FRBA - NASDAQ

I'd like to welcome everyone today to First Bank's Third Quarter 2020 Earnings Call. I'm joined by Andrew Hibshman, our CFO; and Peter Cahill, our Chief Lending Officer. Before we begin, however, Andrew will read the Safe Harbor statement.

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, 2021 filed with the FDIC. Pat, back to you.

Thank you, Andrew. I'll make a few high-level comments, and then we'll turn it back to Andrew and Peter for a little more detail. Overall, I'd say it was another quarter of really strong profitability. We saw our net interest margin expand by another 21 basis points during the quarter. And we also enjoyed continued tangible book value per share growth of $0.35, which is a nice accomplishment given the interest rate environment and the impact that that’s having on the available-for-sale securities portfolio. So, nice to see the tangible book value growth. We did also see a significant reduction in our non-performing loan portfolio, which we're very pleased about. Return on assets of 1.57% during the quarter, which is close to an all-time high. And we continue to bring in high-quality new bankers as a result of some of the M&A activity in our markets. And we believe the merger fallout will continue to drive customer and banker acquisition as we move forward. A couple of key highlights on the performance side. Our return on tangible common equity was north of 15% during the quarter and our efficiency ratio was below 50% for the seventh straight quarter. Our pre-provision net revenue return on assets was over 2% at 2.12 and our net interest margin has been over 3.5% for the past several quarters. Importantly, our non-performing assets to total assets declined to just 21 basis points. On the lending side, we've had $185 million in year-to-date net loan growth and that's exclusive of PPP, which is about a 12% annualized growth rate. We continue to see strong asset quality metrics. In addition to the decline in our non-performers, we also saw very low delinquency numbers during the quarter. Our SBA group remains very active. We're currently holding off on loan sales in this interest rate environment given the reduction in spreads and the high yield that those lows are earning for us. And on the lending side, we also saw some nice activity from a new private equity fund banking team that we brought in, and we think we'll continue to see nice activity from that group as we move forward. On the deposit side, we're up $75 million year-to-date, but the market for deposit generation is clearly getting tougher. We think we will see an acceleration of deposit costs, but that's certainly to be expected given how fast rates have moved up so far this year. In summary, our strong profit trends continue in quarter three and we're well positioned to finish the full year with great results. We see real good strength in our lending area and we're well-positioned to take advantage of the opportunities that present themselves and even to be selective in this environment. And we're also refocusing our organization after a period of excess liquidity. The team in all areas is getting refocused on the deposit side and we're making strong strides there to continue to drive deposit growth going forward. We think that our diversity of commercial banking opportunities as we move forward. We talked about SBA and fund banking where we already have a presence and also on the higher side within the middle market area. And we're also looking at new opportunities that may present themselves in niche opportunities within commercial, whether that be, things like asset-based lending, or small business lending, which we think will drive further diversification and profit enhancement within our portfolio. And then, we continue to look for opportunities outside of the traditional space, whether that be, Fintech or government banking or other areas where we continue to drive core deposit growth. So, a lot of exciting things going on right now and at this point, I'd like to turn it over to Andrew, for a little more detail on the financial results.

