Good morning and welcome to the First Bank Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would like to turn the conference over to Patrick Ryan, President and CEO. Please go ahead.

Thank you. I would like to welcome today to First Bank’s third quarter 2020 earnings conference call. I’m joined by Steve Carman, our Chief Financial Officer; Peter Cahill, our Chief Lending Officer; and Emilio Cooper, our Chief Deposits Officer. Before we begin, however, Steve will read the Safe Harbor Statement. Steve.

The following discussion may contain forward-looking statements concerning the financial condition, results of operations and business of the 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, 2019, filed with the FDIC. Pat, back to you.

Thank you Steve. I would just like to start out today by saying how proud I am of our team across all areas. Everybody has done a really amazing job and we have seen strong execution in what has obviously been a very challenging operating environment. I would like to focus on great progress we have made in four key areas; number one, lowering our deposit cost; number two, improving our fee income; number three, our cost control efforts; and number four, our improving asset quality profile. Starting with the deposit cost as many of you may have seen in our release our deposit cost came down by 28 basis points in the quarter thanks to both disciplined pricing and an improving mix. Today, our non-interest-bearing deposits sit at 24% of total deposits, which is up significantly from 17% at the start of this year. We also had a good quarter for ancillary fee income. Our loan swap fee income was 631,000 in the quarter, which was in line with our past couple of quarters but up from prior years. Our gains on recovery required loans were over 500,000 in the quarter, slightly above where we've been in the last few quarters. Prepayment penalty income was 115,000 in the quarter, slightly below where we've been in prior quarters. And our gains on sale of SBA loans generated 43,000 of income during the quarter, which again was slightly below average. So a good quarter, but not necessarily out of line with where we've been so far this year. Our efficiency ratio came in at 50%, which highlights our strong cost controls. We expect to be able to keep a lid on expense growth moving forward. We have a dedicated team looking at efficiency opportunities. They've already uncovered and executed on several…

Thanks Pat. Third quarter 2020 results were highlighted by strong organic commercial real estate loan activity with existing and new borrowing relationships, double-digit net revenue growth, margin expansion, continued solid asset quality metrics, and effective non-interest expense management despite the logistical and economic challenges resulting from the COVID-19 pandemic. Since the Fed dramatically lowered the Fed funds rate in March, we have aggressively lowered deposit rates reflective of our strong liquidity position. Our strong third quarter earnings performance reflects in part core net interest income gains, resulting primarily from lower interest expense and an improving net interest margins. Net income for Q3 2020 was 5.9 million or $0.30 per diluted share, compared to 1.1 million or $0.06 per diluted share for the third quarter of 2019. Net interest income was 17.6 million for Q3 2020, an increase of 3.7 million or 26.1%, compared to 14 million for Q3 of 2019. Lower interest expense on deposits was the principal driver for the growth in net interest income for the comparative period. Also contributing to the growth was the increase in interest income on loans, primarily commercial. The higher provision for loan losses for the comparative third quarters in 2020 and 2019, as was the case for the Q1 and Q2 comparative quarters, was primarily due to qualitative assessments of challenging economic conditions due to the COVID-19 pandemic. Net income in Q3 2020 was enhanced by higher non-interest income compared to the same period in 2019 due to increased loan swap fee income, which totaled $631,000 for Q3 2020, and gains on recovery of acquired loans, which totaled 500,000 for the quarter. Non-interest expense, excluding merger related expenses for the comparative periods, was up about 17% as the full impact of expenses associated with September of 2019 Grand Bank acquisition are reflected…

