Q1 2020 Earnings Call
Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines like I'm deeply storm use a cold. Thank you for your patience.
[music].
Greetings and welcome to the first foundations first quarter Twentytwenty earnings Conference call today's call is being recorded.
At this time, all participants stop in place any listen only mode and the floor will be opened for your questions. Following the presentation.
He would like to ask a question at that time. Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the Q by pressing the pound key we ask that you. Please pick up your handset to allow optimal sound quality.
Speaking today will be Scott Cabinet first foundations, Chief Executive Officer.
John Mitchell, Chief Financial Officer, David Depillo precedent first Foundation Bank and John how Copiague precedent of first foundation advisers.
Before I hand, the call over to Scott. Please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results.
These forward looking statements army subject to the Safe Harbor statement included in todays earnings release. In addition, somewhat the discussion may include non-GAAP financial measures.
More complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements and reconciliations of non-GAAP financial measures see the company's filings with the Securities and Exchange Commission and now I'd like to turn the call over to Scott Cabinet.
Hello, and thank you for joining us.
We would like to welcome all of your two or first quarter Twentytwenty earnings Conference call.
We will be providing some prepared comments regarding our activities and then we were respond to questions.
Without question much has changed since our call in January.
Cobot 19 pandemic has altered the course or business for all of us.
During this extraordinary time, we've been focused on the health and safety ever employees and our clients.
Providing excellent service client service has been a core values are worse, and we remain committed to offering support to those in the.
We participated in the small business administration Paycheck protection program and have been working with many of our clients.
I've been adversely impacted during this time.
They will speak in more detail about the remarkable work our team did related to this program.
You heard me say numerous times that her business model is designed to withstand difficult times.
This foundation was founded during her crisis and as we stand today with a strong capital position an excellent asset quality, we believe we're well positioned to get through that.
Before I speak about the details of the strong financial results, we reported for the quarter.
Let me share a bit where things stand with her continuity planning and preparedness.
I want to thank our leadership team and our employees, who have done a remarkable job adjusting to the various city county, and state ordinances across the geographies our geographic footprint.
Our work on this started well before public health orders were issued when we began the precautionary steps to ensure the continuity ever business.
This included gathering supplies for the health and safety of our employees.
And then was quickly and decisively followed by securing the necessary technology.
Where employees to work remotely.
Much of which we had already had in place, but some of which we had to.
Procure.
Along those lines, we transitioned over 65% of our employees to work from home environment.
Given the strength of our technology and the responsiveness of our teams we were able to do this in less than a week.
It was worth mentioning we were also able to safely keep all of our branches open.
We initiated the physical distancing policies and followed the local ordinances for each location. We also increased the cleaning some public areas and workstations across our branches in corporate offices.
We split up our teams to reduce the risk of infection and ensure continuity of services for any single group.
During this time, we initiated a ban on all travel canceled and person event.
M. began conducting meetings remotely using technologies, we already had employees.
Given that business did not stop we relied heavily on or digital technologies.
This included our online and mobile banking remote trading and portfolio management as well as increased digital communications with our clients.
We developed resources for clients, who have been impacted including guides for the cares Act and information about the various S.P.A. programs, including PPP.
Our wealth management team began hosting biweekly client webinars about the stated the economy in the markets and our trust team move to virtual meetings and digital documentation.
The investments we've made in our digital offering.
I have not only enabled us to provide resources to existing clients, but allow this to accommodate new client activity. For example, our online savings account. So three times the amount of new applications in the month of March.
Our website traffic in views to or online content increased by over 200%.
And the number of mobile banking users engaging with our app increased by 15%.
These resources, coupled with the human touch of our operations team.
Divide for greater client service, which is so important during times like this.
All in all I'm very pleased with how our digital platforms has helped us maintain services for clients.
As highlighted in the press release, we experienced another strong quarter growth.
Key financial metrics at the firm.
Obviously this take somewhat of a vaccine to the other items I mentioned, but I do.
Want to call out a few key metrics.
Our earnings for the first quarter were 13 million or 29 cents a share.
The earnings represented 17% increase over the prior year first quarter total revenues were 56 million at 12% increase.
