First Bank

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank Earnings Conference call, third quarter 2025. 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 this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Patrick Ryan, President and CEO. Please go ahead.

Patrick Ryan Thank you, Kate. I'd like to welcome everyone today to First Bank's third quarter 2025 earnings conference call. I am joined 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.

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, 2024, filed with the FDIC. Pat, back to you.

Thanks, Andrew. I'll hit on a couple of the high-level points from the quarter and then turn it over to the team to provide some of the details. In the third quarter, we saw a nice increase in net interest income, thanks to continued loan and deposit growth coupled with net interest margin expansion. Our net interest income was up $1.5 million compared to the second quarter, and up $5 million compared to a year ago. Our margin was up six basis points the link quarter, It was up 23 basis points compared to a year ago. And the pre-provision net revenue number increased to 1.81 percent from 1.65 percent in a prior quarter. So, all nice positive movements upward in terms of our overall revenue and margin. That strong revenue growth coupled with expense control growth continued to improve profitability. Our net income was up $3.5 million or 43% compared to Q3 of 2024. Our return on average assets improved 28 basis points to 1.16% compared to 0.88% in the third quarter of last year. Our earnings per share improved to 47 cents in the third quarter, a 46% increase compared to Q3 a year ago, and our return on tangible common equity came in at 12.35%. We did see continued loan portfolio diversification within the quarter. Our investor commercial real estate to capital ratio came down, to 370% from a high of 430% after we closed the Malvern acquisition. Our specialized lending groups now make up 16% of total loans, but within that broader category of specialized lending, no niche makes up more than 5% of total loans. Overall, credit quality seems to be holding up with the exception of some softness we saw in the small business segment, specifically companies with revenues under $1 million. Our MPAs and our non-performing loans did decline during the quarter, and our allowance coverage ratio to non-performers increased to 2.93%. Charge-offs were elevated but remained very manageable. Third quarter results also included two months of, quote, unquote, extra sub-debt expense, as we did not pay off the old sub-debt until September 1st of this year. And during the quarter, we bought back almost 120,000 shares at an average price of $14.91. In summary, the core operating trends look good, and they're improving. The economic outlook remains uncertain. But we're well-positioned for whatever rate environment may emerge, and obviously we're keeping a close eye on the overall level of economic activity and what that might mean for credit quality going forward. I'll turn it over now to Andrew Hipschman, our CFO, to give you a little more detail on the financial results. Andrew?

