First Bank (NASDAQ:FRBA) Q1 2023 Earnings Conference Call April 27, 2023 9:00 AM ET
Company Participants
Patrick Ryan – President and CEO
Andrew Hibshman – CFO
Darleen Gillespie – Chief Retail Bank Officer
Peter Cahill – Chief Lending Officer
Conference Call Participants
Nick Cucharale – Hovde Group
Manuel Navas – D.A. Davidson
Patrick Ryan
I’d like to welcome everyone today to First Bank’s First Quarter 2023 Earnings Call. I’m joined today 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.
Andrew Hibshman
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 31st, 2022, filed with the FDIC.
Pat, back to you.
Patrick Ryan
Thank you, Andrew. I’ll provide some high-level thoughts and observations on the quarter and then turn it over to the team to provide a little more detail. And as always, we’ll have some time for question and answer at the end.
Overall, I’m very proud of the resiliency displayed by our relationship-driven community banking model. Deposit outflows were there, but they weren’t too bad, and they were largely driven by higher-yielding investment opportunities.
Our NIM, our net interest margin held up pretty well despite the heightened deposit competition and the inclusion of additional borrowings we took out just to provide some excess liquidity. Asset quality remained very good with minimal charge-offs and low levels of non-performing assets and delinquencies.
Our expenses were up and some of that increase is related to inflationary factors, but the bigger driver of the increase relates to key hires tied to strategic initiatives. Specifically, we added a group of great bankers from Investors Bank to help us continue to build and grow our presence in Northern New Jersey. We built on a small team to help grow our small business lending unit and we hired a team to build out a new asset-based C&I lending group.
The important point here is that these expenses will drive earnings and profits into the future. It is not simply a function of higher overhead. As a result of the elevated expenses, our return on assets was down, but it remained above 1%, and that’s even after including the merger-related costs that were incurred during the quarter.
Regarding the merger, we’re very excited about the opportunity to meaningfully grow our presence in Pennsylvania. Plus, this still gives us unique balance sheet management options. Specifically, the combined company could end up being leaner, maybe even smaller, but more profitable.
As always, we’ll be reviewing all options related to the size and makeup of the balance sheet of the combined companies and will follow the path that will drive the best profitability and shareholder value.
Also during Q1, we saw a meaningful increase in our allowance as a result of implementing CECL. A couple of quick points on deposits and lending before we turn it over to the team for more details.
Overall, the deposit outflows during the quarter were manageable with most of the decline coming prior to March 9th and signed that alternative investment options, not concerns about banking industry stability, we’re driving the deposit declines.
In Q1, our non-interest-bearing balances continue to move lower, but the pace has slowed and non-interest-bearing balances are flat so far in April. We believe our strategic investments in key hires, our growth of our small business and C&I lending units will help drive quality deposit growth moving forward.
On the lending side, we saw $55 million in loan growth during the quarter with over 80% of that growth coming in C&I and CREO. Those two categories are up approximately $100 million in outstandings in the past two quarters. Importantly, C&I loans provide diversification benefits along with shorter durations, better yields, and more deposits.
Our disciplined loan pricing and a focus on the most attractive segments helped drive a 33 basis point improvement in loan yields during the quarter. As I mentioned, asset quality and delinquency numbers were good and overall, on the lending front, we saw continued evolution from a historically CRE-focused community bank to an evolving lower middle market commercial bank.
In summary, I have renewed excitement and faith in the Community Bank model and I’m even more optimistic about First Bank’s ability to thrive as one of the top players in the community banking space.
Once again, during periods of stress, the relationship-driven community bank model showed its resilience and its value. When we look back over recent history, we saw the community banks made it through the great recession, relatively unscaled.
We showed tremendous value to our communities and our customers during the pandemic in PPP. And in March of 2023, we showed the stickiness of our deposits when others saw large outflows.
At First Bank, our follow-through on important strategic investments despite near-term profit headwinds, shows our commitment to being a leader in the community banking field and our commitment to creating lasting and sustaining value.
Lastly, as I pointed out in our shareholder letter, we are in the midst of a gradual strategic transformation. Our business is evolving and diversifying in meaningful ways, both geographically and across lines of business. Our franchise will be more profitable, more valuable, and more attractive as a result of these strategic investments.
At this time, I’d like Andrew to discuss the financial results in a little bit more detail. Andrew?