And our tangible book value increased and ended the quarter at $11.80.
We also declared and paid our first quarter cash dividend at seven cents per share and we anticipate the continuation of the dividend in future quarters, and finally, we had a modest buyback overstock.
And the amount of 2.8 million during the quarter.
Before I hand, the call over let me say.
The strength of our bank, namely our loan portfolio in our capital levels.
Along with our business in general is directly attributable to our employees and our client.
I couldn't be more proud of our management team many of whom have been together for a long time and that prison persevered through several different business cycles.
Let me also know we're evaluating supporting the nonprofit community through charitable sponsorship contributions.
As you're aware, we're in the midst of the CFO search.
We've had an opportunity to connect with many qualified candidates.
We believe we're in the final step so this process and we hope to make an announcement soon.
I'm always very grateful for our employees and our clients, but is particularly leave the case today as we work through these unprecedented times now let me turn the call over to John Metro.
Thank you Scott.
The long term effects to the pandemic on the general economy on our uncertain at this time, we continue to closely you evaluate the impact of any potential projected loan losses utilizing our seasonal stress modeling. We will continue to monitor this as additional information becomes available and we are prepared to add any additional reserves if necessary.
David will provide additional information regarding our loan activities and the strength of our loan portfolio, but let me share a few updates related to our financials.
The change and then just very market, especially the existence of a defined yield curve should result in increased net margin net interest margin overtime being liability sensitive our financial results will continue to benefit from lower funding costs.
We implemented the current expected credit loss standard otherwise known as Cecil and the first quarter of 2020.
While we did not recognize any change our allowance through the adoption of seasonal on January 1st 2020, our provisioning in the current quarter was approximately $2 million higher as a result of our projection of future activity as required under seasonal.
During the first quarter, our earnings were 13 million or 29 cents per share.
Revenues increased to $56 million for the quarter, an increase of 12% when compared to the first quarter of 2019.
Our net interest margin for the quarter was 2.92% an increase of four basis points over both the first quarter and fourth quarter of 2019.
Our efficiency ratio for the quarter was 59.2% and a return on tangible equity was 10.1%.
I would like to reiterate what Scott said and thank you all our employees.
All of the extraordinary contributions they have made and supporting our clients in the company. During these challenging times, they have gone above and beyond and making sure. We can support the communities we serve as effectively as possible.
I will now I'll turn the call over to Dave Depillo President of first Foundation.
Thank you John first I want to hear any rate debt, the safety and well being of our clients in team members is our top priority.
We believe the steps we've taken have allowed our team members to performance duties. So we can provide are essential services to our clients in a safe manner.
We have taken a number of steps to assist our clients adversely impacted by club at 90.
We have participated in the payment protection program also known as PPP and to date have processed over 200 loans with a balanced an excess of 110 million.
We have also cleared our backlog of additional applications anticipate.
Funding of over 200 additional loans with an aggregate balance in excess of 50 million upon the additional funding of the PPP program by the government.
I'm very appreciative to our team members, who work day and night to accomplish this task.
You should see equivalent of processing years' worth of our production in two weeks.
We have also handled hundreds of request for forbearance and processed approximately 200 and our so on balance equipment Finance group and 34, and our commercial lending group.
While available we have not seen any significant need for parents and our multifamily portfolio at this time.
As with our more multifamily portfolio, we have seen requests related to our single family portfolio and do not expect significant forbearance activity with only a few granted today.
Our team is evaluating all request from loan by loan.
And this challenging time I wanted to reiterate some of the items about our credit quality of our loan portfolio approximately 85% of our portfolio secured by real estate across all segments. The loan to value is low averaging below 60%.
Debt service coverage ratios and our multifamily in non owner occupied commercial real estate our strong.
During the first quarter, we were able to resolve outstanding nonaccrual loans, such as our NPL ratio to total assets decreased 14 base.
We have low exposure to some of the industry's hit hard by the Pandemics, specifically hospitality restaurants under construction.
In addition, we have no exposure to oil airlines or the cruise industry.
We have the implemented additional monitoring activities for our portfolio and our commercial lending team members our focus on monitoring assessing our existing clients. We have also strengthen our underwriting standards to address any potential issues raised by the current economic environment.
