FIRST BANK (Hamilton) (FRBA) 2024 Q4 法說會逐字稿

Hello, everyone and welcome to First Bank earnings conference call.

Please note that this call is being recorded after the prepared remarks.

(Operator Instructions).

Thank you.

I'd now like to hand the call over to Patrick Ryan, CEO.

You may now begin.

Thank you.

I'd like to welcome everyone today to First Bank's fourth quarter, 2024 earnings call.

I'm joined by Andrew Hibshman, our Chief Financial Officer, Darleen Gillespie, our chief retail Banking officer and Peter Cahill, our Chief Lending Officer.

Before we begin, Andrew will read the Safe Harbor statement.

The following discussion may contain forward-looking statements concerning the financial condition, results of operations and business of First Bank.

We caution that such statements are subject to a number of uncertainties and actual results could differ materially and therefore you should not place undue reliance on any forward-looking statements we make, we may not update any forward-looking statements we make today for future events or developments.

Information about risks and uncertainties are described under item 1A risk factors in our annual report on form 10-K for the year ended December 31st, 2023, filed with the FDIC Pat.

Back to you.

Thank you, Andrew.

I'd like to start my comments with a look back on the full year.

I think the fourth quarter was very good finish to what turned out to be an excellent year.

I think by focusing on the 90-day window of time and annualizing those results, we sometimes get a little too focused on the short term.

And so, I think to look back on the full year is worthwhile.

In 2024 we earned $42.2 million or $1.67 per diluted share.

That's a 13% annualized increase in core EPS over the past 10 years.

Tangible book value has more than doubled over the same time period, which is a 7.5% annualized growth rate, and it shows the model is working well.

There always seems to be one-time non-recurring items that impact earnings in a given year.

In 2024 the one-time gains were basically offset by one-time expenses so that the reported GAAP net income was pretty close to a core number.

ROA for the year was 1.15% and return on average tangible common equity was 12.5%.

Strong results in both areas given the continued challenging interest rate environment.

Furthermore, those strong results came at the same time, the bank was investing and working to add and scale up new lines of business.

As we get to a level of profitability and operating efficiency in those areas.

We should see our financial performance continue to improve.

Collectively our newer businesses, our private equity sponsor, banking business, our asset-based lending business and our small business loan portfolios, are all up over $250 million since we started those ventures, we expect each of these developing units to continue to scale with minimal additional expenses driving bottom line improvement.

Beyond the CNI expansion initiatives, our banking as a service banking unit is ready to commence, our first fintech partnership in the first quarter and we expect to be active during the first half of 2025 while we are taking a crawl walk run approach in this area, we see plenty of opportunities to increase fee income and low-cost deposits.

So, what does all this mean?

It means first bank is a unique and compelling franchise that is both a proven and profitable community bank, business core as well as optionality on future growth and development into a true middle market commercial bank.

Not only does the future look bright, but we don't need outside capital and balance sheet restructuring to achieve our goals.

Our mark to market loss position is modest, thanks to prudent balance sheet manage management and a short duration loan portfolio.

Our credit profile is clean, thanks to conservative underwriting and strong credit standards and our strong earnings power and modest dividend payout ratio provides flexibility for stock buybacks and or special dividends.

In summary, I'm very excited about the upside potential of the franchise as we move into 2025, before turning things over to the team to get into more specifics on the fourth quarter there are a few additional areas I'd like to highlight.

During the year, our ratio of investor, commercial real estate to total loans came down from 55.6% at the start of the year to 53.2% at the end of the year, a 2.4%-point reduction which is not insignificant given the size of our balance sheet, our allowance for credit losses and our credit marks to total loans ended the year at 1.43% and our allowance for credit loss to total loans stands at 323% coverage ratio for our nonperforming loans.

This is the highest coverage ratio in our local pure bank survey.

Approximately 40% of the bank's business comes from outside of New Jersey and our net interest margin grew 6 basis points in the fourth quarter and we could see further expansion if the yield curve continues to steepen.

At this point, I'd like to turn it over to Andrew Hibshman to discuss the fourth quarter results in more detail.

Andrew.

Thanks, Pat, for the three months ended December 31, 2024, we recorded net income of 10.5 million or $0.41 per diluted share and a 1.10% return on average assets.

These measures improved significantly from prior periods with our return on average assets improving from 0.88% in the third quarter of 2024 and 0.93% for the fourth quarter of 2023.

We had another strong quarter for growth in our loan portfolio.

Loans were up over 7% annualized from the third quarter.

We saw a nice some nice pickup in activity in the back half of 2024 after a slower first half.

