Patrick Ryan: Thank you. I would like to welcome everyone today to First Bank's Q3 2026 earnings call. I am joined by Andrew Hibshman, our Chief Financial Officer, and Peter Cahill, our Chief Lending Officer. Before we begin, Andrew will read the safe harbor statement.
Andrew Hibshman: 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. 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 31 December 2025, filed with the FDIC. Pat, back to you.
Patrick Ryan: Thanks, Andrew. In Q3, we saw continued improvement. Our balance sheet growth continued at a healthy pace, including loans, which were up $50 million during the quarter, and deposits, which increased $43 million during the quarter, leaving us ahead of plan for deposit growth so far this year. Our margin improved nicely to 3.74%, driving our return on average assets back up to 1.18%. Non-interest expense came in at $20.3 million, and our non-interest expense to average assets ratio came down to 1.97%, working towards our goal of 1.90%. Our pre-provision return on average assets came in at 1.79%, an increase of 8 basis points compared to the prior quarter.
Patrick Ryan: I wanted to highlight some additional strategic considerations before I turn it over to Andrew and Peter to provide some additional details. First, I wanted to point out that our strong capital position gives us significant flexibility, and we intend to pull several levers to optimize our results moving forward. We started by announcing an increase to our quarterly dividend, moving it up to $0.12 per share, a 33% increase. We also announced our new buyback plan, which we intend to use to take advantage of market opportunities as we move forward through the end of this year and into next year. We also see opportunities to leverage our capital for increased organic growth as our middle market commercial lending businesses gain momentum and we have additional investor real estate capacity, which Peter will discuss later. Some earnings tailwinds should help drive continued improved profitability.
Patrick Ryan: Specifically, we are modestly asset sensitive, which could help if rates move higher. We have a relatively small investment portfolio, which minimizes our risk for AOCI degradation if rates do move higher. Our expense containment initiatives should help drive efficiency even lower as we move forward. Improved growth rates will help drive efficiency and profitability, and our healthy level of ACL coupled with improving credit metrics should create opportunities as well. In summary, we think we are in a good position to finish the year strong, and the prospects for even better profitability in 2027 look good. At this time, I would like to turn it over to Andrew to discuss some additional details of our financial results. Andrew?
Andrew Hibshman: Thanks, Pat. For the 3 months ended 30 September 2026, we recorded net income of $12.2 million or $0.49 per diluted share, which translates to a 1.18% return on average assets. Strong net interest income growth and continued operating discipline drove improvement to our bottom line, with diluted earnings per share increasing $0.06 or about 12.5% on a linked quarter basis. Net interest income increased $2 million or 5.6% compared to the linked quarter and increased $1.2 million or 3.4% compared to Q3 of last year. Compared to the linked quarter, net interest income increased primarily due to growth in average earning assets, higher loan yields, disciplined deposit pricing, and continued balance sheet optimization. Loan yields increased 15 basis points linked quarter to 6.48%, while our total cost of deposits increased only 5 basis points to 2.47%.
Andrew Hibshman: As a result, our tax equivalent net interest margin expanded 6 basis points to 3.74%. We continue to expect acquisition accounting accretions to decline over time, and the competitive environment for deposits remains challenging. These are margin headwinds. However, we also continue to see opportunities to grow higher yielding commercial relationships and optimize our funding and balance sheet mix. We successfully put that strategy into action this quarter by using excess liquidity to pay down $90 million in wholesale borrowings. We have reduced broker deposits by $44 million and purchased approximately $57 million of low-risk investment securities, offering higher yields than cash. With these changes, we still have a well-balanced asset and liability position, and we believe continued loan and deposit growth should support net interest income growth regardless of what happens with rates. We are pleased with our loan and deposit growth during the quarter.