Ill now provide some additional comments around our activity screen the corner.
During the first quarter, we originated 663 million in loans the composition of loan originations were as follows.
Multifamily, 66% commercial including owner occupied commercial real estate, 29% single family, 4% land and construction 1%.
For the first quarter, the weighted average interest rate for our loan originations were 4.01%.
Multifamily was 3.71% commercial 4.61%.
Well, we have strengthened our underwriting criteria pricing has also increased on future loan production across all asset classes.
With multifamily pricing in the market as high as 5%.
We expect current pricing for our five year fixed multifamily product around 4.35% as credit spreads and market dislocations start to normalize.
As of March 30, Onest 2020, our loan portfolio, excluding loans held for sale consists of 49% multifamily loans, 24% commercial loans, including owner occupied Cnine.
18% consumer loans, including single family.
7% non owner occupied commercial real estate and 2% land and construction.
During the quarter deposits grew by 140 million, we saw growth in both the retail deposits in specialty deposits, while we decreased our level of wholesale deposits.
Very thankful to our team members, who have done an amazing job during these challenging time.
We'd like to turn over the call to Jones of cooking President of first Foundation advice. Thank you David and good morning.
Heading into the first quarter, we expected market volatility, but of course, no unexpected that pandemic to occur.
In early February we started seeing signs of what the economic impact of a widespread pandemic might look like and rebate, we began making some modest adjustments to our portfolio's.
A lot of the first shocks to the market that began in those early days of February.
Were driven by what if scenarios as the health agencies.
Had not yet declared this say worldwide pandemic, but our investment team was listening closely in making adjustments.
By mid March broader markets were hitting new lows in our portfolio strategist, we're looking for potential buying opportunities and while it is always difficult to predict the bottom of any cycle. We knew that some investments were relatively cheap.
Some of the broader markets experienced a lows of more than 20% off their highs, but our conservative balance portfolios were down less.
We ended the quarter at 3.9 billion.
And while we are never happy about declining you when we can say that our investment philosophy to protect against the downside has worked thus far things could have been a lot worse.
Our entire wealth management team has been very resilient through all of this.
As Scott mentioned many of us have shifted to work from home environment, and we're continuing to make investments and serve our clients without disruption from our new settings.
We have replaced in person meetings with virtual meetings and we continue to help our clients through this extraordinary time.
There have been a lot of changes to retirement planning through the carriers Act and Weve been working with our clients to help them assess how it impacts them.
It is worth noting that many of us on the team have been through several economic downturns.
And while each one is unique to common thread through all of them is to provide communication and transparency to our wealth management clients.
We have done this through an increase in virtual meetings phone calls blog posts and Webinars.
Thanks.
Being built relationships like the ones, we have with our investment clients, many of whom I've been with US for 20 plus years helps in times like these.
And as the economy returns, we expect to be in a good position to attract new clients.
I am so impressed with everyone on our team by their efforts during the past few weeks.
And I'm very grateful for all of our clients.
We will get through this at this time, we're ready to take questions and I'll hand, it back to the operator.
Thank you the floor is now open for questions. If you would like to ask your question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the Q press the pound key.
Your first question comes from the line of Matthew Clark of Piper Sandler.
Hi, good morning, Matthew.
Hi, good morning.
Maybe just starting with the loans in deferral.
Can you just quantify the the dollar amounts in the equipment finance in the commercial lending group those 234.
Relationships, just how much that isn't like yeah, because the 200 in the current finance are all very small balance so the amount of the deferral is.
Probably lesson.
Yes $3 million at this point on the commercial side as I believe a little over 4 million in total principal balance on those as the majority of these are very small balance mostly done for.
Steve and I side, mostly for CRM or acquired.
So these were ones that.
Were directly impacted and prior to PPP.
We felt it prudent to provide in many cases, a 90 day deferral.
30 million aside dropped as Irwin.
30 million total 30 million barrel, yes, I'm, sorry that was my fault.
And yes, so it's up and then on the commercial these from very small loans.
So is.
Those are only 90 day deferrals and our expectation is with PPP. The majority of that will be collected during the terminal one.
Okay and then just.
Similar.
