FIRST BANK (Hamilton)
NASDAQ:FRBA
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FIRST BANK (Hamilton)
Earnings Call Analysis
Q4-2023 Analysis
FIRST BANK (Hamilton)
The bank showcased endurance, having navigated an unprecedented banking environment and deposit challenges through 2023. The fourth quarter was marked by significant deposit activity, where a strategic deposit campaign was vital in aiding organic deposit growth and partially offsetting attrition in the time deposit portfolio due to competition in the rate environment. Though there was a period of flat deposit growth in Q4, a shift towards non-interest bearing funding boosted non-interest bearing balances by $8.1 million, hinting at a strategic pivot the bank plans to maintain throughout 2024.
The lending area was active in the fourth quarter, with a notable increase in loans generated of $36 million; however, a loan sale of equivalent amount resulted in net zero growth for the period. A key strategic shift was evident, moving away from investor real estate loans towards profitable commercial and industrial (C&I) loans, which historically attract more deposits and are now a primary focus for the bank. Despite the changes, the loan pipeline remained robust at $210 million, indicative of a stable prospect for loan growth as the bank enters 2024.
Efforts to achieve cost savings, particularly from the Malvern acquisition, have largely been successful, with the bank eyeing further IT-related savings. While there may be slight fluctuations, non-interest expenses are expected to remain stable, with the potential for continued efficiency improvements. The share repurchase program is on hold, prioritizing capital buildup; however, an opportunistic stance will be taken if share prices become particularly attractive.
Historically a strong organic loan growth entity, the bank now faces a larger balance sheet post-Malvern acquisition. Executives signaled cautious optimism about continued growth, hinged on their ability to secure core deposits at reasonable prices to fund quality commercial loans. The shifting banking landscape presents both challenges and opportunities in achieving historic growth rates in the current fiscal year.
Management anticipates that net interest margin (NIM) could either remain flat or improve in the near term, with favorable balance sheet repositioning and purchase accounting income expected to contribute. Although a $25 million high-cost sub-debt is slated to roll off, this action should provide a future tailwind. The bank will continue to explore opportunistic asset sales, aiming to shed non-core assets at the right market prices, without the need for any substantial balance sheet reconfigurations.
The bank took advantage of favorable bond market movements to opportunistically sell low-yielding investments at the end of the quarter, which won't significantly impact investment yields but reflects a proactive management approach. With the majority of investments from Malvern successfully divested, the bank doesn’t anticipate a need for further significant changes to its investment strategy, staying open to minor adjustments as opportunities arise.
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Hello, and welcome to the First Bank conference call. Please note that this call is being recorded. [Operator Instructions]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 points 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 were 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 provides 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 3 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 a 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.Our 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 30.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. Non-interest 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 3 years -- under 3 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 non-interest income declined primarily due to the aforementioned losses on loan and investment sales, which were net against non-interest income.Non-interest expenses were $17.9 million in Q4 2023 or $17.6 million, excluding merger-related expenses. Non-interest 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 -- 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 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 non-interest bearing funding. Our non-interest 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, a 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 the 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, non-interest bearing funding, managing our cost of deposits and organic growth will continue to be key drivers relative to the 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 nonstrategic 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 that 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 try to track why loans pay off prior to maturity. In 2023, 53% of payoffs took place because the underlying asset was sold. We can't do much about the 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 or sale leasebacks, things like that take place.I usually comment on our loan pipeline during these calls. Our pipeline at December 31 stood at $210 million of what we call probable fundings, basically unchanged from the September 30 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 time frame. 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.
[Operator Instructions] Our first question comes from Justin Crowley from Piper Sandler.
I wanted to start on the margin in the quarter. First, I wanted to see if you can 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 do you anticipate seeing just as far as the lag and the pickup on the funding side?
Yes. 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 see 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?
No, 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 non-interest bearing. Is that an area that you think you can continue to improve as -- 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?
Yes. Well, listen, it's certainly a -- it's core strategic priority #1, 2 and 3. So if we don't continue to grow it, it won't be from lack of effort or investment. But non-interest 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 non-interest bearing balances.Obviously, if you look back at 2023, a lot of money within that category in the sector, less non-interest 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 non-interest 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 non-interest 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, you know, 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?
Yes, 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?
Yes, sure. Yes, 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 non-interest 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 non-interest 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?
Yes. I mean, listen, for the time being, I'd say probably yes, right? But at the end of the day, the 2 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.
Our next question comes from Nick Cucharale from Hovde Group.
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?
Yes. 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.
[Operator Instructions] Our next question comes from Manuel Navas from D.A. Davidson.
I just wanted to go back -- 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.
Yes, 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?
Yes. 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'll -- 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 noncore 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 and 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.
Yes. 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 on the investor side 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.
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. Thanks so much.
Thank you for attending today's conference. Have a wonderful day. Stay safe.