coming quarter, or this current quarter, and then you could probably talk about some of the early signs of, or at least the early balance sheet plans by the July earnings call? Would that timing seem to make sense?
spk09: Yeah, I think that's right. I mean, obviously, the timing of the close is estimated at this point. We have our annual meeting tomorrow. Hopefully, you know, we'll have our shareholder approval squared away for both us and them at the meetings tomorrow. And then, you know, we need to get the regulatory sign-off. But, you know, we're still hopeful that that will come at some point over the – you know, the next few weeks and, you know, assuming we have the shareholder and the regulatory approval, we think we could be in a position to close before the end of June. And assuming that all comes together, Manuel, then, you know, I think we would, yes, be in a position to talk in a lot more specificity around, you know, the optimal combination from a balance sheet management standpoint.
spk08: And that's all going to also come to head because, you know, Malvern also has a little bit of a higher loan-to-deposit ratio, and that kind of increases the need to increase your own funding on the deposit side. Just kind of talk through how you're thinking about it as you approach the close.
spk09: I think you're exactly right, but to the extent that there are opportunities to sell down non-core or lower yielding loans, you know, it has a variety of benefits, right? You can redeploy the cash into higher yielding short-term investment options. You reduce the capital requirements. You lower the loan deposit ratio. You build liquidity. So, you know, I think for all those reasons, it's something we've got to take a good hard look at.
spk08: Is there any more color you can give on kind of the near-term NIM? I know there's a little bit more pressure, but just kind of thoughts here, how the Fed, possible Fed increase would impact things. Just kind of thoughts on the near-term NIM, if possible.
spk09: Yeah. We're obviously taking a hard look at that, as everybody is. I think what Andrew said is right. It's most likely that you'll see some continued NIM compression in the short run. But, you know, the longer-term question really is around, okay, if the Fed's done at the next meeting, you know, what does the economic data look like and how quickly do they start moving in the opposite direction? I think, you know, the good news from our perspective is with the increased activity On the CNI side, we're seeing, you know, loan yields on new production that are at pretty healthy levels. And so even though deposit costs continue to move up, you know, we're adding loans at a rate to help offset some of that impact. So, you know, the exact magnitude of the pressure in the short run is a little hard to predict, but, you know, we certainly think that... As the Fed pauses, you'll start to see a slowdown in terms of the increases on the deposit side. And then, you know, the question becomes, as you move towards the end of the year, where do we head from there? Is the Fed going to need to lower because the economic signals aren't great? Or are we going to sort of live in a, you know, just a newer, normal, higher rate environment? You know, time will tell on that.
spk08: Hey, has this environment, I know you're being a little bit more selective on loan growth. Has this environment changed any of your targets for loan growth for the year, or it's just too early to tell?
spk09: Yeah, I mean, I think at this point, you know, we're not in the business of constantly changing our budget, but I would tell you that two things. I think there's enough good quality loan business to meet the budgeted number that we mentioned, you know, plus or minus $200 million in growth. But at the same time, we're not going to chase it for the sake of chasing it, right? I mean, if liquidity pressures persist or, you know, funding costs move meaningfully higher and we're not generating the yields we need on the new loan production, then we're not going to do it. So, you know, it's got to be it's got to be quality business and it's got to be economically attractive business. And at the end of the day, if we find those opportunities and we get to 200, that's fine. And if we end up coming in below that, you know, I kind of view it in the football analogy, right? You got to take, take what the defense gives you, right? You got to take what the market gives you. And we're not going to, we're not going to shoot for 200 because it's a number that we came up with at the beginning of the year. We're going to add quality new customers at a rate where we can generate a positive return. And, If that means slower growth for a period of time, that's okay.
spk08: Okay. Hey, quick question on the pipeline. Has the methodology changed at all, that you're being a little more selective? Is it just that the pull-through rate might be a little bit lower? How should I think about the pipeline versus other disclosures of it, given you're being a little bit more selective?