Question around the.
Exposures most at risk the hospitality restaurants, Sandy just the amount in terms of dollars a percentage of the total corporate or total portfolio for hotels is 40 million secured by real estate and 10 million.
Other secured by real estate and other.
So less than 50 million in the hotel, we have received no requests for any sort of forbearance and have reached out to those customers.
No issues Thats related to performance at this point in time, and we have about 25 million as it relates to restaurants again, all small balance.
The majority of which are already in the PPP program either.
And process of funding or.
On the west to go through.
And I would say if you looked at Moody's high risk category.
We bucketed I believe we have about a 140 million of what in total the categories in which they consider high risk.
Relatively small unrealized nor total portfolio.
Okay, Great and then just on the.
The PPP.
110 million that was done another 50 million in the pipeline.
Sure.
Do you have the average loan size just so we can assume the original inevitably origination fee on that book of business and then your thoughts in terms of.
How long these might sit on the balance sheet I assume is can be fairly short.
And you have a limited.
Coupon, but just.
And we're modeling it is.
As John it's a simpler for gap.
As he always has been we are.
Assuming two year.
The actual to your statutory life, where the average fee is around 3% we have.
Some deferred cost against that and we're assuming that about 85% will.
Hey off after the forgiveness period in the third in the third quarter.
Okay.
And then just maybe on reserves and.
The addition, this quarter or roughly 2 million tied to cease all I guess what are your thoughts about potential losses, I mean do you think.
Your loss history has been very benign.
But do you think you might have to build summit I guess.
Does it does your.
Seasonal adjustment this quarter consider the the economic deterioration in April I assume it does but your thoughts around reserve levels.
Yes, sure totaling close let's walk through.
Dave on C. so.
We had two.
But approximately 45% in the fed downsides stress scenario.
In that bucket, because the Cecil baseline and Cecil.
Adverse scenarios.
Were not in reflective of the current environment and the part of the problem, though we have is because the richness of the debt service coverage, we have in our portfolios.
Any of those had little impact.
To our portfolio so.
In order to I would say justify ensure up our existing reserves, we had to look to a.
I would say more realistic view of a downside scenario.
Do you want adoption, we had 50% in defense stress test still.
One of the Dutch and just as well.
Hey, why it means that we would had bookings differently. So that's why zero, yes, but our allocation at that point was basically yes, that's true at 45 65.
As of March date, we had 50%.
Stress and then 50 and the more adverse coveted scenarios that existed at the time.
There was an update to the baseline co bid.
Subsequent to that and the our baseline went up however.
It's still was only 83%.
The fed downside for us so as of March we would have been able to cover 100 over 100% of that baseline, which is the majority of what people are using forward there.
But update so as you've seen there was.
Some minor day, one and then the material impact happened on March based on baseline adjustments for the majority of them and the majority of institutions could maybe cover 40% to 45% of fed downside from all the disclosures we've seen.
Our base, if we went off that could cover up to 83% of the old fed downside. So what we're saying as when you have zero loss reserves you have to justify some.
Dress in order to.
Amplify and maintain what you have on the books. So we are in a sense the very conservative yes buffer going into this quarter. Most were kind of just looking at baseline and some historical loss rates.
Would we expect more probably in the fact that the baseline scenario for everyone. The steepness of that.
The updates that they've gotten in the.
From the first quarter actual analytics not necessarily the.
Economic scenarios, but the actual catch ups on the analytics.
Showed up relatively steep.
Increase from from baseline. However, we still have room in our baseline. So what we think is maybe baseline will go up some more.
We will probably have some de minimis charge offs, obviously in some of these little see an eye relationships and we have growth. So orients. Our expectations are we will have some additional reserving and the next quarter to I would say around where we're at what we've added today.
Would be a reasonable expectation, but we kind of view this more around.
You know kind of that general maybe it's too soon but pandemic modeling in general.
Where you've had certain economies in certain areas impacted more significantly.
And our portfolios are being impacted more benignly, so ours would be a slow gradual potential increase but nothing we feel is materially significant.
To the financial results, but if I was trying to model us out I would probably.
Add reserves in the next quarter, probably equivalent to what we have we have no basis currently in the modeling to show that but I.
