First Bank Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2025

There are 5 speakers on the call.

Operator

Hello. Thank you for standing by. Go ahead.

Speaker 1

Thank you for standing by. My name is Angela, I'll be your conference operator today. At this time, I would like to welcome everyone to FirstBank Earnings Conference Call First Quarter twenty twenty five. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Speaker 1

If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.

Speaker 2

If you

Speaker 1

would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to mister Patrick Ryan, president and CEO. You may begin.

Speaker 2

Thank you. I'd like to welcome everyone today to FirstBank's first quarter twenty twenty five earnings call. I'm joined by Andrew Hinchman, our Chief Financial Officer Darlene Gillespie, our Chief Retail Banking Officer and Peter Cahill, our Chief Lending Officer. Before we begin, however, Andrew will read the safe harbor statement.

Speaker 3

The following discussion may contain forward looking statements concerning the financial condition, results of operations and business of FirstNet. 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 ks for the year ended 12/31/2024, filed with the FDIC.

Speaker 3

Pat, back to you.

Speaker 2

Thanks, Andrew. I'd like to hit on a few highlights before turning it over to the team to provide some detail. Think in the first quarter, we saw some really nice positive trends emerge. The cost of our deposits came down 14 basis points, which drove an improvement in our net interest margin of 11 basis points. Strong loan growth of $92,000,000 came in the areas of our strategic focus, namely asset based lending, private equity and community bank C and I lending.

Speaker 2

In fact, c and r CREI or investor real estate loans actually came down $12,000,000 in the quarter despite significant activity and some new production in that area. Deposit growth was decent but did not match our loan growth. We hope to see a catch up and a reversal of that trend in the back half of this year. Our noninterest bearing deposit ratio did move up a little bit during the quarter, which was certainly nice to see. Overall, profitability remained respectable with a 1% ROA.

Speaker 2

We did see higher than normal loan growth during the quarter, which led to a larger provision for credit losses, which pushed profitability down a little bit during the quarter. A reduction in the carrying value of our New York City OREO asset by 815,000 also cut into quarterly profitability. Excluding the OREO write down, earnings would have been in line or slightly better than prior quarters. Our newer middle market and small business lending units continued to gain scale. The asset based lending portfolio increased almost 30,000,000 to just over 90,000,000 in outstandings.

Speaker 2

Our private equity fund banking portfolio grew to 128,000,000, and our small business lending group, which includes our Business Express and SBA loans, grew to 91,000,000. Overall, metrics remained in good position despite the challenging environment. We had a return on tangible common equity that was above 10%. Our efficiency ratio remained below 60%, and our return on average assets remained above 1%. Those are the quick highlights.

Speaker 2

And at this point, I'll turn it

Speaker 3

over to Andrew to discuss additional financial details for the q one results. Andrew? Thanks, Pat. For the three months ended 03/31/2025, we recorded net income of $9,400,000 or $0.37 per diluted share and a 1% return on average assets. Excluding the tax affected impact of the OREO write down we took during the quarter, EPS would have been $0.40 per share or an ROA of 1.07%.

Speaker 3

We had very strong loan growth during the quarter following a strong fourth quarter. We were up nearly $92,000,000 or 12% annualized from the end of the fourth quarter. Over the last twelve months, loans are up approximately $244,000,000 Growth was also solid on the deposit side with balances up $64,000,000 during the quarter or an annualized 8.5% as we executed on adding and maintaining profitable relationships. That growth also included some broker deposits, which we added to support our significant loan growth during the quarter. Net interest income increased about $500,000 compared to the fourth quarter.

Speaker 3

Our net interest income was supported by margin expansion. Our net interest margin increased to 3.65% in the first quarter compared to 3.54% in the fourth quarter. Interest bearing deposit costs declined, down 18 basis points from Q4. We continue to pass continue to be pleased with our success in moving rates lower on a significant portion of our deposit base, while still retaining and growing balances. Deposit cost declines outpaced the decline in average loan yields, which fell by three basis points.