Thanks, Pat. For the three months ended September 30th, 2025, we recorded net income of $11.7 million or $0.47 per diluted share and a 1.16% return on average assets. We saw another quarter of solid loan growth, however, down from the first and second quarter as we continued to prioritize relationships and profitability over volume. Loans were up $47 million for the second quarter or 5.6% annualized. Over the last 12 months, loans have grown $286 million, or over 9%, with our core areas of focus leading the way. CNI grew $194 million in owner-occupied commercial real estate. Loans grew $40 million. Our evolution into a middle-market commercial bank can be seen in our loan mix shift over the past 12 months. CNI and owner-occupied commercial real estate are now a combined 42.2% of loans compared to 40% of loans at September 30, 2024. And our investor commercial real estate loans, which includes multifamily and construction and development, are now 49.8%, down from almost 53% one year ago. Growth was also solid again on the deposit side. Balances were up over $55 million during the quarter, or an annualized 7%, as we continue to execute on adding and maintaining profitable relationships. The growth primarily came in time deposits, along with some interest-bearing demand deposit growth. Darlene will expand on this, but we saw a strong response to promotional campaigns and markets around our new branches. We also utilized some brokered CDs to help reduce FHLB advances by $25 million during the quarter. I'll highlight that our deposit growth occurred even as our average cost of deposits declined three basis points to 2.69% for the quarter. Net interest income increased $1.5 million compared to the second quarter, primarily due to margin expansion on a growing balance sheet. Our net interest margin grew six basis points to 3.71% in the third quarter, despite increased costs on our subordinated debt. We carried sub-debt totaling $65 million from June 18, 2025 through September 1, which is the date we redeemed $30 million of outstanding debt. This carry resulted in about $486,000 in additional interest for the third quarter. Looking ahead, we continue to manage a well-balanced asset and liability position, which should result in continued strong net interest income generation. We will benefit from lower sub-debt interest costs. However, we expect the immediate impact of Fed rate cuts to be slightly negative as it takes longer to move deposit costs lower compared to the immediate impact of rates moving lower on our variable rate assets. We also continue to expect a larger decline in our acquisition account increase over the next several quarters. Overall, we expect our margins to remain relatively stable as we continue efforts to push deposit costs lower and replace the runoff of lower-yielding assets with higher-yielding loans. Our asset quality metrics at September 30th continue to be strong. NPAs to total assets declined to 36 basis points compared to 40 basis points at June 30th and 47 basis points one year ago. The linked quarter decline reflects a decrease of $1.6 million in non-performing loans. Our allowance for credit losses to total loans increased slightly to 1.25% at September 30th from 1.23% at June 30th. We recorded $1.7 million in net charge-offs during the quarter compared to $796,000 for the second quarter and $15,000 in net recoveries in the first quarter. Year-to-date charge-offs are almost exclusively in our small business portfolio. We continue to value this business for the sticky deposit relationships it generates, its impact on improving our community presence and brand loyalty, and it builds a pipeline of future middle market commercial customers. Pat summarized our credit outlook, and Peter will discuss it further in his comments. Non-interest income totaled $2.4 million in the third quarter of 2025 compared to $2.7 million in Q2. The decrease reflects lower swap fees, loan swap fees, as well as $397,000 gain on the sale of a corporate facility that occurred in the second quarter. Non-interest expenses were $19.7 million for the third quarter compared to $20.9 million in Q2. Recall that Q2 expenses included $863,000 in one-time executive severance payments. Additional declines in other line items reflect efficiency initiatives as the bank continues to prioritize effective expense management. Darlene will expand on this in her remarks, but we have some new branch openings that will drive costs slightly higher, but we also have an offsetting branch closure in process and other cost mitigation initiatives in place that should help to minimize cost increases. Tax expense totaled $3.6 million for the third quarter with an effective tax rate of 23.4%. This compares to an effective tax rate of 22.9% in Q2. We anticipate our effective tax rate going forward will be relatively stable. Our efficiency ratio improved to 52% and remained below 60% for the 25th consecutive quarter. We also continue to expand our tangible book value per share which grew 46 cents during the quarter to $15.33. We continue to be pleased with our earnings momentum and our progress in executing our strategy to evolve into a middle market commercial bank. Our capital ratios remain strong, allowing for capital flexibility. This affords us the opportunity to further drive shareholder value through ongoing investment in the franchise and technology, a stable cash dividend, and share buybacks as applicable over time. At this time, I'll turn it over to Darlene Gillespie, our Chief Retail Banking Officer, for her remarks. Darlene?

