Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank Earnings Conference Call Third Quarter 2024. [Operator Instructions]. Thank you. I will now turn the call over to Patrick Ryan, President and CEO. You may begin your conference.

Thank you. I'd like to welcome everyone today to First Bank's third quarter 2024 earnings call. I am 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.

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, in our annual report on Form 10-K for the year ended December 31, 2023 filed with the FDIC. Pat, back to you.

Thanks Andrew. I will kick it off with some high level summary comments and then the team will get into a little more details. Overall, I was happy to see return of solid loan and deposit growth during the quarter. After a couple of flattish quarters in the first half of the year based on a little bit of a slowdown in activity and some elevated pay downs, it was nice to see some robust loan and deposit growth in the quarter. So, we felt very good about that. Overall loans grew about $90 million. Unfortunately, a large portion of that came towards the back half of September, leading to a relatively small increase in the average balances outstanding. So, from a quarterly results perspective, not ideal since we didn't get a chance to earn much interest income on those loans and obviously had to book a full provision. But at the end of the day, we think that will serve us well heading into the fourth quarter and next year. We also saw deposits grow $82 million which was a very nice quarter and $19 million of that was coming in the non-interest-bearing category, which was great to see. We did have some margin compression during the quarter. Andrew will get into some of the reasons about why that happened. Obviously, there was still pressure on the deposit funding side. We did take some significant actions in September when the Fed made their move, and we expect we'll be able to help keep the margin stable as we move forward. We continue to find incremental opportunities to fine tune our balance sheet. We sold about $12 million in low yielding investment securities that had about a 2.41% weighted average rate. We did that during the quarter when the bond…

Thanks, Pat. For the three months ended September 30, 2024, we recorded net income of $8.2 million or $0.32 per diluted share and 88 basis point return on average assets. Recall that we closed the Malvern acquisition in July of last year, so that is a big driver of the year-over-year comparisons for the period. We had an outstanding quarter for growth and our quarterly metrics were slightly obscured by some noisy items. The real highlight of the quarter was the growth of our loan and deposit portfolios, loans were up nearly 12% annualized and deposits up 11% annualized from the second quarter. Loan growth was broad based but the growth occurred late in the quarter with the effect of raising average loan balances only $12.2 million while point to point they were up $89.5 million. With such a high level of late quarter growth, our credit loss expense outpaced the loan interest earned on the new loans originated during the quarter. The 1.6 million credit loss expense for the quarter was primarily related to provision build related to this growth as asset quality remained strong. On the other hand, net interest income actually declined by 446,000 due to some margin compression which was due to higher interest income being outpaced by increased deposit costs and higher average borrowings. On the deposit side, balances were up total $82.4 million with growth occurring across all categories. Our net interest margin declined to 3.49% in the third quarter compared to 3.62% in the prior quarter. Interest bearing deposit cost continue to increase rising 6 basis points from Q2 as we saw some expected upward CD repricing and the competitive environment was still difficult. We also saw average loan yields decline by 8 basis points compared to the linked prior quarter due to…

Sure. Thanks. Thank you, Andrew and good morning everyone. As Pat and Andrew have mentioned deposit growth was robust during the third quarter of this year. We attribute this to our team's outstanding ability to build and maintain deep customer relationships, as well as our very proactive efforts to manage deposit pricing in anticipation of the Fed's rate reduction in September. As mentioned, our total deposits were up approximately $82.4 million or over 11% annualized from the second quarter of 2024 and the expansion was across the board. Non-interest bearing demand and interest bearing demand showed tremendous growth in a very dynamic rate environment, up $19.3 million and $23.3 million, respectively, during the quarter. Money market and savings grew $36.3 million and time deposits grew $3.6 million from the second quarter of 2024. The majority of this growth was in our commercial portfolio. Predominantly all of the Banks year to date deposit growth occurred during the third quarter as a result of onboarding some larger commercial relationships, which aligns with the quarter's loan growth. We have been working to strike the balance of achieving profitable pricing, while also maintaining desirable customer relationships. And our third quarter outcome suggests our bankers are doing this skillfully and effectively. This comes even as we continue to let costlier and non-relationship funding leave the bank. The key word for us here is relationship and that's our marching order. We continue to prioritize full banking relationships and this approach has proven successful. While we started to move some rates lower earlier in the year in anticipation of the Fed rate cut, with the cut actually taken place in late September, it gave us the opportunity to move rates down in a more aggressive manner. We have not experienced any significant attrition to-date and we actually…