Speaker 3

The margin is also impacted by acquisition accounting accretion, which totaled $2,800,000 in the first quarter of twenty twenty five compared to $3,100,000 in Q4 twenty twenty four. Looking ahead, we continue to manage a well balanced asset and liability position, which should result in continued strong net interest income generation and limited variability in the margin regardless of the Fed's actions on rates. Our asset quality continues to be strong. NPAs to total assets declined to 0.42% compared to 0.46% at December 31 and 0.64% at the end of Q1 twenty twenty four. We recorded a $1,500,000 credit loss expense in the current quarter.

Speaker 3

This compared to $234,000 in the fourth quarter, and the increase was commensurate with the high level of loan growth during the first quarter. For the first quarter of twenty twenty four, we recorded a $698,000 credit loss benefit, primarily due to the lack of loan growth during that period. Our allowance for credit losses to total loans increased slightly from 1.2% at 12/31/2024 to 1.21 at 03/31/2025. Noninterest expenses were $20,400,000 for the first quarter of twenty twenty five compared to $19,100,000 in Q4 twenty twenty four. Q1 expenses included an $815,000 impairment of an OREO asset during the quarter.

Speaker 3

The remaining increase in expenses came from higher salaries and employee benefits, primarily due to merit increases in Q1 coupled with higher payroll taxes. Payroll taxes were higher by approximately 300,000 in addition in additional payroll taxes related to annual bonus payments made in Q1. Also driving the expense increase was higher occupancy and equipment costs due to recent branch openings and relocation activity. Offsetting this was professional fees, which declined $425,000 compared to the prior quarter. Tax expense totaled $2,800,000 for the first quarter with an effective tax rate of 22.7%.

Speaker 3

This compares to taxes of $3,900,000 with an effective tax rate of 27.2% for Q4 twenty twenty four, which included the impact of BOLI restructuring completed in the second half of twenty twenty four. We anticipate our effective tax rate going forward will be in a range of 23% to 24%. We are pleased with positive performance and momentum during this quarter. Our efficiency ratio remains strong at 57.65, remaining below 60% for twenty three consecutive quarters. We are also continuing to expand our tangible book value per share, which grew $0.28 during the quarter to $14.47 or 8% annualized.

Speaker 3

Finally, we're happy to drive shareholder value through our successful continuation of our buyback program during the quarter along with a stable cash dividend. We believe our strong core financial results, strong underwriting and low risk balance sheet combined with our investments for growth, position us to continue performing well in any economic or rate environment. At this time, I'll turn it over to Darlene Gillespie, our Chief Retail Banking Officer, for her remarks. Darlene?

Operator

Thanks, Andrew. Good morning, everyone. As Pat and Andrew have mentioned, we saw solid deposit growth during the first quarter of this year, including growth of more than $16,000,000 in noninterest bearing customer deposits. This reflects our team's continued and outstanding ability to build and maintain deep customer relationships. This has been vital to our success in growing and retaining our core deposit funding in a hypercompetitive rate environment.

Operator

Our total deposits were up $64,000,000 or 8% from the fourth quarter of twenty twenty four, and they grew 150,000,000 or 5% from the first quarter of twenty twenty four. Our solid growth mask another quieter success, and that is our ability to manage out some higher cost balances over the past few quarters. This has been a strategic focus, and it's nice to see and reap those benefits. You can also see that in the favorable mix shift over the past year, noninterest bearing demand deposits have steadily grown and now comprise 17.2% of deposits, up from 15.8 a year ago. Ongoing strength and interest bearing DDA brought that bucket up over 20%, while higher cost, money market, and savings dropped to 38.4% from 41.1% a year ago.

Operator

Time deposits jumped this quarter by $47,000,000 This includes some brokerage funding utilized to support our team's outstanding loan growth, and we also benefited from some higher rate customer CDs that either rolled off or into lower rates. Given the ongoing interest in high yielding products, as mentioned, we were happy to see an overall deposit cost decrease again, and this contributed to the solid expansion of our margin for the quarter. As I have mentioned in recent quarters, our branch strategy is aimed at supporting engagement in our current markets and opportunistic expansion into adjacent markets, and we continue to be very active in this space. During the quarter, we opened our de novo branch in Trenton, New Jersey. Looking ahead, we have approvals in place to open two new de novo branches in New Jersey counties where we currently do not operate.

