0:03 Good morning, and welcome to today’s First Bank Fourth Quarter 2021 Earnings Conference Call. My name is Candice (ph), and I'll be your moderator for today’s call. [Operator Instructions]. I’d now like to pass the conference call over to our host, Patrick Ryan, President and CEO of First Bank. Patrick, please go ahead.

0:37 Thank you. I'd like to welcome everyone today to First Bank's fourth quarter 2021 earnings call. I'm joined by Andrew Hibshman, our Chief Financial Officer, and Peter Cahill, our Chief Lending Officer. Before we begin, Andrew will read the Safe Harbor statement.

0:56 Thanks, Pat. 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 and our annual report on Form 10-K for the year ended December 31, 2020, filed with the FDIC. 1:32 Pat, back to you.

1:37 Thanks, Andrew. Overall, I think Q4 was a great finish to a really strong year. I would like to start by hitting on a couple of the key financial performance milestones. In Q4, we had really strong return on average assets of 1.27%, which actually calculate to 1.33% if you back out the merger-related costs associated with our branch acquisition, which we finalized in December. Looking at return on tangible common equity, we were at 12.63%, which when adjusted for merger costs was 13.26%, very good ratios there as well. Our efficiency ratio came in below 50% for the fourth straight quarter. 2:22 Our pre-provision net revenue almost hit $12 million when you exclude merger-related costs. Our pre-provision net revenue return on assets has been over 1.85% in each of the past four quarters, and our net interest margin was over 3.5% for the past five quarters. While many banks are performing well right now, our performance clearly places us within the top quartile, based on our peer comparison of these important financial metrics. 2:50 Looking at the lending side of the house, we basically did the equivalent of a year's worth of lending in the fourth quarter. Our growth came primarily from C&I and owner occupied commercial real estate, which are two areas where we're strategically trying to increase market share. So we are pleased to see not only the growth in the quarter, but where it came in and the impact on our mix. Most of the growth during Q4 came at the very end of the year. So the full benefit of those loans will show up in this year 2022. 3:24 We're glad to see that asset quality is holding up quite well given what appears to still be a very uncertain market for a…

6:26 Thanks Pat. For the three months ended December 31, 2021, we earned $7.8 million in net income or $0.40 per diluted share. This resulted in net income of $35.4 million for the year ended December 31, 2021, or $1.79 per diluted share. The factors contributing to another strong quarter included stable net interest margin and improved non-interest income. Net income declined slightly compared to the prior quarter primarily due to the what Pat mentioned the higher non-interest expenses related to the acquisition and the higher incentive compensation expenses during Q4. 7:03 From a balance sheet perspective, as Pat mentioned, we had a very strong loan growth quarter, excluding PPP loan forgiveness, loans were up $134.4 million in Q4 compared to an increase of non-PPP loans of approximately $13 million in Q3. That loan growth did include approximately $11 million from the OceanFirst branch acquisition that was completed during December of this year. 7:27 Net loan growth excluding PPP activity was $150.5 million for the full year. A significant amount of the year-to-date and Q4 growth was towards the back end of fourth quarter, which Pat mentioned, which we do expect to help propel our interest income in 2022. During Q4 2021, $26.7 million in PPP loans were forgiven, leaving approximately $51 million in PPP loans outstanding at the end of the year. 7:54 During Q4 2021, we realized $1.1 million in PPP fee income, and that compared to $1.8 million in Q3 2021. As of the end of the year, we had $1.7 million in deferred PPP loan fees remaining. Even after our strong loan growth quarter, we feel good about the strength of our commercial loan pipeline and prospects for loan growth, which Peter will mention in additional detail later. 8:18 Total deposits were up $68.6 million during…

13:28 Thanks, Andrew. The earnings release outlines well the overall results for lending and Pat into highlighted what we accomplished. All in all, after a slow start to 2021, we finished very strong and exceeded our organic non-PPP loan growth goal of $120 million by $19 million, or 16% of plan. Noise in the lending results are PPP loans, which are in the forgiveness stage and continue to decline, as Andrew mentioned, and loan payment deferrals related to COVID, which are down to just a little over million dollars, both are detailed in the earnings release. 14:12 Lastly, as you know, we picked up $11 million of consumer loans with our acquisition of the two OceanFirst branches. I'll focus my comments on everything other than these things, which amounts to organic loan growth. 2021 was heavily impacted by loan payoffs. Organic loans were down significantly in Q1. We recovered in the second quarter, and overall growth was a little over breakeven for the first six months. We grew a bit in Q3, but most of our loan growth for the year took place in the fourth quarter. When we look at the fourth quarter growth, 60% of that growth took place in December. December growth was approximately 50% of our total growth for the year. So clearly, clearly back ended the year in 2021. 15:04 I spent some time during the third quarter earnings call describing the nature of the payoffs that we've been experiencing all year, I thought I'd recap the extraordinary level of repayment as well as how we ended up exceeding plan. Comparisons to 2020, where we had a good year and also met our plan or telling. Total loans closed and funded for 2021, total $475 million, an increase of $133 million, or 39% over 2020.…

21:16 Thank you, Peter. Well, at this point, I'd like to turn it over to the operator to open it up for Q&A.

