First Bank Aktie

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank Earnings Conference Call First Quarter 2026. [Operator Instructions]

I would now like to turn the call over to Patrick Ryan, President and CEO. Please go ahead.

Thank you. I'd like to welcome everyone today to First Bank's First Quarter 2026 Earnings Call. I'm joined by Andrew Hibshman, our CFO; Darleen Gillespie, our Chief Retail Banking Officer; and Peter Cahill, our Chief Lending Officer. Before we begin, Andrew 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, 2025, filed with the FDIC.

Pat, back to you.

Thank you, Andrew. Earnings came in below our expectations in the first quarter. Elevated credit costs in the credit scored small business portfolio were the primary driver. We have taken very proactive stance regarding the management and cleanup of this portfolio. The product parameters and sales processes were revamped starting in the summer of 2025, and all known issues in the portfolio have either been charged off in full or specific reserves have been established. Elevated loan payoff activity also impacted earnings.

As Peter and Andrew will discuss, unusually high payoffs in the fourth quarter drove lower average balances during Q1, and that impacted the overall results. We're still working to make up for those elevated payoffs but strong loan growth so far in April and healthy pipelines provide reason for optimism that we can still achieve our loan growth goals. The net interest margin was down slightly in the first quarter, partly driven by reduced purchase accounting accretion income and partly driven by heightened deposit competition.

Overall, credit quality seems to be holding in at manageable levels. Specifically, our levels of nonperforming assets and criticized loans remain at levels well within historical norms and peer averages. Furthermore, our strong allowance for credit losses and overall capital levels provide a strong buffer. Regarding overall core profitability, I believe we'll see a return to strong balance sheet growth as we move forward as payoffs normalize. And in fact, through mid-April, net loan growth was up $50 million, putting us pretty close to plan. The margin will obviously be dependent on the overall rate and competitive environment, but we expect it should remain at healthy levels moving forward.

And the first quarter expenses were somewhat elevated based on seasonal factors like payroll taxes and snow removal, and we expect they will remain relatively stable throughout the remainder of this year. Furthermore, our strong capital levels provide significant dry powder for share buybacks should attractive buying opportunities emerge.

In summary, while the quarterly results were disappointing, we believe the elevated credit costs are isolated to the small business portfolio and profitability should return to stronger levels as we move forward in 2026. At this time, I'd like to turn it over to Andrew to provide some additional detail on the financial results. Andrew?

Thanks, Pat. For the 3 months ended March 31, 2026, we recorded net income of $7.6 million or $0.30 per diluted share. This translates to a 0.79% return on average assets. Net interest income decreased $2.2 million compared to the fourth quarter, primarily due to lower average loan balances, which resulted from the limited growth during the current quarter, coupled with the late quarter timing of payoffs in the linked fourth quarter. Additionally, the yield on average loans declined by 21 basis points, which was partly related to the elevated level of prepayment fees in the linked fourth quarter. This outpaced the 15 basis point decline in interest-bearing deposit costs and contributed to a 5 basis point decline in the net interest margin.

I'll note that compared to last year's first quarter, net interest income grew by $1.9 million or 6% and that was primarily driven by lower interest-bearing deposit costs. At 3.69%, we believe our first quarter net interest margin remained very strong and compares favorably to our peers. Looking ahead, we continue to manage a well-balanced asset and liability position, and we anticipate stronger loan and deposit growth, which should result in increased net interest income generation regardless of what happens with rates. We anticipate continued declines in our acquisition accounting accretion over the next several quarters, and we are also seeing enhanced deposit pricing pressure as the market adjusts to the expectation that the effective Fed funds rate will stay higher for longer. Offsetting some of that pressure is that we continue to replace the runoff of lower-yielding assets with higher-yielding loans.

We expect these factors in aggregate to support a relatively stable margin with the potential for some pressure should the current flat yield curve environment persist. Net charge-offs increased to $5 million for the first quarter from $1.7 million in the linked quarter, almost exclusively related to our small business portfolio. This was the primary driver of increased credit loss expenses in the first quarter. Our allowance for credit losses to total loans increased 1 basis point to 1.39% from 1.38% at December 31, with the recent increases in our allowance, our reserve coverage ratios are very strong.

Noninterest income grew to $2.4 million in the first quarter of 2026 compared to $2.3 million in the linked fourth quarter and $2 million in the first quarter of 2025. The slight increase in the current quarter primarily relates to higher earnings from some modest investments we have made in certain small business investment funds. Noninterest expenses were $20.9 million for the first quarter compared to $17.1 million in Q4. The increase was primarily driven by $1.9 million gain on sale of an OREO asset, which was booked as a contra expense in the fourth quarter. Excluding the impact of this nonrecurring item in Q4, noninterest expense increased by $1.9 million, primarily due to seasonal factors.

Salary and benefits expense increased primarily due to typical first quarter increases related to merit salary adjustments benefit cost increases and increased employment taxes connected to annual incentive payments. Occupancy and equipment expenses were impacted by annual rent increases, along with the impact of higher maintenance costs given the harsh winter in our primary footprint.

Looking ahead, we view our first quarter expense level as a reasonable overall run rate as we move forward. The first quarter marked our 27th consecutive quarter of operating with an efficiency ratio below 60%. This has positioned us as a top quartile performer among our peers on this metric and is a differentiating strength for First Bank. We expect to drive revenue growth during the rest of the year without needing to add to expenses, which should move our efficiency ratio down over the next several quarters.

Tax expenses totaled $2.3 million for the first quarter with an effective tax rate of 22.7%. This compares to 25.7% for Q4. First quarter taxes included the benefit of items related to stock compensation activity, which historically has an outsized impact during the first quarter. We anticipate our future effective tax rate will be approximately 24% to 25%. Our capital ratios remained strong. We executed a modest amount of share repurchases during the quarter, and we could fully execute our approved $20 million buyback program and still maintain strong capital ratios.

For example, assuming $20 million in buybacks and a static balance sheet, our total risk-based capital would be approximately 12.5%, well in excess of any regulatory minimums or internal policy limits. Going forward, we aim to continue driving shareholder value through a combination of core earnings, a stable cash dividend and share buybacks as applicable over time.

At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer for her remarks. Darleen Gillespie?

Thanks, Andrew, and good morning, everyone. Deposit growth of $25.1 million was modest during the quarter. While we saw solid activity onboarding new relationships and expanding existing seasonal fluctuations and some expected outflows influence ending balances for the quarter. Average interest-bearing deposit costs came down 15 basis points during the quarter, and we benefited from the Federal Reserve rate cuts that occurred in the fourth quarter of 2025 as well as our continued proactive efforts to optimize and manage deposit pricing.

Going forward, we may see some moderation in this benefit as heightened industry competition continues to place pressure on deposit pricing. We remain focused on striking the appropriate balance between growth and cost discipline. Overall, we continue to execute effectively against our dual priorities of deepening relationships while prudently managing funding costs. In addition, targeted promotional pricing has proven successful in attracting new customers and importantly, retaining those relationships beyond the promotional period. Our newly opened and relocated branches are doing well and meeting deposit growth expectations. Retention levels among customers impacted by branch consolidations have remained strong and associated attrition has tracked within our planned and budgeted expectations. This is a testament to the outstanding execution of our relationship bankers across our footprint.

Looking ahead in 2026, deposit growth continues to be a priority in order to fund our expected loan growth in a profitable manner and to maintain a strong net interest margin. We intend to achieve this by maintaining a strong deposit funding pipeline, continuing to retain and grow existing relationships and utilizing promotional pricing when prudent and necessary to win in this highly competitive market. Our teams are closing loans and adding full operating accounts, which is a key element of our growth and funding strategy.

After a very active year of optimizing our branch network in 2025, we have minimal branch activity on the horizon in 2026. We will continue to be opportunistic where it makes sense to enhance the efficiency of our network, the convenience for our customers and our potential exposure to new clients in existing or adjacent markets. But right now, our focus is on optimizing the growth and pricing of our deposit portfolio. We intend to keep working to achieve our goal of bringing our deposit costs closer to our peer bank median.

At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Darleen. As Pat and Andrew described, our Q1 numbers reflected a slower quarter in terms of loan growth. Last year, as you know, despite average loan growth of $267 million, we finished with annual growth of $149 million or 4.7%. Much of that second half decline was due to loan payoffs in Q4 of $135 million, which far exceeded payoffs that averaged $50 million in each of the previous 3 quarters.

Results this past quarter were impacted again by loan payoffs. We mentioned a good loan pipeline at year-end. And I think we had a pretty good quarter from the standpoint of converting that pipeline into new funded loans. Loans closed and funded in Q1 totaled $106 million, which equals the quarterly average for both 2024 and 2025. So not a slow quarter from a standpoint of new loans closing and funding.

Payoffs in Q1 were $73 million, however, higher than our average quarterly payments in each of the past 5 years. Payoffs bank-wide were made up of 59% investor real estate loans. Of all of the payoffs in the quarter, the same figure, 59%, stemmed from the underlying asset being sold and the balance of those payoffs were primarily from loans being refinanced out of the bank. As in previous quarters, new loans continue to be centered in C&I and owner-occupied real estate. For the quarter, this category made up 50% of new loans with investor real estate loans comprising 40% and consumer lending 10%.

We're seeing the same competition we've seen in previous quarters, primarily from the regional banks in our market. We continue to get decent spreads in the 250 basis point range over FHLB. Some of the competition is pricing lower, and we're also seeing banks loosening terms a bit by not requiring deposits or offering longer amortization schedules, et cetera. Despite the competition, we are still seeing good things in our lending pipeline. After closing and funding over $100 million in new loans, as I just described during the quarter, the pipeline at quarter end stood at what we call probable fundings of $383 million, up 15% from where it was at year-end.

The number of loans in the pipeline, these are the number of individual loans in the -- at quarter end was up 9% over year-end. Regarding the makeup of those loans, 65% of C&I loans compared to 61% at 12/31. The impact of our solid pipeline, as Pat mentioned, has been seen already in Q2. In mid-April, we hit loan growth for the year of close to $50 million, which is where we should have been a couple of weeks earlier at March 31.

On the topic of asset quality, we've mentioned the softness we've been experiencing in the small business portfolio over the last couple of quarters, and Pat and Andrew both talked about the impact this past quarter. Last quarter, I mentioned that we've turned over staff in that area and significantly tightened credit parameters, which, as you would imagine, has slowed production significantly. Delinquencies are no longer growing and we are very focused on providing attention to the relationships we have in that portfolio presently.

