FRBA

Thank you for standing by. My name is Kate, 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 2025. [Operator Instructions] I would now like to turn the call over to Patrick Ryan, President and CEO. Please go ahead.

Thank you, Kate. I'd like to welcome everyone today to First Bank's Third Quarter 2025 Earnings Conference 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, 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, 2024, filed with the FDIC. Pat, back to you.

Thanks, Andrew. I'll hit on a couple of the high-level points from the quarter and then turn it over to the team to provide some of the details. In the third quarter, we saw a nice increase in net interest income, thanks to continued loan and deposit growth, coupled with net interest margin expansion. Our net interest income was up $1.5 million compared to the second quarter and up $5 million compared to a year ago. Our margin was up 6 basis points linked quarter and was up 23 basis points compared to a year ago. And the pre-provision net revenue number increased to 1.81% from 1.65% in the prior quarter. So all nice positive movements upward in terms of our overall revenue and margin. That strong revenue growth, coupled with expense control, drove continued improved profitability -- our net income was up $3.5 million or 43% compared to Q3 of 2024. Our return on average assets improved 28 basis points to 1.16% compared to 0.88% in the third quarter of last year. Our earnings per share improved to $0.47 in the third quarter, a 46% increase compared to Q3 a year ago, and our return on tangible common equity came in at 12.35%. We did see continued loan portfolio diversification within the quarter. Our investor commercial real estate to capital ratio came down to 370% from a high of 430% after we closed the Malvern acquisition. Our specialized lending groups now make up 16% of total loans, but within that broader category of specialized lending, no niche makes up more than 5% of total loans. Overall, credit quality seems to be holding up with the exception of some softness we saw in the small business segment, specifically companies with revenues under $1 million. Our NPAs in our nonperforming loans did decline during the quarter, and our allowance coverage ratio to nonperformers increased to 2.93%. Charge-offs were elevated but remain very manageable. Third quarter results also included 2 months of "extra sub debt expense" as we did not pay off the old sub debt until September 1 of this year. And during the quarter, we bought back almost 120,000 shares at an average price of $14.91. In summary, the core operating trends look good, and they're improving. The economic outlook remains uncertain, but we're well positioned for whatever rate environment may emerge. And obviously, we're keeping a close eye on the overall level of economic activity and what that might mean for credit quality going forward. I'll turn it over now to Andrew Hibshman, our CFO, to give you a little more detail on the financial results. Andrew?

Thanks, Pat. For the 3 months ended September 30, 2025, we recorded net income of $11.7 million or $0.47 per diluted share and a 1.16% return on average assets. We saw another quarter of solid loan growth, however, down from the first and second quarter as we continue to prioritize relationships and profitability over volume. Loans were up $47 million for the second quarter or 5.6% annualized. Over the last 12 months, loans have grown $286 million or over 9% with our core areas of focus leading the way. C&I grew $194 million and owner-occupied commercial real estate loans grew $40 million. Our evolution into a middle market commercial bank can be seen in our loan mix shift over the past 12 months. C&I and owner-occupied commercial real estate are now a combined 42.2% of loans compared to 40% of loans at September 30, 2024. And our investor commercial real estate loans, which includes multifamily and construction and development, are now 49.8%, down from almost 53% 1 year ago. Growth was also solid again on the deposit side. Balances were up over $55 million during the quarter or an annualized 7% as we continue to execute on adding and maintaining profitable relationships. The growth primarily came with time deposits, along with some interest-bearing demand deposit growth. Darleen will expand on this, but we saw a strong response to promotional campaigns in markets around our new branches. We also utilized some brokered CDs to help reduce FHLB advances by $25 million during the quarter. I'll highlight that our deposit growth occurred even as our average cost of deposits declined 3 basis points to 2.69% for the quarter. Net interest income increased $1.5 million compared to the second quarter, primarily due to margin expansion on a growing balance sheet. Our net interest margin grew 6 basis points to 3.71% in the third quarter despite increased costs on our subordinated debt. We carried sub debt totaling $65 million from June 18, 2025, through September 1, which is the date we redeemed $30 million of outstanding debt. This carry resulted in about $486,000 in additional interest for the third quarter. Looking ahead, we continue to manage a well-balanced asset and liability position, which should result in continued strong net interest income generation. We will benefit from lower sub debt interest costs. However, we expect the immediate impact of Fed rate cuts to be slightly negative as it takes longer to move deposit costs lower compared to the immediate impact of rates moving lower on our variable rate assets. We also continue to expect a larger decline in our acquisition accounting accretion over the next several quarters. Overall, we expect our margin to remain relatively stable as we continue efforts to push deposit costs lower and replace the runoff of lower-yielding assets with higher-yielding loans. Our asset quality metrics at September 30 continue to be strong. NPAs to total assets declined to 36 basis points compared to 40 basis points at June 30 and 47 basis points 1 year ago. The linked quarter decline reflects a decrease of $1.6 million in nonperforming loans. Our allowance for credit losses to total loans increased slightly to 1.25% at September 30 from 1.23% at June 30. We recorded $1.7 million in net charge-offs during the quarter compared to $796,000 for the second quarter and $15,000 in net recoveries in the first quarter. Year-to-date charge-offs are almost exclusively in our small business portfolio. We continue to value this business for the sticky deposit relationships it generates, its impact on improving our community presence and brand loyalty, and it builds a pipeline of future middle market commercial customers. Pat summarized our credit outlook, and Peter will discuss it further in his comments. Noninterest income totaled $2.4 million in the third quarter of 2025 compared to $2.7 million in Q2. The decrease reflects lower swap fees, loan swap fees as well as $397,000 gain on the sale of a corporate facility that occurred in the second quarter. Noninterest expenses were $19.7 million for the third quarter compared to $20.9 million in Q2. Recall that Q2 expenses included $863,000 in onetime executive severance payments. Additional declines in other line items reflect efficiency initiatives as the bank continues to prioritize effective expense management. Darleen will expand on this in her remarks, but we have some new branch openings that will drive costs slightly higher, but we also have an offsetting branch closure in process and other cost mitigation initiatives in place that should help to minimize cost increases. Tax expense totaled $3.6 million for the third quarter with an effective tax rate of 23.4%. This compares to an effective tax rate of 22.9% in Q2. We anticipate our effective tax rate going forward will be relatively stable. Our efficiency ratio improved to 52% and remained below 60% for the 25th consecutive quarter. We also continued to expand our tangible book value per share, which grew $0.46 during the quarter to $15.33. We continue to be pleased with our earnings momentum and our progress in executing our strategy to evolve into a middle-market commercial bank. Our capital ratios remain strong, allowing for capital flexibility. This affords us the opportunity to further drive shareholder value through ongoing investment in the franchise and technology, a stable cash dividend and share buybacks as applicable over time. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer, for her remarks. Darleen?

Thanks, Andrew, and good morning, everyone. As Pat and Andrew noted, we experienced solid deposit growth in the third quarter with balances up $55 million or 7% annualized from Q2. This reflects increased business development activities by our sales teams and the success of targeted promotions, which we were -- which were implemented to drive engagement with our newly opened branch locations. While at a higher cost, promotional campaigns tend to generate strong relationship deposits and have proven successful as part of our branch network optimization efforts. We also saw growth from some CD promotions implemented to strategically onboard funding in support of our strong loan growth. But we're not only growing high-cost deposits. The point-in-time balance sheet hides an important success that I'd like to highlight. Our average noninterest-bearing deposits grew by $21 million during the quarter and by $52 million year-to-date, reflecting strong relationships that provide critical interest-free funding. During the third quarter, our average cost of interest-bearing deposits declined by 2 basis points to 3.27% and our overall cost of deposits declined by 3 basis points to 2.69%. This occurred despite growth coming from higher cost promotional campaigns and some brokered funding to support our loan growth. It reflects our bankers' outstanding success in executing their dual mandate to both maintain deep customer relationships and lower funding costs. The initiatives and banker incentives we have in place to support these goals continue to be effective. Similarly, what's also hiding in our net growth is our continued success in managing out some higher cost balances over the past few quarters. If you look at the first 9 months of 2025, our average money market deposits grew by about $25.1 million or 2.4% over the same period of 2024, but the average cost declined by 61 basis points, lowering the overall interest expense on these deposits by $4.1 million compared to the year-to-date period. And I do not believe we have fully realized the benefit of the Fed's September rate cut yet, but we have made solid progress lowering our pricing and managing interest expense through the first 3 quarters. Now I'll talk a little bit about our branch strategy, which has always been aimed at supporting engagement in our current markets and opportunistic expansion into adjacent markets. We opened a de novo branch in the Fort Monmouth section of Ocean Port, New Jersey, extending our footprint into Monmouth County and increasing our New Jersey footprint to 10 counties. We also completed the relocation of our Palm Beach branch to Wellington, Florida, still in Palm Beach County. This location was part of our Malvern Bank acquisition and was originally in a small office suite. We now have a full-service branch in a more convenient and accessible location to better serve our customers. We also officially closed our limited-service Morristown office in August and transferred those relationships and deposits to our nearby Denville branch. In line with our strategy to operate efficiently, we made the decision to close our Coventry, Pennsylvania branch in December of this year and transferred those deposits and relationships to our nearby Lionville branch. This decision allows us to better leverage our resources while continuing to provide high-quality service across our footprint. Needless to say, it's been a busy year for us with branch -- with several branch openings and consolidations. We've focused on aligning our branch footprint with customer demand and growth opportunities. By year-end, these efforts will result in a net increase of 1 branch in our network. I'll finish up with a note on rates and pricing. We've been very proactive in moving rates with the Fed cuts and expect to continue to do so. Now this does take time and a measured approach. We've been able to grow deposits in many rate environments, and we aim to continue doing this provided the desired profitability levels can be achieved. At this point in our evolution, growth for the sake of growth is not our end goal. We will focus on growing our deposit portfolio through disciplined relationship-driven strategies while remaining competitive in our pricing. Our goal is to continue to offer fair, market-aligned pricing, supported by strong customer relationships and exceptional service. Our focus is on serving our customers -- or growing our customers and serving our customers well and profitably. And also, our team is doing an outstanding job toward this end. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Darleen. Well, Pat and Andrew have already commented on the loan growth. We've experienced in the past quarter as well as year-to-date, an annualized growth rate of 9%, I think, compares favorably to our peers. The third quarter was right in line with budgeted loan growth. And after 2 quarters of growth that were well ahead of plan, I think we're positioned to report good overall growth in earnings at the end of the year. For the past couple of years, I've reported on our goal to do more C&I business, which includes owner-occupied real estate, while maintaining a healthy level of investor real estate and consumer lending. And I'm happy to report that the trend of growing C&I business has continued. New loans closed and funded for the 9 months ending 9/30/25 were comprised 65% by C&I loans and 18% by investor real estate, the remainder consisting mainly of consumer loans. That's an increase in C&I lending from 2024 when C&I loans represented 64% of all new loans. The regional commercial banking teams continue to generate most of the loan growth for us. They represented 39% of new loans generated in Q3, followed by investor real estate at 28%, private equity at 18% and small business banking at 9%. Our specialty areas, which also includes asset-based lending, are all at or very close to their growth plans for the year. Regarding investor real estate, we closed a number of new loans in the third quarter, but similar to previous periods, new loans were offset by payoffs. You'll see a bump up in investor real estate if you look at the schedules in the earnings release, but that was due mainly to a reclassification of a loan from owner-occupied to investor. Our goal over time is to moderate growth in investor real estate and manage more of that business in its own investor real estate team, focusing on relationships and loan concentrations, and that continues to go very well. A focus of most community banks is the ratio of investor real estate loans to total capital, as Pat mentioned, we hit a high point at 430% of capital after the Malvern acquisition, but got to 390% in March of 2025 and finished Q3 at 370%, which is about where we want to be. The lending pipeline at the end of the third quarter stood at $283 million of probable fundings, down 6% from the level of probable fundings at June 30. The number of deals in the pipeline, however, is up 5% from the end of Q2. If one breaks down the components of the pipeline at quarter end, C&I loans made up 68% of the overall pipeline, exactly where we were at June 30 and up from 63% at March 31. Overall, I'm happy with where the new business pipeline stands. We are anticipating a higher level of loan payoffs in Q4 than what we've experienced on average over each of the first 3 quarters, which is why despite a strong start to the year from the standpoint of overall loan growth, our target has remained in the 6% to 7% growth range. On the topic of asset quality, Andrew provided a good outline on where we are. I think things continue to be in good shape. The loan portfolio continues to be well diversified. Andrew mentioned some softness in the small business loan portfolio. We've made some adjustments there, and we anticipate a return to the quality we've experienced previously. Overall, it's a modest piece of the overall loan portfolio. I should probably also comment on what's been out there in the banking news about the fear of deteriorating credit quality and the "one-offs" cited by a handful of banks. I can only say that we don't do any lending into deals like what you read about publicly around First Brands, Tricolor, factoring and borrowers not providing financial information. That's not what we do. We have very -- and we have very limited exposure to NBFIs and none to private lenders. In summary, I think we had a good third quarter. Loan growth was in line with budget, and we expect to meet our loan growth goals for the year. That pretty much concludes my remarks. So I'll turn things back to Pat for any final comments.

Great. Thank you, Peter. Appreciate all the additional comments. And at this point, I think we'd like to open it up for Q&A.

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

Just want to start on expenses. You've talked about tighter cost control before. So nice to see the core base now down 2 quarters in a row. How would you describe some of the efficiency actions taken, what they involve, what, if anything, is left to do? And where does that leave you on the thinking around run rate here over the next several quarters, more specifically, just factoring in your comments as well about some actions like new branches that could add to costs?

Yes. No, absolutely. Justin, we always are focused on costs. But at the same time, we don't want to miss out on important investment opportunities. I think you've seen over the last couple of years, we've invested in some new teams in terms of some of the specialty lending niches, we've invested in some additional branch locations in new markets for us, and we've invested in some technology, whether that be the online loan application platform or salesforce, things like that. But I think in terms of big investments, we're at a point right now where we're just kind of digesting the moves we made. We're letting those new business units scale up. And so I don't see a lot of big new costs on the horizon. We are a year away from needing to make a decision on our core and how much we want to keep kind of with our current provider versus spreading it out amongst other kind of best-in-class operators. So always a little bit of a question mark on tech when you're doing a big core contract renewal. But again, I don't suspect there's going to be anything too outlandish there in terms of technology spend increases. And we've been very focused internally on just making sure we can get our noninterest expense to average asset ratio down to that 2% range and below since that's where we've been able to operate historically. So that's a little bit of big picture on expenses, and I'll let Andrew jump in and talk a little bit about some of the initiatives and kind of where he sees the line item moving forward.

Yes. Thanks, Pat. I'd just add, I think Pat talked about this in previous calls where kind of you do a big acquisition and you get cost saves and then you kind of recalibrate and now we're just kind of recalibrating a little bit more and fine-tuning. We haven't done anything drastic to save money, like things like professional fees, a lot of that was kind of elevated because of some of the big projects we had going, implementation of salesforce. We have consultants helping us with that. We had some other projects going on. And so I think really, the cost mitigation has been really just kind of settling to where we're at, finding some excess spending where we could. I don't think there's any major initiatives that are going to significantly reduce costs from where we're at now. We will -- obviously, like we mentioned, we will see a little bit of a creep for some of the couple of small -- the branches we've done, new branches. But I think we can minimize expenses, keep them relatively flat, maybe again, like some slight increases, always kind of heading into a new year, there's standard cost of living adjustments on things like rent and salaries and things. So we'll continue to see that. But no major new costs that I'm aware of or any major new cost-cutting initiatives, but we're going to just keeping a tight eye on things. We think we can continue to grow without adding meaningfully to the expense base and to the payroll. So again, I think we're going to be able to maintain the total expenses at a relatively flat level.

Okay. And then just, I guess, in terms of like very near-term run rate, like next quarter, even if we do see a little bit of an increase given the new branches, it's going to be modest. It's not going to be anything too eye-popping.

Yes, I think that's right.

Okay. And then on the margin and some of the inputs, obviously, the latest Fed cut came late in the quarter. But following that and what should be, I guess, some further reductions looking out here, and Darleen touched on it, but can you folks talk a little bit more on how aggressive or active you think you can get on lowering deposit costs?

I'll start and then I'll let Darleen provide a little more color there. But at the end of the day, when the Fed moves, we move, as Andrew pointed out, it takes a little bit of time to kind of to go through it. We have certain rack rates we can move down and we obviously are taking a look to see are there areas where we can move more than what the Fed did. And so we try to be selective in certain product categories to see if we can even move things a little bit further. But at the end of the day, our goal is to try to make enough adjustments on the deposit cost side to offset what we know is coming in terms of floating rate asset yields so that after a month or so, it should be a relatively neutral event from a margin perspective. And then separate from that, there's just kind of the work we do every day to drive core low-cost noninterest-bearing deposits and move promotional customers into rack rate so that if we can make the impact of the Fed move neutral, then some of the mix improvements and some of the other changes we make can hopefully continue to drive costs lower. So I don't know, Darleen, anything you want to add there?

I think, Pat, you touched on it. I would just add that we talked a lot about this over the past year and even early -- I'm sorry, late 2024, in which we've really been focused on lowering our cost of deposits, looking at specific portfolios and determining where we can make an adjustment without negatively impacting our customer base. One of the benefits that we have is our government portfolio, a good portion of that is tied to the effective funds rate. So as the Fed makes adjustments, we can make adjustments immediately. But I think everyone within the organization understands the message of competitive pricing but not going overboard and not necessarily winning based on rate. So overall, I think that we do a really good job in managing our cost, and I anticipate us continuing to be able to do that as the Fed continues to make adjustments over the next couple of months.

You mentioned the government portfolio of funding. How much do you have in deposits that are like that, that are indexed directly to Fed funds?

Our government portfolio is approximately 12% to 13% of our total deposit base. And I would say 75% of that portfolio is tied to the effective funds rate. So we look to onboard full customer relationships when we look at deposit opportunities on the government side. And generally, when we bid on that business, the request is to tie it to an index. So we've been successful in winning business in that world by bidding based off of an index rate. And so I think, again, as we look at additional cuts down the road, we'll be able to make adjustments in that portfolio.

Okay. Got it. And then just one last one. You continue to be active on the buyback and seems like that should continue to some degree. Obviously, with the stock right around tangible book makes it attractive. But what are other considerations like, for example, on capital levels? What levels are you comfortable at? Or what do you think could serve as a good floor for you guys?

Well, we always look at internally the total risk-based capital ratio, and we have a soft limit around 11.5% that we try not to dip below if we don't need to. And then after that, it's just sort of looking at different uses for capital, and we're happy to see that based on -- despite the strong growth based on the strong earnings, we've been able to see that level creep up over the last couple of quarters. So I think we're in a position right now where based on organic growth alone, we're growing capital, which gives us flexibility. And what we choose to do with that " additional capital" that we're creating will be a function of the opportunities in the market. Obviously, M&A could be one consideration, but we continue to be very selective there. Our dividend is relatively low, so we could take a look at that. And then depending on where the stock trades, we think we've got room to look at capital deployment in the form of the buyback. So we're at a level where we think capital ratios are growing nicely, and that gives us flexibility to kind of pull the levers that we think will generate the best returns.

[Operator Instructions] I would now like to turn the call over to Patrick Ryan. Please go ahead.

Thank you very much. I just want to conclude the call by thanking everybody for calling in. We appreciate your interest in First Bank, and we look forward to reconnecting with you after year-end results. Thanks, everybody. Have a great day.

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

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to First Bank Earnings Conference Call Second Quarter 2025. [Operator Instructions] I would now like to turn the conference over to Mr. Patrick Ryan, President and CEO. You may begin.

Thank you, Bella. I'd like to welcome everyone today to First Bank's Second Quarter 2025 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, 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, 2024, filed with the FDIC. Pat, back to you.

Thanks, Andrew. The second quarter of 2025 was another quarter of strong balance sheet growth in the right categories. Loans grew over $90 million during the quarter and deposits grew by $50 million. 3/4 of the net loan growth came from our strategic C&I and owner-occupied segments. Our deposit growth during the quarter was fueled by gains in the noninterest-bearing category. Loan growth in excess of deposit growth pushed our loan-to-deposit ratio up to 105%, something we'll be tracking and looking to move lower in the back half of the year. Strong balance sheet growth drove top line revenue growth. For example, net interest income was up $1.9 million compared to the first quarter, which is 6% linked quarter growth. Pre-provision net revenue was up $2.9 million compared to the first quarter, which was 21% linked quarter growth, and our pre-provision net revenue return on assets was 1.65% annualized. Results for the quarter did include some noncore items. Specifically, we had a $397,000 pretax gain on the sale of our Paoli office building, and we had an $862,000 severance cost related to some management changes. Overall, credit quality seems to be holding up despite the economic and tariff-induced uncertainty. Net charge-offs remain relatively low as do our nonperforming assets and nonperforming loans. Our allowance to nonperforming loans sits at 255% coverage, well above industry average. We achieved pretty good profitability over a 1% ROA in the quarter despite the severance costs and the elevated provision. Core profitability is tracking closer to 1.10% or 1.15% ROA. Our newer business units continue to gain size and scale, driving profit improvement moving forward. Furthermore, we expect tighter expense containment to also help boost future profitability. New business units, new branches and technology expenses have driven our noninterest expense to average asset ratio above 2%. Historically, we've operated in the 1.9% to 2% range, excluding merger-related charges. Operating leverage and expense management will help us get back to those historical levels. We've also completed a successful subordinated debt offering during the quarter. We brought in $35 million in new debt at [ 7.18% ] interest rate, one of the lowest coupons on a new debt deal for a community bank this year. At June 30, we still held $30 million of our older higher rate sub debt, and we expect to pay that off on September 1. In summary, core operating trends look good. Our margin is holding in at high levels. Our strong asset growth will drive strong revenue growth during the second half of the year and expense management will help drive better bottom line results. We're keeping a close eye on credit trends, but they appear stable. All in all, things should be shaping up for a good back half to the year. At this point, I'll turn it over to Andrew to get into some more details on the financial results. Andrew?

