Q2 2023 First Bank Earnings Call
Okay.
Thank you for standing by my name is Kayla Baker and I will be your conference operator today.
At this time I would like to welcome everyone to the first Bank F. R. B a earnings conference call second quarter 2023.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
You'd like to withdraw your question again press the star and one I would now like to turn the call over to CEO , Pat Ryan you may begin.
Thank you Kayla and welcome everybody to today's second quarter 2023 first Bank earnings Conference call I'm joined by Andrew Hibshman, Our Chief Financial Officer, Darlene Gillespie, our chief retail banking officer, and Peter Cahill, Our Chief lending officer before we begin however, Andrew.
I 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 made.
Not update any forward looking statements, we make today for future events or developments information about risks and uncertainties are described under item one a risk factors in our annual report on Form 10-K for the year ended December 31, 2022 filed with the FDIC that back to you.
Okay.
Thank you Andrew.
For all the Big News, obviously is the closing of the Melbourne Bank acquisition in mid July the financial results for the quarter do not include the combined franchises, but they do include some minor level of merger related costs.
The main themes from the first quarter continued into the second quarter.
Being deposit pricing pressure, which hurt the margin, but also continued strong asset quality metrics, Here's a key summary of some of the key developments during the quarter, we had strong deposit growth. Thanks to some sizable new commercial and municipal accounts.
We saw continued quality C&I loan growth.
As I mentioned, our asset quality remains very good with net recoveries during the quarter and very low levels of delinquency, we continued to ramp up our new C&I business units.
With each area of meeting or exceeding our budgeted plans year to date.
We have made as we mentioned people and technology investments and those investments are causing some near term drag on earnings. Nevertheless, we achieved a return on assets of close to 1%. Despite despite these strategic investments in industry headwinds.
This combination gives us unique balance sheet management options and flexibility specifically the combined company should end up leaner, maybe even a little smaller but more profitable as always we'll be reviewing all options available related to the size and makeup of our balance sheet and we'll follow the path that will drive the best read.
Adjusted profitability and shareholder value.
Regarding updates on the deposit and funding side as I mentioned deposits grew during the quarter, we were up $158 million, which is a combination of core commercial deposits as well as holding onto some wholesale funding to support the balance sheet with external liquidity during the quarter, we kept liquidity levels.
Higher than usual given the industry conditions plus the need for funding the cash portion of the Malvern acquisition, our noninterest bearing balances tick back up a little in the second quarter, which was nice to see but we're still down from where we were at the start of the year on the lending side, we saw a $44 million in loan growth in the second quarter all of that close.
Coming in C&I and owner occupied lending.
Our disciplined loan pricing and focus on the most attractive segments helped drive continued improvement in our overall loan yield during the quarter.
And overall, we continue our gradual evolution from historically, a primarily CRE focused community bank into more of our lower middle market commercial bank.
In summary, our core strategic commercial banking initiatives are bearing fruit and our acquisition will give us nice strategic opportunities along with significant balance sheet flexibility, we have a unique opportunity to take advantage of the current interest rate environment to sculpt our balance sheet to make us leaner and more profitable and more efficient as we.
Malvern and move towards 2024 are.
Our franchise will become more profitable and more valuable and more attractive as a result of these strategic investments and balance sheet repositioning.
At this point I'd like to turn it over to Andrew to hit on some of the financial results in a little bit more detail Andrew.
Thanks, Pat for the three months ended June 32023, we earned $6 8 million and net income or <unk> 35 per diluted share, which translates to a zero point, 97% return on average assets. Excluding merger related expenses diluted EPS would have been 36 per diluted share or <unk>.
<unk>, 99% return on average assets during the quarter, we had strong deposit growth solid loan growth continued to improve our liquidity position maintained strong credit quality metrics as we push forward with finalizing the Melbourne Malvern back Bank acquisition, the current interest rate environment and the steps we have taken to increase on balance sheet liquidity.
