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DATE

  • Wednesday, July 23, 2025, at 9 a.m. EDT

CALL PARTICIPANTS

  • President & Chief Executive Officer — Patrick L. Ryan
  • Executive Vice President & Chief Financial Officer — Andrew Hibshman
  • Chief Retail Banking Officer — Darleen Gillespie
  • Chief Lending Officer — Peter Cahill

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TAKEAWAYS

  • Net Income: $10.2 million, or $0.41 per diluted share, in Q2 2025.
  • Loans: Increased $91 million sequentially (11% annualized) in the first quarter of 2025, $329 million growth (11%) in loans over the twelve months ended June 30, 2025.
  • Loan Mix: Nearly 75% of loan growth over the past twelve months was in commercial & industrial (C&I) and owner-occupied segments. C&I increased by $176 million and owner-occupied commercial real estate by $60 million in the twelve months ended Q2 2025.
  • Deposits: Grew $48 million in Q2 2025 (6.2% annualized). All growth was in noninterest-bearing balances in Q2 2025.
  • Noninterest-Bearing Deposit Share: Reached 19% of total deposits as of June 30, 2025, up from 17% as of June 30, 2024.
  • Net Interest Income: Increased $1.9 million from the prior quarter (6%) in Q2 2025, driven by margin stability and balance sheet expansion.
  • Net Interest Margin: Remained steady at 3.65% in Q2 2025, with higher loan yields offset by increased subordinated debt costs.
  • Pre-Provision Net Revenue: Pre-provision net revenue increased by $2.9 million in Q2 2025 compared to Q1 2025, representing 21% linked quarter growth.
  • Noninterest Income: $2.7 million in noninterest income for Q2 2025. Up from $2 million in Q1 2025. This reflects higher loan fees and a $397,000 gain from a branch sale in Q2 2025.
  • Noninterest Expense: $20.9 million in the second quarter of 2025, $0.5 million higher than the previous quarter. Largely due to $862,000 in executive severance costs in Q2 2025.
  • Efficiency Ratio: Improved to 56.24% in Q2 2025. Marking the 24th consecutive quarter below 60%.
  • Return on Average Assets (ROA): 1.04% for the quarter; Core profitability is tracking closer to 1.10% ROA in Q2 2025.
  • Tangible Book Value per Share: Increased $0.40 in Q2 2025.
  • Subordinated Debt Issuance: Completed $35 million at a 7.18% interest rate, with existing $30 million higher-rate sub debt to be repaid in September.
  • Allowance for Credit Losses: Coverage to total loans edged up to 1.23% from 1.21% sequentially in Q2 2025. Allowance to nonperforming loans coverage was 255% in Q2 2025.
  • Credit Loss Expense: $2.6 million in the second quarter of 2025. Up from $1.5 million in Q1 2025. Primarily linked to loan growth and a modest net charge-off increase in Q2 2025.
  • Nonperforming Assets (NPA) Ratio: Declined to 0.40% of total assets in Q2 2025. Down from 0.42% at March 31, 2025, and 0.56% at June 30, 2024.
  • Deposit Cost Management: Average money market deposit costs declined nearly 60 basis points in the first half of 2025 compared to the first half of 2024. This reduced interest expense by $2.8 million in the first half of 2025 compared to the prior year period.
  • Lending Pipeline: Stood at $31 million in probable fundings at the end of Q2 2025. Down 8% from March 31, 2025.
  • Pipeline Mix: C&I comprised 68% of the quarter-end lending pipeline in Q2 2025, up from 63% previous quarter-end.
  • Line Utilization Rate: Remained stable at a 41%-42% line utilization rate across quarters.
  • Branch Network Expansion: Opened a new branch in Summit, New Jersey, with another approved for Ocean Port, New Jersey; relocating Palm Beach, Florida, branch to Wellington, Florida by Q3 end.
  • Time Deposits: Increased $26 million in Q2 2025 due to targeted promotions.
  • Effective Tax Rate: 22.9%, up 20 basis points from the prior quarter, with no material impact expected from legislative changes.
  • Share Repurchase and Dividend Programs: Management confirmed ongoing buybacks and maintained a stable dividend policy.
  • M&A Strategy: Management said strategy and philosophy on M&A haven't changed, and it actively surveys opportunities for both scale and cost-saving transactions.
  • PAA (Purchase Accounting Accretion) Income: Declined by $100,000 sequentially to $2.7 million in Q2 2025; anticipated to decline $200,000 per quarter in the second half of 2025, with a steeper decline in 2026.