Thanks, Pat. For the 3 months ended June 30, 2025, we recorded net income of $10.2 million or $0.41 per diluted share and a 1.04% return on average assets. We saw another quarter of substantial loan growth. Loans were up $91 million for the first quarter or 11% annualized. Over the last 12 months, loans have grown $329 million or 11% with our core areas of focus leading the way. C&I grew $176 million and owner-occupied commercial real estate loans grew over $60 million. Growth was also solid again on the deposit side. Balances were up over $48 million during the quarter or an annualized 6.2% as we continue to execute on adding and maintaining profitable relationships. This growth all came from noninterest-bearing deposits and was supplemented by additional FHLB advances to support our significant loan growth. Net interest income increased $1.9 million compared to the first quarter, primarily due to margin stability on a growing balance sheet. Our net interest margin remained at 3.65% in the second quarter, benefiting from slightly higher yields on loans, offset by slightly higher costs, primarily due to increased costs on our subordinated debt. Looking ahead, we continue to manage a well-balanced asset and liability position, which should result in continued strong net interest income generation with limited variability in the margin regardless of the Fed's actions on rates. We will most likely see a larger decline in our acquisition accounting accretion income over the next several quarters than what we saw in Q2, and we will be negatively impacted in Q3 by carrying both of our sub debt instruments. However, we believe that we will be able to maintain a stable margin with some potential upside due to our efforts to push deposit costs lower, combined with lower-yielding assets continuing to run off our balance sheet, which are being replaced with higher-yielding loans. Our asset quality continues to be strong. NPAs to total assets declined to 40 basis points compared to 42 basis points at March 31 and 56 basis points at June 30, 2024. This reflects the second quarter sale of our OREO asset with a carrying value of $4.8 million at March 31, offset somewhat by a net increase of $4.4 million in nonperforming loans. We recorded a $2.6 million credit loss expense during the quarter compared to a credit loss expense of $1.5 million for the first quarter. The increase is primarily due to our loan growth during the quarter, a modest uptick in net charge-offs after several quarters of little to no charge-off activity and a slight build in reserves in our C&I portfolio. Our allowance for credit losses to total loans increased slightly from 1.21% at March 31 to 1.23% at June 30. Noninterest income totaled $2.7 million in the second quarter of 2025, up from $2 million in Q1. The increase reflects higher loan fees as well as a gain of $397,000 on the sale of our Paoli location, which included some excess corporate office space and the branch, and we have leased back just the branch space. Noninterest expenses were $20.9 million for the second quarter compared to $20.4 million in Q1. Recall the Q1 expenses included an $815,000 impairment of an OREO asset during the quarter, which we sold for a gain of $34,000 in Q2. In Q2, salaries and employee benefits expenses grew by $841,000, primarily due to executive severance payments during the quarter. We are laser-focused on expense control and believe that we continue to drive growth without adding meaningfully to our expense base. Tax expense totaled $3 million for the second quarter with an effective tax rate of 22.9%. This compares to an effective tax rate of 22.7% for Q1. We anticipate our effective tax rate going forward will be relatively stable, and we do not expect the recent legislative changes to have a material impact on our tax rate. Our efficiency ratio improved to 56.24% and remained below 60% for the 24th consecutive quarter. We also continued to expand our tangible book value per share, which grew $0.40 during the quarter. Pat commented on this, but it's worth repeating that our $35 million subordinated debt offering was very positive for us in this rate environment. We priced below our expectations and below other comparable deals. The $30 million in sub debt that we issued in 2020 will be carried until the end of August and will impact Q3 results because of the extra interest expense, but we'll see savings of approximately $240,000 monthly starting in September. I'd note that the extra subordinated debt is also included in our total risk-based capital ratio at June 30. Even after the expected redemption, our capital ratios will remain strong, allowing for capital flexibility. We continue to be pleased with the momentum and very positive performance. We are executing our strategy to evolve into a middle-market commercial bank, and we are strengthening our core earnings profile. We're also pleased this success allows us to drive shareholder value through the successful continuation of our buyback program and a stable cash dividend. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer, for her remarks. Darleen?

Thanks, Andrew, and good morning, everyone. As Pat and Andrew noted, we experienced robust deposit growth in the second quarter, highlighted by a $55 million increase in noninterest-bearing deposits. This growth was particularly strong among our commercial clients. This contributed to a favorable mix shift with noninterest-bearing demand comprising nearly 19% of our total deposits at June 30, up from 17% a year ago. Over the same time, interest-bearing demand deposits declined from over 19% of total deposits a year ago to 17.5% at June 30. This reflects our bankers' continued success in building and maintaining deep customer relationships, which supports our focus on growing core funding and lowering our deposit costs. We have initiatives and banker incentives in place to support these goals, and they are proving to be effective. To be a bit more specific, in addition to continued momentum in retail and commercial lending, the small business banking team is advancing industry-specific initiatives aimed at driving deposit growth across the bank, positioning us to meet critical growth targets through year-end. As Andrew mentioned, our total deposits were up $48 million or over 6% annualized from the first quarter, and they grew $201 million or nearly 7% from second quarter of 2024. What's hitting in this net growth is our continued success in managing out some higher cost balances over the past few quarters. If you look at the first 6 months of 2025, our average money market deposits grew by about $16.5 million or 2% over the first half of 2024, but the average cost declined by nearly 60 basis points, lowering the overall interest cost on these deposits by $2.8 million compared to the prior year period. Time deposits continued to grow, up $26 million during the quarter. We introduced a series of CD promotions to strategically onboard funding in support of our continued strong loan growth. In addition, targeted promotions were implemented to drive engagement with our newly opened branch locations, which I will speak to shortly. We've continued to benefit from the runoff of certain customer CDs either maturing from previously higher rate terms or transitioning into our rack rate pricing structure. We continue to execute our branch strategy, which is aimed at supporting engagement in our current markets and opportunistic expansion into adjacent markets. On June 9, we opened our de novo branch in Summit, New Jersey, adding Union County to our footprint. That adds the ninth County where we have a physical location in New Jersey. Looking ahead, we have approvals in place to open another de novo branch in Oceanport, New Jersey, which will extend our footprint into Monmouth County, making that the 10 county in New Jersey where we will reside. We will be closing our limited service Marrisstown office next month in August, transferring the deposits to nearby Denville, where those clients will continue to be serviced. We also expect to complete the relocation and expansion of our Palm Beach, Florida branch to a more convenient and accessible location in nearby Wellington, Florida, staying in the prestigious Palm Beach County by the end of third quarter. As mentioned, we run promotional campaigns in our new branch markets, and it has proven to be a successful tool in gathering core deposits and building new customer relationships. Our customer retention and ability to onboard customers is strong, and we believe this should 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. Peter?

Thanks, Darleen. Andrew described in his comments the overall loan growth we've experienced in the past quarter as well as last 12 months. I think our 11% organic growth rate compares favorably to our peers. It's important to note, as Pat pointed out, that almost 75% of the loan growth over the past 12 months has been in the C&I and owner-occupied real estate areas. The residential -- I'm sorry, the regional commercial banking teams in New Jersey and Pennsylvania are our largest teams, and they continue to execute on their plans to grow loans and deposits as does the smaller team in Florida. All are positioned to meet or exceed plan for the year. I mentioned last quarter that we expect our new business units, private equity fund banking and asset-based lending to be our leaders in net loan growth this year. And through June, both are significantly ahead of plan. Regarding small business banking, which includes SBA lending, it's showing solid loan and deposit growth. Business Express, our credit scored small business product, which is different from SBA lending and caps out at around $350,000 in availability has shown growth through 6 months that almost equals what the group did in all of 2024. I'm also happy to report that our consumer lending area, including residential, also showed excellent growth through the second quarter. We normally anticipate loan runoff through amortization and normal payoffs to equal new loans. But through June 30, that area is up $28 million due to an increase in referrals from our relationship managers and retail team. And lastly, regarding investor real estate, we closed a number of new loans in the second quarter, but similar to the first quarter, new loans were offset by payoffs. I mentioned last quarter a project to shift over time a greater percentage of our investor real estate business into our more specialized investor real estate team and focus on relationship development and increased management of loan concentration levels. That continues to go well. One aspect of that has been a change in the ratio of investor real estate loans to total capital. We were at 420% in early 2024, went to 390% at 3/31/25, and we finished Q2 at 380% after adjusting for a normalized level of sub debt in our calculation of capital. The lending pipeline at the end of the second quarter stood at $301 million of probable fundings, down 8% from the level of probable fundings at March 31. I'm satisfied with the pipeline for a couple of reasons. The average month end balance for Q2 was $323 million, which was more than the average for Q1. And this, coupled with the loan growth we've experienced, which pulls loans off the pipeline and the activity I'm seeing on a day-to-day basis makes me feel good about where we are. If one breaks down the components of the pipeline at quarter end, C&I loans made up 68% of the overall pipeline, up from 63% at 3/31, which we see as a positive. On the topic of asset quality, I really don't have anything to add to Andrew's comments. We think things continue to be in good shape. The loan portfolio continues to be well diversified and the loan growth numbers confirm the direction there. So we have nothing new to report on the impact of changes in federal government spending or tariffs. We're seeing little impact there at this point as well. In summary, I think we had a good second quarter. We're having a good start to Q3 with the lending pipeline that's in place. But as always, things like loan payoffs from unforeseen asset sales by customers can impact loan growth. That concludes my remarks about lending in Q2. I'll turn things back to Pat Ryan for some final comments. Pat?

Thank you, Peter. At this point, I'll turn it back to the operator to open up the Q&A.

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

Maybe just digging into some of the commentary on forward loan growth moderating. The C&I verticals have been growing at a pretty good clip here for a while. So wondering how we should think about continued growth there versus some of the other areas of the portfolio that could be -- serve as an offset.

Yes, it's a good question. I mean, in any given quarter, you're lining up a lot of different things, right? You got different levels of loan demand across your segments, across your regions and different time frames to get things closed. And so it's a little tough to say with much precision within a specific 90-day window what you're going to see. I would say, in general, our guidance has been and continues to be that on average, we're looking to generate plus or minus $50 million in net loan growth in the quarter. That being said, we just had 2 quarters that were well ahead of that. If history is any guide, we usually end up seeing a little bit of a slowdown on the heels of a couple of strong quarters. So we're sort of predicting that things will slow in the back half of the year, not because of any macroeconomic trends or any slowness we're seeing in the market, just more a function of how our business works. And as we close and fund loans, it takes some time to refill the funnel, et cetera. We've also seen a little bit of an unusually low level of payoffs and paydowns, Justin. So some of the net loan growth is driven not just by new production, but by our estimates of what we think will pay off and pay down during any given quarter just based on historical trends. And during the first half of the year, the payoffs and paydowns were a little slower than what we've seen in prior years. So again, we're sort of estimating that, that payoff and paydown trend will normalize and sort of pick back up a little bit together with some time it takes to refill the pipeline. So we're thinking things will be a little slower in the back half of the year. But as Peter mentioned, the pipeline remains healthy and the payoffs are a little difficult to predict. So sorry, we can't be more specific there. But the other thing I think you asked was just about mix. And I think we'll continue to see a majority of the growth coming from the C&I and the owner-occupied categories. We continue to be active on the investor real estate side, but certainly being selective and a lot of times, new production is replacing runoff and paydowns there. So we do see some modest growth in that quarter going forward, but we expect the growth in the C&I units to be a little bit stronger.

Okay. Got it. That's helpful. And then like on the C&I units, the specialty verticals that you're in, can you give us a sense for how much of the growth this quarter and maybe even just the past few quarters, but how much of that growth has been driven by line utilization versus new customer acquisition?

Yes. I'll let Peter try to give a little more clarity if he has it. But from our perspective, we haven't seen big changes in line utilization overall. And in general, the growth has been coming from new customer acquisition. But Peter, I don't know if you have any color you can add on kind of the line utilization question.

No, that's right. The line -- I check it every quarter, and it never seems to fluctuate much. 1% or 2% can be a big number, but we continue to be in that 41%, 42% line utilization rate quarter after quarter. Yes, there is kind of more fluctuation like ABL, for example, you see big chunks moving in and out of individual loan commitments there. But I would say the growth has been primarily from new customer acquisition.

Okay. Got it. And then on the outlook for deposits, a lot of success increasing that noninterest-bearing bucket for a number of quarters running now. Do you think we could continue to see that trend play out? I know you mentioned leaning a bit more on CD promotions to fund growth, maybe in part because of some of the new branch locations. But just wondering how you think that mix could shake out.

Yes. Listen, we're obviously working hard to drive that noninterest-bearing percentage higher. It is working, right? I think post Malvern, we had dipped to even as low as 16%. So nice to see it move from 16% to 19%. That can also be a little harder to predict because you'll have some bigger swings in just kind of balance levels based on seasonality or companies do a capital raise or a customer sells his business and gets a big chunk of money. So there's a lot of kind of singular events that can impact that. But certainly, the trend is one we want to continue to move higher. And I'd say on the other side and the interest-bearing side, we're continuing to see pressure from parked money looking for yield in money market funds and investment products. So in some cases, we've tried to offset some runoff in some of those categories with some additional CD dollars. Plus at the end of the day, when you open a new branch location, offering an attractive CD is a good way to get people in the door, get them to know you're there and then build the relationship. And so it's not uncommon regardless of the underlying trends that as we open a new location, we'll see a little bit of an uptick in CD activity just because we're running promotions for those newer offices. But hopefully, that answers the question, but a little harder to predict on the NIB side.

Understood. Got you. And so I guess with maybe at least net loan growth slowing through the back half of the year, do you look at share repurchases as still a good use of capital with the stock where it is now? And is there room to perhaps get even more active there?

Yes. I mean, I certainly think we have the capital to be active on the repurchase side. We try to be selective, i.e., making sure we're buying at the right time and the right price. And as I'm sure you've noticed, there's been a fair amount of volatility in the community bank stocks even as they've been moving higher. And so we generally don't rush to keep buying as the market is moving higher just because you tend to have some headline risk that pushes things down and then that creates good buying opportunities for us. So trying to be disciplined and selective, but certainly think at the right prices, we can continue to find opportunities to repurchase.

Okay. And then maybe just one last one. Just a question on the appetite for M&A here. I know the currency maybe isn't quite where you want it to be, but can you remind us how whole bank deals fit into the strategy right now? Just the level of conversations being had out there and what you'd potentially look for in terms of size and geography?

Yes. I mean, listen, we've had, I think, a pretty consistent and disciplined M&A strategy. We think size and scale matters. And so we want to be in a position to look at opportunities for M&A. Obviously, we've got to be very careful without a currency, we'd be careful with a good currency. But our job is to find the right opportunities at the right price. And we don't have a magic number in terms of size threshold. I do think, in general, there's a lot of dialogue in the marketplace, but it's not always clear how much of the dialogue is serious dialogue versus folks just thinking about a variety of different things, but ultimately unclear whether any of those more strategic type transactions would come to fruition. So we've been pretty vocal about understanding the importance of looking at M&A from all directions, and we continue to make sure we're in the market and aware of conversations and having conversations. But I would say in the market, I think there's going to be a bit of a resurgence in activity. Whether that means we'll end up doing something or not, I couldn't tell you, obviously. It's hard to know, but our strategy and philosophy on M&A hasn't changed.

Okay. And then just from a geography standpoint, I know you're getting into some new counties in New Jersey. But as far as inorganic growth, are there any areas outside of the footprint that are contiguous to kind of strike you as appealing if you -- if the right opportunity were to come along?

Listen, I think geography is important in the sense that at a high level, you tend to see lower cost deposits at franchises that are a little bit removed from the more competitive urban markets. And so I think for us, given our strong loan growth generation capabilities, finding an opportunity for a low-cost deposit franchise would be very interesting if that became available to us. And then I think if you're looking at more sort of tuck-in economy of scale type transactions, then you're probably looking more within the existing footprint to generate the cost saves. So again, I think we'd look at opportunities in different geographies, but the strategic rationale would be different, obviously.

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

Can I start on some of the near-term NIM movements? You talked about it being pretty stable, but just kind of dig a little deeper, what are kind of new loan yields coming at? How fast can you lower deposit costs? Just kind of talk through some of that a bit.

Yes. I'll talk high level, and then I'll let Peter and Darleen get more specific in their areas. But I'd say, in general, right, we've got a very short-term headwind on NIM with the extra sub debt, if you will, that will be going away at the end of August. Outside of that, I think the general trends are decent in terms of we're seeing an ability to gradually drive higher loan yields with some repricing of some older assets as they come due. We're having some success slowly trying to push down some of our higher rate liability deposit costs. So I think we've got a little bit of a headwind in terms of the reduction of the merger accretion income that comes out of net interest income and can hurt the margin. But with the growth and the fact that the new business seems to be margin accretive, I think we're still kind of guiding high level towards flattish margin over the next couple of quarters. But Peter, maybe you can talk a little bit about what you're seeing on the loan yield side and then turn it to Darleen to talk a little bit about what you've seen on the deposit cost side.

Sure. As far as pricing on the lending side, I mean, shorter-term floating rate loans, our small business loans continue to be prime to prime plus a couple of points. On the fixed rate side, which would be most of investor real estate and some fixed rate and smaller investor deals getting done in the regions, we're still looking for 250 to 300 basis points over -- we kind of priced the 5-year treasuries or FHLB, which could be 25 to 30 basis points over treasuries. But we're trying to get in that 250 basis point spread on that. And overall, when you look at new loans that have come in on a month-to-month basis, our weighted average yield on that bucket of new loans each month has been in the, I'd say, the low to mid-7% range. So I think we're still doing a good job holding to what we want to get on pricing, and we're able to negotiate what we want there between loan pricing and deposits. I think we're in good shape.

Thanks, Peter. Darleen, do you want to jump in?

Yes, sure. So one of the common themes we've talked about is basing our relationship banking and looking at clients and determining how we can ensure that we are competitive because there is still competition out in the market relative to deposits, but also making sure that we're fairly priced. We've been able to moderate some of our pricing, lower some of our deposit costs as a result of that. And then I'll also add, we have great success with some of our CD maturities that were at higher rates that are rolling into our rack rate pricing. I would say we probably have about 85% retention rate in that portfolio, which has boded well for us in terms of helping us manage our deposit costs. And that's even despite rolling out some CD promotions as a result of some of the activity in the loan side and also with the new branches that we are opening. So I think we have a good handle on managing our deposit costs, and I think we'll see some additional savings despite -- regardless of what the Fed decides to do.

I hope that helps. But obviously, a little bit of a moving target, so...

It does. I mean the takeaway is flattish overall, but I just wanted to dig in on a couple of details there. The PAA was about $2.7 million this quarter. Where does -- and it's supposed to trend down? Where should it hit? Where is it expected in the second half of the year?

Andrew, you got those quarterly numbers handy?

Yes. It depends a little bit, Manuel, on payoffs, right? So if you see an acceleration of payoffs, the number could change a little bit. But -- so yes, we saw a decline of only about $100,000 Q1 to Q2. We expect that to be a little bit higher than that over the back half of the year in terms of the decline quarter-over-quarter. So a few hundred thousand dollars of decline each quarter. And then into 2026, the number will drop more significantly. But again, it can depend a little bit on prepayment activity on the loan side. So it could jump around a little bit, but we are expecting based off kind of the current run rate for that to come down again in the third and again in the fourth, but not huge declines, but then starting in 2026, the number comes down more significantly.

I mean it's kind of impressive with a lot of the noise in kind of the new branches with maybe having higher deposit costs that you have kind of a stable NIM with the sub debt as well. as we get into like early 2026 and PAA is stabilized, the sub debt is gone, could you start to see some ramp in NIM? Just kind of thoughts on...

Yes. I mean, let's...

Type of Idea.

It's certainly possible, right? I mean the big question is, tell me the shape of the yield curve in January '26, and then I'll give you a better answer. But listen, there's certainly an opportunity, but there's a lot of different things that might happen. So we like that as a potential future benefit, but we'd rather be a little more conservative in the guidance and hope the optimistic scenario plays out.

And with this -- your balance sheet is more neutrally positioned, if there were to be cuts, you still think stable-ish in the back half of this year, just how it's structured currently?

Yes. I mean that's kind of what we saw last time around with the cuts. We were able to move liability costs enough to offset the -- whatever it is, the 25% of the balance sheet that also goes lower when the Fed moves. So I do think in the long run, cuts will be beneficial if the long end kind of stays where it is and the short end goes down and we get a little more steepening. I think that will be a benefit to us in the back half of '26 and into '27. But you don't get the benefit right away until the steepening really kind of gets through the repricing process.

Shifting lanes a bit. What would get you to pick up loan growth if the funding comes in faster, you probably can't have your folks run this hard consistently. I think that's what came across in some of your commentary is that you have to refill the opportunities a bit. But can you just talk about what would take you to keep loan growth accelerating and general loan demand. It seems like it's a lot better than you maybe expected in the market.

Yes. And listen, I don't -- I think we now have enough different business units, different teams, different geographies. We're seeing a lot of good loan opportunities. So it's really a funding constraint at this point more than it is a loan opportunity constraint. We could do more quality loans if we found the good low-cost funding to support it. So the market is certainly there with the diversity of the teams and the geographies and the business units. I mean we're -- we feel really good about the fact that we don't have to stretch and we don't have to hope. We continually get to look at quality opportunities, and we pick the ones we like the best.

That's great. And I just wanted to clarify, was there any lumpiness in the noninterest-bearing end-of-period number? I mean the average is a little bit more tame, but still solid good growth trend. And could you just comment a little bit on commercial kind of deposit pipelines?

Yes. So listen, there's always lumpiness in the NIB because there's always some significant fluctuations, right? Some quarters, the fluctuations work against you. Some quarters, they move higher and they work for you. I certainly think we benefited from some positive fluctuations. So there's probably some accounts that are sitting there running higher than average at the moment. But it's not like loans where, hey, you book a big loan and it kind of explains the quarter. There's so many moving pieces and so many different accounts fluctuating at different levels that if I had to guess, given the strong uptick in Q2, we'd probably see some fluctuations back down a little in Q3, but nothing in there that says, oh, there was kind of a lot of noise in the number, if you will. In terms of commercial deposit pipelines, I think they look pretty strong. They're kind of consistent with where they've been. And if we were growing loans $25 million a quarter, we feel really good about the $50 million in deposits. But because we grew $90 million, and we're sort of saying, hey, we need to do better than $50 million. But I think the overall pipelines there continue to look pretty good.

