FIRST BANK (Hamilton) (FRBA) 2018 Q2 法說會逐字稿

Good day, and welcome to the First Bank's Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Patrick Ryan, President and CEO.

Please go ahead.

Thank you.

I'd like to welcome everyone today to First Bank's Second Quarter 2018 Earnings Call.

I am joined by our Chief Financial Officer, Stephen Carman; and our Chief Lending Officer, Peter Cahill.

Before we begin, however, Steve 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, 2017, filed with the FDIC.

Pat, back to you.

Thank you, Steve.

I'd like to start off with some general comments, and then I'll be turning it back to Steve and Peter, for some more detail around the financial results and the performance in the loan portfolio.

I would say the second quarter was a good quarter, both strategically and financially.

On the strategic side, we closed on our acquisition of Delanco Federal Savings at the end of April, and we completed our technology integration at the -- in early July.

We now have 3 full service locations serving the South Jersey region, and we believe that will give us a little more critical mass as we look to compete strategically in that market going forward.

In terms of our Southeastern PA expansion, we did move into our loan production office in West Chester, Pennsylvania.

We have an application pending for a branch location at that site as well, and we're hoping to hear back soon.

In terms of early production from that team, I think we're off to a great start.

We've seen strong loan demand, and we also have a very active pipeline.

And the team continues to do well in terms of generating good deposit opportunities for us.

So we feel real good about the early signs of that Southeastern PA expansion.

We have had some success selling vacancies in our Bucks County market.

I think we feel good about the quality of the team there, and I'll let Peter provide a little bit more detail in terms of progress in Bucks County.

In terms of our overall organic growth in our traditional market, if you will.

In Central New Jersey, we did open a fourth location in Pennington, which is a former Yardville National branch location.

It's a location we know very well, and we're very excited about hiring away the former branch manager from Hopewell Valley, who is very well known in that market.

And we're excited about that additional fourth branch location in Mercer County for us.

Rounding out our comments on the strategic side.

We did enter the Russell 3000, which we're optimistic will provide some overall additional stock market liquidity and visibility.

And I'd also like to comment on the regional structure which we deployed about a year ago.

I think we're seeing some real good results in terms of improved ownership and accountability within each of our key markets.

From a financial standpoint, we had a great quarter.

Core earnings were very good when we adjusted for the merger-related expenses.

We did have good, continued organic loan growth, and I'll let Peter provide a little more detail there.

We were pleased to see that our margin held steady.

I think we're up one basis point quarter-over-quarter.

I'm not sure how long that will stay as, I'm sure many of you know, the operating environment is getting more difficult in terms of not only sourcing new deposits but also the cost of those funds as well as the flattening of the yield curve are all creating challenges for us.

We did see an improved deposit mix.

Our commercial deposit team, together with our RMs did a nice job so far.

We're up approximately $30 million year-to-date in our commercial deposits.

Our asset quality profile remained strong.

That translated into core ROA of 1.14% and ROE of 10.13%.

And we also saw our commercial real estate to capital ratio drop down to 326%, which is a low point for us over the last couple of years.

In terms of area of focus, for the second half of this year, we'll have a strong emphasis on continued deposit growth.

We are slightly behind plan.

Some of that was related to what we would consider to be pricing discipline on the CD side.

As you've seen historically, CDs were a strong component of our growth.

And as we've held the line on CD pricing or tried to hold the line, we've seen less growth in the CD portfolio compared to years past.

We're continuing to build out and add to our commercial deposits group.

We do have a new person who's accepted, who'll be starting with us in September, and we're very excited for them to join the team.

In terms of the second half of the year, we're going to have opportunities for continued expense savings from the Delanco integration.

We will continue to opportunistically look for M&A opportunities within our core markets, and we continue to be focused on trying to grow organically while not loosening up credit standards in an economy that appears to be picking up some steam as well as some competition, which we've noticed is driving some pressure, not only on loan pricing but also loan structures.

So to summarize, I think we're on pace for a record year in 2018.

We have a good pipeline for continued organic growth opportunities within each of our markets.

I think our disciplined M&A strategy is bearing fruit, in the sense that we've been able to drive cost savings and improve economies of scale from our prior acquisitions.

And I'm pleased that our asset quality metrics remain very solid.

As mentioned, we do have some headwinds in the second half as we look at the flattering yield curve and the competitive landscape.

But I'm confident that we can continue to be successful with our disciplined strategy within our New York City to Philadelphia corridor.

At this time, I'd like to turn it over to Steve to provide some more detail on our financial results.

Thanks, Pat.

Net income for the second quarter of 2018 was $4.0 million or $0.22 per diluted share compared to $2 million or $0.15 per diluted share for the same period in 2017.

