I'd like to welcome everyone today to First Bank's First Quarter 2023 Earnings Call. I'm joined today 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, 2022, filed with the FDIC. Pat, back to you.

Thank you, Andrew. I'll provide some high-level thoughts and observations on the quarter and then turn it over to the team to provide a little more detail. And as always, we'll have some time for question and answer at the end. Overall, I'm very proud of the resiliency displayed by our relationship-driven community banking model. Deposit outflows were there, but they weren't too bad, and they were largely driven by higher-yielding investment opportunities. Our NIM, our net interest margin held up pretty well despite the heightened deposit competition and the inclusion of additional borrowings we took out just to provide some excess liquidity. Asset quality remained very good with minimal charge-offs and low levels of non-performing assets and delinquencies. Our expenses were up and some of that increase is related to inflationary factors, but the bigger driver of the increase relates to key hires tied to strategic initiatives. Specifically, we added a group of great bankers from Investors Bank to help us continue to build and grow our presence in Northern New Jersey. We built on a small team to help grow our small business lending unit and we hired a team to build out a new asset-based C&I lending group. The important point here is that these expenses will drive earnings and profits into the future. It is not simply a function of higher overhead. As a result of the elevated expenses, our return on assets was down, but it remained above 1%, and that's even after including the merger-related costs that were incurred during the quarter. Regarding the merger, we're very excited about the opportunity to meaningfully grow our presence in Pennsylvania. Plus, this still gives us unique balance sheet management options. Specifically, the combined company could end up being leaner, maybe even smaller, but more profitable. As…

Thanks Pat. For the three months ended March 31st, 2023, we earned $7.0 million in net income or $0.36 per diluted share, which translates to a 1.03% return on average assets. Excluding merger-related expenses and losses on investment sales, diluted EPS would have been $0.38 or a 1.1% return on average assets. During the quarter, we had solid loan growth, improved our liquidity position, maintain strong credit quality metrics, and made investments to help drive future growth. The current interest rate environment and the steps we took in the first quarter to increase on-balance sheet liquidity led to a decline in our margin. In addition, the investments we made in people and new locations led to increased non-interest expenses. The combination of these factors led to a decline in net income of $2.1 million from the linked fourth quarter and a decline of $1.2 million compared to the first quarter of 2022. Strong commercial loan growth continued in the quarter. Loans increased $55 million compared to an increase in loans of $74 million in the fourth quarter of 2022 and $40 million in the first quarter of 2022. Growth during the quarter was primarily driven by C&I lending, as Pat mentioned. Total deposits were down $52 million during the quarter of first quarter of 2023 with non-interest-bearing deposits down $40 million and interest-bearing deposits down 12%. Darleen and Peter will expand on lending and deposit activity in their remarks. Primarily due to the increase in deposit costs, offset somewhat by the increase in the average rate on loans, our tax equivalent net interest margin decreased to 3.52% for the quarter ended March 31st, 2023 compared to 3.69% in the fourth quarter of 2022. Our asset liability management approach continues to be conservative, but we have taken steps and plan to…

Thanks Andrew. Considering all that has been happening in the industry, we continue to remain focused on our key strategic objectives related to the deposit side of our business. That focus includes deposit acquisition and growing our existing deposit fees. It has been a challenging start to the year, but we are optimistic. We remain diligent in working towards our deposit growth goals with seasoned bankers and a sales team that understands the mission. We rolled out deposit campaigns to promote and drive activity into our new location in Fairfield, New Jersey and the relocation of our West Chester, PA branch. We also expanded the campaign to assist in our efforts to mitigate deposit outflows as a result of funds moving into higher yield money market funds and treasuries. After the recent bank failures, our branch team members and relationship managers went to work, assuring our customers of the quality of our business model and the strength of our bank. Our quick action helped us to retain deposits, but we did experience some outflows. Total deposits decreased $52 million in the first quarter. However, we remain true to our core belief of growing the relationships we maintain with our clients, noting that very few of our clients have left the bank, but have reduced their balances and/or shift is funds into interest-bearing vehicles. We began the first quarter with an approximately $61 million decline in total deposits in January as we allowed some higher cost funds to leave the bank. We saw an increase of approximately $35 million in deposits in February and deposit balances were relatively flat from February month end through March 9th. After the Silicon Valley and Signature closures, we experienced some declines, but it should be most of those declines to seasonal outflows and continued movement…