Thanks, Steve. After two quarters were the driving force behind loan growth was PPP loans, we experienced a very solid third quarter growth, it was organic in nature and not related to the impact of the pandemic. Loans at September 30th were up $281 million for the year. If you back out the $190 million in PPP loans we did earlier, we see growth for the nine months of $91 million. This is right on our pre-pandemic's projected growth plan of $120 million for the year. I think the third quarter growth of 50 million was a good performance. It is well above the $10 million per month growth plan that I just mentioned. The financial tables in the earnings release breakdown the segments of the loan portfolio on a quarter by quarter basis. When you look at the segment percentages, the results gets skewed bit by the inclusion of the PPP loans which fall into C&I. In terms of dollars, you can see increases in all segments of the portfolio except consumer. I would like to highlight our loan pipeline for a minute. One thing I mentioned last quarter was that we're going to augment the sales process as we're using this period where face to face sales efforts are difficult, provide sales training to relationship managers and key retail staff. The goal is getting folks more proactive, better organized, and focused on the types of customers that we want to do business with. This training is still going on and while it's too early to see if all the benefits we hope will accrue will in fact happen, our loan pipeline despite the pandemic continues to be in very good shape. I think we've talked about before, we look at deals in the pipeline on a probable funding…

Thanks, Peter. Deposit performance in Q3 was strong. Despite the challenges of COVID-19, we continued to advance in our journey towards accomplishing our strategic objectives and mission for 2020. As you know we are focused on reducing our funding cost, shifting our mix, improving non-interest income, and growing commercial deposit. I am pleased to report that in Q3 we made progress on all four fronts. We reduced our cost of interest bearing deposits by 91 basis points compared to third quarter of 2019. Point to point end of Q2 versus the end of Q3, we reduced our cost of interest bearing deposits by 43 basis point. This was accomplished as we allowed pure CD rate shoppers to attrite while we focused on the retention of our core relationship oriented CD customer base. Over 239 million in CD balances matured in the quarter. We were able to retain nearly 60% at rates on average that were 180 basis points lower. We expect to benefit from continued reduction in our interest expense from our CD portfolio through the greater part of next year as well. In addition, through strong relationship management, our team of lenders and branch bankers were able to effectively navigate with our customers the aggressive rate reduction of our money market portfolio and promotional high yield savings accounts in the quarter, while largely preserving balances. As Steve mentioned, non-interest-bearing deposits now comprise over 24% of total deposits, up from 17% in Q3 of 2019. CDs represent less than 30% of total deposits, down from over 42% in the same time period. Our investments in enhanced cash management services, business banking resources, increased partnership and collaboration, product development and marketing, along with an optimized retail leadership team and structure, are enabling our success in adjusting the mix and it is…

Thank you, Emilio and thanks, Steve and Peter, appreciate those comments and at this point, I'd like to turn it back to the moderator to open things up for the question-and-answer session.

[Operator Instructions]. The first question is from Nick Cucharale with Piper Sandler. Please go ahead.

Good morning, guys. How are you?

Hey, good morning Nick.

With respect to the lending environment, give us a sense of the competitive dynamics in the market, has the competition increased with the modifications coming down across the industry?

I'll give you my quick sense and then turn it to Peter. I think within the bank's competitive set, I think the environment remains competitive. I think in certain areas we saw a pullback from more of the CMBS and the non-bank lenders early on. Some of those folks may be starting to get back into the game but, that's kind of the high level what we've seen and Peter why don’t you jump in here.

Yeah, and I think that's right. I mean, the pandemic kind of first hit the first 90 to 120 days, there wasn't much going on. But I think most banks now are kind of back into it and competition is back where it's kind of always been. I know we're looking at obviously credit a lot closer now than we did in the past. And I'm sure other banks are as well. But there still seems to be banks on every deal and pricing that's out there in the market. I guess if these banks decide if they want to lend has been aggressive. And we've been doing what we can to kind of hold the line on pricing. But, again there seems to be a decent amount of business out there still, so...

Related to that, what are you getting on pricing on your [indiscernible]?