Your next question comes from the line of Kyle Gierman with Hovde Group.

I was wondering if you can share details on the NPL inflows this quarter. And additionally, how is asset quality holding up in your specialty segments like in SBA and private banking?

Yes. So obviously, you saw in the numbers. There was a little bit of movement, a couple of loans that moved into nonperforming category. And listen, not anything that was alarming or really candidly unusual. There's flows in and flows out, and we try to keep an eye on the overall trends. But we're not seeing anything systemic at this point that would lead us to believe that there's going to be major cracks on the credit side. But the -- I don't know, Peter, anything you want to add there?

No, I'm just trying to think over the segments mentioned there. Private equity fund banking, no real changes this quarter. ABL, clean. Yes. I mean SBA, we have -- there's a great pipeline there. I think we should have a pretty good second half of the year getting loans closed and closed funded and we typically sell the guaranteed portion. But we haven't seen much problem loans coming out of SBA. I'd say it's just a general uptick caused by increased loan volume and a couple of smaller problem loans. Nothing unusual.

Got it. And then you mentioned tariffs on loan demand in the commentary. I was wondering if you could provide some more color. Are you seeing any specific trends or shifts in borrower behavior due to the current tariff environment?

Well, I mean, by trends, you're saying anything in certain business segments? No. I mean we keep bringing the topic up and RMs are out researching the issue. And yes, you see a customer or 2 that says they're building inventory to hedge against changes in pricing and that kind of thing, but it's minor. It's -- there's nothing across the board that gives us much concern right now. I mean we are watching it, and we're looking for feedback at our various loan committees and things like that. But no big impact as we speak.

Got it. And then you did mention balance sheet positioning for rate cuts. I was wondering if you could specifically quantify the impact of each like 25 basis point rate cut on your NIM?

Well, again, I think the impact has been and should be muted in the sense that we see a repricing of our variable rate assets, and we make an appropriate adjustment on the non-fixed deposit funding side to really offset the impact. So it tends to be a wash in the short run. And then obviously, if it generates a steeper yield curve moving forward, then we'll start to see some benefit down the road.

[Operator Instructions] That concludes our Q&A session. I will now turn the call back over to Mr. Ryan for closing remarks.

Okay. Thanks very much, everybody. We appreciate your time today, your interest in First Bank, and we'll look forward to reconnecting with folks after third quarter results are released. Thanks, everybody.

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

Thank you for standing by. My name is Angela, and I'll be your conference operator today. At this time, I would like to welcome everyone to First Bank Earnings Conference Call First Quarter 2025. 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] I would now like to turn the call over to Mr. Patrick Ryan, President and CEO. You may begin.

Thank you. I'd like to welcome everyone today to First Bank's first quarter 2025 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 uncertainty are described under Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2024, filed with the FDIC. Pat, back to you.

Thanks, Andrew. I'd like to hit on a few highlights before turning it over to the team to provide some detail. I 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 million came in the areas of our strategic focus, namely asset based lending, private equity and community bank C&I lending. In fact, CREI or investor real estate loans actually came down $12 million 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 non-interest 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, 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 million to just over $90 million in outstandings. Our private equity fund banking portfolio grew to $128 million and our small business lending group, which includes our Business Express and SBA loans grew to $91 million. Overall, key 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. And at this point, I'll turn it over to Andrew to discuss additional financial details for the Q1 results. Andrew?

Thanks, Pat. For the three months ended March 31, 2025, we recorded net income of $9.4 million 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%. We had very strong loan growth during the quarter following a strong fourth quarter. We were up nearly $92 million or 12% annualized from the end of the fourth quarter. Over the last 12 months, loans are up approximately $244 million. Growth was also solid on the deposit side with balances up $64 million 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. 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 3 basis points. The margin is also impacted by acquisition accounting accretion, which totaled $2.8 million in the first quarter of 2025 compared to $3.1 million in Q4 2024. 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 2024. We recorded a $1.5 million credit loss expense in the current quarter. 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 2024, 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 1.20% at December 31, 2024, to 1.21% at March 31, 2025. Non-interest expenses were $20.4 million for the first quarter of 2025 compared to $19.1 million in Q4 2024. Q1 expenses included an $815,000 impairment of an OREO asset during the quarter. 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 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 $2.8 million for the first quarter with an effective tax rate of 22.7%. This compares to taxes of $3.9 million with an effective tax rate of 27.2% for Q4 2024, which included the impact of BOLI restructuring completed in the second half of 2024. 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 remained strong at 57.65%, remaining below 60% for 23 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. 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 Darleen Gillespie, our Chief Retail Banking Officer for her remarks. Darleen?

Thanks, Andrew. Good morning, everyone. As Pat and Andrew have mentioned, we saw a solid deposit growth during the first quarter of this year, including growth of more than $16 million in non-interest 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. Our total deposits were up $64 million or 8% from the fourth quarter of 2024, and they grew $150 million or 5% from the first quarter of 2024. Our solid growth masks 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. Non-interest bearing demand deposits have steadily grown and now comprise 17.2% of deposits, up from 15.8% a year ago. Ongoing strength in 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. Time deposits jumped this quarter by $47 million. This includes some brokered 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. 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 a successful tool in gathering core deposits. We also expect our sales teams to drive 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. Peter?

Thanks, Darleen. 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 million in the quarter, an annualized growth rate of 12%, exceeding the growth rate in Q4 of 7%. Our plan to focus on C&I lending, which would be inclusive of owner occupied real estate, which is where we believe most of our commercial bank's deposits are continues. Pat mentioned areas within C&I that have increased. Of the new loans closed and funded in the first quarter, 81% were C&I loans. 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 sound 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. 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 3/31/25. The lending pipeline at the end of the first quarter stood at $326 million 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 the components of the pipeline at quarter end, C&I loans made up 63% of overall pipeline, down just slightly from 66% at 12/31/24. But if you compare the level of C&I loans to the total pipeline a year ago, at 3/31/24, the level was 55%, that swing of 10% is a good indicator that our focus on C&I business is taking hold within the sales teams. Further, within C&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&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 for the last four quarters shown and recoveries again exceeded charge-offs 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. DOGE is the easier one to address. We think risks from lower federal government spending will not impact us tremendously. We have no concentrations of business directly dependent upon government spending. We've talked on prior calls about office space in particular. First, we have no exposure in the greater Washington, D.C. 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. If that space vacates completely, which we have no indication that it will, debt service coverage still exceeds 1.0 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 produced different levels of responses. In construction lending, for example, we've had mixed responses. Most of our developers say that their prices are either fixed for the projects are 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 too early to tell group of responses. Private equity fund banking, here, it's also too early to tell. Most of our business here thus far has been in the financing of acquisitions made by funds. Most of the funds say that, yes, they've seen a 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, generally, for us, that means those with revenues under $100 million. 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. These are kind of small one-off reactions so far. We talk about line of credit utilization rates from time-to-time. And bank wide, 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. 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 following updates on the whole tariff situation. Pulling these first quarter results together and looking at the next quarter and 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 things like payoffs from unforeseen asset sales by customers clearly impact growth. And obviously, economic conditions are a bit of a wildcard and can change things a bit for us as the year plays out. That concludes my remarks about lending. So I'll turn things back to Pat for some final comments. Pat?

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

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

Hey, good morning.

Good morning, Justin.

I wanted to start on the loan growth in the quarter, pretty strong result, and it was good to see a lot of that coming outside of Investor CRE. And I know you gave an update on the pipeline, but I just wanted to ask how you're thinking about the lending environment as we move forward here, just given some of the uncertainty. I know Peter touched on it, but maybe just some further color on more of what you're hearing from borrowers and how you think that could impact pull through rate on the loan growth side through the balance of the year?

Yeah. I'll hit a couple of points and then let Peter add to it. But the bottom line is a lot of, the activity is stuff that's going to happen, quite frankly, whether it's construction projects that are mid funding, right, folks aren't going to stop things that are already in process. Now you might see a slowdown in construction six, nine, 12 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 has to do with maturities and refinancings that 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 merger related financing or large CapEx purchases. But I think net-net, there won't be at least in the next quarter or two, a huge decline in loan demand overall. But we'll certainly keep an eye on that. 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 managing our funding constraints. So I think we see lots of opportunities. And in terms of what specifically borrowers are talking about, I'll turn it over to Peter and let him share a little detail there.

Yeah. I wish I had more detail there. I mean, the perfect example I referenced a customer that had a big equipment or 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 they had a $10 million number on it, and they're just going to put it on hold. They don't need the equipment, and they're going to wait and see because in that particular case, their belief was that tariffs were in place. Other cases, folks are just waiting to see how things roll out. They don't seem that tremendously concerned. I mean, again, I don't want to say they're not concerned. They're just not in panic mode by any state. From what you read, we're still a couple of quarters away from seeing a big impact on that. And everyone is just watching it closely, hoping we get some agreements made with some of these other companies, and it becomes more and more of a non-event.

Okay. I appreciate all that. And then just to shift a little bit just over on -- or to buybacks. You got pretty active here in the period. Just what are 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 and the event growth does come in a little bit slower through the duration of the year?

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

Yeah. Pat, I would just add, we disclosed this previously, but we do have an active plan right now. We've purchased 350,000 shares from that plan, but the plan was 1 million shares. So we have plenty of run room in our current plan, that plan goes through September 30. So we have room there for sure.

Okay. Great. And then I guess just lastly, on credit. 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. I know to a large extent, it's CECL driven, but I'm just curious your thinking on where the allowance may have to go to -- if we do dip into a recession, just given the strength of balances already.

Yeah. I think we feel pretty comfortable with where the allowance is on top of the on-balance sheet allowance, we still have 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 non-performers, I think in general, for banks in our area, our allowance 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, there's room to feel like, we're in a pretty good place. Andrew, I don't know if there's anything you want to add there.

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. 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 will 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.

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 it was the New York City credit or real estate property, just the mechanics of where the mark is and the time line in terms of just getting that off the books, assuming that's the end game.

Yeah. No, certainly, that is the end game. This was an acquired loan from the Malvern merger that we took a pretty significant upfront credit mark against and then finalized foreclosure, moved it in and it's in a decent area. It's in the Chelsea area of New York City. It's a retail unit below some residential that I think based on prior appraisals and location, we were thinking that it was marked appropriately, even conservatively. But we've had it on the market for a little while. And based on some of the feedback we're getting and an 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 if and when the asset gets sold, which our preference would be sooner than later. So...

Okay. Appreciate it. I’ll leave it there. Thanks so much.

Sure.

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

Hi. Good morning. It seemed like a lot of the growth came late in the quarter. The NIM was nice expansion, but where did the NIM finish in March, like a point in time NIM? And 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 sheet changed at the end of the quarter?

Yeah. I mean, I'm not sure we dug into that level, Manuel. But at the end of the day, I'm not sure, Andrew, that the loan growth all came late in the quarter. I think we saw a nice growth in each month during the quarter, and we obviously benefited from some deposits repricing during the quarter as well. So yeah, I think -- listen, I think we feel like the current level is defensible. We're not predicting it's going to necessarily move a lot higher, but I don't think we see a 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 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.

Yeah. 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 talked about, that kind of continues to run down. So there's some headwinds and some tailwinds that we think are kind of offsetting each other with the good -- the 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, have 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 kind of mark or at least in the short term.

What were new 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 broker side?

Peter, do you want to start with the loan yields and then I can talk about the liability.

Yeah. I mean I don't have the breakdown on fixed to floating, but -- or versus floating. But if we're fixing loans -- fixing the rate on loans, it's going to be typically at something like 250 (ph) over a five year T. So if that's around 4%, that would be 6.5%. I think our -- on a month-to-month basis, we do report to our Board kind of our new loans report and shows the weighted average yield. And I think we've been right in that middle 7.25% to 7.50% range as far as the yields on new loans closed, but that's going to drive the overall yield slowly or impact it slowly. So again, most of that hasn't changed in the past six months, six to nine months, again, we focus on fixed rates at 250 over, and we've been around 7.25%, 7.5% in total. Does that sound about right, Andrew?

Yeah. That's about right. I think, yes, 7.5% about is kind of the average rate of new loans. Now remember, we did a lot of C&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. But yeah, around 7.5% was the average yield on loans. And then on the liability side, the brokered side, we -- I think we added about -- broker deposits increased by about $25 million during the quarter. And those rates, typically, we've been continuing to keep -- we latter a little bit, but we're still staying on the shorter end of the curve. And typically, brokered money is falling between 4% and 4.5% in that range depending on -- if you go out a little bit further, it's a little cheaper. And if you stay short, it's closer to that 4.5% range.

And what's the schedule on the purchase accounting accretion expectations there?

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

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

Yeah. So maybe the easiest way to think about it is current outstandings and then kind of where are we seeing it heading over the next couple of years that, ABL is sitting at $90 million right now. I think we envision that business growing to $150 million, $200 million over the next couple of years, that's not to say we would stop it there. But just to give you a sense for the opportunities for growth. Private equity is at $128 million. Similarly, we could see that business growing to $150 million to $200 million in total outstandings over the next couple of years. And on the small business and SBA side, 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 $125 million or even up to $150 million in the next couple of years. But I think meaningful growth in each of those categories. And I think given the size of the teams that we have and the infrastructure we have at those levels, each of those business units should be contributing meaningfully to the overall profitability of the organization.

That's really helpful. And SBA getting to $125 million, $150 million, what is it at now? Did you get that one earlier?

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

And that’s about $91 million, right?

Those are -- collectively, that is at $91 million today.

And then, so it seems like the pipelines are still really strong. 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?

Well, listen, I think we talk about organic loan growth and deposit growth goals of $175 million to $200 million net. I think one quarter of $90 million, obviously, if you annualize that would put you well ahead of that target. But history shows that we can have a $90 million quarter and then we can have a flat quarter, and then we can have a $50 million quarter and things hop around a little bit. So best guess on the loan side, we probably come in a little bit ahead of the plan based on quarter one, but I wouldn't read too much into one quarter's worth of production. And similarly, on the deposit side, I think we are a little bit behind our budgeted growth plans in Q1. And so we're hoping to see some uptick in activity there, but not necessarily looking to change our overall organic goals for the year at this point.

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

Yeah. I don't think there's anything major on the drawing board that would lead to a major push higher. Similarly, we don't have any big cost cutting campaign coming. And so I think the current level is a decent run rate. Obviously, we're always looking for opportunities to improve efficiency and save money. That being said, 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 we continue to opportunistically look for opportunities on the technology side, which I think will continue to be part of the program going forward. So I think overall levels of non-interest expense to assets are probably a good run rate to think about moving forward.

And just adding those branches, the branch costs, and that will be probably it in terms of increases from the current run rate?

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

Okay. I appreciate the commentary. I’ll step back into queue.

All right. Thanks, Manuel.

Your next question comes from the line of David Bishop with Hovde Group. Your line is now open.

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

Well, I think our view on M&A is the same as it's always been, which is we keep our eyes and ears open. We have lots of conversations, most of which don't go anywhere. And ultimately, when I look at probabilities for M&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 really comes down to 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? Or do they want to wait it out until some hope for rebound so that the announcement looks better on paper. Those are hard questions to answer, Dave. So I think you said it well, right? There's a lot of conversation, but how much of it is going to result in actual activity. I suspect until we have a clear visibility on where the economy is headed and what's actually going to happen with the tariff discussions that M&A activity is going to stay muted is my best guess.

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

Yeah. 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 banking is a good example, right? As we're calling on folks and developing relationships, we're making it very clear where we want to live on that spectrum. And for us, that means lower leverage situations with lower yields. But from our perspective, much better credit profile, if you will. And our mindset on 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 launched some of these new units. We brought that same mindset to the thought process of the teams we want to bring in and the strategies they're going to deploy. And so within ABL and private equity specifically, we've been very focused on trying to stay at the lower end of the risk curve in terms of leverage on deals and things like that. And similarly, in small business, 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 our mindset in SBA has never been, hey, if the SBA will approve it, we'll do it. We just don't want to move out on the risk curve that far. 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. So a long-winded way of saying our model within the core Community Bank business in terms of risk reward and credit hasn't changed with these newer units. So...

That's great color. And I guess one final question for me. 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, 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 the other options are in the market. But I saw a chart the other day that showed the money flowing into money market and overnight funding mechanisms continues to move higher. And that's obviously a direct competitor to the bank deposit business. So until the dynamic between what folks can earn in low-risk money market fund assets and bond fund assets versus bank deposits changes, I think it's going to continue to be a struggle to push deposit costs down.

Got it. Appreciate the color.

Yeah. Good pleasure.

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

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.

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

Hello, everyone, and welcome to First Bank Earnings Conference Call. Please note that this call is being recorded. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I'd now like to hand the call over to Patrick Ryan, CEO, you may now begin.

Thank you. I'd like to welcome everyone today to First Bank's Fourth Quarter 2024 Earnings Call. I'm joined by Andrew Hibshman, Financial Officer; Darleen Gillespie, our Chief Retail Banking Officer; and Peter 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 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'd like to start my comments with a look back on the full year. I think the fourth quarter was a very good finish to what turned out to be an excellent year. I think by focusing on the 90-day window of time and annualizing those results, we sometimes get a little too focused on the short term. And so, I think a look back on the full year is worthwhile. In 2024, we earned $42.2 million or $1.67 per diluted share. That's a 13% annualized increase in core EPS over the past 10 years. Tangible book value has more than doubled over the same time period, which is a 7.5% annualized growth rate, and it shows the model is working. While there always seems to be onetime nonrecurring items that impact earnings in a given year, in 2024, the onetime gains were basically offset by onetime expenses so that the reported GAAP net income was pretty close to a core number. ROAA for the year was 1.15%, and return on average tangible common equity was 12.5%. Strong results in both areas given the continued challenging interest rate environment. Furthermore, those strong results came at the same time the bank was investing and working to add and scale up new lines of business. As we get to a level of profitability and operating efficiency in those areas, we should see our financial performance continue to improve. Collectively, our newer businesses, our private equity sponsor banking business, our asset-based lending business, and our small business loan portfolios are all up over $250 million since we started those ventures. We expect each of these developing units continue to scale with minimal additional expenses driving bottom line improvement. Beyond these C&I expansion initiatives, our Banking-as-a-Service banking unit is ready to commence our first fintech partnership in the first quarter, and we expect to be active during the first half of 2025. While we are taking a crawl-walk-run approach in this area, we see plenty of opportunity to increase fee income and low-cost deposits. So, what does all this mean? It means First Bank is a unique and compelling franchise that has both a proven and profitable community bank business core as well as optionality on future growth and development into a true middle market commercial bank. Not only does the future look bright, but we don't need outside capital or balance sheet restructurings to achieve our goals. Our mark-to-market loss position is modest, thanks to prudent balance sheet management and a short duration loan portfolio. Our credit profile is clean, thanks to conservative underwriting and strong credit standards and our strong earnings power and modest dividend payout ratio provides flexibility for stock buybacks and/or special dividends. In summary, I'm very excited about the upside potential of the franchise as we move into 2025. Before turning things over to the team to get into more specifics on the fourth quarter, there are a few additional areas I'd like to highlight. During the year, our ratio of investor commercial real estate to total loans came down from 55.6% at the start of the year to 53.2% at the end of the year, a 2.4 percentage point reduction, which is not insignificant given the size of our balance sheet. Our allowance for credit losses and our credit marks to total loans ended the year at 1.4 and our allowance for credit loss to total loans stands at 323% coverage ratio for our nonperforming loans. This is the highest coverage ratio in our local peer bank survey. Approximately 40% of the bank's business comes from outside of New Jersey, and our net interest margin grew 6 basis points in the fourth quarter and we could see further expansion if the yield curve continues to steepen. At this point, I'd like to turn it over to Andrew Hibshman to discuss the fourth quarter results in more detail. Andrew?

Thanks, Pat. For the three months ended December 31, 2024, we recorded net income of $10.5 million or $0.41 per diluted share and a 1.10% return on average assets. These measures improved significantly from prior periods with our return on average assets, improving from 0.88% in the third quarter of 2024 and 0.93% for the fourth quarter of 2023. We had another strong quarter for growth in our loan portfolio. Loans were up over 7% annualized from the third quarter. We saw some nice pickup in activity in the back half of 2024 after a slower first half. On a year-over-year basis, loans grew $123 million or 4%. And I'd remind you that, that reflects organic growth and the offsetting loan sale totaling approximately $24 million that occurred in the second quarter of 2024 as part of our balance sheet optimization efforts. Annual loan growth was driven by commercial and industrial and owner-occupied commercial real estate loans. This growth was offset somewhat by a small decline in our investor real estate loans during the year, which includes our CRE, investor, construction and development and multifamily loans. We recorded a $234,000 credit loss expense during the quarter despite strong loan growth, our credit expense was muted due to net recoveries during the fourth quarter and low levels of problem loans. On the deposit side, balances showed a modest $5.8 million increase during the quarter as we continue to focus on profitable relationships and allowed some higher-cost noncore relationship funds to leave the bank during the quarter. Net interest income increased $1.5 million compared to the third primarily related to the benefit of higher average loan volume, which reflects growth during the fourth quarter as well as the late quarter growth from the third quarter. Our net interest income was also supported by margin expansion which was due to lower average rates on deposits and borrowings, which outpaced the reduction in average rates on earning assets. Our net interest margin increased to 3.54% in the fourth quarter compared to 3.48% in the prior quarter. Interest-bearing deposit cost declined, falling 20 basis points from Q3. We're pleased with our success in moving rates lower on a significant portion of our deposit base, while still retaining balances. Deposit costs declined outpaced the decline in average loan yields, which fell by 11 basis points. The decline was primarily due to the Fed rate cuts impact on our variable rate loans. The margin is also impacted by acquisition accounting accretion, which totaled $3.1 million in Q4 2024 compared to $3.4 million in the third quarter of 2024. Looking ahead, we continue to manage a well-balanced asset and liability position, which should result in continued strong net interest income generation with little variability regardless of the Fed's actions on rates. We're happy to see the yield curve has improved and a more friendly yield curve should lead to some further expansion of our margin. Our asset quality continues to be strong. NPAs to total assets declined to 0.46% and compared to 0.47% at September 30, 2024, and 0.69% at the end of 2023. Our allowance for credit losses to loans declined just slightly to 1.20% at December 31 compared to September 30. Noninterest income totaled $2.2 million in Q4 2024 compared to $2.5 million in Q3 2024. We expect as market conditions improve. We will be able to realize additional income from gains on sale of SBA and mortgage loans. However, we do not expect a significant increase in noninterest income as we begin 2025. Noninterest expenses were $19.1 million in the fourth quarter compared to $18.6 million in Q3 2024. The increase primarily reflects an increase in salaries and benefits expense primarily due to a larger employee base. Also, occupancy and equipment expenses were elevated, primarily due to branch opening and relocation activity that happened during Q4. We are also investing in technology in our sales culture which you see bumping up professional fees and other expense. We continue to prioritize expense management and expect that the core expense base decreased just slightly over the next several quarters. As I mentioned earlier, our tax rate was affected by the BOLI restructuring completed in the third and fourth quarters. We anticipate that our effective tax rate going forward will be in the range of 25% to 26%. The increase compared to the more recent 23% to 24% run rate is primarily due to the ongoing impact of the 2.5% New Jersey corporate transit fee, which was added in June of 2024. We are pleased with the very positive performance and momentum this quarter. Our efficiency ratio remains strong, improving slightly to 57% and remain below 60% for the 22nd consecutive quarter. We also expanded our tangible book value per share by 10% annualized from Q3 2024. Finally, we're happy to drive shareholder value through our successful initiation of our buyback program during the quarter, along with a stable cash dividend. We believe our strong financial results in 2024, coupled with our investments for growth, position us to perform well in 2025 and beyond. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer for her remarks. Darleen, go ahead.

