First Bank (FRBA) Earnings Call Transcript

Thank you. Hello everyone, thank you for joining us and welcome to the First Bank Second Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Patrick Ryan, President and CEO. Patrick, please go ahead.

Thank you. I'd like to welcome everyone today to First Bank's second quarter 2026 earnings call. I'm joined by Andrew Hipschman, our Chief Financial 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 31st, 2025, filed with the FDIC. That, back to you.

Thank you, Andrew. I'll share some high level thoughts on the quarter and then turn it over to you. I'll hand it over to Andrew and Peter to provide a little more detail. I think in summary Q2 was a much better quarter. We saw a return of solid asset growth. Our loans grew 68 million during the quarter and with year-to-date growth of 79 million And we're getting close to being back on pace for our annual loan growth goal of $200 million for the year. Our deposits grew 96 million during the quarter, which actually pushed us ahead of our deposit growth plan for the year. Our margin held in at 3.68%. We realized a small decline in loan yields that were largely offset by a modest decline in deposit costs. Our provision for credit losses came down significantly to more normalized levels as the profile within our small business portfolio showed signs of improvement. Our non-interest expense came in at 20.1 million, down from an artificially high level in the first quarter. We are making progress with our goal to get our non-interest expense to average assets down below 2% and eventually back closer to our longer term average of 1.90%. The pre-provision return on average assets came in at 1.69%, an increase of 10 basis points compared to the prior quarter. Two important points about the results. Regarding the asset growth, the return of stronger asset growth feels sustainable. Pipelines are strong. As we've discussed, the new production engine has been very busy, and Peter will provide some more details on that later. Absent abnormal payoff activity between now and the end of the year, we believe we should be able to meet or exceed our $200 million loan growth goal for the year. Regarding deposit growth, we liked that it really picked up in the second quarter as we continued to bring in new customers and we saw a return of money that had fluctuated out earlier in the year. The new growth did not come without a cost as the competition for deposits in our markets remains high. The decision to bring in higher cost money relates to the quality of our loan pipeline, and we feel good about where things stand at the moment. Regarding asset quality, we think overall things seem to be holding in. We feel better about the trends in the small business portfolio, which helped fuel the significant reduction in our charge-off levels for the quarter. Our non-performing asset ratio did tick up as one CRE loan moved to non-accrual, but we're comfortable where we stand with the loan given collateral and guarantor support. Regarding balance sheet strength, even though we had strong growth in the quarter, our capital position remains very strong. Our tangible common to tangible asset ratio is right about 10 percent, and our allowance for credit losses to loans is at 1.38 percent, both levels that compare favorably to peer averages. In summary, I'm excited about where we're we stand at the midpoint of the year. The return of strong balance sheet growth coupled with a stable margin, normalized credit expenses, and slattish to minor non-interest expense growth should help us yield even better results as we move through the back half of the year. At this time, I'd like to turn it over to Andrew to discuss some additional details on the financial results. Andrew.