Otherwise, delinquencies across all business lines were very manageable at quarter end. The earnings release did mention that our increase in nonperforming loans was related primarily to the addition of a well-secured single-borrower commercial real estate credit totaling $9.5 million. I'll just add that this assisted living property shows current cash flows north of 1.8x debt service coverage and a loan-to-value of 52%. So while it impacts our numbers presently, we expect a positive resolution there.

In summary, while the payoffs we experienced resulted in a slow quarter as far as loan growth goes, we've seen pickup since then and we remain confident of our plan to grow the loan portfolio by $200 million this year. All segments are expected to contribute to that growth.

That concludes my remarks about lending. So I'll turn things back now to Pat for some final comments.

Thanks, Peter. At this point, I'd like to open it up for the Q&A.

[Operator Instructions] Your first question comes from the line of Justin Crowley with Piper Sandler.

First, I was just wondering if you could spend just a little more time on the small business portfolio that I know we've discussed a lot. Just a little more on what's been driving the weakness there? And what gets you to a point now where you're comfortable that any further negative impact in that book should be contained, with just some of the actions taken over the past couple of quarters?

Yes. Absolutely. So the short answer, Justin, is there's no one factor. Certainly, I think we've seen plenty of data in the market that small businesses have been feeling some stress given the volatility in the overall economy. And so certainly, I just think general economic factors within a small business portfolio, obviously, these are companies by definition that have a smaller revenue base and therefore, just less of a cushion to absorb things like volatility in margins, loss of a big customer, et cetera.

On top of that, some of it, we believe was tied to folks being a little more aggressive than we would have liked on the overall marketing of the product. It is a credit score product. It is one that we've been using for 6 or 7 years now. So it wasn't a brand-new solution. But certainly, we were looking to grow and scale that business over the last couple of years. And I think some folks in an effort to try to build that. We're moving beyond kind of the core tenets of our relationship banking model.

So we've revamped those processes. We've tightened up the parameters and as Peter mentioned, sort of new production has slowed down significantly. And we're tracking the data closely. When we see issues, when we have significant delinquency, we're moving quickly to take care of those loans either through charge-off or specific reserve and as Peter mentioned, as we've looked at some of the delinquency trends, it feels like things are starting to settle down there.

Obviously, time will tell, but definitely feeling like that initial surge is past us. And given the changes we make -- we've made over the last 9 months, we think the results moving forward should be significantly better, exactly what better means. Obviously, time will tell. But again, it's a relatively small portfolio. It's down under $100 million at this point. And given the steps we've taken to address the known issues, we think we're definitely getting past the uptick and we think we'll see some better performance out of that portfolio moving forward.

Okay. And then just to clarify, the stress you're seeing, it's not coming from the SBA product. It's coming outside of that program and smaller dollar type loans. Is that accurate?

Correct. These are smaller ticket, a couple of hundred thousand lines of credit term loans that are not necessarily SBA related. So it's not an SBA-specific situation.

Okay. And you said it was about $100 million. Just looking to put some more numbers around it. Do you have what the reserves against that portfolio where those stand? And then just a sense of where charge-off rates, what you've experienced in that book specifically so far?

Yes. If you look at over -- obviously, if you looked at the quarter, right, the $5 million number was almost exclusively related to that portfolio. I think over a 12-month period, the number was probably closer to $9 million. But if you sort of scroll back further, again, this isn't a brand-new product. It was one that we've been using for a while that it -- it felt like the scoring became a little less predictable. Some of it might have been related to some of the cash infusion froms COVID, we can't really say for sure.

But prior to that, the performance was actually really good. We had very minimal charge-offs. So if you look at it at a point in time, the numbers look really high, you spread it out over a 2- or 3-year period, you're probably looking at maybe 2% to 3% a year over that time frame. So again, higher than we'd like. And obviously, as a result, we made the changes to the underwriting and the sales process to slow that production down. But what we have in the portfolio now is folks that have been with us for a while, folks that have been paying as agreed that haven't been showing delinquency issues. And so again, we think the performance moving forward should be significantly better.

Pat and Justin, I'll just quickly add. So we have about $2 million of specific reserves allocated to known problems. And we've obviously also made some adjustments in our allowance calculation to put some money away for unknown problems. But right now, it's $2 million of specific reserves for identified specific loans and we've adjusted some of the other factors within our calculation to put some more money away to address some potential issues going forward.

Okay. So does that get you north of sort of like a 3% reserve in that book?

Yes, probably. I mean, again, within the allowance models, the small business is part of the overall C&I. But you can see the overall allowance is up at [ 1.37 ], which is obviously a very healthy level relative to where we've been relative to where the industry is. So we certainly think there's significant money set aside to deal with potential issues.

And listen, we're charging everything off in full. There will be some recoveries here. We're not factoring that into the numbers, but we think that we put a lot of money aside to make sure we're protected here.

Got it. I guess just shifting gears, just on the comment that the NIM should hold relatively stable here, and that's kind of been the messaging. I was wondering if you could detail a little of what's embedded in that just in the way of new loan yields, where those are coming on it versus what's rolling off the portfolio? And then just if you it, have just a sense of the volume of repricing opportunity as we get through the year?

Yes, I can address part of that. And Peter, you can jump in, obviously, on the new loan yields. With some of the volatility in the markets, treasury yields moving higher, I think, you have put loan pricing well in the 6% to 6.5% range, higher depending on asset class product type things like that. And then in terms of, Andrew, the repricing and the modeling, if you want to provide some of the details there.

Yes. So we still have a good chunk without getting into a ton of specifics of loans that were repricing off of loans that we originated 5 years ago, obviously, a significantly lower interest rate environment. So we have we have a lot of loan activity that's repricing into, like I said, a couple of hundred basis points higher in some instances. So again, I think we believe that, that repricing is going to offset some of the purchase accounting accretion declines that -- those declines we expect to be a little bit more muted than they were over the last couple of quarters. I believe purchase accounting accretion was $1.2 million in the first quarter. It was $2.6 million, I believe, last year. So that will continue to come down, but probably only $100,000 to a couple of hundred thousand dollars a quarter going forward. So that will continue to have a negative pull on the margin.

But again, I do think that we continue to see enough loans repricing higher, that should offset most of those declines. And then obviously, it will be very dependent on what we can do on the deposit pricing side, whether we need to price up to bring in new money to fund the loan growth that we expect is the big wildcard there. But again, I think we feel fairly confident that we can maintain a fairly stable margin with, I think, a lean towards maybe some pressure depending on deposit pricing over the next several months.

Okay. And then do you just have just what floating rate exposure is in the loan book?

It's still about 25% of the portfolio. It fluctuates a little bit. We have -- that number has moved a little higher over the last couple of years because we've been doing more C&I and shorter-term stuff than we had been doing in the past, but it's still about a 1/4 or about 25% of the portfolio. It's gone up. I think it was closer to 20%, maybe a couple of years ago. And now, it's between 25% and 30%, but around 25% is still the right number.

Okay. And so would that all reprice immediately? Or is there -- how much of a lag is there in that? And then is there any protection in the way of interest rate floors?

I don't have the details on the floors, but yes, there is some protection there. Most of it would reprice either right away or like the next month. We still do have some interest rate swaps in place that are protecting us a little bit on some of these things, but not much, especially as rates move lower, some of those would move lower.

But it's pretty much right away for the 25%. There are some floors, but I don't believe most of the loans are at the floors. Obviously, if we see some bigger rate cuts, the floors become more relevant than like 0.25 point adjustment by the Fed.

Okay. That's helpful. And then just on expenses, you called out some of the seasonally higher occupancy costs inflated the number in the period. But as we look at the comp line, is something a good way to think about that level moving forward. I know you mentioned some higher payroll taxes. Just kind of curious if that's a decent run rate or if there's -- how much should flow back out just as we think about the forward trajectory here?

Yes, first quarter is a pretty reasonable expectation it could move a little bit down because of that [indiscernible] we did [indiscernible] salary increases in March, so you don't have the full impact of those salary increases in the first quarter. So I think the run rate in Q1 is probably pretty close to where we'd see things going forward because some of the onetime items will get offset by the increases in the salary line item that would happen late in the quarter.

But I don't anticipate there being any significant increases to that number going forward. So I think, again, I think as we mentioned, I think in most the expense line items, I think a fairly stable run rate going forward over the next several quarters is kind of where we're seeing things.

Okay. And then just maybe on the broader topic of expenses, maybe a higher-level question here as well. But, just a lot of talk on managing expense levels. And so I was just wondering how you balance that against further investment? And where do you think you stand, particularly on the technology side as you're seeing more rapid AI adoption, a lot of banks experimenting with different use cases. Trying to be fast followers. So just any thoughts on how you're implementing that to the extent that you are?

Yes. I'd say it's a combination of working internally with folks who are sort of our first movers in terms of, we've got a full team that's sort of doing testing. They have access to the more advanced tools developing use cases. I think as those use cases roll out, there will almost certainly be some tech costs associated with them, but in many cases, there should also be corresponding savings. And so there may be a situation where the tech spend might increase a bit, but we also would envision some other expenses coming down.

Certainly, in conversations with our primary technology providers, they're looking at embedding AI tools into products and services we're already using. We have, in most cases, fixed price contracts there. So we don't expect that will drive significantly higher cost in the short run, what it might mean moving forward as the quality or value add of the tools they embed are more noticeable, could that drive some pricing power on their part, perhaps.

But I guess the short answer is, we will be looking to make strategic incremental investments based on use cases that we uncover, but it's not something that we expect would be huge additional dollars, right? We're not spending time on R&D and coding and the types of things that the big guys are doing to try to get a step ahead. But obviously, as you said, we want to be ready to move quickly, which is why we've develop the working groups and the use cases and the testing parameters and the sandbox safety parameters so that we can really start using some of these AI tools in a safe way. So...

Your next question comes from the line of David Bishop with Hovde Group.

I think you mentioned in the preamble, that you still sit in a very [ enviable ] tangible and regulatory capital position. Just maybe your view of excess capital, maybe how aggressive you can be in terms of addressing the buyback on any sort of pullback in the share price?