Andrew Hibshman
Thanks Pat. For the three months ended March 31st, 2023, we earned $7.0 million in net income or $0.36 per diluted share, which translates to a 1.03% return on average assets. Excluding merger-related expenses and losses on investment sales, diluted EPS would have been $0.38 or a 1.1% return on average assets.
During the quarter, we had solid loan growth, improved our liquidity position, maintain strong credit quality metrics, and made investments to help drive future growth. The current interest rate environment and the steps we took in the first quarter to increase on-balance sheet liquidity led to a decline in our margin.
In addition, the investments we made in people and new locations led to increased non-interest expenses. The combination of these factors led to a decline in net income of $2.1 million from the linked fourth quarter and a decline of $1.2 million compared to the first quarter of 2022.
Strong commercial loan growth continued in the quarter. Loans increased $55 million compared to an increase in loans of $74 million in the fourth quarter of 2022 and $40 million in the first quarter of 2022. Growth during the quarter was primarily driven by C&I lending, as Pat mentioned.
Total deposits were down $52 million during the quarter of first quarter of 2023 with non-interest-bearing deposits down $40 million and interest-bearing deposits down 12%. Darleen and Peter will expand on lending and deposit activity in their remarks.
Primarily due to the increase in deposit costs, offset somewhat by the increase in the average rate on loans, our tax equivalent net interest margin decreased to 3.52% for the quarter ended March 31st, 2023 compared to 3.69% in the fourth quarter of 2022.
Our asset liability management approach continues to be conservative, but we have taken steps and plan to continue to shift our balance sheet to a more liability-sensitive GAAP position. In the current rate environment, we do expect continued pressure on the margin.
Liquidity levels increased during the first quarter, primarily due to increased borrowings, which were used to support our loan growth, replace the losses in deposits, and increased on-balance sheet liquidity.
We have also enhanced our contingent sources of liquidity by adding additional borrowing capacity at the FHLB and pledging securities at the Federal Reserve Bank. We also sold some lower-yielding securities for a small loss during the first quarter and reinvested the funds into higher yielding overnight cash accounts.
We have also reduced some of the risks in our deposit portfolio by reducing uninsured deposits through both adding customers to reciprocal deposit products and some small reductions in balances of some of our largest customers.
The actions taken during the first quarter led to a significantly improved available liquidity to adjusted uninsured deposit ratio of approximately 100% as of March 31st, 2023.
We define available liquidity as cash and due from banks, the market value of our investment securities, currently available funding sources, minus applied securities, and restricted cash. Estimated adjusted uninsured deposits are uninsured deposits, minus deposits of state and political subdivisions, which are separately collateralized.
We are already seeing signs in April of deposit generation improvement. Based on the deposit growth to-date in April, we have improved our liquidity position further and our available liquidity to adjusted uninsured deposit ratio is currently approximately 106%.
As Pat mentioned, we adopted CECL on January 1st, 2023 and based on our updated methodology, we increased our allowance for credit losses on loans to 1.25% of total loans.
Based on a modest level of net charge-offs during the quarter and a strong asset quality profile, we maintained our allowance for loan losses as a percentage of loans at 1.25% at March 31st, 2023, compared to that same percentage at adoption of CECL.
This was supported by only a slight increase in non-performing loans as our non-performing loans are only 33 basis points of total loans at 3/31/2023 compared to 27 basis points at the end of the year. We also established a small reserve of approximately $225,000 on our HTM securities.
In the first quarter of 2023, total non-interest income decreased to $964,000 from $1.4 million in the fourth quarter of 2022. The decrease from the fourth quarter of 2022 was primarily due to a decrease in loan fees, losses on the sale of securities, and a decline in gains on recovery of acquired loans. This was offset somewhat by an increase in gains on sales of loans, primarily SBA loans.
Our SBA loan activity and pipelines continue to be strong. However, sale activity had been slow primarily due to the rising rate environment, which has reduced the premiums earned on sales. And in most cases, we are retaining the loans on our balance sheet. Going forward, we expect SBA sale activity to be more active.
Loan swap activity continues to be slow, and we don’t expect any significant change in the short-term. While non-interest income levels may continue to fluctuate, we do not expect a significant increase in non-interest income over the next several quarters.
Annualized first quarter 2023 non-interest expenses were 1.99% of average assets or 1.3% excluding merger-related expenses. This was an increase, but if you compare this to a peer levels of 2.15%, we still feel good about our expense management.