I think for a conservative purposes, I'm, probably model around that today.
Okay. That's great color and then last one for any for now just do you happen to have does the spot rate on interest bearing deposit costs at the end of March.
In terms of what was the actual deposit rate it why.
So we saw across our groups are we're probably about.
About 1% on about excuse me about 75 basis points on money market savings on at weighted average basis. Our Cds are still higher end, our wholesale funding costs I think we fixed in going through that but I really haven't for the most of the call up 31, most of the cost savings won't even take effect until the second core.
Order and then third third ended the third and fourth we will be the most impacted for this year, yes, Sir I guess, our general premises assuming.
Which is a big assumption for everyone that.
We work our way through the spend American.
Everyone gets back to.
A level of normal see us through reflected in.
Most of the analytical models, which is kind of artificially high unemployment.
Kind of a w. recovery on most of these models with some protracted.
Unemployment.
Our cost saves going into the end of this year and next year will provide.
Pretty substantial.
Increases to our margins and returns and just Matthew one thing that be aware of our customer service costs that wasn't immediate impact and that was definitely came down substantially.
At the end of the first quarter, what will be reflected and reduce costs and on a go forward basis.
Got it okay. Thank you.
Your next question comes from the line of Gary Tenner of D.A. Davidson.
Hi, Gary Good morning, Hi, good morning.
Couple of all the questions first in terms of the comment I think.
Good day mentioned that regarding the request for deferrals on multifamily. It sounds like you had received some but you did not approve any did I hear that correctly.
Yes.
You'd be amazed when people ask for when the news media says go talk to your lender they have pretty money.
We've had requests were.
People have substantial still positive cash flow, but they had a few vacancies so they wanted deferral.
We didn't feel those for dean justified so I think the.
I think like every other institution, we've had had some requests but.
Unlike large institutions that may grant those because they don't have a systematic way to analyze that we do request full packages receipt of financial information and review.
I would say anecdotally in April.
The.
They can see that we talked to our borrowers around have been relatively benign.
In in large maybe one or two here where people arent paying rent.
So we haven't seen a significant impact in the majority of our markets. Having said we have had a few cases, where someone has an effective.
You can see if 30% however, their debt service coverage ratio is still 115 to 120 on an actual basis, we're not going to provide relief.
Someone who is positively cash fun so.
It's.
It's kind of an interesting.
Situation, but we haven't had any today, where we felt comfortable and.
In some cases, where they could have done muted cash on one property there significantly positively cash flowing on others and we feel that.
They have the beneficial benefit of ownership they get 30% compounded returns and we get four.
We still want to assume the.
The ownership responsibility by deferring payments, when we're only earning four and they're still maybe earning 15% to 20%. So.
This is the and so our expectation are there will be some disruption in the interim cash flows but to put in perspective on new appraisals coming in on new originations, where there is an imputed loss to lease now by appraisers.
For our covered 19, it's had about maybe 1% to 1.5%.
Value impact, which we feel is immaterial.
So.
Again, given the the strength of our debt service coverage of the portfolios and our cash flow of our borrowers. We just are compelled to just do blanket 90 day deferrals.
Great appreciate the color.
Regarding the buyback I think 2.8 million shares this quarter, if I heard that correctly.
No material totaled $8 million. It was like dollar you hundred commerce out there.
Yes, we're lucky we got to.
280000 shares not 2.8 million.
Yes, Okay that makes all merchandise. Thank you.
And then in terms of the timing of the CD maturities.
Can you kind of talk through those and maybe what the.
Maturity rates are and your as of today with what kind of the projected.
Great. Thank you generally see most of our Cds under one year. So we.
Our practice on on.
Brokered Cds is to lateral.
Those Cds they can be anywhere from three months six months one year.
And as they mature.
You know, we evaluate whether it's whether we should or shouldn't.
Put brokered deposits back on here recently.
There's been a decline in brokered deposits.
Brokered deposits remained high after the last fed rate cut.
They are starting to trend back down and we might employee using some brokered Cds, but overall.
I would say, we don't have a row reliance on brokered Cds, but we do use them periodically and the non brokered Cds, we expect them to roll off again. The terms, we have an those don't exceed one year. So over the next six months, you're going to see most of reprice out to current market rate.