Thanks, Andrew, and good morning, everyone. As Pat and Andrew noted, we experienced solid deposit growth in the third quarter, with balances up $55 million, or 7% annualized, from Q2. This reflects increased business development activities by our sales teams, and the success of targeted promotions which were implemented to drive engagement with our newly opened branch locations. While at a higher cost, promotional campaigns tend to generate strong relationship deposits and have proven successful as part of our branch network optimization efforts. We also saw growth from some CD promotions implemented to strategically onboard funding in support of our strong loan growth. But we're not only growing high-cost deposits. The point-in-time balance sheet hides an important success that I'd like to highlight. Our average non-interest-bearing deposits grew by 21 million during the quarter and by 52 million year-to-date, reflecting strong relationships that provide critical interest-free funding. During the third quarter, our average cost of interest-bearing deposits declined by two basis points to 3.27%, and our overall cost of deposits declined by three basis points to 2.69%. This occurred despite growth coming from higher-cost promotional campaigns and some brokered funding to support our loan growth. It reflects our bankers' outstanding success in executing their dual mandate to both maintain deep customer relationships and lower funding costs. The initiatives and banker incentives we have in place to support these goals continue to be effective. Similarly, what's also hiding in our net growth is our continued success in managing out some higher cost balances over the past few quarters. If you look at the first nine months of 2025, our average money market deposits grew by about 25.1 million, or 2.4%, over the same period of 2024. But the average cost declined by 61 basis points, lowering the overall interest expense on these deposits by $4.1 million compared to the year-to-date period. And I do not believe we have fully realized the benefit of the Fed's September rate cut yet, but we have made solid progress lowering our pricing and managing interest expense through the first three quarters. Now I'll talk a little bit about our branch strategy, which has always been aimed at supporting engagement in our current markets and opportunistic expansion into adjacent markets. We opened a de novo branch in the Fort Monmouth section of Oceanport, New Jersey, extending our footprint into Monmouth County and increasing our New Jersey footprint to 10 counties. We also completed the relocation of our Palm Beach branch to Wellington, Florida, still in Palm Beach County. This location was part of our Malvern Bank acquisition and was originally in a small office suite. We now have a full service branch in a more convenient and accessible location to better serve our customers. We also also officially closed our limited service Morristown office in August and transferred those relationships and deposits to our nearby Denville branch. In line with our strategy to operate efficiently, we made the decision to close our Coventry, Pennsylvania branch in December of this year and transfer those deposits and relationships to our nearby Lyonsville branch. This decision allows us to better leverage our resources while continuing to provide high-quality service across our footprint. Needless to say, it's been a busy year for us with several branch openings and consolidations. We've focused on aligning our branch footprint with customer demand and growth opportunities. By year end, these efforts will result in a net increase of one branch in our network. I'll finish up with a note on rates and pricing. We've been very proactive in moving rates with the Fed cuts and expect to continue to do so. Now, this does take time and a measured approach. We've been able to grow deposits in many rate environments, and we aim to continue doing this provided the desired profitability levels can be achieved. At this point in our evolution, growth for the sake of growth is not our end goal. we will focus on growing our deposit portfolio through disciplined, relationship-driven strategies while remaining competitive in our pricing. Our goal is to continue to offer fair, market-aligned pricing supported by strong customer relationships and exceptional service. Our focus is on serving our customers, growing our customers and serving our customers well and profitably, And also, our team is doing an outstanding job toward this end. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Darlene. Well, Pat and Andrew have already commented on the loan growth we've experienced in the past quarter, as well as year-to-date, an annualized growth rate of 9%, I think, compares favorably to our peers. The third quarter was right in line with budgeted loan growth, and after two quarters of growth that were well ahead of plan, I think we're positioned to report good overall growth and earnings at the end of the year. For the past couple of years, I've reported on our goal to do more C&I business, which includes owner-occupied real estate, while maintaining a healthy level of investor real estate and consumer lending. and I'm happy to report that the trend of growing CNI businesses continued. New loans closed and funded for the nine months ending 9-30-25 were comprised 65% by CNI loans and 18% by investor real estate, the remainder consisting mainly of consumer loans. That's an increase in CNI lending from 2024 when CNI loans represented 64% of all new loans. The regional commercial banking teams continue to generate most of the loan growth for us. They represented 39% of new loans generated in Q3, followed by investor real estate at 28%, private equity at 18%, and small business banking at 9%. Our specialty areas, which also includes asset-based lending, are all at or very close to their growth plans for the year. Regarding investor real estate, we closed a number of new loans in the third quarter, but similar to previous periods, new loans were offset by payoffs. You'll see a bump up in investor real estate if you look at the schedules and the earnings release, but that was due mainly to a reclassification of a loan from owner-occupied to investor. Our goal over time is to moderate growth in investor real estate and manage more of that business in its own investor real estate team, focusing on relationships and loan concentrations, and that continues to go very well. A focus of most community banks is the ratio of investor real estate loans to total capital. As Pat mentioned, we hit a high point at 430% of capital after the Malvern acquisition, but got to 390% in March of 25, and finished Q3 at 370%, which is about where we want to be. The lending pipeline at the end of the third quarter stood at $283 million of probable fundings, down 6% from the level of probable fundings at June 30th. The number of deals in the pipeline, however, is up 5% from the end of Q2. If one breaks down the components of the pipeline at quarter end, CNI loans made up 68% of the overall pipeline, exactly where we were at June 30th, and up from 63% at March 31st. Overall, I'm happy with where the new business pipeline stands. We are anticipating a higher level of loan payoffs in Q4 than what we've experienced on average over each of the first three quarters, which is why, despite a strong start to the year, from the standpoint of overall loan growth, our target has remained in the 6% to 7% growth range. On the topic of asset quality, Andrew provided a good outline of where we are. I think things continue to be in good shape. The loan portfolio continues to be well diversified. Andrew mentioned some softness in the small business loan portfolio. We've made some adjustments there, and we anticipate a return to the quality we've experienced previously. Overall, it's a modest piece of the overall loan portfolio. I should probably also comment on what's been out there in the banking news about the fear of deteriorating credit quality and the quote-unquote one-offs cited by a handful of banks. I can only say that we don't do any lending into deals like what you read about publicly around first brands, tricolor, factoring, and borrowers not providing financial information. That's not what we do. And we have very limited exposure to NDFIs and none to private lenders. In summary, I think we had a good third quarter. Loan growth was in line with budget, and we expect to meet our loan growth goals for the year. That pretty much concludes my remarks, so I'll turn things back to Pat for any final comments.