In total, non-interest expenses were $13.5 million in the first quarter of 2023, up $1 million or 8.3% compared to the fourth quarter of 2023. The increase was primarily due to higher salaries and employee benefits and occupancy expenses. The increase in salaries and occupancy were primarily related to our new Northern New Jersey regional center and branch as well as the upgraded space in West Chester, Pennsylvania.
We also continue to add lending staff, in particular, our asset-based lending team and some of the other teams that Pat mentioned. With deposit pricing prices persisting, we are refocusing our efforts on expense control. We have already identified some cost savings opportunities on a standalone basis and associated with the Malvern acquisition that we will be initiating in the back half of this year.
For example, we recently announced that our Cranberry branch location will be closing on June 30th of this year with Cranberry location is within four miles of our Monroe branch, and we expect a seamless transition of our customers to the Monroe location.
While we believe the current interest rate environment will continue to put pressure on our margin, we are excited about the opportunities that lie ahead in 2023. Our recent hires and new locations, coupled with the expected closing of the Malvern acquisition, will help us continue to generate core loan and deposit growth and combined with very strong credit quality metrics and efficiency gains, we are well-positioned to maintain strong core profitability.
At this time, I’ll turn it over to Darleen Gillespie, our Chief Retail Bank Officer, for her remarks. Darleen?
Darleen Gillespie
Thanks Andrew. Considering all that has been happening in the industry, we continue to remain focused on our key strategic objectives related to the deposit side of our business. That focus includes deposit acquisition and growing our existing deposit fees.
It has been a challenging start to the year, but we are optimistic. We remain diligent in working towards our deposit growth goals with seasoned bankers and a sales team that understands the mission.
We rolled out deposit campaigns to promote and drive activity into our new location in Fairfield, New Jersey and the relocation of our West Chester, PA branch. We also expanded the campaign to assist in our efforts to mitigate deposit outflows as a result of funds moving into higher yield money market funds and treasuries.
After the recent bank failures, our branch team members and relationship managers went to work, assuring our customers of the quality of our business model and the strength of our bank. Our quick action helped us to retain deposits, but we did experience some outflows.
Total deposits decreased $52 million in the first quarter. However, we remain true to our core belief of growing the relationships we maintain with our clients, noting that very few of our clients have left the bank, but have reduced their balances and/or shift is funds into interest-bearing vehicles.
We began the first quarter with an approximately $61 million decline in total deposits in January as we allowed some higher cost funds to leave the bank. We saw an increase of approximately $35 million in deposits in February and deposit balances were relatively flat from February month end through March 9th.
After the Silicon Valley and Signature closures, we experienced some declines, but it should be most of those declines to seasonal outflows and continued movement of customer funds to higher yield in brokerage accounts.
Total deposits declined approximately $26 million in March. But so far in April, we are now slightly positive in the year-to-date deposit growth. We saw an increase this quarter in our cost of deposits, 48 basis points from Q4 as a result of the rising interest rates the bank has been used to combat inflation.
With the end clients simply have become more rate-sensitive and we continue to evaluate our pricing accordingly. We also had approximately $30 million moving to our reciprocal deposit program in Q1 compared to minimal activity in Q4.
Now, I’ll locate some of the key factors of our deposit performance. As mentioned, total deposits decreased $52 million during Q1 as a result of a number of factors, risk competition and uncertainty in the market and normal business activity and fluctuations.
Non-interest-bearing demand deposits as a percentage of total deposits decreased to 20.7% compared to prior quarter at 22%. Time deposits as a percentage of total deposits increased to 24.7% as compared to 23.1% at December 31st, 2022, driven primarily by promotional CDs.
Combined money market and savings balances as a percentage of total deposits were flat at 40.8% and interest checking remained relatively flat at 13.8% compared to 14.1% at Q4 quarter end.
As noted earlier, our cost of deposits has increased 48 basis points resulting from the competitive landscape. We continue to remain mindful of this when considering future pricing adjustments.
Our deposit mix has shifted towards interest-bearing products, but we have some great initiatives in conjunction with our marketing team with a balanced approach between NIB, non-interest-bearing and interest-bearing products.
Although we experienced some deposit outflows, we’ve actually generated approximately $80 million in new commercial deposits, which is evidence of our success of growing our commercial portfolio.
Overall, we remain optimistic as we are seeing deposit activity normalized in the second quarter. Our deposits remain solid. We are onboarding new clients that are taking advantage of our cash management services, reflecting their commitment to growing with our bank.
Our small business banking group has hit the ground running with enhanced service offering to the small business segment, which is adding significant value to our deposit activity.