On a year over year basis loans grew 123 million or 4% and I remind you that that reflects organic growth and the offsetting loan sale totalling approximately 24 million that occurred in the second quarter of 2024 as part of our balance sheet optimization efforts.

Annual loan growth was driven by commercial and industrial and owner occupied commercial real estate loans, this growth was offset somewhat by a small decline in our investor real estate loans during the year which includes our CRE investor [construction] and development and multifamily loans.

We recorded a $234,000 credit loss expense during the quarter despite strong loan growth.

Our credit expense was muted due to net recoveries during the fourth quarter and low levels of problem loans.

On the deposit side balances showed a modest 5.8 million increase during the quarter as we continue to focus on profitable relationships and allowed some higher cost noncore relationship funds to leave the bank during the fourth quarter.

Net interest income increased 1.5 million compared to the third quarter, primarily related to the benefit of higher average loan volume which reflects growth during the fourth quarter as well as the late quarter growth from the third quarter.

Our net interest income was also supported by margin expansion which was due to lower average rates on deposits and borrowings which outpaced the reduction in average rates on earning assets.

Our net interest margin increased to 3.54% in the fourth quarter compared to 3.48% in the prior quarter.

Interest bearing deposit costs declined following 20 basis points from Q3.

We're pleased with our success in moving rates lower on a significant portion of our deposit base while still retaining balances.

Deposit costs declined outpaced the decline in average loan yields which fell by 11 basis points.

The decline was primarily due to the fed rate cuts impact on our variable rate loans.

The margin is also impacted by acquisition accounting accretion which totalled 3.1 million in Q4, 2024 compared to 3.4 million in the third quarter of 2024.

Looking ahead, we continue to manage a well-balanced asset and liability position which should result in continued strong net interest income generation with little variability, regardless of the fed's actions on rates.

We're happy to see the yield curve has improved and a more friendly yield curve should lead to some further expansion of our margin.

Our asset quality continues to be strong.

NPA is the total assets declined to 0.46% compared to 0.47% at September 30, 2024, and 0.69% at the end of 2023.

Our allowance for credit losses to loans declined just slightly to 1.20% at December 31, compared to September 30.

Noninterest income totalled 2.2 million in Q4 2024 compared to 2.5 million in Q3 2024.

We expect as market conditions improve.

We will be able to realize additional income from gains on sale of [SPA] and mortgage loans.

However, we do not expect a significant increase in noninterest income as we begin 2025. [NAS] expenses were 19.1 million in the fourth quarter compared to 18.6 million in Q3 2024.

The increase primarily reflects an increase in salaries and benefits expense primarily due to a larger employee base also occupancy and equipment expenses were elevated primarily due to branch opening and relocation activity that happened during Q4.

We're also investing in technology and our sales culture which you see bumping up professional fees and other expense.

We continue to prioritize expense management and expect that the core expense base to increase just slightly over the next several quarters.

As I mentioned earlier, our tax rate was affected by the Boli restructuring completed in the 3rd and 4th quarters.

We anticipate that our effective tax rate going forward will be in the range of 25% to 26%.

The increase compared to the more recent 23% to 24% run rate is primarily due to the ongoing impact of the 2.5% New Jersey corporate transit fee, which was added in June of 2024.

We are pleased with the very positive performance and momentum this quarter; our efficiency ratio remains strong improving slightly to 57% and remain below 60% for the 22nd consecutive quarter.

We also expanded our tangible book value per share by 10% annualized from Q3 2024.

Finally, we're happy to drive shareholder value through our successful initiation of our buyback program during the quarter.

Along with the stable cash dividend, we believe our strong financial results in 2024 coupled with our investments for growth position us to perform well in 2025 and beyond.

At this time, I'll turn it over to Darleen Gillespie.

Our Chief Retail Banking Officer for her remarks, Darleen, go ahead.

Thanks Andrew and good morning, everyone.

As Pat and Andrew have mentioned, deposit levels were stable during the fourth quarter of this year following a robust third quarter, we attribute our ability to grow and retain our core deposit funding to our team's outstanding ability to build and maintain deep customer relationships.

We also saw the favourable outcome of our proactive efforts to manage deposit pricing in anticipation of the fed beginning its rate reductions in September, the additional 50 basis points of cuts we saw in November and December aided our efforts to be more aggressive with managing our costs down.

Our total deposits were up a modest 5.8 million from the third quarter of 2024 and they grew 88.3 million or 3% from the end of 2023.

This growth was driven by our success in attracting new deposit relationships and maintaining existing balances in a heightened rate environment with great pricing competition.

Our customers are sticking with us and that is a testament to our fantastic team.

During the quarter we saw a runoff related to fluctuations in some larger commercial customer balances.