Led to a decline in our margin. In addition, the recent investments we've made in people and new locations led to increased noninterest expenses. The combination of these factors led to a decline in net income of 195.
From the linked first quarter and a decline of 2.0 million compared to the second quarter of 2022.
Solid commercial loan growth, primarily in owner occupied and C&I lending led continued in the quarter loans increased $44 million compared to an increase in loans of $55 million in the first quarter of 2023, which puts US right in line with our original goals for the year total deposits were up $158 million during the second quarter of 2023.
Compared to a decline in deposits of $52 million in the first quarter of 2023. We also saw somewhat of a bounce back in noninterest bearing deposits, which were up $13 million during the second quarter of 2023 compared to down $40 million during the first quarter of 2023.
Primarily due to the increase in deposit costs offset offset somewhat by the increase in the average rate on loans, our tax equivalent net interest margin decreased to $3 two 8% for the quarter ended Q2 2023 compared to 352% in the previous quarter. We continue to expect pressure on the core margin as the inverted yield.
Curve environment persists. However, we are continuing to hold the line on loan pricing, which is resulting in higher loan yields and the Malvern acquisition has given us significant liquidity and balance sheet, Optionality, which will allow us to mitigate the increases to our cost of funds. The Malvern acquisition will also impact the margin a certain fair value.
Adjustments required at the time of acquisition.
<unk> or amortized through interest income or interest expense.
Still working through the exact impact of these adjustments.
Liquidity levels increase and we were able to reduce borrowings by $100 million during the second quarter due to increased deposits. We have also continued to enhance our contingent sources of liquidity by adding additional borrowing capacity by pledging additional commercial loans at federal home loan Bank and pledging additional securities as the Federal Reserve Bank.
As of 632023, our allowance for credit losses to total loans remained steady at 125%. We maintained the percentage based on a modest level of net charge offs year to date of 206000 with net recoveries of 109000 during the second quarter of 2023, a stable level of problem loans.
In the second quarter point rate III total noninterest income remained relatively stable compared to the preceding quarter, excluding losses on investment sales, which were net against noninterest income in the prior quarter gains on sale of loans increased slightly compared to the preceding quarter as SBA loan sale activity continues to slowly gain steam but loan swap activity continue.
To be slow, which resulted in the reduced loan fees.
Annualized second quarter 2023, noninterest expenses were 196% of average assets or 193% excluding merger related expenses, which compares to a peer average of $2 one zero percent.
In total non interest expenses were $13 8 million in the second quarter of 2023 up $319000 or two 4% compared to Q1 2023. The increase was primarily due to higher salaries and employee benefits and regulatory fees offset somewhat by lower merger related costs, the slight increase in <unk>.
Salary and benefits was primarily due to the merit increases that occurred in the back end of the first quarter. The increases in regulatory fees was due to an increase in FDIC assessment fees.
We have work to do to finalize the system conversion for the Malvern acquisition and expect to incur the majority of the final merger related expenses in the third quarter, we will start seeing some of the benefits of cost savings immediately but plan to realize the majority of the savings by the end of the fourth quarter. We continue to believe that one of our strengths is our operating efficiency.
<unk> refocused our efforts on cost control as evidenced by our recent closure of our Cranberry brand on June 30th.
As we work to fully integrate the customers' locations and employees from the Malvern acquisition, we will see some volatility in our earnings over the next few quarters, but as Pat mentioned, we are well positioned to improve core profitability as we move towards 2024 at this time I'll turn it over to Darlene Gillespie, our chief retail banking officer for her.
Remarks Sterling.
Thanks, Andrew Good morning, everyone.
After a challenging first quarter of deposit outflows and uncertainty in the market I'm happy to report on strong deposit growth during the second quarter of 2023.
This reflects the continued trust and confidence our value customers have in our community relation driven financial institution.
Our total deposits have increased by $106 million during the first half of 2023.
