Malvern Bancorp, Inc. (FRBA) Earnings Call Transcript & Summary

Hello, everyone, and welcome to First Bank announces strategic acquisition of Malvern Bancorp, Inc. call. [Operator Instructions] I would now like to turn the conference over to Patrick Ryan, President and CEO. Please go ahead.

Hello. Good morning, everybody. Thanks for taking a few minutes to jump on the call and learn more about what we think is a very exciting, strategic combination with First Bank and Malvern. But before we get into some of the details, I'll ask our CFO, Andrew Hibshman, to review the forward-looking statements, please. Andrew?

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, 2021, filed with the FDIC. Pat, back to you.

Thank you, Andrew. I'd like to start on Page 4 before we get into some of the points here. I just would mention that this is a combination that was a long time coming. We've had several combinations -- several conversations with the management team over the years, and certainly it took a while to get to where we are today, but I think sometimes that extra time together can be beneficial. I think we certainly got to know each other well and ended up in a place that I think is good for everybody involved. So I'll start with what we think is a strong financial transaction. Andrew is going to get into some of the metrics and why we think financially this will be good for all the shareholders involved. But before we do that, I think it's important to highlight really the strategic benefits here. And the first thing I would mention is this really accelerates our already earmarked plans for strong growth in the Southeastern Pennsylvania, Greater Philadelphia market. I think this probably rolls forward by 4 or 5 years, what we would have tried to do on our own organically during that time frame. And it makes a significant impact on our overall business mix. I'd say we're roughly 75% New Jersey based today and 25% PA. And I think through the combination, we become more 60%-40% New Jersey, Pennsylvania. So I think it has a meaningful impact on the volume of business we're doing in Pennsylvania and the opportunity to really create some critical mass and scale in those highly desirable Southeastern Pennsylvania market. So we're very excited about that. I think it's another example of our disciplined and successful M&A strategy. As we've talked about, we think the financial metrics are solid. We've shown over the years the ability to execute well and integrate on these types of transactions. So the combined organization thrives and grows, and we certainly feel confident in our ability to execute both from an integration perspective as well as an ability to achieve the projected cost savings. But more important than any of that is to be able to not only execute on the financial plan, but also use it as a platform to build and grow as we've done in prior strategic combinations. And I'd also point out, there's some really important scale benefits here, not just from an operational standpoint, but also -- we see in the community bank space, there continues to be a liquidity discount for the smaller players, and I think certainly greater float and more trading volume will prove to be a benefit for all of our shareholders. On the bottom half of this page, we'll just get into some of the details about the expansion opportunity. You can see we're adding 5 branches in Chester County, in addition to the location that we already have. The combined bank will be ranked fifth in deposit market share in Chester for community banks and 11th overall. We'll be adding 1 branch in Morris County, right in Morristown itself, which is a nice complement to the 2 locations we already have in Morris County, and we'll continue to become a stronger player there. We'll be ranked sixth in deposit market share for community banks and 16th overall. And it will also help our expansion in the Delaware County where we'll be adding 2 branches and over $130 million in deposits. So we're really excited about the strategic benefits of the combined companies. And together what we think is appropriate financial metrics, I think this is a great deal for all involved. On Page 5, we have a little bit of an overview of the Malvern Bancorp footprint. You can see the strong presence along the mainline, outside of Philadelphia. There is the office in Morristown, which we mentioned, and the location in Palm Beach County in Florida, which, while a small location for them and certainly not the primary strategic driver of the franchise. They certainly have customers who spend significant time in Florida, as do we. And so having a location to help service those customers, I think, will be viewed as a nice benefit for the combined franchise and perhaps even a small growth opportunity for us as well. On Page 6, I think you can see visually how well the franchises fit together, how well it basically complements the New York City to Philadelphia corridor, strategic strategy that we've had in place for a number of years. And I think it really paints a nice picture of a strong presence in some really high-quality, high wealth, high-density markets. And when you look at some of the pro forma highlights in terms of $3 billion in loans and about almost $390 million market cap, $3.7 billion in assets in 27 locations, you can see the combined franchise really has some nice size and scale within that attractive marketplace. So at this point, I'm going to turn it back over to Andrew to hit on some of the highlights in terms of the financial metrics of the deal, and Andrew will pick up here on Slide 7.

