Ladies and gentlemen, thank you for standing by. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank FRBA First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [Operator Instructions]. Thank you. And I would now like to turn the conference over to Mr. Patrick Ryan, President and CEO. You may begin.

Thank you, Abby. I'd like to welcome everyone today to First Bank's First Quarter 2024 Earnings Call. I'm joined by Andrew Hibshman, our CFO, Darleen Gillespie, our Chief Retail Banking Officer, and Peter Cahill, our Chief Lending Officer. Before we begin, however, Andrew will say [Audio Gap].

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 10K for the year-ended December 31, 2023, filed with the FDIC. Pat, back to you.

Thank you, Andrew. I'd like to start with a quick overall view. I think first quarter was an excellent quarter in terms of earnings produced. We did see the benefits of Project Sculpt, which, as we've referenced in the past, is our effort to create a leaner, more capital-efficient balance sheet. We also saw continued strong asset quality performance and good cost controls during the quarter, all of which helped to lead to strong earnings results during the period. We did see a modest decline in loans outstanding by the end of the quarter, but that reduction came from declines in non-core investor real estate or acquired loans. We actually enjoyed nice growth in the quarter in our C&I categories. Deposits were flat, and the environment for attracting retaining core deposits remains challenging. While we were successful in adding that new account during the quarter, movement of funds out of existing accounts and shifting of funds out of non-interest bearing continued to push deposit costs higher. Our loan pipeline remains very healthy, and we expect we'll be able to meet our lending goals for the year. With the sizable decline in CRE balances during the quarter, its unclear where those balances will finish, but with the healthy pipeline we have, we think our overall lending goals will be met. During the quarter, we had a few non-core items that are worth mentioning. The after-tax impact of these various items was just under $300,000. We had a bully death benefit of $187,000. We also had a purchase accounting adjustment from the retired sub-debt, which produced about a $400,000 earnings benefit, and then offsetting that was about $200,000 in abnormal additional payroll taxes during the quarter. In addition to these items, we also had some other unusual items, which I'm sure if…

Thank you, Pat. For the three months ended March 31, 2024, we recorded net income of $12.5 million, or $0.50 per diluted share, and a 1.41% return on average assets. Our strong quarterly earnings metrics were driven by stable margin, stable asset quality metrics, and continued strong efficiency metrics. Our net income was positively impacted by credit loss benefit recorded during the first quarter. The benefit was primarily due to the decline in loans, coupled with strong credit metrics. With non-performing loans declining by $7.9 million and net recoveries during the quarter when excluding a PCD loan charged off of $5.5 million, which was reserved for it through purchase accounting marks at the time of Malvern acquisition. This led to our overall allowance for credit losses to total loans to decline to 1.22% at March 31, from 1.40% at December 2023, including general acquisition accounting credit marks that are not included in the allowance. Our ratio increases to 1.56%. During the first quarter, we did not execute any additional loan or investment sales. However, we did continue to reduce our investor commercial real estate concentration. The additional payoffs and paydowns offset somewhat by selective new originations. During Q1, 2024, investor commercial real estate loans declined by $42.8 million when including multifamily and construction and development, while owner-occupied commercial real estate and C&I loans increased by a combined $15.4 million. Overall loans were down $29.1 million during the first quarter of 2024. Total deposits were up slightly during the quarter, however, non-interest-bearing balances declined as we saw a continued shift of deposits into interest-bearing products. This contributed to a 20 basis point rise in the total cost of deposits during the quarter. The cost of deposits for the quarter was also impacted by some liquidity enhancement that we did at the…

Thanks, Andrew. Good morning, everyone. I'm happy to share some of the deposit activity that took place throughout the quarter that has prepared us for what we expect to be a very successful 2024 despite the continued challenging deposit environment and this higher for longer rates sentiment. While total deposits were up slightly from the end of 2023, we are still experiencing shifts within our deposit mix as customers and prospects continue to seek the highest return for their funds. Our non-interest-bearing portfolio decreased 1.1% while our money market and savings increased 1.6% and time deposits increased 1.1% from Q4 2023. The market consensus on Fed rate hikes has changed considerably from the beginning of the year. In January, we were expecting six cuts. Now we're left wondering if there will be any with the recent strong job report and CPI exceeding market expectations. This has caused us to pivot. Throughout the quarter, we began to lower rates on some of our promotional products and took some selective cost-cutting initiatives without losing sight of the need to stay competitive amidst ongoing pricing competition in the market. While we are laser-focused on reducing our cost of deposits, this mixed shift in pricing pressure has contributed to the increase of 20 basis points from the end of Q4, 2023 as mentioned earlier. However, this has not changed our strategic focus in which we will continue to seek opportunities to onboard non-interest-bearing and low-cost deposits as well as determine ways to lower our costs while still meeting the needs of our clients. The changes we are making today may not have an immediate significant impact, but it allows us to position ourselves for the months ahead. We continue to grow our deposit base by expanding existing and developing new relationships through organic growth.…