Thanks, Darleen. The lending area in Q3 had a quarter where our work over the past few quarters was a lot more evident. As you know, we've been focused on developing business where relationships are shared with our customers. That's where deposits and other ancillary business lies. Transaction business is something we're just not looking to do. As we've mentioned before, we are seeing more relationship business in commercial and industrial than elsewhere. Our regional teams are doing well and the C&I related specialized business areas are also doing very well. Private equity banking after a slower start than planned this year has picked up steam significantly and our asset based lending area is on track to meet its goals for the year. All of this is not to say that we are no longer in the market for investor real estate relationships. We've always done a good bit of investor real estate lending and will continue to do so. Historically, slightly more than half of our lending business has been in that area. Investor real estate loans, as you know, tend to be more transactional as properties are bought and sold. Our focus on investor real estate has been with investors and developers who want to maintain a relationship with us over the long-term. The earnings release details lending activities year-to-date. Loan growth was essentially flat through the first six months absent the sale of approximately $24 million in non-strategic investor real estate loans in Q2. In the third quarter, we converted our very strong loan pipeline into outstanding loans that resulted in growth for the quarter of almost $90 million. The schedules in the earnings release break down the loan portfolio into their various segments and show the changes from quarter to quarter. We saw growth in all…

Thank you, Peter. Thank you, Andrew and Darleen. At this point, we will open it up for the Q&A portion of the call.

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

Hey, good morning everyone. Wondering if you could talk through a little more of the commentary on a stable margin from here. And I guess to start with the lower loan yields in the quarter, just where new loan production is coming on that, and how that compares to what's rolling off?

Yes, Justin, great question. Obviously, we're keeping a close eye on it. On the kind of the term side, as I'm sure you know, a lot of that gets priced off of kind of the middle of the curve. And so when things dipped for a while, we did see loans on the term side moving closer to the mid low 6s, which was down a fair bit from where we were a few months ago when we were getting yields in the 7s. That being said, our floating rate stuff, whether it's construction or prime based lines of credit are still earning prime, prime plus half, prime plus 1 and even with the Fed move, the yields on those are still in the 8s or 9s sometimes. So sometimes it's a little bit of a mix that can help drive the impact within any given quarter. But the big thing for overall margin stabilization is our commitment to continue to move deposit costs lower to make sure that we're at least matching if not doing better than what we're seeing on the asset side. We did take some steps during the quarter in terms of funding. Obviously, you saw based on what happened with loan yields, we didn't quite keep pace, but we're keeping a close eye on it and we're going to continue to drive liability costs down based on what we need to do to preserve the margins. So, hard to say specifically how it will play out, but it's obviously a key goal of ours, and we're happy to say that what we're seeing in the market and what we're hearing from customers and we have lower rates is not necessarily excitement, but we're not getting a ton of pushback and it doesn't appear to be anybody in the market who's really trying to continue to push growth with higher yield and deposit products. So, I think we will have the opportunity to see things stabilize as we move forward.

Okay. And then on just levers to pull on the funding side, what is sort of and I'm not sure if you're able to quantify it, but as far as betas on the way down, what's embedded in there? And is there any element of conservatism as far as that goes? And might there be opportunity to do better there to perhaps see or outperform a stable margin and see margin expansion as rates continue to come down?

Yes, I mean, listen, there's certainly a scenario where that plays out, right. I don't think we're forecasting it, not because it can happen, but there's obviously a scenario where competitive pressures on the deposit side make it harder to keep it stable. So, I think we figured the safest guidance was the middle of the road guidance. But, yes, and obviously the other piece of this is what's happening with the yield curve. There's been a lot of talk about the spread between 2s 10s and the curve is not inverted anymore, well, yes, I guess at the 2 and the 10 level, but what about the 0 to 5, which is probably more meaningful for banks that do commercial lending like us. And so if we start to see some extension and some steepening within the lower part of the curve, that could obviously lead to some margin expansion. But I think it's a little early to predict that at this point. So, we're going to work towards stable and obviously take advantage of opportunities to make it move higher if we see them.

