First Bank (FRBA) Q2 2026 Earnings Report, Transcript and Summary

Hello everyone. Thank you for joining us and welcome to the FirstBank Second Quarter 26 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. I will now hand the conference over to Patrick L. Ryan, president and CEO. Patrick, please go ahead.

Thank you. I would like to welcome everyone today to First Bank's second quarter 26 earnings call. I am joined by Andrew L. Hibshman, our Chief Financial Officer and Peter J. 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 FirstBank. 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, 2025 filed with the FDIC. That back to you.

Thank you, Andrew. I will share some high level thoughts on the quarter and then turn it over to Andrew and Peter to provide a little more detail. I think in summary, Q2 was a much better quarter. We saw a return of solid asset growth. Our loans grew $68 million during the quarter. And with year to date growth of $79 million we are getting close to being back on pace for our annual loan growth goal of $200 million for the year. Our deposits grew $96 million during the quarter, which actually pushed us ahead of our deposit growth plan for the year. Our margin held in at 3.68% We realized a small decline in loan yields that were largely offset by a modest decline in deposit costs. Our provision for credit losses came down significantly, to more normalized levels as the profile within our small business portfolio showed signs of improvement. Our noninterest expense came in at $20.1 million down from an artificially high level in the first quarter. We are making progress with our goal to get our noninterest expense to average assets down below 2.0%, and eventually back closer to our longer term average of 1.90%. Our pre provision return on average assets came in at 1.69%, an increase of 10 basis points compared to the prior quarter. A few important points about the results. Regarding the asset growth, the return of stronger asset growth feels sustainable. Pipelines are strong. As we have discussed, the new production engine has been very busy, and Peter will provide some more details on that later. Absent abnormal payoff activity between now and the end of the year, we believe we should be able to meet or exceed our $200 million loan growth goal for the year. Regarding deposit growth, we liked that it really picked up in the second quarter as we continue to bring in new customers and we saw a return of money that had fluctuated out earlier in the year. The new growth did not come without a cost as the competition for deposits in our markets remains high. The decision to bring in higher cost money relates to the quality of our loan pipeline, we feel good about where things stand at the moment. Regarding asset quality, we think overall things seem to be holding in. We feel better about the trends in the small business portfolio. Which helped fuel the significant reduction in our charge off levels for the quarter. Our nonperforming asset ratio did tick up as 1 CRE loan moved to nonaccrual, we are comfortable where we stand with the loan given collateral and guarantor support. Regarding balance sheet strength, with this even though we had strong growth in the quarter, our capital position remains very strong. Our tangible common to tangible asset ratio is right about 10.0%, and our allowance for credit losses to loans is at 1.38% both levels that compare favorably to peer averages. In summary, I am excited about where we stand at the midpoint of the year. The return of strong balance sheet growth, coupled with a stable margin, normalized credit expenses, and flattish to minor noninterest expense growth should help us yield even better results as we move through the back half of the year. At this time, I would like to turn it over to Andrew to discuss some additional details on the financial results. Andrew?

