First Bank (FRBA) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the First Bank First Quarter 2019 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 First Quarter 2019 Earnings Call. I am joined today by our Chief Financial Officer, Stephen Carman; and 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, 2018, filed with the FDIC. Pat, back to you.

Thank you, Steve. Well, I think we had a decent start to the year giving - given the challenging operating interest rate environment. From a balance sheet standpoint, we did have net loan growth but we were a little behind plan, although I don't think that's the worst outcome given the competitive environment we're in today. We certainly don't want to chase deals especially if we're in the later innings of the economic cycle, and we did see about $30 million in payoffs during the quarter, which obviously impacted our net gross number. Deposit growth was almost double loan growth, helping to lower our longer deposit ratio from 105% at the end of the year to 103%. Unfortunately, we did not see growth in noninterest bearing balances, but we did open several new accounts and we expect positive trends in this category going forward. Some run-off involved normal fluctuation, and we do expect that we'll see a return to some dollar balances in certain categories as we move forward throughout the year. From an income statement perspective, our net interest income was up significantly compared to Q1 2018 and was basically flat compared to Q4. We believe a big part of the deposit repricing has occurred. Our review of current funding costs compared to stated product rates that we're currently offering would indicate that we're getting towards the tail end of the impact from repricing of short-term liabilities. We do still expect to see some impact of higher liability costs moving forward, which will lead to some additional margin compression, but we hope we're getting towards the later stages of that impact. From a noninterest expense standpoint, our expenses were $9 million in the first quarter, which were down compared to $9.2 million in the fourth quarter, and we still see some room to drive expenses lower. In the first quarter, we had a couple of nonrecurring or more unusual type expenses. We had $117,000 in merger-related costs. We also had $180,000 in personnel-related costs for taxes and severance. Going forward, we think there will be opportunities for additional savings specifically related to the closing of our Levittown branch, which happened in mid-March of this year. We think that could generate about $400,000 in annual cost savings going forward. We also believe there's another $500,000 in additional personnel cost savings from staff-reduction changes we made during the quarter and in April. We will see some merger-related costs going forward in 2019 related to the Grand Bank acquisition. I would also note that at the end of March, we had 181 full-time equivalent employees, which was down 5 compared to 186 at the end of the year. Our provision was lower than normal because of some significant - because of a significant paydown we received on a classified loan and because of some slower growth during the quarter. Our overall allowance did go up a little bit and our coverage of nonperformers remains very strong. On a strategic front, we announced our Grand Bank acquisition, which we believe does a few things for us. It solidifies our position as a go-to bank in Mercer County, will help to improve funding costs and loan yields. It's an opportunity to drive additional scale and profitability in the business. And we believe the pricing was reasonable and that thorough credit marks should help mitigate some of the transaction risk that can be associated with M&A. I'll try - I'd finish up by noting that we have active pipelines for new loans and deposits in each of our regions. And we're pleased to start to see some positive momentum from our Bucks County, Pennsylvania team. At this point, I'd like to turn it over to Steve to discuss the financial details for first quarter. Steve?

Thanks, Pat. After a successful 2018, we knew entering 2019 we'd be facing this challenge of a flat converted treasury yield curve in very competitive deposit markets. Our focus based on this environment was the impact to our net interest margin and bottom line results. Net income for first quarter of 2019 was $4.3 million or $0.23 per diluted share compared to $4 million or $0.23 per diluted share for the first quarter of 2018. Net interest income growth, the primary driver of our profitability, was $14 million for Q1 2019, an increase of $1.4 million or 11.4% compared to $12.6 million for the first quarter. Our tax equivalent net interest margin for the first quarter of 2019 was 3.45% compared to 3.62% for Q1 of 2018, a decline of 17 basis points. The combination of a higher interest rate environment during 2018, coupled with stiff competition for deposits, resulted in a 54 basis point increase on interest-bearing deposits outpacing the 23 basis point increase on interest-earning assets. On a linked-quarter basis, our tax equivalent net interest margin was 3.45% for the 3 months ended March 31, 1 basis point higher than our margin for the fourth quarter of 2018. Our margin in the first quarter benefited from the Federal Reserve rate increase on December 19 as well as additional loan income from prepayment penalties, a normal part of our commercial loan business. As we look at the margin over the next couple of quarters, we are projecting our margin to modestly decline from Q1 2019. Commercial loan pricing is expected to be impacted by the inverted yield curve, and we expect that competitive pricing measure - pressure will continue as well. The 17 basis point increase in interest-bearing deposits experienced in Q1 2019, we expect to lessen over the next couple of quarters based on a level of our CDs that have already repriced. Actions we have taken to lessen margin pressure include the fact that we have recently lowered CD rates and our continued emphasis on attracting lower cost core relationship. Based on all the factors discussed today, we are expecting our net interest margin to modestly decline for Q2 of 2019. We'll continue to update you each quarter on the performance of our margin. Our efficiency ratio for the first quarter was 60.95%, down slightly from 61.78% for Q4 of 2018. Noninterest expense plus merger-related costs were about $8.9 million, as Pat discussed earlier, and we did experience onetime type of personnel-related cost that contributed to the variance of our projected net interest income - I'm sorry, noninterest expense. We believe our noninterest expense will be lower over the next couple of quarters not including merger-related costs, and we expect our efficiency ratio to move below 16%. Our effective tax rate for the first quarter of 2019 was 20.1%. We believe at this time our state tax planning strategy will continue to be beneficial in 2019 and project our effective tax rate to be about 21% for the year. Even with the headwinds we are experiencing at the margin, we continue to believe that 2019 financial goals are achievable. Our loan pipeline remains solid, and our asset quality profile continues to be strong. To further discuss our results in lending is Peter Cahill, our Senior Lending Officer. Peter?