Thanks, Pat. For the three months ended September 30th, 2022, we earned $10.2 million in net income or $0.52 per diluted share, which translates to a 1.57% return on average assets. The primary factors, as Pat mentioned, contributing to another strong income quarter included an improving net interest margin, strong credit quality metrics and effective management of non-interest expenses. Net income increased $1.4 million from the linked second quarter and was up $1.2 million compared to Q3 2021. Commercial loan growth continued in the quarter, excluding PPP loan forgiveness, Total loans were -- our net loans were up $36.5 million, compared to an increase in non-PPP loans of $84 million in Q2 and $65.3 million in Q1 of 2022. During the third quarter of 2022, $6.2 million in PPP loans were forgiven, leaving $3.9 million in PPP loans outstanding as of September 30th. During Q3 2022, we earned $200,000 in PPP fees, compared to $493,000 in Q2 2022 and $768,000 in the third quarter of 2021. As of September 30th, 2022, we have $136,000 in deferred PPP loan fees remaining. Total deposits were up $25 million during the third quarter of 2022, but non-interest-bearing deposits were down $16.4 million. The small decline in non-interest-bearing deposits was expected as the current higher interest rate environment is putting pressure on all banks deposit pricing and mix. Due to our disciplined deposit pricing, our total cost of deposits increased only 27 basis points in Q3 2020, compared to the linked prior quarter despite a 300 basis point increase in the federal funds rate since March of this year, primarily due to an increase in rates on our variable rate loans, coupled with our disciplined deposit pricing, our tax equivalent net interest margin increased to 3.7% and for the quarter ended Q3 2022, compared to 3.76% in the previous quarter. Excluding PPP fee income, our margin would have been approximately 3.93%, in the current quarter versus 3.68% in the linked second quarter. Our margin benefited from the rising rate environment as our variable rate loans and investments repriced immediately while our deposit portfolio has repriced more slowly. Our asset liability management approach continues to be conservative with the goal over the next few quarters to get to a balanced or potentially slightly liability-sensitive gas position. Currently, we continue to be well positioned for the rising rate environment with a slightly asset-sensitive balance sheet. However, deposit pricing pressures have increased, as the Fed continues to raise rates, we anticipate that we can maintain our margin at the third quarter level. When the federal funds rate by those, we will inevitably see pressure on the margin, but any declines will be off our currently historically high-levels. Liquidity levels increased slightly during the quarter. Our continued loan growth has put pressure on our excess liquidity position, but we have ramped up our core deposit gathering efforts. We also increased our use of brokered deposits and FHLB advances during the third quarter of 2022. As we mentioned in our last call, we have reduced our brokered deposit and FHLB balances by a combined $57 million over the period from July of 2021 through the end of June of this year. So we had additional capacity to use these ancillary sources as loan growth opportunities continue to present themselves. Our strong organic loan growth has also contributed to our investment portfolio being relatively small when compared to peers. We have also been focused on credit and interest rate management in our investment decisions, the size and short duration of our investment portfolio has limited our unrealized losses, but these unrealized losses are impacting our stated equity capital somewhat. We also had some additional buyback activity in Q3 2022, although slightly less than the prior quarter as we repurchased 59,885 shares at an average price of $13.97 or a total of $833,000 during the quarter. These purchases also reduced our capital levels, but only marginally impacted our tangible book value per share because the shares were bought at only a slight premium to our tangible book value per share of $13.43 as of September 30, 2022. In spite of these factors, we were able to increase our tangible book value per share by $0.35 during the current quarter because of our strong net income. Based on another quarter of modest charge-offs and strong asset quality profile, we reduced our allowance for loan losses as a percentage of loans to 1.09% at September 30, 2022, excluding the impact of PPP loans from 1.13% at June 30, 2022. This reduction was primarily supported by nonperforming loans declining by 57% when comparing the balance at September 30th to the June 30th balance, and our nonperforming loans are now only 23 basis points of total loans. In the third quarter of 2022, total non-interest income decreased to $944,000 from $1.5 million in Q2 2020. The decrease from the second quarter was primarily due to lower loan sale income and lower loan fees. Our SBA loan activity and pipelines are strong. However, sales activity has been slower than expected, primarily due to the rising rate environment, which has reduced the premiums earned on sales. And in most cases, we are retaining the loans on our balance sheet. Loan fees are low, primarily due to no loan swap activity during the third quarter of 2022. While, non-interest levels may continue to fluctuate, we do not expect a significant increase in non-interest income, at least over the next several quarters. Annualized Q3 2022 non-interest expenses were 1.81% of average accident average assets compared to a peer average of 2.4%. In total, non-interest expenses were $11.7 million in the third quarter of 2022, up $328,000 or 2.9% compared to the linked second quarter. The increase was primarily due to higher salaries and employee benefits, combined with some smaller increases in various other expense categories. We continue to be laser focused on expense control, but we anticipate our quarterly expenses will continue to increase slightly from Q3 2022 levels as we continue to add staff and inflationary pressure continues to affect numerous other expense items. With continued loan and deposit growth, a historically strong margin, which has benefited from the rising rate environment, strong credit quality metrics and effective management of non-interest expense, we are well-positioned to continue our strong and improving core profitability trends during the remainder of 2022 and into 2023. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Andrew. As it usually does, the earnings release summarizes pretty well, the results for the lending area. Pat and Andrew, at this point have highlighted a lot of the numbers in their remarks. My comments are always focused on non-PPP related results. As Andrew pointed out, PPP loans are about down now declining to under $4 million during the quarter. The third quarter represented a period of good growth for the bank. As Andrew mentioned, after growing $65 million in Q1, we followed that up with a loan growth of $84 million in Q2 and we tacked on another $36 million in loan growth this quarter. 6 months -- that total organic growth at this point is $185 million and that puts us in a good position to meet or exceed our loan growth goal for the year of $200 million, which is -- represents right around 10% organic loan growth. Our loan generation continued to be very good in all areas. We closed and funded new loans totaling $101 million in the quarter and experienced payoffs of $63 million both the New Jersey region and the Pennsylvania region are doing well as is our specialized lending group. Specialized lending encompasses our large investor real estate borrowers, SBA lending and consumer lending. Last quarter, I believe I mentioned that the investor real estate team had led the way that quarter with approximately 60% of our newly funded loans. This quarter, our New Jersey region, the largest in terms of relationship managers, closed and funded the most new business at around 43% of the total with the Pennsylvania region right behind them at 42%. This fluctuation between lending areas is normal. And as I've mentioned before, all are producing well and have good pipelines. As I stated previously in this rising rate environment outside of variable rate loans for fixed rate loans, you typically commit to spreads over a base rate, usually a five or seven year treasury rate and fixed interest rates on loans only two to three days prior to closing. I think we've remained disciplined here. Andrew mentioned loan yields in the portfolio for the quarter internally in the lending area, we get a report monthly of what the weighted average loan yield was a new loan closed that month. As I mentioned last quarter, and as you might expect, those rates continue to decline, I referenced an average loan rate -- weighted average loan rate at the last quarter of 4.62% for example. Now our average yield for September was 6.37%. Looking at loan pay-offs of $63 million in Q3, this represented our largest quarter for payoffs this year, just above the amount we experienced in the second quarter. We track the regions the loan gets paid off and on a year-to-date basis, the underlying asset being sold, usually real estate was the biggest reason for a loan payoff at 49% of total payoffs. I'm also happy to report that a $5 million piece of the total payoffs included alone in our workout area where we were taken out by an investor in that project. Also, when you look at the loan composition tables in the earnings release, note that normal term loan amortization and line of credit activity in addition to new loans and paid off loans activity all contributed to the movement in the numbers in those tables. This point, I'll talk a little bit about our loan pipeline. It continues to look good. As we've discussed before, our pipeline numbers are based upon what we call probable funding, which means we project anticipated 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 is already approved, we'll have a higher profitability at closing than well one that just went into, say, the underwriting process. At September 30th, our loan pipeline stood at $240 million, up from $226 million at the end of Q2. The average at month end for the nine months this year was $249 million 1st September we were around 3% off the average so far for the year. Factors that impact the month-end numbers include the number and size of loans that we've recently closed and funded, and therefore moved off the pipeline. Changes in probability factors as loans move through the process of negotiation, underwriting, documentation, et cetera, can also impact those numbers. One positive we continue to experience with the loan pipelines is that investor real estate loans in the pipeline have been maintained at less than 50% of the total. We set that 50% target some time ago, to not let this type of loan grow unabated. And only in June, we actually get investor real estate loans in the pipeline under the target. Overall, I'd say that, based upon the economic uncertainty we face, we've taken on a more cautious approach to underwriting new business, especially in investor real estate and construction lending, obviously. We continue to sensitize projected results, and we take a firm line on speculative projects. They're just not as easy to do anymore. As loans move through the pipeline, they eventually hit our projected loan funding report. This report looks after 60 days, project funding and payoffs for Andrew's team in finance. Again on the list of projected funding the loan must be approved and moving towards closing. That list projected loan funding, net of payoffs continues to look strong. It's really putting us in a good position to meet or exceed our goals for the year. Toward that end, Pat had mentioned our equity fund banking initiative. We have a couple of other new projects we're working on as well. The first is a new regional office in Westchester, Pennsylvania. Right now, we are running that market out of a very small space on the third floor of the building in downtown Westchester. We're in the process of moving to what was a vacant full service bank in Westchester that will provide room to grow as well as be a better retail location with a drive up, et cetera. Similarly, in Northern, New Jersey, we're working on a new northern regional office. We've outgrown the space we have up there, and we're targeting locations for a new office as well as retail space. We're excited about these projects, we'll provide the needed space to continue to grow as well as give us additional visibility in those markets. Lastly, regarding asset quality, there's not much to say beyond Andrew's comments and within the release things from my perspective, continue to look very good. Credit metrics are solid, and as a percent of total loans, delinquencies were at record lows at the end of Q3, lower than they were in either Q1 or Q2. That's my report for lending for the third quarter. I'll turn it back over now to Pat for some final comments. Pat?