Operator

We are also making progress with our plans to relocate and expand our Florida branch to a more convenient and accessible location in the third quarter of this year. We run promotional campaigns in our new branch markets, which are typically at a higher cost, but the relationship value is strong and it has proven to be be a successful tool in gathering core deposits.

Speaker 4

We

Operator

also expect our sales teams to drive for future growth through the rollout of our Salesforce CRM tool, which aggregates customer data for both business and consumer relationships, and we're very excited about this initiative. We understand we are still operating in a challenging deposit environment. However, our customer retention and our ability to onboard new customers remain strong. Our teams are always focused on organic core funding and expanding existing relationships, and we are confident these efforts will continue to support a solid and growing deposit base in 2025 and beyond. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks.

Operator

Peter?

Speaker 4

Thanks, Colleen. After a good fourth quarter in 2024, the lending areas had another good quarter and strong start to the year. As you've heard, loans grew $92,000,000 in the quarter at annualized growth rate of 12%, exceeding the growth rate in Q4 of 7%. Our plan to focus on C and I lending, which is in would be inclusive of owner occupied real estate, which is where we believe most of our commercial banks deposits are, continues. Pat mentioned areas within C and I that have increased of the new loans closed and funded in the first quarter, '80 '1 percent were C and I loans.

Speaker 4

Investor real estate loans made up less than 5% of new loans funded in the period. The regional commercial banking teams in New Jersey and Pennsylvania are our largest teams and are executing on their plans to grow loans and deposits. The New Jersey team had another excellent quarter and the Pennsylvania team has a good pipeline and is positioned to have a down second quarter. We're depending upon our newer business units, private equity fund banking and asset based lending to be our leaders in net loan growth this year. And Pat mentioned small business banking, which includes SBA lending, which is showing very solid loan and deposit growth.

Speaker 4

We mentioned each quarter our focus on investor real estate. Late last year, we undertook a project to shift over a period of time, a greater percentage of our investor real estate loans to be managed in our investor real estate team. The goal here is an increased focus on relationship development and increased management of loan concentration levels. This helped result in a decline in the ratio of investor real estate loans to total capital from 420% a year ago to 390% at threethirty onetwenty five.

Speaker 2

The lending pipeline at the end of the first

Speaker 4

quarter stood at $326,000,000 of probable fundings. That's up 33% from the level of probable fundings at December 31. We're pleased with the level of business in the pipeline, especially after the loan growth we experienced during the quarter. If one breaks down a component of the pipeline at quarter end, C and I loans made up 63% of overall pipeline, down just slightly from 66% at twelvethirty onetwenty four. But if you compare the level of C and I loans to the total pipeline a year ago at $3.31 24, the level was 55.

Speaker 4

That swing of 10% is good indicator that our focus on C and I business is taking hold within the sales teams. Further, within C and I, SBA and asset based lending have good pipelines and private equity banking is up significantly over a year ago. Those three areas now comprise 39% of total C and I, up from 25%, which is where they were a year ago. On the topic of asset quality, portfolio continues to be in good shape. As the earnings release shows non performing loans were down in the last four quarters shown and recoveries again exceeded charge offs.

Speaker 4

And delinquencies in the portfolio continue to be very low. On the topics of Doge and tariffs, we've had our relationship managers reach out to customers two different times now to discuss potential impacts on their companies. Generally, the responses we've gotten at this point reflect concern, but only modest anticipated impacts. Those are the easy ones to address. We think risks and lower federal government spending will not impact us tremendously.

Speaker 4

We have no concentrations of business directly dependent upon government spending. We've talked on prior calls about office space in particular. First, you know, we have no exposure in the greater Washington DC market, so that obviously helps. In the markets we do business in, we have minimal federal government leases in our investor real estate portfolio. For example, we have one property with space under lease to the Social Security Administration.

Speaker 4

If that space vacates completely, which we have no indication that it will, that service coverage still exceeds one point o times coverage. We have that kind of analysis underway, and I can tell you that the overall exposure is going to be very small. Regarding tariffs, the feedback we've gotten is basically general uncertainty across the board. Most of our customers are not seeing anything yet that is creating a lot of concern. Certain areas have, you know, produced different levels of responses.