Thanks, Andrew, and good morning, everyone. As Pat and Andrew have mentioned, deposit levels were stable during the fourth quarter of this year, following a robust third quarter. We attribute our ability to grow and retain our core deposit funding to our team's outstanding ability to build and maintain deep customer relationships. We also saw the favorable outcome of our proactive efforts to manage deposit pricing in anticipation of the Fed beginning its rate reductions in September. The additional 50 basis points of cuts we saw in November and December aided our efforts to be more aggressive with managing our costs down. Our total deposits were up a modest $5.8 million from the third quarter of 2024, and they grew $88.3 million or 3% from the end of 2023. This growth was driven by our success in attracting new deposit relationships and maintaining existing balances in a heightened rate environment with great pricing competition. Our customers are sticking with us, and that is a testament to our fantastic team. During the quarter, we saw a runoff related to fluctuations in some larger commercial customer balances. This reflected business activity, and these customers remain active depositors of our bank. For this exact reason, we take a longer-term view on deposits and average and looking at average balances gives us a good view of that. For example, average interest-bearing deposits increased over 11% annualized from the third to the fourth quarter of 2024. We are pleased with the mix shift during the quarter. Noninterest-bearing demand deposits remained stable, while interest-bearing demand continued to show outstanding growth in a very dynamic rate environment. Time deposits grew by $11.9 million, while money market and savings declined $37.6 million or 12% annualized from the third quarter. The majority of the growth we experienced was in our commercial portfolio, which, again, is a testament to our blended sales teams onboarding new clients and expanding existing relationships. Given the ongoing interest in high-yielding product, as previously mentioned, we were happy to see our overall deposit cost decreased meaningfully during the quarter and throughout 2024 as we continue to adjust our pricing and let costly our fund lead the bank. We've talked about this on previous calls in which we started to make changes or eliminate promotional products and exception pricing in anticipation of the cuts. We continue to effectively manage our funding costs to support lowering this metric and maintaining a stable net interest margin. As I've mentioned in recent quarters, our branch strategy is aimed at supporting engage in our current markets and opportunistic expansion into adjacent markets. In Q4, we completed the relocation of our Glen Mills, Pennsylvania location to Media, Pennsylvania, and just this week, we officially opened the doors to our de novo branch in Trenton, New Jersey. We also completed the consolidation of our two Flemington, New Jersey locations into one. Net, there is no change in the number of locations just an expanded and more convenient network for our customers and greater deposit and overall opportunities for First Bank. We're excited to continue pursuing further opportunities to optimize our franchise for growth. Working closely with our marketing team has created some opportunities to enhance our brand awareness in 2025 and throughout our footprint as we looked to launch some very targeted marketing, brand, and deposit campaigns in Q1 and beyond. So overall, we continue to focus on our existing and prospective customer relationships, which are our priority, and we aim to attract and retain profitable relationships through excellent service, their pricing and with the distribution network and products that offer elevated convenience and sophistication. We are very confident that our continued focus in these areas will support deposit growth into 2025 and beyond. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Darleen. As Andrew described a few minutes ago, after basically flat results for the first six months of 2024, the lending area has had another good quarter and had a strong finish to the year. Loans grew $56.8 million in the quarter, an annualized growth rate of 7.3%. This is a good follow-up to Q3, where we grew almost $90 million. Our plan to focus on more C&I lending, which is where most banks find deposits and other relationship business continues to take shape. New C&I and owner-occupied real estate loans in 2024 made up 64% of all new loans closed and funded. Investor real estate loans by comparison made up only 29% of new loans booked and funded last year. In comparison, two years ago, in 2022, investor real estate loans totaled 55 -- I'm sorry, 53% of new loans. We're certainly not turning away good loans. We expect to continue to have investor real estate be a significant part of what we do, but it needs to bring with it deposits and other relationship business. We had good contributions from a number of areas during the year, and I'm pleased with the diversification we have among the lending units. Our regional commercial banking team in New Jersey led the way for us in 2024, having a very good year in terms of C&I growth and contributing significantly to overall deposit growth. Pat mentioned our newer business units, private equity fund banking, asset-based lending and small business banking, which includes SBA, are all developing their businesses and should have very solid results in 2025. In our investor real estate area, increased management has resulted in a decline in the ratio of real estate loans to total loans from 55.6% at 12/31/23. And to 53.2% at 12/31/25 as well as a decline in the ratio of investor real estate loans to total capital from 418% to 397%. The schedules in the earnings release break down the loan portfolio into their various segments and show the changes from quarter-to-quarter. When compared to a year ago, one can see both the growth in C&I loans as well as the decrease in investor real estate loans. I'll comment now on our loan pipeline. Our pipeline at the end of the fourth quarter stood at $245 million of probable fundings, down 11% from the level at September 30. This wasn't unexpected after another good quarter of loan closings. When loans close, they come off the pipeline. We need to close a lot of loans to offset payoffs and normal term loan amortization. In Q4, for example, we closed and funded new loans totaling $129 million to end up with the $56.8 million in loan growth for that period. If one breaks down the components of the pipeline at quarter end, C&I and owner-occupied loans made up 66% of the overall pipeline. Regarding asset quality, the earnings release and Pat and Andrew's comments summarize things well. Portfolio continues to look good. Nonperforming loans at the end of the year were less than half of what they were a year ago and we had net recoveries of bad debt in Q4. Also importantly, delinquent loans at 12/31 were again very, very small. The supplement to the earnings release provides some detail around the loan portfolio, loan concentrations, demographics, et cetera. They really don't change much from quarter-to-quarter. Obviously, they can shift over time. We continue to have very modest exposure in office and hotel segments and what we have continues to perform very well. In summary, we are proud of the culture we've created around asset quality, where good quality relationships take precedence over growth rates and returns, and we believe we can have all three. Looking at how all this might impact next quarter and the coming year, our level of projected loan funding for the first quarter of 2025 is solid and in line with historic quarterly growth projections. We continue to see good activity in all lending areas. We looked at potential growth areas, whether business lines or new markets. At present, there's nothing major in terms of new business lines we're looking at. As Arlene mentioned -- Darleen mentioned, I'm sorry, we have some retail branch expansion plans, and lending through our regional presidents is very involved in that undertaking. We're spending time and resources to manage growth. We continue to tweak our credit administration area in order to service our lending businesses, and we're in the middle of adding a sales force-based customer relationship management tool that we think will really help manage new business efforts and create better coordination between our business units. And importantly, we're always on the lookout and ready to add staff that we think can help us reach and exceed our goals. As a result of all of this, we anticipate achieving growth -- loan growth rates in 2025 that approximate the growth rate experienced this past quarter. That concludes my remarks about lending. So, I'll turn things back now to Pat for some final comments. Pat?

Thank you, Peter, and thanks, Andrew and Darleen. So, at this point, we'd like to open it up for the Q&A portion of the call.

We're now opening the floor for question-and-answer. [Operator Instructions]. Your first question comes from Justin Crowley from Piper Sandler. Your line is now open.

I wanted to start on the margin and get a sense for how you're thinking about the deposit cost progression over the course of the year. I think last time we spoke, maybe more flattish NIM was alluded to, given maybe what the time or maybe some unknowns on the funding side and how that lays out. As we look back on the fourth quarter, is it fair to say that you had a little bit more success in lowering rates? And how would you sit here today, expect that to unfold in the event we're only looking at one, maybe two more rate cuts over the course of the next year?

Yes. It's a great question, Justin. Obviously, we wish we had perfect visibility into that. I would say, the biggest variable as we think about the margin moving forward is, the shape of the yield curve. We did see some steepening during the fourth quarter, which was certainly welcome. And I think if that confuses throughout '25, we're hopeful that steepening curve will help drive some margin expansion. And we continue to have lower yielding loans that hit their maturity or reprice, which obviously helps and we're doing everything we can to make sure that we're keeping our deposit costs low. So, I think flat to improving is probably the best guidance we can give and a lot of it will be tied to not only the pace of rate cuts, but more importantly, what's the relationship between the short and the long end. So, we'll be keeping a close eye on that, but we're optimistic that some added steepening could be a benefit to us.

Okay. Got it. Appreciate that. And then just a quick follow-up there. Andrew, I'm not sure, do you have what is expected in terms of the level of purchase accounting? How that trend is going forward?

Yes. I think we had mentioned. It's going to continue to kind of trickle down from where it was. It dropped a little bit more. I think there was a little bit of elevated payoff on those loans in the fourth quarter. So, a continued kind of trickle down of that number over the next about year and a half or so. And then as we've mentioned before, after that kind of three-year mark, so like July of 2026 is when it really kind of drops more significantly.

Okay. That's helpful. And then just in terms of loan growth, the strong year for the two areas you're focused on C&I and owner-occupied CRE. Based on the pipeline that Peter laid out, maybe it sounds like maybe sounds like it, but are you expecting that to remain the case over the near or intermediate term as you look to continue lowering CRE concentration?

I can jump in there. We've been focused. Yes, sorry, Pat. We've been focused on lowering CRE concentrations for a while now, right? It's tough to do. We have relationships. We want to maintain good relationships and we want to bring in new relationships if they're ones that are truly relationship driven. So, it's kind of a slow process by design. But I think the pipeline will build from where it is, not decline overall. I just think it's 245 at year-end, it's down from a couple of quarters of closing a lot of loans. So, I'm bullish on where we're headed as far as loan volume as it hits the pipeline and gets funded. Pat, I don't know if you want to add anything there?

No, I think that's right. I mean, overall, we're seeing good activities in all of our segments. And as we've mentioned before, Justin, we're not believers that the commercial real estate lending game is a bad business. We think it's a very good business. So that being said, there are reasons why in any good business, you got to keep an eye on your concentration levels. And I think we've taken the right steps to add quality C&I business to help totally bring down the overall level of CRE, but certainly not an exiting of the business by any sense.

Okay. Got you. And maybe just one last one, Pat. I was wondering to spend a little more time drilling down further into the Banking-as-a-Service initiative. And I know you're taking it slow to start off, but just what investment into that business in terms of talent and resources has entailed? And then I'm not sure if you could give us any color on the types of fintech partners may be targeting to start off?

Yes. So, it's something we've been working on behind the scenes for a while. A lot of investment on the tech side. The nice part about the tech investments is, the things we needed to do to be able to pursue some fintech partnerships had added benefits for us outside of BaaS in terms of just added flexibility going forward and opportunities to sort of decouple from the core and really utilize best-in-class providers. So, we're excited about those tech investments, not just because of the BaaS capability, but just the overall improvement in the architecture and the flexibility. But that was a big area of investment. And then we've also given all the press out there about banks that kind of rushed into BaaS and jumped into the deep end quickly and then ended up on the wrong side of the regulatory view. We've just been going slow, engaging consultants working on risk assessments and policies and procedures and compliance and AML and all that. So, there's been some added investment both in terms of bulking up our BSA group, but also you tell them to help us make sure we got all of our I's dotted and T's crossed before we went live. So, I think a lot of those investments have been made, and now it's time to start generating some revenue. And as I indicated in the comments, we're going to start slow with a couple of programs. We're focused on lower risk programs right out of the gate, things that are more finite in terms of duration as well as use of proceeds, things like a prefunded car to pay for certain things we view kind of a lower risk way to get started. So yes, we're excited to see some revenue and deposits come in during '25. We're going to watch it closely. And as I've indicated, this is not a make-or-break initiative for the bank. If we can find a way to do it profitably and successfully in managing the risk, I think, we'll continue to invest and grow that segment. But we're going to see how it goes over the next 12 to 18 months and then reevaluate in terms of future growth funds.

Next question comes from David Bishop from Hovde Group. Your line is now open.

This is John on for Dave this morning. Congrats on the quarter. I was hoping to maybe just follow up quickly on Justin's question on the margin. Hoping you can maybe provide a little bit of specificity around your CD maturities throughout 2025? And then maybe also how you're thinking about managing the duration of those renewals from a rate perspective. Just looking to see get a better sense of really how much of an opportunity you have to work pricing down in deposits throughout the year.

Yes. Good question. We obviously get the CD maturity regularly. We do have a bucket coming due within the first quarter, and it looks like -- if the rate environment stays the way it is today, we can probably get about a 50-basis point reduction in terms of the average cost of the portfolio and that's renewing and being conservative and assuming it kind of reprices at our higher rates -- at our highest rates today, we should see about 50 basis points. Andrew, I don't remember the exact dollar amount, I think it might have been $100 million or $150 million in the next quarter here.

Yes. I'm pulling up the data, but that's -- yes, that's about right. I think it's even a little bit more than that. I think it's about $130 million, $140 million of CDs that will reprice in the first quarter. And then we have a pretty big chunk in the second quarter. I mean we basically have no CDs that are longer term than about 12 months. So, everything is pretty much repricing within the next 12 months with a handful of CDs that are extended a little bit longer than that. But I know we have about $140 million maturing just in the first quarter alone. And I think you're right, Pat, around that 50 basis points.

That's a wonderful color. And maybe just one last quick one. I know you were active on the repurchase this quarter. Can you just remind me how many shares you have left on your current authorization?

Yes. We had a plan approved for about 1 million shares. And I think we may be a little less than $100,000 we bought during the quarter, Andrew, is that right?

Correct. Yes. Exactly right. $1 million approved, we purchased right up to about $100,000 during the fourth quarter, which gives us about 900,000 shares left in our currently approved plan.

[Operator Instructions]. As of right now, we don't have any pending questions. I'd now like to hand the call over to Patrick Ryan for final remarks.

Okay. Thank you. I think that will wrap the call. We appreciate everybody taking the time to join in, and we'll look forward to getting back with everybody after the end of the full year results. Thanks, everyone.

Thank you for attending today's call. You may now disconnect. Have a wonderful day.

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 market rallied. And we canceled $25 million in lower yielding BOLI assets and purchased $20 million in new policies with a net pickup of about 2.5% on those additional BOLI policies, which will certainly help as we move forward. We estimate sort of a normalized net income during the quarter of about $9.7 million. We calculate that by sort of smoothing out some of the unusual items during the quarter, whether that be one-time non-recurring revenue expense items or certain line items that may have been unusually high or low compared to what we normally see. And we try to take a look at that normalized number just to get a sense for the run rate going forward. That $9.7 million estimate was basically in line, maybe a little bit lower than where we were in the first and the second quarters doing the same analysis. So, continuation of continued good performance on kind of a core normalized basis. And we think we're well positioned for good results moving forward. Importantly, the income from the strong growth in Q3 together with the balance sheet enhancements should help position us for a good Q4 and for a strong start to next year. $56 million of the loan growth or about 60% came from our C&I and owner occupied segments, which are two areas of emphasis for us. So, that was nice to see. And the credit quality remained strong across the entire portfolio with all of our segments, including commercial real estate performing well. Last but not least, tangible book value grew significantly $0.38 during the quarter or about 3% quarter-over-quarter. In summary, I think we're doing the right thing to create value in this environment. We're generating quality earnings and growing book value. We're optimizing our portfolios and driving growth in deposits and C&I lending. Future earnings profile looks strong and we expect a stable margin and growth and maturation of some of our new specialized lending businesses will help drive improved profitability as we move forward. So now I'd like to turn it over to Andrew to get into a little more detail on the financial results for the quarter. Andrew?

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 a combination of approximately $200,000 in lower acquisition accounting accretion, approximately $60,000 in lower prepayment penalties on loans and slightly lower average loan rates primarily due to the current market rate environment. Our margin was also impacted by the higher level of on balance sheet liquidity maintained during the quarter. Looking ahead, interest income will be negatively impacted by those late September Fed rate cut. However, we still have loans that were originated in a lower rate environment that will be repricing higher. We also successfully moved rates lower on a significant portion of our deposit base after the recent fed cut. We continue to manage a well-balanced asset and liability position which we expect will lead to a relatively stable margin with opportunities for improvement regardless of how quickly the Fed reduces rates. As I mentioned our asset quality continues to be strong, NPAs to total assets declined from 56 basis points to 47 and our allowance for credit losses to total loans remained steady at 1.21%. Including general acquisition accounting credit marks that are not included in the allowance, our ratio increases to 1.47%. As we continue our ongoing work to prioritize our balance sheet or optimize our balance sheet, we executed sales of certain lower yielding investment securities. During the third quarter, we sold approximately $11.7 million in additional investment securities resulting in a $555,000 net loss on the sale of investments. Another balance sheet optimization strategy that impacted income was the BOLI restructuring transaction we completed during the quarter. We recorded a one-time enhancement fee of approximately $1.1 million related to the restructuring and on the flip side of this benefit was additional tax expense totaling approximately $1.2 million. Non-interest expenses were $18.6 million for the third quarter compared to $18 million in Q2 2024. The increase primarily reflects an increase of $533,000 in OREO expense which was primarily related to the write down of an OREO asset during the quarter. We continue to prioritize expense management and expect the core expense base to be relatively stable over the next several quarters. As I mentioned earlier, our tax rate was affected by a one-time basis by the BOLI restructuring. Without that impact our effective tax rate would have been approximately 24% for the quarter. We anticipate that our effective tax rate going forward will be in the range of 24% to 25%. Stripping away some of these noisy factors you see a very positive story for this quarter. We reported an efficiency ratio of around 58%, once again remaining below 60% for the 21st consecutive quarter. We also expanded our tangible book value per share as Pat mentioned. We are very pleased with our business growth and the continued balance sheet repositioning we executed during the quarter despite the short-term impact it had on earnings. We believe we are positioned to perform very well for the remainder of 2024 and beyond. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer for her remarks. Darleen go ahead.

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 saw an increase in our deposit balances. Given the interest in high yielding products throughout the year and our large growth in volume during the quarter, we're happy to see our overall total deposit cost only increased by 4 basis points from the second quarter. We continue to effectively manage our funding costs to support lowering this metric and maintaining a stable net interest margin. As I've mentioned in recent quarters, our branch strategy is aimed at supporting engagement in our current markets and opportunistic expansion in adjacent markets. We currently have 26 branches and in Q4 we're completing a relocation from our Glen Mills, Pennsylvania location to Media, Pennsylvania. And we're excited about our new branch opening in Trenton, New Jersey. We will also be consolidating our two Flemington, New Jersey locations into one. Net, there is no change in the number of locations, but we are excited about the deposit and overall opportunities that will present itself by expanding into these markets. Lastly, I want to mention we recently launched our online account opening platform as part of our digital banking initiative to support our deposit growth efforts. We continue to see an increased preference for digital banking and we're excited about the momentum we have built in offering easy and convenient solutions for our customers. Overall, we are very pleased with the performance of our deposit portfolio this quarter and confident that our continued focus on customer service, competitive product offerings and innovation will support sustained deposit growth into the next quarter and beyond. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer for his remarks. Peter?

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 key areas led by C&I/CREO and owner occupied and including investor real estate as well as residential and consumer. A positive factor in all this growth as was pointed out by I think both Pat and Andrew was that growth in C&I loans outpaced growth in investor real estate by a factor of 2 to 1. Overall for Q3, we closed and funded new loans of $122 million and experienced loan payoffs of $43 million. Other factors impacting overall loan growth are borrowings and pay downs underlines of credit as well as the amortization of term debt. Worth mentioning I think is that Q3 represented our largest quarter in terms of new loans funded and our smallest quarter in terms of loan payoffs in over two years. I don't really have a specific reason for this happening other than the build of a strong and growing loan pipeline heading into Q3 coupled with experiencing out of the ordinary levels of payoffs in recent quarters. The bottom line is the quarter-to-quarter results can be bumpy but they should even out in the long run. C&I loans made up 70% of new loans funded over the first nine months of the year. This well exceeds what we've done in previous years and is evidence I think that we're executing on our plan to go where the relationship business is. We always track the reasons that loans get paid off and the number one reason through the first nine months of the year was that the asset underlying loan was sold, kind of an out of control occurrence source. Very close second was where loans are refinanced out of the bank and the good news is with some of these payoffs that the majority in over 70% have been investor real estate loans. The turnover in this segment helps us manage the makeup of the overall portfolio. In fact, there's a slide in the earnings supplement that reflects our level of investor real estate loans to capital. One can see an increase after the acquisition of Malvern last September, but then decreasing since. Now on our loan pipeline, our pipeline at the end of the third quarter stood at $276 million of probable fundings down 19% from the June 30th level of $342 million. This was expected after the loan closings we had in Q3 most of which were at the very end of the quarter as Andrew and Pat mentioned. Overall, I continue to be pleased with these results. We have an active calling effort and we're seeing good diversification between the groups. If one breaks down the components of the pipeline at quarter end, C&I loans are 49% of the pipeline, investor real estate 48%, and consumer making up the balance of 2% or 3%. Looking at how this might impact the rest of the year, our level of projected loan funding for Q4 is solid and in line with historic quarterly loan growth projections. While a lot of banks in the market are experiencing weak loan demand, we're seeing good activity in most areas. Regarding asset quality, I don't have anything to add to what's in the earnings release or what's already been mentioned. The portfolio continues to look good to me. Charge offs for minimal non-performing loans continue to decline and delinquent loans continue to be very small. To wrap things up, there weren't any significant changes this quarter with our regional teams or specialty banking areas. They all continue to perform fairly well. This concludes my remarks about lending and I'll turn things back now to Pat Ryan for some final comment.

