Ladies and gentlemen, thank you for standing by, and welcome to the First Bank Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I will now hand today's call over to Patrick Ryan, President and CEO. Please go ahead, sir.

Thank you. I'd like to welcome everyone today to First Bank's second quarter 2024 earnings call. I'm joined by Andrew Hibshman, our Chief Financial Officer; Darleen Gillespie, our Chief Retail Banking Officer; and Peter Cahill, our Chief Lending Officer. Before we begin, however, 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 31, 2023, filed with the FDIC. Pat, back to you.

Thank you, Andrew. I'll start with some overall comments and then turn it over to the team to provide some more details. First of all, I thought it was another solid quarter of results despite the challenging environment. To use a sports analogy, we continue to take what the defense gives us. We're not trying to force growth. We're doing the best deals available, but we're also letting loans pay off if the rate or structure is not appropriate. We continue to work to optimize both our deposit and loan portfolios, shifting to more core funding by not chasing growth and allowing payoffs. We also generated growth in our specialized lending areas to gradually shift our loan portfolio for a little less reliance on investor commercial real estate. In fact, during the quarter, our CREI to risk-based capital levels declined from 417% to 398% getting us back much closer to where we were prior to the Malvern acquisition. We continue to feel good about our commercial real estate portfolios, and in the long-term value that line of business creates, as we shift some of our balance sheet into specialized C&I niches, allowing us to meet our strategic goals and evolving into more of a middle market commercial bank. We continue our modest balance sheet repositioning with the sale of $24 million in lower yielding acquired commercial real estate loans, allowing us to improve the overall quality of our portfolio and the yield on that portfolio. As a result of those activities during the quarter, we had solid financial results. We achieved a 1.23% return on average assets. Our margin held steady at 3.62%. We enjoyed continued strong asset quality performance, and we saw a meaningful book value and capital growth during the quarter. Our asset based lending in small business…

Thanks, Pat. For the three months ended June 30, 2024, we recorded net income of $11.1 million or $0.44 per diluted share and a 1.23% return on average assets. Our strong quarterly earnings metrics were driven by a stable margins, solid asset quality metrics, continued strong efficiency metrics and some one-time tax adjustments, offset somewhat by losses on the sale of low yielding non-core commercial real estate loans. Our net interest margin declined slightly to 3.62% in the second quarter of 2024 compared to 3.64% in the prior quarter. Deposit costs continued to increase during the second quarter of 2024, rising 18 basis points, but that was mostly offset by an increase of 15 basis points on the yield on loans. We expect some minimal deposit pricing increases in Q3 as we still have some CDs repricing higher at maturity and the competitive environment is still difficult. However, we expect yields on loans to continue to move higher as well, which we expect to result in a relatively stable margin in the third quarter. Our results did benefit from minimal credit loss expenses recorded during the second quarter. The minimal expense was primarily due to the low level of loan growth during the quarter combined with limited charge-offs and strong loan credit metrics. This led to our allowance for credit losses to loans declining slightly to 1.21% at June 30, 2024, from 1.22% at March 31, 2024, including general acquisition accounting credit marks that are not included in the allowance, our ratio increases to a little over 1.5%. During the second quarter, we executed approximately $24 million in additional non-core commercial real estate loan sales, which continued our strategy of optimizing our balance sheet and helped to further reduce our investor commercial real estate concentration. The loans had a weighted…