Speaker 4

In construction lending, for example, we've had mixed responses. Most of our developers say that their prices are either fixed for the projects they're in, and any impact would be small and can be covered by amounts budgeted for contingencies. In the longer term, they believe cost increases will be able to be passed on. So again, kind of a too early to tell group of responses. Private equity fund banking, here, it's also too early to tell.

Speaker 4

Most of our business here thus far has been in the financing of acquisitions made by funds. Most of the funds say that, you know, yes, they've seen the slowing of activity, but at the smaller end of the spectrum, there's still plenty of action. And on a deal by deal basis, the topic of tariffs comes up and gets vetted at that point. In the regional teams, where we're focused on middle market companies, you know, generally for us, that means those revenues under $100,000,000 Some responses from customers have referenced preordering some inventory where appropriate, potential cost of Canadian lumber having an impact. We had one that's delaying an equipment purchase from China.

Speaker 4

You know, these are kind of small one off reactions so far. We talked about line of credit utilization rates from time to time. And bank wise, these have not changed much either. Higher rates could be tied to customers building inventory levels, but we're just not seeing that yet. Historically, these rates have been in the low to mid 40% range, and they continue to be there.

Speaker 4

And, of course, we're following the trend in that number pretty closely. So in summary, we're cautiously optimistic. We've come across no what I'd call to be crisis situations out there with individual clients, but we're still out talking to customers and always updates on the whole tariff situation.

Speaker 2

Pulling these first quarter results together and looking at the next quarter and

Speaker 4

the coming year, I'll just mention that we continue to have a big focus on deposit generation. It's an important part of our conversation that we have with our sales teams and then with our customers and prospects. Sales teams in all regions are in the middle of new business calling efforts that we hope will result in increased deposit balances. We're having a good start to Q2 with the lending pipeline that's in place, but didn't quite pay off some unforeseen asset sales by customers clearly impact growth. And obviously, conditions are a bit of a wildcard and can change things a bit for us as the year plays out.

Speaker 4

That concludes my remarks about lending. So I'll turn things back to Pat for some final comments. Pat?

Speaker 2

Thank you, Peter, and thanks, Andrew and Darlene. At this point, I think we'd like to open it up for the Q and A portion.

Operator

Thank you. We will

Speaker 1

now begin the question and answer session. Thank you. And your first question comes from the line of Justin Crowley with Piper Sandler.

Speaker 4

Wanted to start on the loan growth in the quarter. Pretty strong result, and we see a lot of that coming outside of investor pre. And I know

Speaker 3

you gave an update on

Speaker 4

the pipeline, but just wanted to ask how you're thinking about lending environment as we move forward here, just given some of the uncertainty. I know Peter touched on it, but maybe some further color around more of what you're hearing from borrowers and how you think that could impact, you know, pull through rate on the loan growth side through the balance of the year.

Speaker 2

Yeah. I'll hit a couple of points and then I'll let Peter add to it. But, you know, the bottom line is a lot of the activity is, you know, stuff that's gonna happen quite frankly, whether it's construction projects that are mid funding. Right? Folks aren't gonna stop the things that are already in process.

Speaker 2

Now you might see a slowdown in construction six, nine, twelve months from now if the economy is slow or going into recession. But over the next quarter or two, I don't think you'll see much of an impact there. And then a lot of the activity on the real estate side that it has to do with maturities and refinancings that, you know, they need to get dealt with one way or the other. And so I don't think you'll see a real slowdown there. You might see a little bit of a slowdown in, you know, merger related financing or large CapEx purchases.

Speaker 2

But I think net net, there won't be, at least in the next quarter or two, a huge decline in in loan demand overall. But, yeah, we'll certainly keep an eye on that. Our our bigger governor, if you will, in terms of loan production has always been making sure we can fund it with good core deposit funding. And so we tend to turn away more than we can do anyways just based on, you know, managing our our funding constraints. So I think we see lots of opportunities.

Speaker 2

And, you know, in terms of what specifically borrowers are talking about, I'll turn it over to Peter and let him share a little detail there.

Speaker 4

Yeah. I I wish I had more detail there. I mean, the the perfect example I referenced, a customer that had a big equipment or, know, machinery purchase out of China, and it was kind of a nice to have. We'll be a little bit more efficient with it. And we had a $10,000,000 number on it, and they're just gonna put it on hold.

