First Bank (FRBA) Q1 2025: C&I Pipeline Jumps 33%, Lending Mix Shift Drives Margin Expansion

April 23, 2025 | By EarningsIQ Research

First Bank’s Q1 saw a decisive pivot toward C&I lending as the pipeline surged 33% and deposit costs declined, enabling margin expansion despite a competitive funding landscape. Management’s disciplined focus on lower-risk business lines and core deposit growth supports resilient profitability, but funding lags loan growth and macro uncertainties remain front of mind. Investors should watch for the sustainability of loan momentum and deposit catch-up in the coming quarters.

Summary

• C&I Lending Focus Accelerates: Commercial and industrial lending now dominates new loan activity, driving pipeline growth and margin gains.
• Deposit Cost Management: Strategic deposit mix shifts and lower funding costs support net interest margin improvement.
• Forward Emphasis on Core Funding: Management signals deposit growth and disciplined capital deployment as key levers for 2025.

Performance Analysis

First Bank delivered a quarter defined by robust loan growth and margin expansion, as net interest margin (NIM) rose to 3.65% from 3.54% last quarter, propelled by a 14 basis point decline in deposit costs. Loan balances increased $92 million (12% annualized), with growth concentrated in asset-based lending, private equity fund banking, and small business segments. Deposit balances grew $64 million (8.5% annualized), but lagged lending demand, requiring incremental brokered funding and a continued focus on core deposit acquisition.

Non-interest expense rose to $20.4 million, reflecting branch investments, higher payroll taxes, and an $815,000 write-down on a New York City OREO (other real estate owned) asset. Profitability remained solid with a 1% ROA and a sub-60% efficiency ratio, though higher loan provisions and the OREO impairment weighed on bottom-line results. Tangible book value per share grew 8% annualized, and buybacks continued, with 350,000 shares repurchased under the current authorization.

• Loan Mix Shift: 81% of new loans were C&I, and investor real estate was under 5%, reflecting a deliberate de-risking and focus on relationship-based lending.
• Deposit Mix Optimization: Non-interest-bearing deposits rose to 17.2% of total, while higher-cost money market and savings balances declined year-over-year.
• Credit Quality Stability: Allowance for credit losses inched up to 1.21% of loans, coverage remains conservative versus peers, and non-performing assets declined sequentially and year-over-year.

Management’s commentary and Q&A reinforced a theme of measured growth, prudent risk management, and ongoing investment in scalable business lines, with the lending pipeline and deposit initiatives setting the tone for the next several quarters.

Executive Commentary

Strategic Positioning

1. Commercial & Industrial Lending Pivot

First Bank’s lending mix is shifting rapidly toward C&I (commercial and industrial) lending, which now comprises 81% of new loan originations and 63% of the $326 million pipeline, up from 55% a year ago. This strategic pivot is designed to deepen client relationships, manage loan concentration risk, and deliver higher-margin, lower-risk growth. The bank’s asset-based lending, private equity fund banking, and SBA/small business portfolios are each targeted for meaningful expansion in the next two years, with current outstandings at $90 million, $128 million, and $91 million, respectively.

2. Deposit Franchise Strengthening

Deposit growth remains a central theme. Management is actively shifting the deposit base toward lower-cost, relationship-driven funding, as evidenced by the growth in non-interest-bearing and demand balances. The rollout of Salesforce CRM is expected to further enhance customer acquisition and cross-sell. However, deposit growth lags loan growth, and brokered deposits (short-term, higher-cost funding sourced via brokers) increased to bridge the gap, highlighting the ongoing challenge of funding high loan demand in a competitive rate environment.

3. Margin Expansion and Efficiency Discipline

Margin improvement was a clear highlight, with NIM expanding as deposit costs declined and loan yields remained stable. The efficiency ratio remained below 60% for the 23rd consecutive quarter, reflecting operational discipline even as the bank invests in new branches and technology. Management’s approach balances growth investments with a conservative expense posture, aiming to scale new business lines without sacrificing profitability.