Okay.
Thanks, Jim in terms of PTC on with this was asked previously are you going to use the.
Fed liquidity facility to fund those or you're going to fund them yourself. How come you think we're evaluating we have been approved for that facility.
And I believe the home loan bank is rolling out on Monday, competing facility, which were evaluating as well.
So we'll probably between the two utilize them a little bit.
But you know it's still a little early to determine how much will use of that.
The rates on those facilities, so far have been pretty reasonable.
Okay, Great and then was less question for me in terms of the customer service costs.
The first quarter represent the full impact of the lower rates or is that kind of pro rata for the timing. So it's probably one one third of that period was reflects the fall. The first two months did not so it kind of had the impact in March so.
From that perspective again, that's cyclical so as our balances due increased during the year, you're going to see more cost because of the balances at the rates are probably.
30% of what they were 35% of what they were at the peak year ago, and then I would just point out.
As the.
Just like as the brokered Cds or will mature and will roll those to lower rates.
If you'll recall, we had a half a billion of home loan bank, one year advance and I believe was put on at 177 in September and matures.
Matures in September and that will roll in fourth quarter in the fourth quarter. Two you know obviously a much lower rate.
Great. Thanks, Yes.
Yes.
Your next question comes from the line of David Feaster of Raymond James.
Hey, good morning, everybody.
David.
I'm well.
Thank you.
Originations were really strong in the first quarter just curious how your pipelines trended early in the second quarter and you know I guess, just how are conversations with clients going what's the pulse and maybe just net expectations for loan growth in the near term.
Sure.
So as expected with rates precipitously dropping in the first quarter, there was a little bit of rush by borrowers to the market.
Mostly.
Around rate in term and some cash out refinances so.
First quarter, we ran about 75% re by 25% purchase stepmothers on more dominating there.
Pipeline going into second quarter.
Was extremely strong as well.
Still as however, we had the market dislocation when everyone.
Figured out while this may be worse than we thought we saw other lenders who are being inundated at rate.
Core forbearance and in a lot of other asset classes pull out of a market.
More or less and kind of flip to asset management. So some of the major players in our market.
Kind of like flushed out their pipelines and actually returned deposits and other things so great a little bit a disruption. So what we did with like other lenders is we went back to our pipeline and we re underwrote it.
Some of those were rush to get in for more favorable financing that really didnt have I would say that the greatest information on we got rid of some of those and then.
Started to require some additional underwriting enhancement in anticipation there maybe some near term collection loss.
Adding a requirement for one year of.
Payments, whether amortized in our interest selling to be.
Held in an account by lender and higher vacancies and so on and so forth.
It flushed out probably about 75 million of our pipeline between those items.
But still Maine is maintaining fairly significant for the second quarter May and June should be strong July starts or excuse me April and May our strong Jews starts to fall off a little bit as people are trying to get their bearings back in the market and what we saw was.
Because of uncertainty a lot of the purchase transactions either our on hold or people are delaying.
Refinances have slowed down as people start to get used to I would say the new norm for rates.
So we expect probably lower originations in June.
Lastly, lower originations in July and August and then starting to get back to normalcy in the latter part of the third quarter and then what we would consider more normal originations in the fourth quarter.
What does that mean, we'll probably do we.
Yes.
Probably about a bit too.
For the year I was just multifamily just multifamily.
Is running a much higher rate as you could see going we were probably on a rate to do probably a billion six.
Not that we do a lot or construction or other things, but we did put on hold.
Or you know strongly.
We have not added a new construction.
In quite some time, but I would say the good news for US is the production that we will be the adding although weaver.
I would say.
Frothy now the prospect of a three 475% to 5% coupon.
We're realistically with credit spreads another thing settling down which is good for the market. We're looking at.
Doing probably closer to 435 is kind of our benchmark five year, so even with lower volumes with higher rates and lower pre pay our pre pays for running.
I would say on the chart because of the rush to market that has slowed down dramatically in April.
Significantly from our estimates at the beginning of the April to end of May April It was one quarter of what we originally had borrowers proposing to pay.