Yes. I mean, listen, we have a buyback -- approved buyback in place. There's plenty of availability within the plan. Obviously, slower growth in the quarter isn't the goal, but the paydowns during fourth quarter and first quarter, led to some significant additional capital appreciation during the last half year. So the short answer is I think we've got strong capital levels to put to work if it makes sense. So...

Got it. And then just in terms of holistically, maybe the revamping of the small business group there, you've got the other specialized business units. Do you guys continue to see good opportunity to grow there? Any stress you're seeing in any of those segments like private equity or ABL and just appetite to continue to grow those segments.

Yes. No, I think those segments are doing well. And we talk about them together as sort of niche businesses, but they're really very different businesses, right? You're talking about a credit scored product that's supposed to be scalable, but it's supposed to be light touch, which is very different than the detailed thorough traditional underwriting that we're doing on the ABL and the private equity side.

And so the short answer is, I think those other groups are performing well. And we think, again, without -- we try to take a very measured, methodical approach. We're not looking to bet the farm on any one of these individual segments, but we think each of them could grow reasonably over the next couple of years and continue to contribute to overall profitability and diversification of the portfolio.

Got it. And as a follow-up, I think Peter may have mentioned the one larger commercial real estate credit assisted living. Any sort of color or more details you can add there in terms of ultimate resolution and the near-term outlook for that credit?

Yes. So we're a participant with a larger bank on that. So we're sort of taking our cues from them. But again, all the data regarding our specific borrower, which is part of a much larger corporate entity that's going through a restructuring points to the fact that we're in a very strong position.

But obviously, when you've got a corporate restructuring, things kind of get put on hold while that restructuring gets sorted out. But again, given the underlying strength of the asset from a cash flow and LTV perspective, we have every reason to believe we're going to be fine there. But the timing of when that sort of comes off the books will be driven by how long it takes to work through that corporate restructuring process. So we certainly think and hope it would be gone by the end of the year, but it's hard to be a little more specific than that.

Got it. And final question. Obviously, a lot of discussion about deposit pricing competition across the metro New Jersey, New York market, obviously very competitive.

Just curious, Pat or Andrew, if you had the spot rate of deposits or margin at the end of the quarter and maybe sort of the marginal cost of deposits so far through April?

Yes. Sure. Andrew, you probably have the March deposit cost number. Maybe that's the best place to start.

Certainly, for incremental dollars, we're seeing pressure like if you want to try to raise some money out on the CD market, that might have been a [ 3.50% ] rate 3, 6 months ago, and now it's moving closer to [ 3.75% ] or even higher. I'm sure you've seen the costs move higher on the brokered and wholesale side. And so those markets are kind of moving in lockstep. But Andrew, if you've got more specific data around kind of what the March deposit level look like.

Yes, I think, obviously, we had a rate cut in December and a couple of other rate cuts earlier in the quarter. So that trickled into the first quarter. We saw the big benefit of that hit in January. Pricing has stayed relatively stable when you look at kind of the deposit -- overall deposit cost January, February, March. So I think relatively stable. Obviously, like Pat said, there's a little bit of pressure now with us trying to bring in some additional money and the pricing has gotten a little bit more competitive with the treasury yields moving a little bit.

But I do think deposit pricing should remain relatively stable compared to the first quarter with maybe a little bit of pressure as we saw a little bit of pressure starting in March. And I do think that we're going to have to continue to be competitive into the second quarter.

Your next question comes from the line of Jake Civiello with D.A. Davidson.

You talked about on the compensation expense side. You talked about some of the moving parts associated with that. Is any of that competition-related or opportunistic hiring?

Yes. I mean, listen, I think regarding opportunistic hiring, that's sort of always happening, but I don't think there was anything in particular I would point to in Q1 to say that was -- that was a driver. Again, I think it was really more a function of what we see as kind of seasonal items that, I don't want to call them nonrecurring because they happen every season, but they're nonrecurring for the remainder of the year, and I think that was kind of the driver of the elevated numbers in Q1.

Jake, I would just add that we're -- I mean, I think the market is still competitive where we are finding people, but we haven't seen a ton of extra pressure, like salary increases were pretty standard this year.

So overall, it was more standard stuff and some seasonal items in Q1, but nothing outside of normal or outsized salary increases or anything this year. And we don't expect that we're going to have to be more competitive than normal to continue to drive and bring good people into the bank.

That's fair. And then just one more for me. You pointed to the kind of $50 million net loan growth number in the first couple of weeks of April. Does that kind of follow the similar 50-40-10 split that you referenced earlier?

Yes. I think year-to-date growth has been pretty consistent with kind of the portfolio that exists today. In any given quarter or month, you could have a particular larger loan that might sway the particular numbers one way or the other.

But I don't know, Peter, was there anything that jumped out of you if you looked at year-to-date growth that was sort of an outlier from kind of the overall portfolio composition?

No, I'd say it fits right in. I do -- I mean, because it's more recent, I know a couple of the chunkier loans since 3/31, were in that C&I owner-occupied category. So it's not was not the case where we closed and funded a couple of investor real estate loans to help the numbers or anything like that. It's been kind of more of what we've been chasing for previous years.

[Operator Instructions] I will now turn the call back over to Patrick Ryan for closing remarks.

Okay. Well, thank you, everybody. We appreciate your time today, and we look forward to regrouping with folks once we get through the second quarter here. Thanks, everyone.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank Earnings Conference Call Fourth Quarter. [Operator Instructions]

It is now my pleasure to turn the call over to Patrick Ryan, President and CEO. You may begin.

Thank you. I'd like to welcome everyone today to First Bank's Fourth Quarter 2025 Earnings Call.

I'm joined by Andrew Hibshman, our CFO, Darleen Gillespie, our Chief Retail Banking Officer; and Peter Cahill, our Chief Lending Officer.

Before we begin, however, Andrew 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, 2024, filed with the FDIC.

Pat, back to you.

Thank you, Andrew. 2025 overall in Q4, in particular, did not play out exactly as we expected, but the overall results were solid, nonetheless. For us, the margin drives overall profitability. And in that respect, 2025 was a very good year. Our net interest margin of 3.7% in the fourth quarter was 20 basis higher than in the fourth quarter of last year.

For the full year, our NIM was 3.69% compared to 3.57% for the full year 2024. The strong margin expansion helped drive overall profitability higher as our fourth quarter return on average assets was 1.21% compared to 1.10% in the fourth quarter of 2024. Similarly, the return on tangible common equity also improved during the year, reaching 12.58% in the fourth quarter of 2025 compared to 11.82% in the fourth quarter of 2024.

Despite these strong overall results, we were not happy with the performance of our small business loan products. Given the higher yield on those loans, we did expect credit cost to be higher than our other loan products, but the overall level of delinquency and charge-offs exceeded what we believe to be accessible levels. During the course of the year, we made several changes to credit parameters and how we discuss and sell the product. We expect these changes will lead to overall better performance in 2026 and beyond, and we will continue to monitor closely to make sure the changes are having the impact we believe they should.

We did see some modest improvement in noninterest income during the year as our total fee income increased by almost $2 million compared to the prior year. Gains from SBA loan sales were higher in 2025. Further enhancements to technology and staff towards the end of the year in 2025 should help drive continued improvement for the SBA team in the coming year. Fee income from residential mortgage sales remained muted given continued slowness in that market.

Overall, noninterest expense was managed effectively as the onetime benefit from the sale of an OREO asset helped to offset some severance and other nonrecurring expenses during the year. Our noninterest expense to average asset ratio was 1.97% for the full year 2025 compared to 2.01% for the full year 2024. Our goal will be to continue to move that ratio lower as we believe improved profitability from our newer business units and improved operating leverage will allow us to drive even stronger efficiency.

Regarding credit quality, the story is mixed. The challenges in small business have been documented, but we expect to see those costs stabilize over the next few quarters given the changes we've implemented. Performance in our core CRE and Community Banking division continues to be strong. In fact, credit statistics in those areas actually improved throughout the year as the overall risk rating on the CRE portfolio improved modestly and delinquency at the end of the year stood at a very low 0.02%.

As a result of these positive developments in our largest portfolios, all loans rated past watch, special mention and substandard declined from 4.86% of total loans at the end of '24 to 4.20% of total loans at the end of '25. Despite these positive developments across the board, we did see an increase in the substandard loan category because of the downgrade of 1 specific $23 million C&I loan that was moved to substandard towards the end of the year.

While that overall business has a number of locations that are performing well, the decline in sales and profitability makes that a situation we will be monitoring closely. As we look ahead to 2026, we see reasons for optimism. Our pipelines remain active, and we believe we'll be able to achieve our $200 million net loan growth goal for 2026. We expect growth in asset-based lending, community banking and a return to modest growth in commercial real estate to help drive that growth in 2026.

Deposit growth continues to be an area of focus. We have great teams in New Jersey and Pennsylvania working across various customer segments to help us add new relationship-based customers and drive growth. Furthermore, we expect continued expense management and operating leverage can help drive improved earnings.

In summary, our primary goals for 2026 include closing the gap with our cost of funds relative to our peers, moving modestly higher with noninterest income generation and driving further reductions in our noninterest expense to average asset ratio.

At this time, I'd like to turn it over to Andrew to discuss the financial details of Q4 and full year. Go ahead, Andrew.

Thanks, Pat. For the 3 months ended December 31, 2025, we recorded net income of $12.3 million or $0.49 per diluted share, which translates to a 1.21% return on average assets. We saw another solid quarter of loan production. However, elevated payoffs more than offset the increase.

Payoffs were $135 million for the fourth quarter, which was nearly as much as the total for the first 3 quarters of the year combined. As a result, total loans declined about $81 million from the end of the third quarter. We are happy to report that despite the elevated payoffs, loans were up $149 million or approximately 5% over the last 12 months. with C&I leading the way.

On the deposit side, we took advantage of the decreased funding requirements related to the decline in loans and allowed certain higher cost balances to roll off during the fourth quarter. Total deposit balances were down $21 million during the quarter as we continued to prioritize profitable relationships. While total deposits were down, primarily driven by a $27.1 million decline in brokered deposits, we did see nice new customer acquisitions, especially at some of our newer branch locations.