Speaker 4

They don't need the equipment, and they're gonna wait and see because that particular case, they their belief was the tariffs were in place. Other cases, folks are just waiting to see how it how things roll out. They don't seem that tremendously concerned. I mean, again, I don't wanna say they're

Speaker 2

not concerned. They're just not, you

Speaker 4

know, in panic mode by any at least any date. You know, from what you read, we're still a couple quarters away from seeing a big impact on that. And everyone's just watching it closely, hoping that, you know, we get some agreement today with some of these other companies and it becomes more and more of nonevent. Okay. I appreciate all that.

Speaker 4

And then just to shift a little bit, just over on or to buybacks, you got pretty active here in the period. Just wondering your thoughts moving forward with the stock trading below where activity got done in the quarter. Could we see this type of pace continue or perhaps even pick up in the event growth does come in a little bit slower through the duration of the year?

Speaker 2

Yes. Certainly on our radar, Justin. I mean, given where the the stock's been trading, you know, had we not been in in blackout for earnings, I think you would have probably seen even even more activity. So definitely something we're looking at. Obviously, we're we're trying to balance it with with organic growth goals and and other constraints, but I think it's something we'll continue to, you know, have at the forefront of our radar in terms of capital management going forward, at least, you know, while the stock is trading, you know, in the current range.

Speaker 2

So

Speaker 3

And, Pat, I would just add, and we've disclosed this previously, but we we do have an active plan right now. We we've purchased 350,000 shares from that plan, but the plan was was a million shares. So we have plenty of run room in our in our current plan. That plan goes through September 30. So so we have room there for sure.

Speaker 4

Okay. Great. And then I guess just lastly on credit. You know, you've got pretty strong reserves here, up slightly for the quarter and really above where you guys were back in the pandemic. Does it feel like the reserve is at a point where even if things got worse from an economic standpoint that you'd probably be okay?

Speaker 4

I know to a large extent, it's CECL driven, but I'm just curious your thinking on where the allowance might have to go to if we do get into a recession just, you know, given the strength of balances already.

Speaker 2

Yeah. I I think we feel pretty comfortable with where the allowance is, you know, on top of the odd balance sheet allowance, we still have, you know, some considerable credit marks on some of the acquired stuff, which gives us a little bit more of an off balance sheet cushion. And so when you look at things like our coverage ratio, meaning our allowance to our nonperformers, I think in general for banks in our area, our allowance is is higher than most already. And then given that our nonperformers are lower than most other folks, our coverage ratio looks very, very strong relative to peers. So I think from that perspective, you know, there's room to feel like we're in a in a in a pretty good place.

Speaker 2

Andrew, I don't know if there's anything you wanna add there.

Speaker 3

Yeah. I think that's right. We feel pretty good about the coverage ratio. Obviously, it would depend on the level of any economic issues or concerns and if our data changes. But right now, we're just not seeing a lot of risk in our portfolio.

Speaker 3

We think we have a fairly conservative allowance and approach right now. So if we see something like a mild recession, I just I wouldn't think we need to move it significantly, but it it'll really depend on a lot of different factors, so it's hard to say. But we do feel good about where the level is right now.

Speaker 4

Okay. Got it. And then just one last one, I guess, just sticking with credit. Just on the OREO write down in the quarter, can you remind us exactly what that is? I think you mentioned those are New York City credit or or real estate property.

Speaker 4

Just the mechanics of, you know, where the market is and, you know, the time line in terms of just getting that off the books, assuming that's the end game.

Speaker 2

Yeah. No. Certainly, that is the end game. This was an acquired loan from the from the Malvern merger that, you know, we took a pretty significant, you know, upfront credit mark against and then finalized foreclosure, moved it in. And, you know, they it's it's in a decent area.

Speaker 2

It's in the Chelsea area of New York City. It's a retail unit below some residential that you know, I think based on prior appraisals and location, we were thinking that it was marked appropriately even conservatively. But, you know, we've had it on the market for a little while. And based on some of the feedback we're getting and indication from the broker, we thought it was prudent to take a little bit of an additional write down just to make sure we're fully covered, you know, as and when the the asset gets sold, you know, our preference would be sooner than later. So

Speaker 4

Okay. Appreciate it. I'll leave it there. Thanks so much. Sure.