This reflected business activity, and these customers remain active depositors of our bank.

For this exact reason, we take a longer-term view on deposits and look at average balances and looking at average balances, gives us a good view of that for example, average interest-bearing deposits increased over 11% annualized from the third to the fourth quarter of 2024.

We are pleased with the mix shift during the quarter, noninterest bearing demand deposits remained stable while interest bearing demand continues to show outstanding growth in a very dynamic rate environment.

Time deposits grew by 11.9 million while money market and savings declined 37.6 million or 12% annualized from the third quarter, the majority of the growth we experienced was in our commercial portfolio, which again is a testament to our blended sales teams onboarding new clients and expanding existing relationships.

Given the ongoing interest in high yielding products as previously mentioned, we were happy to see our overall deposit cost decrease meaningfully during the quarter and throughout 2024 as we continue to adjust our pricing and let costlier funds leave the bank, we've talked about this on previous calls in which we started to make changes or eliminate promotional products and the exception pricing and in anticipation of the cuts, we continue to effectively manage our funding costs to support lowering this metric and maintaining a stable net interest margin.

As I mentioned in recent quarters, our branch strategy is aimed at supporting engagement in our current markets and opportunistic expansion into adjacent markets.

In Q4, we completed the relocation of our Glenn Mills, Pennsylvania location to Media Pennsylvania.

And just this week, we officially opened the doors to our De Novo branch in Trenton, New Jersey.

We also completed the consolidation of our two Flemington New Jersey locations into one.

[Yet], there is no change in the number of locations, just an expanded and more convenient network for our customers and greater deposit and overall opportunities for first bank.

We're excited to continue pursuing further opportunities to optimize our franchise for growth.

Working closely with our marketing team has created some opportunities to enhance our brand awareness in 2025 and throughout our footprint, as we look to launch some very targeted marketing, brand, and deposit campaigns in Q1 and beyond.

So overall, we continue to focus on our existing and prospective customer relationships which are our priority, and we aim to attract and retain profitable relationships through excellent service, their pricing and with the distribution network and products that are that offer elevated convenience and sophistication.

We're very confident that our continued focus in these areas will support deposit growth into 2025 and beyond.

At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer for his remarks.

Peter.

Thanks Darleene, as Andrew described a few minutes ago after basically flat results for the first six months of 2024 the lending areas had another good quarter and a strong finish to the year.

Loans grew 56.8 million in the quarter, an annualized growth rate of 7.3%.

This is a good follow up to Q3 where we grew almost $90 million.

Our plan to focus on more C&I lending, which is where most banks find deposits and other relationship.

Business continues to take shape.

New C&I and owner-occupied real estate loans in 2024 made up 64% of all new loans closed and funded.

Investor real estate loans by comparison, made up only 29% of new loans booked and funded last year.

In comparison, two years ago, in 2022 investor real estate loans totalled 55 I'm sorry, 53% of new loans.

We're certainly not turning away good loans.

We expect to continue to have investor real estate be a significant part of what we do, but it needs to bring with it, deposits and other relationship business.

We had good contributions from a number of areas during the year and I'm pleased with the diversification we have among the lending units.

Our regional commercial banking team in New Jersey led the way for us in 2024 having a very good year in terms of C&I growth and contributing significantly to overall deposit growth.

Pat mentioned our newer business units, private equity fund banking, asset based lending and small business banking, which includes [SPA] are all developing their businesses and should have very solid results in 2025.

In our investor real estate area, increased management has resulted in a decline in the ratio of investor real estate loans to total loans from 55.6% at 12/31/23 to 53.2% at 12/31/25.

As well as the decline in the ratio of that real estate loans to total capital from 418% to 397%.

The schedules in the earnings release, break down the loan portfolio into their various segments and show the changes from quarter to quarter when compared to a year ago, one can see both the growth in C&I loans as well as the decrease in industrial real estate loans.

A common coming down in our own pipeline.

Our pipeline at the end of the fourth quarter stood at $245 million of probable fundings down 11% from the level at September 30.

This wasn't unexpected after another good quarter of loan closings when loans close, they come off the pipeline.

We need to close a lot of loans to offset payoffs and normal term loan amortization.

In Q4, for example, we closed and funded new loans totalling $129 million to end up with the 56.8 million in loan growth for that period.

If one breaks down the components of the pipeline at quarter end C&I and owner-occupied loans made up 66% of the overall pipeline.

Regarding after the quality, the earnings release and Pat and Andrew's comments, summarize things well, portfolio continues to look good non-performing loans at the end of the year were less than half of what they were a year ago and we had net recoveries of bed debt in Q4.