Andrew Hibshman: Loans grew $50.2 million or approximately 6% annualized, led by C&I, owner-occupied commercial real estate, and construction lending. Our high-yielding C&I portfolio grew to comprise 22.5% of total loans at the end of Q3 compared to 21.9% a year ago. Credit costs and metrics were generally stable during the quarter. Provision expense was $2.2 million, essentially unchanged from the linked quarter. We did see slightly higher net charge-offs of $1.9 million compared to $1.6 million in Q2, and those charge-offs again primarily reflect activity in our Business Express portfolio. This portfolio continues to run down, and we expect any future losses will moderate from recent quarters. We are not seeing any meaningful signs of stress in our other loan segments. Non-performing assets rose slightly to $35.7 million during the quarter.
Andrew Hibshman: However, since quarter end, NPAs have been reduced, and we have seen improvement in some early credit indicators, such as slightly lower delinquencies in our Business Express portfolio so far in October. Our allowance for credit losses remains essentially stable at 1.37% of total loans and represented approximately 132% of non-performing loans. We believe our reserve coverage ratio remains strong. Our loan growth was supported by another strong quarter of deposit generation, with total deposits increasing $43 million or approximately 5% annualized. Continuing to grow deposits while controlling our overall cost of deposits and improving our overall funding profile is a primary focus for us. During the quarter, we continued to onboard new relationships while expanding existing client relationships. Total deposits increased $43 million or $87 million if you exclude the $44 million decline in broker deposits, and our cost of deposits rose by just 5 basis points.
Andrew Hibshman: We saw a point-to-point decline in non-interest-bearing deposits of 48.7 from 30 June through 30 September. However, average non-interest-bearing deposits increased to $32 million during the quarter. Some of the point-to-point decline was due to normal fluctuations. However, we are seeing increased pricing pressure with the recent run-up in rates, and we expect this will have an impact on our cost of interest-bearing deposits and put pressure on our non-interest-bearing balances. We remain focused on striking the appropriate balance between growth and pricing discipline. Our teams are incented to generate core profitably based, relationship based deposits, and we expect their efforts will continue to generate meaningful opportunities across our footprint. Looking ahead, our commercial deposit pipelines remain healthy, and we are using select promos to drive new personal customers to the bank.
Andrew Hibshman: While we expect heightened industry competition will pressure deposit pricing, we believe our diversified funding base positions us well to support future loan growth while prudently managing funding costs. Non-interest income was $2 million for Q3 2026, compared to $2.1 million in the linked Q2. We are seeing a nice pipeline of SBA loan sale activity, which should lead to increased gains on loan sales. However, non-interest income continues to be a small portion of our revenue, and we do not expect to see any material changes in the short term. Non-interest expense was $20.3 million for Q3, modestly higher than Q2, and primarily attributable to salaries and employee benefits.
Andrew Hibshman: The increase in salaries and benefits was primarily driven by one additional day during the quarter, increased staff through our summer intern program, and a slight increase in incentive comp due to the stronger performance in Q3. Despite the increase, we continue to demonstrate favorable operating leverage. Our efficiency ratio improved to 52.4% from 54.5% in Q2 and marked our 29th consecutive quarter operating below 60%. We believe our efficiency continues to be a significant differentiator for our franchise. We remain highly focused on expense management and have demonstrated a track record of disciplined cost control. Tax expense totaled $4.0 million during the quarter, with an effective tax rate of approximately 25%. Consistent with our prior guidance, we continue to anticipate being able to keep our effective tax rate at or below 25%. Our capital ratios remain strong, and capital generation was another highlight of the quarter.
Andrew Hibshman: Tangible book value per share increased to $16.59 from $16.27 at 30 June, representing an annual growth of nearly 8%. Consistent with our confidence in earnings performance and capital generation, our board approved a 33% increase in the quarterly dividend. We also received final regulatory approval for a new share repurchase program authorizing the repurchase of up to 1.2 million shares with an aggregate value of up to $24 million, which will run through September 2027. Our disciplined capital management strategies, including maintaining a relatively modest dividend compared to peers, executing measured stock buybacks, and emphasizing more profitable growth, has positioned us with significant capital optionality. Going forward, we expect to continue driving shareholder value through a combination of strong asset and core earnings growth, a healthy cash dividend, and opportunistic share repurchases. At this time, I will turn it over to Peter Cahill, our Chief Lending Officer, for his remarks.