SUMMARY

First Bank (NASDAQ: FRBA) management underscored stable net interest margin and strong core profitability, supported by disciplined expense control and a sustained low efficiency ratio. Capital ratios are described as robust and flexible, bolstered by the subordinated debt raise and upcoming repayment of older, higher-cost sub debt. Strategic expansion into new branch markets combined with a shift towards a higher proportion of noninterest-bearing deposits is cited as critical to future funding and cost management. Credit quality metrics remain above industry averages, with allowance and nonperforming ratios at conservative levels during the growth period in Q2 2025. Margin outlook is guided as stable, with management expressing confidence in their ability to control deposit costs regardless of Federal Reserve policy changes.

  • We could do more quality loans if we found the good, you know, low-cost funding to support it. highlighting that funding -- not loan demand -- is the current growth constraint.
  • Specialty business units, including private equity fund banking and asset-based lending, are "significantly ahead of plan" in net loan growth through June 2025.
  • The proportion of investor real estate loans to total capital decreased from 420% (early 2024) to 380% in Q2 2025 after adjusting for normal sub debt, lowering potential concentration risk.
  • Commercial deposit pipelines remain strong, and management reports an 85% retention rate for CDs maturing into new lower-rate pricing.
  • Management expects core loan growth to slow in the back half of 2025 as pipeline replenishment follows two above-average quarters and paydown activity normalizes.
  • Outlook for M&A emphasizes continued evaluation of both scale and low-cost deposit opportunities, with no fixed size threshold.
  • No significant asset quality deterioration is reported within the specialty lending units or SBA segment; The recent increase in nonperforming loans in Q2 2025 is attributed to loan volume, not systemic issues.

INDUSTRY GLOSSARY

  • C&I (Commercial and Industrial Loans): Loans made to businesses for purposes other than the purchase of real estate, typically used for working capital or capital expenditures.
  • NPA (Nonperforming Assets): Loans or assets that are not generating expected interest income, generally 90 days or more past due or not earning.
  • OREO (Other Real Estate Owned): Property owned by the bank after foreclosure, not including property used for normal operations.
  • PAA (Purchase Accounting Accretion): Incremental interest income recognized as previously discounted loans from acquisitions are repaid or mature.
  • Subordinated Debt: Debt that ranks below other loans or securities with respect to claims on assets or earnings in the event of liquidation.

Full Conference Call Transcript

Patrick Ryan: Thanks, Andrew. The 2025 was another quarter of strong balance sheet growth in the right categories. Loans grew over $90 million during the quarter, and deposits grew by $50 million. Three-quarters of the net loan growth came from our strategic C&I and owner-occupied segments. Our deposit growth during the quarter was fueled by gains in the non-bearing category. Loan growth in excess of deposit growth pushed our loan-to-deposit ratio up to 105%, something we'll be tracking and looking to move lower in the back half of the year. Strong balance sheet growth top line revenue growth, for example, net interest income was up $1.9 million compared to the first quarter, which is 6% linked quarter growth.

Pre-provision net revenue was up $2.9 million compared to the first quarter, which was 21% linked quarter growth. And our pre-provision net revenue return on assets was 1.65% annualized. Results for the quarter did include some non-core items. Specifically, we had a $397,000 pretax gain on the sale of our Paoli office building. And we had an $862,000 severance cost related to some management changes. Overall, credit quality seems to be holding up despite the economic and tariff-induced uncertainty. Net charge-offs remain relatively low, as do our nonperforming assets and nonperforming loans. Our allowance to nonperforming loans sits at 255% coverage, well above industry average.

We achieved pretty good profitability over a 1% ROA in the quarter, despite the severance costs and the elevated provision. Core profitability is tracking closer to 1.10% ROA. Our newer business units continue to gain size and scale, driving profit improvement moving forward. Furthermore, we expect tighter expense containment to also help boost future profitability. New business units, new branches, and technology expenses have driven our noninterest expense to average asset ratio above 2%. Historically, we've operated in the 1.9 to 2% range, excluding merger-related charges. Operating leverage and expense management will help us get back to those historical levels. We've also completed a successful subordinated debt offering during the quarter.

We brought in $35 million in new debt at a 7.18% interest rate, one of the lowest coupons on a new debt deal for a community bank this year. At June 30, we still held $30 million of our older higher rate sub debt. And we expect to pay that off on September 1. In summary, core operating trends look good. Our margin is holding in at high levels. Our strong asset growth will drive strong revenue growth during the second half of the year, and expense management will help drive better bottom-line results. We're keeping a close eye on credit trends, but they appear stable.

All in all, things should be shaping up for a good back half to the year. At this point, I'll turn it over to Andrew to get into some more details on the financial results.