Solid organic loan growth of $45.2 million for the second quarter 2018, not including the impact of purchase accounting or Delanco, resulted in strong net interest income growth for the quarter.

In addition, as Pat mentioned our -- we've had significant loan growth over the last several quarters, supported by a strong asset quality profile.

Reported return on average assets and average equity for the second quarter of 2018 were 1.02% and 9.09% respectively.

That compares to an ROAA of 72 basis points and ROAE of 7.54% for the second quarter of 2017.

Not including certain merger-related items, we would've earned adjusted net income of $4.5 million.

Or as Pat mentioned, from a core operating earnings standpoint, an ROA of 1.14% and return on equity of 10.13%, respectively, for the second quarter of 2018.

Net interest income for the second quarter of 2018 was $13.6 million, an increase of $5 million or 57.5% compared to $8.7 million in the second quarter of 2017.

Average loan balances, primarily commercial, grew $405.1 million as a result of organic and acquired growth.

Our focus as we continue to grow is to effectively manage the level of noninterest expense growth.

Our efficiency ratio for the second quarter 2018 was 55.64%, up slightly from 53.91% for the linked first quarter and lower compared to the same quarter in 2017 when our efficiency ratio was 58.21%.

Our earnings for the quarter and year-to-date have benefited from the federal statutory income tax rate decrease from 35% to 21%.

On July 1, New Jersey passed a new law regarding the corporation business tax.

We expect the new state tax legislation will create additional New Jersey income tax expense starting in the third quarter of 2017 and into future periods.

We are currently assessing the impact with our tax advisers.

Looking at our net interest margin.

At this time, we have not changed our view.

We expect our margin to be stable to modestly declining in the second half of 2018.

There are several factors that will affect the margin, including the relatively flat treasury yield curve, which affects both loan and deposit pricing.

Competitive deposit pricing pressures are clearly present in all of our markets.

That said, the adding of lower-cost commercial deposits and the addition of stable deposits from Delanco will assist in maintaining a stable margin.

Our tax equivalent net interest margin for the second quarter of 2018 was 3.63%, an increase of 40 basis points compared to 3.23% for the prior year quarter.

The increase in federal funds rate has contributed to higher floating rate loan yields and, subsequently, a higher overall loan yield.

Prepayment penalties have also added to the stability of our net interest margin despite higher deposit costs.

On a linked-quarter basis, our margin for the first quarter was 3.62%.

Led by net interest income, primarily from loans, we expect continued growth in core operating earnings in the second half of 2018.

Our expansion into new markets, a strong asset quality profile and the benefit of a comparatively lower annual effective tax rate have all been beneficial to the bottom line.

We are well positioned after the first half of the year to achieve our financial goals for 2018.

To further discuss our results in lending, here's Peter Cahill.

Peter?

Thanks, Steve.

As Steve had mentioned earlier, organic loan growth in the second quarter, which would be exclusive of Delanco, was $45 million, up from the $43 million in growth generated in the first quarter.

You can get to this $45 million by taking the $100 million [resettlement] loan growth in the quarter.

Of that, Delanco was $78 million.

But you've got to back out $23 million reflected as held-for-sale, and that gets you to the $45 million.

That event just puts us just about on plan with our annual growth goal from an average loan standpoint.

I'm happy where we are right now from the standpoint of business generation.

After the first quarter, I mentioned the impact of staffing turnover in Bucks County, describing it as short-term pain which would turn into longer-term gain.

I still believe that very much.

Right now, all the replacement relationship managers we had reached agreements with to hire have arrived.

They're onboard, and they're now up to speed with how we do things and are out meeting existing clients and letting former clients know where they are.

Growth in the market had halted for a while with the turnover, but things are now headed back in the right direction.

Secondly, in the second quarter, we experienced extraordinary loan repayments, approximating $42 million, up from the level in the first quarter where we reported $37 million in loan prepayments.

As described in the earnings release, we did earn approximately $232,000 in prepayment penalties as a result of these payoffs.

Regarding the makeup of the loan portfolio, again, as in previous quarters, there's been no significant changes.

As it pertains to new business, we've done a good job increasing the percentage of C&I loans we do relevant to investor real estate, and we hope to see continued progress in that area.

We've set a target on our loan pipeline of around 50% for investor real estate loans, the balance being comprised of C&I and consumer loans.

We continue to be right around that number, which we view as very positive.

One thing I could add here was that, during the quarter, we went live with a new small business product we're calling Business Express.

We're using what is a small business credit scoring system developed by Experian, which is basically the same one the SBA uses for small business loans.

We're using this to approve C&I loans up to $500,000 in size.

We tested this for about 6 months, and it allows us to be much more efficient in decisioning this type of credit.