21:24 Thank you. [Operator Instructions]. Our first question comes from Nick Cucharale from Piper Sandler. Nick, your line is open. Please go ahead.

21:58 Good morning, everyone. How are you?

22:01 Good. Good morning Nick.

22:03 So I'd like to start with expenses. I appreciate your commentary on the $850,000 linked quarter increase in variable comp. If you remove that impact in the merger expenses, is this a good run rate? And how do you think about the expense base playing out throughout 2022, especially in light of the wage pressure in the economy?

22:21 Yeah, I'll give you a couple of thoughts and then let Andrew dive in here, Nick. But I think the – the incentive comp in Q4 was higher a because we performed better, but there's also a component of a catch up, right? So we're running an accrual all year, based on sort of budgeted performance. And then over time, as we start to realize that we're performing in excess of budget, then we start to bump up the accrual. So I think the short answer is you can't just back it all out and assume that it's the normal run rate. But Andrew compared Q4 to Q3, which is probably closer to a normal run rate if we hit budget. So, we've made some changes to make our variable comp, a little more variable, if that makes sense. So I think the good news is we're a little more aligned in terms of making sure that pay for performance is there, but it makes it a little harder to predict the run rate, because you don't necessarily know you're going to hit budget a little below a little above. 23:25 So I think, it's Q3 is probably a decent proxy for a run rate, but even that's not a perfect number. And on your second point, we're certainly keeping a close eye on expenses and wage inflation. Obviously, there's a lot of information out in the press about what's happening, both in terms of the ability to retain folks and what you need to do to attract folks. So I think we're trying hard to make sure we can keep a lid on that expense growth as best we can. But I certainly expect that kind of the base rate, salary levels next year will be higher. Traditionally, I think we were looking at 2% to 3%, kind of inflation-based increase, and I suspect that number will be – will be higher by a 1 or 2 this year. But we've got other ways to manage that right? And you have got what you pay per person and then you've got how many people you have and how you reallocate work to make sure you can stay lean and so we're looking at all those factors and short answers. I think expenses will be up almost certainly, but I think we'll do a good job, trying to manage that growth. Anything, you would add there, Andrew?

24:42 I think you hit it though. There will clearly be some bit of a creep. I mean, we did, we added a couple of branches towards the end of the quarter, which will – but they're fairly – they're consistent with our model, which is fairly cost effective branches that aren't significantly expensive, but $10.5 million was the non-interest expense in September quarter, the $11.8 million was the expenses in the fourth quarter, probably the run rate going forward somewhere in between there, a little bit higher than the third quarter, but not nearly as high as the $11.8 million we had in the fourth quarter.

25:20 Okay, that's very helpful. And then back to your remarks for stable NIM in 2022, excluding PPP, does that include rate hikes? And is your anticipation to show some NIM expansion through the first several rate hikes?

25:36 Pat, you want to take that first. Do you want me to take a crack at it that you can jump in?

25:41 No, no, go ahead.

25:42 Yeah, I mean, I think we're well balanced. So I think we're in a good position for rate hikes, it's really going to depend on what happens with the yield curve. If the yield curve, short end moves up, the long end doesn't and tightens, that's obviously bad for banks across the board. But we do feel like the way we positioned ourselves, we're in pretty good shape for rising rates. I don't want to predict exactly where it will be at. But I think we can, at the very least keep a stable margin. But I think it'll be a little bit difficult, at least early in the process. Typically, as rates move, curve kind of tightens, at least at first. But again, I think we're in pretty good position to not see a big, there's a lot – there's not much downward risk, I think, on our margin at this point, as I see it. But we'll see how kind of everything shakes out during the year.

26:35 Okay. and then nice, we are getting a loan growth target this year. What are you targeting for loan growth in 2022? And do you expect that to be back-end loaded, given such strong growth in the fourth quarter?

26:48 Well, it's always kind of been – it's always tended to be back end loaded a little bit. But we don't, we're not – we're not projecting much of that this year. I don't believe Andrew could jump in there in a minute. But the growth plan for the year is a little under 10%, I think, right around $200 million, where the plan for this year was $120 million.