Andrew Hibshman: Thanks, Pat. For the three months ended June 30, 2025, we recorded net income of $10.2 million or $0.41 per diluted share and a 1.04% return on average assets. We saw another quarter of substantial loan growth. Loans were up $91 million for the first quarter or 11% annualized. Over the last twelve months, loans have grown $329 million or 11% with our core areas of focus leading the way. C&I grew $176 million, and owner-occupied commercial real estate loans grew over $60 million. Growth was also solid again on the deposit side. Balances were up over $48 million during the quarter or an annualized 6.2% as we continue to execute on adding and maintaining profitable relationships.

This growth all came from noninterest-bearing deposits and was supplemented by additional FHLB advances to support our significant loan growth. Net interest income increased $1.9 million compared to the first quarter primarily due to margin stability on a growing balance sheet. Our net interest margin remained at 3.65% in the second quarter, benefiting from slightly higher yields on loans, offset by slightly higher costs, primarily due to increased costs on our subordinated debt. Looking ahead, we continue to manage a well-balanced asset and liability position, which should result in continued strong net interest income generation with limited variability in the margin regardless of the Fed's actions on rates.

We will most likely see a larger decline in our acquisition accounting accretion income over the next several quarters than what we saw in Q2, and we will be negatively impacted in Q3 by carrying both of our sub debt interest instruments. However, we believe that we will be able to maintain a stable margin with some potential upside due to our efforts to push deposit costs lower combined with lower-yielding assets continuing to run off our balance sheet, which are being replaced with higher-yielding loans. Our asset quality continues to be strong.

NPA as a percentage of total assets declined to 40 basis points compared to 42 basis points at March 31, and 56 basis points at June 30, 2024. This reflects the second quarter sale of our OREO asset, which had an accounting value of $4.8 million at March 31, offset somewhat by a net increase of $4.4 million in nonperforming loans. We recorded a $2.6 million credit loss expense during the quarter compared to a credit loss expense of $1.5 million for the first quarter.

The increase is primarily due to our loan growth during the quarter, a modest uptick in net charge-offs after several quarters of little to no charge-off activity, and a slight build in reserves in our C&I portfolio. Our allowance for credit losses to total loans increased slightly from 1.21% at March 31 to 1.23% at June 30. Noninterest income totaled $2.7 million in the second quarter of 2025, up from $2 million in Q1. The increase reflects higher loan fees as well as a gain of $397,000 on the sale of our Paoli location, which included some excess corporate office space and the branch. And we have leased back just the branch space.

Noninterest expenses were $20.9 million for the second quarter, compared to $20.4 million in Q1. Recall that Q1 expenses included an $815,000 impairment of an OREO asset during the quarter, which we sold for a gain of $34,000 in Q2. In Q2, salaries and employee benefits expenses grew by $841,000, primarily due to executive severance payments during the quarter. We are laser-focused on expense control and believe that we continue to drive growth without adding meaningfully to our expense base. Tax expense totaled $3 million for the second quarter with an effective tax rate of 22.9%. This compares to an effective tax rate of 22.7% for Q1.

We anticipate our effective tax rate going forward will be relatively stable, and we do not expect the recent legislative changes to have a material impact on our tax rate. Our efficiency ratio improved to 56.24% and remained below 60% for the twenty-fourth consecutive quarter. We also continue to expand our tangible book value per share, which grew $0.40 during the quarter. Pat commented on this, but it's worth repeating that our $35 million subordinate debt offering was very positive for us in this rate environment. We priced below our expectations and below other comparable deals.

The $30 million in sub debt that we issued in 2020 will be carried until August and will impact Q3 results because of the extra interest expense, but we'll see savings of approximately $240,000 monthly starting in September. I note that the extra subordinate debt is also included in our total risk-based capital ratio at June 30. Even after the expected redemption, our capital ratios will remain strong, allowing for capital flexibility. We continue to be pleased with the momentum and very positive performance. We're executing our strategy to evolve into a middle-market commercial bank, and we are strengthening our core earnings profile.

We're also pleased this success allows us to drive shareholder value through the successful continuation of our buyback program and a stable cash dividend. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer, for her remarks. Darleen?

Darleen Gillespie: Thanks, Andrew, and good morning, everyone. As Pat and Andrew noted, we experienced robust deposit growth in the second quarter, highlighted by a $55 million increase in noninterest-bearing deposits. This growth was particularly strong among our commercial clients. This contributed to a favorable mix shift with noninterest-bearing demand comprising nearly 19% of our total deposits at June 30, up from 17% a year ago. Over the same time, interest-bearing demand deposits declined from over 19% of total deposits a year ago to 17.5% at June 30. This reflects our bankers' continued success in building and maintaining deep customer relationships, which supports our focus on growing core funding and lowering our deposit costs.