Andrew Hibshman: Peter?
Peter Cahill: Thanks, Andrew. As Pat and Andrew mentioned, we had a good quarter in lending, where loans were up $50 million, which is right on our growth plan for the year. We continue to see good new business. New loans closed and funded during the quarter totaled $124 million, and we had the benefit in Q3 of a more normalized level of loan payoffs. We had $53 million of loan payoffs this quarter, which is below the average we had in H1. Final period end numbers are also impacted by regular principal amortization and fluctuations in line of credit usage. As the earnings release shows, investor real estate loans, a major part of our business, declined a bit in Q3.
Peter Cahill: We have described in previous meetings that we have been focusing on C&I growth, believing that is where the deposits are and that those types of loans experience less turnover. We saw some good growth in C&I again this quarter, led by our regional banking teams as well as our specialized lending groups. Through 30 September, C&I loans, including owner-occupied real estate loans, made up 65% of our new business. Investor real estate made up around 30%, and the balance was in consumer lending. Regarding business in the pipeline, our new loans pipeline looks good. We look at probable funding on a loan-by-loan basis, and at 30 September, probable funding stood at $363 million. For comparison, levels in March and June were $326 million and $323 million, respectively. So we are up about 12% from the average of those two quarter ends.
Peter Cahill: This, we hope, will lead to a solid Q4 and good beginning to 2027. Looking at asset quality, I do not have a lot to add to what has been mentioned. Issues coming out of Business Express have slowed, so we are building some optimism there. We have referenced previously a couple of larger problem real estate loans. Some good news on those, although it came post quarter end. Andrew referenced it. Just after the end of the quarter, we received a $5.5 million pay down on one of them. If you recalculated our classified ratio, it would have brought that down to about 2.24%. That is below the average for the past eight quarters, which is around 240 basis points. Then the other problem, real estate loan that we have mentioned briefly in the past, a $9.5 million participation in a loan for a senior living facility.
Peter Cahill: We've learned that an agreement's been accepted by the court, and all indications are that that loan will be paid in full later in Q4. We're very happy to hear that as well. Looking forward, we're doing our best to convert our loan pipeline into new business. We're still focused on meeting the loan growth goal for this year. Beyond Q4, the business opportunities we're seeing are spread throughout all of our banking units. The regional lending teams should continue to do very well. We made a significant addition to our leadership team in the Pennsylvania region, which we hope will drive growth going forward. After a slow start to the year, our SBA team has built a nice pipeline. Private equity and asset-based lending are both looking at a lot of new business.
Peter Cahill: In the investor real estate area, more opportunities are being reviewed than they've looked at in past quarters. With the actions we've taken in targeting C&I relationships, our investor real estate to capital ratio is down well below where it's been in previous years. We think that creates an opportunity to accelerate loan growth heading into next year. As a result of what we're seeing throughout the business units, as we think about 2027, we're setting our sights on total loan growth that's up from the $200 million annual number that we've targeted the past couple of years to a targeted growth rate closer to $300 million. Based on all this, I'm pretty optimistic about finishing the year strong and about 2027 as well. That covers it for a lending review, and I'll turn things now back to Pat for final comments. Pat?
Patrick Ryan: Thanks, Peter, and thanks, Andrew for that additional info. At this point, we'll turn it back to the operator to open up for Q&A.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Bader Hajla with Piper Sandler. Your line is open. Please go ahead.
Bader Hajla: Hey, good morning, guys. This is Bader on for Justin.
Patrick Ryan: Good morning. How are you?