Also importantly, delinquent loans at 12/31 were again very, very small.

The supplement to the earnings release provides some detail around the loan portfolio, loan concentrations, demographics, et cetera.

They really don't change much from quarter to quarter.

Obviously, they can shift over time.

We continue to have very modest exposure in office and hotel segments and what we have continues to perform very well.

In summary, we're proud of the culture we've created around [Africa] quality where good quality relationships take precedence over growth rates and returns and we believe we can have all three.

Looking at how all this might impact next quarter in the coming year, our level of projected loan funding for the first quarter of 2025 is solid and in line with historic quarterly growth projections, we continue to see good activity in all lending areas.

We looked at potential growth areas, whether business lines or new markets.

At present there's nothing major in terms of new business lines we're looking at.

But as Darleene mentioned, I'm sorry, we have some retail branch expansion plans and lending through our regional Presidents is very involved in that undertaking.

We're spending time and resources to manage growth, we continue to tweak our credit administration area in order to service our lending businesses.

And we're in the middle of adding a sales force-based customer relationship management tool, that we think will really help manage new business efforts and create better coordination between our business units.

And importantly, we're always on the lookout and ready to add staff that we think can help us reach and exceed our goals.

As a result of all of this, we anticipate achieving growth, loan growth rates in 2025 that approximate the growth rate experienced this past quarter.

That concludes my remarks about lending.

So, I'll turn things back to Pat for some final comments.

Pat.

Thank you, Peter and thanks Andrew and Darleene.

So, at this point, we'd like to open it up for the Q&A portion of the call.

(Operator Instructions) Justin Crowley, Piper Sandler.

Hey, good morning, everyone, wanted to start on the margin and get a sense for how you're thinking about the deposit cost progression over the course of the year.

I think last time we spoke you maybe more flattish and was alluded to given maybe what is the time or maybe some unknowns on the funding side and how that would play out.

You know, as we look back and, on the fourth quarter, is it fair to say that you had a little bit more success in lowering rates?

And, you know, how would you, as we sit here today, expect that to unfold in the event?

We're only looking at one, maybe two more rate cuts over the course of the next year.

Yeah, it's a great question just and obviously, we wish we had perfect visibility into that.

I would say the biggest variable as we think about the margin moving forward is the shape of the yield curve.

We did see some steeping during the fourth quarter, which was certainly welcome.

And you know, I think if that continues throughout 25 we're hopeful that that steeping curve will help drive some margin expansion.

And you know, we continue to have lower yielding loans that hit their maturity or reprice, which obviously helps.

And you know, we're doing everything we can to make sure that we're keeping our deposit costs low.

So, I think flat to improving is probably the best guidance we can give.

And a lot of it will be tied to not only the pace of rate cuts, but more importantly, what's the relationship between the short and the long end so we'll be keeping a close eye on that, but we're optimistic that thematic steeping could be a benefit to us.

Okay.

Got it.

Appreciate that and then just a quick follow up there.

Andrew, I'm not sure.

Do you, do you have what is expected in terms of the level of purchase accounting, how that trends going forward?

Yeah, I think we mentioned it's going to continue to kind of trickle down from where it was, it dropped a little bit more I think there was a little bit of a to pay off on some of those loans in the fourth quarter.

So, as a continued kind of trickle down of that number over the next about year and a half or so.

And then as we've mentioned before, after that kind of three-year mark, so like July of 2026 is when it really kind of drops more significantly.

Okay.

That's helpful.

And then just in terms of loan growth, a strong year for the two areas you're focused on C&I and owner occupied [CRE] you know, based on the pipeline that Peter laid out, maybe sounds like maybe it sounds like it.

But are you expecting that to remain the case over the near or intermediate term as you look to continue lowering [CRE] concentration.

I can jump in there. we've been focused.

Yes, sorry that we've been focused on lower increased concentrations for a while now.

Right.

It's tough to do we have relationships; we want to maintain good relationships and we want to bring in new relationships if they're ones that are truly relationship driven.

So, it's kind of a slow process by design.

But I think the pipeline will build from where it is not, not decline overall.

You know, I just think it's at 245 at year end, it's down from, a couple of quarters of closing a lot of loans.

So I'm bullish on where we're headed as far as loan volume as it hits the pipeline and gets funded.

Pat, I don't know if you want to add anything or.

No.

I think that's right.

I mean, overall, we're seeing good activities in all of our segments and as we've mentioned before, Justin, we're not, you know, we're not believers that the commercial real estate lending game is a bad business.

I think it's a very good business that being said there are reasons why in any good business, you got to keep an eye on your concentration levels.