We have initiatives and banker incentives in place to support these goals, and they are proving to be effective. To be a bit more specific, in addition to continued momentum in retail and commercial lending, the small business banking team is advancing industry-specific initiatives aimed at driving deposit growth across the bank, positioning us to meet critical growth targets through year-end. As Andrew mentioned, our total deposits are up $48 million or over 6% annualized from the first quarter, and they grew $201 million or nearly 7% from the second quarter of 2024. What's hidden in this net growth is our continued success in managing out some higher-cost balances over the past few quarters.

If you look at the first six months of 2025, our average money market deposits grew by about $16.5 million or 2% over the first half of 2024, but the average cost declined by nearly 60 basis points, lowering the overall interest cost on these deposits by $2.8 million compared to the prior year period. Time deposits continued to grow, up $26 million during the quarter. We introduced a series of CD promotions to strategically onboard funding in support of our continued strong loan growth. In addition, targeted promotions were implemented to drive engagement with our newly opened branch locations, which I will speak to shortly.

We've continued to benefit from the runoff of certain customer CDs either maturing from previously higher rate terms or transitioning into our RAC rate pricing structure. We continue to execute our brand strategy, which is aimed at supporting engagement in our current markets and opportunistic expansion into adjacent markets. On June 9, we opened our De Novo branch in Summit, New Jersey, adding Union County to our footprint. That adds the ninth county where we have a physical location in New Jersey. Looking ahead, we have approvals in place to open another De Novo branch in Ocean Port, New Jersey, which will extend our footprint into Monmouth County, making that the tenth county in New Jersey where we will reside.

We will be closing our limited service Morristown office next month in August, transferring the deposits to nearby Zenville, where those clients will continue to be serviced. We also expect to complete the relocation and expansion of our Palm Beach, Florida branch to a more convenient and accessible location in nearby Wellington, Florida, staying in the prestigious Palm Beach County by the end of the third quarter. As mentioned, we run promotional campaigns in our new branch markets, and it has proven to be a successful tool in gathering core deposits and building new customer relationships.

Our customer retention and ability to onboard customers is strong, and we believe this should continue to support a solid and growing deposit base in 2025 and beyond. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Peter Cahill: Thanks, Darleen. Andrew described in his comments the overall loan growth we've experienced in the past quarter as well as the last twelve months. I think an 11% organic growth rate compares favorably to our peers. It's important to note that, as Pat pointed out, almost 75% of the loan growth over the past twelve months has been in the C&I and owner-occupied real estate areas. The regional commercial banking teams in New Jersey and Pennsylvania are our largest teams, and they continue to execute on their plans to grow loans and deposits, as does the smaller team in Florida. All are positioned to meet or exceed plan for the year.

I mentioned last quarter that we expect our new business units, private equity fund banking, and asset-based lending, to be our leaders in net loan growth this year. And through June, both are significantly ahead of plan. Regarding small business banking, which includes SBA lending, it's showing solid loan and deposit growth. Business Express, our credit score small business product, which is different from SBA lending and caps out at around $350,000 in availability, has shown growth through six months that almost equals what the group did in all of 2024. I'm also happy to report that our consumer lending area, including residential, also showed excellent growth through the second quarter.

We normally anticipate loan runoff through amortization and normal payoffs to equal new loans. But through June 30, that area is up $28 million due to an increase in referrals from our relationship managers and retail team. And lastly, regarding investor real estate, we closed a number of new loans in the second quarter. But similar to the first quarter, new loans were offset by payoffs. I mentioned in the last quarter a project to shift over time a greater percentage of our investor real estate business into our more specialized investor real estate team and focus on relationship development and increased management of loan concentration levels. That continues to go well.

One aspect of that has been a change in the ratio of investor real estate loans to total capital. We were at 420% in early 2024, went to 390% at March 31, 2025, and we finished Q2 at 380% after adjusting for a normalized level of sub debt in our calculation of capital. The lending pipeline at the end of the second quarter stood at $31 million of probable fundings, down 8% from the level of probable fundings at March 31. I'm satisfied with the pipeline for a couple of reasons. The average month-end balance for Q2 was $323 million, which was more than the average for Q1.

And this, coupled with the loan growth we've experienced, which pulls loans off the pipeline, and the activity I'm seeing on a day-to-day basis makes me feel good about where we are. If one breaks down the components of the pipeline at quarter-end, C&I loans made up 68% of the overall pipeline, up from 63% at March 31, which we see as a positive. On the topic of asset quality, I really don't have anything to add to Andrew's comments. We think things continue to be in good shape. The loan portfolio continues to be well diversified, and the loan growth numbers confirm the direction there.