Net interest income increased $633,000 compared to the third quarter, primarily due to net interest margin expansion. Our net interest margin grew 3 basis points to 3.74% in the fourth quarter. It benefited from the decrease in interest-bearing deposit costs, which outpaced the decline in earning asset yields. It also reflects lower costs related to the subordinated debt refinance we executed over the summer. Recall that we had a double carry of sub debt for 2 months in the third quarter that resulted in about $486,000 in additional interest for that quarter.

Last quarter, we said that we expected the immediate impact of Fed rate cuts to be slightly negative to the net interest margin as it takes longer to move deposit costs lower compared to the immediate impact of rates moving lower on our variable rate assets. The decline in loans in the fourth quarter shifted the balance sheet and our funding needs, ultimately driving an improvement instead.

Looking ahead, we continue to manage a well-balanced asset and liability position which should result in continued strong net interest income generation. We continue to expect declines in our acquisition accounting accretion over the next several quarters. However, we expect our margin to remain relatively stable as we continue efforts to push deposit costs lower and replace the runoff of lower-yielding assets with higher-yielding loans.

Our asset quality metrics at December 31, 2025, reflect some continued deterioration in the bank's small business portfolio. NPAs to total assets increased to 46 basis points compared to 36 basis points at September 30. The increase reflects growth in nonperforming loans of $4.8 million. Note that the OREO asset we sold during the quarter had a carrying value of 0, so there is no reduction in NPAs related to that sale.

Our allowance for credit losses to total loans increased to 1.38% at December 31 from 1.25% at September 30. This increase primarily relates to fourth quarter charge-offs and an elevated level of specific reserves in our small business portfolio. Despite the $23 million C&I loan that moved to substandard that Pat mentioned, overall criticized loans increased only $9.4 million from September 30, 2025, as we experienced a number of payoffs and paydowns of classified loans during the quarter and had a few upgrades related to businesses with improving financial results.

We recorded $1.7 million in net charge-offs during the fourth quarter, in line with net charge-offs of $1.7 million during the linked quarter with net recoveries of $155,000 in the fourth quarter of 2024. Charge-offs during 2025 were almost exclusively in our small business portfolio.

Noninterest income totaled $2.3 million in the fourth quarter of 2025 compared to $2.4 million in the third quarter. The decrease of $138,000 mainly reflected lower gains on recovery of acquired loans, but this was partially offset by higher loan swap fees and gains on sale loans during the fourth quarter of 2025.

Noninterest expenses were $17.1 million for the fourth quarter compared to $19.7 million in Q3. The decline was primarily driven by a $1.9 million gain on the sale of an OREO asset. This Florida-based property was acquired through the Grand Bank acquisition in 2019 and was held at no carrying value. The gain was booked as a contra expense. Outside of this nonrecurring item, salaries and benefits expense decreased by $400,000 compared to the third quarter due to lower bonus expenses, as the increased credit costs in Q4 drove a decline in our year-end bonus accruals.

Other smaller declines across other expense lines compared to the linked quarter reflect our focus on expense management in 2025. We've been successful in managing expenses even as we've incurred some ongoing costs related to our efforts to optimize our branch network. We expect branch network optimization activity to slow in 2026.

Tax expenses totaled $4.3 million for the fourth quarter with an effective tax rate of 25.7%. This compares to 23.4% for Q3. For the full year 2025, our effective tax rate was 23.8%. Our fourth quarter tax rate included some year-end adjustments primarily related to state tax allocations. We anticipate our future effective rate will be approximately 24% to 25%. Our efficiency ratio improved to 49.46% and remained below 60% for the 26th consecutive quarter. We also continued to expand tangible book value per share, which grew more than 12% annualized during the quarter to $15.81. We're pleased with our earnings momentum and our progress in executing our strategy to evolve into a middle-market commercial bank. We've demonstrated we don't need big balance sheet growth to produce growth and profitability.

Our capital ratios remain strong, and we're pleased to provide our shareholders with a 50% increase in our quarterly cash dividend. For the first half of the quarter of the fourth quarter, we did not have a regulatory approved share repurchase plan. And with our improved stock price during the quarter, we did not execute any share repurchases during Q4.

Going forward, we aim to continue driving shareholder value through a combination of core earnings, while still making ongoing investment in our franchise and technology, a stable cash dividend and share buybacks as applicable over time.

At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer for her remarks. Darleen?

Thanks, Andrew, and good morning, everyone. As mentioned, we were able to drive favorable shifts in our deposit portfolio during fourth quarter of 2025. The decline in total deposits were largely attributed to our decision to reduce higher-cost brokered deposits in light of a lower loan funding needs. You can see in our ending balances that we reduced time deposits by $38 million or 18% annualized during the quarter.

We also let other higher costs and nonrelationship deposits run off, which you can see in our ending balances for money market and savings, which declined by $23.5 million or an annualized 8% during fourth quarter of 2025.

Despite the attrition, we are pleased with these outcomes, the benefit from the decrease in interest-bearing deposit costs had a positive impact on our net interest margin. And even so -- even more so with our success in growing relationship-based interest-bearing demand deposits, we ended the quarter with growth of $47 million in that portfolio or 33% annualized compared to September 30. And that is a testament to the outstanding execution of our relationship bankers across our footprint.

I'll also note that the $6 million linked quarter decline in noninterest-bearing deposits reflects seasonal fluctuations in business customer deposits related to things such as year-end bonuses. We have been successful onboarding noninterest-bearing deposits as we grew the portfolio by $53 million year-to-date in 2025.

In addition to deposit activity, we've been equally busy in 2025, executing on our branch strategy. We opened 3 branches, closed 2 and relocated another branch, netting just 1 additional branch, but gaining stronger alignment of our branch footprint with customer demand and growth opportunities and enhancing profitability of existing locations.

We ran targeted promotions at our new and relocated branches and saw great engagement, retention and the ability to onboard new customers. We see opportunity to bring these promotional rates down in line with market rates throughout 2026, while maintaining key deposit and loan relationships. I'd also note that we saw strong retention among customers affected by our branch consolidations in both relationships and balances.

As Andrew mentioned, we see branch network activity slowing in 2026. We will continue to be opportunistic where it makes sense to enhance the efficiency of our network the convenience for our customers and our potential exposure to new clients in existing or adjacent markets. But right now, our focus is on optimizing the pricing and profitability of our deposit portfolio. We continue to prove successful in lowering our deposit rates while maintaining key customer relationships.

As Pat mentioned, our goal is to bring our deposit costs closer to our peer bank. This is part of our evolution into a middle-market commercial bank as we move beyond our years of rapid growth. We no longer need to grow for the sake of growth, which necessitated funding that growth with expensive deposits.

In 2026, we'll continue to focus on optimizing our deposit portfolio, as I mentioned, by continued to -- continuing to lower deposit costs while simultaneously deepening and adding high-quality relationships where we can serve the breadth of the customers' financial needs.

Additionally, our relationship bankers are focused on onboarding noninterest-bearing deposits and cross-selling to clients who have interest-only deposits with us. We expect this will aid in bringing our overall deposit costs down and support a strong net interest margin in 2026.

At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Darleen. As Pat and Andrew described, while not a good quarter from the standpoint of overall loan growth, we did finish the year up $149 million or almost 5% compared to the end of 2024.

If you recall, we started the year very quickly, but we knew from speaking with clients that we had payoffs coming from either asset sales or refinancing and for that reason, held our overall estimate for the year than what was originally budgeted.

As our press release states, average loan growth for the entire year was $267 million, which I believe is a good indicator of a busy year. We know that the strong loan growth we had in the first half put some pressure on funding sources, and I think we naturally became more selective in business development. When we dig into the numbers, we see that of the $429 million of new loans funded during the year, only 20% of that amount was funded in the fourth quarter. New loans continue to be centered on C&I and owner-occupied real estate.

For the year, this category made up 62% of new loans with investor real estate loans comprising 22%. On the flip side, the loan payoffs, we believe were coming hit us pretty hard. The $135 million in payoffs in Q4, as referenced by Andrew, made up 47% of all payoffs for the year. Looking back, it was the largest amount of loan payoffs we've ever had in a single quarter. 6 of our 10 largest payoffs for the year took place in Q4, all but one were investor real estate loans and 3 of the investor real estate loans were construction loans that were paid off of long-term financing down elsewhere. Our goal continues to be moderate growth in investor real estate and managing more of that business in our investor real estate team.

We look closely at the ratio of investor real estate loans to total capital. We have been as high as 430% of capital after the Malvern Bank acquisition, but got to 390% at March 31 of this year, 370% at September 30 and finished the year at 346% due in part to the loan payoffs previously described. Going forward, we're comfortable staying around a range of 350% to 375% capital.

The lending pipeline at the end of the year stood at $284 million of probable fundings, almost exactly the same as we had at the end of Q3. If one breaks down the components of the pipeline at year-end, C&I loans made up 61% of the overall pipeline compared to 36% for investor real estate. Overall, I continue to be satisfied with where the new business pipeline stands.

On the topic of asset quality, we mentioned some softness in the small business portfolio last quarter and Pat and Andrew both talked about the Q4 impact. I'll only add that we've reorganized how we manage that business. We've turned over some staff in that area, slowed production and we're giving a lot of attention to the relationships we have on our books presently. Delinquencies across all business lines are very manageable at year-end and were virtually nonexistent other than what was from the small business portfolio.

In summary, while the payoffs we experienced resulted in a down quarter as far as loan growth goals, as I mentioned earlier, average loan growth for the year was strong. Our plan is to continue to grow in all segments, those being the New Jersey and Pennsylvania regions, SBA, consumer, private equity, asset-based lending and exceed what we accomplished in 2025.

That concludes my remarks about lending, so I'll turn things back down to Pat Ryan.

Thank you, Peter. At this point, we'd like to open it up for the Q&A portion of the call.

[Operator Instructions] And our first question comes from the line of Justin Crowley with Piper Sandler.

Good morning, everyone. I was wondering if you could start out just on some further discussion on loan growth and the outlook there. I know the payoffs can be tough to predict and you had foreshadowed some of that earlier in the year. But just wondering how you think those could perhaps trend through the year as lower rates continue to work their way through the system and especially if we continue to get more cuts, just maybe -- just what you continue to hear from customers on that end of things?