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.

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 segments saw nice growth in the quarter, and they have strong momentum. Our private equity fund banking group has been a little less active so far this year, given the market conditions, but the pipeline in that area is growing. The deposit environment continues to be a challenge. Customers remain rate-sensitive and excess cash continues to chase yield outside of the banking sector. We expect this to be a little normalized as rates move lower and the inverted yield curve disappears. In the meantime, we're happy with our current healthy net interest margin despite having lived through two years of an inverted yield curve. Our loan pipeline remains robust but throughput is definitely down in this environment. More borrowers are taking a wait and see approach. And as mentioned, we're not winning as many deals given our discipline with rate and structure. The first quarter did include a few non-standard items that are worth mentioning here. Our loan sale generated a pretax loss of $1.2 million. Changes to the New Jersey corporate tax rate and structure, while a negative going forward, actually generated a onetime gain of $1.1 million due to the increase in the value of our deferred tax assets. We also had a limited provision for credit losses in the quarter due to our strong asset quality metrics and the lack of loan growth within the portfolio during the quarter. So in summary, I think we're doing the right things to create value in this environment. We're generating quality earnings and we're growing book value. We're optimizing our portfolios, and we're also creating additional balance sheet flexibility as we move through this year and into 2025. At this time, I'd like to turn it over to Andrew to discuss additional financial details for the second quarter. Andrew?

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 average rate of approximately 3.61%, and the sale resulted in a loss of approximately $1.2 million. We have already redeployed those funds into significantly higher yielding loans, which produces a minimal earn back period. Overall loans were up by $5.6 million during the second quarter of 2024. During the quarter, investor commercial real estate loans declined by $32.5 million, which includes multifamily and construction and development, while owner occupied commercial real estate and C&I loans increased by a combined $44.1 million during the current quarter. Total deposits were down slightly during the quarter. However, non-interest bearing balances rebounded and were up $29 million during the quarter. We were pleased to maintain our overall level of deposit balances and increased non-interest bearing deposits while market conditions continue to be challenging. In addition, we increased our liquidity position slightly during the quarter, and we still have significant unused borrowing capacity. We're also working to increase our capacity with both the FHLB and Federal Reserve Bank, primarily by pledging additional commercial loans. And we also have a number of wholesale deposit relationships for contingent funding purposes. Minimal growth and strong earnings had a positive impact on our capital ratios and our total risk based capital ratio increased to over 11.6% at June 30, 2024. Total non-interest income was down compared to the first quarter of 2024, primarily due to the aforementioned loss on sale of loans. In addition, included in our Q1 2024 was bank-owned life insurance income from a death benefit of approximately $187,000. Non-interest expenses were $18 million in the second quarter of 2024 compared to $17.8 million in the first quarter of 2024. The slight increase was primarily due to an increase in professional fees and some other minor increases, which were all primarily timing related. We have fully realized all of the expected cost saves from the Malvern acquisition, but we continue to focus on our efficiency. We are very pleased with our efficiency ratio remaining relatively stable at 55.9% for the quarter compared to 55.6% during the first quarter of 2024, and we continue to track well below peer averages. Our Q2 2024 tax expense was reduced due to the revaluation of our deferred tax assets based on the recent 2.5% New Jersey surtax that was signed into law at the end of June. The increase in our tax rate resulted in a write-up of our deferred tax assets and a corresponding reduction of tax expense for the second quarter. Unfortunately, that this new surtax will negatively impact our future effective tax rate by approximately 1%. We anticipate that our effective tax rate going forward will now be in a range of 24% to 25%, up slightly from 23% to 24% prior to the new tax. While we continue to operate in a difficult rate environment, we are very pleased with our second quarter financial results. We are also excited about the prospects for the remainder of 2024 and beyond as we are operating from a position of strength and are well positioned to react to any changes in interest rates or other market conditions. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer, for her remarks. Darleen?

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 quarter, new loans closed and funded totaled $99 million, an increase of 27%. I'm pleased to add that C&I loans made up 75% of these new loans funded in Q2. For comparison last year in 2023, C&I made up 69% of new loans closed and funded for the year. In 2022 and 2021, C&I loans were 42% and 39%, respectively. So there's good evidence there, I think, that we're executing on our plan. We continue, however, to experience a fairly high level of payoffs, including the $24 million in loan sales this quarter. In each of the first two quarters this year, we experienced payoffs of $75 million. Looking back the last couple of years in 2022 and 2023, we averaged less than $50 million in payoffs each quarter. We do track the reasons the loans get paid off the number one reason through the first half of 2024, was that the asset underlying the loan was sold. If there's any good news behind these payoffs, it sits at 72% of them were in the investor real estate segment, which helps us in repositioning the makeup of the loan portfolio, the one with a higher level of C&I loans. Pat referenced the positive movement in the 300% regulatory guidance ratio of investor real estate to risk-based capital. This movement was aided by the loan sales. Obviously, they were part of the payoffs I mentioned, along with the increase this quarter in risk-based capital. I'll now comment on our pipeline. At June 30, it stood at $342 million of what we call probable fundings, up 14% from the March 31 level of $300 million. I am obviously pleased with these results. We continue to have active calling efforts and continuing to see good diversification between the groups. And if one breaks down the components of the pipeline, C&I loans made up 57%; investor real estate, 41%; and consumer loans, 2% of the overall pipeline. On the top sits asset quality, portfolio continues to look solid. Charge-offs were down. Nonperforming loans continued to decline from the uptick in Q3 last year when Malvern was acquired and delinquencies were minimal at quarter end. The slide deck released with the earnings report also provides a lot of additional information about the makeup of the portfolio. So to wrap things up, our regional teams, including our new team in Palm Beach County, Florida, are active in the market, and they continue to take new deposit and loan business. Our specialty areas, as Pat referenced, asset-based lending, private equity banking, small business banking are all doing well. Those are the highlights for lending and conclude my comments that are related to Q2. I'll turn things back over to Pat for final comments. Pat?

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.

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

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

Following discussion may contain forward-looking statements concerning the financial condition, results of operations, and business of First Bank. We caution that such statements are subject to a number of uncertainties and actual results could differ materially, and therefore, you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties are described under Item 1A, Risk Factors, in our annual report on Form 10K for the year-ended December 31, 2023, filed with the FDIC. Pat, back to you.

Thank you, Andrew. I'd like to start with a quick overall view. I think first quarter was an excellent quarter in terms of earnings produced. We did see the benefits of Project Sculpt, which, as we've referenced in the past, is our effort to create a leaner, more capital-efficient balance sheet. We also saw continued strong asset quality performance and good cost controls during the quarter, all of which helped to lead to strong earnings results during the period. We did see a modest decline in loans outstanding by the end of the quarter, but that reduction came from declines in non-core investor real estate or acquired loans. We actually enjoyed nice growth in the quarter in our C&I categories. Deposits were flat, and the environment for attracting retaining core deposits remains challenging. While we were successful in adding that new account during the quarter, movement of funds out of existing accounts and shifting of funds out of non-interest bearing continued to push deposit costs higher. Our loan pipeline remains very healthy, and we expect we'll be able to meet our lending goals for the year. With the sizable decline in CRE balances during the quarter, its unclear where those balances will finish, but with the healthy pipeline we have, we think our overall lending goals will be met. During the quarter, we had a few non-core items that are worth mentioning. The after-tax impact of these various items was just under $300,000. We had a bully death benefit of $187,000. We also had a purchase accounting adjustment from the retired sub-debt, which produced about a $400,000 earnings benefit, and then offsetting that was about $200,000 in abnormal additional payroll taxes during the quarter. In addition to these items, we also had some other unusual items, which I'm sure if you read the release you noticed. The first of which was the negative credit provision, largely driven by the overall reduction in loan balances during the quarter, and as you'll see in the report, our overall allowance to loans basically stayed about where it was in the prior quarter. And we also had a tax adjustment which led to a lower effective tax rate, and that added about $837,000 to earnings during the period. Going forward, we expect the tax rate should return to historical levels. To hit a few highlights, our adjusted return on assets was 1.39%, which is basically in line with where we were last quarter at 1.38%, and obviously at very healthy levels. Our adjusted diluted earnings per share was $0.49, which is right in line with the prior quarter. Our tangible book value per share increased 3.2% during the period, and our efficiency ratio remained below 60% for the past 19 quarters now. So in summary, as we hoped, our scaled-down balance sheet is driving capital efficiency, improved interest rate risk management, and continued strong earnings. While many banks remain stuck with large mark-to-market positions that constrain business, profitability, and strategic alternatives, our balance sheet is getting leaner, and we have maximum flexibility to thrive as we move forward, even in a higher for longer interest rate world. At this point, I'd like to turn it over to Andrew to discuss some of the results in more detail. Andrew?

Thank you, Pat. For the three months ended March 31, 2024, we recorded net income of $12.5 million, or $0.50 per diluted share, and a 1.41% return on average assets. Our strong quarterly earnings metrics were driven by stable margin, stable asset quality metrics, and continued strong efficiency metrics. Our net income was positively impacted by credit loss benefit recorded during the first quarter. The benefit was primarily due to the decline in loans, coupled with strong credit metrics. With non-performing loans declining by $7.9 million and net recoveries during the quarter when excluding a PCD loan charged off of $5.5 million, which was reserved for it through purchase accounting marks at the time of Malvern acquisition. This led to our overall allowance for credit losses to total loans to decline to 1.22% at March 31, from 1.40% at December 2023, including general acquisition accounting credit marks that are not included in the allowance. Our ratio increases to 1.56%. During the first quarter, we did not execute any additional loan or investment sales. However, we did continue to reduce our investor commercial real estate concentration. The additional payoffs and paydowns offset somewhat by selective new originations. During Q1, 2024, investor commercial real estate loans declined by $42.8 million when including multifamily and construction and development, while owner-occupied commercial real estate and C&I loans increased by a combined $15.4 million. Overall loans were down $29.1 million during the first quarter of 2024. Total deposits were up slightly during the quarter, however, non-interest-bearing balances declined as we saw a continued shift of deposits into interest-bearing products. This contributed to a 20 basis point rise in the total cost of deposits during the quarter. The cost of deposits for the quarter was also impacted by some liquidity enhancement that we did at the end of 2023 and into the early part of 2024 by adding some additional broker deposits. In-market deposit pressure also impacted deposit pricing in the first quarter. We were pleased to maintain the overall level of deposit balances while market conditions continued to be challenging. While deposit costs increased, we believe that maintaining deposit levels to assist in paying off higher cost sub-debt and borrowings while maintaining strong liquidity was a net positive during the quarter. In addition, we had significant unused borrowing capacity at March 31, 2024, and we pledged additional commercial loans to the FHLB subsequent to quarter end, which increased our capacity. Our net interest margin declined slightly to 3.64% in the first quarter of 2024, compared to 3.68% in the fourth quarter of 2023. We continued to benefit from acquisition accounting accretion. In Q1 2024, we recorded an acceleration of accretion on the mark on the acquired Malvern sub-debt, which was redeemed during this quarter. This acceleration reduced interest expense on subordinated debt. This led to an increase in the net positive impact on net interest income from acquisition accounting accretion to approximately $4.2 million in the first quarter of 2024, compared to an approximately $3.9 million positive impact on net interest income in the fourth quarter of 2023. Excluding the acquisition accounting income impact, we estimated that the margin declined by approximately nine basis points compared to the linked fourth quarter. Throughout the rest of 2024, our margin will benefit from the $25 million subordinated debt redemption, which was carrying a 9.79% rate. However, we expect continued margin compression from persistent deposit pricing pressure, with a higher for a longer rate sediment. The sub-debt redemption did lead to a reduced total risk-based capital ratio, but our ratio remained well above minimum capital ratios at 11.41% at March 31st. In the first quarter of 2024, total non-interest income increased significantly compared to the fourth quarter of 2023, primarily due to losses on loan and investment sales in the fourth quarter, which were net against non-interest income. In addition, included in our Q1 2024, non-interest income was bank-owned life insurance income from a debt benefit of approximately $187,000. Non-interest expenses were $17.8 million in the first quarter of 2024, compared to $17.6 million, excluding merger related expenses in the fourth quarter of 2023. The slight increase was primarily due to an increase in salary and employee benefits, which was partially offset by decreases in professional fees, regulatory fees, marketing, and other expenses. The increase in salary and benefits was primarily due to standard salary increases, which typically take place in the first quarter of the year, and approximately $214,000 increase in payroll tax expense due to the year-end bonuses being paid during the first quarter, and some slight increases in benefit costs. The decline in the other expense categories from the prior quarter were related to certain elevated expenses in the fourth quarter, primarily related to certain residual Malvern-related expenses. We have now realized all of the expected cost savings from the acquisition. We continue to focus on operating efficiency, and even as we have seen pressure on our margin and the continued impact of inflation on our expense base, our efficiency ratio remained relatively stable at 55.6% for the quarter-ended Q1 2024, compared to 53.8% during the fourth quarter of 2023, and we continue to track well-below-peer averages. Our Q1, 2024 tax rate was positively impacted by certain discreet or one-time tax adjustments that were primarily related to the finalization and filing of the final Malvern tax returns during the first quarter of 2024, and we anticipate our effective tax rate going forward will be between 23% to 25%. Although we continue to operate in a difficult rate environment, the efficiencies we gain from the Malvern acquisition and the balance sheet repositioning we executed during the second half of 2023 has already paid dividends and positioned us for a strong core profitability in 2024. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Officer for her remarks. Darleen?

Thanks, Andrew. Good morning, everyone. I'm happy to share some of the deposit activity that took place throughout the quarter that has prepared us for what we expect to be a very successful 2024 despite the continued challenging deposit environment and this higher for longer rates sentiment. While total deposits were up slightly from the end of 2023, we are still experiencing shifts within our deposit mix as customers and prospects continue to seek the highest return for their funds. Our non-interest-bearing portfolio decreased 1.1% while our money market and savings increased 1.6% and time deposits increased 1.1% from Q4 2023. The market consensus on Fed rate hikes has changed considerably from the beginning of the year. In January, we were expecting six cuts. Now we're left wondering if there will be any with the recent strong job report and CPI exceeding market expectations. This has caused us to pivot. Throughout the quarter, we began to lower rates on some of our promotional products and took some selective cost-cutting initiatives without losing sight of the need to stay competitive amidst ongoing pricing competition in the market. While we are laser-focused on reducing our cost of deposits, this mixed shift in pricing pressure has contributed to the increase of 20 basis points from the end of Q4, 2023 as mentioned earlier. However, this has not changed our strategic focus in which we will continue to seek opportunities to onboard non-interest-bearing and low-cost deposits as well as determine ways to lower our costs while still meeting the needs of our clients. The changes we are making today may not have an immediate significant impact, but it allows us to position ourselves for the months ahead. We continue to grow our deposit base by expanding existing and developing new relationships through organic growth. We on-boarded over 40 million in new core deposits in Q1, although offset by some of the attrition we are experiencing in the former Malvern footprint as we continue to reshape our balance sheet for optimum efficiency. We are okay with letting some of these higher-price deposits and single-service relationships go and replacing them with lower-cost, full relationships. We have some great initiatives we kicked off this past quarter that will assist us in our growth efforts as we continue to build and expand relationships throughout the remainder of the year and beyond. We on-boarded a new escrow product, making it easier for our clients with the need to conduct their business on our platform. Our online account opening service will be kicked off at the end of this month, and we continue to evaluate our deposit products and determine ways to make them more attractive for our clients and stickier for the bank. We continue to provide training to our frontline sales teams to have effective conversations and improve the customer experience. We have two new branches in our pipeline for 2024, one being a De Novo in New Jersey and the other a relocation out in our PA market. Overall, our deposit pipeline remains healthy, opportunities in the commercial and government space as we continue to develop new full-service relationships. At the end of the fourth quarter, 2023, I talked a little bit about non-interest-bearing funding, managing our cost of deposits, and organic growth, and these will continue to be key drivers to deposit activity in 2024, so that has not changed and it will remain throughout the rest of this year. Lastly, we know the deposit and rate environment will continue to be challenging, however, we're extremely optimistic given what we've accomplished 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. I'll try to provide some color now on how things are going and lending. As you read and heard previously, and again today, our goals are to prioritize relationships while reducing concentrations in investor real estate loans. And in the first quarter, as you've heard, loans are down $29 million from the end of December. We've talked for a while about our disciplined approach to new business and our focus on what we think will be profitable relationships. This means relationships that bring deposits as well as have adequate pricing on loans. This also means a greater focus on C&I loans, which for us includes owner-occupied real estate. And you can see in the schedules in the earnings release, and as Andrew recently mentioned, those segments continue to head in the right direction. This strategy for us is not new, and you'll hear when I talk about our pipeline that the volume of business we're looking at is as robust as ever. What we unfortunately encountered in the first quarter was a large number of asset sales on the part of our clients, and not all were in the investor real estate segment. New loans closed and funded in Q1 totaled $78 million. In comparison, $78 million exceeded the quarterly average for all of last year. It's important to note that these funded loans in Q1 consisted of 71% C&I loans, and only 22% investor real estate, the remaining being primarily consumer. The issue in Q1 was that we experienced $74 million in payoffs, basically offsetting the new loan growth. When we get payoffs, we track the reason for them, determining whether they were caused by refinances out of the bank, where we have a chance to retain a loan, but maybe choose not to. Asset sales resulting in the payoff of our loans, and loans that have undesirable credit quality, so we let them grow, or sometimes the borrower has excess cash and chooses just to pass off. In Q1, asset sales made up 55% of the payoffs, and the largest individual loan getting paid off from an asset sale was a C&I borrower where the business was sold. These large number of payoffs coming from asset sales, and the largest one being a C&I customer, both a little out of the ordinary for us. I can now comment on our loan pipeline. Our pipeline at March 31st stood at $300 million of probable fundings, up from the December 31st level of $212 million. I'm very pleased with these results. I especially like that the $300 million is from 266 different loans, certainly the highest number of loans in a couple of years, and an indicator of active calling efforts and good loan diversification. Our sales teams are out looking for the type of good relationship business that we've described, and the pipeline reflects the results of their activities. I should also mention, if we break down the pipeline, the various components, C&I loans make up 55% of the pipeline, investor real estate 40%, and consumer loans about 5% of the overall pipeline. We're seeing every day the results of our active sales efforts and solid pipeline. Moving past the negative loan growth numbers in the first quarter, loan fundings in April so far have been excellent, and have outpaced the first quarter loan runoff and the surprise reduction in loans. I expect we'll have good quarters in Q2 and beyond, and meet our loan growth goals for the year. On the topic of asset quality, a hot one these days, particularly when it comes to real estate, I don't have much to add to what the earnings release and the earnings release supplement show. The information provided describes what I think is a stable and sound condition. We did see a modest uptick in delinquencies at quarter end. You won't see this in the release that we made yesterday, but it will show up in the call report in 10-Q, which will be released shortly. This uptick was due to one large loan we acquired from Malvern that went 31 days past due before making its payment. All of our numbers are now back in line. The asset quality table and the quarterly financial highlights section of the release shows positive trends in all areas. The earnings release supplement has some good slides covering geographic diversification and, importantly, the diversification of the investor real estate portfolio. That one slide, I believe it's number 14, further breaks down our fairly modest office portfolio, virtually all of which is in our core market, but none located in major cities such as New York or Philadelphia, where a lot of the stress in the office market has been felt. I think overall credit quality continues to be good, and there continues to have been no surprises from the former Malvern portfolio. So to kind of wrap things up, our regional teams, including a small team in Palm Beach County, Florida, acquired with the Malvern merger, are actively in the market seeking to drive deposit and loan business. Our specialty areas, asset-based lending, private equity banking, and small business banking are all showing good signs of success. And along with this, we continue to explore new ways to expand our business in all of our markets. Those are the highlights for lending, and conclude my comments related to Q1. I'll turn things back over now to Pat for any final comments you might have.

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

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

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

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

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

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

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

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

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

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

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

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

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

Yes, our pleasure. Thank you, Justin.

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

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

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

Sharon G on for Manuel.

Oh, okay. Good morning.

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

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

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

All right. Thank you.

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

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

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

Hello, and welcome to the First Bank Conference Call. Please note that this call is being recorded. After today's presentation, there will be an opportunity to ask questions in the Q&A session. Instructions will be provided before opening the floor for questions. I'd now like to hand over the call to Patrick Ryan, President and CEO. Please go ahead.

Thank you. I'd like to welcome everyone today to First Bank's fourth quarter 2023 earnings call. I'm joined by our CFO, Andrew Hibshman; our Chief Retail Banking Officer, Darleen Gillespie; and our Chief Lending Officer, Peter Cahill. Before we begin, Andrew will read the safe harbor statement. Andrew?

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, 2022, filed with the FDIC. Pat, back to you.

Thanks, Andrew. I'd like to start with some high-level remarks. We'll then turn it over to Peter, Darleen and Andrew to provide a little more detail. And then, of course, we'll open it up for Q&A session at the end. So, overall, I think the fourth quarter was a nice finish to the year. We realized strong core earnings growth as a result of both our balance sheet repositioning as well as the slowly improving interest rate environment. In particular, I'd like to call attention to our net interest margin, which finished the quarter at 3.68%, which was an increase of 32 basis point compared to the third quarter margin, and Andrew will provide some detail around the components of that margin improvement during the quarter. As a result of the margin improvement and otherwise good operating results, we saw our return on tangible common equity finish the quarter at 15.75%, which was our highest level since the first quarter of 2021. And in that quarter, we had the benefit of PPP income. So, we're really pleased to see that nice strong return on tangible common equity number. And I also want to point out that as a result of actions taken during the fourth quarter, we believe we've now met the cost savings targets that we laid out when we announced the merger, and Andrew can provide a little more detail on that. A couple of non-core items that occurred during the fourth quarter worth pointing out. We sold an additional $21.5 million in low-yielding investment securities, which generated a loss on sale of $916,000. We also sold $35.6 million in non-strategic commercial real estate loans, with a loss on that sale of $3.8 million. We had an additional $338,000 in merger-related costs, which will finalize the expenses related to the merger. And during the quarter, we actually had a positive credit loss amount because of the overall flat loan growth as well as the modestly improving economic outlook. Some of the financial highlights that you saw in the release: the adjusted return on assets was 1.38% annualized, the adjusted earnings per share for the quarter was $0.49, our tangible book value per share increased 3.2% during the quarter, and our efficiency ratio remained below 60%, which has been a target of ours and something we've achieved for the past 18 quarters. So, in summary, I think the fourth quarter earnings provide some really good initial insight into the improved earnings power of the franchise, both from the additional scale through the acquisition as well as from our more streamlined balance sheet. At this point, I'd like to turn it over to Andrew to get into a little more detail around the financial results for the quarter. Andrew?

