First Bank

Ladies and gentlemen, thank you for standing by. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank FRBA first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you. And I would now like to turn the conference over to Mr. Patrick Ryan, President and CEO. You may begin.

Thank you, Abby. I'd like to welcome everyone today to First Bank's first quarter 2024 earnings call. I'm joined by Andrew Hipschman, our CFO, Darlene Gillespie, our Chief Retail Banking Officer, and Peter Cahill, our Chief Lending Officer.

Before we begin, however, Andrew will say... 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 31, 2023, filed with the FDIC. Pat, back to you.

Thank you, Andrew. I'd like to start with a quick overall view. I think first quarter was an excellent quarter in terms of earnings produced. We did see the benefits of Project Sculpt. which as we've referenced in the past is our effort to create a leaner, more capital efficient balance sheet. We also saw continued strong asset quality performance and good cost controls during the quarter, all of which helped to lead to strong earnings results during the period. We did see a modest decline in loans outstanding by the end of the quarter, but that reduction came from declines in non-core investor real estate or acquired loans. We actually enjoyed nice growth in the quarter in our CNI categories. Deposits were flat, and the environment for attracting and retaining core deposits remains challenging. While we were successful in adding net new accounts during the quarter, movement of funds out of existing accounts and shifting of funds out of non-interest bearing continued to push deposit costs higher. Our loan pipeline remains very healthy, and we expect we'll be able to meet our lending goals for the year. With the sizable decline in CRE balances during the quarter, it's unclear where those balances will finish, but with the healthy pipeline we have, we think our overall lending goals will be met. During the quarter, we had a few non-core items that are worth mentioning. The after-tax impact of these various items was just under $300,000. We had a BOLI death benefit of $187,000. We also had a purchase accounting adjustment from the retired sub-debt, which produced about a $400,000 earnings benefit. And then offsetting that was about $200,000 in abnormal additional payroll taxes during the quarter. In addition to these items, we also had some other unusual items, which I'm sure if you read the release, you noticed. The first of which was the negative credit provision, largely driven by the overall reduction in loan balances during the quarter. And as you'll see in the report, our overall allowance to loans basically stayed about where it was in the prior quarter. And we also had a tax adjustment which led to a lower effective tax rate, and that added about $837,000 to earnings during the period. Going forward, we expect the tax rate should return to historical levels. So to hit a few highlights, our adjusted return on assets was 1.39%. which is basically in line with where we were last quarter at 1.38% and obviously at very healthy levels. Our adjusted diluted earnings per share was 49 cents, which is right in line with the prior quarter. Our tangible book value per share increased 3.2% during the period, and our efficiency ratio remained below 60% for the past 19 quarters now. So in summary, as we hoped, our scaled-down balance sheet is driving capital efficiency improved interest rate risk management, and continued strong earnings. While many banks remain stuck with large mark-to-market positions that constrain business, profitability, and strategic alternatives, our balance sheet is getting leaner and we have maximum flexibility to thrive as we move forward, even in a higher-for-longer interest rate world. At this point, I'd like to turn it over to Andrew to discuss some of the results in more detail. Andrew.