Speaker 1

Your next question comes from the line of Manuel Nava with D. A. Davidson. It

Speaker 4

seems like a lot of the growth came late in the quarter. The the NIM is is is was nice expansion. But

Speaker 2

where did the NIM finish in March, like, point

Speaker 4

in time then? And I I know you were adding funding as well. Just kind of giving a little bit more guidance around that near term NIM given how much kind of the balance you changed at the end of the quarter.

Speaker 2

Yeah. I mean, I'm not sure we we dug into to that level, Emmanuel. But at the end of the day, I'm not sure, Andrew, that the loan growth all came late in the quarter. I think I think we saw nice growth in each month during the quarter, and, you know, we obviously benefited from some deposits repricing during the quarter as well. So, yeah, I think listen.

Speaker 2

I think we feel like the current level is sensible. We're not predicting it's gonna necessarily move a lot higher, but I don't think we see reason for it to come back a lot either. Obviously, it depends on what the Fed does and the shape of the yield curve and all that. But I think from our perspective, we think the current level plus or minus is is a reasonable estimate moving forward. I don't know, Andrew, if there's anything you noticed more granular in terms of month to month or week to week that might have impacted the numbers that you wanted to mention.

Speaker 2

Yes.

Speaker 3

So I'd add that you're right. There was decent growth in all the months. March was our best month in terms of loan growth, but there was growth in January and February as well. We did add some of our higher cost funding towards the end of the quarter in terms of some of the broker deposits and some of the advances that we added. We're also going to see a decline in another decline in purchase accounting accretion as we've talked about that kind of continues to run down.

Speaker 3

So there's some headwinds and some tailwinds that we think are kind of offsetting each other with the good loan growth. Obviously, that growth will trickle into the second quarter. We are going to see some of the higher cost funding that got added later in the quarter as some some strain on the margin and then the purchase accounting as well. But, yeah, all things kind of getting close to offsetting each other. We think a fairly stable margin is the right right kind of mark or at least in the short term.

Speaker 4

What were the loan yields in the first quarter? And then what were the brokered added at in terms of cost? And how much was added on the brokered side?

Speaker 3

Peter, you wanna start with the loan yields and then I

Speaker 4

can talk about the liability? I mean, I don't have the breakdown on fixed to floating, you know, or versus floating. But if we're fixing loans fixing the rate on loans, it's gonna be typically, it's something like 250 over a five year team. So if that's around 4%, that would be six and a half. I think our on a month to month basis, we do report to our board some of our new loans report and shows the weighted average yield.

Speaker 4

I think we've been right in that middle seven to 25 to seven fifty range as far as the yields on new loans closed, you know, but that's gonna drive the overall yield slowly or impacted slowly. So, again, most of that hasn't changed in the past six months, six to nine months. So, again, we we focus on fixed rates at two fifty over, and we've been around seven and a quarter, seven and a half in total. Does that sound about right, Andrew?

Speaker 3

Yeah. That's about right. Think, yeah, seven and a half about is kind of the average rate of new loans. Now remember, we did a lot of c and I, which during the quarter, which tends to be more of the variable rate. I don't have the exact numbers as well, but some typically a little bit shorter term.

Speaker 3

But, yeah, around seven and a half was the average yield on loans. And then on the liability side, the the brokerage side, we I think we added about broker deposits increased by about 25,000,000 during the quarter. And those rates, typically, we've we've been continuing to keep we're we're the latter a little bit, but we're still staying on the shorter end of the curve. And and typically, brokered money is falling between four and four and a half percent in that range depending on if you go out a little bit further, it's it's a little cheaper. And if you stay short, it's closer to that four and a half percent range.

Speaker 2

And what's the schedule on

Speaker 4

the purchase accounting accretion expectations there?

Speaker 3

Yeah. I think as we've mentioned before, slight declines over the next several quarters. And then once you get to year 2.5, year three, it starts dropping off more and more significantly.

Speaker 4

Great color on kind of the C and I categories and how well they're growing. I feel like I I I'd love to get more color on that on how much bigger they could get, like, what are they targeting? I I guess you're probably still in the experimentation phase, seeing what what works is is kind of how you've talked about it in the past. Can you just add some perspective on on how big each can get and and how much growth you've already had? You you went through it very quickly at the very beginning, and I don't think I caught it all.