Thanks Darleen. I'll try to provide some additional information, it's not already covered by the team. After a strong fourth quarter, I think we had another very good quarter in the first quarter of 2023. As you've heard, loan growth was $55 million, which puts us at an annual growth rate of right around 9%. You'll recall last year, loans grew by $260 million, but the fourth quarter showed slower growth than to the other three. Last year, we closed and funded on average during the first three quarters, $126 million in new loans. In the fourth quarter, we closed $83 million of new loans. Reasons for the slower growth then were, first, we were a good deal ahead of plan throughout 2022, which meant we could be more selective. As for the first six months, loan growth was weighted towards investor real estate loans. So, again, we were selective about what we pursued in the second half. And lastly, the impact of the economy on interest rates was helping cool loan demand on the investor real estate side, and that also led to a reduction in loan payoffs during the quarter, which again, are normally centered in investor real estate. The first quarter kind of neared the fourth quarter of last year. We are still being very selective about new business. We prescreened prospective loans a lot more than we did in the past and we're focusing on loan type and the degree of overall relationship we think we can get. New loans closed and funded in Q1 totaled $86 million, up slightly from Q4. Loan payoffs were $35 million in Q1, up a bit from Q4, but well below the average level of payoffs for 2022, which was around $48 million per quarter on average. The other factors…

Great. Thank you, Peter, and thanks, start leaning in Andrew. Appreciate the additional insight there. And at this point, I would like to turn it back to the moderator to open things up for Q&A.

Thank you. [Operator Instructions] Our first question for today comes from Nick Cucharale from Hovde Group. Nick, your line is now open, please go ahead.

Good morning everyone. How are you?

Good. Good, how are you Nick?

Good. Thank you. So, I wanted to start with the C&I initiatives and the strong growth there again this quarter. I know you've addressed this in your annual shareholder letter in the past, but longer term, can you share your vision for the composition of the loan portfolio over time?

Yes. Sure, Nick. It's a good question. And there's no magic number. And as you can appreciate, portfolio mix shifts tend to be a little more gradual although mergers can create opportunities to impact that change over time. But we've kind of been in the 50%, 55% range on investor real estate. And I think we'd like to see that move down closer to 50% and then maybe even between 40% and 45% over time. But I don't want to be beholden to a number that in and of itself isn't critical, right? We want to continue to take the best opportunities that are available to us across all the business segments where we operate. And while doing that, we also want to see a gradual shift to a little more C&I and owner-occupied. I think step one is getting to the point where C&I and owner occupied together are roughly equal to the investor real estate portfolio. We're not there yet. So, that will be kind of the near to medium term target. And from there, we'll have to see what the best opportunities are moving forward. But I think if we can do that, Nick, we can continue to keep our overall CRE to capital ratio down close enough to the guidance where we can continue to be effective players in that space, while at the same time, I think, enhancing franchise value and enhancing the deposit franchise by being more active on the C&I side.

That's very helpful. From a geographic perspective, where are you seeing the most opportunity right now? Or is it pretty broad-based across the footprint?

Yes, I mean we have things broken up into sort of four regions, right? We've got a team in North Jersey, we got a Central Jersey team, we have a South Jersey team, and we have our Southeastern PA team. And I can tell you the pipelines and the activity in all the markets are good. So, we're not seeing any significant differences in either volume of opportunities or quality across those segments. So, everybody is performing well. The pipelines are active. And while we may be a little more selective, there's plenty of good opportunities in each of those markets.

