First Bank
Q2 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Company Representatives:]

Patrick Ryan - President, Chief Executive Officer Andrew Hibshman - Chief Financial Officer Peter Cahill - Chief Lending Officer Emilio Cooper - Chief Deposits Officer

[Operator:]

Good day, and welcome to the First Bank Second Quarter 2021 Earnings Call. All participants will be in a listen-only mode. . Please note, this event is being recorded. I would now like to turn the conference over to Patrick Ryan, President and CEO. Please go ahead.

[Patrick Ryan:]

Thank you. I'd like to welcome everyone today to First Bank's First Quarter 2021 Earnings Call. I'm joined today by Andrew Hibshman, our Chief Financial Officer; Peter Cahill, our Chief Lending Officer; and Emilio Cooper, our Chief Deposits Officer. Before we begin, however, Andrew will read the safe harbor statement.

[Andrew Hibshman:]

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, 2020, filed with the FDIC. Pat, back to you.

[Patrick Ryan:]

Thank you, Andrew. I'd like to start off with some high level comments before turning it over to Andrew for some additional information on the financials, as well as Peter and Emilio on lending and deposits. I think Q2 was another very good quarter for us. We saw the continuation of positive trends from the past several quarters, namely our cost and deposits continued to move lower, our net interest margin held in at a very strong level, and our deposit growth continued to be driven by non-interest bearing deposits. Furthermore, credit metrics continue to improve, our delinquencies declined, our deferrals were down and we experienced a very low level of net charge offs during the quarter. We also saw improvement in areas that lagged a bit in Q1. Our core non-PPP commercial loan growth returned to very healthy levels in the second quarter and our non-interest expense was down from Q1 showing our expense control initiatives were proving successful. We didn't realize a decline in non-interest income from prior quarters, but the underlying trends related to SBA loans and loan swap fees remain strong, and we expect we'll have some good quarters in the second half of this year in those areas. PPP did come to an end in Q2, but we had another strong effort in round two generating nearly $108 million in addition of PPP loans in 2021. PPP income of $1.3 million helped during the quarter, and we still have about $4.5 million in PPP fees that have yet to come into earnings. The improved credit trends and solid economic growth during the quarter allowed us to reduce our ALLL, down from 1.24% to 1.118% excluding PPP. The future direction of the ALLL will be data driven, based on credit quality metrics and underlying economic trends. Our efforts to focus on quality earnings and earnings growth are clearly bearing fruit. Our return on average assets came in at 1.48% and our return on tangible common equity was 15.37%. These are very strong levels of profitability and up significantly from a couple of years ago.

[Andrew Hibshman:]

Thanks Pat. For the three months ended June 30, 2021 we earned $8.9 million in net income or $0.45 per diluted share. That compares to $4.1 million or $0.21 per diluted share for the second quarter of 2020 and $9.7 million in net income or $0.49 per diluted share during Q1, 2021.The factors contributing to another strong quarter included a stable net interest margin, controlled non-interest expense and a credit to the provision for loan losses. We also had a nice bounce back quarter as Pat mentioned in non-PPP loan growth. Excluding PPP loan activity, loans were up $85.7 million in Q2, 2021, compared to a decline in non-PPP loans of approximately $82.1 million in Q1. During Q2, 2021 we originated $5.7 million in new PPP loans as the program came to an end, and $59.6 million in PPP loans were forgiven during the current quarter, leaving $139.9 million in PPP loans outstanding at June 30, 2021. During Q2 we realized $1.3 million of PPP fee income compared to $1.6 million in Q1, 2021. As of June 30, 2021 as Pat mentioned, we still have $4.5 million in deferred PPP loans remaining. The strong non-PPP loan growth during the quarter gets us back on track to meet our loan growth goals for the year and we continue to feel good about the strength of our commercial pipeline which Peter will expand on in his remarks. We also had a strong deposit growth quarter while continuing to improve our deposit mix. Total deposits grew $65.7 million during Q2, 2021 and non-interest bearing demand deposits now represent 26.3% of total deposits, up from 23.9% at June 30, 2020 and 25.4% at March 31, 2021.