spk09: Yeah, I mean, it's a fair question. I think you look at the pipeline as the universe of opportunities and it's down a little bit, but not a ton. And I think that's good news because that just means, you know, based on what we decide to do, we could, you know, find those opportunities to grow if it makes sense. And, you know, selectives, to some degree, can be about credit, but it's not always just about credit, right? It's about, can we get the commitment for a meaningful deposit relationship? Can we get the yield that we think we need? Can we get the loan to value that we think we need? Can we get the amortization repayment schedule we think we need? So, you know, it's a variety of factors that come into play. But, you know, I think to some degree, right, we're going to we're going to hold firmer on the deal structure and pricing and deposits that we think we need. And in this environment, if the borrower doesn't agree, then, you know, we move on to the next opportunity. So, I don't know, Peter, let me let you jump in here for a minute on that question.
spk05: No, I think that's exactly right. I mean, the change is light as they may be in the makeup of the pipeline. A lot of it has to do with rising rates. I mean, there's less lately less real estate deals out there, but there's still investor real estate deals out there. And we're taking a harder look at those and some that are solid credits where the pricing might've been thin. We might've done those in past years, right? But, uh, we're, um, you know, we're being this as we talked about a little bit more selective and, uh, focus more on taking a pass on loans where we think we can't make the return we need or get the, uh, relationship business that we need. The relationship side is on the C&I side. If you focus more there, you're going to see a drop off in real estate.
spk08: I appreciate the color. One last question from me and I'll step out. Is there a possibility that you could have buybacks before the deal closed? Just kind of walk me through through that, um, those hurdles or, or is that something you're not contemplating at the current time?
spk09: Yeah. Uh, I think the short answer is yes. Right. The big near term kind of hurdle, if you will, or our constraints is the shareholder meeting. So, uh, my understanding through discussions with council is once, um, the shareholder approval comes in, assuming we shareholder approval and it's, uh, then announced to the market, that could open up a window of opportunity before, you know, potentially needing to go back into a blackout period related to regulatory feedback or approval. So the short answer is yes, there could be a window. It just depends on the timing and how things play out.
spk08: And is there a desire?
spk09: At these prices? Sure. I mean, I think you look at the You know, we think a lot of our strategic initiatives will generate great long-term shareholder value, but it's hard to imagine an investment that would have a quicker and more immediate positive impact than buying your own stock at 65 cents on the dollar.
spk08: Okay. Thank you very much. I'll step back and take it. All right. Thank you, man.
spk02: Thank you. As a reminder, if you'd like to ask a question, you can press Start followed by 1 on your telephone keypad. Our next question comes from Howard Hennick from Stericycle. Howard, your line is now open. Please go ahead.
spk07: Yeah, I think my question was answered, Pat. It was just about buybacks. Obviously, you're held up because of the merger.
spk06: When do you think you'd be able to do it if you wanted to? Not until the merger closes or is there any period before the EVO?
spk09: You know... It depends. You know, the two key variables, Howard, are shareholder approval and regulatory approval. So once shareholder approval is secured and that news is made public, assuming there's no new information on the regulatory side, that should open up a window. And then, you know, if and when we get regulatory feedback, depending on what the feedback is, that could create a new blackout period. And then obviously, once the deal's closed and the announced closure happens, then, you know, we would have a new opportunity once earnings came out, you know, depending on the timing. So those are the three variables, shareholder approval, regulatory approval, and the earnings window. And depending on how those things play out, there could, should be a window in between shareholder approval and regulatory feedback, so.
spk06: Okay, thank you.
spk09: Sure.
spk02: Thank you. At this time, we currently have no further questions, so I'll hand back to Patrick Ryan for any further remarks.
spk09: Yeah, nothing further here. I think I had seen a note that Nick Cucciarelli had jumped back on, and I didn't know, Nick, if you had any additional questions, but if not, then I think that would conclude the call.
spk02: Oh, I can see Nick has just jumped back into the queue. Are you happy for me to take his question?
spk07: Yes, please.
spk02: Okay, sure. Nick, your line is now open. Please go ahead.
spk04: I just wanted to thank you for taking my questions. All of them have been answered, so I appreciate it, guys. Sorry for being disconnected.
spk09: No problem. Sorry about the technology glitch there, but glad we got your questions answered, Nick.
spk04: Thank you.
spk02: At this time, we currently have no further questions.
spk09: I just would like to thank everybody for their time and interest, and I look forward to regrouping with folks after second quarter earnings. Thank you, everyone. I'd like to welcome everyone today to First Bank's first quarter 2023 earnings call. I'm joined today by Andrew Hitchman, our Chief Financial Officer, Darlene Gillespie, our Chief Retail Banking Officer, and Peter Cahill, our Chief Legislator.
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