Thank you Pat. For the three months ended March 31st 2024 we recorded net income of 12.5 million or 50 cents per diluted share and a 1.41 percent return on average assets. Our strong quarterly earning metrics were driven by stable margin stable asset quality metrics and continued strong efficiency metrics. Our net income was positively impacted by credit loss benefit recorded during the first quarter. The benefit was primarily due to the decline in loans coupled with strong credit metrics. with non-performing loans declining by $7.9 million and net recoveries during the quarter when excluding a PCD loan charge off of $5.5 million, which was reserved for through purchase accounting marks at the time of Malvern acquisition. This led to our overall allowance for credit losses to total loans to decline to 1.22% at March 31st from 1.40% at December 2023, including general acquisition accounting credit marks that are not included in the allowance Our ratio increases to 1.56 percent. During the first quarter, we did not execute any additional loan or investment sales. However, we did continue to reduce our investor commercial real estate concentration. The additional payoffs and paydowns offset somewhat by selective new originations. During Q1 2024, investor commercial real estate loans declined by 42.8 million when including multifamily and construction and development. while owner-occupied commercial real estate and C&I loans increased by a combined $15.4 million. Overall loans were down $29.1 million during the first quarter of 2024. Total deposits were up slightly during the quarter. However, non-interest-bearing balances declined as we saw a continued shift of deposits into interest-bearing products. This contributed to a 20 basis point rise in the total cost of deposits during the quarter. The cost of deposits for the quarter was also impacted by some liquidity enhancement that we did at the end of 2023 and into the early part of 2024 by adding some additional broker deposits. In-market deposit pressure also impacted deposit pricing in the first quarter. We were pleased to maintain the overall level of deposit balances while market conditions continued to be challenging. While deposit costs increased, we believe that maintaining deposit levels to assist in paying off higher cost sub-debt and borrowings while maintaining strong liquidity was a net positive during the quarter. In addition, we had significant unused borrowing capacity at March 31st, 2024, and we pledged additional commercial loans to the FHLB subsequent to quarter end, which increased our capacity. Our net interest margin declined slightly to 3.64 in the first quarter of 2024, compared to 3.68% in the fourth quarter of 2023. We continue to benefit from acquisition accounting accretion, In Q1, 2024, we recorded an acceleration of accretion on the mark on the acquired Malvern sub debt, which was redeemed during this quarter. This acceleration reduced interest expense on subordinated debt. This led to an increase in the net positive impact on net interest income from acquisition accounting accretion to approximately 4.2 million in the first quarter of 2024, compared to an approximately 3.9 million positive impact on net interest income in the fourth quarter of 2023. Excluding the acquisition accounting income impact, we estimated that the margin declined by approximately nine basis points compared to the linked fourth quarter. Throughout the rest of 2024, our margin will benefit from the $25 million subordinated debt redemption, which was carrying a 9.79% rate. However, we expect continued margin compression from persistent deposit pricing pressure with a higher for longer rate settlement. The sub-debt redemption did lead to a reduced total risk-based capital ratio, but our ratio remained well above minimum capital ratios at 11.41% at March 31st. In the first quarter of 2024, total non-interest income increased significantly compared to the fourth quarter of 2023, primarily due to losses on loan and investment sales in the fourth quarter, which were net against non-interest income. In addition, included in our Q1 2024 Non-interest income was bank-owned life insurance income from a death benefit of approximately $187,000. Non-interest expenses were $17.8 million in the first quarter of 2024 compared to $17.6 million excluding merger related expenses in the fourth quarter of 2023. The slight increase was primarily due to an increase in salary and employee benefits, which is partially offset by decreases in professional fees, regulatory fees, marketing, and other expenses. The increase in salary and benefits was primarily due to standard salary increases, which typically take place in the first quarter of the year, and approximately $214,000 increase in payroll tax expense due to the year-end bonuses being paid during the first quarter, and some slight increases in benefit costs. The decline in the other expense categories from the prior quarter were related to certain elevated expenses in the fourth quarter, primarily related to certain residual mal-earned related expenses. We have now realized all of the expected cost savings from the acquisition. We continue to focus on operating efficiency, and even as we have seen pressure on our margin and the continued impact of inflation on our expense base, our efficiency ratio remained relatively stable at 55.6% for the quarter-ended Q1 2024 compared to 53.8% during the fourth quarter of 2023, and we continue to track well below peer averages. Our Q1 2024 tax rate was positively impacted by certain discrete or one-time tax adjustments that were primarily related to the finalization and filing of the final Malvern tax returns during the first quarter of 2024. And we anticipate our effective tax rate going forward will be between 23 to 25%. Although we continue to operate in a difficult rate environment, the efficiencies we gained from the Malvern acquisition and the balance sheet repositioning we executed during the second half of 2023 has already paid dividends and positioned us for a strong core profitability in 2024. At this time, I'll turn it over to Darlene Gillespie, our Chief Retail Officer, for her remarks. Darlene?