Thank you, Andrew, and good morning, everyone. As Pat and Andrew have already mentioned, deposit growth was muted for the second quarter of this year, which is attributed to the higher for longer rate sentiment and the continued effects of the inverted yield curve. Our total deposits were down approximately $2.6 million from the first quarter of 2024 and basically flat year-to-date. However, shifts within our deposit mix have started to moderate in our favor, as we saw our interest-bearing portfolio decrease and an increase in our non-interest bearing portfolio by $29 million or 1% from the previous quarter. The increase in our non-interest bearing was primarily with commercial business. Some of this shift is attributed to customers continuing to seek a higher return on their funds, but a big part of the story is the efforts our sales teams are making onboarding full commercial relationships. For every loan we make, our teams have been able to effectively communicate, we want your full relationship, and we are seeing that success. Additionally, we continue to take advantage of opportunities to let costlier and no relationship funding leave the bank. Despite our efforts, deposit costs increased 18 basis points from the previous quarter. We continue to adjust and lower exception and promotional rate offers while remaining mindful of the continued pricing competition in the market. As previously mentioned, it is a strategic focus to reduce our deposit costs. We realized that we will not see an immediate impact of the changes we are making now, but we continue to position ourselves to realize these benefits in the months ahead. The deposit funding pipeline remains strong with primarily commercial business. We are leveraging our deposit campaigns to attract new customers in the commercial and consumer portfolios, and we will continue to evaluate our product mix to ensure we have attractive offerings in the marketplace. Our online account opening platform went live in June, making it easier for customers to open accounts when they are not located near one of our 26 locations or simply just want the convenience of opening an account from their home or place of business. We will be relocating our Glen Mills, Pennsylvania branch to Media, Pennsylvania and opening a new location in Trenton, New Jersey, which are both slated for September of 2024. We're excited about the deposit and overall opportunities that will present itself by expanding into these markets. In closing, deposit funding, customer expansion and monitoring of our deposit costs continue to be some of our key drivers. The environment remains challenging, but we are very optimistic, and we remain optimistic and committed to the great results we have achieved so far this year. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Darleen. As you heard a few times now, our goal at First Bank is to avoid business that is only a transaction and prioritize our efforts on building relationships where we believe we're getting our share of the customers' banking business as well as fair interest rates on our loans. This has resulted in a greater focus on C&I lending, which includes owner-occupied real estate loans, which by its nature, brings greater deposits and other business with it. While we still like investor real estate lending and expect to keep doing it, we've become more selective about what we'll do in that area. This has resulted in some runoff in that portfolio, reducing our concentrations in investor real estate loans. In the first quarter of this year, total loans were down $29 million from December; as Pat and Andrew have mentioned, total loans in the second quarter were basically flat, up $6 million from March 31. Pat and Andrew also mentioned the $24 million loan sale this past quarter. The loans sold were investor real estate in nature and reduced our exposure there. Absent the loan sale, organic loan growth would have been up approximately $30 million for the quarter and resulted in flat loan growth for the first six months of the year. The results in the earnings release break down the loan portfolio in the various segments. They continue to head in the right direction with growth in the C&I area, offset by reductions in investor real estate. As I mentioned last quarter, the overall volume of business we're looking at continues to be significant. I reported last quarter, the new loans closed and funded in Q1 totaled $78 million and that $78 million has exceeded the quarterly average roll all of 2023. For our most recent…

Thank you, Peter, and thank you, Darleen and Andrew. And at this point, we will open it up for Q&A.

[Operator Instructions] Your first question is from the line of Justin Crowley with Piper Sandler.

Hey. Good morning, everyone.

Good morning, Justin.

I was wondering if you could remind us your thinking on how you expect the NIM to behave through the first couple of rate cuts and just how competition you're seeing on the deposit gathering side informs that beyond maybe just like a flat margin for the next quarter or so?

Yeah. It's a great question, Justin. We've obviously taken a look at that, especially in light of the most recent market activity and some of the commentary from the Fed. It does feel like some of the prior comments about future rate cuts were more speculative, and it seems like it's more likely that we're going to see some activity on that front as we move to the back end of the year. Obviously, the biggest variable on the impact in margin is how quickly can we lower liability costs as the Fed lowers rates. And that's not something that's easy to predict, right? You're talking about elasticity of demand and competitiveness in the marketplace. And I think we'll have room to move, whether we'll be able to lower as quickly on the non-maturity funding side to match some of the declines on the asset yield side. I think we probably will. I think we'll be looking at an environment where the margin holds in relatively well. But we're obviously going to have to pay attention to the competitive dynamics and see what is happening in the market. And then the other piece, which we obviously don't know is the shape of the yield curve. If we see an environment where the yield curve is less inverted and ultimately upward sloping, I think that will be a significant net positive for us in terms of our margin, but that's obviously difficult to predict as well. So we can certainly run numbers that shows there's plenty of ability to lower liability costs as some of the asset yields comes down, but the full impact is obviously based on other factors that we don't know how that's going to play out.

