First Bank (FRBA) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed picture: strong net income and efficiency ratios, but declining deposits and elevated charge-offs in small business loans. Management's optimistic loan growth outlook is tempered by a significant C&I downgrade. The Q&A reveals cautiousness in small business credit, with no systemic commercial issues. The active share buyback program is a positive, yet the unclear guidance and lack of specifics on downgraded credits limit positive sentiment. Overall, the sentiment is neutral, reflecting balanced positive and negative factors.

Key Financial Performance

Net Interest Margin (NIM) 3.7% in Q4 2025, up 20 basis points from Q4 2024. Full year NIM was 3.69% compared to 3.57% in 2024. The increase was driven by strong margin expansion and effective management of deposit costs.

Return on Average Assets (ROAA) 1.21% in Q4 2025, compared to 1.10% in Q4 2024. The improvement was attributed to higher profitability driven by margin expansion.

Return on Tangible Common Equity (ROTCE) 12.58% in Q4 2025, compared to 11.82% in Q4 2024. The increase reflects improved profitability.

Noninterest Income Increased by almost $2 million in 2025 compared to 2024. Gains from SBA loan sales contributed to the increase, while residential mortgage sales remained muted due to market conditions.

Noninterest Expense to Average Asset Ratio 1.97% for full year 2025, compared to 2.01% in 2024. The decrease was due to effective expense management and a one-time benefit from the sale of an OREO asset.

Credit Quality - Delinquency and Substandard Loans Delinquency in core CRE and Community Banking improved to 0.02% at year-end 2025. Loans rated past watch, special mention, and substandard declined from 4.86% of total loans in 2024 to 4.20% in 2025. However, a $23 million C&I loan was downgraded to substandard.

Net Income $12.3 million in Q4 2025, translating to $0.49 per diluted share and a 1.21% ROAA. This was supported by strong loan production despite elevated payoffs.

Loan Growth Loans increased by $149 million (5%) over the last 12 months, despite $135 million in payoffs in Q4 2025. C&I loans led the growth.

Deposit Balances Total deposits declined by $21 million in Q4 2025, driven by a $27.1 million reduction in brokered deposits. However, relationship-based interest-bearing demand deposits grew by $47 million (33% annualized).

Allowance for Credit Losses to Total Loans Increased to 1.38% at December 31, 2025, from 1.25% at September 30, 2025, due to charge-offs and specific reserves in the small business portfolio.

Net Charge-Offs $1.7 million in Q4 2025, consistent with Q3 2025. Charge-offs were primarily in the small business portfolio.

Efficiency Ratio Improved to 49.46% in Q4 2025, remaining below 60% for the 26th consecutive quarter.

Tangible Book Value Per Share Increased by more than 12% annualized during Q4 2025 to $15.81, reflecting strong earnings momentum.

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Operating Highlights

Small Business Loan Products: Performance was below expectations due to higher delinquency and charge-offs. Changes to credit parameters and sales approach were implemented to improve performance in 2026.

SBA Loan Sales: Gains from SBA loan sales were higher in 2025. Enhancements to technology and staff are expected to drive further improvement in 2026.

Deposit Growth: Focus on adding new relationship-based customers in New Jersey and Pennsylvania. Efforts to optimize deposit portfolio by reducing higher-cost brokered deposits and growing relationship-based interest-bearing demand deposits.

Branch Strategy: Opened 3 branches, closed 2, and relocated 1 branch in 2025. Targeted promotions at new and relocated branches showed strong engagement and retention.

Net Interest Margin (NIM): Improved to 3.7% in Q4 2025, up from 3.57% in 2024. Focus on reducing deposit costs and replacing lower-yielding assets with higher-yielding loans.

Noninterest Expense: Managed effectively with a decline in the noninterest expense to average asset ratio to 1.97% in 2025 from 2.01% in 2024. Sale of an OREO asset offset severance and other nonrecurring expenses.

Loan Growth Strategy: Targeting $200 million net loan growth in 2026, focusing on asset-based lending, community banking, and commercial real estate.

Evolution to Middle-Market Commercial Bank: Focus on optimizing deposit portfolio, reducing deposit costs, and deepening customer relationships to support profitability and growth.

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Risk or Challenges

Small Business Loan Performance: Higher delinquency and charge-offs in small business loans exceeded acceptable levels, despite adjustments to credit parameters and sales processes. This poses a risk to credit quality and profitability.

Substandard Loan Downgrade: A $23 million C&I loan was downgraded to substandard due to declining sales and profitability, increasing the risk of further credit deterioration.

Nonperforming Assets (NPAs) Increase: NPAs to total assets rose to 46 basis points from 36 basis points, driven by growth in nonperforming loans, particularly in the small business portfolio.

Loan Payoffs Impacting Growth: Elevated loan payoffs, particularly in Q4, offset new loan production and led to a decline in total loans, impacting overall loan growth.

Deposit Cost Management: Efforts to reduce higher-cost deposits and optimize the deposit portfolio may face challenges in maintaining customer relationships and balancing funding needs.

Small Business Portfolio Charge-offs: Charge-offs in the small business portfolio were a significant contributor to credit losses, reflecting ongoing challenges in this segment.