[Peter Cahill:]

Thanks Andrew. As has been outlined in the earnings release and commented on by both Pat and Andrew, total loans in the second quarter increased nicely by $31.8 million or 1.6% from the end of the first quarter 2021. They also mentioned our participation in PPP. With that program winding down and entering the forgiveness stage, I'll focus my comments here on non-PPP lending topics. So after a first quarter, it was driven by loan prepayments over $100 million alone in our Investor Real-Estate segment. Non-PPP loans in the first quarter ended up being down by around $82 million. A quarter ago I talked about a strong loan pipeline and non-PPP loan fundings were in fact very solid in the second quarter. In Q2 alone we had growth in non-PPP loans of around $85 million, which more than offset the non-PPP loan decline in Q1. A lot of the second quarter growth was due to new investor real estate loans replacing the volume that paid off in the first quarter. Any changes in loan mix overall were minor and are reflected in the financial highlights section of the earnings release. You’ll see movement in both commercial and industrial loans, which is where PPP loans are carried, as well as an increase in investor real-estate loans.

[Emilio Cooper:]

Thanks Peter. Building upon the momentum from last year in Q1, the team rallied to post the stellar outcome in deposits for Q2. As Pat and Andrew have shared, we made strong forward progress on our key strategic objectives related to the deposit side of our business. We continue to lower the cost of deposits, improved the mix, and grow non-interest bearing balances. What we see happening is the result of great collaboration, partnership and teamwork between the lending, cash management, marketing and deposit teams. A core competency of our people is the ability to work together to achieve positive results for our customers and prospects. We get excited about providing tremendous value and unmatched personalized service to our customers, and exceeding their expectations of service delivery from the bank. Leveraging the success of the work we did in both rounds of PPP, the team continued to advance the ball and move the needle in winning operating relationships of targeted prospects, in head-to-head matchups against large national and smaller regional and community banks. Our investment in technology and in our team is paying us back in huge dividends as our acquisition is strong and our deposit pipeline continues to grow. While we are pleased with our performance to-date, it is important to note we are not resting on our laurels. We fully expect to see some pullback in balances as customers continue to get back to full productivity and begin to utilize stored cash stockpile during the pandemic. Our goal, I mean it’s an ambitious one, is for us to match our rate of acquisition to outpace any potential reductions when this occurs. To accomplish this, the team is focused on outbound prospecting activities, supported by targeted and customized marketing. We also are seeing success in converting referrals from customers in key centers of influences within our markets. We prize word of mouth referrals from satisfied customers and take pride in converting them into one business. Market leaders continue to coach and help reinforce the use of the skills we developed in sales training last year. Key highlights of our deposit performance for the first half of the year and quarter are as follows

[Patrick Ryan:]

Thank you, Emilio, and thank you Peter and Andrew for that additional information. At this point, I'd like to turn it back to the operator to open it up for question-and-answer.

[Operator:]

Thank you. Our first question comes from Bryce Rowe with The Hovde Group. Please go ahead.

[Bryce Rowe:]

Thanks. Good morning and I appreciate you taking the questions here. Maybe I'll start with Emilio and I certainly appreciate all the comments you made around the funding base and the funding profile and was kind of most interested in continuing the momentum that you talked about in terms of the non-interest bearing versus the time deposit percentages. So I'm kind of curious, what you kind of mean by that? Do you have a specific goal in mind in terms of target as a percentage of the portfolio, and is there kind of a flow in terms of where you want that time deposit level to be?

[A - Emilio Cooper:]

Yeah, thank you for the question. You know quite frankly, we had set a goal a couple of years ago and obviously with what's happened with the pandemic, we've been able to exceeded the goal that we had set for our three to five year time horizon. So you know our goal is to ensure that non-interest bearing continues to make up beyond where we are with time deposits. Ideally I'd like to see that number north of 30% and that's what you know we're working hard to drive to.

[A - Patrick Ryan:]

Yeah, Emilio I agree with that, and Bryce I would just add that sometimes the metrics are you know set at a certain level, but a lot of times on the deposit side we tend to focus on where we’re lining up relative to our peer group, because you know depending on the interest rate environment and other macro factors, the absolute level within a certain category is difficult to predict, but we're closely tracking how we're performing relative to the peer group, so we make sure that you know our goals are factoring in what's happening outside as well. So, you know in the world we're in right now getting to 30% I think is a great goal, but I think we also realize that depending on how things online with the fed and other areas, that 30% a year from now may not be a particularly realistic goal, but as long as we're moving up and the ranking is relative to our peer group, I think we're pushing the ball forward in the right direction, so I hope that helps.

[Bryce Rowe:]

Yes, that’s good perspective. And then maybe you know one follow-up on pricing from a deposit perspective. You saw – you've seen very good declines in the cost of CD's and you know curious kind of where you're seeing new CD's renew or re-price in this environment relative to where the average cost is here in the second quarter?

