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First Bank  (NASDAQ:FRBA)
Q1 2019 Earnings Call
April 30, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and Welcome to First Bank First Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) 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 L. Ryan -- President and Chief Executive Officer

Thank you. I'd like to welcome everyone today to First Bank's first quarter 2019 earnings call. I'm joined today by our Chief Financial Officer, Stephen Carmon; and Chief Lending Officer,Peter Cahill.

Before we begin, however Steve will read the Safe Harbor statement.

Stephen Carman -- Executive Vice President, Chief Financial Officer

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, 2018, filed with the FDIC. Pat, back to you.

Patrick L. Ryan -- President and Chief Executive Officer

Thank you, Steve. Well I think we had a decent start to the year given the challenging operating interest rate environment. From a balance sheet standpoint, we did have net loan growth but we were a little behind plan. Although, I don't think that's the worst outcome given the competitive environment we're in today. We certainly don't want to chase deals especially in the later innings of the economic cycle and we did see about 30 million in payoffs during the quarter, which obviously impacted our net growth.

Deposit growth is almost double loan growth helping to lower our loan to deposit ratio from 105% at the end of the year to 103% do not see growth in non-interest bearing balances but we did open several new accounts and we expect chop (ph) positive trends in this category -- category going forward. Some runoff involved normal fluctuation and we do expect, we'll see a return to some dollar balances in certain categories as we move forward throughout the year. From an income statement perspective our net interest income was up significantly compared to Q1, 2018. It was basically flat compared to Q4. We believe a big part of the deposit repricing has occurred. Our review of current funding costs compared to stated product rates that were current offer -- currently offering would indicate they were getting toward the tail end of the impact from repricing of short term liabilities. We do still expect to see some impact of higher liability costs moving forward, which will lead to some additional margin compression but we hope we're getting toward the later stages of that impact. From a non-interest expense standpoint our expenses were 9 million in the first quarter, which were down compared to 9.2 million in the fourth quarter. And we still see some room to drive expenses lower. In the first quarter we had a couple of non-recurring or more unusual type expenses. We had 1, 017 in merger related costs. We also had 1,080 in personnel related costs for taxes and severance.

Going forward we think there will be opportunities for additional savings specifically related to the closing of our Levittown (ph) branch which happened in mid-March of this year. We think that could generate about 400, 000 in annual cost savings going forward. We also believe there's another 500,000 an additional personnel cost savings from staff reduction changes we made during the quarter and April. We will see some merger relating costs going forward in 2019 related to the Grand Bank acquisition.

I would also note that at the end of March we had 181 full time equivalent employees, which was down five compared to 186 at the end of the year. Our provision was lower than normal because of some significant -- because in the significant pay down we received on a classified loan and because of some slower growth during the quarter, our overall our allowance did go up a little bit in our coverage of non-performance remains very strong. On the strategic front, we announced our Grand Bank acquisition, which we believe does a few things for us. It solidifies our position as the go to bank in Merced (ph) County will help improve funding costs and loan yields. It's an opportunity to drive additional scale and profitability in the business and we believe the pricing was reasonable and that thorough credit marks should help mitigate some of the transaction risks that can be associated with M&A.

I try -- I finish up by noting that we have active pipelines for new loans and deposits in each of our regions. And we're pleased to start to see some positive momentum from our Bucks (ph) County. At this point I'd like to turn it over to Steve to discuss the financial details for first quarter. Steve?

Stephen Carman -- Executive Vice President, Chief Financial Officer

Thanks (inaudible). After our successful 2018, we knew entering 2019 would be facing these challenges that a flat to inverted treasury yield curve in a very competitive deposit markets. Our focus based on this environment was the impact of our net interest margin and bottom line results. Net income for first quarter of 2019 was four point three million or twenty three cents per diluted share compared to four million or twenty three cents per deluded share for the first quarter of 2018. Net interest income growth, the primary driver of our profitability was 14 million dollars for Q1 2019, an increase of one point four million or eleven point four percent compared to twelve point six million for the first quarter.