Well, a lot of our loans end up getting -- most of our loans are not -- don't have swaps attached, right. So we like to fix the rate for no longer than five years if we can do that. And, we're still trying to keep our rates up around 375, 4% depending upon the credit. I mean it could be higher obviously, smaller kind of retail related commercial accounts should bring in a little higher rate than your top C&I deal or investor real estate deal. But then around 375 would probably be a good number to look at.

Okay, that's very helpful. And with respect to the CD book, can you update us on the amount and rate due to mature in the December quarter?

Yes, I can. So, we have a 75 million coming due in the fourth quarter and they're going to renew on average at a rate that'll be about 100 basis points lower than our existing rate.

Okay, perfect. And then Pat you mentioned fair value marks in the allowance commentary, do you have the value of those credit marks?

The actual dollar amount of the credit markets, I don't have that handy, Nick, but perhaps we could track down.

Okay, great. And then just lastly on the tax rate, I am not surprised to see an increase with the state surcharge. What is your expectation for the effective tax rate?

Well Nick, I think our effective tax rate at this point at least for the remainder of 2020 will probably be somewhere around 25% or slightly below. So I think that's probably a pretty good number until we see what happens in November.

Great, thanks for taking my questions.

Great. Thank you Nick.

The next question is from Christopher Keith with D.A. Davidson. Please go ahead.

Good morning, guys. How are you?

Good. Good morning, Chris.

Okay, so just looking at non-interest income, you had a pretty good increase in service fees on deposit accounts, which I think makes sense. I'm just curious, we are even getting to a point where it looks slightly above kind of pre-COVID or at pre-COVID numbers, is that a good run rate for the next few quarters?

Yeah, I would think so, Chris. I mean, there wasn't anything really unusual in the quarter from overall deposit fee perspective. So I think, it's a good number to have just kind of a starting point.

Okay, great. And then just over on the expense side, a slight uptick in salaries and employee benefits. I'm just curious, do you have -- are you comfortable with your staffing levels or do you have any plans for expansion there in the future?

Yeah, but I think overall we're looking for opportunities to find savings there. Sometimes what happens is you find some savings in one place and you need to augment your team in another. So I don't think we're projecting significant declines, but I do think we can keep our expense level close to where we are and potentially even get it down a little bit. But the reason you see the change from second quarter to third quarter is partly a function of the way the accounting for the PPP worked out in the second quarter. There was kind of an unusual salary reduction line item in Q2 that kind of artificially represented what the true employee expense base was. And that onetime expense reduction from PPP didn't show up again in the third quarter. So comparing Q2 to Q3 is a little bit misleading but, I think where we are in terms of overall expense base in Q3 is pretty much in line with where we thought we would be. And again, I think, our goal is to not let it get much higher and potentially bring it down a little bit. And we've got a lot of -- we've got a lot of projects underway that are going to find us some savings here and there. I kind of use the analogy of we're turning over all the couch cushions, we're fine and all the loose change is around. And I think, if you do that regularly and consistently you'll be able to effectively manage your costs. And that's what we plan to do going forward. Steve, I don't know if there's anything you wanted to add around the PPP impact in Q2.

I would just add to your comments Pat, which were more comprehensive on that front that, absent that accounting you just referred to, salary expense in the third quarter would have been between $50,000 and $100,000 less compared to Q2.

Got it. Okay, great. Thanks, guys. And then I guess just looking at kind of the excess liquidity on the balance sheet, it looks like you've been investing in the securities book. I'm just curious, obviously you also had strong loan growth. So at what point do you think we start getting some run down in liquidity via loan growth versus securities or do you think that the securities book will continue to go up over the next few quarters?

Yeah, I mean I don't think you're going to see a big increase in the investment portfolio, but Steve, chime in here.

With PPP loan forgiveness we expect that probably will enhance our liquidity position, but we'll be opportunistic as it relates to what we do on the investment side, obviously, due to the challenges presented there from a yield curve perspective. But we certainly, with excess liquidity yielding 30 basis points or less we will take our selective opportunities on the investment side going forward.