[Patrick Ryan:]

Sure. So if you look at – if you look out over the next half of the year, we've got about 200 million in CD's that will re-price on average, about 15 to 20 basis points lower than what they're at today.

[Bryce Rowe:]

Okay. And Emilio, what are the kind of retention rates you're seeing with those renewing CD's?

[Emilio Cooper:]

Yeah, so we're seeing a good retention rate. I mean our teams have empowerment where there are customers that have full relationships with the bank and who are not pure rate shoppers, they've got empowerment to adjust our standard rate up about 10 basis points, and they’ve been doing a very nice job differentiating to make sure we retain core relationships. And so on average we’re seeing about an 80% retention at the current rates that we're priced at. Our 12 month CD today is priced at 25 basis points and so you know that's in line with most of the competition. We track the competitive rates in the market. There certainly are some that are higher, but we feel very good about where we are and we've been doing a nice job retaining in CD's and then we’ve seen some movement into you know savings or money market products as well.

[Bryce Rowe:]

Okay. Alright, I’ll step back in the queue. I appreciate the time.

[A - Patrick Ryan:]

Thanks Bryce.

[Operator:]

Our next question comes from Erik Zwick with Boenning and Scattergood. Please go ahead.

[Erik Zwick:]

Good morning, everyone.

[Patrick Ryan:]

Good morning Erik.

[Erik Zwick:]

Maybe just to continue that the line of questioning from Bryce a little bit, but flip it to the other side of the balance sheet and thinking about the net interest margin. Curious if you could provide any color in terms of kind of you know where new loan originations are coming for, you know kind of within the pipeline what the average yield books, like in how that compares to the existing portfolio and how that might impact the outlook for the core margin going forward?

[Patrick Ryan:]

Andrew, you want me to take a stab at that?

[Andrew Hibshman:]

Yeah, why don’t you talk about the new loan rates and then I can talk about some of the work we’ve done on plan with the margin and what we think might be a run rate after some of the PPP stuff falls off.

[Patrick Ryan:]

Okay. Yeah, we got a snapshot at month end of all the new loans that got booked during the month and just puts out a weighted average there. So it gives us some – you know a decent idea you know of what we've just done, and for June for example the number was 3.89%. So that was the weighted average rate, all these loans booked during the month of June. And if you go back throughout the year, it's been kind of fluctuating between 340 some months, up to 397, but somewhere around at 375, 380 range. You know obviously we're not competing in the market every day and what our competitors are doing impacts where we end up on good assets. But if we see a loan we like and there’s hopes of bringing in additional business along with it, i.e., deposits and other loans, you know we’ll compete pretty hard for that business. But you know as I mentioned for the month of June, to give you some perspective, the number was 389.

[Erik Zwick:]

Great! That's helpful. Go ahead.

[Andrew Hibshman:]

Yeah, just to add a little bit more color on the margin, I mean as I mentioned in my remarks, we were – if you matched PPP fees and matched prepayment penalties to where we were last quarter, we would have been up two basis points compared to last quarter. So we've seen a, obviously a significant improvement in the margin. I think we're still – well, this last quarter we saw the cost of deposits go down more than the cost of the interest earning assets. Also, if you kind of normalize some of the PPP activity, we’re closer to around the 340 margin. It's a little bit of a tricky analysis right, because you have to take the PPP loans out of your average assets and you also got to think about how that impacts the liability side, so it's not an exact science, but obviously strong prepayment penalties, strong PPP fee income boosted up the margins somewhat, but I think looking at 340, 350 is probably if you kind of strip out PPP loans and you kind of try and do some analysis, that's probably more of where our core margin was during the quarter. But we did again see kind of improvement in our core margin, although smaller than it had been in the previous quarters, but we still saw some improvement in that core margin based on being able to drive down deposit costs faster than we've had to move down some of our interest earning asset rates.

[Erik Zwick:]

I appreciate the color from both you guys there. Switching gears to the non-interest expenses, I guess I was impressed with how much of a benefit came through from the branch closures and just curious if that's all kind of expected to be ongoing as this is kind of pinned to a good run rate to start with or if you have any planned growth initiatives or tech investments that you might utilize some of those savings.

[Patrick Ryan:]

Pat, I’ll address it first and then you can jump in if I miss anything. I think this is a fairly good run rate. I think we'll start seeing expenses creep up a little bit as things get back to normal. As Pat mentioned, we have folks back on the road, more people are getting into the office, but there wasn't really any kind of unusual activity this month, either positive or negative. As you might remember, we did have a $300,000 write-off of leasehold improvements based on the closure of our admin space last quarter, so last quarter's numbers were a little bit artificially inflated. So I think this is a good kind of normal run rate. Like I said, I think you will see it creep up a little bit as we move through the rest of the year and into next year. Obviously that doesn't take into account any kind of large or unusual items, but this is a fairly normal quarter on the expense side. No large unusual items, either positive or negative, but again I think you will start to see it creep up a little bit. But we should be able to manage that number in and around that $10.5 million range I would think going forward.