Thanks, Darleen. I'll try to provide some color now on how things are going and lending. As you read and heard previously, and again today, our goals are to prioritize relationships while reducing concentrations in investor real estate loans. And in the first quarter, as you've heard, loans are down $29 million from the end of December. We've talked for a while about our disciplined approach to new business and our focus on what we think will be profitable relationships. This means relationships that bring deposits as well as have adequate pricing on loans. This also means a greater focus on C&I loans, which for us includes owner-occupied real estate. And you can see in the schedules in the earnings release, and as Andrew recently mentioned, those segments continue to head in the right direction. This strategy for us is not new, and you'll hear when I talk about our pipeline that the volume of business we're looking at is as robust as ever. What we unfortunately encountered in the first quarter was a large number of asset sales on the part of our clients, and not all were in the investor real estate segment. New loans closed and funded in Q1 totaled $78 million. In comparison, $78 million exceeded the quarterly average for all of last year. It's important to note that these funded loans in Q1 consisted of 71% C&I loans, and only 22% investor real estate, the remaining being primarily consumer. The issue in Q1 was that we experienced $74 million in payoffs, basically offsetting the new loan growth. When we get payoffs, we track the reason for them, determining whether they were caused by refinances out of the bank, where we have a chance to retain a loan, but maybe choose not to. Asset sales resulting…

Thank you, Peter. Appreciate the comments. And at this point, I'd like to turn it back to the operator to open things up for the Q&A.

Thank you. We'll now begin the question and answer session. [Operator Instructions] And your first question comes from Justin Crowley with Piper Sandler. Your line is open.

Hey, good morning, guys. Just wanted to start with some discussion on the margin here. Obviously, not quite out of the woods yet in terms of lingering pressure on the funding side. So just curious you're thinking on if and when that starts to level off and you start to see continued pickup on the asset yield side. When you start to see that benefit the margin? Is it something that might not take shape until we start to see rate cuts? Or how are you thinking about that heading if you look to the end of the year?

Yes, it's a great question, Justin. I wish I had perfect visibility into that. But I can give you a few thoughts. This point, 90 days ago when we had our call, we were envisioning a flattish margin as a result of the market rates moving lower, which was starting to take a little bit of pressure off the deposit funding partially because the wholesale options were getting cheaper and everybody was being a little less aggressive on pricing as a result of those alternatives. So obviously, when the market rates moved higher, the wholesale rates followed along and that alternative cheaper funding sort of went away. So long story short, I think we expect that we'll see some continued pressure on the margin if the current rate environment remains in place over the next quarter or two. And I don't think the Fed has to move in order for things to stabilize or improve, but I do think the market needs to start anticipating rates coming down, alleviating or reducing the cost on the wholesale side. And I think that ends up driving rates and liability costs overall down a bit. So, I know I'm not giving you an exact answer to when that changes, but I don't think it has to be the Fed actually lowers, but I do think the market needs to go back to thinking the Fed is going to lower. And at this point, I'm not sure we know when that's going to happen.

Okay. Got it. And then just like thinking about the higher for longer, just like looking at, I guess, the loan side, of course, it's got its impacts on funding costs. But with the focus on C&I, is there any signs of maybe borrowers pulling back at all just given the idea of higher-for-longer and just variable rate nature of that buck or so far, your growth targets, are they unchanged in terms of building out that loan bucket?

Yes, listen, I think our growth targets are unchanged. We went into the year with reasonable, but modest compared to prior years targets in the plus or minus 5% range. And given the volume of activity and the probability adjusted pipeline being higher than we've seen it in the last couple of years, I don't think we're seeing a slowdown in activity. Now that being said, it takes a while for loans to get from idea phase to closing. And a lot of the activity now probably was getting pushed forward when folks started to anticipate rates coming down. But I think once you get the engine started, if it's an important project, you're not going to pull the plug if rates move higher by 25 basis points or whatever it is. So, I think there's plenty of good loan demand out there. We're seeing really nice activity throughout our community banking C&I segment throughout our new niche commercial segments. And listen, there's plenty of opportunities on the real estate side too, we're just being a little more selective there. So I don't think there's going to be an issue with loan demand. The challenge is going to be the cost of funding that loan growth as we move forward.

Right. Okay, I appreciate that. And then just, I mean, just thinking about that loan mix over the longer term, as far as investor CRE sitting today at 40% of the book, and maybe it's tough to quantify. But is there a level that you target or would like to see that get to over time? And then maybe just some commentary on how long I guess that could be a governor on overall balance sheet growth?