We have nothing new to report on the impact of changes in federal government spending or tariffs. We're seeing little impact there at this point as well. In summary, I think we had a good second quarter. Probably a good start to Q3 with the lending pipeline that's in place. But as always, things like loan payoffs from unforeseen asset sales by customers can impact loan growth. That concludes my remarks about lending in Q2. I'll turn things back to Pat Ryan for some final comments. Pat?

Patrick Ryan: Thank you, Peter. At this point, I'll turn it back to the operator to open up the Q&A.

Operator: Question, press star, then the number one on your telephone keypad. We do request right now that you will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Justin Crowley of Piper Sandler. Your line is now open. Please go ahead.

Justin Crowley: Good morning, everyone.

Patrick Ryan: Morning, Justin.

Justin Crowley: Maybe just dig into some of the commentary on forward loan growth moderating. The C&I verticals have been growing at a pretty clip here for a while. So, you know, wondering how we should think about continued growth there, versus some of the other areas of the portfolio that could be, you know, service and offset.

Patrick Ryan: Yeah. It's a good question. I mean, in any given quarter, you're lining up a lot of different things. Right? You got levels of loan demand across your segments, across your regions, and different time frames to get things closed. And so it's a little tough to say with much precision, you know, within a specific ninety-day window what you're gonna see. I would say, in general, our guidance has been and continues to be that, you know, on average, we're looking to generate plus or minus $50 million in net loan growth in a quarter. That being said, we just had two quarters that were well ahead of that.

If history is any guide, we usually end up seeing a little bit of a slowdown on the heels of a couple of strong quarters. So we're sort of predicting that things will slow in the back half of the year, not because of any macroeconomic trends or any slowness we're seeing in the market, just more a function of how our business works. And as we close and fund loans, it takes some time to refill the funnel, etcetera. We've also seen a little bit of an unusually low level of payoffs in paydowns, Justin.

So, some of the net loan growth is driven not just by new production, but by our estimates of what we think will pay off and pay down during any given quarter just based on historical trends and during the first half of the year, the payoffs and paydowns were a little slower than what we've seen in prior years. So again, we're sort of estimating that payoff and paydown trend will normalize and sort of pick back up a little bit together with some time it takes to refill the pipeline. So, you know, we're thinking things will be a little slower in the back half of the year.

But as Peter mentioned, you know, the pipeline remains healthy, and the payoffs are a little difficult to predict. So, sorry we can't be more specific there. But the other thing I think you asked was just about mix, and I think we'll continue to see a majority of the growth coming from the C&I and the owner-occupied categories. We continue to be active on the investor real estate side, but, you know, certainly being selective and, you know, a lot of times, new production is replacing, you know, runoff and pay downs there. So, we do see some modest growth in that quarter going forward, but we expect growth in the C&I units to be a little bit strong.

Justin Crowley: Okay. Got it. That's helpful. And then, like, on the C&I units, the specialty verticals that you're in, can you give us a sense how much of the growth this quarter and maybe even just the past few quarters but, you know, how much that growth has been driven by line utilization versus new customer acquisition?

Patrick Ryan: Yeah. I'll let Peter try to give a little more clarity if he has it. But, you know, from our perspective, we haven't seen big changes in line utilization overall. And in general, the growth has been coming from new customer acquisition, but Peter, I don't know if you have any color you can add on kind of the line utilization question.

Peter Cahill: No. That's right. The line, I check it every quarter, and it never seems to fluctuate much. You know? That's, you know, one or 2% can be a big number, but we continue to be in that 41-42% line utilization rate, quarter after quarter. Yeah. There is kinda more fluctuation in, like, ABL, for example. You see big chunks moving in and out of individual loan commitments there. But I would say the growth has been primarily from new customer acquisition.

Justin Crowley: Okay. Got it. And then on the outlook for deposits, you know, a lot of success increasing that noninterest-bearing bucket for a number of quarters running now. Do you think we could continue to see that trend play out? I know you mentioned leaning a bit more on CD promotions to fund growth, maybe in part because of some of the new, you know, branch locations. But just wondering how you think that mix could shake out.

Patrick Ryan: Yeah. Listen. We're obviously working hard to drive that noninterest-bearing percentage higher. It is working. Right? I think, you know, post Malvern, we had dipped even as low as 16%. So nice to see it move from 16 to nineteen. You know, that can also be a little harder to predict because, you know, you'll have some bigger swings in, just kinda balance levels based on seasonality or, you know, companies do a capital raise or a customer sells his business and gets a big chunk of money. So there's a lot of, you know, kind of singular events that can impact that. But, you know, certainly, the trend is one we wanna continue to move higher.

And I'd say on the other side and the interest-bearing side, we're, you know, we're continuing to see pressure from quote, unquote, parked money looking for yield in, you know, money market funds and investment products. So in some cases, you know, we've tried to offset some runoff in some of those categories with some additional CD dollars. Plus, you know, at the end of the day, when you open a new branch location, offering an attractive CD is a good way to get people in the door, get them to know you're there, and then build the relationship.