[Emilio Cooper:]

Yeah, I'll add to that Erick that you know from an overall strategic perspective, I mean our company continues to look for growth opportunities, so you know our goal on the expense side is to reduce them, but to you know keep the rate of growth in the low single digits and hopefully well below the pace of growth on the revenue side so that we're generating some operating leverage. And we've done that historically. I think we can continue to do that. We remain opportunistic when it comes to, see opportunities in terms of new hires or new market opportunities and at the same time we're constantly looking for areas where we can tighten up and reduce costs as we pointed out on the last call with the closure of a couple branches and some sizable admin space that had a lease come due that we didn't renew. So that's kind of our goal going forward, is to manage the expenses at a low single digit growth rates, and I think we can do that.

[Erik Zwick:]

Got it, and then within the prepared remarks, you guys mentioned a couple times, confidence in being able to meet the loan growth target for the year and just want to make sure I've still got kind of that range in mind. I think it was kind of 5% to 7% exclusive of the impact of PPP, is that still kind of what you guys are shooting for?

[Emilio Cooper:]

Yes, I think that numbers right Peter. I don't know if you have the actual number.

[Peter Cahill:]

Yeah, I mean the overall growth non-PPP was in dollars, $120 million. So I mean right around $2 billion, what's that math, 6%. So that’s in that range.

[Erik Zwick:]

Okay. Perfect.

[Peter Cahill:]

And yeah, and then just my view – I was just going to add, my view is we’re still, are relatively flat through six months. We made up for the hole in Q1, but based upon the pipeline and what we're seeing in the market, at least I still think we are going to make that growth goal by December.

[Erik Zwick:]

And then, last one for me, it looked like maybe the pace of buybacks slowed a little bit in 2Q relative to the first quarter. Just curious about your appetite to continue buying back shares at this point.

[Emilio Cooper:]

Yeah, I mean you know we have plans in place where we sort of give guidance to the firms that are managing it for us. So we're not day-to-day managing it and adjusting it, but I think, we believe that when our stock was down below book value, it was an obvious buy opportunity and even as we move forward, given our prospects and we think our ability to grow book value, I think we'll continue to look for opportunities, but as the stock has moved higher, probably not surprising that the pace slowed a bit in Q2. But we continue to be believers in our own story and the value we can create. So I think we will continue to look for opportunities.

[Erik Zwick:]

Thanks for taking my questions today.

[Emilio Cooper:]

Alright, thank you Erik.

[Operator:]

. Our next question comes from Nick Cucharale with Piper Sandler. Please go ahead.

[Nick Cucharale:]

Good morning, everyone. How are you doing?

[Patrick Ryan:]

Hey, good morning Nick.

[Nick Cucharale:]

On the loan growth this quarter, were there any particular geographies that were driving the growth or was the advanced broad base across the footprint?

[Patrick Ryan:]

Broad based, Nick really nothing unusual about it, still you know our lending is primarily in our geographic market and there was nothing I could think of, any significance outside of that.

[Nick Cucharale:]

Okay, and then just to hit on the non interest income side from the prepared remarks, it sounds like you're optimistic for the back half, can you help quantify your expectations there, especially on the SBA and swap fee lines which tend to be historically volatile.

[Emilio Cooper:]

Yeah, I would tell you Nick that, I think overall Q1 was probably a better than average quarter in terms of overall non-interest income and Q2 was probably a little bit below low average. So you know, every quarter because the components of the non-interest income can be somewhat lumpy, it's hard to predict on a quarter-by-quarter basis, but I think if you kind of look at the first two quarters of this year, as one being a little above, one being a little below that, it gives you an overall sense with the understanding that within any specific 90 day window the number can jump around a bit, so.

[Nick Cucharale:]

That's great color. Thanks for taking my questions.

[Patrick Ryan:]

Yeah, thank you Nick.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Patrick Ryan for any closing remarks.

[Patrick Ryan:]

Well, I would just like to close by thanking everybody for taking their time to listen in to the call today. We appreciate the interest in First Bank and the questions received, and we look forward to regrouping with everybody at the end of the third quarter. Thank you very much.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.