The growth in deposits is proof of how we are steadfast with our strategic initiatives, such as retention and expansion of our existing customer base.
<unk> vision of new commercial and consumer clients and our deposit campaigns that helped mitigate deposit outflows, while focused on building relationships and a competitive rate environment.
We began the second quarter with the $44 million increase in total deposits in April we saw an increase of $20 million in deposits in may and deposit balances were up $94 million in June much.
Much of the growth comes from our commercial and government portfolios during the second quarter, we on boarded new government clients to the bank through the RFP bidding process.
Although we let some high cost money leave the bank we still.
The increase this quarter and our cost of deposits of 50 basis points from.
First quarter.
Clients continue to be rate sensitive and we continue to evaluate our pricing accordingly.
I will now take some of the key factors of our deposit performance as mentioned total deposits increased $158 million during the second quarter. As a result of our continued focus on retention expansion and acquisition deposit initiatives.
This gets us back on track for our 2023 deposit growth goal we.
We experienced growth in our non interest bearing demand deposits in the second quarter, despite the challenging rate environment and losses in the first quarter.
This demonstrates the bank's ability to navigate challenges and capitalize on opportunities through our deposit campaigns and targeted marketing strategies.
Deposits decreased slightly as compared to prior quarter. This is intentional by allowing some single service clients and rate shoppers to leave the bank and replacing with relationship driven business.
Our cost of deposits has increased 50 basis points from the first quarter as a result of the competitive landscape.
10 year to remain mindful of this when considering future pricing adjustments as well as the potential effect on our margin our.
Our deposit mix has remained relatively flat from the first quarter. We believe the current rate environment, we will continue to be a challenge.
We are strategically focused on improving our deposit mix by driving in non interest bearing core deposits.
Our deposit pipeline remains healthy with active campaigns out in the market to drive in new customers and new deposits.
We're excited about the potential deposit growth opportunities as we welcome eight new branch locations into our footprint as a result of the Melbourne acquisition.
We have changed our retail staffing model by introducing the market manager role within our network, which oversees 3% to four branches with the feet on the street approach. These individuals are tasked with not only being engaged in the community.
Typically seeking new commercial deposit opportunities while coaching their branch teams to do the same.
As Andrew.
Andrew mentioned, we closed our granberry location and consolidated it into our mine wrote branch to create some efficiencies and increased profitability of that location that transition has been going very well and our clients have not been negatively impacted since the branch with.
Only four miles away.
After opening our Fayetteville location. This past April which has already exceeded our 2023 deposit growth goal.
Look at additional opportunities to expand in the northern New Jersey in Central New Jersey markets.
Overall, we are very happy with the second quarter successes and look forward to a favorable third quarter and throughout the remainder of the year at this time I will turn it over to Peter Cahill, our chief lending officer for his remarks Peter.
Thanks Sterling.
Now to provide some additional information but.
Not already covered by the team.
After a strong first quarter for 2023, I think we had another good one in Q2.
As you just heard loan growth was $44 million, which puts us just under $100 million in growth for the six months.
I think Andrew mentioned right on plan.
The second quarter kind of mirrored first quarter, we continued to be selective about new business.
Continue to be focused on C&I lending.
<unk> talked about that previously C&I brings with it more floating interest rates on loans.
Well as much higher relationship deposits than you'd see in for example, investor real estate loans, we've seen progress increased efforts here, which dates back a few quarters now.
Last year for example for all of 2022, C&I loans closed and funded with just under 50% of all new loans brought into the bank.
That includes the fourth quarter of 2022, where the percentage of new loans volume to the C&I bucket rose to 70% of new loans in.
In Q1 of this year C&I loans comprised 74% of all new loans closed and funded and then this past quarter C&I loans represented 73% of new loans closed and funded so we're happy with the way our results are trending there.
New loans closed and funded of all types in Q2 totaled $91 million up slightly from the $86 million in the first quarter.