Great. Thank you, Peter. Appreciate all the additional comments. And at this point, I think we'd like to open it up for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Justin Crowley with Piper Sandler. Your line is open.

Hey, good morning. Good morning.

Just want to start on expenses. You know, you've talked about tighter cost control before. So nice to see the core base now down two quarters in a row. You know, how would you describe some of the efficiency actions taken, you know, what they involve, what, if anything, is left to do, and where does that leave you on the thinking around run rate here over the next several quarters more specifically? Just, you know, factoring in your comment as well about some actions like new branches that could add to costs.

Yeah, no, absolutely. You know, Justin, we always are focused on costs, but at the same time, we don't want to miss out on important investment opportunities. I think you've seen over the last couple of years, we've invested in some new teams in terms of some of the specialty lending niches. We've invested in some additional branch locations and new markets for us. And we've invested in some technology, whether that be, you know, the online loan application platform or Salesforce, things like that. But I think in terms of big investments, We're at a point right now where we're just kind of digesting the moves we made. We're letting those new business units scale up. I don't see a lot of big new costs on the horizon. We are a year away from needing to make a decision on our core and how much we want to keep with our current provider versus spreading it out amongst other best-in-class operators. Always a little bit of a question mark on tech when you're doing a big core contract renewal. But again, I don't suspect there's going to be anything too outlandish there in terms of technology spend increases. And we've been very focused internally on just making sure we can get our non-interest expense to average asset ratio down. you know, to that 2% range and below since that's where we've been able to operate historically. So that's a little bit of big picture on expenses. I'll let Andrew jump in and talk a little bit about some of the initiatives and kind of, you know, where he sees the line item moving forward.

Yeah, thanks, Pat. I just add, I think Pat talked about this in previous calls where kind of You do a big acquisition, and then you get cost saves, and then you kind of recalibrate, and now we're just kind of recalibrating a little bit more and fine-tuning. We haven't done anything drastic to save money, like things like professional fees. A lot of that was kind of elevated because of some of the big projects we had going, implementation of Salesforce. We had consultants helping us with that. We had some other projects going on. So I think really the cost mitigation has been really just kind of settling in to where we're at, finding some excess spending where we could. I don't think there's any major initiatives that are going to significantly reduce costs from where we're at now. We will, obviously, like we mentioned, we will see a little bit of a creep for some of the couple of small, the branches we've done, new branches. But I think we can minimize expenses, keep them relatively flat, maybe, again, like some slight increases, always kind of heading into a new year. There's standard cost of living adjustments on things like rent and salaries and things. So we'll continue to see that. But no major new costs that I'm aware of or any major new cost-cutting initiatives, but we're going to just keep keeping a tight eye on things. We think we can continue to grow without adding meaningfully to the expense base and to the payroll. So, again, I think we're going to be able to maintain the total expenses at a relatively flat level.