Yes. Listen, I think our goal on the investor real estate side is to continue to be selective, obviously, with the heightened regulatory focus and areas of added concentration risk, we want to be selective, we want to do the right deals that are low risk with relationship based borrowers that bring some deposits along with them. And I think as you get selective, that creates kind of a natural constraint on how much growth we're going to see there. And let's say we're at a point now where we're seeing close to $9 million in monthly amortization on the portfolio, so there's a certain amount of running we need to do every month just to replace the $9 million that's paying off and paying down. So I think we're going to look to hit our 5% growth goal with largely C&I and owner-occupied and I think the target on the investor side will be to stay plus or minus flat, but it will depend on the opportunities we get to take a look at. So, Peter, anything you'd add to that?

No, I mean, I think you covered it. There's a heavy volume of investor deals that are running off every month aside from amortization. I mean deals that just get refinanced out or sold or whatever. So there's a lot of work going on with that team just to keep things flat. So I think that's basically what you said, but I don't have much to add there, Pat.

Yes. And I think, Justin, it's also interesting when you look at the market, there was some concern on my end as bank's face increasing regulatory pressure around commercial real estate lending, what would that mean in terms of capital availability for good projects and for existing projects that are performing well that need to basically renew when they mature. And it's interesting, we're seeing a lot of non-bank players filling that void. The insurance companies have gotten more aggressive in terms of pricing and long-term fixed rates given their business model and their ability to take on those longer-term fixed rates. And obviously private credit has been very active and continues to be active and hedge funds as well. So it's bad news in one sense because it's a more competitive market for investor deals than I would have expected, but in terms of the overall health of the landscape, I think its good news that there's plenty of capital available for performing assets and that ultimately is important for everybody that plays in the space. So, yes, there's money available and deals are getting done. It's just not all getting done through the banks right now.

Okay. I appreciate the color there. And then, I know a lot of the focus coming out of the Malvern acquisition has been integrating the deal and replenishing capital, but thinking more maybe medium term and it almost feels silly to ask right now just given the environment, but where do acquisitions sit in terms of prioritizing capital deployment, again, of course, recognizing that continues to be slow there as far as transaction activity?

Yes, listen, we try to be consistent with our M&A philosophy, right? We think the right deals at the right price can create value and add scale in certain situations that attractive lines of business, but at the end of the day, the first part of the sentence is the most important, right? The right deals at the right price. And if there are sellers out there that are interested in strategic, long-term value creation deals that are more partnership type deals, I think those are the deals that might get done over the next six to 12 months. But anybody who's looking to just sell, cash out, get a premium and go away, I don't think there's a lot of players out there that are going to be offering those types of exits right now. So, I think it's an important that you stay in the game, that you keep having conversations, but it's equally important that you don't lose your discipline in terms of your criterion for attractive transactions. So we're going to continue to look, but I don't have any real sense for probabilities right now.

Okay, I appreciate it. All right, Great. Thank you. I appreciate you taking the questions.

Yes, our pleasure. Thank you, Justin.

[Operator Instructions] And we will take our next question from Manuel Navas with D.A. Davidson. Your line is open.

Hi, this is Sharon G [ph] for Manuel. Thank you so much for taking my question.

I'm sorry. Who's this calling in?

Sharon G on for Manuel.

Oh, okay. Good morning.

Good morning. So I just want to talk a little bit about, so the press release mentions investments in business units and information technology. What do those investments include? And do you have any OPEX run rate targets?

Well, we haven't given any specific guidance on OpEx, but as we've looked at the analyst models that are out there, we didn't see any projections on the expense side that seemed, way off the mark from what we anticipate. And a lot of the tech investments that we've been looking at over the last 12 to 18 months are sort of in implementation mode right now. So we don't see large additional expenses built in beyond the current run rate. And we're looking forward to some of the benefits of those new technologies as they roll out. For example, online deposit account opening should be up and running for us both on the commercial and the consumer side over the next couple of months. And we're also implementing some middleware technology, which is going to give us some additional flexibility to tie in best and breed technologies and not be so beholden to our core. And so we're continuing to look for opportunities there. And some of it may even create opportunities for us, either on the deposit or the fee income side, if we can find interesting partnerships in terms of, Fintech or banking as a service that meets our risk profile parameters. So, we think we've got some interesting things happening. And we're looking forward to share the results of those initiatives as we move through the end of this year.

Yes, that sounds great. I think that's it for me. Thank you.

All right. Thank you.

[Operator Instructions] And with no further questions at this time, I will now turn the call back to Mr. Patrick Ryan for closing remarks.

Wonderful. Thank you, Abby. Well, at this point, I would just like to thank everyone for tuning in and we'll look forward to catching up with everybody when we release earnings at the end of the second quarter. Thanks, everyone.

And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.