Thanks, Pat. Yes. As a reminder, we're going through the slide deck that was included in the actual press release. So you can find it as a link in the release, talk a little bit about transaction pricing, price-to-tangible book, a little over 102%; price to -- premium-to-core deposits, 47 basis points and a pay-to-trade just under 90%. So as Pat mentioned, we think this is following our strategic plan of disciplined pricing, and there are some of the key highlights of the pricing of the transaction. In terms of the financial results, some of the key results, we put on Slide 7. We talked about -- approximately 9% tangible book value at close with a 2.5-year earn-back, and that equates to about 20% EPS accretion in '24. We also list here, excluding AOCI and interest rate marks, we think that this is an important kind of metric to share with folks. And if you eliminate AOCI and interest rate marks, the tangible book value dilution was down significantly to a little under 2.8%. The earn-back declines to 1.4 years. And that also caused a decrease in EPS accretion because those marks are accreting back through income. So your EPS accretion drops to 9.2% in 2024. The next slide, which is Slide 8, talks a little bit more about the transaction summary. There will be a mix of stock and cash of approximately 60% stock, 40% cash. That equates to 0.7733 shares for Malvern common shareholders and First Bank stock and $7.80 per share in cash or a total value of $19.64 per share. That will be -- equates to a merger consideration of just under $150 million and pro forma ownership of about 77% current shareholders and about 23% for the new Malvern shareholders that will be getting First Bank stock. In terms of timing and approval, we'll have to go through customary regulatory approvals and shareholder approvals. We don't see any major impediments to either of those approvals, but it is a process that we'll have to go through. And anticipated close would get us close to the end of the second quarter of 2023. Next slide, Slide 9, talks about some of the key transaction assumptions to get to some of those numbers we talked about dilution and EPS accretion. We have onetime merger expenses of around $10 million. We have cost savings of approximately 50% of Malvern's estimated noninterest expenses that's phased in partially in 2023 and then fully into 2024 and beyond. We feel good about this cost savings numbers, and I think there's a lot of ways to get to those numbers, and we feel good about how we've executed on our previous deals in terms of cost saves. From the loan credit mark standpoint, we're around 3% of gross loans. Again, we feel like we've done a good job with these marks in the past and feel good about that credit mark based on the due diligence that we've done. The interest rate mark equates to about [ 2.75% ] of loans, and we have a security mark of about $6 million on their HTM portfolio. We also have a fixed asset mark up. They have a few owned locations that have some significant value. So we are able to mark those up to their appraised values. And we're recording a CDI in the model here of about 2% of core deposits. Talk a little bit more about due diligence. As Pat mentioned, this is a fairly long process. We spent a lot of time on due diligence. We looked at a large percentage of their commercial loan portfolio and also looked at their underwriting standards and their residential portfolio as well. So we feel very good about the due diligence we've done over the last year. And in terms of corporate governance, we are going to be adding 3 Malvern directors to our Board, and we will be hopefully retaining some senior management to help with the integration and enhance some of our business lines. I think that's it from a standpoint of the key deal metrics. I'll pass it back to Pat for some closing remarks.