27:13 Thank you for taking my questions.

27:17 Thank you, Nick.

27:20 Thank you, Nick. Our next question is from Bryce Rowe from Hovde Group. Bryce, please go ahead.

27:29 Thanks a lot. Good morning. Good morning, guys. Maybe just a little more follow-up around the margin discussion there. Obviously, you've seen a pretty material improvement in your in the funding mix, and the funding side of the – of your balance sheet. I was curious how you're thinking about kind of deposit betas with the prospects for rate hikes come in here and 2022?

28:02 Yeah, I mean, we obviously model deposit increases as rates move higher. We do it based on historical, evidence of what we've seen in prior rate moves higher. As you know, every markets a little bit different and the key variables us competitive dynamics, I think we're starting from a point of very strong liquidity in the system overall, which you would expect would lead that maybe deposit betas won't go up quite as quickly as they haven't in other environments. But we don't know how quickly the money is going to get sucked out of the system. And you're starting to see signs that loan growth might be picking up, which obviously, could put some, excess liquidity to work and therefore, put some pressure on deposits maybe later in the year. So I think that the numbers we have in our model are reflective of what you usually see in these rising rate environments. But, whether it'll come in a little better or worse than that, it's hard to say, I don't know, Andrew, anything you want to add there?

29:06 No, I think, you hit it. I mean, we're still seeing, for example, I mean, we've led a lot of our brokered money go but brokered money is still very cheap, because there's just, there's a lot of money out in the system, and they're looking for places to put it. A lot of municipal, we're seeing a lot of bids for municipal money and the bids are not crazy in terms of what we've seen historically. So yeah, we'll see, I mean Pat's point about how quickly the liquidity gets sucked out of the market is the best point. But right now we're still seeing a lot of liquidity and if that kind of sticks and rates move and there's still a lot of liquidity that should help with beta pressure, but we'll see how it all shakes out.

29:45 Okay, that's good color. Maybe one for Peter, just around the loan prospects here for ‘22. Peter, any sense for how payoffs are kind of shaping up. I mean, you talk a lot – you talked a lot about the investor real estate pressure, so to speak from ‘21. Just curious how your, how that feels right now?. Do you still – you still see some of these some of these investor real estate projects, maybe wanting to get pushed out or refinanced, sold or refinanced? And does that kind of play into the increased budget from a loan growth perspective for ‘22?

30:32 Good question. I don't think we're seeing any tremendous pressure payoffs. I mean, this time last year, we knew the first quarter of 2021 was going to be tops. And we're just not seeing it, when we do a 60%, or 60% a day. Look out on loan funding, we're also looking at payoffs, and it's never, it’s not an exact science, but we're not seeing a degree of payoffs that we have been seeing this year. 31:07 I don't think that's what's driving the plan. I think the overall teams come together. Better, we had a number of openings in our team through most of 2021, we fill those. We just feel good about prospects and what the pipeline looks like and what folks throughout looking at, so that's kind of where we are.

31:34 Okay. That's great. That's helpful. Last one for me. You guys highlighted the preferred SBA status and obviously that's been a highlight here, within the income statement with the loan sale gains coming from the SBA group. Can you speak to any kind of impact from a positive perspective that you might see for having that SBA preferred status relative to that – to that fee income line, that would be helpful? Thanks.

32:05 Well, I can – I can tell, go ahead, Pat.

32:10 No, no, no. It's okay. I'll jump back after you.

32:13 Yes. I'll just say that when you look back over the last three years, we did a handful of deals in 2019. I think we did five SBA loans in 2020, 14 in 2021 and those were not as a preferred lender and you were lower on top of that PPP, the pressure that’s put the SBA on there to turn around deals would be responses, if you're not a preferred lender, it was a handicap, that's we were not projecting or nor is our plans to blow out SBA business and do five times the number of deals we've done, but we did – what did I say 14 – 13, 14 deals in 2021 and I'd be disappointed if we didn't do 20 or roughly. So it's going to help us. 33:14 Pat, do you want to add that?

33:14 Yeah. I would, I would echo those comments, I mean you got – we got two things helping us heading into the year, well, three things, we've got momentum, right? Well, now that we've built a better system in process that should help continue to flow. We've added a quality person to the group and now we've got preferred status, which means we can move faster on deals. So, as Peter said, our expectation is to do even better in ‘22 than we did in ‘21 and I think we've got good reason to be optimistic there. So…

33:50 Excellent. I appreciate the answers. That’s it for me. Thanks.