Our tax equivalent net interest margin for the first quarter of 2019 was 345 compared to 362 for Q1 of 2018. A decline of 17 basis points. The combination of a higher interest rate environment during 2018 coupled with stiff competition for deposits resulted in a 54 basis point increase on interest bearing deposits outpacing the twenty three basis points increase on interest earning assets. On a linked quarter basis to our tax equivalent net interest margin was 345 for the three months ended March 31, one basis points higher than our margin for the fourth quarter of 2018.

Our margin in the first quarter benefited from the Federal Reserve rate increase on December 19 as well as additional loan income from prepayment penalties and normal part of our commercial loan business.

As we look at the margin over the next couple of quarters, we are projecting our margin to modestly decline from Q1 2019. Commercial loan pricing is expected to be impacted by the inverted yield curve and we expect that competitive pricing measured pressures will continue as well. A 17 basis point increase in interest bearing deposits experienced in Q1 2019, we expect to lessen over the next couple of quarters based on the level of our (inaudible) that have already repriced. Actions we have taken to lessen margin pressure include the fact that we have recently lowered (inaudible) rate and our continued emphasis on attracting lower cost core relationship.

Based on all the factors discussed today, we are expecting our net interest margins to modestly decline for a Q2 2019. We'll continue to update you each quarter on the performance of our margin. Our efficiency ratio for the the first quarter was 60.95% down slightly from 61.78% for Q4 of 2018.

Non-interest expense was merger related costs were about $8.9 million as Pat discussed earlier and we did experience one-time type personnel related costs that contributed to the balance of our projected net interest income -- I'm sorry non-interest expense. We believe our non-interest expense will be lower over the next couple of quarters not including merger related costs and we expect our efficiency ratio to move below 60%. Our effective tax rate for the first quarter of 2019 was 20.1%. We believe at this time our state tax planning strategy will continue to be beneficial in 2019 and projects our effective tax rate to be about 21% for the year.

Even with the headwinds we are experiencing at the margin, we continue to believe that 2019 financial goals were achievable. Our loan pipeline remains solid and our asset quality profile continues to be strong.

To further discuss our result in lending is Peter Cahill our Senior Lending Officer. Peter?

Peter Cahill -- Executive Vice President, Chief Lending Officer

Thanks Steve. As was mentioned earlier loan growth in the first quarter was $34.6 million, up about 2.4$from year-end 2018. The bad news I guess is that this was a slow quarter for us from a loan growth perspective. We were off about $10 million from the average quarterly rate of growth that we experienced in 2018. You might recall though that the slow first quarter we had comes after a pretty strong fourth quarter, our biggest quarter in 2018 so the slowdown is kind of normal. There's any good news in having a slow quarter it's not the quarterly growth we did have was in line with most of our peers experienced during the period.

More important though is that we continue to close and find new loans at a steady pace without offsetting pay offs and that our loan pipeline continues to be strong. At [twelve thirty one eighteen] after a good low growth quarter which usually shrinks the pipeline a bit the loan pipeline included a $178 million which was well above the 12-month average for 2018. The pipeline at the end of the first quarter was $172 million also well above the 2018 average and I think that positions as well for hitting our organic loan growth target of about 15% to 16% for the year, which would pretty much match with the last year.

Things affecting loan growth include obviously loan prepayments, the level experienced in the first quarter were in line with previous quarters. Also impacting lending effort was our recent core system conversion. The earnings release outlined the conversion of our core operating system from Jack Henry (inaudible) during the quarter. I had mentioned last what are the impact that this project had on lending staff in 2018 and that impact was even greater in the first quarter of this year as people from all areas of lending were involved in projects and special assignment. Thankfully where conversions don't happen often, things like that are growing pains or growing organization and we're glad to have the project for the most part behind us.