As you might guess loan payoffs were $45 million in Q2, which was an increase from 55 million Im sorry, $35 million in Q1, but below the average level of payoffs that we saw last year.
Almost $50 million per quarter.
The other factor is obviously impacting net loan growth in all periods or normal term loan amortization and line of credit changes.
Regarding line of credit usage this quarter. It was up slightly from 41% of total commitments of $3, 31% to 43%.
The average for the past year past four quarters has been 42%.
I don't think Theres any question that new business generation for us is a little slower than what we experienced in 2022.
This is due to our focus on relationship business.
<unk> impact of rising interest rates and general economic uncertainty.
Last year, new loans funded on average for each of the first three quarters totaled $127 million.
And then in Q4 of last year and for the first two quarters of 2023, new loans funded have averaged 80 $788 million per quarter.
One benefit to the rising rates theres been a decline in loan payoffs, which averaged $31 million for each of the past three quarters compared to almost $60 million for each of the first three quarters of 2022.
At June 30, our loan pipeline stood at $171 million down 21% from the $218 million level at the end of Q1.
The total number of individual loans in the pipeline also declined by just about exactly the same percentage.
Overall im not dissatisfied with the pipeline.
Economic headwinds, we've experienced we've slowed down things a bit and we're taking a cautious approach to underwriting new business.
I know I mentioned last quarter.
But a few years ago, we set a loose target on our pipeline.
50% of loans under the cap for Investor Real estate.
At the end of 2022, we were just below 50% and we were glad to see for Q1 that investor real estate loans.
Around 30%, 31% of the pipeline in terms of total dollars.
Have stayed in that range in Q2, where investor real estate loans made up just 35% of the pipeline.
We also continue to track on the pipeline anticipated deposits as a percentage of anticipated loan volume and we continue to see positive trends where that ratio of deposits to loans is growing.
So to summarize new business efforts, we're focusing on finding and growing our business with relationship oriented borrowers.
We are doing all the things, we think we should around setting and monitoring concentration limits and stress testing.
We continue to be very well diversified within the existing portfolio itself.
On the topic of asset quality.
Andrew's comments in the earnings release lay out where we are we had net recoveries in the quarter.
Nonperforming loans were up only very slightly.
Delinquent loans continued to be low at 24 basis points at 630, 23 down from 35 basis points at.
At the end of Q1.
Overall im seeing no areas of great concern and things from my perspective continues to look very good year.
That recaps, the second quarter and lending our objectives for the second half of 2023 will be to continue to organically grow loans and deposits, where we can gain relationship business and at the same time integrate the Malvern Bank staff and their book of business. The Malvern integrations just done, but we think we know the staff.
And then the portfolio very well at this point and we anticipate no major issues.
With that I'll turn things back over the past for some final comments.
Thank you Peter.
Tim I think what I'd like to do is turn it back over to the operator to open things up for Q&A.
Great and 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.
And our first question comes from Nick <unk> with <unk>. Your line is open.
Good morning, everyone. How are you today.
Okay.
Meanwhile, Nick how are you.
Doing very well thank you.
With respect to the balance sheet flexibility you mentioned in the prepared remarks I know its very early stages. Considering you just closed the deal last week, but have you made any decisions on the path forward at this point I'm curious if your views the accounting treatment to restructure the securities portfolio or pay down their sub debt among other options at this time.
Yes, I think the short answer Nick is.
Everything's on the table.
We sort of.
Taking a look at the balance sheet and kind of prioritize did from.
Lease strategic to most strategic and.
The obvious path forward would be to focus on.
Yes, selling off assets that.
Are viewed as less strategic and grab.
Gradually work our way down the list now we haven't set any specific targets for exactly.
How much will ultimately be sold versus retained and some of it will depend on what we view as the reasonableness of the.
The market in the bids for things that we might consider selling so it'll be a fluid process, but I think the good news is we've got a number of different options available and I think.