Thanks, Andrew. Good morning, everyone. I'm happy to share some of the deposit activity that took place throughout the quarter that has prepared us for what we expect to be a very successful 2024, despite the continued challenging deposit environment and this higher-for-longer rate sentiment. While total deposits were up slightly from the end of 2023, we are still experiencing shifts within our deposit mix as customers and prospects continue to seek the highest return for their funds. Our non-interest-bearing portfolio decreased 1.1%, while our money market and savings increased 1.6%, and time deposits increased 1.1% from Q4 2023. The market consensus on Fed rate hikes has changed considerably from the beginning of the year. In January, we were expecting six cuts. Now we're left wondering if there will be any with the recent strong job report and CPI exceeding market expectations. This has caused us to pivot. Throughout the quarter, we began to lower rates on some of our promotional products and took some selective cost-cutting initiatives. without losing sight of the need to stay competitive amidst ongoing pricing competition in the market. While we are laser focused on reducing our cost of deposits, this mixed shift in pricing pressure has contributed to the increase of 20 basis points from the end of Q4 2023, as mentioned earlier. However, this has not changed our strategic focus in which we will continue to seek opportunities on board non-interest-bearing and low-cost deposits, as well as determine ways to lower our costs while still meeting the needs of our clients. The changes we are making today may not have an immediate, significant impact, but it allows us to position ourselves for the months ahead. We continue to grow our deposit base by expanding, existing, and developing new relationships through organic growth. We onboarded over $40 million in new core deposits in Q1, although offset by some of the attrition we're experiencing in the former Malvern footprint as we continue to reshape our balance sheet for optimum efficiency. We're okay with letting some of these higher price deposits and single service relationships go and replacing them with lower cost full relationships. We have some great initiatives we kicked off this past quarter that will assist us in our growth efforts as we continue to build and expand relationships throughout the remainder of the year and beyond. We onboarded a new escrow product, making it easier for our clients with the need to conduct their business on our platform. Our online account opening service will be kicked off at the end of this month. And we continue to evaluate our deposit products and determine ways to make them more attractive for our clients and stickier for the bank. We continue to provide training to our frontline sales teams to have effective conversations and improve the customer experience. We have two new branches in our pipeline for 2024, one being a de novo in New Jersey and the other a relocation out in our PA market. Overall, our deposit pipeline remains healthy, opportunities in the commercial and government space as we continue to develop new full service relationships. At the end of the fourth quarter 2023, I talked a little bit about non-interest bearing funding, managing our cost of deposits, and organic growth. And these will continue to be key drivers to deposit activity in 2024. So that has not changed and it will remain throughout the rest of this year. Lastly, we know the deposit and rate environment will continue to be challenging. However, we're extremely optimistic given what we've accomplished so far this year. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer for his remarks. Peter.

Thanks Darlene. I'll try to provide some color now on how things are going in lending. As you read and heard previously and again today, our goals are to prioritize relationships while reducing concentrations in investor real estate loans. And in the first quarter, as you've heard, loans were down $29 million from the end of December. We've talked for a while about our disciplined approach to new business and our focus on what we think will be profitable relationships. This means relationships that bring deposits as well as have adequate pricing on loans. This also means a greater focus on C&I loans, which for us includes owner-occupied real estate. And you can see in the schedules in the earnings release, and as Andrew recently mentioned, those segments continue to head in the right direction. This strategy for us is not new. And you'll hear when I talk about our pipeline that the volume of business we're looking at is as robust as ever. What we unfortunately encountered in the first quarter was a large number of asset sales on the part of our clients. And not all were in the investor real estate segment. New loans closed and funded in Q1 totaled $78 million. In comparison, $78 million exceeded the quarterly average for all of last year. It's important to note that these funded loans in Q1 consisted of 71% CNI loans and only 22% investor real estate, the remaining being primarily consumer. The issue in Q1 was that we experienced $74 million in payoffs, basically offsetting the new loan growth. When we get payoffs, we track the reason for them, determining whether they were caused by refinances out of the bank, where we have a chance to retain a loan, maybe choose not to, asset sales resulting in the payoff of our loans, and loans that have undesirable credit quality, so we let them grow, or sometimes the borrower has excess cash and chooses just to pass off. In Q1, asset sales made up 55% of the payoffs. And the largest individual loan getting paid off from an asset sale was a C&I borrower where the business was sold. These large number in payouts coming from asset sales and the largest one being a C&I customer are both a little out of the ordinary for us. I can now comment on our loan pipeline. Our pipeline at March 31st stood at $300 million of probable fundings up from the December 31st level of $212 million. I'm very pleased with these results. I especially like that the $300 million is from 266 different loans, certainly the highest number of loans in a couple of years, and an indicator of active calling efforts and good loan diversification. Our sales teams are out looking for the type of good relationship business that we've described, and the pipeline reflects the results of their activities. I should also mention, if we break down the pipeline, the various components, CNI loans make up 55% of the pipeline, investor real estate 40%, and consumer loans about 5% of the overall pipeline. We're seeing every day the results of our active sales efforts and solid pipeline. Moving past the negative loan growth numbers in the first quarter, loan fundings in April so far have been excellent and have outpaced the first quarter loan runoff and the surprise reduction in loans. I expect we'll have good quarters in Q2 and beyond, and meet our loan growth goals for the year. On the topic of asset quality, a hot one these days, particularly when it comes to real estate, I don't have much to add to what the earnings release and the earnings release supplement show. The information provided describes what I think is a stable and sound condition. We did see a modest uptick in delinquencies at quarter end. You won't see this in the release that we made yesterday, but it will show up in the call report at 10Q. which will be released shortly. This uptick was due to one large loan we acquired from Malvern that went 31 days past due before making its payment. All of our numbers are now back in line. The asset quality table in the quarterly financial highlights section of the release shows positive trends in all areas. The earnings release supplement has some good slides covering geographic diversification. and importantly, the diversification of the investor real estate portfolio. That one slide, I believe it's number 14, further breaks down our fairly modest office portfolio, virtually all of which is in our core market, but none located in major cities such as New York or Philadelphia, where a lot of the stress in the office market has been felt. I think overall, credit quality continues to be good, and there continues to have been no surprises from the former Malvern portfolio. To kind of wrap things up, our regional teams, including a small team in Palm Beach County, Florida, acquired with the Malvern merger, are actively in the market seeking to drive deposit and loan business. Our specialty areas, asset-based lending, private equity banking, and small business banking are all showing good signs of success. And along with this, we continue to explore new ways to expand our business in all of our markets. Those are the highlights for lending and conclude my comments related to Q1. I'll turn things back over now to Pat for any final comments you might have.