And so it's not uncommon regardless of the underlying trends that as we open a new location, we'll see a little bit of an uptick in CD activity just because we're running promotions for those newer offices. But, you know, hopefully, that answers the question, but, you know, a little harder to predict on the NIB side.

Justin Crowley: Understood. Gotcha. So I guess with maybe at least net loan growth slowing through the back half of the year, do you look at share repurchases as still a good use of capital, with the software it is now? And, you know, is there room to perhaps get even more active there?

Patrick Ryan: Yeah. I mean, I certainly think we have the capital to be active on the repurchase side. You know, we try to be selective, i.e., you know, making sure we're buying at the right time and the right price, and as I'm sure you've noticed, there's been a fair amount of volatility in the bank stocks even as they've been moving higher. And so we generally don't rush to keep buying as the market's moving higher just because, you know, you tend to have some headline risk that pushes things down, and then that creates good buying opportunities for us.

So trying to be disciplined and selective but certainly think at the right prices, we can continue to find opportunities to repurchase.

Justin Crowley: Okay. And then maybe just one last one. Just a question on the appetite for M&A here. I know, you know, the currency maybe isn't quite where you want it to be, but can you remind us how whole bank deals fit into the strategy right now, you know, the level of conversations being had out there and, you know, what you'd potentially look for in terms of size and geography.

Patrick Ryan: Yeah. I mean, listen. We've had, I think, a pretty consistent and disciplined M&A strategy. We think size and scale matters, and so we wanna be in a position to look at opportunities for M&A. Obviously, we've got to be very careful without a current. We'd be careful with a good currency. But, you know, our job is to find the right opportunities at the right price. And, you know, we don't have a magic number in terms of size threshold. But I do think, in general, there's a lot of dialogue in the marketplace.

But it's not always clear how much of the dialogue is, you know, serious dialogue versus folks just, you know, thinking about a variety of different things, but, you know, ultimately unclear whether any of those, you know, more strategic type transactions would come to fruition. So, you know, we've been pretty vocal about, you know, understanding the importance of looking at M&A from all directions. And we continue to make sure we're in the market and aware of conversations and having conversations, but I would say in the market, I think there's gonna be a bit of a resurgence in activity. Whether that means we'll end up doing something or not, I couldn't tell you, obviously.

It's hard to know, but our strategy and philosophy on M&A hasn't changed.

Justin Crowley: Okay. And then just from a geography, I know you're getting into some new counties in New Jersey, but as far as inorganic growth, are there any areas outside of the footprint that are contiguous to kind of strike you as appealing if you, you know, the right opportunity were to come along?

Patrick Ryan: You know, listen. I think geography is important in a sense that at a high level, you tend to see, you know, lower-cost deposits at franchises that are a little bit removed from the more competitive urban markets. And so I think for us, our strong loan growth generation capabilities, you know, finding an opportunity for a low-cost deposit franchise would be very interesting if, you know, that became available to us. And then I think if you're looking at more sort of tuck-in, you know, economy of scale type transactions, then, you know, you're probably looking more within the existing footprint to generate the cost saves.

So, again, I think we'd look at opportunities in different geographies, but the strategic rationale would be different, obviously.

Justin Crowley: Okay. Great. I appreciate all the detail. I'll leave it there. Thanks so much for taking the questions.

Patrick Ryan: Yeah. Thank you, Justin.

Operator: Your next question comes from the line of Manuel Navas with D.A. Davidson. Please go ahead.

Manuel Navas: Hey. Good morning. Can I start on some of the near-term NIM movements? You talk about it being pretty stable. But just kind of dig a little deeper. What are kind of new loan yields coming at? How fast can you lower deposit costs? Just kind of talk through some of that a bit.

Patrick Ryan: Yeah. I'll talk high level, and then I'll let Peter and Darleen get more specific in their areas. But I'd say in general, right, we've got a very short-term headwind on NIM with the extra sub debt, if you will, that will be going away. It's the August. Outside of that, I think the general trends are decent in terms of, you know, we're seeing an ability to gradually drive higher loan yields with some repricing of some older assets as they come due. We're having some success, you know, slowly trying to push down some of our higher rate liability deposit costs.

So, you know, I think we've got a little bit of a headwind in terms of the reduction of the merger accretion income that, you know, comes out of net interest income and can hurt the margin. But with the growth and the fact that the new business seems to be margin accretive, I think we're still kind of guiding high level towards, you know, flattish margin over the next couple quarters. But Peter, maybe you can talk a little bit about what you're seeing on the loan yield side, then turn it to Darleen to talk a little bit about what you've seen on the deposit cost side.

