KBRA Affirms Ratings for First Bank

KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Hamilton, NJ-based First Bank (NASDAQ: FRBA) ("the bank"). The Outlook for all long-term ratings is Stable.

The ratings reflect the successful execution of strategic initiatives in recent years, guided by a conservative and experienced management team with extensive knowledge of FRBA's markets. Overall, management has demonstrated effective integration of acquisitions, often involving underperforming institutions, which have diversified its operating footprint closer to major MSAs like Philadelphia and New York while also adding scale in New Jersey. These acquisitions have included meaningful cost savings, enhancing profitability, and successful problem loan workouts with minimal losses. FRBA managed to effectively navigate the interest rate hiking cycle and associated funding cost pressures, maintaining a resilient NIM due to a higher proportion of loans in the asset mix (88% at 3Q24) and favorable loan yields. As such, profitability has tracked at the higher end of the peer group, with ROA of nearly 1.2% YTD24. Additionally, First Bank’s focus on building a stronger core deposit base has been notable, with slight growth in noninterest-bearing balances while the proportion of high-cost time deposits have declined significantly from pre-pandemic levels (21% of total as of 3Q24 vs. +40% between 2018-2019). Although the bank’s deposit costs have outpaced similarly rated peers (2.98% at 3Q24 v. 2.48% average for KBRA BBB+ rated banks), FRBA is well positioned for the recent and additional Fed rate cuts due to its liability-sensitive balance sheet. However, management noted that NIM would likely remain stable around the 3.5% level as the core margin expands and purchase accounting accretion income decreases. On- and off-balance sheet liquidity sources are deemed sufficient despite a loan-to-deposit ratio consistently above 100%. Moreover, management noted the preference to reduce the loan-to-deposit ratio to 95%-97% over time, which we view favorably. Uninsured deposits represent a relatively low 23% of total deposits (excl. collateralized), adding stability to the funding profile. Meanwhile, the bank’s smaller available-for-sale (AFS) securities portfolio (2% of total assets) has insulated it from significant negative AOCI marks. First Bank has reported solid credit quality metrics in recent years, with the spike in the NCO ratio YTD24 related to a purchase credit deteriorated loan from the 2023 Malvern Bancorp, Inc. acquisition that was moved to OREO and previously reserved for. Moreover, despite an above average concentration in investor CRE (nearly 400% of total risk-based capital), the exposure to the office sector is also considered minimal at just 4% of total loans, which is diversified across its footprint and largely consists of smaller buildings in Central NJ, with no exposure to Philadelphia or NYC. Following the Malvern acquisition, which included significant interest rate marks, the bank’s risk-based capital measures tracked well below peer levels. However, management has exhibited commitment to restoring capital ratios to pre-merger levels, supported by robust earnings and moderated growth. Core capital remains mixed, with the TCE ratio relatively strong (9.4% as of 3Q24), although the CET1 ratio lags due to the high RWA density (95%) associated with a commercial lending focus.

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