Thank you, Peter. Appreciate the comments. And at this point, I'd like to turn it back to the operator to open things up for the Q&A.

Thank you. We'll now begin the question and answer session. If you've dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. And your first question comes from Justin Crowley with Piper Sandler. Your line is open.

Hey, good morning, guys. Just wanted to start with some discussion on the margin here. You know, obviously not quite out of the woods yet in terms of lingering pressure on the funding side. So just curious, you're thinking on if and when that starts to level off and you start to see continued pickup on the asset yield side. When you start to see that benefit the margin, is it something that might not take shape until we start to see rate cuts? Or how are you thinking about that heading, you know, if you look to the end of the year?

Yeah, it's a great question, Justin. I wish I had perfect visibility into that, but I can give you a few thoughts. At this point, 90 days ago when we had our call, we were envisioning a flattish margin as a result of the market rates moving lower, which was starting to take a little bit of pressure off the deposit funding, partially because the wholesale options were getting cheaper and everybody was Being a little less aggressive on pricing as a result of those alternatives. Well, obviously, when the markets rates moved higher, the wholesale rates followed along and that alternative cheaper funding sort of went away. So long story short, I think we expect that we'll see some continued pressure on the margin if the current rate environment remains in place over the next quarter or two. I don't think the Fed has to move in order for things to stabilize or improve, but I do think the market needs to start anticipating rates coming down, alleviating or reducing the cost on the wholesale side, and I think that ends up driving rates and liability costs overall down a bit. So I know I'm not giving you an exact answer to when that changes, but I don't think it has to be the Fed actually lowers. But I do think the market needs to go back to thinking the Fed is going to lower. And at this point, I'm not sure we know when that's going to happen. So.

Okay, got it. And then just like thinking about the hire for longer, you know, just like looking at, I guess, the loan side, of course, it's got its impacts on funding costs. But with the focus on CNI, is there any, you know, signs of maybe borrowers pulling back at all, just given the idea of hire for longer, and just variable rate nature of that book? Or so far, you know, your growth targets? Are they unchanged in terms of building out that loan bucket?

Yeah, listen, I think our growth targets are unchanged. We went into the year with reasonable but modest compared to prior years targets in the plus or minus 5% range. And given the volume of activity and the probability adjusted pipeline being higher than we've seen it in the last couple years, I don't think we're seeing a slowdown in activity. Now, that being said, it takes a while for you know, loans to get from idea phase to closing. And a lot of the activity now probably was getting pushed forward when folks started to anticipate rates coming down. But I think once you get the engine started, if it's an important project, you're not going to pull the plug if rates moved higher by 25 basis points or whatever it is. So I think there's plenty of good loan demand out there. We're seeing really nice activity. throughout our community banking, C&I segment, throughout our new niche commercial segments. And listen, there's plenty of opportunities on the real estate side, too. We're just being a little more selective there. So I don't think there's going to be an issue with loan demand. You know, the challenge is going to be the cost of funding that loan growth as we move forward.

Right. Okay. I appreciate that. And then just, I mean, just thinking about that loan mix over the longer term, um, as far as investor Cree, you know, sitting today at 40% of the book, um, and you know, maybe it's tough to quantify, but is there a level that you target or like to see that get to over time? Um, and then maybe just some commentary on, you know, how long, I guess that could be a governor, uh, on overall balance sheet growth.

Yeah. Um, listen, I think, um, Our goal on the investor real estate side is to continue to be selective, obviously, with the heightened regulatory focus and areas of added concentration risk. We want to be selective. We want to do the right deals that are low risk with relationship-based borrowers that bring some deposits along with them. And I think as you get selective, that creates kind of a natural constraint on how much growth we're going to see there. And So we're at a point now where we're seeing close to $9 million in monthly amortization on the portfolio. So there's a certain amount of running we need to do every month just to replace the $9 million that's paying off and paying down. So I think we're going to look to hit our 5% growth goal with largely CNI and owner occupied. And I think the target on the investor side will be will be to stay, you know, plus or minus flat, but it'll depend on the opportunities we get to take a look at. So, Peter, anything you'd add to that?