Peter Cahill: Sure. You know, as far as pricing on the lending side, I mean, you know, shorter-term, floating rate loans, or small business loans continue to be prime to prime, you know, plus a couple of points. On the fixed rate side, which would be most of investor real estate and some fixed rate and smaller investor deals getting done in the regions, you know, we're still looking for 250 to 300 basis points over, you know, we kind of price the five-year treasuries or FHLB, which could be 25 to 30 basis points over treasuries. But we're trying to get in that, you know, 250 basis points spread on that.

And overall, when you look at new loans that have come in on a month-to-month basis, our weighted average yield on that, you know, bucket of new loans each month has been in the, you know, I'd say the low to mid 7% range. So I think we're still doing a good job holding to what we wanna get on pricing and able to negotiate what we want there. Between, you know, loan pricing and deposits, I think we're in good shape.

Patrick Ryan: Thanks, Peter. Darleen, you wanna jump in?

Darleen Gillespie: Yeah. Sure. So one of the common themes we've talked about is, you know, basing our relationship banking and looking at clients and determining how we can ensure that we are competitive because there is still competition out in the market relative to deposits. But also making sure that we're fairly priced. We've been able to moderate some of our pricing, lower some of our deposit costs as a result of that. And then I'll also add, we have great success with some of our CD maturities that were at higher rates that are rolling into our rack rate pricing.

I would say we probably have about an 85% retention rate in that portfolio, which has boded well for us in terms of helping us manage our deposit costs. And that's even despite rolling out some CD promotions as a result of some of the activity on the loan side and also with the new branches that we are opening. So I think we have a good handle on managing our deposit costs, and I think we'll see some additional savings regardless of what the Fed decides to do.

Patrick Ryan: Thanks, Darleen. I really hope that helps. But, you know, obviously, a little bit of a moving target.

Manuel Navas: It does. I mean, the takeaway is flattish overall, but I just wanted to dig in on a couple of details there. The PAA was about $2.7 million this quarter. Where does and it's supposed to trend down. Where should it hit? Where is it expected in the second half of the year? Andrew, you got those quarterly numbers, Andy?

Andrew Hibshman: Yeah. It'll it depends a little bit, Manuel, on payoffs. Right? So if you see an acceleration of payoffs, the number could change a little bit. But so, yeah, we saw a decline of only about $100,000 Q1 to Q2. We expect that to be a little bit higher than that over the back half of the year in terms of the decline quarter over quarter. So $200,000 decline each quarter and then into 2026, the number will drop more significantly. But, again, it can depend a little bit on prepayment activity on the loan side.

So it could jump around a little bit, but we are expecting based off kind of the current run rate for that to come down again in the third and again in the fourth, but not huge declines. But then starting in 2026, the number comes down more significantly.

Manuel Navas: I mean, it's kind of impressive with a lot of the noise and kind of the new branches with maybe having higher deposit costs. That you have kind of a stable NIM, you know, with the sub debt as well. As we get into, like, early 2026 and PAA stabilized, the sub debt is gone. Could you start to see some ramp in NIM? Just kind of thoughts on this kind of idea.

Patrick Ryan: It's certainly possible. Right? I mean, the big question is tell me the shape of the yield curve in January 2026, and then I'll give you a better answer. But, listen, there's certainly an opportunity, but, you know, there's a lot of different things that might happen. So we like that as a potential future benefit, but, you know, we'd rather be a little more conservative in the guidance and, you know, hope the optimistic scenario plays out.

Manuel Navas: And with this, you know, your balance sheet's more mutually positioned. If there were to be cuts, you still think stable-ish? In the back half of this year? Just as how it's structured currently?

Patrick Ryan: Yeah. I mean, that's kinda what we saw last time around with the cuts. You know, we were able to move liability costs enough to offset the, you know, whatever it is, the 25% of the balance sheet that also goes lower when the Fed moves. So I do think in the long run, cuts will be beneficial if the long end kinda stays where it is and the short end goes down and we get a little more steepening, I think that will be a benefit to us, you know, in the back half of 2026 and into '27. But, you know, you don't get the benefit right away until the steepening really kinda gets through the repricing process.

Manuel Navas: Shifting lanes a bit. What would get you to pick up loan growth? If the funding comes in faster, you probably can't have your folks run this hard consistently. I think that's what came across in some of your commentary is to get the re refill the opportunities a bit. But can you just talk about what would take you to re to keep loan growth accelerating and general loan demand? It seems like it's a lot better than you maybe expected in the market.