Great. Thank you, Peter. Well, at this point, I would like to turn it back to the moderator to open things up for the Q&A portion of the call.

Great. Thank you. [Operator Instructions] And our first question of the day is from the line of Nick Cucharale of Piper Sandler. Nick, your line will be open now, if you'd like to proceed with your question.

Good morning, everyone. How are you?

Good. Good morning, Nick. How are you?

Good. Thank you. So I wanted to start with loan growth. Historically, you've pretty consistently posted high single-digit, low double-digit organic loan growth, and you're certainly on track for that again this year. It may be too early at this point, but given the remarks calling for an acceleration of deposit costs, how are you thinking about the pace of loan growth going forward?

Yes. Good question, Nick. I mean, our ability to generate good opportunities and to have a full and healthy pipeline has been pretty consistent. So we're not seeing a real slowdown in demand yet. I think, depending on how high rates move, you might start to see a little bit of a slowdown from a market perspective. But I also expect, we're going to start to see a pickup in opportunities based on some of the recent M&A activity. Obviously, Investors Bank acquired is a big deal in our markets, and I think there will be some opportunities emerging from that and down the road, just because of the way mergers tend to create displacement. I think the Provident and Lakeland merger will create further opportunities. So even if the market slows a little bit in general, in terms of demand, I think, from a market share perspective, we're going to have lots of opportunities. So then you get to the other side of the equation, and I think the heart of your question, which is, how you're going to fund those opportunities. And, obviously, our strong desire is to fund it with core deposit growth and to the extent that we can hit our goals on that side, I think, we'll continue to produce net organic loan growth in line with what we've done in years past. It is possible if for some reason, the ability to generate core deposits slows a little bit, we may have to be a little bit more selective on the lending side in the short run. But I don't anticipate that to be the case, Nick. I think, we've got a lot of exciting initiatives underway on the deposit side, and I think we'll be able to continue to grow at moderate, at healthy levels, consistent with what we've done in the past. But you're 100% right. If for some reason, the core deposit growth becomes more challenging, we may end up slowing the loan growth a bit, but I don't think it would be a large decline from historical levels.

That's very helpful. I just wanted to follow up on the loan sale commentary. Just given the shift in the SBA environment, it's not surprising, there's more of a willingness to portfolio these assets rather than sell into the secondary market. Should we expect any loan sales in the near term?

Well, listen, I never say never, right? But I think, in general, our mindset right now for the new SBA production is to hold it. At some point, the cost benefit on holding on to the guaranteed piece may change, in which case, we may look to explore selling off those guarantee pieces down the road. So, I don't look at it, Nick, as a -- if we book it now and we don't sell it, that just means we're going to hold us forever. I think the sale of the guaranteed piece is something we could look at, at any point in time, depending on the rate environment. And in the meantime, we can enjoy the healthy yields that those loans are providing. So, I think, maybe, it creates a bit of a pipeline or backlog of future sales. But when exactly those might come to fruition, I think, it's a little hard to predict at this point.

Yes. Makes sense. And then lastly, you've been opportunistic with stock repurchase in the past, and I saw the regulatory approval for the new authorization. Can you share some color on how you're thinking about the repurchase and capital return more broadly.

Thank you, Nick

Is there a target you have in mind in terms of how big this could become over the near to medium term?

Yes. I mean, listen, I think any time we're launching a new venture or entering a new niche, our philosophy is to walk before we run. So for that group within a 12-month period if they could do, call it, $20 million to $40 million, I think that would be a really good start over time. Maybe it could become 5%, 10% of the total portfolio, but I don't see it becoming the primary source of growth in the company, so.

Got it. And then maybe a housekeeping question. I thought it looks like if I'm reading right, for release, loan fees turned negative there, anything driving that? Was there any sort of like accounting nuance to drive that to the negative level? Thanks.

Yes, I'm going to ask…

Pat, I’ll take that one. Yes.

Andrew, yes, go ahead.

Yes. It's the way that certain SBA servicing assets are recorded. And if -- we had a few large SBA loans pay off early, and those servicing assets kind of get written off net against income. Normally, we have enough kind of loan fee income to offset some of those nettings, but this quarter, we were kind of slow from a loan fee amount. That's also where our swap fee income goes through that line item, and we didn't have any this quarter. So it was really just an accounting thing and it related to SBA servicing assets.

Any guidance where we think about that in the fourth quarter in 2023?