Regulatory and Economic Uncertainty: Forward-looking statements caution about uncertainties in financial conditions and regulatory risks, which could impact future performance.

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Guidance & Outlook

Small Business Loan Performance: Changes to credit parameters and sales processes are expected to lead to better performance in 2026 and beyond.

SBA Loan Sales: Enhancements to technology and staff in late 2025 are anticipated to drive continued improvement in SBA loan sales in 2026.

Noninterest Expense Management: The company aims to further reduce the noninterest expense to average asset ratio, leveraging improved profitability from newer business units and operating efficiencies.

Credit Quality: Costs in the small business portfolio are expected to stabilize over the next few quarters due to implemented changes. Growth in asset-based lending, community banking, and modest growth in commercial real estate are expected to drive net loan growth of $200 million in 2026.

Deposit Growth: Focus on adding new relationship-based customers in New Jersey and Pennsylvania to drive deposit growth.

Net Interest Margin: Efforts to push deposit costs lower and replace runoff of lower-yielding assets with higher-yielding loans are expected to maintain a stable net interest margin.

Branch Network Optimization: Branch network optimization activity is expected to slow in 2026, with a focus on optimizing pricing and profitability of the deposit portfolio.

Loan Growth: The company aims for moderate growth in investor real estate loans, maintaining a ratio of 350%-375% of capital, and plans to grow in all segments, including SBA, consumer, private equity, and asset-based lending.

Effective Tax Rate: The effective tax rate is anticipated to be approximately 24%-25% in the future.

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Shareholder Return Plan

Quarterly Cash Dividend Increase: The company announced a 50% increase in its quarterly cash dividend.

Share Repurchase Plan: The company did not execute any share repurchases during Q4 2025 due to the lack of a regulatory approved share repurchase plan for the first half of the quarter and an improved stock price during the quarter.

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Key Q&A

Q:What is the outlook for loan growth and payoffs?

A:Management is not raising alarm bells about loan growth, viewing recent high payoff activity as an anomaly. They believe the pipeline remains strong and consistent, with no concerning trends such as losing desirable business or customers being taken by private credit or nonbank lenders. They expect growth to rebound in the next quarter or two, consistent with historical performance of $175 million to $200 million in net loan growth.

Q:Can you provide more details about the downgraded C&I credit?

A:The downgraded C&I credit is a multi-location consumer-based business experiencing downward trends. While some locations are performing well, others are not, leading to a decline in performance. The loan is cash flow-based, and its size prompted a downgrade to substandard. Management is monitoring the situation closely but did not provide further details.

Q:What are the expectations for expenses and cost management?

A:Management aims to keep a tight lid on expense growth while maintaining a lean and appropriately staffed operation. They expect limited expense growth coupled with revenue growth to drive efficiency. The third quarter is considered a good baseline for expenses, with adjustments for inflation and cost-saving initiatives expected to maintain stable or slightly increasing expenses.

Q:What is the status of the share buyback program?

A:The share buyback program was delayed due to regulatory approval processes but is now active with an allotment of up to 1.2 million shares or $20 million. Management views buybacks as a tool and considers price relative to book value when deciding on activity.

Q:What is driving cautiousness in the small business credit portfolio?

A:The small business credit portfolio has an average yield of around 9%, but annualized charge-offs have been elevated at 3% or higher, which is above the desired 1%-2% range. Management has made changes to tighten the portfolio, including reducing loan amounts, revising team structures, and focusing on relationship-based selling. They aim to improve profitability and reduce credit costs.

Q:What caused the increase in prepaid fees this quarter?

A:The increase in prepaid fees was driven by a few larger CRE loans with prepayment structures. In one case, a borrower refinanced to a nonrecourse CMBS structure despite the prepayment fee. Elevated prepayment activity, especially within CRE, contributed to the higher income from fees.

Q:What are the trends in new loan origination yields?

A:New loan origination yields remain strong, with spreads of 200-300 basis points over treasuries or FHLB, resulting in yields north of 6%. The average interest rate on new loans is in the high 6% range. Spreads may tighten slightly due to industry-wide payoff activity, but management is maintaining reasonable yields based on credit quality.

Q:Are there any emerging credit issues in the commercial segments?

A:Management is not seeing systemic credit issues in commercial segments. A deeper dive into the portfolio showed improvement across most areas, with the exception of one isolated downgrade. CRE performance remains strong, and no broader credit challenges have been identified.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details about the downgraded C&I credit, citing limited information they could share. They also did not provide precise guidance on quarterly expense run rates, instead offering general comments about cost management.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

FRBA Transcript

First Bank (FRBA) Q4 2025 Earnings Call Transcript

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The earnings call highlights strong loan growth, strategic branch expansion, and a focus on maintaining credit quality. The replacement of higher-rate debt with lower-rate subordinated debt is a financial positive. The Q&A indicates stable NIM, strong loan demand, and effective cost management. Although management was vague on some future projections, the overall sentiment is positive, supported by a disciplined M&A strategy and a focus on shareholder returns through selective buybacks. The positive financial metrics and strategic initiatives suggest a likely stock price increase.

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