Patrick Ryan: Yeah. And listen. I don't I think, you know, we now have enough different business units, different teams, different geographies. We're seeing a lot of good loan opportunities. So it's really a funding constraint at this point more than it is a loan opportunity. We could do more quality loans if we found the good, you know, low-cost funding to support it. So the market is certainly, you know, there with the diversity of the teams and the geographies and the business units. I mean, we feel really good about the fact that we don't have to stretch and we don't have to hope.

We continually get to look at, you know, quality, and we pick the ones we like the best.

Manuel Navas: That's great. And just wanted to clarify, was there any lumpiness in a noninterest-bearing end-of-period number? I mean, the average is a little bit more tame. But still solid, good growth trend. Yeah. And could you just comment a little bit on commercial kind of deposit pipelines?

Patrick Ryan: Yeah. So listen. There's always lumpiness in the NIB because there's always some significant fluctuations. Right? Some quarters, the fluctuations work against you. Some quarters, they move higher and they work for you. I certainly think we benefited from some positive fluctuations. So there's probably some accounts that are sitting there running higher than average at the moment. But it's not like it's not like loans where, hey. You book a big loan, and it kind of explains the quarter. There's so many moving pieces and so many different accounts fluctuating at different levels that, you know, if I had to guess, given the strong uptick in Q2, we'd probably see some fluctuations back down a little in Q3.

But, you know, nothing in there that says, oh, there was, you know, kind of a lot of noise in the number, if you will. In terms of commercial deposit pipelines, I think they look pretty strong. They're kind of consistent with where they've been, and, you know, if we were growing loans $25 million a quarter, we feel really good about the $50 million in deposits. But because we grew $90 million and we're sort of saying, hey. We need to do better than $50. But I think the overall pipelines there continue to look pretty good.

Manuel Navas: Thank you so much for the commentary.

Patrick Ryan: Yeah. Sure. No problem. Thank you, Manuel.

Operator: Your next question comes from the line of Kyle Girman with The Hobby Group. Please go ahead.

Kyle Girman: Hi. Good morning, everyone. I was wondering if you can share details on the NPL and inflows this quarter. And additionally, how is asset quality holding up in your specialty segments? Like in SBA and private banking?

Patrick Ryan: Yeah. So, obviously, you saw in the numbers, there was a little bit of movement a couple loans that moved into the nonperforming category and, you know, listen, not anything that was alarming or really candidly unusual. There's flows in and flows out, and, you know, we try to keep an eye on the overall trends. But we're not seeing anything systemic at this point that would lead us to believe that there's gonna be major cracks on the credit side. But the I don't know. Peter, anything you wanna add there?

Peter Cahill: No. I'm just trying to think over the segments mentioned there. Private equity fund banking, no real changes this quarter. ABL, clean. Yeah. I mean, SBA, we have there's a great pipeline there. I think we should have a pretty good second half of the year getting loans closed and closed fund that didn't, you know, sell we typically sell the guaranteed portion. We haven't seen much problem loans coming out of SBA. I'd say it's just, you know, general uptick caused by increased loan volume and, you know, a couple smaller problem loans. Nothing unusual.

Kyle Girman: Got it. Thank you. And then you mentioned tariffs on loan demand in the commentary. I was wondering if you could provide some more color. Are you seeing any specific trends or shifts in borrower behavior due to the current tariff environment?

Peter Cahill: Well, I mean, if by trends, you're saying, you know, anything in certain business segments, no. I mean, we keep bringing the topic up and RMs are out, you know, researching the issue and, yeah, you see a customer or two that says they're building inventory to hedge against, you know, changes in pricing and that kind of thing, but it's minor. There's nothing across the board that gives us much concern right now. I mean, we are watching it. We're looking for feedback at our various loan committees and things like that. But no big impact as we speak.

Kyle Girman: Got it. Thank you. And then you did mention balance sheet positioning for rate cuts. I was wondering if you could specifically quantify the impact of each, like, five basis point rate cut on your NIM?

Patrick Ryan: Well, again, I think the impact has been and should be muted in the sense that we see a repricing of our, you know, variable rate assets. And we make an appropriate adjustment on the nonfixed deposit funding side to really offset the impact. So it tends to be, you know, a wash in the short run, and then obviously, if it generates a steeper yield curve moving forward, then we'll start to see some benefit down the road.

Kyle Girman: That's all I have. Thank you for your time.

Patrick Ryan: Alright. Thank you, Kyle.

Operator: Again, if you would like to ask a question, press 1 on your telephone keypad. That concludes our Q&A session. I will now turn the call back over to Mr. Ryan for closing remarks.

Patrick Ryan: Okay. Thanks very much, everybody. We appreciate your time today, your interest in First Bank, and we'll look forward to reconnecting with folks after third quarter results are released. Thanks, everybody.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Everyone, have a great day.