Thanks, Pat. For the three months ended December 31, 2023, we recorded net income of $8.4 million or $0.33 per diluted share. As Pat mentioned, excluding some additional merger-related expenses and the losses on sale of loans and investments, we saw a nice uptick in our net income to $12.4 million or diluted EPS of $0.49 per share and adjusted return on average assets of 1.38%. Fourth quarter net income was also impacted by certain tax adjustments to our deferred tax assets based on changing state tax apportionment calculations, which led to the lower effective tax rate in Q4. However, we do expect our quarterly effective tax rate to be back closer to our historic rate of between 23% to 25% as we head into 2024. Net income was also positively impacted by a negative credit loss expense, which was due to low level of charge-offs during the quarter and strong loan credit metrics and the improving economic outlook, as Pat mentioned, coupled with the limited loan growth. This led to our allowance for credit losses to total loans to decline slightly to 1.4% from 1.42% at September 30th. During the fourth quarter, we continued our strategy of repositioning our balance sheet and sold some additional investments in loans, which improved our future earnings profile, helped us manage liquidity levels, and will help us to optimize our use of capital. Because the commercial loans sold were 100% risk-weighted assets, the impact from the transaction, even after the loss recorded, was a net increase to our risk-weighted regulatory capital ratios. This partially contributed to the increase in our overall risk-based capital ratios at the end of December compared to the prior quarter. Excluding the loan sales, net loans increased $36.3 million during the fourth quarter. This growth primarily came from higher-yielding commercial and industrial loans. The weighted average rate on new loans originated during the fourth quarter of 2023 was 8.35% compared to 4.89% on the loans sold during the quarter. Total deposits were up $114,000 during the fourth quarter of 2023. Noninterest-bearing balances increased $8.1 million, which was offset by a decline in interest-bearing balances of $7.9 million. The total cost of deposits was up 16 basis points during the fourth quarter compared to 28 basis point increase in the third quarter of 2023. Primarily due to the benefits of the Malvern acquisition and the balance sheet repositioning that occurred during the end of the third quarter and into the fourth quarter of 2023, our net interest margin improved from 3.36% in the third quarter of 2023 to 3.68% in the fourth quarter. We also benefited from a full quarter of acquisition accounting accretion, which had an approximately $3.9 million positive impact on net interest income. Excluding the acquisition accounting income impact, we estimated that the margin improvement was approximately 17 basis points, which was due to an approximately 30 basis point increase in earning asset yields excluding the acquisition accounting accretion, which outpaced the 15 basis point increase in the cost of interest-bearing liabilities. Deposit pricing pressure has subsided, which should help the margin in 2024, and we will also benefit from the February 2024 redemption of $25 million in subordinated debt that was inherited from Malvern, which currently carries a 9.79% rate. The redemption will have a slight negative impact on our total risk-based capital ratio, but the impact is muted because the capital credit we are receiving for these notes has been reduced to 40% in the first quarter of 2024 as the debt instruments are now under three years from their maturity date. Liquidity levels during the fourth quarter increased as we used proceeds from asset sales to help fund new loans, but we also added some FHLB advances and some brokered CDs to increase our on-balance sheet liquidity as we head into 2024. We still have significant unused borrowing capacity and we have additional commercial loans that we can pledge to the FHLB to increase our borrowing capacity if needed. In the fourth quarter of 2023, total noninterest income declined primarily due to the aforementioned losses on loan and investment sales, which were net against noninterest income. Noninterest expenses were $17.9 million in Q4 2023 or $17.6 million excluding merger-related expenses. Noninterest expenses, excluding merger-related costs, increased $1.1 million or 6.9% from the prior quarter, primarily due to a full quarter of additional expenses from the Malvern acquisition, but also some timing-related items that inflated professional fees, increased regulatory fees, primarily due to the impact of the Q3 results, which impacted the FDIC fees higher, and the marketing expenses that were elevated due to some increased marketing efforts and donations towards the end of 2023. These increases were offset some by additional Malvern-related cost saves during the quarter, mainly related to salaries and employee benefits. We continue to focus on our operating efficiency and we believe we've met our cost savings goals from the Malvern acquisition, but we still have opportunities to generate some additional cost saves and improve efficiency metrics as we head into 2024. Although we continue to operate in a difficult rate environment, the Malvern acquisition, coupled with the balance sheet repositioning we executed during the second half of 2023 has us positioned for strong core profitability in 2024. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer, for her remarks. Darleen?

Sure. Thank you, Andrew, and good morning, everyone. I'll start off by stating that we had a good year despite the unprecedented banking environment and the deposit challenges of 2023. During the fourth quarter, the bank continued to experience significant deposit activity. We rolled out a deposit campaign that assisted with the organic deposit growth in addition to [stemming] (ph) some of the attrition we were experiencing in our time deposit portfolio as a result of the competitive rate environment. And while our deposits were flat basically during the fourth quarter as a result of letting higher rate money leave, we did replace it with some noninterest-bearing funding. Our noninterest-bearing balances actually increased $8.1 million, and while we continue to focus on strategies to bring in low-cost deposits, that is part of our thought process and strategic focus throughout 2024. As we ended 2023, much of those losses were partly due to deposit fluctuations. However, little of it was due to closure of accounts. This was a factor in the decline in our interest-bearing liquid balances. However, it was offset somewhat by growth in our time deposit portfolio during the quarter and this shows that some of those dollars actually moved into this portfolio. While this is not a strategic initiative to grow our time deposit portfolio, it is the nature of the rate environment we are in as customers continue to be rate sensitive. I'll reiterate as I've mentioned in previous quarters that we know our clients, and while their balances have declined, they remain loyal customers to our bank. As Andrew mentioned, our cost of deposits increased 16 basis points in Q4, which is less than the increase we experienced in Q3. Again, a result of the rate environment, but overall, we are managing this metric by letting go of higher rate funding. We continue to work with our bankers and we're having conversations with our customers around managing our pricing, our promotional non-maturity deposits in anticipation of potential rate cuts this year. This is another strategic focus for 2024, to continue to manage our costs, while still providing competitive offerings to our existing customers as well as prospects. In summary, noninterest-bearing funding, managing our cost of deposits and organic growth will continue to be key drivers relative to deposit activity in 2024. We realize the environment will remain challenging; however, we are extremely optimistic regarding what we'll be able to accomplish 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 just heard and have read in our earnings release, the fourth quarter was another busy one for the lending area. Loans generated by the teams represented an increase in total loans of $36 million. However, the team also facilitated another loan sale that coincidentally also totaled $36 million and resulted in overall flat growth for the quarter. As Pat and Andrew both mentioned, those loans sold consisted of lower-return non-strategic commercial loans. As we've mentioned in previous quarters and as Pat mentioned in the earnings release, we've had a disciplined approach to new business and our focus has been on what we think will be profitable relationships, which means relationships that bring in deposits as well as have adequate pricing. This also means a greater focus on C&I loans, which include owner occupied real estate. And you can see in the schedules in the earnings release that those segments are headed in the right direction. When I look at all new loans booked during 2023, only 26% of them were investor real estate loans. For comparison, in 2022, 53% of new loans closed and funded were investor real estate. In 2021, investor real estate loans comprised 58% of our total new loans. We know there are more deposits on average tied to C&I loans, so those are our big focus. We'll continue to do business in the investor real estate area. It's a major part of the economy in our markets, but we'll be pointing the majority of our sales folks to growing our C&I book of business. Throughout the year, one thing we always need to deal with are loan payoffs, and we tried to track why loans payoff prior to maturity. In 2023, 53% of payoffs took place because the underlying asset was sold. We can't do much about customers selling their assets. This number is up from the previous couple of years. In 2022, 49% of payoffs came from asset sales, and in 2021, the number was only 42%. Normally, most of those payoffs are related to investor real estate loans, over 50% historically. But we also saw and continue to see a sizable number of C&I payoffs where businesses are sold -- excuse me, or sale leasebacks, things like that take place. I usually comment on our loan pipeline during these calls. Our pipeline at December 31st stood at $210 million of what we call probable fundings, basically unchanged from the September 30th level of $212 million. Our average for the 12 months of 2023 was $214 million, and the number of loans in the pipeline has not changed significantly over that timeframe. Overall, I'm happy with where the pipeline stands. As we begin 2024, our sales teams are out actively looking for good business. Regarding asset quality, I don't have much to add to what the earnings release states. So, I think overall credit quality is good and basically unchanged over the quarter. There have been no surprises from the former Malvern portfolio, and I see no areas of real weakness in the portfolio as a whole. Our objective as we move further into 2024 is to organically grow loans and deposits where we can gain relationship business. In addition to our regional teams, our private equity fund relationship management team is doing well. Our new asset-based lending group had some big wins in Q4 and has developed a solid pipeline. On the small business front, we recently shifted our SBA unit into a more formalized small business group where management is shared with our Business Express product. That product is for smaller business loans and deposits. And we expect this will create some good synergies moving forward. Those were the highlights from lending and conclude my comments related to the fourth quarter. I'll turn things back over now to Pat for any final comments.

Thank you, Peter, and thanks, Darleen and Andrew. At this point, I think we're through the prepared remarks, and we'd like to open it up for the Q&A session.

Thank you. We are now opening the floor for the question-and-answer session. [Operator Instructions] Our first question comes from Justin Crowley from Piper Sandler. Your line is now open.

Hey, good morning, guys.

Good morning, Justin.

I wanted to start on the margin in the quarter. First, I wanted to see if you could share your expectations just on purchase accounting assumptions going forward, if you have them. And then maybe also on a more core basis, just with some signs of stabilization, are you at a point where loan yields are starting to offset what you anticipate seeing just as far as the lag and the pickup on the funding side?

Yeah, I'll give you a couple of data points and then let Andrew add some detail, Justin. But $3.9 million was the purchase accounting number during the quarter. Obviously, that's about $1.3 million a month. That number will continue for a while. As I'm sure you know, it starts to amortize down a little bit over time. But over the course of the year and the first couple of years, there's not a lot of decline in that number, but Andrew can give a little bit of color. As we looked at the kind of margin excluding the purchase accounting, it looked like we actually saw some nice margin growth in the quarter even without that purchase accounting. So, I think overall the margin was up 32 basis points and we had pegged about half of that was driven by kind of the core underlying improvements, i.e., loan yields starting to exceed -- the increases in loan yields starting to exceed the increases on the deposit side. Obviously, we saw some mix improvement as we sold off some lower-yielding assets and repositioned it either into cash or higher yielding assets. So, we saw some really good trends on the margin. Andrew, anything you want to add in terms of the run rate on the purchase accounting stuff?

I think you hit it right. It should stay fairly close. And obviously as the loan portfolio starts to pay down, that number starts to roll down. But in 2024, the number just kind of rolls down fairly slowly. So, it's a pretty good estimate of kind of what the run rate will be based on the fourth quarter.

Okay. Got it. Appreciate it. And then you spoke about some of the traction in noninterest-bearing. Is that an area that you think you can continue to improve, especially as the C&I build-out remains a focus, just taking into consideration just some of the commentary on growth, which seems pretty positive, just looking out through the year?

Yeah. Well, listen, it's certainly a -- it's core strategic priority number one, two and three. So, if we don't continue to grow it, it won't be from lack of effort or investment. But noninterest-bearing balances are obviously sensitive, right? They move up and down based on the cash flow, needs of the business that has those operating accounts with us. I think we're doing a good job attracting new clients and bringing them on board. That sales cycle takes a while, and then it takes a while to get them onboarded and get those accounts fully funded. So, there tends to be a lot of variability from month-to-month and quarter-to-quarter within the overall noninterest-bearing balances. Obviously, if you look back at 2023, a lot of money within that category in the sector left noninterest-bearing and moved over either to bond funds, money market funds or just out of NIB into CDs or money markets. So, we're hopeful that a lot of that movement of excess money out of noninterest-bearing into the interest-bearing accounts has played out at this point. But that's a guess, right? We don't know if we'll still see some of that underlying trend during the course of the year. And as Peter mentioned, we're very focused on growing in the C&I areas that we think can help drive a higher noninterest-bearing balances as well. So, whether we'll hit our targets or not, time will tell, but I think we've got a healthy goal to grow in that area this year, and we're investing a lot of time and effort and money to make that happen. So let's see how it plays out.

Okay. And then just one last one on the margin. But just thinking about the prospect of rate cuts and then also factoring in wanting to generate deposits to grow, if and when we do get rate cuts, what are your thoughts on being able to bring rates down after the first few cuts? And just the idea of what betas will look like as rates move lower?

Yeah, it's a great question. It's obviously a critical question to the margin assumptions going forward. The short answer is time will tell, right? Historically, I think banks have been very good at following the Fed and lowering rates quickly. That being said, the Fed is still slowly pulling money out of the system. A lot of banks have loan-to-deposit ratios today. They are a bit higher than they were a few years ago. So, we might not see the same pace of decline that we've seen in prior cycles, but it's really going to ultimately depend on the overall level of liquidity in the market and what banks are doing on the lending side. What we're seeing and hearing is there's several banks, mostly larger banks that are sort of in a holding pattern in terms of new loan production. And as a result, that should reduce some of the strain on the overall liquidity in the system, which should translate into an ability to lower deposit costs quickly. But obviously, there's several ifs that were in that statement right there. So, we'll see how it plays out.

Okay. Got it. And then just on the expenses in the quarter, with maybe some lingering costs tied to the Malvern deal and opportunities to maybe find some additional efficiencies, how much of that is from Malvern? How much of that is maybe on an organic basis? Just trying to think about run rate off of the expense level that we saw in the fourth quarter.

I don't know if, Andrew, you want to jump in on that?

Yeah, sure. Yeah, there were some noise in the fourth quarter outside of Malvern to just some elevated expenses associated with some professional fees and things like that. So, there's definitely some opportunities to get some additional saves. We pretty much got everything out of Malvern from the cost saves estimate. So, I think we've hit that number. There are some additional stuff IT-related, some other little areas where we may be able to generate some additional efficiencies that are directly related to Malvern, but we pretty much hit the cost saves there. But we're always looking for opportunities for savings. So, I think there's room to move it down slightly. But again, then you get into New Year and we start seeing some cost increases in other areas. So, I don't see the fluctuation in noninterest expenses being significant, but there are some opportunities to continue to drive that number down slightly, but maybe offset by some other increases. So, I expect noninterest expenses to be relatively stable but with some opportunities to continue to gain some efficiencies as we head into the new year.

Okay. That's helpful. And then just one last one, but is it still fair to assume share repurchases or maybe on the shelf for the time being, just as capital rebuilds and just given some of your expectations on the growth side of things over the coming year?

Yeah. I mean, listen, for the time being, I'd say probably yes, right? But at the end of the day, the two variables are our overall capital position and the price we can get the shares at. So, at levels at or above book value, not to say those aren't attractive levels to buy, but we probably prefer to build some capital in the short run. But we also see with the improved earnings profile, the ability to retain earnings and grow capital quickly. So, if for some reason, the price of stock got real attractive, then we would obviously take a look at it.

Okay. Great. I will leave it there. Thanks so much for taking the questions.

Yeah, no problem. Thank you, Justin.

Our next question comes from Nick Cucharale from Hovde Group. Your line is now open.

Good morning, everyone. How are you?

Good. How are you, Nick?

Good. Thank you. Just one for me. On the loan front, the franchise has historically been a high single-digit organic grower for many years. Given the larger balance sheet, especially after the Malvern addition, how are you thinking about the natural rate of growth going forward, especially with the emphasis on the C&I initiatives?

Yeah. I would tell you, Nick, that it's an interesting market right now because, as I mentioned, with a number of players sort of on the sidelines, there's lots of good opportunities to build relationships with quality commercial borrowers. And I think we're very well positioned given our size and our brand and customer segments to take advantage of that. The question is going to be what can we fund at reasonable prices based on good core deposit growth. So, the ultimate level of loan growth is going to be driven not by whether there are good opportunities, but can we have success on the deposit growth side to be able to fund those with good core accounts. So that's really the nature of the current market. And we'll see how the deposit story plays out during the course of the year. And I think that will be the main driver of how much new loan business we end up doing.

Sounds good. Thank you for taking my question.

Sure. Thank you, Nick.

[Operator Instructions] Our next question comes from Manuel Navas from D.A. Davidson. Your line is now open.

Hey, good morning. I just wanted to go back to the...

Hey. How are you, Manuel?

I'm well. Just wanted to jump back into the margin for a moment. There's a lot of moving pieces. You have the sub debt coming off in the first quarter. Could you see kind of the NIM decline next quarter, but then kind of build back up with the sub debt benefit and maybe decelerating deposit costs across the rest of the year?

Well, you asked, could we see that? Yes, we could. I'm not sure that's what we anticipate. Some of the trends outside of the purchase accounting that drove the improvement in Q4, we think will continue. And the benefits of the balance sheet repositioning will continue to bear fruit. And obviously, the purchase accounting income will be there at least for the next several quarters. So, we'll see how successful we are in terms of generating new deposits and what we need to pay for them. But I would like to see the margin at least stay where it is, if not maybe get a little better. So, Andrew, I don't know if you have any thoughts based on what you've seen in your numbers.

Yeah, I think that's right. That's the goal. I mean, I think if the first quarter is flat, I don't think that we would be upset about that, but I think there's opportunities for improvement. And as you said, halfway through the quarter, we're going to get a pretty big benefit of $25 million rolling off at almost 10%. So, we definitely have some tailwinds, I think, and we're -- the deposit pressure is definitely subsiding. So, I'm excited about kind of where things are headed, and I feel good about at least being able to keep that margin stable and then hopefully continue to see some improvement, especially as we get that sub debt off the books in the middle of the quarter.

That's great color. Are there any other kind of actions that still remain out there that you're considering? Or do you feel like most of them are done at this point? Just kind of what can still happen? What are you considering? And how close are you to setting up the balance sheet fully?

Yeah. Listen, I think at this point, whatever we do would be opportunistic based on what we see in terms of market pricing and other things. I think we're at a size now where we should be regularly exploring asset sales. And if the transaction makes sense, I think we'll do it. If it doesn't make sense, we're happy where we are. So, I think we're in a good position. We don't need to do a lot to further change the nature of the balance sheet, but if we have opportunities to sell assets that we believe are non-core for whatever reason and the market pricing is good, then we may take advantage of that. But I don't think it would be huge portfolios per se, more just the smaller pieces here or there where we might have changed our view on an industry segment or something like that, so.

That's really helpful. On the securities, you sold some securities. What was the yield pickup there? And any more color on that would be great. And what did they end the quarter at, maybe the securities book yield? Any more color on that transaction would be helpful.

Yeah. I'll let Andrew jump in there on that.

I don't have the specific details of the yield pickup here in front of me, Manuel, but what we did was it was a small amount of securities towards the back end of December as the -- kind of the bond market moved in our favor, we kind of opportunistically shed some lower-yielding investments, but it's not going to make a significant impact on the overall yield on investments or the overall yield on the portfolio because it wasn't a huge transaction. But I don't have the details here in front of me, but that was the rationale for it. We saw some movement in the bond market. We took advantage of it. I don't think we're going to be doing a lot of additional investment sales at this point, but we'll obviously, as Pat mentioned, continue to be opportunistic if we see opportunities to sell some lower-yielding stuff, we may take advantage of that, but nothing significant [indiscernible] at this point. We have pretty much sold all the investments inherited from Malvern. So, there isn't really any segments of the investment portfolio that we feel like we need to get out of or anything like that at this point.

Okay, thank you. I'll hop back into the queue. I appreciate the comments.

As of right now, we don't have any questions coming in. I'd now like to hand back over to the management for the closing remarks.

Okay. Well, thank you so much. We appreciate everybody who took the time to listen in and ask questions on the call. We appreciate your interest in First Bank, and we look forward to being back in front of everybody when we have the results from the first quarter. So that will conclude the call. Thank you so much.

Thank you for attending today's conference. Have a wonderful day. Stay safe.

Ladies and gentlemen, thank you for standing by. My name is Cherelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank FRBA Earnings Call Third Quarter 2023 Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Ryan, President and CEO. Please go ahead.

Thank you. I'd like to welcome everyone today to First Bank's, Third Quarter 2023 Earnings Call. I'm joined today 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, 2022, filed with the FDIC. Pat, back to you.