Yes, Justin, obviously, it's something we're keeping a close eye on. I'll give you kind of some high-level thoughts of mine and then let Peter give you a little more clarity based on what's actually in the pipeline. But we're looking closely not just at the amount of payoffs, but what's behind them. And we didn't see any necessary, call it, disturbing trends in the sense that we weren't keeping the business that we wanted to keep or that private credit or other nonbank lenders were stealing our customers.

We did have one large payoff that went CMBS because they were able to get non-recourse, which something we weren't prepared to do. But that's sort of par for the course, forgive the term, to manage the portfolio with the rate and structure and term that we like. And in situations where other financing sources are willing to do things we're not willing to do, we obviously live with the payoffs. But I think if you look back over 12, 16, 20-quarter period, I mean, these windows of what look like abnormally high payoffs, given that they come within a 90-day window, almost always snap back with strong growth, whether it's the next quarter or the quarter after.

And as we've talked about in the past, our ability to kind of deliver on that historically, $175 million, $200 million in net loan growth has been pretty consistent. And so we're not -- we're not raising any alarm bells. We think it was a little bit of an anomaly. It is interesting talking to other bankers out in the market.

It sounds like there were a number of banks at least we know in this market that similarly experienced unusually high payoff activity. But again, at this point, not anything that we'd attribute to macro conditions as much as perhaps more just timing and coincidence. But Peter, maybe if you can jump in and just give a little color on where the pipeline stands and what you're seeing for kind of the first half of 26% for new production.

Yes. Thanks, Pat. Justin, I would -- the pipeline is where it was a quarter ago. I think that's a fairly positive sign. Everything we're hearing, I mean, we -- for the last 6 to 9 months after jumping way out ahead of plan early on in the year, we kind of were a little bit more restrictive as to what we would do or what deals we -- how hard we negotiate for a piece of business.

But I'm hearing from whether it's real estate lenders in the Philadelphia market that there's plenty of business there to C&I type lenders in our regional/community bank space. We opened up new branches in Summit, in Monmouth, in Central to Northern New Jersey. But these are kind of new markets that locally we're out making ourselves known in and the feedback there is good as well.

So Florida is another one where we've been there a year or 2 now coming out of the Malvern acquisition, staffed that up a bit with a couple of folks, and they're doing well. So it's kind of like all areas are producing good activity. No one more than others, really, but I don't see any reason to be overly concerned about being able to drive the growth we're forecasting.

Okay. Awesome. I appreciate all the detail there. I guess just on the credit side, you talked through a lot of what you've seen on the small business side. I was wondering if you could talk a little bit more about the C&I credit that got downgraded. I'm not sure if there's any further detail you could share there in terms of things like industry and whether it was your credit alone or if it was perhaps participation? Just anything there?

Yes. Not a whole lot we can add, Justin, other than what we've already provided. It's a multi-location consumer-based business that has seen some downward trends. And while they still have a number of locations that we believe they believe are performing very well. They have some others that aren't. And so that's kind of driving a decline in the performance.

And just given the cash flow-based nature of the loan and the size of the loan, we -- with the downgrade of substandard, we wanted to mentioned it on the call. But other than something we're keeping a close eye on, there's not a whole lot more we can share at this point.

Okay. Got it. Understood. And then just on expenses. Obviously, some noise there this quarter with OREO gain that flowed through. And then overall, a lot of work that's been done on efficiency initiatives. I was just wondering if you could -- and I know you gave the expense to assets target, but I was wondering if you could provide thoughts on run rate from here on the expense base and just how you're thinking about costs for the duration of the year?

Yes. So high level, we're not talking about massive cuts, right? I think we're operating pretty lean and I think we're appropriately staffed. I think what we're really looking for is keeping a tight lid on expense growth as we move throughout this year and next year. And so limited expense growth, coupled with revenue growth should help drive that revenue down.

But Andrew, I don't know if there's anything specific you wanted to provide around quarterly expense run rate or anything. I'm not sure we usually provide specific guidance there. But maybe you can give a sense for kind of what the core number was in Q4 and what -- is that a good basis for the future?

Yes. So I'd just add that I think the third quarter was a pretty standard quarter with not a lot of noise. So that was -- that's a decent kind of starting point. Obviously, as you head into a new year, there are some things that drive costs higher in terms of kind of standard inflationary-type adjustments to salaries and some of our other costs there. But as I mentioned, I think the fourth quarter had the OREO gain, which was unusual.

And then our bonus expenses were abnormally a little low in the fourth quarter because we had to make some adjustments to our bonus numbers based on kind of the final year-end results. So again, if you look at kind of third quarter and then kind of strip out the couple of noise there in terms of bonus, lower bonus expense in the OREO, you get a decent run rate. And I do think we have some good plans to offset some of those inflationary type adjustments with some other cost-saving initiatives. So we're hoping to maintain a fairly stable and maybe slightly increasing expense number, but I do think we should be able to hold the line pretty well as we head into 2026.

Okay. I appreciate that. And then maybe just one last one. As far as the buyback, no activity in the quarter. So was wondering if you could remind us where that stands as far as capital deployment and just the appetite going forward?

I mean in terms of appetite, I don't think our views have changed, right? We had a timing issue just because these buybacks in New Jersey get approved on a kind of rolling 1-year basis. And so every year, you got to reapply and then it just -- the process can sometimes take time. So we were sort of without a plan for a while, which I think was a driver of the lack of activity. And then it stays on our -- in our toolkit. It's something we look at.

We obviously pay attention to the price relative to book value when we're thinking about where to buy back. But yes, I think it's something we continue to look at. And Andrew, maybe you can just provide some information around the plan that got approved in terms of dollar amount or shares.

Yes. So I think we had it in the release, we did get a new plan approved. We got regulatory approval, I think, about in the middle of November. So we have the full allotment of what was approved. It's up to 1.2 million shares up to a total dollar amount of $20 million, and we have -- through the fourth quarter -- or through the fourth quarter, we had not executed any buybacks. We do have an active plan in place and available depending on pricing, as Pat mentioned.

[Operator Instructions] And your next question is from Dave Bishop with Hovde Group.

I'm curious, I noted that -- I saw the narrative regarding the softness in the micro small business credit portfolio there. Though just from a numbers perspective, didn't seem to really show up maybe there's a little bit of an increase in nonaccruals, charge-offs. Just curious maybe if you can maybe give us some more details what's driving that cautiousness and softness or the 20 basis points in terms of charge-offs, is that sort of well above your expectations here when you first got into it? And does that imply you're going to sort of look that to get...

Yes. I think of it -- and again, these are high-level numbers, Dave, not specific. But right now, the average yield on the portfolio is probably around 9%. And I think what we were seeing in terms of annualized charge-off numbers were elevated 3% or higher. And so I think we'd want that portfolio to perform more in the kind of 1% to 2% annualized given the yield. So getting up at 3% or higher depending on the quarter and the annualization that just was a level that we didn't think was conducive to the long-term profitability of the segment.

And so we made some changes. We reduced the overall loan amount, the availability relative size of the business, changed how we managed it. As Peter mentioned, revised the team structure a bit and really went back to basics around relationship-based selling. And I think to me, the performance is partly, as I mentioned, to be expected, right, these are smaller businesses. They have less wiggle room if they lose a big customer or they face some negative trends. And I think across the board you've seen small businesses have struggled a little bit this year.

And then I think, quite frankly, we had some issues with folks that weren't selling it the right way, weren't bringing in the right types of customers and we had to fix that problem, too. And so we continue to think that if sold correctly, it can be a good product for us. Again, it's going to be -- continue to be relatively small compared to our other business units and portfolios. But it was more a function of just wanting to tighten it up a little bit.

And we'll see, like you said, at 20 basis points overall, it's not overly punitive, but we look at it more within the segment itself, and we want it to be stand-alone profitable, and we think there's some work that's needed there to reduce credit cost to get it to the return on equity thresholds that we have. So...

Got it. Yes. I figured there had to be a lot more going on behind the scenes that probably comes through across the macro level. So I appreciate that detail. And then I noted in the narrative too, a pretty good bump in the prepaid fees this quarter with the higher volume. Was that just symptomatic of just getting a wash with the prepayments? Or were these loans that maybe had earlier in their prepayment penalty phase? And did that sort of surprise you as well?

Yes. Listen, I think it was a couple of larger CRE loans that had prepayment structures built into them. And in one case, in particular, the borrower found a structure they preferred, specifically around the nonrecourse that was available in the CMBS world. And so they thought it was to their benefit to refi and move in that direction despite the prepayment fee. And so we collected the fee on the way out.

We don't get prepayment fees all the time, right? If it's a construction loan, and we were offering permanent financing and then it moves on, we generally get a small fee. But if we were just planning on doing the construction, knowing that it would get taken out elsewhere for permanent, we wouldn't necessarily collect the fee.

But any time you see heightened prepayment activity, especially within CRE, where we tend to have those prepayment fee structures, you're generally going to see elevated income within the quarter, again, just to help offset the lost income going forward. But I don't know, Peter, anything in particular you'd point out as you look at the prepayment fee income that we got during the quarter?

No, I think you hit on most all of the topics. I mean, we do occasionally on the construction side, get kind of an exit fee on the way out. Every deal is a little different. Every deal is negotiable. And it's a combination of really all the things Pat described.

Got it. And then maybe just curious, Peter, Pat, maybe what you're seeing in terms of new loan origination yields, if there was much movement there on a quarter-to-quarter basis?

Yes. Listen, I think we expect spreads to tighten a little bit, given the payoff activity kind of across the industry. I think folks are going to want to look to replace loans and that will probably lead to a little bit of tighter pricing. But Peter, if you want to jump in, in terms of what you're seeing specifically from the team.

Yes, we're still trying to get anywhere from 200 to 300 basis points over treasuries or FHLB. So we're still north of 6%. And I think we've done a pretty good job there as far as the yield on loans as they get booked. I don't know, Andrew, I think if I recall some of the monthly presentations on new loans, they get -- we look at kind of the average interest rate, and they've been up in the high 6s. So it's a combination of all types of loans. But yes, we're still hanging in there at a spread of 250 basis points, I'll call it, as the target, whether it's treasuries or FHLB, there might be a 25, 30 basis point difference there, but that 250 number is kind of a good target for us.

Yes. And obviously, Dave, the spread depends on the credit, right? We'll tighten up the spread on a deal that we think is super strong and obviously look to stretch it a little bit if it doesn't meet kind of the A++ criteria. And so it's a mix. But I think our folks are doing a good job getting reasonable yields on the loans coming in.