Bader Hajla: Good. I just wanted to start out on the deposit side of things. That's been a positive story so far this year. So maybe if you guys could talk about how you're thinking about maybe deposits continuing to keep pace to fund loan growth, then maybe your thoughts on the level of competition on the deposit side as well.
Patrick Ryan: Yeah. I'll hit a couple of highlights and turn it over to Andrew. I think, the short answer, obviously, is we continue to grow in our C&I book. We're doing, I think, a good job of making sure we're getting a lot of additional relationship deposits. There's also significant fluctuation in that book. So it becomes a little bit tricky to predict quarter to quarter, but the underlying trends there certainly seem positive. So that's been good news. Obviously, we still play in the retail space on the deposit side. From time to time as needed, we'll get competitive with a market rate on a CD or a money market. So we continue to look for opportunities to grow in that segment as well. Andrew, why don't you jump in and talk a little bit about what you've been working on with the retail teams?
Andrew Hibshman: Yeah. Just hit on the pricing pressure. It has definitely accelerated, obviously, with the run-up in rates over the last month or so. Deposit pricing pressure has continued to be stiff, but we are used to that. I mean, the markets we are in, we are always dealing with a lot of pricing pressure. We have got some promos we recently rolled out to generate some deposit growth in the CD market. We are also doing some targeted marketing in some certain industries with a more liquid promo that is not a marketed promo, but something we are out letting our teams use to sell. We are definitely going to see some pressure. Pricing is tough. But on the flip side of that, we are, I think, seeing some good opportunities on the loan side, and the spreads are pretty good there.
Andrew Hibshman: Do expect that deposit pricing is going to be tough and is going to move higher, but we think we can offset that in the loan book. I am really expecting to see a stable margin. Hopefully, we can see some slight improvement in the margin going forward.
Bader Hajla: That is helpful. Thank you. Just switching gears to the margin, are you guys able to quantify or comment on the asset repricing benefit you guys have left? Then to the extent to which those floating rate exposures you guys have can mitigate any pressure, like you said, on the funding side?
Patrick Ryan: Yeah. Well, the good news, we have got 25% plus of our assets that reprice immediately when the Fed moves. Now, obviously, there is some giveback there, depending on what you need to do on the deposit side. But we have a much smaller percentage of our liabilities that will reprice automatically. That gives us time to move slowly and really gauge the market and see where they are. Now, over time, you end up having to give some of that back, but you do not need to do it right away. So the short-term benefits are real. But Andrew, if you want to jump in and talk a little more about kind of where you see the margin going. I know it is hard to predict because it is dependent on competition. But anything you want to add there?
Andrew Hibshman: Yeah. I think Pat hit it well. I mean, day 1, when the Fed makes a rate change, we see positives. We have more assets that reprice immediately. On the deposit side, we have been really trying to hold the line as much as we can. But there is obviously a lot of areas
Andrew Hibshman: where we need to move higher. We are slightly asset sensitive, so just running models. If rates go higher, we do better. So a lot of positive tailwinds we have there from a margin standpoint. But again, the deposit thing, sometimes you got to take what the market gives you, so there is going to be some added pressure there. But we have historically maintained a very balanced asset liability position. We are still in a very similar place than we have been since I have been here over the last 10 years. But we are slightly asset sensitive right now, so as rates move higher, it should be at least a slight benefit. But we will see how the deposit market shapes up. We also did some things, as I mentioned, late in the quarter. We paid off some higher cost borrowings.
Andrew Hibshman: We did some reallocation of some cash into investments right towards the end of the quarter when rates moved higher, and we let some brokered money roll off the balance sheet as well. So a lot of positive things going on. I think we can confidently say that we should be able to maintain a stable margin with some upside.
Bader Hajla: Got it. Thank you. Those are all my questions. Thank you.
Andrew Hibshman: Thank you, Victor.
Operator: Your next question comes from the line of David Bishop with Hovde Group. Your line is open. Please go ahead. Just a reminder to unmute your device. Our next question comes from the line of Jake Civiello with D.A. Davidson. Your line is open. Please go ahead.