Okay, great. And then just one more if I can, so on deferrals, can you just talk about your philosophy on migrating, I mean, I know deferrals are quite low, but your philosophy on migrating loans that are currently on deferral status kind of through the credit classifications, are you viewing those as performing loans until the end of the deferral period or are you continuing to migrate them even while they're on deferral?

Yeah, I mean, it's done on a case by case basis Chris. But certainly as a general rule I would say an initial 90-day deferral didn't necessarily trigger a risk rating downgrade. In most cases if not all cases, a second 90-day deferral would almost certainly have triggered a downgrade. And for folks that need support beyond 180 days, that's almost certainly going to trigger additional downgrades. We're not necessarily putting folks on non-accrual, but we've moved away from, hey, if you think you need help, we're happy to do a deferral to -- we're really going to dig into the numbers. Let's see what the cash flow is. Let's see what you can handle. And on a temporary basis, if folks can perform according to terms of the additional deferral, that wouldn't necessarily trigger a move to non-accrual. But it's really done on a case by case basis. And obviously, if you have folks that haven't paid at all and can't pay anything going forward, then those are situations where you're almost certainly looking at non-accrual status. But thankfully, we really haven't had any of those. So, most of the folks that we've dealt with obviously have seen in the numbers the percentage of deferrals are way down, the dollars are way down. And even the folks that need a little bit of additional time, they're seeing some decent improvement in trends to the point where in almost all cases, folks that maybe had a full P&I deferral initially are at least coming back to making interest only payments as a way to hopefully get them back towards full payment status in the not too distant future.

That's great. Thank you guys so much for taking my questions.

Sure. Thank you.

The next question from Erik Zwick with Boenning & Scattergood. Please go ahead.

Good morning, guys.

Good morning Erik.

First, I just wanted to follow up a little bit on your comments about seeing some good new opportunities in the C&I portfolio. Chris [ph], if you could provide any color to what any particular industries and markets within your footprint that are driving those new opportunities today?

I'll let Peter chime in here as well. I mean, from my perspective Erik, it's not really industry specific. I mean, the opportunities that we're seeing quite honestly, a lot of them were generated by our ability to get a quality PPP process up and running quickly to the point where a number of local CPAs and other friends of the bank who knew people that weren't getting taken care of by their banking organization were getting referred over to us. And that was kind of across the board. So it wasn't really a function of there was an industry trend. It was more a function of folks were sort of realizing the importance and the value of having that relationship with their bank. And a number of those folks got referred over and we're looking to bring that business to us. But Peter, anything you'd add there.

Yeah, no, I agree. No concentrations anywhere. As you would imagine, a lot of service-related companies that haven't been impacted directly by PPP much; professionals, doctors, those kind of things typically, I would consider C&I to include owner occupied real estate as well. So, as those that -- that side of the C&I stuff is a little bit lumpier, right. Bigger dollars, immediate outstanding’s, that kind of stuff with real estate. Really no concentrations anywhere. No loans of major size.

Great, thanks for the color there. And that's great to hear that there's some secondary benefit coming off of their PPP participation as well. I guess -- where I think you mentioned about 4.8 million in unamortized PPP fees remaining, what are your current expectations for I guess the percentage that will ultimately be forgiven and kind of remind the timing on those as well?

Yeah, I mean we -- I know some banks sort of held off on starting the forgiveness process. We didn't, we have our portal up and running and we have our full team dedicated working on applications. I think we've submitted to the SBA approval applications for about 20% of the total portfolio. Unfortunately, I've only heard back on a small fraction of that, or we have gotten a few loans where we've heard back and they've been forgiven. But I think and Peter maybe you can provide a little more detail. I think what we're seeing is in most of the applications, the vast majority, if not all of the PPP loan amount is being forgiven. There are in some cases some small stub periods remaining. But I think, Peter, for the most part it looks like a big chunk of that is getting forgiven, is that right?