In addition to the efficiencies created, we hope it will help increase C&I loans for us as well as commercial deposits.

As far as the loan pipeline goes, at 6/30/18, it's pretty robust.

At 3/31, you might recall, we were down 19% from year-end in terms of dollars, but up slightly in terms of the number of loans in the pipeline.

On the previous earnings call, we said that we viewed that as an aberration, and it turned out to be so.

The pipeline at 6/30 was up 38% in terms of dollars and 9% in terms of the number of loans.

And as referenced previously, the loan mix is aligned with prior periods and spread out well among most of the relationship management teams.

As things continue to get settled in the greater Bucks County market, I expect the pipeline to grow even further as that team gets acclimated and begins to produce new business.

Lastly, in return -- in regard to asset quality, things at the end of the second quarter continue to look good.

As pointed out in the earnings release, net recoveries exceeded net charge-offs for the quarter, which is a good thing.

Nonperforming loans jumped up a few basis points, but that was the result of one real estate secured loan going a couple of days over the 90-day mark.

It has since made a payment and is back to performing.

Other than that, things were good, delinquencies were few and we are near all-time lows as far as past due loans are concerned.

That's it for the second quarter lending report.

I'll turn it back to Pat Ryan.

Thank you, Peter.

I appreciate the additional background and commentary.

I think at this time, I'll turn it back to the operator and open things up for Q&A.

(Operator Instructions) Now the first question comes from Nick Cucharale from Sandler O'Neill.

So first, I wanted to start on expenses.

A few moving parts here with the cost extractions from Bucks County and Delanco, I mean, your commentary last quarter with respect to some planned investments in people and locations in the back half of the year.

How should we be thinking about the expense run rate as we enter the back half of the year and into 2019?

I'll give that a shot and then let Steve jump in.

But I think that the investments that we discussed last time have, at this point, largely been made.

We did open up our new LPO.

We've had the team in Southeastern PA for a little while, but obviously, we have now the actual physical location expense built in as well as the new branch in Pennington.

As we've grown, I think we've done a really good job holding the line on back office hires.

But from time to time, there are needs to add as we've grown, and so we've made some additions in a couple of places.

But I do think a big chunk of the increase in expenses is built into the numbers.

Obviously, with new locations, like Pennington and West Chester probably takes 1 year, 1.5 years to get those up to profitability.

And so we've got a little bit of a drag for right now.

But I do think other than those sort of one-off strategic investments, the kind of the core plan of trying to keep a lid on expense growth is still in place.

That's great color.

And then on the loan growth front, you mentioned you are on target for your full year goal for average loans.

And just given the resolution in Bucks County and what seems to be a significant increase in the pipeline, it seems to be like loan growth in the back half of the year is going to be exceptionally strong.

Am I right in assuming that?

And kind of what is your full year target for loans?

Well, Nickie, you got to let us under-promise and over-deliver a little bit, right?

Peter, go ahead.

I'll let you jump in.

Well, we've reported over the past couple of quarters that we're right about on plan, right?

So we were up $43 million in the first quarter, $45 million this quarter.

So the plan for the year is about $200 million.

And I -- whether it's going to be tremendously more than the first half of the year, I doubt it.

But it's going to a little bit -- it should be more than the first half of the year and should put us right on or over plan.

That $200 million is exclusive of Delanco, correct?

That's correct, yes.

And then lastly, just considering the LPO in West Chester.

You continue to strengthen the Pennsylvania footprint.

Just from a strategic perspective, what geographies are attractive to you that you aren't in?

Or is more the focus just filling in and adding scale to your existing markets?

Yes.

I would say right now, when we think about our regional structure, we got North Jersey, Central Jersey, South Jersey and then kind of Southeastern PA, which is Bucks County, down through the city and Chester counties.

And I think that's a pretty big sandbox to be in for the moment.

There are probably opportunities to expand some presence, either up north or even in the Lehigh Valley.

But I view those as sort of mid to long-term opportunities, if the right opportunity presents itself.

For us, we're not looking to go de novo into markets where we don't historically have a presence.

So market expansion, beyond where we are today, is probably either going to be driven by finding the right team or teams and/or M&A opportunities.

But if you look at kind of our historical core market within central, we probably will look for de novo opportunities there on a very selective basis.

The next question comes from Joe Gladue from Merion Capital.

Let me start out just ask Peter to repeat one number I think I missed, just the amount of loan prepayment penalties in the quarter.

The prepayments were around $42 million for the quarter, and the prepayment penalties were around $232 million that we showed.

Okay.

And I guess that sort of leads into my next question, just on the net interest margin.

Yes, I guess other than prepayment penalties, I assume there is some accretion income that's going into the net interest margin.

And just wondering how that plays into the guidance for a flat to down net interest margin.