Long all asset classes. So we brand our CPR is down so.
Bottom line is our balance sheet growth will probably still be there even with some reduce the originations in the latter part of the second and third quarter.
But primarily because CPR is going to slow down as well and as you noticed we.
Trued up one of our I O strips because it was running at a rate that was significantly high end.
Couple of quarters from now I'm sure we're going to see.
On all the agencies.
Backed securitization, we did the prepays are going to slow down dramatically and even in April they look de minimis compared to previous periods.
And then enough that was helpful. Yes, the only thing other thing I'd say, David is make sure you understand that you're going to have a blip here in the June the second quarter, because the PPP loans, and then probably most of it rolling off so yeah, I'm going to be a kind of unusual.
Cycle.
Absolutely.
So kind of taking all that together so it sounds like loan yields probably flat to maybe up a little bit deposit cost continue to decline.
The NIM should actually probably continue to expand from here just thinking about the timing and some of this stuff is that fair and do you think we can ultimately get back north of 3% and by the yes.
Yes, we agree with what you're saying and yes, we believe we can get back above three.
If you look where we'll be at the end of the year going into next year, we're going to get additional benefit like Scott said, we have a large FHLB advance I think that things have 175, and 77, yet whats overnight today.
30 30.
At this point $5.5 billion Thats, a pretty big chunk of savings right. There, yes, so basically you're going to see second third and fourth quarter continued improvement quarter by quarter, because our funding costs.
Repriced.
Okay. That's helpful last one from me just any updates on the securitization in September.
So any thoughts on increasing the size or how do you think about gain on sale just given everything that's happening in the market.
Sure well.
As usual we.
Typically hedge our transaction so we have hedged.
A portion of our securitization going in and other some disclosure on that.
We were Oh, I would say somewhat nervous about credit spreads.
With the market dislocation.
There has been some market pricing that is indicated those credit spreads have come back dramatically and would put us in line with our original estimate of credit spreads.
So our anticipation is still hit market, we're starting that process now and expectations unless the world falls apart.
September we will.
You know hit our normal time period as far as gain on sale, we've always put in a proxy.
Of about 1%.
As far as upsizing, the probably not a need to do it at this point given the fact that we still want to show some balance sheet growth. Yes. So we're kind of just kind of target that.
Half billion dollar number is our proxy.
Which is kind of where our available for sale pool is today.
But we do have the option in our outside cool is very large we could do a significantly larger or do slightly smaller the economies of scale pennant diminished below I would say 450 ish is kind of where.
The inherent cost again, a little prohibitive, but.
I would say our our estimate of gain right now based on the market is relatively conservative.
On could be some upside, but you never know with credit spreads in the market given the environment. We're in.
Terrific extremely helpful. Thanks, guys.
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Your next question comes from the line of Steve Moss with B. Riley FBR.
Hi, good morning, guys.
Thanks.
Just wanted to circle up on the margin plus outflow that further in terms of timing getting over that 3% margin here just given that I hear you will have a meaningful decline here this quarter and even more in the next quarter.
But it feels like that spread is weighing up pretty meaningfully combined with not just bearing you could you or 3% margin in the second quarter is that there are maybe a little bit too hot I.
I think I think in the second quarter one of the things you have to contemplate too is you put on all these PPP loans with interest rates substantially below what the yield on the portfolio is so the second quarter will be a little muted because of that the benefit on the funding side you'll start seeing.
In terms of our repricing of the deposits again, one of the big differences is not something that doesn't run through the NIM, which is our customer service costs.
We expect to see better there so bottom bottom line. So the second quarters, we expect to see improvement, but maybe a little muted because the PPP program and Oh I think we some of our multifamily pipeline that was built.
During the first quarter when rates were well below will are under pressure and those will fund and on through so we're not going to really see the benefit of larger multifamily Reits probably till after the third and fourth quarter death, so from that perspective, but you'll see continues from our perspective, when we look at it we see continued nice continuing improvement.
For the third and fourth quarter as we mentioned because of other repricings that we have.
Okay. That's fair unhelpful and then in terms of the.
I guess couple housekeeping items do you guys have any more interest only strips are being on balance sheet, just kind of curious about that we do we do have interest only strips that we own.
