First Bank

Thank you. I'd like to welcome everyone today to First Bank's First Quarter 2018 Earnings Call.

I'm joined by our Chief Financial Officer, Stephen Carman; and our Chief Lending Officer, Peter Cahill. Before we begin, however, Steve 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, 2017, filed with the FDIC. Pat, back to you.

Thanks, Steve. Well, I'd like to start off by saying, I think, the first quarter was a very good start to the year, building off the good momentum, I believe, we generated in 2017.

Loan growth continued with an increase of $43 million. And that was net including some significant payoff and pay-down activity during the quarter, which Peter Cahill will discuss later.

I'm proud to report, growth came from each of our regions, Northern New Jersey, Central New Jersey and Pennsylvania. We had good growth in our Southeastern PA market, which helped to offset some runoff in the greater Bucks County market.

Joe Calabro, our Market Executive for the Southeastern PA region and his team are off to a great start. And we're in the process of hiring some new commercial lending RMs in the Bucks County market to transition from some turnover we've had in that area over the last couple of months.

We also enjoyed a good mix of loan growth in the first quarter with more growth coming from our owner-occupied real estate compared to our investor real estate.

Unfortunately, loan growth outpaced deposit growth to a significant measure in the first quarter, further increasing our loan-to-deposit ratio. That was driven, to some degree, by efforts to preserve our margin, which led to some CD runoff.

And we also experienced some seasonal balance fluctuations in our Commercial Deposit segment.

We're hopeful in our new office in Pennington, New Jersey and Mercer County, together with strong commercial deposit growth and more competitive rates will help us drive improved deposit growth for the remainder of this year. We think that the improved deposit growth and the addition of core deposits from Delanco should help alleviate some of the pressure on our loan-to-deposit ratio.

Future deposit growth will come with higher funding cost, although we expect an improved mix driven by increased commercial deposits will help offset that trend to some degree.

Our net interest margin not only held up but actually increased a little bit in the first quarter, which was nice to see, although that may be difficult to preserve going forward, given the heightened deposit competition in our market and, what appears to be, a flattering yield curve. We also benefited from some prepayment income in the quarter, which Steve and Peter will provide some additional detail on.

We did have steady asset quality and steady noninterest income growth during the quarter. And overall, our strong revenue growth, coupled with prudent investments and expense management, drove record earnings of $4.0 million in the quarter, which was our best quarterly income number to date, and was obviously aided by our improved tax rate, which effectively was 17% in the first quarter.

That led to return on average assets of 1.11% and return on average equity of 9.90%.

If you adjust those ratios for some merger-related and other onetime items, we actually realized the 1.14% return on average assets and a 10.18% return on average equity.

In terms of other strategic updates, we did have our Annual Shareholder Meeting today, and we received votes of approval for the pending Delanco acquisition. Their shareholder meeting is today as well.

But we believe we're on target to close by the end of April.

Overall, our loan pipeline remains very active with opportunities evenly distributed across our markets, with Northern New Jersey making up about 30% of the pipeline; Central New Jersey, about 40%; and Pennsylvania, the other 30%. We recently added a team member to our commercial deposits group and we're seeing some good activity in our pipeline in the commercial deposit area.

We still have some work to do to get to our 20% noninterest-bearing deposits goal, but we were at 16% at quarter-end.

Thus far, we've realized about 3 quarters of the projected cost saves from the Bucks County Bank merger. And we expect we'll be able to meet or exceed our full goal of cost savings by the end of the year.

As we move forward, we may see a tick-up in expenses towards the second half of the year, given some planned investments in people and locations. But we continue to expect that revenue growth will outpace expense growth as we move forward with cost savings from BCB and Delanco helping to offset added expenses in other areas.

We also are optimistic that when we negotiate our core IT vendor contract that we'll create some efficiencies and some cost savings there as well.

Our market-focused structure is taking root. Our teams are developing a real sense of ownership within their markets.

And this will certainly be critical to our success going forward.

In summary, our strong results in the first quarter and our great opportunities within each of our regions gives us plenty of optimism for the remainder of the year, even though, we do expect the operating environment, particularly on the deposit side, will get more difficult.

At this point, I'd like to turn it over to Steve to discuss our financial results in more detail.

Thanks, Pat. As was the case in 2017, we started 2018 with solid net interest income growth led by loan growth, as Pat mentioned, of $43.1 million, and supported by a strong asset quality profile.

Noninterest expenses were effectively managed in the first quarter, reflected in a lower efficiency ratio of 53.91%, down from 54.76% for the linked fourth quarter, and 60.34% for the first quarter of 2017. In addition, we've benefited from the federal statutory income tax rate decrease from 35% to 21%, which was effective January 1, 2018.

Result of this core operating earnings continued to move higher as we recorded record profitability in the first quarter.

We reported net income for the first quarter of 2018 of $4.0 million or $0.23 per diluted share, compared to $1.9 million or $0.17 per diluted share for the first quarter of 2017.

Return on average assets, or ROAA, and average equity, or ROAE, for the first quarter of 2018 was 1.11% and 9.90%, respectively. That compares to a return on average assets of 73.73% and return on average equity of 8.73% for the first quarter of 2017.

As Pat mentioned, if you don't include certain merger-related items, we would have earned an adjusted net income of $4.15 million for the first quarter of 2018, or return on average assets of 1.14%, and return on average equity of 10.18%, respectively.

Net interest income for the first quarter of 2018 was $12.6 million, an increase of $4.5 million or 55.6%, compared to $8.1 million in the first quarter of 2017.

Average loan balances, primarily commercial, grew $357.6 million, as a result of organic and acquired growth. Included in first quarter 2018 results was $302,000 in prepayment penalties on paid-off loans.