Okay. And have you like preliminarily at all experimented with the dropping deposit rates a little ahead of any potential Fed rate cuts or are you seeing any competition doing it.

Yeah. We've done a couple of things there, Justin, and I'll let Darleen jump in, but we have been gradually reviewing our preferred rates and making adjustments there as we felt was necessary. And we're constantly reviewing and resetting our promotional rates based on what we're seeing out in the marketplace. So Darleen, you want to jump in and talk a little more about that?

Sure. Yeah. Just to do what Pat has said, we have moved forward from probably the earlier part of the year in making adjustments with some of the special pricing and some of the promotional products that we put out into the market. And I think that the reaction to our customer base has been relatively positive. We're not seeing a lot of runoff as a result of making those adjustments and clients are willing to have conversations and stay in a product that might be a few basis points lower than the bank down the street. So I would anticipate as those Fed cuts come into fruition that it would not negatively affect our deposit growth opportunities.

Okay. Great. I appreciate all the color there. And then, Pat, maybe stepping back a bit here. You've closed the Malvern deal a year ago now in the past 12 months, building capital, improving the balance sheet. So as we sit here today, how do you look at current capital levels? It sounds like organic growth, to the extent that you can get it, is the number one goal. But beyond that, how would you prioritize deployment options when we think about things like potential M&A, which you obviously have experience with or share repurchase activity?

Yeah. I mean listen, I think as you think about excess capital, you've got a variety of options. If you'd asked me that question three weeks ago, I probably would have said buybacks were far and away the top priority given where we are trading. Obviously, the world is a little bit different today. But I think we're building capital for a variety of reasons. And even if the buyback isn't immediately on our radar, it's certainly something we'd like to know we have capital there to deploy in that manner if market conditions create opportunities to buy it back at attractive prices. So we're not going to forget about the buyback, but obviously, the world today is a little different than it was a few weeks ago. You've got organic growth, you got M&A and you got dividends. I think all of those are important considerations depending on what happens. And a lot of times, it comes down to, well, what are the best opportunities in the market. If you can grow organically and deploy capital effectively that way. That is certainly a strong priority. That being said, if the market conditions are such that yields on loans are low or credit structures are weak. We're not going to chase deals just to find growth. And so then you look at other things like either the buyback or the dividend. And M&A is always there. It's something we're thoughtful about, but it's not generally a driver. If we can find a good deal at the right price that creates value, I think we're always interested in pursuing those opportunities. But from a capital deployment standpoint, we're not sitting here saying, hey, we've got to do a deal in the next couple of years to deal with excess capital, that's never our mindset. So jumped around a little bit there, but hopefully, that was helpful.

Yeah. No. That’s was helpful. Appreciate it. And then just a small one, but looking at the SBA gain on sale in the quarter, what are your early expectations here in terms of sale volume and just what the revenue stream could look like going forward?

Yeah. We set a target to try to generate $1 million in gain on sale income through SBA production this year. I think through the first six months, we're on track to do that. If you sort of annualize the results from the first half of the year. That being said, how much you can generate in gain on sale income is obviously driven by what's happening with the rate environment. And there's lots of SBA deals to look at, but similar to what we described in talking about the pipeline, it seems like it's taking longer to get deals to the finish line. So we're hopeful we'll hit our goal. If we do hit that $1 million gain on sale goal, that would be up significantly from where we've been in prior years. So I think it will be nice progress. And we're continuing to invest time and effort to build out that group and look for that to be a continued growth engine for us. So slow and steady there, but I think we're making nice progress, Justin.

Okay. Great. And then one last one for me, just on expenses. What's the best way to think about run rate here? Are there any areas in particular that you're looking to make more investment into now that Malvern cost saves are fully pulled through?

Well, listen, I mean, in any given period, we're looking at investment opportunities and cost savings opportunities together. So we continue to believe that there will be a need to digitize and modernize some of our product offerings and capabilities through our channels. We've made a lot of progress in the last couple of years through an online loan application platform for small business and now an online deposit account opening platform. And we made a significant investment in middleware, which is going to allow us to tap into best-in-class applications across a variety of areas. So I think tech is an area where we'll have to continue to invest. As we've said many times, we're not looking to win on tech, but we got to make sure we're competitive, and I think we're doing the right things there. And Andrew, why don't you jump in and talk a little bit. I know you spend a lot of time looking at the expense numbers and where you think we're headed. So maybe you can provide a little extra color there.