Our branch team members are benefiting from some enhanced training, which is helping to encourage quality conversations with our clients, resulting in uncovering deposit opportunities.
And lastly, we have a healthy deposit pipeline with active campaigns out in the market to drive in new customers and new deposits. All of these initiatives are positioning us for a positive trajectory through the remainder of this year.
At this time, I’ll turn it over to Peter Cahill, our Chief Lending Officer for his remarks. Peter?
Peter Cahill
Thanks Darleen. I’ll try to provide some additional information, it’s not already covered by the team. After a strong fourth quarter, I think we had another very good quarter in the first quarter of 2023. As you’ve heard, loan growth was $55 million, which puts us at an annual growth rate of right around 9%.
You’ll recall last year, loans grew by $260 million, but the fourth quarter showed slower growth than to the other three. Last year, we closed and funded on average during the first three quarters, $126 million in new loans.
In the fourth quarter, we closed $83 million of new loans. Reasons for the slower growth then were, first, we were a good deal ahead of plan throughout 2022, which meant we could be more selective. As for the first six months, loan growth was weighted towards investor real estate loans. So, again, we were selective about what we pursued in the second half.
And lastly, the impact of the economy on interest rates was helping cool loan demand on the investor real estate side, and that also led to a reduction in loan payoffs during the quarter, which again, are normally centered in investor real estate.
The first quarter kind of neared the fourth quarter of last year. We are still being very selective about new business. We prescreened prospective loans a lot more than we did in the past and we’re focusing on loan type and the degree of overall relationship we think we can get.
New loans closed and funded in Q1 totaled $86 million, up slightly from Q4. Loan payoffs were $35 million in Q1, up a bit from Q4, but well below the average level of payoffs for 2022, which was around $48 million per quarter on average. The other factors impacting net loan growth for any period are normal term loan amortization and line of credit changes, borrowings and repayments.
Like the fourth quarter of last year, all this resulted in good growth in the C&I side of the portfolio, which is what we talked — we talked about a number of quarters, brings other floating rate interest rates on loans as well as higher relationship deposits. Last year, for example, C&I loans closed and funded for under 50% of all new loans.
In the fourth quarter of 2022, the percentage of new loans falling into the C&I bucket rose to 70% of total new loans. Now, in Q1, as you heard Pat mention, C&I loans comprised almost 80% of new loans closed and funded. So, we’re seeing good results there.
At this point, I’ll describe our loan pipeline, which continues to look good. The numbers we discussed here are based upon probable funding, which means we project first year usage and multiply that by a probability factor based upon where in the approval process below request is. That means, for example, that a loan is already approved, will have a higher probability of closing than one that just went into underwriting, for example.
At March 31st, our loan pipeline stood at $218 million, down 6% from $233 million at the end of Q4. However, the total number of individual loans in the pipeline rose slightly from $222 million at year-end to $227 million at March 31st. So, the activities there are loans on average are a little smaller.
Overall, I’m satisfied with the pipeline with the rising rates and economic uncertainty, things have slowed a bit, but we’re still seeing good activity. We’re taking a very cautious approach, as I mentioned, to underwriting new business, especially in investor real estate and construction lending as well as with any new prospective customers who look to bring into the bank.
We set a loose target a few years ago of no more than 50% of loans in the pipeline being from the investor real estate sector. Investor real estate loans in the pipeline at the end of 2022 were just below 50% of total loans in the pipeline.
We were happy to see at March 31st that investor real estate loans were only 31% of the pipeline in terms of dollars and 22% in terms of the number of loans in the pipeline. And related to deposits, we continue to track on our pipeline anticipated deposits as a percentage of loan volume.
An interesting point you’ve seen is that the C&I business in the pipeline has grown overall still has the amount of expected deposits. Expected deposits to probable funding at March 31st, 2023, was 34%. This compares very favorably to a year ago when the same ratio was 10%.
Regarding asset quality, Andrew’s comments on the earnings release lay out where we are. Net charge-offs were low in Q1, non-performing loans up only slightly. The length of the loans at March 31st were low, around 35 basis points. This figure for us includes workout loans and administrative delinquencies where the hard maturity was hit, there’s no credit problem, and we’re in the process of renewing it, but for some reason, it drags on and is — and was on the past due loans report.
To provide a frame of reference regarding delinquencies, last year on March 31st, the delinquency number was 46 basis points. And in March 2021, it was 37 basis points. So, overall, things from my perspective, continue to look very good and credit metrics are solid.