Okay. Got it. That's helpful. And then, just shifting gears a little. With the loan growth so back loaded, not sure if you think there is any correlation to the Fed having moved and borrowers making decisions based off that, however expected it was. But what are your expectations on how loan growth could trend over more so like the medium and longer term for the Bank?

Yes. I'll let Peter give you a little bit of data just in terms of the historical trends. I think it's worth mentioning that we obviously spend our time looking at the world in quarterly 90 day increments. But in our business, it's a little crazy to think about things in that short of time horizon. So, the short answer to the first part of your question is loans close at the end because that's where they happen to close, right? So, we tend to see very consistent performance over time in terms of loan production, but whether they close in the beginning of the quarter, the end of quarter, the beginning of the year, the end of the year, there's just a lot of variability across the hundreds of conversations that we're having with our different borrowers and different projects that it's very rare that some outside factor would be the key driver, it just tends to be more the timing of the specific project or the renewal of the line or what have you. But Peter, why don't you jump in and maybe share with Justin some of the kind of the historical numbers you've looked at, not quarter-to-quarter per se, but how it kind of averages out over time?

Yes. Justin, what that said is correct. I mean deals end up in the pipeline for quarters on end. In fact, we just went through the end of September and kind of did a very modest scrub of the pipeline and said, hey, look, if you go through deals that have been in the pipeline for 360 days or more, there was only a handful of them, but it was amazing to me that most of them were still live deals. In fact, one was closing within two weeks. So, they can get delayed as to the various stages they go through, but when you look back at the $276 million or we call probable funding and you've been on our call that's where we kind of waited as to likelihood and where it is in the approval process. So, $276 million compared to an average for this year for the 9 months was over $315 million. So, we're down, but we're down because we had our biggest quarter and our biggest month in September in loan fundings. If you took that $315 million average for the nine months and compared it to last year, last year we're at $214 million. So, we're $100 million in average pipeline this year greater than where we were last year. So, our folks are finding business out there, it's just a question sometimes of getting across the finish line.

Okay, great. I appreciate it. Yes, no, totally. I appreciate the detail there. And then, Pat, I guess just one on the buyback. I think in the past you've spoken about perhaps wanting to get to a point where you're operating with, call it, excess capital, if you will, before thinking about getting real active there. Just directionally, we saw capital ratios move lower with some of the growth. So just, I guess looking for an update there and if the new authorization is more of a just let's put it in place so we have it.

Yes. I mean, I'd say it's both, right? I mean, obviously, we think there's value in having a program in place regardless of the environment or the situation. But as far as do we think about when we're going to jump in, obviously, a key factor is where are we trading, right? And the closer we get to book value, the more interesting the stock buyback looks to us. Obviously, some of it has to do with what we're seeing in our own pipeline and our growth prospects and overall capital levels. But I think we're at a point with current capital where we can be opportunistic. So, I don't think we are in a let's wait till we get to some much higher level than we are. I think the levels that we're at are adequate and therefore, we can be in the market looking if we think the time is right. But at the same time, it's not an aggressive strategy of ours to buy back every share we can that's in the plan. I think it's more an opportunistic vehicle, if you will.

Okay. Helpful. I will leave it there. I appreciate you guys taking the questions.

Yes. Thank you, Justin.

Our next question comes from the line of Manuel Naves with D.A. Davidson. Your line is open.

Hey, good morning. What is the kind of the right level of purchase accounting accretion going forward? Or could you just kind of it should be writing down, was this quarter that different than expectations, just can you kind of help with that?

Yes, I think Andrew can give you some visibility there. I mean it's a set schedule that does slowly work its way down over time. So, Andrew you want to jump in?