Yes, I think it will get back to positive. It's going to be fairly low. Again, the primary driver of those -- some of those larger loan fee quarters was when we were doing a decent amount of loan swap activity. So it will be back to positive numbers, but it will be -- loan fees shouldn't be a significant piece of the puzzle going forward, at least in the short-term.

Got it. Thanks for taking my question.

Thank you, Dave.

Thank you. [Operator Instructions] And we'll take our next question from Manuel Navas of D.A. Davidson. Manuel, your line is now open.

Hey, good morning, guys.

Hey, good morning, Manuel.

With your NIM expectations of kind of stable with Fed fund increases, what kind of are you’re assuming on the deposit beta front, has that shifted at all?

Yes. I think on the deposit beta side, we're seeing it move closer to the levels we had in our models and we're starting to see a bit of an inflection point during the quarter where deposit costs were moving up a little bit faster than loan asset yield. Of course, that could change again if and when the Fed moves in November and December. But I think, Andrew, on the beta side, we're probably right now at a level that's listen with what's in our models, but maybe you can provide a little bit of detail there.

Yes, we typically model and each product, we model a little bit differently, but betas around 50%. I think we're getting closer to that number, but obviously, we were way below that early. I definitely think that we're going to see betas that are lower than what we've seen in some previous rate cycles, because of all the liquidity that was in the market. But yes, we're definitely created to get kind of closer to kind of that normal expectation. I think it's what we talked about, I think, in a previous call that this is fairly regular, right? The first couple of moves, betas are very low and then the beta do start to move significantly. So we're definitely going to see, I think betas closer to that number I just threw out there, but we'll wait and see what's going to happen here, but we are seeing some additional pressure on the betas on the deposit side now.

So it's kind of like your conservative modeling on the interest-bearing deposit beta or is that the total cost beta of 50%?

That would be on the interest-bearing side.

Okay. That's helpful. Of the new PE fund, is that all from one organization? And is that capital frontline, or is that like a couple of call lines, or is that working with PE sponsors?

Yes. So it's a couple of guys that we hired, they came from different banking organizations, but they had worked together in – in previous lives. And to be clear, these are folks that we hired that can do traditional C&I as well as the fund banking deal. So it's, call it, a partially dedicated group, if that makes sense. But -- as far as products offer yet, it's capital call line, it's banking services for portfolio companies, the traditional – traditional suite of services that private equity sponsors or their portfolio companies are looking for?

Okay. That's helpful. And is APL new personnel helping with that line, or is that also similar what you have

Yes, that’s an example…

That could carry.

Yes, that's an example of an area, where if we found the right person or the right team, I think it's a logical strategic fit, but at this point, it's still in the exploratory phase. But yes, I wouldn't be something we'd roll out without bringing in the requisite expertise either through banker acquisition or company acquisition. But -- it's an example of areas where I think as we continue to build and grow as more of a middle-market, commercial bank, that could be an area where we find the right group, it should be another little niche bolt-on opportunity.

All right. I appreciate that color. On the -- I had another question on the buyback, just circling back to that. If you saw growth slow for whatever reason, just maybe the economy hitting demand rates being higher, would the buyback potentially be an area where you could deploy more as like an offset to lower growth, or is it really just depending on pricing of shares?

Well again, I think, if we were in a lower growth environment and we got to a point where excess capital was well beyond what was necessary, then I think the buyback or the dividend would be vehicles we could use for deployment and how we -- how we think about which to use, I think, is some driven by when the stock is trading at lower levels, the buyback feels like the EG best solution, when the stock trend higher at some point, you start to think about the dividend in addition to or instead of the buyback.

Okay. Perfect. That's possible. I appreciate that. And I guess my last question is, as some of your expense commentary include the investment in like your two new offices and some of the new personnel? Is that all in?

Yes. So obviously, when we're looking out at the expense horizon, we're factoring in those potential future investments. I would say, when you look at the Westchester opportunity for us, it's a relocation into what we think is a better, more full-service location, but the net expense of the office is fairly comparable to the place we're in. So there's not a huge incremental cost. We just think an improvement in location and quality there. And then on the North Jersey side, the new office there, if it comes to fruition, would be a net incremental expense, but the place where we have some people located currently that would move over. That could be an opportunity for a sublease or sale leaseback. So again, there might be some incremental additional expense, but we have some ways to offset as well.

Okay. I appreciate that. Thank you. Thanks for your time today.

Yes, sure. Thank you.