Parker Whitman: Hey, good morning. This is Parker Whitman on for Jake Civiello this morning. Just had one quick question on credit here for you regarding the Business Express portfolio. Apologies if I missed this during the prepared remarks, but any chance you could size up the remaining exposure within the portfolio for runoff and when you expect impacts on net charge-offs provisioning to be a little bit less meaningful? Thank you.
Patrick Ryan: Yeah, sure. Obviously, it's hard to predict the future. But as Peter mentioned, we're seeing a slowdown in new issues emerging. We're seeing some improvements on the delinquency side. So I don't know that we have a definitive answer, but I think we feel comfortable saying that things are getting better, and we think they will continue to incrementally get better. Obviously, we're probably 18 months out from when we first noticed some challenges there, and we started making significant changes to how we were analyzing, how we were sourcing and onboarding. So I would tell you that anything new that's been originated, which hasn't been much, has been done according to much tighter standards. Everything that gets renewed is getting done in much tighter standards. So again, it's a portfolio, given the yields, that we don't expect the credit cost to be zero.
Patrick Ryan: But if we can get it back down to a more reasonable 2%, even 3% annualized, I think we will be back to generating profitability out of that segment. The good news is when you look at charge-offs year to date, I think that the total might be something around $8.5 million, and 95% of that was in the Business Express portfolio, which obviously we are not happy about. But the good news is the non-Business Express charge-offs year to date are close to zero. So we are seeing real strong performance throughout the remainder of the portfolio, which is a positive. As we mentioned, we had some good news come right after the end of Q3. But significant pay down on a non-performer and a criticized loan that was showing improved performance and got upgraded.
Patrick Ryan: So across the bank, we are seeing some reason for optimism on credit. Business Express is slowly getting better. But I think as we showed this quarter, even with having to do some additional charge-offs, still able to earn some reasonable returns.
Parker Whitman: That is great. Thank you very much.
Patrick Ryan: Sure.
Operator: Your next question comes from the line of David Bishop with Hovde Group. Your line is open. Please go ahead.
David Bishop: Hey, can you guys hear me?
Patrick Ryan: Yes, we got you now, Dave.
David Bishop: Perfect. Apologies. I do not know what happened before. Hey Pat.
Patrick Ryan: No problem.
David Bishop: You mentioned before the reduction in the operating expense to average asset ratios getting closer to your 190 target. Is that something you guys are looking to improve upon as you move into 2027 and beyond? Just curious if you have any longer-term targets for that ratio.
Patrick Ryan: Well, I think the goal throughout 2027 is to get to the 190. We hope it doesn't take us until Q4 to get there. I think through incremental efforts we've made to contain costs, to reduce costs, to slow the growth, that obviously hits the numerator. While we're concurrently looking to show some decent growth that hits the denominator. We think getting to that 190 at some point sort of during the middle of 2027 is possible. Obviously, both things need to happen, right? We got to slow the expense, continue to slow the expenses and see the asset growth. We have reason to believe we can achieve both those goals. We did a lot of analysis looking back at that ratio over time.
Patrick Ryan: I think sort of pre-COVID, we were operating before we launched some of our new kind of niche commercial businesses in the 180 range. We obviously had some expense increase through the Malvern acquisition and the addition of these new business units. I think as those business units scale up and we continue to take out costs where we can. Longer term, could we get back to the 180? It's certainly possible, Dave. We've been there before, but I think our goal is to get to the 190, and then we'll see where we are. Obviously, it depends on new investment opportunities, right? Getting down to the lower level is good news from a short-term performance perspective, but may also be an indicator that there haven't been new opportunities that looked like quality investments.
Patrick Ryan: I think living for us, if we can live between the 180 and the 190 and continue to look for little niche growth opportunities, that's probably where we want to be.