Got it. One final question back to credit. Last quarter, there was a lot of other about NDFIs and such, and we talked about the private banking and ABL, mostly portfolio lending. Are you seeing any sort of credit cracks emerging there at all in terms of those commercial segments?

Yes. I mean we looked at -- one of the reasons we did the deeper dive and provided a little extra data was to kind of say, "All right, if sub-standards are up, is this a one-off credit issue? Or is it more systemic? And what we had seen across all the portfolios is actually an improvement, obviously, outside of the one downgrade we talked about." But it does seem and feel like that's a bit of an isolated situation versus an indicator of broader softness within C&I, in particular.

And like we mentioned in the call, that the CRE performance has been amazing. So we're not seeing challenges emerge there yet. Obviously, you always knock on wood and keep a close eye on where things are headed. But based on what we're seeing within the portfolio today, we're not seeing across the board indicators of emerging credit issues systemically, if you will.

And with no further questions in queue, I will now hand the call back to Patrick Ryan for closing remarks.

Okay. Thank you very much. We appreciate your time today, and we look forward to regrouping with everybody when we put out the first quarter results. Thanks, everyone.

This concludes today's conference call. Thank you for joining us. You may now disconnect.

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank earnings conference call third quarter 2025. [Operator Instructions]

I would now like to turn the call over to Patrick Ryan, President and CEO. Please go ahead.

Thank you, Kate. I'd like to welcome everyone today to First Bank's Third Quarter 2025 Earnings Conference Call.

I am joined by Andrew Hibshman, our Chief Financial Officer; Darleen Gillespie, our Chief Retail Banking Officer; and Peter Cahill, our Chief Lending Officer.

Before we begin, Andrew 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, 2024, filed with the FDIC.

Pat, back to you.

Thanks, Andrew. I'll hit on a couple of the high-level points from the quarter and then turn it over to the team to provide some of the details.

In the third quarter, we saw a nice increase in net interest income, thanks to continued loan and deposit growth, coupled with net interest margin expansion. Our net interest income was up $1.5 million compared to the second quarter and up $5 million compared to a year ago. Our margin was up 6 basis points linked quarter and was up 23 basis points compared to a year ago. And the pre-provision net revenue number increased to 1.81% from 1.65% in the prior quarter. So all nice positive movements upward in terms of our overall revenue and margin.

That strong revenue growth, coupled with expense control, drove continued improved profitability -- our net income was up $3.5 million or 43% compared to Q3 of 2024. Our return on average assets improved 28 basis points to 1.16% compared to 0.88% in the third quarter of last year. Our earnings per share improved to $0.47 in the third quarter, a 46% increase compared to Q3 a year ago, and our return on tangible common equity came in at 12.35%.

We did see continued loan portfolio diversification within the quarter. Our investor commercial real estate to capital ratio came down to 370% from a high of 430% after we closed the Malvern acquisition.

Our specialized lending groups now make up 16% of total loans, but within that broader category of specialized lending, no niche makes up more than 5% of total loans.

Overall, credit quality seems to be holding up with the exception of some softness we saw in the small business segment, specifically companies with revenues under $1 million.

Our NPAs in our nonperforming loans did decline during the quarter, and our allowance coverage ratio to nonperformers increased to 2.93%. Charge-offs were elevated but remain very manageable.

Third quarter results also included 2 months of "extra sub debt expense" as we did not pay off the old sub debt until September 1 of this year. And during the quarter, we bought back almost 120,000 shares at an average price of $14.91.

In summary, the core operating trends look good, and they're improving. The economic outlook remains uncertain, but we're well positioned for whatever rate environment may emerge. And obviously, we're keeping a close eye on the overall level of economic activity and what that might mean for credit quality going forward.

I'll turn it over now to Andrew Hibshman, our CFO, to give you a little more detail on the financial results. Andrew?

Thanks, Pat. For the 3 months ended September 30, 2025, we recorded net income of $11.7 million or $0.47 per diluted share and a 1.16% return on average assets.

We saw another quarter of solid loan growth, however, down from the first and second quarter as we continue to prioritize relationships and profitability over volume. Loans were up $47 million for the second quarter or 5.6% annualized. Over the last 12 months, loans have grown $286 million or over 9% with our core areas of focus leading the way.

C&I grew $194 million and owner-occupied commercial real estate loans grew $40 million. Our evolution into a middle market commercial bank can be seen in our loan mix shift over the past 12 months. C&I and owner-occupied commercial real estate are now a combined 42.2% of loans compared to 40% of loans at September 30, 2024. And our investor commercial real estate loans, which includes multifamily and construction and development, are now 49.8%, down from almost 53% 1 year ago.

Growth was also solid again on the deposit side. Balances were up over $55 million during the quarter or an annualized 7% as we continue to execute on adding and maintaining profitable relationships. The growth primarily came with time deposits, along with some interest-bearing demand deposit growth. Darleen will expand on this, but we saw a strong response to promotional campaigns in markets around our new branches. We also utilized some brokered CDs to help reduce FHLB advances by $25 million during the quarter. I'll highlight that our deposit growth occurred even as our average cost of deposits declined 3 basis points to 2.69% for the quarter.

Net interest income increased $1.5 million compared to the second quarter, primarily due to margin expansion on a growing balance sheet. Our net interest margin grew 6 basis points to 3.71% in the third quarter despite increased costs on our subordinated debt. We carried sub debt totaling $65 million from June 18, 2025, through September 1, which is the date we redeemed $30 million of outstanding debt. This carry resulted in about $486,000 in additional interest for the third quarter.

Looking ahead, we continue to manage a well-balanced asset and liability position, which should result in continued strong net interest income generation. We will benefit from lower sub debt interest costs. However, we expect the immediate impact of Fed rate cuts to be slightly negative as it takes longer to move deposit costs lower compared to the immediate impact of rates moving lower on our variable rate assets.

We also continue to expect a larger decline in our acquisition accounting accretion over the next several quarters. Overall, we expect our margin to remain relatively stable as we continue efforts to push deposit costs lower and replace the runoff of lower-yielding assets with higher-yielding loans.

Our asset quality metrics at September 30 continue to be strong. NPAs to total assets declined to 36 basis points compared to 40 basis points at June 30 and 47 basis points 1 year ago. The linked quarter decline reflects a decrease of $1.6 million in nonperforming loans. Our allowance for credit losses to total loans increased slightly to 1.25% at September 30 from 1.23% at June 30.

We recorded $1.7 million in net charge-offs during the quarter compared to $796,000 for the second quarter and $15,000 in net recoveries in the first quarter. Year-to-date charge-offs are almost exclusively in our small business portfolio. We continue to value this business for the sticky deposit relationships it generates, its impact on improving our community presence and brand loyalty, and it builds a pipeline of future middle market commercial customers. Pat summarized our credit outlook, and Peter will discuss it further in his comments.

Noninterest income totaled $2.4 million in the third quarter of 2025 compared to $2.7 million in Q2. The decrease reflects lower swap fees, loan swap fees as well as $397,000 gain on the sale of a corporate facility that occurred in the second quarter.

Noninterest expenses were $19.7 million for the third quarter compared to $20.9 million in Q2. Recall that Q2 expenses included $863,000 in onetime executive severance payments. Additional declines in other line items reflect efficiency initiatives as the bank continues to prioritize effective expense management.

Darleen will expand on this in her remarks, but we have some new branch openings that will drive costs slightly higher, but we also have an offsetting branch closure in process and other cost mitigation initiatives in place that should help to minimize cost increases.

Tax expense totaled $3.6 million for the third quarter with an effective tax rate of 23.4%. This compares to an effective tax rate of 22.9% in Q2. We anticipate our effective tax rate going forward will be relatively stable.

Our efficiency ratio improved to 52% and remained below 60% for the 25th consecutive quarter. We also continued to expand our tangible book value per share, which grew $0.46 during the quarter to $15.33.

We continue to be pleased with our earnings momentum and our progress in executing our strategy to evolve into a middle-market commercial bank. Our capital ratios remain strong, allowing for capital flexibility. This affords us the opportunity to further drive shareholder value through ongoing investment in the franchise and technology, a stable cash dividend and share buybacks as applicable over time.

At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer, for her remarks. Darleen?

Thanks, Andrew, and good morning, everyone. As Pat and Andrew noted, we experienced solid deposit growth in the third quarter with balances up $55 million or 7% annualized from Q2. This reflects increased business development activities by our sales teams and the success of targeted promotions, which we were -- which were implemented to drive engagement with our newly opened branch locations. While at a higher cost, promotional campaigns tend to generate strong relationship deposits and have proven successful as part of our branch network optimization efforts.

We also saw growth from some CD promotions implemented to strategically onboard funding in support of our strong loan growth. But we're not only growing high-cost deposits. The point-in-time balance sheet hides an important success that I'd like to highlight.

Our average noninterest-bearing deposits grew by $21 million during the quarter and by $52 million year-to-date, reflecting strong relationships that provide critical interest-free funding. During the third quarter, our average cost of interest-bearing deposits declined by 2 basis points to 3.27% and our overall cost of deposits declined by 3 basis points to 2.69%. This occurred despite growth coming from higher cost promotional campaigns and some brokered funding to support our loan growth. It reflects our bankers' outstanding success in executing their dual mandate to both maintain deep customer relationships and lower funding costs. The initiatives and banker incentives we have in place to support these goals continue to be effective.

Similarly, what's also hiding in our net growth is our continued success in managing out some higher cost balances over the past few quarters. If you look at the first 9 months of 2025, our average money market deposits grew by about $25.1 million or 2.4% over the same period of 2024, but the average cost declined by 61 basis points, lowering the overall interest expense on these deposits by $4.1 million compared to the year-to-date period. And I do not believe we have fully realized the benefit of the Fed's September rate cut yet, but we have made solid progress lowering our pricing and managing interest expense through the first 3 quarters.

Now I'll talk a little bit about our branch strategy, which has always been aimed at supporting engagement in our current markets and opportunistic expansion into adjacent markets. We opened a de novo branch in the Fort Monmouth section of Ocean Port, New Jersey, extending our footprint into Monmouth County and increasing our New Jersey footprint to 10 counties.