Obviously, there are certain sectors within the industry that are more susceptible to current economic challenges. I can tell you that we are doing all the things we can around setting and monitoring concentration limits and stress testing portfolio. We continue to be very well-diversified within investor real estate portfolio itself.
The segment getting most of the attention in all markets is office space. Office exposure for us makes up 4% of our loans. The average size of our loan in this segment is $1.5 million. Our weighted average loan to value in this segment is 65% and debt service coverage is close to two times.
No serious delinquencies in this segment and non-accrual, none criticized or classified. And it’s important to note that all of our exposure is within our geographical market area, we don’t have any exposure in any urban or city area, which seem to be more prone to having a continued impact from COVID-19 and work from home.
From the standpoint of underwriting, it’s natural that areas of low opportunities for deposits are now low on our priority list. I’ve mentioned the shift to a greater focus on C&I, investor real estate loans in the office segment, speculative construction loans, et cetera, are very difficult to get done. Sensitivity analyses are done ahead of time, showing much higher rising interest rate scenarios than we ever did in the past.
As one would expect under these economic conditions, we’re anticipating a greater level of scrutiny by our regulators. That’s only natural. We’ve always received good grades in this area, and we expect to continue to do so.
We’ve been expanding our credit administration area. A new project recently finished and up and running is a more robust monitoring of credit policy exceptions. We brought in an outside vendor and instead of monitoring and reporting on the top six key policy exceptions we now monitor and report to the Board all policy exceptions, however, minor.
So, in summary, in 2023, we are planning on continued growth and meeting goals and objectives. From the lending side, we talked previously about a number of new priorities. Obviously, the pending merger with Malvern Bank is a top priority. Things are going well there from my perspective. We continue to meet with our lending counterparts there frequently every week or two.
In Northern New Jersey, as you heard, we opened our new Northern regional office in Fairfield, Essex County and have a relationship management team in place there. Our new regional office in West Chester, Pennsylvania open. In fact, the official grand opening celebration of this afternoon, and there’s a relationship management team there as well.
Late last fall, we announced our equity fund banking initiatives. This team disclosed a number of loans generated solid deposits and has a strong pipeline. And last quarter, we announced the hiring of a seasoned banker to build out and develop an asset-based lending team.
I’m happy to report that Mike Marino now has his team in place and is building its pipeline. We’re excited about all these projects, each in its all way will enable us to continue to grow the bank successfully in the coming years.
That’s my report for London for the first quarter. I’ll turn things back over now to Pat for final comments. Pat?
Patrick Ryan
Great. Thank you, Peter, and thanks, start leaning in Andrew. Appreciate the additional insight there. And at this point, I would like to turn it back to the moderator to open things up for Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
Our first question for today comes from Nick Cucharale from Hovde Group. Nick, your line is now open, please go ahead.
Nick Cucharale
Good morning everyone. How are you?
Patrick Ryan
Good. Good, how are you Nick?
Nick Cucharale
Good. Thank you. So, I wanted to start with the C&I initiatives and the strong growth there again this quarter. I know you’ve addressed this in your annual shareholder letter in the past, but longer term, can you share your vision for the composition of the loan portfolio over time?
Andrew Hibshman
Yes. Sure, Nick. It’s a good question. And there’s no magic number. And as you can appreciate, portfolio mix shifts tend to be a little more gradual although mergers can create opportunities to impact that change over time. But we’ve kind of been in the 50%, 55% range on investor real estate. And I think we’d like to see that move down closer to 50% and then maybe even between 40% and 45% over time.
But I don’t want to be beholden to a number that in and of itself isn’t critical, right? We want to continue to take the best opportunities that are available to us across all the business segments where we operate. And while doing that, we also want to see a gradual shift to a little more C&I and owner-occupied.
I think step one is getting to the point where C&I and owner occupied together are roughly equal to the investor real estate portfolio. We’re not there yet. So, that will be kind of the near to medium term target. And from there, we’ll have to see what the best opportunities are moving forward.
But I think if we can do that, Nick, we can continue to keep our overall CRE to capital ratio down close enough to the guidance where we can continue to be effective players in that space, while at the same time, I think, enhancing franchise value and enhancing the deposit franchise by being more active on the C&I side.
Nick Cucharale
That’s very helpful. From a geographic perspective, where are you seeing the most opportunity right now? Or is it pretty broad-based across the footprint?