4. Prudent Credit Risk Management

First Bank continues to emphasize credit quality, maintaining an above-peer allowance for credit losses and keeping non-performing assets low. The bank’s underwriting in new business units is intentionally at the lower end of the risk spectrum, prioritizing lower leverage and higher coverage. The OREO write-down is viewed as a one-off, and management’s approach to credit reserves remains cautious given macro uncertainty.

5. Capital Management and M&A Stance

Buybacks remain active, with runway left in the current authorization. Management is opportunistic but disciplined on M&A, with no near-term catalysts for deals amid muted seller activity and unattractive valuations. Capital is being deployed to support organic growth and shareholder returns, with M&A as a secondary lever should market conditions shift.

Key Considerations

This quarter’s results underscore First Bank’s operational discipline and strategic pivot toward scalable, relationship-based commercial lending, but also surface the challenges of funding growth in a hyper-competitive deposit environment.

Key Considerations:

• Lending Pipeline Momentum: The 33% sequential increase in pipeline signals sustained demand, but execution hinges on matching core funding growth.
• Deposit Cost Headwinds: While deposit costs declined this quarter, management acknowledges the ongoing challenge from money market alternatives and market competition.
• Expense Trajectory: Non-interest expense growth is tied to branch expansion and technology upgrades, but management expects current run rates to hold absent major changes.
• Credit Reserve Buffer: Allowance levels are above peers, providing a cushion should economic conditions deteriorate.
• Capital Allocation Discipline: Buybacks are prioritized when shares trade below intrinsic value, with M&A activity on hold pending better market conditions.

Risks

Deposit growth lagging loan demand elevates funding risk, especially if competitive pressures intensify or if rate cuts are delayed. Macroeconomic uncertainty, including potential tariff impacts and construction cycle slowdowns, could temper loan growth or elevate credit risk. While the credit reserve is robust, any sharp downturn could still test coverage. Ongoing reliance on brokered deposits for funding is a watchpoint for net interest margin and liquidity.

Forward Outlook

For Q2 2025, First Bank expects:

• Continued strong C&I loan origination, with lending pipeline at $326 million and focus on core relationship growth.
• Modest deposit growth catch-up as branch openings and CRM initiatives ramp up.

For full-year 2025, management maintained its guidance of $175 million to $200 million in net organic loan and deposit growth. The focus remains on funding new lending with core deposits, maintaining margin stability, and opportunistically deploying capital via buybacks.

• Stable net interest margin expected, with offsetting headwinds from funding costs and tailwinds from loan yields.
• Expense growth tied to branch and technology investments, but no large cost increases anticipated.

Takeaways

First Bank’s Q1 results reinforce its disciplined approach to growth and risk, with a clear pivot to scalable C&I lending and ongoing investment in deposit franchise strength.

• Lending Mix Realignment: The strategic shift toward C&I, asset-based, and private equity lending is driving pipeline growth and supporting margin expansion, but requires sustained deposit growth to fund.
• Margin and Efficiency Resilience: Deposit cost management and operational discipline support profitability, even as the bank invests in new branches and technology.
• Funding and Credit Watchpoints: Investors should monitor the pace of deposit catch-up versus loan growth, and watch for any early signs of credit deterioration or margin compression if funding costs re-accelerate.

Conclusion

First Bank’s Q1 2025 performance highlights a successful shift to relationship-driven commercial lending and solid margin management, but also surfaces the imperative to grow core deposits in lockstep with lending. The bank’s conservative credit posture and capital allocation discipline position it well, but macro and funding risks remain key variables for the year ahead.

Industry Read-Through

First Bank’s results offer a microcosm of broader industry trends: Regional banks are leaning into C&I lending while actively managing deposit costs and mix, seeking to defend margins amid a competitive funding landscape. The move away from investor real estate and toward asset-based and private equity-related lending is a notable industry pivot to diversify risk and deepen client relationships. Funding pressure remains an industry-wide challenge, with brokered deposits and promotional rates likely to persist until core deposit growth accelerates. Credit discipline and capital allocation remain critical as macro uncertainty and rate volatility continue to shape the sector’s risk-reward profile.

FRBA Financials Banking Commercial lending Deposit growth Net interest margin Credit risk Capital allocation