Okay. And then I guess in terms of very near-term run rate, like next quarter, even if we do see a little bit of an increase given the new branches, it's just going to be modest. It's not going to be anything too eye-popping? Yeah, I think that's right. Okay. And then on the margin and some of the inputs, obviously the latest Fed cut came late in the quarter. But following that and what should be, I guess, some further reductions looking out here, and Darlene touched on it, but can you folks talk a little bit more on how aggressive or active you think you can get on lowering deposit costs?

I'll start and then I'll let Darlene provide a little more color there.

But, you know, at the end of the day, when the Fed moves, we move. As Andrew pointed out, it takes a little bit of time to kind of go through it. We have certain rack rates we can move down, and we obviously are taking a look to see are there areas where we can move more than what the Fed did. And so we try to be selective in certain product categories to see if we can even – move things a little bit further. But at the end of the day, our goal is to try to make enough adjustments on the deposit cost side to offset what we know is coming in terms of floating rate asset yield so that, you know, after a month or so, it should be a relatively neutral event from a margin perspective. And then separate from that, there's just kind of the work we do every day to drive core, low-cost, non-interest-bearing deposits, and move promotional customers into rack rates so that if we can make the impact of the Fed move neutral, then some of the mix improvements and some of the other changes we make can hopefully continue to drive costs lower. So, I don't know, Darlene, anything you want to add there?

I think, Pat, you touched on it. I would just add that we talked a lot about this over the past year and even early, sorry, late 2024, in which we've really been focused on lowering our cost of deposits, looking at specific portfolios and determining where we can make an adjustment without negatively impacting our customer base. One of the benefits that we have is our government portfolio, a good portion of that is tied to the effective funds rate. So as the Fed makes adjustments, we can make adjustments immediately. But I think everyone within the organization understands the message of competitive pricing, but not going overboard and not necessarily winning based on rates. So overall, I think that we do a really good job in managing our costs, and I anticipate us continuing to be able to do that as the Fed continues to make adjustments over the next couple of months.

You mentioned the government portfolio of funding. How much do you have in deposits that are like that, that are indexed directly to Fed funds?

Our government portfolio is approximately 12 to 13% of our total deposit base. And I would say 75% of that portfolio is tied to the effective funds rate. So we look to onboard full customer relationships when we look at deposit opportunities on the government side. And generally, when we bid on that business, the request is to tie it to an index. So we've been successful in winning business in that world by bidding based off of an index rate. And so I think, again, as we look at additional cuts down the road, we'll be able to make adjustments in that portfolio.

Okay, got it. And then just one last one. You know, you continue to be active on the buyback and seems like that should continue to some degree. You know, obviously with the stock right around tangible book makes it attractive. But what are other considerations? Like, for example, on capital levels, you know, what levels are you comfortable at? Or what do you think could serve as a good floor for you guys?

Well, you know, we always look at internally the total risk-based capital ratio, and we have a soft limit around, you know, 11 and a half that we try not to dip below if we don't need to. And then, you know, after that, it's just sort of looking at different uses for capital, and we're happy to see that based on, you know, despite the strong growth, based on the strong earnings, we've been able to see that level creep up over the last couple quarters. So I think we're in a position right now where, based on organic growth alone, we're growing capital, which gives us flexibility. And what we choose to do with that, you know, quote, unquote, additional capital that we're creating, will be a function of the opportunities in the market. Obviously, M&A could be one consideration, but we continue to be very selective there. You know, our dividend is relatively low, so we could take a look at that. And then depending on where the stock trades, we think we've got room to, you know, look at capital deployment in the form of the buyback. So, you know, we're at a level where we think capital ratios are growing nicely, and that gives us, you know, flexibility to kind of pull the levers that we think will generate the best returns.

Okay. Very helpful. I will leave it there. Thanks so much for the time this morning. Thank you, Justin.

Again, if you would like to ask a question, press star 1 on your telephone keypad. I would now like to turn the call over to Patrick Ryan. Please go ahead.

Thank you very much. I just want to conclude the call by thanking everybody for calling in. We appreciate your interest in First Bank, and we'll look forward to reconnecting with you after year-end results.

Thanks, everybody. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.