Thanks, Pat. For the three months ended June 30th, 2026, we recorded net income of 10.9 million or 43 cents per diluted share, which translates to a 1.09% return on average assets. A 3.3 million decline in credit loss expense compared to the first quarter drove improvement to our bottom line. diluted earnings per share increasing 13 cents or about 43% on a linked quarter basis. Year over year, EPS grew 6.6%. net interest income increased 798,000 compared to both the linked and prior year quarters compared to the linked quarter net interest income increased primarily due to growth in average loan balances. Rates were essentially stable on both sides of the balance sheet, as our net interest margin was 3.68% down just one basis point from the linked quarter. Compared to the second quarter of last year, net interest income increased due to a combination of growth and slightly better spreads, which drove a three basis point improvement in the margin. We believe our second quarter net interest margin remains strong and compares favorably to our peers. We expect continued declines in acquisition accounting accretion over the next several quarters and the ongoing competitive landscape for core deposits remains challenging. However, the yield curve has steepened and we continue to replace the runoff of some lower yielding assets. with higher yielding loans, offsetting some of the deposit pressure. We continue to manage a well-balanced asset and liability position, and we anticipate continued loan and deposit growth will drive increased net interest income, regardless of what happens with rates. We're very pleased with our balance sheet growth during the quarter. Loans grew a growth of 68 million. This parallels our robust deposit growth, which was driven by new commercial relationships and growth in existing commercial client balances. Our sales teams are deposit focused and we are seeing good deposit activity throughout our regions and teams. Financier's bearing balances grew 45.1 million during the quarter, or about half of our $96 million increase in total deposits for the quarter. We also added some broker and government deposits to support our robust loan production. Credit costs improved from the link quarter. However, we saw some additional charge-offs, again, almost entirely related to our credit score small business portfolio. Looking ahead, we expect to see continued improvement in credit costs in the small business portfolio, and we are not seeing any red flags in our other loan segments. Overall, asset quality remains generally stable and our allowance for credit losses to total loans is essentially flat at 1.38%. As Pat mentioned, we saw a slight increase in NPAs during the quarter, which again was related to one new non-accrual CRE loan. We continue to believe our reserve coverages are very strong. Non-interest income was $2.1 million for the second quarter of 2026, compared to $2.4 million in the linked first quarter and $2.7 million in the second quarter of 2025. The decrease from the linked quarter was primarily due to lower earnings from our investments in certain small business investment funds, and the year-over-year decline was primarily to a $397,000 gain on the sale of a corporate facility in last year's second quarter. Non-interest expenses were $20.1 million for the second quarter, down by $797,000 compared to $20.9 million in Q1. The decrease primarily reflects lower salaries and benefit costs during the second quarter, and to a lesser extent, lower second quarter occupancy expenses. Looking ahead, we believe we can continue to drive growth without adding to the expense base, and we have opportunities for some additional expense savings. Our continued focus on tight expense management produced a 54.5% efficiency ratio and marked our 28th consecutive quarter of operating with a sub-60% efficiency ratio. I believe this continues to be a differentiating strength for us. Tax expenses totaled 3.7 million for the second quarter with an effective tax rate of a little over 25%. This compares to 22.7% for Q1, which included the benefit of discrete items related to stock compensation activity. anticipate our future effective tax rate will be approximately 25%. Our capital ratios remain strong and we executed share repurchases totaling about 325,000 shares during the quarter, bringing our total to 5.5 million or 359,000 shares under the currently approved program. Going forward, we aim to continue driving shareholder value through a combination of core earnings, a stable cash dividend, and share buybacks as applicable over time. I'll now dig into the deposit activity a little further. During the quarter, we saw solid activity onboarding new relationships and expanding existing relationships. Total deposits increased a little over 96 million from March 31st to June 30th, with non-interest bearing balances increasing 45.1 million. However, average interest bearing deposit balances were up only 41.4 million in average non-interest bearing balances were actually down 461,000 during the quarter. This was due to strong growth towards the end of the quarter, which should be a nice tailwind as we head into the back half of the year. Total cost of deposits came down one basis point during the quarter from 2.43% in Q1 to 2.42% in Q2. Going forward, we believe heightened industry competition will place some pressure on deposit pricing. But we do remain focused on striking the appropriate balance between growth and cost discipline. Overall, we continue to execute effectively against our dual priorities of deepening relationships while prudently managing funding costs. Moving ahead, our deposit funding pipeline is strong with some nice new commercial and government opportunities as we continue to retain and grow existing relationships. We're also utilizing retail promotional pricing when prudent and necessary to win in this highly competitive market. time i'll turn it over to peter cahill our chief lending officer for his remarks peter.