Shortly, Peter will discuss the level of prepayments we experienced in the first quarter and their impact on loan growth.

Our tax equivalent net interest margin for the first quarter of 2018 was 3.62%, an increase of 46 basis points compared to 3.16% for the prior year quarter. The prepayment penalty income we experienced contributed about 8 basis points to the margin.

Throughout 2017, we benefited from the Fed raise in the federal funds rate, which resulted in higher floating rate loan yields and subsequently a higher overall loan yield. During that period, we were able to hold deposit cost relatively stable.

The result was an improved net interest margin.

On an linked-quarter basis, our margin for the first quarter would've been about 3.54% without the prepayment county income, compared to 3.51% for the fourth quarter of 2017. What has become evident looking at the comparative period is the increasing cost of interest-bearing deposits.

The cost of interest-bearing deposits increased 7 basis points during the first quarter. As discussed on previous earnings calls, we have taken steps to manage our cost of funds, as interest rates have moved higher.

As Pat noted, we remain focused on increasing lower-cost core commercial deposits and have made progress in that regard.

Also, we expect the addition of Delanco with a stable core deposit base to assist in maintaining a stable margin.

We are expecting large impression as we move further in 2018 with the Fed expected to continue to raise the federal funds rate. Pat noted the factors that may affect our margin moving forward.

Competitive pricing pressures related to deposits are clearly present in the marketplace. So we are expecting a stable to modestly declining net interest margin as we move through the rest of the year.

As we look forward, we expect continued net interest income growth, primarily from new loans as we expand into new markets, a strong asset quality profile and the additional benefit of a lower annual effective tax rate, all beneficial to the bottom line. We believe we are well positioned, after first quarter results, to achieve our financial goals for 2018.

To further discuss our positive results in lending is Peter Cahill, our Senior Lending Officer. Peter?

Thank you, Steve. As Steve and Pat both mentioned, loan growth in the first quarter was $43 million or 3.5%.

I'm satisfied with this level of growth for a couple of reasons: First, while the integration of the Bucks County Bank loan portfolio went smoothly from an operational standpoint, we experienced a decent amount of turnover in the relationship management staff early in the quarter. This slowed us down from a production standpoint in that market, and that slowdown will roll into much of the second quarter.

We did a good job, however, getting out meeting our important clients there and don't anticipate a major impact from the RM turnover. I'm also pleased to report that we've reached agreement with new hires that will get staffing back to normal over the next couple of weeks.

The turnover in staff creates some short-term pain, but I think over the long term, it will be a gain for the bank once our new RMs get in and get acclimated. Secondly, we experienced extraordinary loan payments of approximately $37 million during the quarter.

For comparisons, this exceeded the prepayments we had in the first quarter of 2017 by almost $16 million.

As Steve pointed out, we did earn approximately $302,000 in prepayments penalties as a result of these payoffs.

So to summary, after facing the challenges, I've just described, I think the quarter was a good one from a new business standpoint.

Regarding the makeup of a loan portfolio, again, Pat alluded to this, as in previous quarters, there's been no significant change. From a growth perspective, we've been focused on increasing the percentage of C&I loans we do relative to investor real estate, and we continue to see progress in that area.

As you probably know, we track and report our loan pipeline to our Board of Directors monthly, deals roll on and off the pipeline as they are in the underwriting process and then get documented and funded. I mentioned working on increasing the percentage of C&I business we do.

I'd like to report that for each of the first 3 months of 2018, our level of investor real estate loans was less than the 50% soft cap we've kind of targeted on investor real estate loans in the pipeline.

At quarter-end, 3/31/18, the pipeline was up 11% in the terms of the number of loans in it, but was down almost 19%, as measured in dollars. Some of this has to do with additional smaller loans being worked on our relationship managers as well as the impact on the pipeline caused by the level of loan closings leading up to 3/31.

I can tell you as we near the end of April, the pipeline is up near the level it was at year-end. As things get settled in the former Bucks County Bank market, I anticipate the pipeline to continue to grow further.

Lastly, in regard to asset quality metrics, the first quarter continues to look good, as described in the release. Charge-offs dropped down a bit and nonperforming loans to total loans were about flat compared to year-end.

There were no surprises during the quarter. We had a few more administrative delinquencies at quarter-end than I would've liked.

But overall past due loans are in very good shape.

That's it for the first quarter lending update. I'll turn it back now to Pat Ryan.

Thanks, Peter. While at this point, I'd like to turn it back to the operator to open it up for Q&A.

I guess, just first of all, I just wanted to talk about -- I'll ask you to repeat a number. I didn't quite catch, you said what percentage of the Bucks County cost saves have been achieved so far?

About 75%. Let me clarify just 75% of the stated goal.

So we targeted 40%, so 30% of the base, if you will.

Okay. And just wondering between that and Delanco, if you have a sort of a target efficiency ratio, you think you can get to by the end of the year?

Well, I don't know that we have a formal target. But I certainly think we can continue to see improvement there.

I mean, some of it will be driven by what happens with the margin. But holding the margin constant, I think we can get down closer to 50% by the end of the year.

And I guess, I'll also ask the tax rate for the full year. And I think we -- gets a little lower first quarter, just wondering if you had any change or?

Well, we had, Joe, some discrete items in the first quarter related to the exercise of stock options which effective tax rate for the first quarter at 17.10%, and we expect if those discrete items aren't there next quarter that our annual effective tax -- run rate will be somewhere right around 20% for the rest of the year at this point.

All right. Just like to thank, everybody, for taking the time to listen in, and we look forward to speaking with folks again next quarter.

Thank you.