David Bishop: Got it. Appreciate that color. Then, I do not know if Peter or Andy, any sense in terms of what new loan origination yields were this quarter versus roll-off? Is the third quarter average yield number, the 15 basis point increase, a good number to model a go-forward yield on? Thanks.
Peter Cahill: Well, Andrew may be able to come up with the number, but we continue to price most of our loans at a spread over the 5-year Treasury or FHLB, and we are getting spreads north of 200 basis points. So we are pretty consistent there. It is really an exception to the rule when we dip below that spread. Andrew, do you have the numbers handy on what the quarterly average or weighted average might have been on new business?
Andrew Hibshman: Yeah. While they are bringing it up, give me 1 more second. But yeah, I think just to add some high-level commentary on that as I am pulling it up. Yeah, I think the third quarter, we saw a 15 basis point increase in loan yields, and the Fed increased rates on 18 September, I think it was. So, I think that is a reasonable kind of baseline bottom for where loan yields are going to go as we move forward. Obviously, not everything is repricing, but as Pat mentioned, we have a pretty big chunk. A lot of that over 25% now is kind of liquid, more liquid assets, but we have a chunk of loans that are going to move higher immediately when the Fed moves. So yeah, we should see nice improvements in loan yields into Q4. I will pull up the origination rates in a second.
Patrick Ryan: Yeah. Dave, I can tell you going off memory that it depends on the mix. But looking at the last couple of months and just the new originations, I think the average for 1 of the months was close to 7.25%. 1 of them might have been down in the 6.75% range. But that is also dependent on what types of loans got originated in those months. So certainly, there is the full quarter benefit of everything that repriced during the quarter that will flow through into Q4. As Peter said, the market now for most new business is in the high 6s or 7s. So we think there is still good opportunities to make a good spread there.
Andrew Hibshman: Yeah. Just to put some exact numbers on that, the weighted average spread for the quarter was about 690.
David Bishop: 690. Okay. Just curious with the backup in rates, notwithstanding what happened, I guess, yesterday, have you seen the gears sort of lock up or slow on the commercial real estate front there just as projects maybe require more equity or tougher debt service coverage? Just curious what you are hearing from your folks on the ground.
Patrick Ryan: Yeah. Listen, I think when you see a big change like we saw yesterday, that can cause people to try to get back to the table to renegotiate if there is still wiggle room on a deal that is sort of in process. But I do not think it is really gumming up the general traditional, like I had a five-year loan that came due, I got to refinance and roll it over. You are going to do it. You are going to try to get the best rate you can, but you are not going to not refinance it. It may slow things down a little bit. New projects that have not come out of the ground yet, people might sharpen their pencil and make sure the project still makes sense. But the short answer is we have not seen a significant pullback or slowdown based on what has happened over the last month or two.
Patrick Ryan: But if they move again, is that a potential risk? Yes, certainly it is.
David Bishop: Yeah. Got it. I appreciate that color. I guess one final from me. I guess maybe you missed the announcement on the new market President, the new leader. Any color you can provide there in terms of his background, et cetera? Thanks.
Patrick Ryan: Yeah. We are excited. Dan Cuneo joined the team I think about a month and a half ago. Dan has got a breadth of experience at community banks and regional banks all within that Southern Jersey, Southeastern PA market. We are excited. We think he is going to be a great addition, and we are looking forward to seeing a rev up on the growth side with him helping to lead the team there.
David Bishop: Great. Appreciate all the color.
Operator: We have reached the end of the Q&A session. I will now turn the call back to Patrick Ryan, President and CEO, for closing remarks.
Patrick Ryan: Okay. Thanks, everyone. We appreciate your time today. Appreciate your interest in First Bank, and we will look forward to regrouping with everybody once we get through the end of Q4. Thanks, everyone.
Operator: This concludes today's call. Thank you for attending. You may now disconnect. This event has now concluded. Thank you for joining First Bank, FRBA Earnings Conference Call Q3. The line will disconnect automatically.