33:56 Thank you, Bryce.

33:57 Yeah.

33:58 Thank, Bryce. Our next question is from Erik Zwick from Boenning & Scattergood. Your line is now open. Please go ahead.

34:08 Good morning, guys.

34:11 Good morning, Erik.

34:12 Good morning.

34:14 Wondering first, can you remind me with the two branches that were acquired. Were any commercial lenders included with that acquisition?

34:27 No.

34:28 Okay. And where does your kind of total commercial understand today? The headcount?

34:36 We're roughly around 25. We've break it up by regions. New Jersey, which is primarily Mercer County in North and then, Pennsylvania South Jersey market. And then we also have teams focused on investor real estate and SBA. Obviously, we just talked about that and a couple of consumer lenders that are responsive to business brought in through the branches.

35:08 Great, thank you for the update there. And then, Pat, in your prepared comments, you mentioned, I think that the language use was continued to explore, new C&I opportunities and Peter certainly mentioned a little bit in his comments as well. But I'm curious is that, in those new opportunities purely just having, adding some new lenders in the year and making sure calling efforts are staying diligent? Are you also considering, kind of expanding into your markets a little bit and maybe lending to new industries? Or just curious if you can, add a little bit to that, to that comment?

35:43 Yes. I think it's a combination of everything you mentioned, right? We continue to incentivize and coach our folks to focus a little more on C&I. As we bring in new folks, they have connections or expertise in areas where maybe we haven't done much in the past. So, get a little bit of additional new C&I exposure through some of those new hires. And then we're, we're actively looking for opportunities, as we get bigger as our lending limit grows, we have opportunities to move up and to, more of the true middle market, as opposed to the lower end of the middle market where we've been and so I think there's just a variety of new opportunities emerging that we're exploring that, won't fundamentally change the composition of the balance sheet overnight, but I think it will allow us to continue, the really good results we saw in ‘21, which is a loan mix, which is [Indiscernible] out a little bit more between CRE and C&I, so.

36:46 Thanks, Pat. That’s helpful. And just last one for me, for Andrew I guess, I think that the effective tax rate for 2021 was still a little bit above 24%. Is that a good rate to use? Again or would you expect any, any differences in ‘22?

37:05 No, we don't expect any significant changes. There's a lot of things that can impact the tax rate. But yes, I think we're still thinking mid, mid 24%, low 24% for a run rate unless things change, but there shouldn't be a huge swing in the tax rate, unless obviously, there is some kind of tax rate change or tax law change, but that’s pretty good estimate for what we expect the run rate to be going forward.

37:31 Perfect. Thanks for taking my questions this morning.

37:36 Thanks, Erik.

37:38Thank you, Erik. Next question is from Manuel Navas from D.A. Davidson. Manuel, please go ahead. Your line is unmuted.

37:49 Hey, good morning.

37:55 Good morning, Manuel.

37:57 Can you help describe the colonials you're seeing in either in the fourth quarter or in the pipeline currently?

38:08 I would, I would describe them as up a bit. Right. I mean, you see what's going on in the treasury market. And that is our primary benchmark on five and seven-year loans. And, our folks have been trained, price off of treasuries and we haven't seen huge compression in that spread over treasuries. So, the short answer is, I think the stuff we're looking at today is up 25 bps, 50 bps, so over where it was three months ago. Peter, anything you'd add there?

38:40 No, I agree. I would say, overall, specific yields we're looking at are in the high threes to 4%. We’re prior for top credit, you might be down in the lower threes to 3.5%, so we're up – we're up a bit fourth quarter.

39:01 Given where the pipeline is and how much I kind of close with a comparable pipeline in the fourth quarter. Is there some definite upside to the loan growth outlook?

39:21 Well, I think there's upside, we don't anticipate, quite the level of payoffs that we had in 2021. And the pipeline now is arguably about the same level as it was heading into a strong fourth quarter. So, we talked about our goal going up fairly significantly from under $20 million to $200 million, almost 10%. So, I think we're expecting some upside.

39:51 Okay, thank you very much.

39:55 You are welcome.

39:55 Thank you, Manuel.

39:58 Thank you, Manuel. There are currently no further questions registered. [Operator Instructions]. There are no additional questions waiting at this time. So I will pass the conference over to the management team for closing remarks.

40:19 Thanks very much. I just like to thank everybody for taking their time to listen in and ask questions on the call today. And we'll look forward to regrouping with everybody after the end of the first quarter. Thank you very much.

40:34 That concludes our First Bank fourth quarter 2021 earnings conference call, you may now disconnect your lines.