I assume first couple of quarters, after Bucks and Delanco, that you have a little bit higher accretion income and that that will go down.

Is that included in the guidance?

Yes.

That is incorporated in, Joe.

That's -- that accretion is part of what we look at.

We've also, as you take a look at that guidance and take a look at our deposit costs and it still appears to us that we're in a position to meet the goal of a stable to modestly declining market in a rising interest rate environment.

And I guess I'll just ask on the -- you mentioned the -- I guess, completing the technology upgrade.

Just wondering if you have some cost saves available from that.

Or is that just going to be sort of a new place to buy the investments in the new locations and such?

No.

I think, Joe, there are some good opportunities there.

First and foremost, we had a group of folks that were retained through the end of this month to help with the transition and the conversion, and so there will be some rolling off of folks that aren't staying long term.

And then we also had, I think, some significant savings through the discussions with our core provider that we're still negotiating around, so I can't get into a lot of detail.

But I do think there's going to be some nice cost savings, from a strictly IT standpoint as well.

So no, I think we'll be in good shape to generate some good savings now that the conversion is complete, Joe.

Okay.

And are we completely through with the Bucks County cost saves?

And I guess what's the timeline on anything from Delanco?

Well, I would say that -- I think the timeline on Bucks will be to -- be pretty close to at 100% of our goal by the end of this year.

We do have some things we're working on there to get the final pieces of the cost saves than we had originally projected.

And then I would say, on the Delanco side, I would think by, call it, first quarter or second quarter of next year, we should be at or above what we thought we'd save in terms of cost from them, so.

(Operator Instructions) And the next question comes from Bryce Beard from Merion Capital -- Bryce Rowe from Merion Capital (sic) [Robert W. Baird].

Wanted just to follow-up on some of the previous questions.

Number one, Steve, on the purchase accounting impact.

Any way to quantify that on both the loan side, the loan and deposit side in terms of income and expense?

I think it's somewhere in the neighborhood a couple of hundred thousand dollars a quarter.

Okay.

And I would assume that the deposit side of that purchase accounting effect will kind of play out more quickly than the loan side.

Yes.

That's a -- it will, Bryce, but it's a much smaller piece.

Okay, okay.

You guys mentioned the impact of the new state tax and understand you're still kind of assessing the impact.

Is there a way to kind of think about what an effective tax rate could be from just a range of an effective tax rate as we look out into the second half of the year?

Well, that's a bit of a difficult question, Bryce.

When we put the plan together, we had projected an effective tax rate of 23%, it's been lower than that.

I don't think some of the changes that the State of New Jersey are currently instituting, the 2.5% surcharge in '18 and there would be some change to our dividends, are necessarily material to our effective tax rate.

It'll be what happens in 2019 that we're taking a very close look at with combined reporting and what that means to us.

Steve, let me jump in here.

You might want to clarify.

You used the term change in dividends.

I think you want to specify that you're talking about dividends from the Delaware REIT, not corporate dividends.

That's right.

I apologize for that.

Yes, it's obviously subsidiary dividends, dividends coming up from our Delaware corporation up to New Jersey now will be viewed differently by the state, and they will -- there's an exclusion to some of that dividend income.

But it's rather minor in the first year.

Okay.

And then wanted just to maybe get a little more discussion around the commercial deposit group.

Appreciate that you've seen some nice growth out of that group.

Just kind of curious what the pipeline might look like and if you have a kind of a targeted balance for growth over the course of the year or the next couple of years?

Yes.

So I think Phase 1 was getting the group off the ground and really working the existing commercial portfolio, and I think we've had some early successes there.

We are a little bit behind plan.

One of the things that we want to ultimately do with that group is build it out a little bit so we've got more of a direct sales effort into kind of cash-rich companies that may not have significant borrowing needs.

Historically, our commercial deposit focus, we've led with lending and then tried to backfill on the deposit side.

And so I'd say our medium-term goal for that group is to get them built out a little bit more so we can do more in terms of direct sales into those what we'll call kind of cash-rich, non-borrowing-type niches.

But for now, I think the group's doing well.

We've been able to circle back through a number of clients and build out our deposits from those folks.

I think the pipeline continues to build, which is nice, and I'm hopeful that the investment will prove to be a good one.

But we're still, I would call it, in the early stages, Bryce.

Okay, that's helpful.

So just to be clear, Pat, the kind of the effort so far has been geared at your kind of the current customer base and trying to maximize the relationship.

Exactly.

This concludes our question-and-answer session.

I would like to turn the conference back over to Patrick Ryan for any closing remarks.

Okay.

Well, I appreciate everybody taking the time to call in.

We appreciate the questions, and that will conclude our call.

Thank you very much.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.