Thanks, Patrick. The 3 months ended June 30, 2026, we recorded net income of $10.9 million or $0.43 per diluted share. Which translates to a 1.09% return on average assets. A 3.3 million decline in credit loss expense compared to the first quarter drove improvement to our bottom line, with diluted earnings per share increasing $0.13 or about 43.0% on a linked quarter basis. Year over year, EPS grew 6.6%. Net interest income increased $798 thousand compared to both the linked and prior year quarters. Compared to the linked quarter, net interest income increased primarily due to growth in average loan balances. Rates were essentially stable on both sides of the balance sheet as our net interest margin was 3.68%, down just 1 basis point from the linked quarter. Compared to the second quarter of last year, interest income increased due to a combination of growth and slightly better spreads. Which drove a 3 basis-point improvement in the margin. We believe our second quarter net interest margin remains strong and compares favorably to our peers. We expect continued declines in acquisition accounting accretion over the next several quarters and the ongoing competitive landscape for core deposits remains challenging. However, the yield curve has steepened, and we continue to replace the runoff of some lower yielding assets with higher yielding loans. Offsetting some of the deposit pressure. We continue to manage a well balanced asset and liability position and we anticipate continued loan and deposit growth will drive increased net interest income regardless of what happens with rates. We are very pleased with our balance sheet growth during the quarter. Loans grew $68 million, which was strong. This parallels our robust deposit growth. Which was driven by new commercial relationships and growth in existing commercial client balances. Our sales teams are deposit focused, and we are seeing good deposit activity throughout our regions and teams. Noninterest bearing balances grew $45.1 million during the quarter or about half of our $96 million increase in total deposits for the quarter. We also added some brokered and government deposits to support our robust loan production. Credit costs improved from the linked quarter, However, we saw some additional charge offs, again, almost entirely related to our credit score small business portfolio. Looking ahead, we expect to see continued improvement in credit costs in the small business portfolio and we are not seeing any red flags in our other loan segments. Overall, asset quality remained generally stable, our allowance for credit to total loans is essentially flat at 1.38%. As Patrick mentioned, we saw a slight increase in NPAs during the quarter, which again, was related to 1 new nonaccrual CRE loan. We continue to believe our reserve coverages are very strong. Noninterest income was $2.1 million for the second quarter of 2026, compared to $2.4 million in the linked first quarter and $2.7 million in the second quarter of 25. The decrease from the linked quarter was primarily due to lower earnings from our investments in certain small business investment funds and the year over year decline was primarily related to a $397 thousand gain on the sale of a corporate facility in last year's second quarter. Non interest expenses were $20.1 million for the second quarter down by $797 thousand compared to $20.9 million in Q1. The decrease primarily reflects lower salaries and benefit costs during the second quarter and to a lesser extent, lower second quarter occupancy expenses. Looking ahead, we believe we can continue to drive growth without adding to the expense base, and we have opportunities for some additional expense savings. Our continued focus on tight expense management produced a 54.5% efficiency ratio and marked our 28th consecutive quarter of operating with a sub-60% efficiency ratio. We believe this continues to be a differentiating strength for us. Tax expenses totaled $3.7 million for the second quarter with an effective rate of a little over 25.0%. This compares to 22.7%, for Q1 which included the benefit of discrete items related to stock compensation activity. We can anticipate our future effective tax rate will be approximately 25.0%. Our capital ratios remain strong, and with share repurchases totaling about 325 thousand shares during the quarter. Bringing our total to $5.5 million or 359 thousand shares. Under the currently approved program. Going forward, we aim to continue driving shareholder value through a combination of core earnings, a stable cash dividend, and share buybacks as applicable over time. I will now dig into the deposit activity a little further. During the quarter, we saw solid activity onboarding new relationships and expanding existing relationships. Total deposits increased a little over $96 million, from March 31 to June 30, with noninterest bearing balances increasing $45.1 million. However, average interest bearing deposit balances were up only $41.4 million and average noninterest bearing balances were actually down $461 thousand during the quarter. This was due to strong growth towards the end of the quarter, which should be a nice tailwind as we head into the back half of the year. Total cost of deposits came down 1 basis point during the quarter, from 2.43% in Q1 to 2.42% in Q2. Going forward, we believe heightened industry competition will place some pressure on deposit pricing. But we do remain focused on striking the appropriate balance between growth and cost discipline. Overall, we continue to execute effectively against our dual priorities of deepening relationships while prudently managing funding costs. Looking ahead, our deposit funding pipeline is strong with some nice new commercial and government opportunities, as we continue to retain and grow existing relationships. We are also utilizing retail promotional pricing when prudent and necessary. To win in this highly competitive market. At this time, I will turn it over to Peter J. Cahill, our chief lending officer, for his remarks. Peter?