Great. Thanks, Andrew. We will have some time for Q&A at the end. Quickly just hit on Slide 10, which I think kind of shows our history in pictures with kind of the growth over the years. And to me, the real highlight is the dark blue at the top of the last bar that shows, while this is consistent with what we've done in the past, it is meaningful, and I think will have a nice impact and really give a nice boost to the size and scale of the combined franchise. On Page 11, we've laid out the prior M&A deals we've done. Because those were done in a different interest rate environment, we included the financial impact on this transaction without the AOCI and interest rate, just so you could try to see it on a more apples-to-apples basis with what we've done in the past. But I think what you can see pretty clearly here is while this is a bit larger than what we've done in the past, that's very much within the playbook of our M&A strategy, disciplined pricing, nice EPS accretion, manageable book value dilution and reasonable earn-back. And quite honestly, we think this, as structured, provides some nice upside as we move forward. So again, we're excited about the strategic benefits. We think there will be some nice financial benefits as well. And we think together, the combined organization will be well positioned to become really strong, if not the go-to community bank within this New York City to Philadelphia corridor. So on Pages 12 and 13, we've got some information on the deposit and loan composition available for folks to take a look at as well as a financial impact reconciliation. But I think at this point, what will probably be best is to pause and open it up for any questions that folks may have for us.

[Operator Instructions] Our first question today comes from David Bishop from Hovde Group.

Good, good. It looks like a good deal here. Just curious in terms of Malvern's loan portfolio, I know you discussed the Florida footprint, the branch there. Just curious where you think you can lever their franchise from a lending perspective. You guys have always done a nice job of that on a pro forma basis. I assume this sort of pencils out the same way. But be curious where you can see the most opportunity to grow the loan portfolio pro forma.

Yes. So thanks for the question, Dave. And yes, I think we view this as similar to combinations in the past. I mean, we're getting more size and scale and presence in kind of Main Line Greater Philadelphia market. So that's obviously the primary area where we've been making inroads in the past through to organic growth, but we think this really gives us a great catapult, if you will, to become an even stronger player within those markets. And so I'd say that's #1 growth focus as we move forward. Certainly, the team up in Morristown and North Jersey has done a nice job, and we think we can work well with that team to continue to build and grow our presence in Northern New Jersey. And the answer in Florida is we'll see what happens, Dave. But we've done some business down there already with folks that we know very well here, who also have some business down there. And certainly, it's no secret that over time, more folks here spend time down there. And so having a location and maybe doing a little business down in Florida, I think, would be a nice complement, but certainly, we don't expect it to be the strategic driver.

Got it. And then you noted sort of the mix shift or the distribution to 60%-40% pro forma. Do you have a goal? Or is there a thought on to move that to 50%-50% over time, PA versus New Jersey? Just curious how you're thinking on a holistic basis longer term.

Yes, I think that's probably right. I mean, there's no magic number. But certainly, as we look at our growth opportunities, we think there's more untapped opportunity in the Greater Philadelphia and even Lehigh Valley. That's not to say, we're not going to look to continue to build and grow our presence in New Jersey by any stretch. But I do think incrementally, we can probably add a little more in Pennsylvania as we move forward. So over time, going to 50-50 probably a reasonable expectation.

Got it. And one more for me, and I'll jump off so that someone else to ask. But curious, the cost base you laid out there, maybe where the majority of those are coming from an expense-base perspective?

Yes. So I think the biggest opportunity, quite frankly, is just taking a look at some of the back office, if you will, or not necessarily personnel, although there's always some personnel savings that emerge in these things. But there just seems to be a heightened level of noninterest expense in certain areas that just look like really ripe opportunities just to try to bring lower as we move forward. Andrew, I know you spent a lot of time looking at that. Anything in particular that's worth noting or...

Yes. I think a lot of what's happened over the last couple of years with Malvern in terms of some of their costs were higher in terms of things like professional fees and insurance and things. So there's big savings there. We're not anticipating any huge closures of locations, but they've been looking at some locations as well to optimize their footprint. But the savings aren't mainly coming from closing locations. It's mainly, just like Pat said, some personnel, but there's a lot of opportunities with their professional kind of standard cost. They've kept a lot of there, like their core processing contracts, a very short-term high cost because they didn't want to have huge termination fees in there. So we've done a real good deep dive into their expenses. We feel good about the 50%. Like I said, I think, there's multiple ways to get there, but the biggest opportunity is just some of the higher costs that they've been incurring on some of their consulting and professional fees, legal and data processing.

Our next question comes from Ross Haberman from RLH Investments.

I have a quick question. You didn't touch upon possibly any revenue enhancements. Could you touch upon that if there are any?