That gives us the ability to really try to optimize in terms of what we keep.
Keep in what the combined franchise looks like looks like going forward. So stay tune, we hope to be in a position to have a lot of that work are finalized.
<unk> finalized.
By the end of the third quarter so that.
One more back.
Reporting.
So minus 90 days from now there'll be a lot more visibility in terms of what that looks like.
Okay. That's very helpful. And then on the C&I growth, which was strong again this quarter are there any particular niches youre targeting with this initiative or is it broad based across a whole host of industries.
Yes, well I think.
Within C&I, it's broad based but as you know Nick we have got a couple of.
Younger business units not brand, new but things we've been rolling out over the last 12 months to 18 months that are doing well. We've got particular focus now in terms of small micro business lending loans under 500000.
To the smallest businesses, our continuing to see nice traction with our private equity sponsor group in terms of opportunities to finance portfolio companies within that segment and.
Our asset base lending team is now fully staffed up and running and we're starting to see some traction there as well and all of that is in addition to our core market teams, which have been and continue to look for quality C&I opportunities within our New York. So it won't be a footprint. So we got a lot of.
Different levers in terms of business units.
Targeting small and medium size business opportunities, that's obviously, our bread and butter, our strategic focus and.
It's nice to see that we're gaining some added traction there.
Great and then you noted that systems conversion in the prepared remarks, when is that scheduled to take place.
September the weekend of September 910, 11, I believe is the current schedule.
Great and then lastly, with loan growth on track through mid year can you remind us of your organic loan growth target for the full year.
And we typically target in terms of just pure core organic growth plus or minus 200, obviously.
Round numbers 100, net growth so far that puts us puts us right on track but.
Listen I think there's plenty of opportunities to get to that 200 number but I would also tell you that probably this year more than most.
Additionally, selective and making sure the right deals with deposits with our pricing.
Our goal is doing the right business. If we ended up hitting the 200 number that's fine if it ends up coming in less than that we're not overly concerned.
Sounds great. Thank you for taking my questions.
Yes, Thank you Nicholas.
And again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
And our next question comes from Manuel Novice with D. A Davidson your line is open.
Hey, good morning, just a follow up on the loan growth.
Could.
I understand this year could be a little bit influx, but.
In the commentary.
Selectivity in the pipeline.
Can you just discuss demand general demand.
Also it seemed like it ticked down as well.
Yeah listen, there's certainly less activity, but there is not no activity. There is still a fair amount going on I'd say.
Dave.
And borrowers are being a little more deliberate but.
Yes, they certainly haven't come to a grinding halt in any sense. There is still plenty of opportunities and when you think about it in the context of net loan growth you got to remember the other side of the equation, which is payoffs and paydowns. So.
We are almost certainly going to do less new business. This year, but we won't need to do as much new business to grow loans, because payoffs and paydowns have slowed up as well so.
That's great and as you get larger.
Do you have a sense for where the.
Where that 200 million annual target could could reach.
This year is in flux I hear that.
Any thought on where it could be in future years.
Yes, we havent focused on that yet right I mean, we're focused right now on continuing to do good quality business, but also.
On this balance sheet.
Repositioning project so.
We're still trying to figure out what the size of the balance sheet is going to be at the end of the year, let alone how much we're going to grow as a percentage off of that so I think as we get larger.
Yes.
When we were a small quasi startups our loan growth was critical because we needed the revenue to cover the expenses to drive profitability I think as we as we grow and as we mature.
There is not going to be as much of an emphasis on driving growth rates at the levels that we saw in the past, although we aren't going to want to continue to do quality business, but really the emphasis is around portfolio optimization.
If we can add the right type of customers I think we've got capacity to continue to grow at that 200 or more number but.
We're going to we're going to be adding the right business.
Honestly, it's going to be somewhat driven by what can we funded with core deposits right I mean, depending on the deposit market and what's available there.