Thanks, Steve. As was mentioned earlier, loan growth in the first quarter was $34.6 million, up about 2.4% from year-end 2018. The bad news, I guess, is that this is a slow quarter for us from a loan growth perspective; we were off about $10 million from the average quarterly rate of growth that we experienced in 2018. You might recall, though, that the slow first quarter we had comes after a pretty strong fourth quarter, our biggest quarter in 2018. So a slowdown was kind of normal. If there's any good news in having a slow quarter is that the quarterly growth we did have was in line with what most of our peers experienced during the period. More important, though, is that we continue to close and fund new loans at a steady pace and with it offsetting payoffs and that our loan pipeline continues to be strong. At 12/31/18, after a good loan growth quarter, which usually shrinks the pipeline a bit, the loan pipeline stood at $178 million, which was well above the 12-month average for 2018. The pipeline at the end of the first quarter was $172 million, also well above the 2018 average. And I think that positions us well for hitting our organic loan growth target of about 15% to 16% for the year, which would pretty much match what we did last year. Things affecting loan growth include, obviously, loan prepayments. The level experienced in the first quarter were in line with previous quarters. Also impacting the lending effort was our recent core system conversion. The earnings release outlined the conversion of our core operating system from Jack Henry to Fiserv during the quarter. I had mentioned last quarter the impact that this project had on lending stats in 2018, and that impact was even greater in the first quarter of this year as people from all areas of lending were involved in projects and special assignments. Thankfully core conversions don't happen often. Things like that are growing pains for a growing organization, and we're glad to have the project for the most part behind us. Regarding asset quality from a new business perspective, we continue to focus only on what we believe are high-quality loans. Our underwriting standards remain consistent. We had a solid year in 2018 from an asset quality perspective and the first quarter of 2019 was really more of the same. As was pointed out in the earnings release, we had net recoveries for the quarter, an improvement over the small level of charge-offs last quarter. Nonperforming loans as a percentage of total loans increased a few basis points compared to last quarter due mainly to a couple of loans that continue to make payment but where - but where the delinquency was administrative in nature. In most cases that means an expired line of credit that we're in the process of renewing. Other than that, things are good. Delinquencies otherwise were in line with previous quarters. The lending team in general is well organized and all regional relationship management teams are busy developing relationships in their markets. We're in the process of getting fully staffed in our PA market; Pat alluded to improved performance there. We had 2 openings in that team for the entire first quarter and brought 1 replacement relationship manager onboard a couple of weeks ago, and we're also very close to reaching an agreement with another seasoned RM to fill the last position. We've also, for the first time, started placing credit underwriters in the regional offices and adding loan administrator staff in the region as well. We feel certain that this will increase responsiveness in those teams even more. And we're also preparing for next steps in the recently-announced Grand Bank acquisition. So we think all these activities will position us well for the next few quarters. That's it for my first quarter lending report. I'll turn it back now to Pat Ryan.

Great. Thank you, Peter. Thank you, Steve. And at this point, we'll turn it back to the operator to open up for any questions.

[Operator Instructions]. Our first question comes from Joe Gladue with Alden Securities.

Let me, I guess, just ask a little bit about the Grand Bank acquisition. Yes, they've got a pretty nice deposit mix. Just wondering if there's any opportunity to - I guess any strategies they have or anything that can be expanded more widely in your network to sort of improve the deposit mix a little bit?

Yes. I don't know if there's any sort of secret sauce, Joe, that they have as much as I think part of what you see, the good side of loan growth is you drive revenue growth but it also pressures deposit pricing because you need deposits to fund those loans. And you probably notice Grand Bank hadn't been growing much over the last couple years, which I think gave them some added flexibility on the deposit side. But I do believe there's some things we're going to bring to the table in terms of cash management solutions and a larger lending limit that should allow us to expand some of their existing relationships as well as really help solidify our position of strength in Mercer County, which I think can drive some added scale and benefits from a marketing standpoint in kind of the home base of Mercer County. So I do think there are some nice upside opportunities there, none of which were really modeled in from a financial analysis perspective. But I do think there are some things that we can do to help make the combined franchise even better.

Okay. So we're shifting gears just a little bit. Just wondering if there's any trends in sort of early-stage delinquencies that are notable.

Yes. And I think Peter hit on part of it, that part of the increase we saw in the delinquencies are related to a couple of situations where there were lines of credit that needed to be removed that took a little longer than expected and ultimately got booked and updated on the system after the end of the month, so they showed up as delinquencies. But as Peter mentioned, were more administrative than payment delinquencies. But there were a couple of C&I credits that payment got extended on a little bit that we're keeping an eye on. So overall, we still feel pretty good about credit quality, but you can't be - can't be complacent and certainly, we're keeping a close eye on things there. And Peter, I guess, I would turn it over to you to add anything on that point.

No, Pat, I think that's exactly right. He had it covered well.

[Operator Instructions]. At this time seeing no further questions, I would like to turn the conference back over to Patrick Ryan for any closing remarks.

Great. Thank you. Well, I'd like to thank everybody for taking the time to listen in and we'll be back to the group in another quarter with additional update, so thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.