Regarding asset quality from a new business perspective we continue to focus only on what we believe are high quality loans. Our underwriting standards remain consistent. We had a solid year in 2018 from an asset quality perspective in the first quarter 2019 was really more of the same. As is pointed out in the earnings release we had net recoveries for the quarter, an improvement over a small level of charge offs last quarter. Non-performing loans as a percentage of total loans increased a few basis points compared to last quarter due mainly to a couple of loans that continue to make payments but we're where the delinquency was administrative in nature. In most cases that means an expired line of credit that we're in the process of renewing.

Other than that things were good. Delinquencies otherwise were in line with previous quarters. But lending team in general is well organized in all regional relationship management teams are busy developing relationships in their markets. We're in the process of getting fully staffed in our PA market, Pat alluded to improve performance there. We had two openings in that team for the entire first quarter and brought one replacement relationship manager on board a couple of weeks ago and we're also very close to reaching an agreement with another seasoned (inaudible) to fill a blank position.

We've also for the first time started placing credit underwriters in the regional offices and adding loan administrator staff from the regions as well. We feel certain that this will increase responsiveness in those teams even more. And we're also preparing for next steps than the recently announced Grand Bank acquisition. So we think all of these activities will position us well for the next few quarters. That's it for my first quarter lending report, I'll turn it back now to Pat Ryan.

Patrick L. Ryan -- President and Chief Executive Officer

Great, thank you Peter. Thank you Steve and at this point we'll turn it back to the operator to open up for any questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Joe Gladue with Alden Securities. Please go ahead.

Joe Gladue -- Alden Securities -- Analyst

Let me I guess just start a little bit about the Grand Bank acquisition, they've got a pretty nice deposit mix. Just wondering if there's any opportunity to I guess any strategy they have or anything that can be expanded more widely in your network to sort of improve the deposit mix a little bit?

Patrick L. Ryan -- President and Chief Executive Officer

Yeah. I don't know if there's any sort of secret (inaudible) that they have as much as I think part of what you see the good side of loan growth is you drive revenue growth but it also pressures deposit pricing because you need deposits to fund those loans and as you probably noticed Grand Bank hadn't been growing much over the last couple of years which I think gave them schematics flexibility on the deposit side. But I do believe there's some things we're going to bring to the table in terms of cash management solutions and a larger lending limit that should allow us to expand some of their existing relationships as well as really help solidify our position of strength in (inaudible) which I think can drive some added scale benefits from a marketing standpoint in kind of the home base of Mercer County so I do think there are some nice upside opportunities there. None of which were really modeled in from financial analysis perspective but I do think there are some things that we can do to help make the combined franchise even better.

Joe Gladue -- Alden Securities -- Analyst

Okay. It just sort of shifted gears a little bit I just wondering if there's any trends in early stage delinquencies that are notable?

I think Peter hit on part of that, the part of the increase we saw in the delinquencies were related to a couple of situations where there were a lot of lines of credit that needed to be reviewed that took a little longer than expected and ultimately got booked and updated on the system after the end of the month. So they showed up as delinquencies but as Peter mentioned more and more administrative and payment delinquencies. But you know there were a couple of CNI credit that payments got extended on a little bit that we're keeping an eye on. So overall we still feel pretty good about the credit quality but it can't be complacent and certainly we're keeping a close eye on things there and Peter I guess I'll turn it over to you to add anything on that point.

Peter Cahill -- Executive Vice President, Chief Lending Officer

No I think that's exactly right. We've covered well.

Joe Gladue -- Alden Securities -- Analyst

All right. Thank you.

Patrick L. Ryan -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) At this time saying no further questions. I would like to turn the conference back over to Patrick Ryan for any closing remarks.

Patrick L. Ryan -- President and Chief Executive Officer

Great. Thank you. I'd like to thank everybody for taking the time to listen in and we'll be back to the group in another quarter with additional update. So thank you very much.

Operator

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

Duration: 17 minutes

Call participants:

Patrick L. Ryan -- President and Chief Executive Officer

Stephen Carman -- Executive Vice President, Chief Financial Officer

Peter Cahill -- Executive Vice President, Chief Lending Officer

Joe Gladue -- Alden Securities -- Analyst

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