We may have the ability to grow 300 $400 million, but we may choose not to because we don't want to have to go out and bring in high Tech high price money to do it so.
It's a balancing act.
It's really as much art as science Theres not a specific number we're trying to head if we've got lots of good opportunities that we can fund with core deposits I think we're happy growing more than 200, but if the funding as an issue and or the quality of the borrower and relationship doesn't make us feel good then we may choose to do less than that.
I appreciate that but.
And my follow up now is on deposits.
Really strong growth there.
I just wanted to follow up on two comments during the presentation one.
Okay.
These market manager role his view.
This kind of renewed impetus and market concentration to get more deposits and then.
Seems like you're tracking deposits to loan on a lender specific ratio more can you kind of talk about where those two initiatives overlap and how much of deposits and getting from your lenders specifically.
Yeah. So listen the obvious answer is were trying to get all hands on deck to grow quality core deposits.
Been working closely with the RMS for years to continue to drive deposit growth along with their loan portfolio and.
What we've seen in our review is the ratio of deposits to allowance for our ends with portfolios continues to tick up higher in many cases close to 40%, 50%, which we think are pretty good levels, but that's just one avenue for driving deposit drove the other and other area not the other area, but another area.
He is trying to figure out how do we get more out of the branch network and I think as Darlene mentioned.
Really repositioning not necessarily adding a lot of staff, but figure out how we can reallocate staff that we have to get more people out into the market and less and while we don't love. The fact that people don't come into the branch as much as they used to we're also taking advantage of that reality by reshuffling position. So.
Our staff has time to get out in the market more and spend more time, attracting and developing new relationships. So I think what <unk> was referring to there was really just a reallocation so that folks have more time out in the market, partly because that's what we need to grow deposits and partly because theyre just not needed as much inside the branch sale.
My last question on deposit pricing across the.
The second quarter into the third quarter.
Is the pricing pressure has shifted at all I am sure. Its high all the time, but like is it a little bit less high here in June and July or is it.
Thats sort of a new trend here.
I think I think a little less high is a good way to describe it so not quite as dramatic as it was then yes listen I think part of it. So a lot of banks ourselves included just decided post SBB signature that it was worth paying a little more to have extra liquidity.
As the market calms down and as we're seeing stabilization and I think all of US are saying, hey, maybe that are need to carry as much excess liquidity and therefore I don't need to be.
Quite as aggressive on the deposit pricing side, I think thats part of it and.
And part of it is just folks are starting to feel like we're getting to the end of the rate cycle and theres not this constant expectation that rates are going to move higher rates are going to move higher and I think that takes a tiny bit of pressure off of the pricing.
Negotiation and then Andrew you mentioned to me that some of your conversations with folks on the wholesale side, you're starting to see a little less pressure there you want to jump in on that point.
Yes, it definitely seems like the market settling down it's still competitive for.
Or some of the wholesale funding, but it definitely feels like the pricing pressure on when the fed just moved this week, maybe we won't have to move rates on the wholesale side as much as we had in the past so.
Seems like things are settling down but like you said, it's still it's still very competitive rates are still still a challenge, but it definitely is seems to be muted at least a little bit with what we've seen in the first six months of the year.
Okay. Thank you guys I'll step back. Thank you I really appreciate the comments.
Yes, Thank you Emmanuel.
And there are no further questions at this time, so I will turn it back over to Pat Ryan.
Okay wonderful well thanks, everybody appreciate you taking the time to.
Listen and certainly appreciate the questions during the Q&A and.
We will look forward to being back in front of folks at the end of the third quarter with.
I would guess lots of updates on what we've been doing from an integration standpoint, as long as as well as updates on.
The core business, so lots to talk about.
And we'll look forward to that meeting in about 90 days. So thank you everyone.
Yes.
And that concludes today's conference call you may now disconnect.
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Okay.
Sure.
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