Speaker 4

So the ABL, the PE funding, kind of love to to know what each of those categories are are kind of doing.

Speaker 2

Yeah. So maybe the easiest way to think about is current outstandings and then kind of where we see heading over the next couple of years that ABL is sitting at 90,000,000 right now. I think we envision that business growing to, you know, hundred and 50, 2 hundred million over the next couple of years. That's not to say we would stop it there, but just to give you a a sense for, you know, the opportunities for growth. Private equity is at a 28.

Speaker 2

You know, similarly, we could see that business growing to a hundred and 50 to 200 in total outstandings over the next couple of years. And on the small business and SBA side, we we sell a fair portion of the SBA production. So the total outstandings probably won't grow as much there. Maybe that portfolio gets to one twenty five or or even up to one fifty in the next couple of years. But I think meaningful growth in each of those categories and, you know, I think, you know, given the size of the teams that we have and the infrastructure we have at those at those levels, each of those business units should be contributing meaningfully to the overall profitability of the organization.

Speaker 4

That's really helpful. And and SBA getting to one twenty five, one 50, what is it at now? Did you catch that one earlier?

Speaker 2

Let's let's be careful. It's not just SBA. SBA and Business Express are the two components of our, you know, small business portfolio that we're quoting here. And That's

Speaker 4

about 91,000,000. Right?

Speaker 2

Are collectively, that is at 91 today.

Speaker 4

And then so it seems like the pipelines are still really strong. The the this quarter was a fantastic quarter in growth. Any kind of perspective there are some uncertainties. Any perspective on kind of past targets for full year growth?

Speaker 2

Well, listen. I think we we talk about organic loan growth and deposit growth goals of, you know, $1.75 to 200,000,000 net. I think one quarter of ninety, obviously, if you annualize that, would put you well ahead of that target. But history shows that, you know, we can have a $90,000,000 quarter, and then we can have a flat quarter, and then we can have a 50,000,000 quarter, and things hop around a little bit. So, you know, that's yes.

Speaker 2

On the loan side, we'll probably come in a little bit ahead of the the the plan based on quarter one, but I wouldn't read too much into, you know, one quarter's worth of production. And, you know, similarly on the deposit side, I think we are a little bit behind our our budgeted growth plans in q one. And so we're hoping to see some uptick in activity there, but, you know, I'm not necessarily looking to change our overall organic goals for the year at this point.

Speaker 4

That's helpful. And then on on expenses, is the is the core rate ex the OREO impairment and and some of the seasonal items kind of where I should look at for OpEx? Is is anything that should change it from from that level?

Speaker 2

Yeah. I don't I don't think there's anything major, you know, on the drawing board that, you know, would lead to, you know, major push higher. Similarly, we don't have any, you know, big cost cutting campaign coming. And so I think the current level is a is a decent run rate. Obviously, we're always looking for opportunities to improve efficiency and and save money.

Speaker 2

That being said, you know, our our goals for growth in some of these new business units require investment, and so we expect we'll continue to do that as well. And, you know, we continue to opportunistically look for opportunities on the technology side, which, you know, I think will continue to be part of the the program going forward. So I think, you know, overall levels of noninterest expense to assets are, you know, probably a good run rate to think about moving forward.

Speaker 4

And and just adding those branches, the branch cost and and that that would be probably good in terms of the increases from from the current run rate?

Speaker 2

Yeah. I think that's right. Certainly, locations cost money, and there's some marketing tied to them. Sometimes, you know, what we've seen in the past is, you know, we'll open two new and maybe consolidate one of the existing into another location to help offset some of the costs. But, you know, the bigger we get, adding one branch doesn't move the needle quite as much in terms of the impact on expenses.

Speaker 2

So

Speaker 4

Okay. I appreciate the commentary. I'll step back in. Thank you.

Speaker 2

Alright. Thanks, Daniel.

Speaker 1

Your next question comes from the line of David Bishop

Speaker 3

Glad to finally get in the question queue here. Pat, just curious, capital is still very abundant here. I know there's obviously a lot of dislocation within the market. Prospects for M and A activity this year, I'm just curious how the phone lines have been trending here. Do you think that's an opportunity to to deploy capital?