Andrew Hibshman
Yes, I mean we have things broken up into sort of four regions, right? We’ve got a team in North Jersey, we got a Central Jersey team, we have a South Jersey team, and we have our Southeastern PA team. And I can tell you the pipelines and the activity in all the markets are good.
So, we’re not seeing any significant differences in either volume of opportunities or quality across those segments. So, everybody is performing well. The pipelines are active. And while we may be a little more selective, there’s plenty of good opportunities in each of those markets.
Nick Cucharale
Great news. Then in terms of expenses, I appreciate the commentary on the new hires and the reinvestment in the business. I know you mentioned some opportunities in the back half of the year. But in the near-term, is there some relief expected in the second quarter or is this a good standalone run rate for the next few periods?
Patrick Ryan
Yes, I mean, listen, there are certainly things in the quarter that are non-recurring. Obviously, the merger-related is the most obvious and the security sales piece. And then you got some expenses that were tied to the build-out of the fit out of the new locations.
But we also had new hires that came along during the quarter. So, Q2 will be a full quarter’s worth as opposed to a partial quarter. As Andrew mentioned, we’ve got a number of things we’re looking at.
We’ve already highlighted an opportunity on the branch side. We’ve got a number of things we’re looking at on kind of the non-interest expense non-personnel side. And then obviously, over time, we have to see how much further we need to go on the expense side to make sure that we can meet our return hurdle.
So, it’s always that balancing act between reinvesting in the franchise, operating not too lean so that you’re doing everything you need to do from a safety and salvage perspective. But at the same time, we got to meet the critical return hurdles that our shareholders have.
So the point, I guess, Nick, is we’re keeping an eye on all that. We’re trying to strike the right balance. I think in the short run, you’re going to see expenses run a bit higher than you’ve seen in the past for us, partly as a result of the new strategic initiatives, partly as a result of some inflationary pressure.
And then the third piece is, we were operating in a couple of years where there was just kind of a standard amount of open position vacancy if I can call it that, where the tight labor market just made it harder, it took longer to fill positions. We’re seeing some loosening there and so physicians are getting filled faster, which is kind of another component.
So, we’re obviously looking closely at our stand-alone expense base. We’re obviously very focused on making sure that the combination with Malvern is done optimizing efficiency there.
So, I think the good news is these opportunities, none of it’s going to wave a magic wand. But certainly, I think as we look towards the back half of this year, as a result of better revenue from some of these initiatives as well as tighter expense control, I think we’ll start to see those operating metrics improve a bit. So–
Nick Cucharale
Appreciate the color. And lastly, I wanted to touch base on share buybacks. I believe you’re limited with the deal pending, but given the projected close at the end of June, could you remind us how many shares are remaining on your authorization and your appetite to repurchase at this level?
Patrick Ryan
Yes, I don’t have the exact numbers. Andrew might have. But I think the short answer is there’s plenty of capacity. One of the things we’ll need to look hard at when I mentioned balance sheet flexibility tied to the merger, right? You’ve got a couple of unique things that happen when you’re combined two franchises, one of which is you got a mark-to-market all the assets.
So, in a world where we don’t currently mark everything to market, you sometimes have assets with lower yield, but you can live with them, and there’s no sense of crystallizing the losses.
But in a world where you’re crystallizing losses, all of a sudden, you start thinking about, well, would it make sense to reposition some of the assets and, in essence, de-lever a little bit to both improve earnings but also improve capital and potentially even improve capacity for buybacks.
So, that’s one of the things, excuse me, that I think it’s interesting as we look at the various options related to the combination, depending on how we end up putting things– [Technical Difficulty]
Operator
[Operator Instructions]
Our next question for today comes from Manuel Navas from D.A. Davidson. Your line is now open, please go ahead.
Manuel Navas
Hey. I think you were there, you were talking about some possible repositioning with the Malvern transaction that could de-lever the bank to potentially increase capacity for buybacks. Could you kind of finish that thought?
Patrick Ryan
Yes, sorry. I wasn’t sure where you lost me. But yes, I guess the point is that given the current rate environment and the requirements under the mark-to-market accounting, I think it — at the time of a transaction, there’s flexibility to reconsider the different options around balance sheet composition.
And I guess the point is we’re glad to see that we’ve got flexibility if there’s a few different ways we can put the combined banks together. And to the extent that one potential scenario involves potentially selling off any non-core assets. And as a result, boosting capital and the ability to do buybacks, that’s a scenario.