Great. Thanks, Andrew. I'd like to start with some high-level remarks before we get some additional detail from Andrew, Darleen and Peter. Overall, I think it's important to highlight, we did close on the Malvern Bank merger during the quarter. We also finalized our facilities and systems integration projects which overall have gone very well so far. The numbers in our financial statements and releases include the impact of this transaction. Given the significant noise in the numbers this quarter, I'm going to focus my remarks on bigger picture items and the strategic impact of the merger. Most importantly, as many of you know, we added significant size and scale in our core Southeastern Pennsylvania market. We now have 1/2 of our overall 26 branch locations in the Greater Philadelphia market, 10 of them in Pennsylvania and 3 of them in Southern New Jersey. And almost 1/3 of our loans are sourced from the Greater Philadelphia and Southern New Jersey markets. Second, we made significant progress on what we call Project Sculpt where we're reshaping our balance sheet. As many of you saw in the release, we sold approximately $95 million in investment securities. We sold another $100 million in residential mortgage loans. We used these proceeds to pay off about $130 million in borrowings. And we also let $68 million in brokered deposits run off during the quarter. The net result of these activities will drive better ROA, improved ROE and increased capital efficiency while also freeing up contingent funding availability. We continue to explore additional sculpting opportunities to shed noncore assets that have been mark-to-market through the acquisition. This project should continue into 2024 as we use proceeds from investor real estate loan payoffs and paydowns to fund some of our newer C&I loan initiatives with the goals of improving capital efficiency, getting more deposits per customer relationship and reducing our overall investor real estate concentrations. Our focus for the remainder of this year and into 2024 will be portfolio optimization and strong profit growth, not overall balance sheet growth. Furthermore, merger benefits have already started driving our core profitability higher. When adding back onetime merger-related costs, we achieved the following results during the third quarter. EPS of $0.42, which is $1.68 annualized; our return on average assets of 1.13%; and adjusted return on tangible common equity of 13.23%. The current earnings run rate could be even higher than these adjusted figures because they do not include a full quarter of interest rate mark accretion, and the numbers during Q3 also include some extra costs that will not continue into Q4. Here's a brief summary of the merger accounting. The final tangible book value per share dilution came in higher than originally anticipated at 15% versus our estimate in December of 9%. But that change is entirely driven by the interest rate market environment and how that moved since December of 2022. The tangible book value per share impact when adding back the interest rate marks was negligible. That doesn't mean it's not real, but rather, it reduces the risk and uncertainty in terms of our ability to earn back that dilution that was recognized during the quarter. Our projected earnings accretion moved much higher for the same reason. A larger interest rate mark equates to more interest rate earnings accretion moving forward. In summary, the integration thus far has gone very well, and we believe the economic benefits derived from establishing critical mass in the attractive market of Southeastern Pennsylvania and the benefits from creating significant scale and cost savings will make this an excellent deal for our shareholders. These benefits will materialize in the form of really strong earnings growth and capital appreciation as we head into 2024. At this time, I'd like to turn it over to Andrew to discuss our financial results in a little more detail.

Thanks, Pat. For the 3 months ended September 30, 2023, we recorded a net loss of $1.3 million or $0.05 per diluted share. Excluding merger-related expenses, the initial credit loss expense on the Malvern-acquired loan portfolio and some other onetime items during the current quarter, adjusted net income was $10.1 million or adjusted EPS of $0.42 and an adjusted return on average assets of 1.13%. The acquisition of Malvern closed on July 17, 2023. The combined stock and cash transaction was valued at approximately $129.7 million with Malvern providing $953.8 million in assets, $727.7 million in loans and $671.9 million in deposits on the date of the acquisition. During the third quarter, as Pat mentioned, the sale of certain acquired investments and residential loans netted us approximately $165 million in cash, which allowed us to reposition our balance sheet to manage interest rate risk and boost efficiency. Net of impact of the loan sales, loans increased by $581.1 million during the third quarter primarily due to the Malvern acquisition. Excluding the remaining balance of acquired Malvern loans, which was $626 million at the end of September, loans declined by $42 million during the quarter. Total deposits were up $567.6 million during the third quarter of 2023, also primarily due to the Malvern acquisition. Excluding the $671.9 million in deposits acquired from Malvern, deposit balance declined by $104.3 million during the 3 months ended September 30, 2023. The decline during the quarter was primarily due to the bank allowing some higher-cost brokered and noncore funding to leave, but the overall industry-wide deposit declines and competitive pricing pressures are also impacting our total deposit levels. Primarily due to the benefits of the Malvern acquisition, our net interest income improved from 3.28% in the second quarter of 2023 to 3.36% in the third quarter of 2023. Because the Malvern acquisition closed in the second half of July, our net interest income only included 2 months of acquisition accounting accretion, which had an approximately $2.7 million positive impact on net interest income. Also, the asset sales allowed for the reduction of certain higher-cost deposits and borrowings, but most of this activity occurred later in the quarter. Deposit costs continued to move higher as market pressure persisted, but the weighted average rate on loans originated during the quarter also moved higher. We believe that a full quarter of accretion income, coupled with the balance sheet repositioning we have will have a positive impact on the margin in Q4, even despite the challenges related to deposit pricing conditions and the inverted yield curve. Liquidity levels remained stable during the third quarter as we used the proceeds from the asset sales to pay off the $130 million in FHLB borrowings that Pat mentioned, and it also allowed some higher cost deposit runoff. We have significant unused borrowing capacity and expect to enhance that contingent funding availability even further in the fourth quarter. As of September 30, 2023, our allowance for credit losses to total loans increased to 1.42% from 1.25% at June 30, 2023. The increase, however, was primarily due to the impact of specific reserves on certain acquired loans. In the third quarter of 2023, total noninterest income declined primarily due to losses on loan and investment sales, which were net against noninterest income on our income statement. The investment and loan sale losses were the result of the aforementioned sale of residential loans and investments that were acquired from Malvern. These assets were marked at fair value at the time of acquisition, but saw some additional decline in value between the acquisition date and the ultimate sale date of the assets, primarily due to continued interest rate movement. Noninterest expenses were $23.5 million in Q3, 2023 or $16.5 million, excluding merger-related expenses. Noninterest expenses, excluding merger-related costs, increased $2.7 million or 19.5% from the prior quarter, primarily due to the new Malvern employees and locations. Annualized Q3 2023 noninterest expenses, excluding merger-related expenses, were 1.83% of average assets compared to 1.93% in the second quarter of 2023. We realized a number of immediate cost savings after the Malvern acquisition, and we are confident that we will hit our announced goals on cost savings as we head into 2024. We continue to believe that one of our strengths is our operating efficiency and believe the Malvern acquisition has provided us additional opportunities to improve our efficiency metrics. Although we continue to operate in a difficult rate environment, the Malvern acquisition, coupled with the balance sheet repositioning we executed during the quarter, has positioned us to improve our core profitability metrics as we move towards 2024. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer for her remarks. Darleen?

Thank you, Andrew, and good morning, everyone. I'll start off by stating that there were no big surprises relative to the [ paused ] activity in the third quarter. While we have initiatives in place focused on retention and acquisition, we're not immune from the unprecedented shift in funding mix and pressure on funding costs experienced within the industry. The second quarter -- in the second quarter, we reported strong deposit growth, primarily in our government and commercial portfolios. In Q3, while total deposits were up mostly due to the Malvern acquisition, as Andrew has mentioned, we experienced a $104.3 million decline, of which $68 million was higher-cost brokered and noncore deposits. We continue to experience declines in our time deposit portfolio due to the rate environment. However, we anticipate some stabilization and potential growth with some of the offers we've recently launched in the market. We experienced larger-than-normal outflows from some of our commercial clients that move funds for rate and/or business purposes. We know who these clients are and while their balances may have declined, they still remain customers of our bank. Our cost of deposits increased 28 basis points in Q3, inclusive of the deposits we onboarded from Malvern, but it's less than the increase we experienced in the second quarter. Again, a result of the rate environment, but overall, we're managing this metric by letting go of higher-rate funding. Our deposit mix continues to shift with noninterest-bearing moving into interest-bearing vehicles and noninterest-bearing funding remains a strategic focus as we build on expanding the relationships that our customers maintain with us. As we move forward, one of our key priorities is to continue to focus on deposit growth. We remain steadfast with our strategic initiatives. And this month, we launched a fall deposit campaign focused on driving growth as well as retaining funds that are at risk because of the competitive landscape. We're excited about our 8 new branches from the Malvern acquisition and the growth opportunities with expansion into the Southeastern part of PA. The sales teams are engaging with our new customers, and the feedback has been very, very positive. So at this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Darleen. As you just heard and read in our earnings release, third quarter was a busy one for all areas of the bank, and that includes the folks in lending. You might recall that we had a very good first half of the year where loans grew $100 million, and we were right on plan to meet our annual growth goal. Despite the good results, we were seeing signs then of the impact of a slowing economy, rising interest rates as well as our increased focus on growth in C&I lending and other loans where relationships include increased levels of deposits. During the third quarter, we continued this focus while consolidating the Malvern loan portfolio into ours. As Andrew mentioned, we sold a portfolio of residential mortgages and onboarded the remaining loans. We think going forward we'll drive a lot of synergies by folding that portfolio into our existing sales teams. You can see in the schedules in the earnings release a breakdown of the portfolio by loan type. Obviously, these numbers are post-consolidation with Malvern so the percentages are impacted by the merger. But we did experience some good organic growth in C&I during the quarter despite some payoffs there. Absent the positive impact of the Malvern merger, overall organic loan growth was negative in the quarter, as Andrew mentioned. We saw some loans, primarily investor real estate loans, refinance out of the bank for lower interest rates elsewhere. And we sold a couple of loan participations to smaller community banks, and we also saw a decline in loans of approximately $50 million because the assets securing those loans were sold. Nearly 66% of this $50 million bucket were non-investor real estate loans, meaning they were mainly C&I and in a couple of cases, businesses just got sold and it was completely out of our control. Overall, on the topic of organic loan growth, we're pleased that the sales teams are holding firm on structure and interest rates while pursuing relationship business. C&I growth, where we find deeper relationships, totaled 73% of new loans booked during the 9 months ending 9/30/23. Looking at our loan portfolio, while we continue to focus on relationship business, our pipeline at September 30 stood at $212 million, up from the June 30 level of $171 million. This is a healthy increase and puts us back at about the same level as we were at the end of the first quarter. In fact, our average for the 9 months has been $214 million. So we're right in line there. And the number of loans in the pipeline hasn't changed much either. At September 30, it was $209 million compared to the average for the year of $208 million. So overall, I'm happy with where the pipeline stands. Regarding asset quality, due to the consolidation with Malvern, there are a lot of moving pieces. And Andrew's comments in the earnings release really lay out well where we are. Overall, I believe that we know the former Malvern portfolio very well. And the pre-Malvern First Bank portfolio has not changed from an asset quality perspective. So I see no areas of great concern from the combined banks. Credit quality to me seems in line with prior quarters. Our objectives for the remainder of the year and into 2024 are to complete the integration of the former Malvern Bank portfolio and continue to grow organically loans and deposits where we can gain relationship business. In addition to our regional relationship management teams, our new asset-based lending group has developed a nice pipeline. Our SBA unit has also been busy building its business and our enhanced focus on our Business Express product, which is for smaller business loans and deposits, has been producing good results. This concludes my comments for the third quarter in lending, and I'll turn things back over now to Pat for final comments. Pat?

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

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

I was wondering if you could maybe expand a bit on some of the efficiencies gained with the deal. Obviously, real nice progress as telegraphed. It seems like there's maybe a bit more to come next quarter. I wasn't sure if you're in a position to get a little more specific on how that may look. And then maybe just more broadly speaking, not necessarily specifics, but just heading into 2024.

Yes. So obviously -- well, I shouldn't say obviously, but there are stages in merger integration. And when we closed on the deal on July 17, there were some folks who were not retained starting at that point. And then there was another group of people that we retained through the end of September to help with the systems and facility integration. So the -- kind of the stages of cost savings really reflect that process. And then as you move forward, there's always some inevitable attrition that comes from folks that you thought might stay that decide to move on or folks you thought you wanted to keep, but it doesn't work out. So things continue to evolve as we move forward. But I think on the people side, Andrew, we've gotten the bulk of what we expect there. And we're continuing to realize savings in other areas in terms of back office, professional service and things like that. So there'll probably be some lingering expenses that we'll need to incur in the fourth quarter just to kind of finalize legacy Malvern expenses and onetime merger-related things. But I think we'll have a pretty good view of the run rate for Q1 when we regroup on our next call. But Andrew, anything you want to add there?

I think that's a great summary. There's probably going to be a little bit of continued noise in the fourth quarter as we wrap up some of the things that we need to wrap up. And still, there's still some people on things that we're figuring out. But yes, I mean, I think as we head into the first quarter of 2024, all that "noise" should clear up and we should continue to see some additional cost savings now. As you then head into the next year, there will be other things that impact expenses, obviously. So there's a lot going on, especially with the size we're at now, but we expect to continue to get some additional benefits. But we did, I think, get more upfront maybe than we even anticipated, but there is still, I think, at least a little bit more to come on the cost savings side.

Okay. Got it. Appreciate that. And then just looking at the balance sheet repositioning in the quarter, a lot was expected and I think a big added benefit of doing the deal. But just curious if you could talk through maybe a bit more what continued opportunity could look like. I know timing can be tough to pin down for sure, but maybe just in terms of magnitude compared to what we've already seen so far.

Yes. I wouldn't say from a magnitude perspective, there would be major additional sales along the lines you saw in the third quarter. There may be some one-off situations where there may be some noncore assets that could be sold. But again, I wouldn't expect anything in the size and scale of what we realized in the third quarter. And then some of it is just more gradual, Justin, where you've got loans that you might view as not strategically necessary and you have negotiations around rate and structure and price that you might hold the line on a little stronger if you're not worried about the loan leaving. So I do think we'll see some situations where some loans will mature or rates will reset. And we might see some continued payoffs and paydowns, particularly in the investor real estate portfolio. And those are things that I expect will continue to happen as we move forward over the next couple of quarters. But I don't think it would be a big headline announcement as much as a gradual strategic transition out of some less relationship-based investor real estate loans into more relationship-driven higher deposit balance C&I loans.

Okay. So -- and combining that sort of with some of the commentary on some loan growth and just the size of the balance sheet, is -- what is the right way to think about it? And I'm sure it's sort of a moving target, but a flat balance sheet? Or is contraction a more likely scenario just looking out over the next couple of quarters?

Yes. Listen, I don't know. Right? At the end of the day, it's all about adding the right types of customers and transitioning out of potential noncore nonstrategic assets. But if our team does an incredible job, which I hope they will, and generating good new core deposit balances, then we've got plenty of activity in the loan pipeline, as Peter outlined, to grow loans a little bit over the next couple of quarters. But if the core deposit funding is hard to come by, then I'd say a flattish scenario where we reposition payoffs and paydowns into new loans is probably more likely. But I'm not overly concerned about whether it's flat or 5% growth. It's about doing the right kind of business. And in this environment, we can generate value without growing by optimizing the portfolio. But that doesn't mean we won't grow if there are good opportunities to add quality customers and relationships though.

Okay. Understood. And then just one last one quickly for me. Just on the margin. Andrew, I'm not sure are you able to walk through just the purchase accounting impact and quantifying, if you can? And then just perhaps what the thought is on how that trend is moving forward?

Yes. So I think in the remarks, I mentioned the kind of net impact of purchase accounting accretion was $2.7 million. And again, that was because the deal closed later in the month of July, that was 2 months. So you can kind of figure out what the monthly run rate. Now that runs down over time, but not quickly. So it will run down gradually over time. But yes, I mean that's all those large interest rate marks that we have gone. So that's kind of the number that we saw in the second quarter based -- or third quarter based on 2 months. You can kind of figure out what the run rate will be kind of the trailing off over time going forward. There's also some impact on some other areas, not just the margin, like core deposit intangibles and things like that, that get amortized back through expenses on the core deposit side. So there is some other impacts, but those are more muted than the interest rate marks, which is the number that I gave you there.

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

Just a big picture. I have your slide deck with the businesses you're focusing on. Are there any businesses that you've exited fully that aren't on that slide?

No. I mean we obviously sold a big chunk of residential mortgage loans that were legacy Malvern loan. But we haven't stopped making new residential consumer loans. But as you know, it's never been a real big part of our business. So we continue to make consumer residential loans where there's a larger relationship involved, and it makes sense. But those are areas where we've historically been very selective, and I think we'll continue to be selective. And then on the investor real estate side, we're definitely not exiting that area. We're just looking to rebalance the portfolio as we move forward to bring down some of that real estate concentration as well as grow in some areas where we think we can generate additional deposit balance.

Okay. That's helpful. In the past, you talked about some of the repositioning opening up room for buybacks. Are those still on the table? It looks like it mainly went to borrowings and the NIM is -- that should help the NIM, and that is a very solid way to use the proceeds as well. But just wondering how you balance that versus buyback.

Yes. Listen, I think in the short run, our focus over the next couple of quarters is going to be replenishing capital. Obviously, the acquisition both with the cash component and the mark to market used up some of our excess capital. I think we'd like to first replenish that. But if down the road, the buyback remains an attractive way to deploy excess capital, we would absolutely continue to look at it. As I think you know, we did -- we did some buybacks early in the year. As we sort of project out, with flat to slight balance sheet growth and significantly enhanced earnings, we expect we're going to be able to replenish capital quite quickly. So I don't think we'll be on the sidelines for too long on the buyback, but in the short run, I think the priority is to get those capital ratios back up a little higher than where they are right now.

What is that medium-term target on CET1? Or what metric would you use?

Yes. I mean we've got internal levels that we keep an eye on. Our Tier 1 risk-based is at 9% right now, which again is a level we're perfectly comfortable with. But I think we'd want to see that a fair bit over 9% before we started buying back stock. So there's not a magic number. It depends on where the stock's trading and other strategic initiatives underway. But I think at 9%, we'd be focused on moving that number higher in the short run. And then as we build up some additional buffers, we'll take a look and see where the stock's trading. And if that's the right way to deploy any excess capital we might have, we'll absolutely look at it.

All right. The growth -- the organic growth took a step back, but the pipeline has rebuilt. Do you -- do you see fourth quarter as you're back to normal? Or is it still going to take a couple of quarters before kind of the different loan and deposit channels are fully back up and running again?

Yes. Again, I think the loan pipeline is robust. So there's no shortage of good quality loan opportunities out there. At this point, we're focused on funding the quality loans that we can fund with core deposit growth. And Darleen and her team and Peter and his teams are out there pounding the pavement every day to find new opportunities and look to grow those deposits. I think we're doing a great job acquiring new customers. The challenge is there continues to be some seepage out of the banking industry into money market, bond funds, et cetera. So sometimes you're adding customers, but you're running in the wind a little bit, and so it may not result in a lot of overall balance sheet growth. But that's going to be the driver. And at this point, we don't need to force it. We can drive strong earnings growth without the need for significant balance sheet growth. Again, that doesn't mean if we have good opportunities, we won't continue to do that. But the way we've been able to reposition the balance sheet and the way we can manage attrition and payoffs and paydowns along with deposit growth will allow us to continue to add new business. Whether that translates into modest growth or flat balance sheet, time will tell. But I don't view that as a huge variable in terms of us hitting our goals on a financial performance perspective.

And Nick (sic), I would add that, as Pat and I think Peter both mentioned, typically right after a deal closes, there is some workouts of loans. We're trying to work out if they're problem loans. And we're getting out of some strategic and nonstrategic relationships. So that will obviously impact the net loan growth as well as we'll see. We will ultimately see some elevated payoffs and paydowns over the next couple of quarters.

That brings up kind of my next comment is that pipeline can help generate -- in the past, the projection was about $200 million in growth just out of that pipeline. Obviously, there's going to be some -- that's not going to be net fully next year. But is that kind of the production you think you can generate even as soon as next year? Just kind of some thoughts there in terms of that production side. Obviously, there's going to be continued runoff. There's going to be continued kind of keeping what you want to keep. But do you feel comfortable with the production side being at that $200 million level? Or could it be a little bit higher?

Yes, I don't see it being higher than $200 million. If I had to guess, I'd say it's going to be less than $200 million, not because there's not good loan opportunities out there, but just because as we see opportunity to reposition the balance sheet, we're not going to force it. Right? There's no reason in this inverted yield curve environment to be borrowing money to fund loans. So we're going to do what we can based on our deposit growth initiatives. And if the headwinds in that market mean that we don't have as much in core funding as we'd like to fund all the good loan opportunities, then we may end up growing less than that $200 million number that we've done in the past. But it's not for lack of good loan opportunities. It's really just dealing with the rate environment we're in and the funding market for it.

Okay. And then what levels of attrition are you seeing on the deposit side? And is that slowing? Is that progressing as expected? Just kind of some thoughts on customer retention?

Yes. I think we knew we were going to have some excess cash coming through the sales of securities and residential mortgage loans. So for a good part of the third quarter, we weren't aggressively pricing deposits. And if it was a rate-sensitive situation, we decided to let some of that money go. And as you saw, almost 3/4 of the decline in deposits during the quarter was a function of letting brokered run off, which is much more of a turn it on, turn it off type funding store. So we've got a nice new deposit campaign going. We've got our group laser-focused on finding core deposits, and we're seeing some initial good results from our current promotion. So I think we'll return to deposit growth in Q4. Darleen, anything you'd add there?

No. I would just ditto your comment that we have some great campaigns out in the market. We have a great sales team that is focused on expanding relationships and acquiring new customers and deposits. So as long as we continue with that trajectory, I think that we'll continue to see positive deposit growth as we move into 2024.

And I just -- I appreciate that. My last question's on the NIM outlook. Is the best way to kind of think about the NIM next quarter is taking that $2.7 million and adding an extra month, because that was 2 months of accretion, add that -- kind of going forward, add some little bit of growth. Are there any other moving parts I should be thinking about on that near-term NIM?

Yes. The market environment. I mean that's the right way to start the analysis, and then you got to factor in where you think deposit costs are going and what you're seeing on the loan side. We do think we're getting to a point where the increase in loan yield is almost offsetting the increase on the deposit funding costs. So we hope to be in a position where the net impact of those 2 variables is neutral from a margin standpoint. I'm not sure we'll be there in Q4. Hope to get there soon. But even with some of those headwinds, just the math of the interest rate accretion earn back, the margin should be moving higher for sure.

Is there like opportunities for security yield pickup? Is there opportunities -- what are like new loan yields coming on? I know it's more C&I, that should be higher. What's in the pipeline. Those are the kind of things that I can't quite see that could be a nice benefit to the NIM going forward?

Yes. And I think anything we're doing, that short-term variable rate is getting priced really anywhere between 8% to 10%. So plenty of yield on the new production, on the floating rate stuff. I think the term fixed rate stuff is now getting priced in the probably 7% to 7.5% range and so if you line up a new incremental deposit dollar, which is probably coming in at close to 5% against a new fixed rate loan at 7.5%, obviously, that's only 2.5% spread, which would tighten your margin a bit. But I'd say of the new loan production we're doing right now, 2/3 or more is in the shorter-term floating rate category. So I think the net benefit on the loan yield side is getting pretty close to matching what we're seeing in terms of the increase on the funding cost side.