Yes, I think we talked about this, the level will drop and it does depend sometimes on paid prepayments or loans and things like that. Loan accretion is the primary driver of this. There is some other things going on in there, but it's mainly loan mark accretion. So, it will drop slightly over the next few years and most of it gets earned in the first three years and then it drops off fairly significantly after that. So, there will continue to be small declines over the next two years and then it drops off kind of after that. But it should again it will continue to drop slowly over approximately the next 24 months.

And do you have an exact number for what the new loan yield was? I know a lot of it came on at the end of the quarter. I just was trying to compare it to the loan yield that you booked for the whole quarter. Hello?

Yes, Manuel, sorry, this is Andrew. Peter, do you I know you keep track of the kind of the weighted average yields. I don't have that data in front of me, but do you have some just kind of at least an estimate of what the loan yields were for the quarter?

Yes, Well if you look at the new loans funded, closed and funded, not advances under existing lines, things like that, but new loans funded for the quarter, the weighted average was around 765 and that was down about a quarter maybe 30 basis points from the same similar number the quarter before. So, I'd say the loans some of that gets pushed by larger loans that might be at a tighter spread or whatever, but quarter-to-quarter went down went from about 8% to around 7.65%, 7.70%. Does that help?

Yes, that does help. So that's where the commentary that the NIM would have been a little better if those loans were fully in there the whole quarter. Why isn't there kind of a bias for up NIM given that they are up?

Some of the smaller loans that we do, we have business banking teams that are out doing you know couple hundred thousand dollars lines of credit term loans to smaller businesses, they're going to be at prime plus 1, where a larger owner occupied real estate loan, $10 million, $15 million loan is going to be at 250 basis points or 250 to 275 over treasuries, five year treasuries as you know are right around four. So, there's different there's a different mix in there, different sizes, different mixes and it impacts that quarter-to-quarter number a little bit.

Okay. Yes, I also think, Mehul, there's you know as Justin talked about there is a scenario where the margin can tick back up a little bit. I think we're a little hesitant to predict it just because A, we don't know what the Fed is going to do. We got 25% of our balance sheet that floats down every time the Fed moves and you get into the unknowns around what will the market absorb in terms of deposit reductions. And so I think there's a scenario where that plays out to our benefit, but I'd be hesitant to predict it until we get a little more visibility and how quickly we can lower the deposit costs.

On deposit costs, do you have an end of period total deposit costs after the Fed cut? Your average was at 3.05%. What were you at the end of period?

I don't know if we did that calculation. I know we what we did was we took a look at the asset side and we figured out the dollar amount that was going to reprice with the Fed move and then we came up with a reduction across a variety of our deposit portfolios that once fully implemented would have a similar impact to the lost interest income from the asset side. But I'm not sure we sort of calculated what does that mean in terms of the funding costs for the last two or three weeks of the quarter. But obviously it's something we're keeping a close eye on.

Okay. And then the OpEx run rate, you did call out the OREO write down. Should we think of OpEx being stable with the write down or without, so it's like $18 million or $18.6 million.

Yes, probably in between, but I don't know Andrew if you want to give a little more color there.

Yes, I think that's about right. Obviously there's that's assuming kind of a core and they're very rarely do we not have some kind of one time unusual item during the quarter. But yes, I think we're thinking somewhere kind of in between that is the kind of core run rate over the next couple of quarters outside of any kind of unusual or one-time items.

Okay. And is the right way to think of the fee side, is that like $1.8 million stripping out securities, stripping out some of the BOLI, is that the right run rate going forward and what could kind of take it down?

The question is on non-interest income?

Yes, fee income.

Yes, I mean I think if you strip out some of the noise from this quarter, that's a decent expectation for what we expect the numbers to look like going forward.

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

All right. Thank you, Manual.

There are no further questions at this time. I will hand the call back over to Patrick Ryan for closing remarks.

Okay, great. Well, again thanks everybody for taking their time to join the call. We appreciate the interest in First Bank and we'll look forward to regrouping with everybody at the end of next quarter. I hope everybody has a wonderful day.

This concludes today's conference call. You may now disconnect. Have a good day.