Great news. Then in terms of expenses, I appreciate the commentary on the new hires and the reinvestment in the business. I know you mentioned some opportunities in the back half of the year. But in the near-term, is there some relief expected in the second quarter or is this a good standalone run rate for the next few periods?

Yes, I mean, listen, there are certainly things in the quarter that are non-recurring. Obviously, the merger-related is the most obvious and the security sales piece. And then you got some expenses that were tied to the build-out of the fit out of the new locations. But we also had new hires that came along during the quarter. So, Q2 will be a full quarter's worth as opposed to a partial quarter. As Andrew mentioned, we've got a number of things we're looking at. We've already highlighted an opportunity on the branch side. We've got a number of things we're looking at on kind of the non-interest expense non-personnel side. And then obviously, over time, we have to see how much further we need to go on the expense side to make sure that we can meet our return hurdle. So, it's always that balancing act between reinvesting in the franchise, operating not too lean so that you're doing everything you need to do from a safety and salvage perspective. But at the same time, we got to meet the critical return hurdles that our shareholders have. So the point, I guess, Nick, is we're keeping an eye on all that. We're trying to strike the right balance. I think in the short run, you're going to see expenses run a bit higher than you've seen in the past for us, partly as a result of the new strategic initiatives, partly as a result of some inflationary pressure. And then the third piece is, we were operating in a couple of years where there was just kind of a standard amount of open position vacancy if I can call it that, where the tight labor market just made it harder, it took longer to fill positions. We're seeing some loosening there and so physicians are getting filled faster, which is kind of another component. So, we're obviously looking closely at our stand-alone expense base. We're obviously very focused on making sure that the combination with Malvern is done optimizing efficiency there. So, I think the good news is these opportunities, none of it's going to wave a magic wand. But certainly, I think as we look towards the back half of this year, as a result of better revenue from some of these initiatives as well as tighter expense control, I think we'll start to see those operating metrics improve a bit. So--

Appreciate the color. And lastly, I wanted to touch base on share buybacks. I believe you're limited with the deal pending, but given the projected close at the end of June, could you remind us how many shares are remaining on your authorization and your appetite to repurchase at this level?

Yes, I don't have the exact numbers. Andrew might have. But I think the short answer is there's plenty of capacity. One of the things we'll need to look hard at when I mentioned balance sheet flexibility tied to the merger, right? You've got a couple of unique things that happen when you're combined two franchises, one of which is you got a mark-to-market all the assets. So, in a world where we don't currently mark everything to market, you sometimes have assets with lower yield, but you can live with them, and there's no sense of crystallizing the losses. But in a world where you're crystallizing losses, all of a sudden, you start thinking about, well, would it make sense to reposition some of the assets and, in essence, de-lever a little bit to both improve earnings but also improve capital and potentially even improve capacity for buybacks. So, that's one of the things, excuse me, that I think it's interesting as we look at the various options related to the combination, depending on how we end up putting things-- [Technical Difficulty]

[Operator Instructions] Our next question for today comes from Manuel Navas from D.A. Davidson. Your line is now open, please go ahead.

Hey. I think you were there, you were talking about some possible repositioning with the Malvern transaction that could de-lever the bank to potentially increase capacity for buybacks. Could you kind of finish that thought?

Yes, sorry. I wasn't sure where you lost me. But yes, I guess the point is that given the current rate environment and the requirements under the mark-to-market accounting, I think it -- at the time of a transaction, there's flexibility to reconsider the different options around balance sheet composition. And I guess the point is we're glad to see that we've got flexibility if there's a few different ways we can put the combined banks together. And to the extent that one potential scenario involves potentially selling off any non-core assets. And as a result, boosting capital and the ability to do buybacks, that's a scenario. I think we need to look long and hard at no definitive decisions have been made. I guess the point is we have some flexibility leading up to the closing, and we're going to look at all those options because, obviously, with the stock trading where it is, we want to have the ability to do buybacks if it makes sense.