I think we need to look long and hard at no definitive decisions have been made. I guess the point is we have some flexibility leading up to the closing, and we’re going to look at all those options because, obviously, with the stock trading where it is, we want to have the ability to do buybacks if it makes sense.
Andrew Hibshman
So, just to add to that, we do have — we have a currently approved plan, 1.2 million shares are still available to be repurchased. We have been kind of tied up because of the acquisition, but we are probably going to free up here to be able to be at least a little bit more active. And as Pat mentioned, we’ll analyze all our options here over the next couple of months, but we do have a large chunk of shares that are approved.
Manuel Navas
Just a quick question on timing. So, the deal closes at the end of this coming quarter or this current quarter. And then you could probably talk about some of the early signs of the — or at least the early balance sheet plans by the July earnings call? Would that timing seem to make sense?
Patrick Ryan
Yes, I think that’s right. I mean, obviously, the timing of the close is estimated at this point. We have our annual meeting tomorrow. Hopefully, we’ll have our shareholder approval squared away for both us and them at the meetings tomorrow and then we need to get the regulatory sign-offs.
But we’re still hopeful that, that will come at some point over the next few weeks. And assuming we have the shareholder and the regulatory approval, we think it could be in a position to close before the end of June.
And assuming that all comes together, Manuel, then I think we wouldn’t yet be in a position to talk in a lot more specificity around the optimal combination from a balance sheet management standpoint.
Manuel Navas
And that’s all going also comes ahead because Malvern also has a little bit of a higher loan-to-deposit ratio and that kind of increases the need to increase your own funding on the deposit side. Just can you talk through how you’re thinking about it as you approach the close?
Patrick Ryan
Yes, I mean I think you’re exactly right. But to the extent that there are opportunities to sell down non-core or lower-yielding loans. It has a variety of benefits, right? You can redeploy the cash into higher yielding short-term investment options, you reduce the capital requirements, you lower the loan deposit ratio, you build liquidity. So, I think for all those reasons, it’s something we got to take a good outlook at.
Manuel Navas
Okay. Is there any more color you can give on kind of the near-term NIM? I know there’s a little bit more pressure, but just kind of thoughts here how the Fed possible that increase would impact things? Just kind of thoughts on the near-term NIM if possible.
Patrick Ryan
Yes, yes. We’re obviously taking a hard look at that as everybody is. I think what Andrew said is right, it’s most likely that you’ll see some continued NIM compression in the short run. But the longer term question really is around, okay, the Fed is done at the next meeting, what does the economic data look like? And how quickly do they start moving in the opposite direction.
I think the good news from our perspective is with the increased activity on the C&I side, we’re seeing loan yields on new production that are at pretty healthy levels. And so even though deposit costs continue to move up, we’re adding loans at a rate to help offset some of that impact.
So, the exact magnitude of the pressure in the short run is a little hard to predict, but we certainly think that as the Fed pauses, you’ll start to see a slowdown in terms of the increases on the deposit side.
And then the question becomes, as you move towards the end of the year, where do we head some there? Is the spend going to need to lower because the economic signals aren’t great? Or are we going to sort of live in just a newer normal higher rate environment time will tell on that.
Manuel Navas
As this environment, I know you’re being a little bit more selective on loan growth. Is this environment changed any of your targets for loan growth for the year? Or it’s just too early to tell?
Patrick Ryan
Yes, I think at this point, we’re not in the business that’s constantly changing our budget, but I would tell you that two things. I think there’s enough good quality loan business to meet the budgeted number that we mentioned of plus or minus $200 million in growth. But at the same time, we’re not going to chase it for the sake of chasing it, right?
I mean if liquidity pressures persist or funding costs move meaningfully higher and we’re not generating the yields that we need on the new loan production, then we’re not going to do it. So, it’s got to be quality business, and it’s got to be economically attractive business. And at the end of the day, if we find those opportunities and we get to $200 million, that’s fine.
And if we end up coming in below that, I kind of view it in the football analogy, right, you got to take what the defense skin, right? You got to think what the market gives you. And we’re not going to shoot for $200 million because it’s a number that we came up at the beginning of the year. We’re going to add quality new customers at a rate where we can generate a positive return. And does that mean slower growth for a period of time, that’s okay.
Manuel Navas
Okay. Hey, a quick question on the pipeline. Does that — has the methodology changed at all that you’ve been a little more selective? Is it just like the pull-through rate might be a little bit lower? How should I think about the pipeline versus other disclosures of the — given you’re being a little bit more selective.