And I think we've taken the right steps to add quality C&I business to help fully bring down the overall level of [CRE] but certainly not and exiting of the business by any sense.

Okay.

Got you.

And then maybe just one last one Pat.

You know why we spend a little more time drilling down further into the banking as a service initiative and I know you're taking it slow to start off, but, just you know, what investment of that business in terms of talent and resources has entailed and then I'm not sure if you're able to give us any color on you know, the types of fintech partners you may be targeting to start off.

Yeah.

So, you know, it's something we've been working on behind the scenes for a while.

A lot of you know, investment on the tech side, the nice part about the tech investment is the things we needed to do to be able to pursue some fintech partnerships had added benefits for us outside of bass in terms of just added flexibility going forward and opportunity to sort of decouple from the core and really utilize best in class providers.

So, we're excited about those tech investments, not just because of the [V] capability, but just the overall improvement of the architecture and the flexibility.

But that was a big area of investment and then we've also given all the press out there about, banks that, kind of rushed into bass and, and jumped into the deep end quickly and then ended up on the wrong side of the regulatory view.

You know, we've just been going slow engaging consultants working on risk assessments, policies, procedures, and compliance and [AM L] and all that.

So, there's been some added investment both in terms of, bulking up our the [S A] group but also engaging consultants to help us make sure we got all of our, I's dotted, and t's crossed before we went live.

So, I think a lot of those investments have been made and now it's time to start generating some revenue.

And as I indicated in the comments, we're going to start slow with a couple of programs.

We're focused on a lower risk program right out of the gate things that are more finite in terms of duration as well as use of proceeds, things like a prefunded card to pay for certain things is you know, we view, kind of a lower risk way to get started.

So, yeah, we're excited to see some revenue deposits come in during 25.

We're going to watch it closely and as I indicated; this is not a make-or-break initiative for the bank.

If we can find a way to do it profitably and successfully and managing the risk, I think we'll continue to invest and grow that segment, but you know, we're going to see how it goes over the next 12 to 18 months and then reevaluate in terms of future growth plans.

Great I'll leave it there.

Thanks everyone.

Thank you, Justin.

[John], Hovde Group.

Hey guys, this is John on for Dave this morning.

Congrats on the Quarter.

Thanks John.

How are you?

Not too bad.

Thank you.

Was hoping to maybe just follow up quickly on Justin's question on the margin.

Hoping you can maybe provide a little bit of specificity around your CD maturities throughout 2025.

And then maybe also how you're thinking about managing the duration of those renewals from a rate perspective, just looking to see, get a better sense of really how much of an opportunity you have to work pricing down on deposits throughout the year?

Yeah, good question.

We obviously look at the CD maturity, you know, regularly, we do have a bucket coming due within the first quarter and it looks like if the rate environment stays the way it is today, we can probably get about a 50 basis points reduction in terms of the average cost of the portfolio that's renewing and being conservative and assuming it kind of reprices at our higher rates at our highest rates today.

We should see about 50 basis points.

Andrew.

I don't remember the exact dollar amount.

I think it might have been 100 million or 150 million in the next quarter here.

Yeah, I'm pulling up the data.

But that's, yeah, that's about right.

I think it's even a little bit more than that.

I think it's about $130 million - $140 million of CDs that will reprice in the first quarter.

And then we have a pretty big chunk in the second quarter.

I mean, all we basically have no CDs that are longer term than about 12 months.

So, everything is pretty much repricing within the next 12 months with a handful of CDs that are extended a little longer than that.

But I know we have about $140 million maturing just in the first quarter alone.

And I think you're right.

Pat about the around that 50 basis points.

That’s a wonderful color.

Thank you.

And maybe just one last quick one.

I know you were active on the repurchase this quarter.

Can you just remind me how many shares you have left on your, your current authorization?

Yeah, I think we had a plan approved for about a million shares and I think, we maybe a little less than 100,000 we bought during the quarter.

Andrew.

Is that right?

Correct?

Yeah.

Exactly right.

Million approved we purchased right up to about 100,000 during the fourth quarter, which gives us about 900,000 shares left in our currently approved plan.

Great, great color.

Thank you, guys.

I'll leave it there and congrats on the quarter.

Again.

All right.

Thank you, Jeff.

(Operator Instructions).

We will pause for a brief moment to wait for the questions to come in.

As of right now, we don't have any pending questions.

I'd now like to hand the call over to Patrick Ryan for a final remark.

Okay, thank you.

I think that will wrap the call.

We appreciate everybody taking the time to join and we'll look forward to getting back with everybody after the end of the first quarter results.

Thanks everyone.

Thank you for attending today's call.

You may now disconnect.

Have a wonderful day.