So, just to add to that, we do have -- we have a currently approved plan, 1.2 million shares are still available to be repurchased. We have been kind of tied up because of the acquisition, but we are probably going to free up here to be able to be at least a little bit more active. And as Pat mentioned, we'll analyze all our options here over the next couple of months, but we do have a large chunk of shares that are approved.

Just a quick question on timing. So, the deal closes at the end of this coming quarter or this current quarter. And then you could probably talk about some of the early signs of the -- or at least the early balance sheet plans by the July earnings call? Would that timing seem to make sense?

Yes, I think that's right. I mean, obviously, the timing of the close is estimated at this point. We have our annual meeting tomorrow. Hopefully, we'll have our shareholder approval squared away for both us and them at the meetings tomorrow and then we need to get the regulatory sign-offs. But we're still hopeful that, that will come at some point over the next few weeks. And assuming we have the shareholder and the regulatory approval, we think it could be in a position to close before the end of June. And assuming that all comes together, Manuel, then I think we wouldn't yet be in a position to talk in a lot more specificity around the optimal combination from a balance sheet management standpoint.

And that's all going also comes ahead because Malvern also has a little bit of a higher loan-to-deposit ratio and that kind of increases the need to increase your own funding on the deposit side. Just can you talk through how you're thinking about it as you approach the close?

Yes, I mean I think you're exactly right. But to the extent that there are opportunities to sell down non-core or lower-yielding loans. It has a variety of benefits, right? You can redeploy the cash into higher yielding short-term investment options, you reduce the capital requirements, you lower the loan deposit ratio, you build liquidity. So, I think for all those reasons, it's something we got to take a good outlook at.

Okay. Is there any more color you can give on kind of the near-term NIM? I know there's a little bit more pressure, but just kind of thoughts here how the Fed possible that increase would impact things? Just kind of thoughts on the near-term NIM if possible.

Yes, yes. We're obviously taking a hard look at that as everybody is. I think what Andrew said is right, it's most likely that you'll see some continued NIM compression in the short run. But the longer term question really is around, okay, the Fed is done at the next meeting, what does the economic data look like? And how quickly do they start moving in the opposite direction. I think the good news from our perspective is with the increased activity on the C&I side, we're seeing loan yields on new production that are at pretty healthy levels. And so even though deposit costs continue to move up, we're adding loans at a rate to help offset some of that impact. So, the exact magnitude of the pressure in the short run is a little hard to predict, but we certainly think that as the Fed pauses, you'll start to see a slowdown in terms of the increases on the deposit side. And then the question becomes, as you move towards the end of the year, where do we head some there? Is the spend going to need to lower because the economic signals aren't great? Or are we going to sort of live in just a newer normal higher rate environment time will tell on that.

As this environment, I know you're being a little bit more selective on loan growth. Is this environment changed any of your targets for loan growth for the year? Or it's just too early to tell?

Yes, I think at this point, we're not in the business that's constantly changing our budget, but I would tell you that two things. I think there's enough good quality loan business to meet the budgeted number that we mentioned of plus or minus $200 million in growth. But at the same time, we're not going to chase it for the sake of chasing it, right? I mean if liquidity pressures persist or funding costs move meaningfully higher and we're not generating the yields that we need on the new loan production, then we're not going to do it. So, it's got to be quality business, and it's got to be economically attractive business. And at the end of the day, if we find those opportunities and we get to $200 million, that's fine. And if we end up coming in below that, I kind of view it in the football analogy, right, you got to take what the defense skin, right? You got to think what the market gives you. And we're not going to shoot for $200 million because it's a number that we came up at the beginning of the year. We're going to add quality new customers at a rate where we can generate a positive return. And does that mean slower growth for a period of time, that's okay.

Okay. Hey, a quick question on the pipeline. Does that -- has the methodology changed at all that you've been a little more selective? Is it just like the pull-through rate might be a little bit lower? How should I think about the pipeline versus other disclosures of the -- given you're being a little bit more selective.