Thanks, Andrew. As Pat and Andrew both mentioned, in the lending area, we had a much better quarter in Q2. Following up modest loan growth in the first quarter with new business activity which resulted in loan growth of 8.3% annualized. Excuse me, for the period. New loan closed and funded in the second quarter totaled $174 million, up 64.0% from the first quarter And you might recall that Q1 was not a bad quarter from the standpoint of new business. The $106 million of new loans we generated in Q1 equal the quarterly average of both 2024 and 2025. We are very pleased with our performance finishing the first half of the year. As we have talked about previously, while investor real estate loans will always be a big part of our business, we have been looking to drive C&I lending for a few years now. C&I and owner occupied real estate made up 61.0% of our new loans during the first half of the year. With investor real estate of 33.0% and consumer loans making up the balance. As we grow, The volume of loan payoffs grows, and this continued in Q2. This past quarter, we experienced $87 million in payoffs 19.0% greater than what we had in Q1. Payoffs bank wide were 62.0%. Investor real estate loans for the first half mainly due to refinancing of the sale of the underlying asset. Regarding our new loans pipeline, our sales team continues to be active and the pipeline continues to be in good shape. We finished Q2 after a solid new business quarter at a level of what we call probable fundings that totaled $323 million. This is in line with the level at the end of March which totaled $325 million. If 1 breaks down the components of the pipeline at June 30, C&I and owner occupied loans made up 62.0% of the pipeline. Again, in line with previous quarters. As we have talked about on these calls, there are more deposits and ancillary business with C&I relationships. Our salespeople are relationship managers. And as Andrew pointed out, they are focused on deposits, as well as loans. And their goals are set accordingly. All in all, I think the pipeline is strong. which positions us well to finish the year very nicely in terms of both loan and deposit growth. On the topic of asset quality, we have mentioned some continued softness in the credit score small business portfolio. But relative to asset quality, we did much better in Q2 that than we did in Q1. We expect to see improvement over time based upon the changes we made there. The earnings release mentions nonperforming loans and increasing marginally during the quarter, As both Patrick and Andrew, I think, mentioned, this is related to 1 credit. And as Patrick mentioned earlier, our expectation there is repayment in full. In summary, loan growth for the second quarter was strong. Our plan is to continue to grow in all of our business segments and meet or exceed the bank's plan for the year. That concludes my remarks about lending. And I will turn things back now to Patrick for some final comments.

Thank you, Peter and Andrew. And at this point, we will turn it back to the operator to open things up for the Q&A session.

We will now begin the question and answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Bader with Piper Sandler. Your line is open. Please go ahead.

Hey, good morning guys. This is Bader Just on for Justin Crowley.

Yeah. Good morning, Bader.

Signing on deposit growth this quarter, you highlighted the performance of a non interest bearing. It seems like you guys typically get, some nice pickup in the second quarter. Can you talk more about that trend and to what extent that is driven by seasonality? And how you are thinking about maybe the deposit mix evolving from here in the coming quarters?

Yeah. I wish we had a perfect answer regarding seasonality. there is definitely some components within certain clients, but there is a lot of, you know, different types of customers that have different needs at different points in time. So it is a little difficult to predict with precision the fluctuations, but we generally see a decline, especially in the noninterest bearing in Q1, and we start to see some money coming back during the second and third quarters. So, you know, I think that is pretty consistent with what we have seen in prior years. But we were certainly happy that you know, the overall level of, you know, kind of fluctuation change, I. E, the change in balances and accounts that had already been opened at the start of the year, We saw a nice bounce back there in the second quarter. that was certainly good news. But given the strong pipeline and, you know, what we think are some significant high quality lending opportunities. We are going to continue to you know, be out in the market to ensure that we can win our share of the new deposit business as well. And, certainly, our plan to, you know, meet or exceed that $200 million deposit growth goal for the year.

Got it. Thanks. And then with regard to that and deposit pricing, the full quarter figures remained relatively stable from last quarter. I know you mentioned you guys mentioned the expectation for increased pressure on cost in the near term. Could you provide the current spot rate for deposits and, you just any color on pricing competition you are seeing on that front?