Yeah. I don't see anything that -- any huge expenditures. As Darleen mentioned, we have some branch kind of optimization stuff going on. So there may be a little bit of noise just go -- although we get some of that stuff going over the next couple of quarters. But there isn't really much in terms of significant expenditures on IT or any other area for that matter. Nothing significant. Again, as Pat mentioned, every time we spend some more money, we're looking at opportunities to cut costs. So I don't expect there to be any material changes in the long run expense base.

Okay. Great. And then apologies, if I could just sneak one last one in. But you spent a lot of time over the past couple of years talking about some of the specialty C&I areas and we've seen a lot of success there. And then certainly, on this call, speaking to just taking what's out there, the opportunities to present themselves. Geographically, how does that shake out in terms of what you're seeing? And then particularly maybe some of the legacy Malvern markets and the suburban Philly markets?

You want to jump in there, Andrew?

So he is talking -- Justin, you're talking about geography in terms of lending businesses, maybe Peter can jump in.

Yes, exactly.

Sorry, Peter, are you there?

Yeah, I am here. Yes, I'd say we're bullish on Eastern Pennsylvania. So we're continually keeping our eyes open for folks that could help us fill in some gaps. We have a couple of regional offices there, West Chester and Doylestown as we've had for a few years now. And the pipeline across the board, whether it's PA, the PA teams or the New Jersey kind of regional teams that are geographically oriented; the pipelines are pretty strong. So it's kind of like, as I just mentioned, look for people and fill in gaps. Maybe it's a Center City, Philadelphia County orientation or something like that. But business is pretty consistent across the various markets. Does that answer your question or…

Yeah, absolutely. That’s helpful. I appreciate you guys taking my questions.

Yeah. Thank you.

You’re welcome.

[Operator Instructions] You next question is from the line of Manuel Navas with D.A. Davidson.

Hey, good morning. Is there a current like CRE concentration target you're trying to get to? Your back two levels prior to the deal? And just trying to see where you're trying to head to? I'm sure it's lower is better, but just wanted to touch up on that.

Yeah. Good question. There's no magic number, Manuel. We've operated our business in a very consistent fashion for the last 15 years. And we've sort of oscillated between 300% on the low end to 400% on the high end. Obviously, we ticked up a little higher than $400 million as a result of the immediate impact of the Malvern merger in terms of the short-term reduction to capital and then they obviously had a little bit of a concentration in commercial real estate. But I think we've operated in between that 300%, 400% range for a long time. We're doing all the things that the regulators are asking for any bank that operates above 300%. I think they're happy with what we're doing in terms of risk management and monitoring. I think we're operating in segments that we know well. I think our credit quality and charge-off history in those portfolios speaks to the strength of the underwriting that we're doing there. So again, we think it can be a valuable part of the revenue pie, and we're not looking to get out of it by any stretch. But obviously, it's important that as we grow, we continue to find ways to diversify. And so long and short, I think if we're living in between the 300% and 400%, I think we're comfortable there. If we tick above 400% for some reason based on a strategic transaction, I think we'd probably look to try to maneuver down closer to the 400%. And if through regular market mechanisms, that ratio continues to move lower below the 400%, we're obviously fine with that, too.

I appreciate that. In context of your capital stack, you obviously have strong levels of PCE. Is the push to build capital really because of the total risk-based capital ratio at 11.7%. Is that kind of where you feel like you need to be higher?

Well, again, I'm not sure I position it as need to be higher, right? At the end of the day, I think our capital levels today are good. That being said, if you want to start thinking about buybacks or increased dividends, you're really talking about excess capital. And so I like where we are right now in terms of our levels. And given the strong earnings profile and the more moderate growth profile, I think absent anything else, we're going to continue to grow capital and then the question becomes what do we do with it? Do we look at a buyback? Do we look at the dividend? And I think all else equal, it's better to have a little more capital than not enough. And so we like building capital to have capital flexibility. But obviously, the goal isn't just to build it up and let it sit there. We're either going to put it to good use. So we're going to give it back to the shareholders.