Okay. I appreciate that color. And with that, just to follow up briefly, would that kind of give you the expectation as that's bottoming out, that you could see some expansion in the second half next year? Like what's -- any kind of thoughts on the NIM trajectory?

Well, again, I mean, just with the math on the earnings accretion, it's going to move higher significantly in the first half of the year. At some point, that does slow down a little bit. But the downside of larger interest rate marks upfront and the tangible book value dilution just means there's more interest rate mark income to earn back in. So "you get the benefit of that" over a longer period of time. So I don't know. Andrew, we haven't finalized our budget for '24 and beyond, so I don't think we're prepared to give you guidance beyond the next couple of quarters at this point.

Yes. I mean, obviously, there's -- there's, it's all contingent on what the rate environment looks like. If it stays inverted like this for a long time, it'll continue to put pressure on the margin. If we get some -- some relief from the yield curve environment, that will help. But Pat's point is right. I think over the -- at least over the next few quarters, starting in the fourth quarter, we should see some improvement. And then hopefully, it stabilizes. But again, it's going to be very contingent on rate environment and a lot of things out of our control.

At this time, there are no further questions. I would like to now turn the call back over to Patrick Ryan, President and CEO.

Okay. Thank you very much. We certainly appreciate folks dialing into the call today. And we look forward to providing additional updates when we do our fourth quarter update later in January. Thanks, everyone.

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

Thank you for standing by. My name is Kayla Baker and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank FRBA Earnings Conference Call Second Quarter 2023. [Operator Instructions] I would now like to turn the call over to CEO, Pat Ryan.

Thank you, Kayla and welcome, everybody, to today's second quarter 2023 First Bank earnings conference 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.

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 31st, 2022, filed with the FDIC. Pat, back to you.

Overall, the big news, obviously, is the closing of the Malvern Bank acquisition in mid-July. The financial results for the quarter do not include the combined franchises but they do include some minor level of merger-related costs. The main themes from the first quarter continued into the second quarter, that being deposit pricing pressure which hurt the margin but also continued strong asset quality metrics. Here's a key summary of some of the key developments during the quarter. We had strong deposit growth, thanks to some sizable new commercial and municipal accounts. We saw continued quality C&I loan growth. As I mentioned, our asset quality remained very good with net recoveries during the quarter and very low levels of delinquency. We continue to ramp up our new C&I business units with each area meeting or exceeding our budgeted plans year-to-date. We have made, as we mentioned, people and technology investments and those investments are causing some near-term drag on earnings. Nevertheless, we achieved a return on assets of close to 100% despite these strategic investments and industry headwinds. Regarding the Malvern merger, we're very excited about the opportunity to meaningfully grow our presence in Southeastern Pennsylvania. Plus, this combination gives us unique balance sheet management options and flexibility. Specifically, the combined company should end up leaner, maybe even a little smaller but more profitable. As always, we'll be reviewing all options available related to the size and makeup of our balance sheet and we'll follow the path that will drive the best risk-adjusted profitability and shareholder value. Regarding updates on the deposit and funding side. As I mentioned, deposits grew during the quarter. We were up $158 million which is a combination of core commercial deposits as well as holding on to some wholesale funding just to support the balance sheet with extra liquidity during the quarter. We kept liquidity levels higher than usual given the industry conditions plus the need for funding the cash portion of the Malvern acquisition. Our noninterest-bearing balances ticked back up a little in the second quarter which was nice to see but we're still down from where we were at the start of the year. On the lending side, we saw $44 million in loan growth in the second quarter, all of that growth coming in C&I and owner-occupied lending. Our disciplined loan pricing and focus on the most attractive segments helped drive continued improvement in our overall loan yield during the quarter. Overall, we continue our gradual evolution from historically a primarily CRE-focused community bank into more of a lower middle market commercial bank. In summary, our core strategic commercial banking initiatives are bearing fruit and our acquisition will give us nice strategic opportunities along with significant balance sheet flexibility. We have a unique opportunity to take advantage of the current interest rate environment to scope our balance sheet to make us leaner and more profitable and more efficient as we integrate Malvern and move towards 2024. Our franchise will become more profitable, more valuable and more attractive as a result of these strategic investments and balance sheet repositioning. At this point, I'd like to turn it over to Andrew to hit on some of the financial results in a little bit more detail.

For the three months ended June 30th, 2023, we earned $6.8 million in net income or $0.35 per diluted share which translates to a 0.97% return on average assets. Excluding merger-related expenses, diluted EPS would have been $0.36 per diluted share or 0.99% return on average assets. During the quarter, we had strong deposit growth, solid loan growth, continue to improve our liquidity position, maintain strong credit quality metrics as we push forward with finalizing the Malvern Bank acquisition. The current interest rate environment and the steps we have taken to increase on-balance sheet liquidity led to a decline in our margin. In addition, the recent investments we've made in people and new locations led to increased noninterest expenses. The combination of these factors led to a decline in net income of $190,000 from the linked first quarter and a decline of $2.0 million compared to the second quarter of 2022. Solid commercial loan growth, primarily in owner-occupied and C&I lending continued in the quarter. Loans increased $44 million compared to an increase in loans of $55 million in the first quarter of 2023 which puts us right in line with our original goals for the year. Total deposits were up $158 million during the second quarter of 2023 compared to a decline in deposits of $52 million in the first quarter of 2023. We also saw somewhat of a bounce back in noninterest-bearing deposits which were up $13 million during the second quarter of 2023 compared to down $40 million during the first quarter of 2023. Primarily due to the increase in deposit costs, offset somewhat by the increase in the average rate on loans. Our tax equivalent net interest margin decreased to 3.28% for the quarter ended Q2 2023 compared to 3.52% in the previous quarter. We continue to expect pressure on the core margin as the inverted yield curve environment persists. However, we are continuing to hold the line on loan pricing which is resulting in higher loan yields and the Malvern acquisition has given us significant liquidity and balance sheet optionality which will allow us to mitigate the increases to our cost of funds. The Malvern acquisition will also impact the margin as certain fair value adjustments required at the time of acquisition or accrete or amortize through interest income or interest expense. We are still working through the exact impact of these adjustments. Liquidity levels increased and we were able to reduce borrowings by $100 million during the second quarter due to increased deposits. We have also continued to enhance our contingent sources of liquidity by adding additional borrowing capacity by pledging additional commercial loans at the Federal Home Loan Bank and pledging additional securities at the Federal Reserve Bank. As of 6/30, 2023, our allowance for credit losses to total loans remained steady at 1.25%. We maintained the percentage based on a modest level of net charge-offs year-to-date of $206,000 with net recoveries of $109,000 during the second quarter of 2023, a stable level of problem loans and our view on future economic activity has not changed materially. Due to the stable level of allowance as a percentage of loans, coupled with the net recoveries, our credit loss expense was $449,000 during the second quarter of 2023 compared to $1.1 million in the first quarter of 2023. In the second quarter of 2023, total noninterest income remained relatively stable compared to the preceding quarter, excluding losses on investment sales which were net against noninterest income in the prior quarter. Gains on sale of loans increased slightly compared to the preceding quarter as SBA loan sale activity continues to slowly gain steam but loan swap activity continues to be slow which resulted in the reduced loan fees. Annualized second quarter 2023 noninterest expenses were 1.96% of average assets or 1.93%, excluding merger-related expenses which compares to a peer average of 2.10%. In total, noninterest expenses were $13.8 million in the second quarter of 2023, up $319,000 or 2.4% compared to Q1 2023. The increase was primarily due to higher salaries and employee benefits and regulatory fees, offset somewhat by lower merger-related costs. The slight increase in salary and benefits was primarily due to the merit increases that occurred in the back end of the first quarter. The increases in regulatory fees was due to an increase in FDIC assessment fees. We have work to do to finalize the system conversion for the Malvern acquisition and expect to incur the majority of the final merger-related expenses in the third quarter. We will start seeing some of the benefits of cost savings immediately but plan to realize the majority of the savings by the end of the fourth quarter. We continue to believe that one of our strengths is our operating efficiency and have refocused our efforts on cost control as evidenced by our recent closure of our Cranberry branch on June 30th. As we work to fully integrate the customers, locations and employees from the Malvern acquisition, we will see some volatility in our earnings over the next few quarters. As Pat mentioned, we are well positioned to improve core profitability as we move towards 2024. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer, for her remarks.

After a challenging first quarter of deposit outflows and uncertainty in the market, I'm happy to report on strong deposit growth during the second quarter of 2023. This reflects the continued trust and confidence our value customers have in our community relation-driven financial institution. Our total deposits have increased by $106 million during the first half of 2023. The growth in deposits is proof of how we are steadfast with our strategic initiatives such as retention and expansion of our existing customer base, acquisition of new commercial and consumer clients and our deposit campaigns that help to mitigate deposit outflows while focused on building relationships in a competitive rate environment. We began the second quarter with the $44 million increase in total deposits in April. We saw an increase of $20 million in deposits in May and deposit balances were up $94 million in June. Much of the growth comes from our commercial and government portfolio. During the second quarter, we onboarded new government clients to the bank through the RFP bidding process. Although we let some high-cost money leave the banks, we still experienced the increase this quarter in our cost of deposits of 50 basis points from first quarter. Clients continue to be rate sensitive and we continue to evaluate our pricing accordingly. I will notate some of the key factors of our deposit performance. As mentioned, total deposits increased $158 million during the second quarter as a result of our continued focus on retention, expansion and acquisition deposit initiatives. This gets us back on track for our 2023 deposit growth goals. We experienced growth in our noninterest-bearing demand deposits in the second quarter despite the challenging rate environment and losses in the first quarter. This demonstrates the bank's ability to navigate challenges and capitalize on opportunities through our deposit campaigns and targeted marketing strategies. Time deposits decreased slightly as compared to prior quarter. This is intentional by allowing some single service clients and rate shoppers to leave the bank and replacing with relationship-driven business. Our cost of deposits has increased 50 basis points from the first quarter as a result of the competitive landscape we continue to remain mindful of this when considering future pricing adjustments as well as the potential effect on our margin. Our deposit mix has remained relatively flat from the first quarter but we believe the current rate environment will continue to be a challenge but we are strategically focused on improving our deposit mix by driving in noninterest-bearing core deposits. Our deposit pipeline remains healthy with active campaigns out in the market to drive in new customers and new deposits. We're excited about the potential deposit growth opportunities as we welcome eight new branch locations into our footprint as a result of the Malvern acquisition. We have changed our retail staffing model by introducing the market manager role within our network which oversees 3-4 branches with a "beat on the street" approach. These individuals are tasked with not only being engaged in the community but specifically seeking new commercial deposit opportunities while coaching their branch teams to do the same. As Andrew mentioned, we closed our Cranberry location and consolidated it into our Monroe branch to create some efficiencies and increase profitability of that location. That transition has been growing very well and our clients have not been negatively impacted since the branch was only four miles away. After opening our Fairfield location this past April which has already exceeded our 2023 deposit growth goal, we look at additional opportunities to expand in the Northern New Jersey and Central New Jersey market. Overall, we are very happy with those second quarter successes and look forward to a favorable third quarter and throughout the remainder of the year. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks.

I'll try now to provide some additional information not already covered by the team. After a strong first quarter of 2023, I think we had another good one in Q2, as you just heard, loan growth was $44 million which puts us just under $100 million in growth for the six months. As I think Andrew mentioned right on plan. The second quarter mirrored the first quarter, we continue to be selective about new business. We're continuing to be focused on C&I lending. We've talked about that previously. C&I brings with it more floating interest rates on loans as well as much higher relationship deposits than you'd see in, for example, investor real estate loans. We've seen progress on increased efforts here which states back a few quarters now. Last year, for example, for all of 2022, C&I loans closed and funded were just under 50% of all new loans brought into the bank. That includes the fourth quarter of 2022, where the percentage of new loans falling to the C&I bucket rose to 70% of new loans. In Q1 of this year, C&I loans comprised 74% of all new loans closed and funded. And then this past quarter, C&I loans represented 73% of new loans closed and funded. We're happy the way our results are trending there. New loans closed and funded of all types in Q2 totaled $91 million, up slightly from $86 million in the first quarter. Gas loan payoffs were $45 million in Q2 which was an increase from $55 million, I'm sorry, $35 million in Q1 but below the average level of payoffs that we saw last year of almost $50 million per quarter. The other factor is obviously impacting net loan growth in all periods are normal term loan amortization and line of credit changes. Regarding line of credit usage this quarter, it was up slightly from 41% of total commitments to 3.31% to 43%. The average for the past year, past four quarters, has been 42%. I don't think there's any question that new business generation for us is a little slower than what we experienced in 2022. This is due to our focus on relationship business, the continued impact of rising interest rates and general economic uncertainty. Last year, new loans funded on average for each of the first three quarters totaled $127 million. Then in Q4 last year and for the first two quarters of 2023, new loans funded have averaged about $87-$88 million per quarter. One benefit to the rising rates has been a decline in loan payoffs which averaged $31 million for each of the past three quarters compared to almost $60 million for each of the first three quarters of 2022. At June 30th, our loan pipeline stood at $171 million, down 21% from the $218 million level at the end of Q1. The total number of individual loans in the pipeline also declined by just about exactly the same percentage. Overall, I'm not dissatisfied with the pipeline but the economic headwinds we've experienced, we've slowed down things a bit and we're taking a cautious approach to underwriting new business. I know I mentioned last quarter that a few years ago, we set a loose target on our pipeline of 50% of loans, the cap for investor real estate. At the end of 2022, we were just below 50% and we were glad to see for Q1 that investor real estate loans were around 30%-31% of the pipeline in terms of total dollars. We have stayed in that range in Q2 where investor real estate loans made up just 35% of the pipeline. We also continue to track on the pipeline anticipated deposits as a percentage of anticipated loan volumes and we continue to see positive trends where that ratio of deposits to loans is growing. To summarize new business efforts, we're focusing on finding and growing our business with relationship-oriented borrowers. We are doing all the things we think we should around setting and monitoring concentration limits and stress testing. We continue to be very well diversified within the existing portfolio itself. On the top of the asset quality Andrew's comments in the earnings release lay out where we are, we had net recoveries in the quarter and nonperforming loans were up only very slightly. Delinquent loans continue to be low, around 24 basis points at %6.30-23%, down from 35 basis points at the end of Q1. Overall, I'm seeing no areas of great concern and things from my perspective, continue to look very good year. That recaps the second quarter in lending. Our objectives for the second half of 2023 will be to continue to organically grow loans and deposits where we can gain relationship business and at the same time, integrate the Malvern Bank staff and their book of business. The Malvern integration has just begun but we think we know the staff and then the portfolio very well at this point and we anticipate no major issues. With that, I'll turn things back over to Pat for some final comments.

At this time, I think what I'd like to do is turn it back over to the operator to open things up for Q&A.

[Operator Instructions] Our first question comes from Nick Cucharale with Hovde.

With respect to the balance sheet flexibility you mentioned in the prepared remarks, I know it's very early stages, considering you disclosed the deal last week. Have you made any decisions on the path forward at this point? I'm curious if you've used the accounting treatment to restructure the securities portfolio or pay down their sub debt among other options at this time.

Yes. I think the short answer, Nick, is everything is on the table. We've taken a look at the balance sheet and prioritize it from least strategic to most strategic and the obvious path forward would be to focus on selling off assets that are viewed as less strategic and gradually work our way down the list. Now, we haven't set any specific targets for exactly how much will ultimately be sold versus retained and some of it will depend on what we view as the reasonableness of the market and the bids for things that we might consider selling. It will be a fluid process but I think the good news is we've got a number of different options available. I think that gives us the ability to really try to optimize in terms of what we keep, what we don't keep and what the combined franchise looks like going forward. Stay tuned. We hope to be in a position to have a lot of that work finalized by the end of the third quarter so that when we're back reporting plus or minus 90 days from now, there'll be a lot more visibility in terms of what that looks like.

Then on the C&I growth which was strong again this quarter. Are there any particular niches you're targeting with this initiative? Or is it broad-based across a whole host of industries?

Yes. Well, I think within C&I, it's broad-based. As you know, Nick, we've got a couple of younger business units, not brand new but things we've been rolling out over the last 12 to 18 months that are doing well. We've got a particular focus now in terms of small micro business lending loans under $500,000 to the smallest businesses. We're continuing to see nice traction with our private equity sponsor group in terms of opportunities to finance portfolio companies within that segment. And our asset-based lending team is now fully staffed up and running and we're starting to see some traction there as well. And all of that is in addition to our core market teams which has been and continues to look for quality C&I opportunities within our, New York just still got the footprint. We got a lot of different levers in terms of business units targeting small and mid-size business opportunities. That's obviously our "bread and butter," our strategic focus. It's nice to see that we're gaining some added traction there.

Then you noted the systems conversion in the prepared remarks, when is that scheduled to take place?

The weekend of September 9, 10, 11, I believe, is the current schedule.

Then lastly, with loan growth on track through midyear, can you remind us of your organic loan growth target for the full year?

We typically target in terms of just pure core organic growth, plus or minus 200. Obviously, with round numbers of 100 and net growth so far, that puts us right on track. Listen, I think there's plenty of opportunities to get to that 200 number but I'd also tell you that probably this year more than most, being additionally selective and making sure it's the right deals with deposits, with our pricing. Our goal is doing the right business. If we end up hitting the 200 number, that's fine. If it ends up coming in less than that, we're not overly concerned.

[Operator Instructions] Our next question comes from Manuel Navas with D.A. Davidson.

Just a follow-up on the loan growth. I understand this year could be a little bit influx. In the commentary, there's some selectivity in the pipeline. Can you just discuss demand, general demand? Is that's also, it seems like it's ticked down as well?

Yes. Listen, there's certainly less activity but there's not no activity. There is still a fair amount going on. I'd say businesses and borrowers are being a little more deliberate but they certainly haven't come to a grinding halt in any sense. There's still plenty of opportunities. When you think about it in the context of net loan growth, you've got to remember the other side of the equation which is payoffs to pay down. We're almost certainly going to do less new business this year but we won't need to do as much new business to grow loans because payoffs and pay downs have slowed up as well.

As you get larger, do you have a sense for where that $200 million annual target could reach? This year's is influx, I hear that. Any thought on where it could be in future years?

Yes. We haven't focused on that yet. We're focused right now on continuing to do good quality business but also on this balance sheet repositioning project. We still trying to figure what the size of the balance sheet is going to be at the end of the year, let alone how much we're going to grow as a percentage off of that. I think as we get larger, when we were a small quasi start-up, the loan growth was critical because we needed the revenue to cover the expenses to drive profitability. I think as we grow and as we mature, there's not going to be as much of an emphasis on driving growth rates at the levels that we saw in the past, although we're going to want to continue to do quality business. Really, the emphasis is around portfolio optimization. If we can add the right type of customers, I think we've got capacity to continue to grow with that 200 or more number. We're going to be adding the right business. Quite honestly, Manuel it's going to be somewhat driven by what can we fund with core deposits. Depending on the deposit market and what's available there, we may have the ability to grow $300 million, $400 million but we may choose not to because we don't want to have to go out and bring in high price money to do it. It's a balancing act and it's really as much art as science. There's not a specific number we're trying to hit. If we've got lots of good opportunities that we can fund with core deposits, I think we're happy growing more than 200. If the funding is an issue and/or the quality of the borrower and relationship doesn't make us feel good, then we may choose to do less than that.

My follow-up now is on deposits. Really strong growth there. I just wanted to follow up on two comments during the presentation. One, you have the market manager role as you, you have this renewed impetus and market concentration to get more deposits. Then it seems like you're tracking deposits to loan on a lender-specific ratio more. Can you kind of talk about where those two initiatives overlap and how much of deposits are you getting from your lenders specifically?

Yes. Listen, the obvious answer is we're trying to get all hands on deck to grow quality core deposits. We've been working closely with the RMs for years to continue to drive deposit growth along with their loan portfolio and what we've seen in our review is the ratio of deposits to loans for our RMs with portfolios continues to tick up higher in many cases, close to 40%-50% which we think are pretty good levels. That's just one avenue for driving depositors. The other and other area, not the other area but another area is trying to figure out how do we get more out of the branch network. I think as Darleen mentioned, really repositioning, not necessarily adding a lot of staff but figuring out how we can reallocate staff that we have to get more people out into the market. Listen, while we all love the fact that people don't come into the branch as much as they used to. We're also taking advantage of that reality by reshuffling positions so that our staff has time to get out in the market more and spend more time attracting and developing new relationships. I think what Darleen was referring to there was really just a reallocation so that folks have more time out in the market, partly because that's what we need to grow deposits and partly because they're just not needed as much inside the branch.

Has pricing across the second quarter and into the third quarter, has the pricing pressure shifted at all? I'm sure it's high all the time but is it a little bit less high here in June and July?

I think a little less high is a good way to describe it. Not quite as frenetic as it was. Listen, I think part of it is a lot of banks, ourselves included, just decided post SBB signature that it was worth paying a little more to have extra liquidity. As the market calms down and as we're seeing stabilization, I think all of us are saying, "Hey, maybe I don't need to carry as much excess liquidity," and therefore, I don't need to be quite as aggressive on the deposit pricing side. I think that's part of it. Part of it is just folks are starting to feel like we're getting to the end of the rate cycle and there's not this constant expectation that rates are going to move, higher rates are going to move higher. I think that takes a tiny bit of pressure off of the pricing negotiation. Andrew, you mentioned to me that some of your conversations with folks on the wholesale side, you are starting to see a little less pressure there. You want to jump in on that point?

Yes. It definitely seems like the market is settling down. It's still competitive for some of the wholesale funding but it definitely feels like the pricing pressure on when the Fed just moved this week, maybe we won't have to move rates on the wholesale side as much as we had in the past. It seems like things are settling down. Like you said, Pat, it's still very competitive. Rates are still a challenge but it definitely seems to be muted at least a little bit with what we've seen in the first six months of the year.

There are no further questions at this time. I will turn it back over to Pat Ryan.

Well, thanks, everybody. Appreciate you taking the time to listen in. We certainly appreciate the questions during the Q&A. We look forward to being back in front of focus at the end of the third quarter with, I would guess, lots of updates on what we've been doing from an integration standpoint as long as well as updates on the core business. Lots to talk about and we look forward to that meeting in about 90 days. Thank you, everyone.

That concludes today's conference call. You may now disconnect.