Sure. Thanks, Ross. Great question. I think the short answer is, yes, we believe there are. They've got a couple of smaller lines of business and wealth management insurance that should create some opportunities. And we have some things we're doing on the commercial side in terms of products and services that are not currently offering, which I think we'll be able to sell effectively into their market. But the short answer is, none of that's modeled in, Ross. That's all sort of hope for expected potential upside, but we didn't want to build it into the analysis.

And just a follow-up question on the AOCI. Will you take any hits? I think some banks are beginning to take some fourth quarter adjustments on either yours or theirs to restructure and maybe take some hits and put money back into higher-yielding loans.

Yes, sure. Thanks, Ross. Good question. I mean I think the short answer is, we're always looking at that. Whether we'll ultimately find the right opportunity and the right transaction, I think, remains to be seen. But listen, at the end of the day, by and large, the markets are fairly efficient. So there's not huge opportunities to beat the system as it relates to trading out of certain assets and jumping back into others. But that being said, we are always taking a look at it and if it makes sense. And certainly, between now and close, obviously, Malvern will be looking closely at their own portfolio, and we'll be talking with them about potential opportunities. But I would say you never rule it out, but it's not something we necessarily plan to do as part of the modeling for the transaction.

I would just add. I mean, we're always looking at the opportunity, but we do already have a fairly small investment portfolio. Our loan-to-value is around where we feel comfortable at. So I don't think we're going to do a lot. We may do selectively, but we're not going to sell a whole chunk of investments, take losses and reinvest into loans because of where we're at from the size of our investment portfolio and liquidity positions and things like that. But like I said, we're always looking at opportunities. And if we see something we think makes sense, we'll take advantage of it.

[Operator Instructions] Our next question comes from Howard [ Henick ] from [ Stag Gillette Capital ].

Congrats. I've got several -- I'm sorry, several questions. The first one -- I'll get off speaker. Several questions. The first one is, what's the status with -- I think it's about a [ $30 million ] loan in Manhattan that was, I think, put in available for sale and marked down somewhat. I believe it was the one that was like a retail subway baseline kind of loan, a funky loan, and they've been trying to get rid of it for a while. Where does that stand?

Yes. Well, 2 things, Howard. Yes, we are aware of the loan, and it was obviously an important part of our due diligence. At this point, we're not prepared to share anything other than what they've already shared in the public filings regarding that specific credit. But it was honestly factored into our analysis and built into our credit marks and we're aware of the situation. And other than that, not really much we can say at this point.

Okay. And, I think, I read somewhere that 3 directors are coming over, and I was wondering which 3 have been picked out? And also, are there any Malvern executives who will remain or become executives of FRBA?

Yes. So on the Board side, the process we're going to follow is consistent with what we've done in prior deals where we agree upfront to the number. The other side basically selects a group of candidates to fill those roles. They meet with our nominating and governance committee. Recommendations are made by our nominating and governance committee to the full Board, and that's the process we follow. The Board basically will select 3 from the group, obviously in consultation with the folks of Malvern. And we'll reach that conclusion over the next several months as we work through the approval process. On the management side, we're certainly hopeful we'll be able to keep some of the key players. I would say, some preliminary discussions have been had with folks, and we certainly think there's some nice opportunities for folks to have meaningful roles in the combined franchise. So we're optimistic that we will be able to retain some of the key folks, and we'll just have to see how it plays out.

And what specifically, last question, what about Tony?

Yes. Tony and I have had a number of conversations. We've traded some interesting ideas. I think we feel like there is a good potential opportunity there. But until we fine tune the details, we're not in a position to announce anything specifically there.

We have no further questions at this time. I'll hand you back over to Patrick Ryan for closing remarks.

Okay. Well, thank you very much for taking your time to listen in. We appreciate your interest in First Bank, and certainly in the combined franchise moving forward. And that will wrap the call. So thank you, everybody.

That concludes today's First Bank announces the strategic acquisition of Malvern Bancorp, Inc. call. You may now disconnect your line.