Yeah. I think if you are out in the market trying to get new dollars, we are seeing the pricing anywhere from 4.0% to, you know, 4.10%, 4.15%, 4.25% in some in some cases. So, certainly, that is up a little bit. I think you see that same increase, you know, if you look out in the wholesale markets in terms of what, you know, brokered or that kind of money is going for now, you know, it is all north of 4.0%, which certainly it was not, you know, 3 or 6 months ago. The good news is, you know, the 5- and the 10-year treasuries and the FHLB rates are moving higher. And so we are getting we are getting some of that back in terms of the price on our new loan production, which is why we are, you know, we are targeting flat to down slightly on the margin as we move through this year. But I think what we saw in the second quarter in terms of the margin impact, 1-basis-point decline, I think that is hopefully, we can keep it flat. But we do not see it declining more than a basis point or 2 as we move forward. And, obviously, loan mix plays a role there too, but yeah, we are earning healthy yields on the new loan production. Obviously, the incremental spread on a new loan versus a you know, dollar we have to raise out in the market in terms of the higher priced money. And whether it is 4.0% or 4.25%, that obviously is dilutive to the margin. But not every dollar we are raising is at the highest price point. So hopefully, that, you know, provides a little bit of a view on where we see things heading. Got it. that is some good detail. Thank you. And maybe 1 last question, if you could pivot to expenses. Could you walk us through the decrease in the expense line this quarter? and we are just trying to understand the underlying moving parts and whether the current quarter's expense run rate is sustainable or if we should anticipate normalization in the subsequent quarters? Yeah. I do think Q2 is a much more of a base run rate normalized number. As Andrew pointed out last quarter, there were some seasonal factors that led to the higher levels in terms of noninterest expense in Q1. But Andrew, I do not know if you want to jump in and, you know, give some thoughts. Going forward, obviously, in a world where inflationary pressures are increasing, it is difficult to keep expenses flat. But that is our goal, flat to, you know, single-digit growth and certainly, as we add assets and revenue, we think that will be generating operating leverage. But, Andrew, if you want to jump in?

Yeah. I think that is a good summary. I would just add that there is nothing there was not really any kind of unusual noise. I think that, as Pat said, pretty straightforward quarter, pretty good run rate. We do not have any major projects or major cost saving initiatives right now, but we are always looking at cost saves and things. So I think hopefully, we can offset any of those kind of inflationary pressures with some savings. So I think we should be able to manage expenses pretty flat and continue to grow, and, obviously, that will create some additional efficiency.

Got it. That is all for me. Thanks for taking my question.

No problem. Thank you.

As a reminder, if you would like to ask a question, press *1 to raise your hand. Your next question comes from the line of Emily Gracis with Hovde Group. Your line is open. Please go ahead.

Good morning, everyone. I am in for David Bishop today.

Hi, Emily.

So I wanted to start off on what is the rate on new commercial loan originations during the quarter, and how does it compare to last quarter?

Yes. So obviously, within commercial, we have you know, several different business lines that have, you know, different kinda origination rates. But think, Peter, on average over the last few months, you know, the average for new origination per month is kind of fluctuated between, what, 6.5% and 7.0%?

Yeah. We actually, the majority of the loans get priced off FHLB. Treasuries is 5-year treasuries as an alternative that is usually I do not know, 15 to 25 basis points less, but, you know, we had more of a spread to treasury based pricing. But yeah, if you look back, it this Q2, the weighted average new loan rate was between, I do not know, 6.50% to 6.75%. Q1, probably right around that same range. A lot of it has to do with Patrick said, you know, the mix. If it is a prime based loan, it is gonna be prime plus 1's a little higher than that. Right? But the majority of our loans booked are gonna be term loans you know, kind of 5-year interest rate could be a 10-year loan, but a 5-year commitment on rates, you know, adjustable in 60 months But help at all?

Yes. Thank you. And my second question is can you provide some color on the new CRE non-accrual loan and provide some details around what your loss expectations are.

Did you say non-accrual? I think the question here was about the loan that moved into non-accrual.

Oh, okay.

Well, for real estate, see, it is an office space loan. it is underperforming. It was worth a lot more when we made the loan than it is now, but it is still roughly you know, even on a discounted basis, about the same value as the loan amount, and we have strong guarantor support there to make up the difference. Guarantors committed to do that, and as I said in my comments, we expect full recovery there.

Alright. Thank you for your time. That is all my questions for now.

Thanks, Emily.

You are welcome.

There are no further questions at this time. I will now turn the call back to Patrick for closing remarks.

Okay. Thank you very much. We appreciate everybody taking their time out of their busy day to listen in on the call, and, we will look forward to getting back in front of the group after third quarter results are released. So everybody Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.