Yeah, you're right. Across the board it is at 20% of the 1100 or so PPP loans we did have been forgiveness has been filed and what we've heard back is positive stuff. So we'll just have to see how that goes.

Okay, so that 20% submitted so far and I think once the FBI gets that they have technically I think up to what 90 days to respond, how long do you think it takes you to get that remaining 80% submitted?

Well, it's kind of -- go ahead. I was just going to say, we're kind of at the -- the borrower has to initiate the process, right, the way we're set up. So we have a portal for them to supply the information. The application fee for forgiveness with the supporting documentation. So we reached out to all 1100 plus a couple of times to show them what to do, remind them where to go, etc. And they're kind of dribbling it. So that's where we're at right now.

Got it, that's helpful. And then just looking at the loan to deposit ratio is up a little bit this quarter and I know this PPP loans and related deposits are impacting both the numerator and a denominator. Mentioned also that the deposit pipeline is strong and kind of on track for your goals. Just curious about kind of where if you're kind of targeting a certain ratio or where the upper limit kind of comfort range is at this point?

Sorry, upper limit on what Erik?

The loan to deposit ratio?

Oh, yeah, that's something in a normal environment we track pretty closely. I think right now, the primary issue is overall liquidity levels. And we have a strange situation where you got these PPP loans that we didn't end up funding them dollar for dollar with PPP funds. But obviously if you did, right you'd be adding this portfolio of almost 200 million in loans, which is impacting your numerator, but you got borrowing's funding it instead of deposits. So the loan deposit ratio temporarily looks a little bit out of whack. So, in normal times we want to keep it under 110% closer to 100% or lower. But right now, because it's getting artificially inflated if you will by the PPP, I think we're more focused on what does it look like once the PPP loans are forgiven, the borrowers are paid off, and the balance sheet kind of deflates back to where it was. And certainly in that environment, we'd like to see it down closer to 100% than 110%, so.

And then just last one for me on the new share repurchase authorization, curious about your appetite to utilize that today, kind of how active will you be, whether it'll take several quarters if that's your full intent to use it just given where, it seems like a fairly attractive from a financial perspective, given where the stock is trading today?

Yeah, exactly. And that's obviously going to be the big driver trading at a significant discount to book value. And given what we're seeing in terms of core performance and improving asset quality metrics, the best investment opportunity out there right now is probably buying back the stock. Obviously, the stock price moves significantly or if we see some trends that are problematic, we'll have to revisit it. But I think right now what you're seeing is a clear signal from the board that based on everything we're seeing, buying back our stock at these levels looks attractive to us. So, I suspect we will be moving forward and trying to put that -- trying to put that buy back to work.

Thanks for taking all my questions this morning.

Sure, no problem. Thank you Erik.

The next question is a follow-up from Nick Cucharale with Piper Sandler. Please go ahead.

Hey guys, just a quick follow-up on the PPP remarks, the 20% who have applied for forgiveness is that by number of loans or by dollar amount?

Yeah, I think it is about both Nick.

Yeah, I think again it's 20% that have applied. I think part of what was being asked was of those that have applied, what percentage of the loan amount was applied to be forgiven. And it wasn't 100%, but it was a pretty high number, I think, north of 90 on average. And that obviously includes a bunch of loans that should be 100% forgiven and some others that are maybe more 70%, 80%. But, the 20% is what we've submitted. Unfortunately, we haven't actually heard back from the SBA on more than a handful of them.

That's very helpful, thank you.

Yeah Nick, I know you would ask the question about the credit, the purchase account and credit marks from acquisitions and that number we were able to track down. I think it's 7.7 million.

Terrific. Thank you so much.

Sure.

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Patrick Ryan for any closing remarks.

Thank you. I just would like to thank those who called in for their interest and their questions, and we look forward to providing an update for the full year on our earnings call in late January. Thanks, everybody.

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