We also completed the relocation of our Palm Beach branch to Wellington, Florida, still in Palm Beach County. This location was part of our Malvern Bank acquisition and was originally in a small office suite. We now have a full-service branch in a more convenient and accessible location to better serve our customers.

We also officially closed our limited-service Morristown office in August and transferred those relationships and deposits to our nearby Denville branch. In line with our strategy to operate efficiently, we made the decision to close our Coventry, Pennsylvania branch in December of this year and transferred those deposits and relationships to our nearby Lionville branch. This decision allows us to better leverage our resources while continuing to provide high-quality service across our footprint.

Needless to say, it's been a busy year for us with branch -- with several branch openings and consolidations. We've focused on aligning our branch footprint with customer demand and growth opportunities. By year-end, these efforts will result in a net increase of 1 branch in our network.

I'll finish up with a note on rates and pricing. We've been very proactive in moving rates with the Fed cuts and expect to continue to do so. Now this does take time and a measured approach. We've been able to grow deposits in many rate environments, and we aim to continue doing this provided the desired profitability levels can be achieved. At this point in our evolution, growth for the sake of growth is not our end goal. We will focus on growing our deposit portfolio through disciplined relationship-driven strategies while remaining competitive in our pricing.

Our goal is to continue to offer fair, market-aligned pricing, supported by strong customer relationships and exceptional service. Our focus is on serving our customers -- or growing our customers and serving our customers well and profitably. And also, our team is doing an outstanding job toward this end.

At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?

Thanks, Darleen. Well, Pat and Andrew have already commented on the loan growth. We've experienced in the past quarter as well as year-to-date, an annualized growth rate of 9%, I think, compares favorably to our peers. The third quarter was right in line with budgeted loan growth. And after 2 quarters of growth that were well ahead of plan, I think we're positioned to report good overall growth in earnings at the end of the year.

For the past couple of years, I've reported on our goal to do more C&I business, which includes owner-occupied real estate, while maintaining a healthy level of investor real estate and consumer lending. And I'm happy to report that the trend of growing C&I business has continued. New loans closed and funded for the 9 months ending 9/30/25 were comprised 65% by C&I loans and 18% by investor real estate, the remainder consisting mainly of consumer loans. That's an increase in C&I lending from 2024 when C&I loans represented 64% of all new loans.

The regional commercial banking teams continue to generate most of the loan growth for us. They represented 39% of new loans generated in Q3, followed by investor real estate at 28%, private equity at 18% and small business banking at 9%. Our specialty areas, which also includes asset-based lending, are all at or very close to their growth plans for the year.

Regarding investor real estate, we closed a number of new loans in the third quarter, but similar to previous periods, new loans were offset by payoffs. You'll see a bump up in investor real estate if you look at the schedules in the earnings release, but that was due mainly to a reclassification of a loan from owner-occupied to investor.

Our goal over time is to moderate growth in investor real estate and manage more of that business in its own investor real estate team, focusing on relationships and loan concentrations, and that continues to go very well. A focus of most community banks is the ratio of investor real estate loans to total capital, as Pat mentioned, we hit a high point at 430% of capital after the Malvern acquisition, but got to 390% in March of 2025 and finished Q3 at 370%, which is about where we want to be.

The lending pipeline at the end of the third quarter stood at $283 million of probable fundings, down 6% from the level of probable fundings at June 30. The number of deals in the pipeline, however, is up 5% from the end of Q2. If one breaks down the components of the pipeline at quarter end, C&I loans made up 68% of the overall pipeline, exactly where we were at June 30 and up from 63% at March 31. Overall, I'm happy with where the new business pipeline stands.

We are anticipating a higher level of loan payoffs in Q4 than what we've experienced on average over each of the first 3 quarters, which is why despite a strong start to the year from the standpoint of overall loan growth, our target has remained in the 6% to 7% growth range.

On the topic of asset quality, Andrew provided a good outline on where we are. I think things continue to be in good shape. The loan portfolio continues to be well diversified. Andrew mentioned some softness in the small business loan portfolio. We've made some adjustments there, and we anticipate a return to the quality we've experienced previously. Overall, it's a modest piece of the overall loan portfolio.

I should probably also comment on what's been out there in the banking news about the fear of deteriorating credit quality and the "one-offs" cited by a handful of banks. I can only say that we don't do any lending into deals like what you read about publicly around First Brands, Tricolor, factoring and borrowers not providing financial information. That's not what we do. We have very -- and we have very limited exposure to NBFIs and none to private lenders.

In summary, I think we had a good third quarter. Loan growth was in line with budget, and we expect to meet our loan growth goals for the year. That pretty much concludes my remarks. So I'll turn things back to Pat for any final comments.

Great. Thank you, Peter. Appreciate all the additional comments. And at this point, I think we'd like to open it up for Q&A.

[Operator Instructions] Your first question comes from the line of Justin Crowley with Piper Sandler.

Just want to start on expenses. You've talked about tighter cost control before. So nice to see the core base now down 2 quarters in a row. How would you describe some of the efficiency actions taken, what they involve, what, if anything, is left to do? And where does that leave you on the thinking around run rate here over the next several quarters, more specifically, just factoring in your comments as well about some actions like new branches that could add to costs?

Yes. No, absolutely. Justin, we always are focused on costs. But at the same time, we don't want to miss out on important investment opportunities. I think you've seen over the last couple of years, we've invested in some new teams in terms of some of the specialty lending niches, we've invested in some additional branch locations in new markets for us, and we've invested in some technology, whether that be the online loan application platform or salesforce, things like that. But I think in terms of big investments, we're at a point right now where we're just kind of digesting the moves we made. We're letting those new business units scale up. And so I don't see a lot of big new costs on the horizon. We are a year away from needing to make a decision on our core and how much we want to keep kind of with our current provider versus spreading it out amongst other kind of best-in-class operators. So always a little bit of a question mark on tech when you're doing a big core contract renewal. But again, I don't suspect there's going to be anything too outlandish there in terms of technology spend increases. And we've been very focused internally on just making sure we can get our noninterest expense to average asset ratio down to that 2% range and below since that's where we've been able to operate historically. So that's a little bit of big picture on expenses, and I'll let Andrew jump in and talk a little bit about some of the initiatives and kind of where he sees the line item moving forward.

Yes. Thanks, Pat. I'd just add, I think Pat talked about this in previous calls where kind of you do a big acquisition and you get cost saves and then you kind of recalibrate and now we're just kind of recalibrating a little bit more and fine-tuning. We haven't done anything drastic to save money, like things like professional fees, a lot of that was kind of elevated because of some of the big projects we had going, implementation of salesforce. We have consultants helping us with that. We had some other projects going on. And so I think really, the cost mitigation has been really just kind of settling to where we're at, finding some excess spending where we could. I don't think there's any major initiatives that are going to significantly reduce costs from where we're at now. We will -- obviously, like we mentioned, we will see a little bit of a creep for some of the couple of small -- the branches we've done, new branches. But I think we can minimize expenses, keep them relatively flat, maybe again, like some slight increases, always kind of heading into a new year, there's standard cost of living adjustments on things like rent and salaries and things. So we'll continue to see that. But no major new costs that I'm aware of or any major new cost-cutting initiatives, but we're going to just keeping a tight eye on things. We think we can continue to grow without adding meaningfully to the expense base and to the payroll. So again, I think we're going to be able to maintain the total expenses at a relatively flat level.

Okay. And then just, I guess, in terms of like very near-term run rate, like next quarter, even if we do see a little bit of an increase given the new branches, it's going to be modest. It's not going to be anything too eye-popping.

Yes, I think that's right.

Okay. And then on the margin and some of the inputs, obviously, the latest Fed cut came late in the quarter. But following that and what should be, I guess, some further reductions looking out here, and Darleen touched on it, but can you folks talk a little bit more on how aggressive or active you think you can get on lowering deposit costs?

I'll start and then I'll let Darleen provide a little more color there. But at the end of the day, when the Fed moves, we move, as Andrew pointed out, it takes a little bit of time to kind of to go through it. We have certain rack rates we can move down and we obviously are taking a look to see are there areas where we can move more than what the Fed did. And so we try to be selective in certain product categories to see if we can even move things a little bit further. But at the end of the day, our goal is to try to make enough adjustments on the deposit cost side to offset what we know is coming in terms of floating rate asset yields so that after a month or so, it should be a relatively neutral event from a margin perspective.

And then separate from that, there's just kind of the work we do every day to drive core low-cost noninterest-bearing deposits and move promotional customers into rack rate so that if we can make the impact of the Fed move neutral, then some of the mix improvements and some of the other changes we make can hopefully continue to drive costs lower.

So I don't know, Darleen, anything you want to add there?

I think, Pat, you touched on it. I would just add that we talked a lot about this over the past year and even early -- I'm sorry, late 2024, in which we've really been focused on lowering our cost of deposits, looking at specific portfolios and determining where we can make an adjustment without negatively impacting our customer base. One of the benefits that we have is our government portfolio, a good portion of that is tied to the effective funds rate. So as the Fed makes adjustments, we can make adjustments immediately. But I think everyone within the organization understands the message of competitive pricing but not going overboard and not necessarily winning based on rate. So overall, I think that we do a really good job in managing our cost, and I anticipate us continuing to be able to do that as the Fed continues to make adjustments over the next couple of months.

You mentioned the government portfolio of funding. How much do you have in deposits that are like that, that are indexed directly to Fed funds?

Our government portfolio is approximately 12% to 13% of our total deposit base. And I would say 75% of that portfolio is tied to the effective funds rate. So we look to onboard full customer relationships when we look at deposit opportunities on the government side. And generally, when we bid on that business, the request is to tie it to an index. So we've been successful in winning business in that world by bidding based off of an index rate. And so I think, again, as we look at additional cuts down the road, we'll be able to make adjustments in that portfolio.

Okay. Got it. And then just one last one. You continue to be active on the buyback and seems like that should continue to some degree. Obviously, with the stock right around tangible book makes it attractive. But what are other considerations like, for example, on capital levels? What levels are you comfortable at? Or what do you think could serve as a good floor for you guys?

Well, we always look at internally the total risk-based capital ratio, and we have a soft limit around 11.5% that we try not to dip below if we don't need to. And then after that, it's just sort of looking at different uses for capital, and we're happy to see that based on -- despite the strong growth based on the strong earnings, we've been able to see that level creep up over the last couple of quarters.

