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 recognize First Bank’s successful execution of strategy in recent years, which has incorporated an effective and well-thought-out approach to M&A that has diversified the operating footprint closer to major MSAs, including Philadelphia and New York, as well as added scale in its home state of New Jersey. This has been accomplished by a conservative and experienced management team that has demonstrated the ability to effectively integrate acquisitions, which, we note, are often times underperforming institutions, including the work out of problem loans without material losses and achieving meaningful cost-savings. As such, FRBA now reflects a vastly improved earnings profile, which compares favorably to the rated peer average and other local banks (core ROA nearing 1.10% for 9M23). While the bank has not been immune to NIM headwinds stemming from rising rates, and in turn, the acceleration in funding costs, FRBA’s NIM has been more resilient than peers, which is somewhat due to the maintenance of a higher level of loans in the earning asset mix. Moreover, despite the minimal noninterest revenue generation (generally tracking around 5% of revenues), the bank’s below average cost base has allowed FRBA to maintain solid profitability. First Bank is also well positioned moving forward given the substantial amount of purchase accounting accretion income and cost-savings to be realized from the recent Malvern Bancorp, Inc. ("Malvern") acquisition that closed in 3Q23. KBRA acknowledges the improvement in the funding base over the years, including a significant reduction in costly time deposits (21% of total as of 3Q23 vs. +40% between 2018-2019), though the deposit base continues to reflect a higher beta (cost of IB-deposits nearing 3.00%). Additionally, the liquidity position has typically been managed more aggressively, notably from a loan-to-deposit perspective, which has consistently tracked above 100%. However, we believe on-and-off balance sheet liquidity is sufficient, especially in the context of uninsured deposit levels, which are relatively low at 21% of total (excluding collateralized relationships). The bank has also reported solid credit quality metrics in recent years, though the acquisition of Malvern added a higher level of purchase credit deteriorated nonaccrual loans (adjusted NPA ratio of ~0.80% as of 3Q23). With that said, we believe these loans are appropriately marked and present minimal loss content to First Bank. With regard to the potential issues facing the banking industry, with repricing risks from rising interest rates, and headwinds in the office sector, we believe that FRBA is not overly exposed to these risk factors as the bank does not have a material amount of fixed-rate loans set to mature/reprice over the next 12 months, and reflects a minimal investor office exposure of ~4% of total loans. Following the Malvern acquisition, which resulted in a significant interest rate marks, the bank’s risk-based capital measures track well below peer (CET1 ratio of 9.0% at 3Q23). However, management is committed to rebuilding ratios back to pre-merger levels, which should be facilitated by strong earnings, minimal shareholder distributions (payout ratio was less than 15% based on core net income in 3Q23), and slower growth. Moreover, the lower risk-based capital levels are somewhat offset by a strong TCE ratio of 8.7% as of 3Q23.

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