Yeah. I would just add, Manuel, that total risk-based capital tends to be the most restrictive for us. So that's the one we usually highlight because that's the one that's going to come under pressure the soonest. So that's why we talk about that one. But yes, I mean, we wanted to, I think, put some distance between the Malvern acquisition, which was dilutive to capital and just continue to show that we're a capital accretion. But now I think we're in a real good position with a lot of different levers that we can push to use some of that capital we build up over the last 12 months.

Have you had your growth expectations changed much? I know that balances were impacted by a loan sale. Otherwise, it kind of would have been at the right range of that 5% level-ish, plus or minus. Is that still the right target or is it just this is a different environment. I mean it's quarter-by-quarter.

Yeah. I mean, listen, I think it's always quarter-by-quarter, right? Like at the end of the day, it's nice to have targets. They provide some high-level guidance, but you got to see what the market conditions are, right? So we're not going to chase bad deals or low-margin deals in an ultracompetitive sector just because we told everybody we're going to grow 5%. So I think at the end of the day, what we're seeing right now is prudence is valuable. Ironically, in the commercial real estate segment, some of the nonbank lenders are getting pretty aggressive in terms of rate and term. And so some of the slowdown there isn't just about, oh, the regulators don't like it. It's a marketplace that surprisingly seems to be having some pretty aggressive structures out there. So I think for us, we've always sort of talked about growing plus or minus $200 million on the asset side. And as we get bigger, $200 million is a smaller percentage of the balance sheet. But listen, at the end of the day, if it's 0 because that's what the market dictates, we'll find ways to make money in that environment. And I think as I look out over the next six months, I think we'll see some reasonable organic growth opportunities to show some growth between now and the end of the year.

And it seems that to match kind of maybe what you're doing on the loan side, you're comfortable at this 101% loan-to-deposit ratio. You're not doing anything you wouldn't -- on the deposit side, you're not doing anything that -- you don't feel like you're being forced to grow there based on current asset side growth. Is that the right way to think about it?

Yeah. I think that's right. I mean at 100% loan-to-deposit ratio, that's down from where we've operated in the past. But I think given some of the turmoil of last spring and other things, it's probably prudent to have a little more liquidity on hand and a little lower loan-to-deposit ratio. So I think we're comfortable where we are. Obviously, we're cognizant that liquidity took on added importance and thankfully, we've seen strong retention within our core customer base, and we didn't have major outflows when some other banks are seeing them. So I think it's a reasonable level. I wouldn't want to see it go a whole lot higher. And at the end of the day, if we're generating core deposits and we don't have immediate loans to make and that ratio comes down a little bit, that would be fine, too.

Can I just have a brief update on some of your commercial lending team to new products. Anyone that's kind of hitting out of the park? Ones that you are hoping to ramp even more than they have. Just kind of can you run through -- you've added a number of different types of products. I just kind of wanted -- get an update on that.

Yeah. Well, so the three main ones that we've talked about are asset-based lending, private equity fund banking and small business. Asset-based lending has had a great start to the year. They've got a very robust pipeline, and I think they're going to do well above the internal goals we set for that group for the year. So we're excited about that. Private equity was strong growth last year. Things did slow down towards the end of last year, the first part of this year. Some of that, I think, was a function of just what was occurring in the private equity space and the number of transactions, etc. But we have seen recently, there does seem to be a little bit of an uptick in activity there. And so I think we'll end up having a strong finish to the year for that group and ultimately hit our growth goals. And our small business group has done a really nice job leveraging the new technology in the online application and our business express product to the point where we're ahead of schedule for six months with that group as well. So I'd say across the board, we feel pretty good in those segments.

Appreciate that. Thank you. I’ll step back into the queue.

Yeah. Sure. No problem. Thank you, Manuel.

At this time, there are no further questions. I will now hand today's call back over to Mr. Ryan for any closing remarks.

Okay. Wonderful. Thank you. We appreciate everybody taking the time to listen in. Thanks for the questions. And we look forward to getting back together at the end of the third quarter with another update. Thank you, everyone.

This concludes today's call. Thank you for joining. You may now disconnect your lines.