Thanks, Andrew. As Pat and Andrew both mentioned, in the lending area we had a much better quarter in Q2, following up modest loan growth in the first quarter with new business activity, which resulted in loan growth of 8.3% annualized. Excuse me for the period new loan closed and funded in the second quarter total total of 174M dollars. Up 64% from the 1st quarter and you might recall the Q1 was not a bad quarter from the standpoint of new business. The $106 million of new loans we generated in Q1 equaled the quarterly average of both 2024 and 2025. We're very pleased with our performance finishing the first half of the year. As we've talked about previously, while investor real estate loans will always be a big part of our business, we've been looking to drive C&I lending for a few years now. C&I and owner-occupied real estate made up 61% of our new loans during the first half of the year. investor real estate at 33%, and consumer loans making up the balance. As we grow, the volume of loan payoffs grows, and this continued in Q2. This past quarter, we experienced $87 million in payoffs, 19% greater than what we had in Q1. Payoffs bank wide were 62% investor real estate loans for the first half, mainly due to refinancing or the sale of the underlying assets. Regarding our new loans pipeline, our sales team continues to be active, and the pipeline continues to be in good shape. We finished Q2 after a solid new business quarter at a level of what we call probable fundings that totaled $323 million. This is in with the level at the end of March, which totaled $325 million. If one breaks down the components of the pipeline at June 30th, C&I and under occupied loans made up up 62% of the pipeline, again, in line with previous quarters. As we've talked about these calls, there are more deposits and ancillary business to CNI relationships. salespeople, or relationship managers. And as Andrew pointed out, they're focused on deposits as well as loans, and their goals are set accordingly. All in all, I think the pipeline is strong and positions us well to finish the year very nicely in terms of both loan and deposit growth. On the topic of asset quality, we've mentioned some continued softness in the credit scored small business portfolio, but relative to asset quality, did much better than we did in Q1, and we expect to see improvement over the next few years. over time based upon the changes we made there. The earnings release mentions non-performing loans increasing marginally during the quarter. As both Pat and Andrew, I think, mentioned, this is related to one credit. And as Pat mentioned earlier, our expectation there is repayment in full. In summary, loan growth for the second quarter was strong. Our plan is to continue to grow in all of our business segments and meet or exceed the bank's plan for the year. That concludes my remarks about lending, and I'll turn things back now to Pat for some final comments.

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

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

Hey, good morning, guys. This is Bader, just on for Justin Crowley. Yes, good morning, Bader. Starting on deposit growth this quarter, you know, you highlighted the performance of a non-interest bearing. It seems like you typically get like some nice pickup in the second quarter. Can you talk more about that trend and to what extent that is driven by seasonality and how you're thinking about maybe the deposit mix evolving from here in the coming quarters?.

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

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

Yes, I think if you're out in the market trying to get new dollars, you know, we're seeing the the pricing anywhere from four to you know four ten four fifteen four and a quarter in some in some cases um So, you know, certainly that's up a little bit. I think you see that same increase, you know, if you look out in the wholesale markets in in terms of what, you know, broker or that kind of money is going for now. You know, it's all north of four, which certainly it wasn't, you know, or six months ago. Now, the good news is the five and the 10-year Treasuries and the FHLB rates are moving higher. And so we're getting some of that back in terms of the pricing on our new loan production, which is why we're targeting flat down slightly on the margin through this year, but I think what we saw in the second quarter in terms of the the margin impact one basis point decline. You know, I think that's hopefully we can keep it flat, but you know, we don't see it declining more than a basis point or two as we move forward. And obviously, loan mix plays a role there too. But we're earning healthy yields on the new loan production. the incremental spread on a new loan versus a you know, dollar we have to raise out in the market in terms of the higher price money, you know, whether it's four or four and a quarter, that obviously is diluted to the margin, but not every dollar we're raising is at the highest price point. So, yes. hopefully that you know provides a little bit of uh our view on where we see things heading.

Got it. That's some good detail. Thank you. And maybe one last question, if we could pivot to expenses. Could you walk us through the decrease in the expense line this quarter? We're just trying to understand the underlying moving parts and whether the current quarter's expense run rate is sustainable or if we should anticipate normalization in the subsequent quarters.