Yes, I mean it's a fair question. I think if you look at the pipeline as the universe of opportunities and it's down a little bit, but not a ton. And I think that's good news because that just means based on what we decide to do, we could find those opportunities to grow if it makes sense. And selective to some degree, can be about credit, but it's not always just about credit, right? It's about can we get the commitment for a meaningful deposit relationship? Can we get the yields that we think we need, can we get the loan to value that we think we need to and we get the amortization repayment schedule, we think we need? So, it's a variety of factors that come into play. But I think to some degree, right, we're going to hold firmer on the deal structure and pricing and deposits that we think we need. And in this environment, if the borrower doesn't agree, then we move on to the next opportunity. So, I don't know, Peter, let me let you jump in here for a minute on that question.

No, I think that's exactly right. I mean the changes light as a and the makeup of the pipeline. A lot of it has to do with rising rates. I mean there's less -- slightly less real estate deals out there, but there's still investor real estate deals out there, and we're taking a harder look at those and some that are solid credits where the pricing might have been thin. We might have done those in past years, right? But we're being -- as we talked about, a little bit more selective and focus more on taking a path on owns where we think we can't make the return we need or get the relationship business that we need. So, the relationship side on the C&I side. So, if you focus more there, you're going to see a drop-off in in real estate.

I appreciate the color. One last question from me and I'll step out? Is there a possibility that you could have buybacks before the deal closed? Like just kind of walk me through that -- those hurdles? Or is that something you're not complexating at the current time?

Yes, I think the short answer is yes, right? The big near-term kind of hurdle, if you will, or constraint is the shareholder meeting. So, my understanding is through discussions with counsel is one the shareholder approval comes in, assuming we shareholder approval, and it's been announced to the market that could open up a window of opportunity before potentially needing to go back into a blackout period related to regulatory feedback or approval. So, the short answer is yes, there could be a window. It just depends on the timing and how things play out.

And is there a desire?

At these prices, sure. I mean I think you look at the -- we think a lot of our strategic initiatives will generate great long-term shareholder value, but it's hard to imagine an investment that would have a quicker and more immediate positive impact than buying your own stock at $0.65 on the dollar.

Okay. Thank you very much. I'll step off back into the queue.

Thank you Manuel.

Thank you. [Operator Instructions] Our next question comes from Howard [Indiscernible] from Stericycle. Howard, your line is now open, please go ahead.

Yes, I think the question was answered, Pat, it was just about buybacks. Obviously, you're held up because of the -- when do you think you'd be able to do it if you want to not until the merger closes? Or is there any period of--

It depends -- the two key variables, Howard, our shareholder approval and regulatory approval. So, once shareholder approval secured and that news is made public, assuming there's no new information on the regulatory side, that should open up a window. And then if and when we get regulatory feedback depending on what the feedback is, that could create a new blackout period. And then obviously, once the deal is closed and the announced closure happens, then we would have a new opportunity once earnings came out depending on the timing. So, those are the three variables; shareholder approval, regulatory approval, and the earnings window. And depending on how those things play out, there could should be a window in between shareholder approval and regulatory feedback.

Okay. Thank you.

Sure.

At this time, we currently have no further questions. So I'll hand back to Patrick Ryan for any further remarks.

Yes, nothing further here. I think I have seen a note that Nick Cucharale jumped back on. And I don't know, Nick, if you had any additional questions, but if not, then I think that would conclude the call.

I can see Nick has just jumped back into the queue. Are you happy for me to take this question?

Yes, please.

Okay. Sure. Nick, your line is now open, please go ahead.

No, I just want to thank you for taking my questions all of them have been answered. So, I appreciate it, guys. Sorry for being disconnected.

No problem. Sorry about the technology glitch there, but glad we got your questions answered.

Thank you.

Well, I think that--

We have no further questions.

I just would like to thank everybody for their time and interest, and we look forward to regrouping with folks after second quarter earnings. Thank you everyone.