So I think we're in a position right now where based on organic growth alone, we're growing capital, which gives us flexibility. And what we choose to do with that " additional capital" that we're creating will be a function of the opportunities in the market. Obviously, M&A could be one consideration, but we continue to be very selective there. Our dividend is relatively low, so we could take a look at that. And then depending on where the stock trades, we think we've got room to look at capital deployment in the form of the buyback.

So we're at a level where we think capital ratios are growing nicely, and that gives us flexibility to kind of pull the levers that we think will generate the best returns.

[Operator Instructions] I would now like to turn the call over to Patrick Ryan. Please go ahead.

Thank you very much. I just want to conclude the call by thanking everybody for calling in. We appreciate your interest in First Bank, and we look forward to reconnecting with you after year-end results. Thanks, everybody. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to First Bank Earnings Conference Call Second Quarter 2025. [Operator Instructions] I would now like to turn the conference over to Mr. Patrick Ryan, President and CEO. You may begin.

Thank you, Bella. I'd like to welcome everyone today to First Bank's Second Quarter 2025 Earnings Call. I'm joined by Andrew Hibshman, our Chief Financial Officer; Darleen Gillespie, our Chief Retail Banking Officer; and Peter Cahill, our Chief Lending Officer. Before we begin, Andrew 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, 2024, filed with the FDIC. Pat, back to you.

Thanks, Andrew. The second quarter of 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. 3/4 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 noninterest-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 drove 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 noncore 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% or 1.15% 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 [ 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?

Thanks, Pat. For the 3 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 12 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 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. NPAs to 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 with a carrying 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 the 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 24th consecutive quarter. We also continued 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 subordinated 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 the end of 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'd note that the extra subordinated 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 are 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?

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 were up $48 million or over 6% annualized from the first quarter, and they grew $201 million or nearly 7% from second quarter of 2024. What's hitting 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 6 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 rack rate pricing structure.

We continue to execute our branch 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 Oceanport, New Jersey, which will extend our footprint into Monmouth County, making that the 10 county in New Jersey where we will reside.

We will be closing our limited service Marrisstown office next month in August, transferring the deposits to nearby Denville, 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 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?

Thanks, Darleen. Andrew described in his comments the overall loan growth we've experienced in the past quarter as well as last 12 months. I think our 11% organic growth rate compares favorably to our peers. It's important to note, as Pat pointed out, that almost 75% of the loan growth over the past 12 months has been in the C&I and owner-occupied real estate areas.

The residential -- I'm sorry, 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 scored small business product, which is different from SBA lending and caps out at around $350,000 in availability has shown growth through 6 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 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 3/31/25, 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 $301 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 3/31, 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. So 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. We're having 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?

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

[Operator Instructions]

Your first question comes from the line of Justin Crowley of Piper Sandler.

Maybe just digging into some of the commentary on forward loan growth moderating. The C&I verticals have been growing at a pretty good clip here for a while. So wondering how we should think about continued growth there versus some of the other areas of the portfolio that could be -- serve as an offset.

Yes, it's a good question. I mean, in any given quarter, you're lining up a lot of different things, right? You got different 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 within a specific 90-day window what you're going to see. I would say, in general, our guidance has been and continues to be that on average, we're looking to generate plus or minus $50 million in net loan growth in the quarter. That being said, we just had 2 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, et cetera.

We've also seen a little bit of an unusually low level of payoffs and 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, 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 we're thinking things will be a little slower in the back half of the year.

But as Peter mentioned, 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 certainly being selective and a lot of times, new production is replacing runoff and paydowns there. So we do see some modest growth in that quarter going forward, but we expect the growth in the C&I units to be a little bit stronger.

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 for how much of the growth this quarter and maybe even just the past few quarters, but how much of that growth has been driven by line utilization versus new customer acquisition?

Yes. I'll let Peter try to give a little more clarity if he has it. But 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.

No, that's right. The line -- I check it every quarter, and it never seems to fluctuate much. 1% or 2% can be a big number, but we continue to be in that 41%, 42% line utilization rate quarter after quarter. Yes, there is kind of more fluctuation 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.

Okay. Got it. And then on the outlook for deposits, 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 branch locations. But just wondering how you think that mix could shake out.

Yes. Listen, we're obviously working hard to drive that noninterest-bearing percentage higher. It is working, right? I think post Malvern, we had dipped to even as low as 16%. So nice to see it move from 16% to 19%. That can also be a little harder to predict because you'll have some bigger swings in just kind of balance levels based on seasonality or companies do a capital raise or a customer sells his business and gets a big chunk of money. So there's a lot of kind of singular events that can impact that. But certainly, the trend is one we want to continue to move higher.

And I'd say on the other side and the interest-bearing side, we're continuing to see pressure from parked money looking for yield in money market funds and investment products. So in some cases, we've tried to offset some runoff in some of those categories with some additional CD dollars. Plus 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 hopefully, that answers the question, but a little harder to predict on the NIB side.

Understood. Got you. And 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 stock where it is now? And is there room to perhaps get even more active there?

Yes. I mean, I certainly think we have the capital to be active on the repurchase side. We try to be selective, i.e., 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 community bank stocks even as they've been moving higher. And so we generally don't rush to keep buying as the market is moving higher just because 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.

Okay. And then maybe just one last one. Just a question on the appetite for M&A here. I 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? Just the level of conversations being had out there and what you'd potentially look for in terms of size and geography?

Yes. 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 want to be in a position to look at opportunities for M&A. Obviously, we've got to be very careful without a currency, we'd be careful with a good currency. But our job is to find the right opportunities at the right price. And we don't have a magic number in terms of size threshold. 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 serious dialogue versus folks just thinking about a variety of different things, but ultimately unclear whether any of those more strategic type transactions would come to fruition.

So we've been pretty vocal about 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 going to 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.

Okay. And then just from a geography standpoint, 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 -- if the right opportunity were to come along?

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

Your next question comes from the line of Manuel Navas with D.A. Davidson.

Can I start on some of the near-term NIM movements? You talked 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.

Yes. 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 at the end of August. Outside of that, I think the general trends are decent in terms of 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 slowly trying to push down some of our higher rate liability deposit costs.

So I think we've got a little bit of a headwind in terms of the reduction of the merger accretion income that 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 flattish margin over the next couple of quarters.

But Peter, maybe you can talk a little bit about what you're seeing on the loan yield side and then turn it to Darleen to talk a little bit about what you've seen on the deposit cost side.

Sure. As far as pricing on the lending side, I mean, shorter-term floating rate loans, our small business loans continue to be prime to prime 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, we're still looking for 250 to 300 basis points over -- we kind of priced the 5-year treasuries or FHLB, which could be 25 to 30 basis points over treasuries. But we're trying to get in that 250 basis point 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 bucket of new loans each month has been in the, I'd say, the low to mid-7% range. So I think we're still doing a good job holding to what we want to get on pricing, and we're able to negotiate what we want there between loan pricing and deposits. I think we're in good shape.

Thanks, Peter. Darleen, do you want to jump in?

Yes, sure. So one of the common themes we've talked about is 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 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 in 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 despite -- regardless of what the Fed decides to do.

I hope that helps. But obviously, a little bit of a moving target, so...

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 handy?

Yes. 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 yes, 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 a few hundred thousand dollars of 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.

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

Yes. I mean, let's...

Type of Idea.

It's certainly possible, right? I mean the big question is, tell me the shape of the yield curve in January '26, and then I'll give you a better answer. But listen, there's certainly an opportunity, but there's a lot of different things that might happen. So we like that as a potential future benefit, but we'd rather be a little more conservative in the guidance and hope the optimistic scenario plays out.

And with this -- your balance sheet is more neutrally positioned, if there were to be cuts, you still think stable-ish in the back half of this year, just how it's structured currently?

Yes. I mean that's kind of what we saw last time around with the cuts. We were able to move liability costs enough to offset the -- 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 kind of 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 in the back half of '26 and into '27. But you don't get the benefit right away until the steepening really kind of gets through the repricing process.

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 that you have to refill the opportunities a bit. But can you just talk about what would take you to keep loan growth accelerating and general loan demand. It seems like it's a lot better than you maybe expected in the market.

Yes. And listen, I don't -- I think 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 constraint. We could do more quality loans if we found the good low-cost funding to support it. So the market is certainly there with the diversity of the teams and the geographies and the business units. I mean we're -- 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 quality opportunities, and we pick the ones we like the best.

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

Yes. 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 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 if I had to guess, given the strong uptick in Q2, we'd probably see some fluctuations back down a little in Q3, but nothing in there that says, oh, there was 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 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 million. But I think the overall pipelines there continue to look pretty good.

Your next question comes from the line of Kyle Gierman with Hovde Group.

I was wondering if you can share details on the NPL inflows this quarter. And additionally, how is asset quality holding up in your specialty segments like in SBA and private banking?

Yes. So obviously, you saw in the numbers. There was a little bit of movement, a couple of loans that moved into nonperforming category. And listen, not anything that was alarming or really candidly unusual. There's flows in and flows out, and 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 going to be major cracks on the credit side. But the -- I don't know, Peter, anything you want to add there?

No, I'm just trying to think over the segments mentioned there. Private equity fund banking, no real changes this quarter. ABL, clean. Yes. 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 funded and we typically sell the guaranteed portion. But we haven't seen much problem loans coming out of SBA. I'd say it's just a general uptick caused by increased loan volume and a couple of smaller problem loans. Nothing unusual.

Got it. 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?

Well, I mean, by trends, you're saying anything in certain business segments? No. I mean we keep bringing the topic up and RMs are out researching the issue. And yes, you see a customer or 2 that says they're building inventory to hedge against changes in pricing and that kind of thing, but it's minor. It's -- there's nothing across the board that gives us much concern right now. I mean we are watching it, and we're looking for feedback at our various loan committees and things like that. But no big impact as we speak.

Got it. And then you did mention balance sheet positioning for rate cuts. I was wondering if you could specifically quantify the impact of each like 25 basis point rate cut on your NIM?

Well, again, I think the impact has been and should be muted in the sense that we see a repricing of our variable rate assets, and we make an appropriate adjustment on the non-fixed deposit funding side to really offset the impact. So it tends to be 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.

[Operator Instructions] That concludes our Q&A session. I will now turn the call back over to Mr. Ryan for closing remarks.

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.

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