Speaker 2

Well, you know, I I think our view on m and a is the same as it's always been, which is, you know, we keep our eyes and ears open. We, you know, have lots of conversations, most of which don't go anywhere. And, ultimately, you know, when I look at probabilities for m and a, you either need a catalyst on the sell side or you need improved valuations on the buy side, we certainly don't have the latter right now. And so, you know, it really comes down to, you know, what's driving somebody to seek a partner. And based on that, is it enough to push them forward at a time when nominal prices won't look that good?

Speaker 2

Or do they wanna wait it out until some hope for rebound so that, you know, the announcement looks better on paper? Those are hard questions to answer, Dave. So I think, you know, you said it well. Right? There's a lot of conversation, but, you know, how much of it is gonna result in actual activity?

Speaker 2

So until, you know, we have a clear clear visibility on where the economy is headed and what's actually going to happen with the tariff discussions that M and A activity is going to stay muted is my best guess.

Speaker 3

Got it. And then, Pat, as you sort of grow some of the commercial small business segments on the C and I side, especially the private equity banking. Comfort level in terms of I mean, I'm just curious with your underwriting and doing the due diligence there. Just curious with the comfort level for the portfolio companies that sort of make up some of these private sponsor units. Just curious how you're thinking about that, you know, limiting credit exposure and and and credit quality degradation in a slower comp.

Speaker 2

Well, listen. I can tell you, Dave, we went into these new units with a lower risk, lower yield mindset. Right? So private equity fund bank is a good example, right, as we're calling on folks and developing relationships. We're making it very clear where we wanna live on that spectrum.

Speaker 2

And for us, that means lower leverage situations with, you know, lower yield, but from our perspective, much much better, you know, credit profile, if you will. And our mindset of credit has always been don't stretch for yield and take on risk, but do the lower risk deals and manage overall profitability with really strong expense management. And so that mindset didn't change as we as we launched, you know, some of these new units. We we brought that same mindset to, you know, the thought process of the teams we wanted to bring in and the strategies they're gonna deploy. And so, you know, within ABL and private equity specifically, we've we've been very focused on trying to stay at the at the lower end of the risk curve in terms of leverage on deals and things like that.

Speaker 2

And and similarly, it's small business, so we're constantly tweaking the model there. But within SBA, similarly, we're looking and trying to find deals that look and feel a lot closer to almost conventional in nature than, you know, our mindset in SBA has never been, hey. If the SBA will approve it, we'll do it. We we just don't wanna, you know, move out on the risk curve thus far. And and, listen, candidly, that's constrained some volume on the SBA side, but we're willing to live with that rather than take the risk.

Speaker 2

So long winded way of saying, you know, our model within the core community bank business in terms of risk reward and credit hasn't changed with these newer units.

Speaker 3

That's that's that's great color. And I guess one final question for me, you know, It's always a battle, I know in terms of deposit rates and deposit costs. Just curious, is there a decent amount of exception based pricing left where you can sort of lean on some relation based pricing to continue to move deposit funding costs lower? Well,

Speaker 2

listen, that's a great question, right? I mean, to the extent that there is some exception based pricing, we're regularly reviewing it and moving it down where and when we think we can. And a lot of that just becomes a function of what, you know, what the other options are in the market. But I saw a chart the other day that showed, you know, the money flowing into money market and, you know, overnight funding mechanisms continues to move higher, and that's obviously a direct competitor to the bank deposit business. So, you know, so the the dynamic between what folks can earn in in low risk money market fund assets and bond fund assets versus bank deposits changes, I think it's gonna continue to be a struggle to push to push deposit costs down.

Speaker 3

Got it. Appreciate the color.

Speaker 2

Yep. My pleasure.

Speaker 1

There are no further questions. I will now turn the call back over to mister Patrick Ryan for closing remarks.

Speaker 2

Okay. Thanks, everybody. We certainly appreciate your time, your interest and your questions today, and we'll look forward to catching up with everybody when we do our earnings call at the end of the second quarter. Thanks, everyone.

Speaker 1

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
First Bank Q1 2025
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