No, I mean, I think you covered it. There's a heavy volume of investor deals that are running off every month, aside from amortization. I mean, deals that just get refinanced out or sold or whatever. So, there's a a lot of work going on with that team just to keep things flat. I think that's basically what you said, but I don't have much to add there, Pat.

Yeah, and I think, Justin, it's also interesting when you look at the market, there was some concern on my end as banks face increasing regulatory pressure around commercial real estate lending. What would that mean in terms of capital availability for for good projects and for existing projects are performing well that need to, uh, you know, basically renew when they mature. And it's interesting, uh, we're seeing a lot of non-bank players, um, you know, filling that void. The insurance companies have gotten more aggressive in terms of, uh, pricing and long-term fixed rates given their business model and their ability to take on those, uh, longer term fixed rates. And, uh, Obviously, private credit has been very active and continues to be active and hedge funds as well. So it's bad news in one sense because it's a more competitive market for investor deals than I would have expected. But in terms of the overall health of the landscape, I think it's good news that there's plenty of capital available for performing assets. And that ultimately is important for everybody that plays in the space. So Yeah, there's money available and deals are getting done. It's just not all getting done through the banks right now.

Okay, I appreciate the color there. And then, you know, I know a lot of the focus coming out of the Malvern acquisition has been integrating the deal and replenishing capital. But thinking more maybe medium term, and it almost feels silly to ask right now, just given the environment, but where do acquisitions sit in terms of prioritizing capital deployment? You know, again, of course, recognizing that, you know, continues to be slow there as far as transaction activity.

Yeah, listen, we try to be consistent with our M&A philosophy, right? We think the right deals at the right price can create value and add scale and certain situations add attractive lines of business. But at the end of the day, the first part of the sentence is the most important, right? The right deals at the right price. And if there are sellers out there that are interested in strategic long-term value creation deals that are more partnership type deals. I think those are the deals that might get done over the next six to 12 months. But anybody who's looking to just sell, cash out, get a premium and go away, I don't think there's a lot of players out there that are going to be offering those types of exits right now. So, you know, I think it's important that you stay in the game, that you keep having conversations. But it's equally important that you don't lose your discipline in terms of your criterion for attractive transactions. So we're going to continue to look, but I don't have any real sense for probabilities right now.

Okay, I appreciate it. All right, great. Thank you. I appreciate you taking the questions.

Yeah, our pleasure. Thank you, Justin.

And as a reminder, it is star one if you would like to ask a question. And we will take our next question from Manuel Navas with DA Davidson. Your line is open.

Hi. This is Sharon G on for Monroe. Thank you so much for taking my question. I'm sorry. Who's this calling in? Sharon G on for Monroe.

Oh, OK. Good morning.

Morning. So I want to talk a little bit about, so the press release mentions investments in business units and information technology. What do those investments include, and do you have any OpEx run rate targets?

Well, we haven't given any specific guidance on OpEx, but, you know, as we've looked at the analyst models that are out there, we didn't see any projections on the expense side that seemed, you know, way off the mark from what we anticipate. And a lot of the tech investments that we've been looking at over the last 12 to 18 months are sort of in implementation mode right now. So we don't see large additional expenses built in beyond the current run rate. And, you know, we're looking forward to some of the benefits of those investments. New technologies as they roll out, for example, you know, online deposit account opening should be up and running for us both on the commercial and the consumer side over the next couple of months. And, you know, we're also implementing some middleware technology, which is going to give us some additional flexibility to, you know, tie in best in brief technologies and not be so beholden to our core. And so we're continuing to look for opportunities there. And some of it may even create opportunities for us, either on the deposit or the fee income side, if we can find interesting partnerships in terms of, you know, FinTech or banking as a service that meets our risk profile parameters. So we think we've got some interesting things happening, and we're looking forward to share the results of those initiatives as we move through the end of this year.

Yeah, that sounds great. I think that's it for me. Thank you.

All right. Thank you.

And as a reminder, it is Star 1 if you would like to ask a question. And with no further questions at this time, I will now turn the call back to Mr. Patrick Ryan for closing remarks.

Wonderful. Thank you, Abby. Well, at this point, I would just like to thank everyone for... tuning in, and we'll look forward to catching up with everybody when we release earnings at the end of the second quarter. Thanks, everyone.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.