Andrew Hibshman
Yes, I mean it’s a fair question. I think if you look at the pipeline as the universe of opportunities and it’s down a little bit, but not a ton. And I think that’s good news because that just means based on what we decide to do, we could find those opportunities to grow if it makes sense.
And selective to some degree, can be about credit, but it’s not always just about credit, right? It’s about can we get the commitment for a meaningful deposit relationship? Can we get the yields that we think we need, can we get the loan to value that we think we need to and we get the amortization repayment schedule, we think we need?
So, it’s a variety of factors that come into play. But I think to some degree, right, we’re going to hold firmer on the deal structure and pricing and deposits that we think we need. And in this environment, if the borrower doesn’t agree, then we move on to the next opportunity. So, I don’t know, Peter, let me let you jump in here for a minute on that question.
Peter Cahill
No, I think that’s exactly right. I mean the changes light as a and the makeup of the pipeline. A lot of it has to do with rising rates. I mean there’s less — slightly less real estate deals out there, but there’s still investor real estate deals out there, and we’re taking a harder look at those and some that are solid credits where the pricing might have been thin.
We might have done those in past years, right? But we’re being — as we talked about, a little bit more selective and focus more on taking a path on owns where we think we can’t make the return we need or get the relationship business that we need. So, the relationship side on the C&I side. So, if you focus more there, you’re going to see a drop-off in in real estate.
Manuel Navas
I appreciate the color. One last question from me and I’ll step out? Is there a possibility that you could have buybacks before the deal closed? Like just kind of walk me through that — those hurdles? Or is that something you’re not complexating at the current time?
Peter Cahill
Yes, I think the short answer is yes, right? The big near-term kind of hurdle, if you will, or constraint is the shareholder meeting. So, my understanding is through discussions with counsel is one the shareholder approval comes in, assuming we shareholder approval, and it’s been announced to the market that could open up a window of opportunity before potentially needing to go back into a blackout period related to regulatory feedback or approval. So, the short answer is yes, there could be a window. It just depends on the timing and how things play out.
Manuel Navas
And is there a desire?
Peter Cahill
At these prices, sure. I mean I think you look at the — we think a lot of our strategic initiatives will generate great long-term shareholder value, but it’s hard to imagine an investment that would have a quicker and more immediate positive impact than buying your own stock at $0.65 on the dollar.
Manuel Navas
Okay. Thank you very much. I’ll step off back into the queue.
Peter Cahill
Thank you Manuel.
Operator
Thank you. [Operator Instructions] Our next question comes from Howard [Indiscernible] from Stericycle. Howard, your line is now open, please go ahead.
Unidentified Analyst
Yes, I think the question was answered, Pat, it was just about buybacks. Obviously, you’re held up because of the — when do you think you’d be able to do it if you want to not until the merger closes? Or is there any period of–
Patrick Ryan
It depends — the two key variables, Howard, our shareholder approval and regulatory approval. So, once shareholder approval secured and that news is made public, assuming there’s no new information on the regulatory side, that should open up a window.
And then if and when we get regulatory feedback depending on what the feedback is, that could create a new blackout period. And then obviously, once the deal is closed and the announced closure happens, then we would have a new opportunity once earnings came out depending on the timing.
So, those are the three variables; shareholder approval, regulatory approval, and the earnings window. And depending on how those things play out, there could should be a window in between shareholder approval and regulatory feedback.
Unidentified Analyst
Okay. Thank you.
Patrick Ryan
Sure.
Operator
At this time, we currently have no further questions. So I’ll hand back to Patrick Ryan for any further remarks.
Patrick Ryan
Yes, nothing further here. I think I have seen a note that Nick Cucharale jumped back on. And I don’t know, Nick, if you had any additional questions, but if not, then I think that would conclude the call.
Operator
I can see Nick has just jumped back into the queue. Are you happy for me to take this question?
Patrick Ryan
Yes, please.
Operator
Okay. Sure. Nick, your line is now open, please go ahead.
Nick Cucharale
No, I just want to thank you for taking my questions all of them have been answered. So, I appreciate it, guys. Sorry for being disconnected.
Patrick Ryan
No problem. Sorry about the technology glitch there, but glad we got your questions answered.
Nick Cucharale
Thank you.
Patrick Ryan
Well, I think that–
Operator
We have no further questions.
Patrick Ryan
I just would like to thank everybody for their time and interest, and we look forward to regrouping with folks after second quarter earnings. Thank you everyone.
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