Some from the first two deals and a couple of Nonetheless, we did.
The evaluation, we did in terms of going through this we obviously look to every single strip, we had to make sure.
This was the one that we did the write down on what is from 2016 and just a level of prepayments over the last six months as you can imagine.
For the fourth quarter end the first quarter were so substantial that you just weren't going to have the revenues coming in on those loans going forward.
But the other strips because they are relatively new and also because especially strips. We just did are still protected by prepayment penalties. The cash flows we have from them are very strong and they are actually exceeding what our projections where.
That's helpful and we'll close the balance on the total interest only strips.
Probably about $25 million right now.
Okay. So it's as you said original bio strip one's a little over 12 million at at amortized to about five yes, and then because of the Prepays.
Unfortunately.
When you model I'm you have to model it based on historical data because we use outside valuation services.
So we know prepays are going to slow down dramatically, but they have to go up historical so some of that.
If we if we reevaluated if six months from now some of that would probably go wave with lower pre pays. So it's just kind of a timing issue and any acceleration of prepays that impacted that one specific line.
Great. That's helpful. And then just on the securitization in the.
Late third quarter here, how should we think about how much you guys are thinking of.
Retaining on balance sheet.
Probably not a lot.
Unlike last year when rates were pretty good and spreads were wide you know we decided to.
Shift out of some of our 15 year paper and take advantage of the wider spreads lower.
Durations.
This year round, where we're probably more apt and here's the other thing that look quickly ratio.
For us is running about 15% right now and.
We try to maintain 12.
So I would say we're probably.
Over where we really need to be from a liquidity standpoint.
So I think kind of given those factors we're kind of.
We are evaluating it but we probably won't add much if any.
Yes, Okay. That's helpful.
And last one for me just in terms of the gain on sale margin I think David you said, a 1% proxy.
It is still reasonable just kind of what given the hedged the hedge you put on just kind of want to make sure that but I heard that correctly.
Yes.
The that that would anticipate that.
Due to the hedge would still basically work the way it has been consistently in credit spreads.
I guess, the key is where credit spreads going to be they widened out they've come back.
But we're about where we were and I think most of the negative information in the market fourth last year, when we put a hedge on at one point. It was 26 million upside down and our economics I think at the time that we closed out.
Repaying our hedge was about 21 million in a loss and our team. That's one yes, yes, yes, and our economics were about the same as what we've modeled and told you guys. So.
I think where.
Pretty good position.
We have to say, we feel confident that 1% is is still realistic.
Okay.
Alright, Thank you very much.
Thanks, Steve Thanks.
Question as a follow up from Matthew Clark with Piper Sandler.
Hey, guys.
Hey, two quick ones.
Do you happen to have.
Where are your square Cnine.
Reserve stood.
Hi reserves.
As a percentage of that portfolio.
On I don't have the table actually in front of me, but.
I would say were pretty consistent with the industry, where we over 1% no. It's definitely over 1% in terms are going through that but it just depends on how that enable answer let me point.
Yes.
Okay.
We can get back CMS yeah.
Well give itself.
Disclosing that obviously in the Q.
Yes, Okay and then just.
In net interest income the amount of accretion recoveries I think it was 1.1 billion last quarter just wanted to know what it was yes, we because of the change in the accounting undersea. So we really didn't have any and terms and increasing accounting because basically we classified all those as normal amortization of deferred fees.
So there was no significant recoveries at all from any acquisition acquired loans.
Okay, and then just on $140 million.
Of loans that are high risk you gave us the 50 million of hotel. The 25 million of restaurants can you just give us the remaining balance.
I can I can follow up with that I don't have that chart in front of me, but it's basically.
Other Arts Entertainment Recreation.
There's a few other categories I think considered retail trade.
I can give you the breakdown, but it's basically.
Moody's.
Segregation under their Cnine module.
But it's very well dispersed it's just would fall into those nicest codes.
Category I mentioned, our largest categories.
Yeah. Those are the only material ones, where we have I would say larger balances in.
For us but.
Okay, and then the weighted average price at which you bought back the.
Stock this quarter.
I want to say it was like.
11, well, yeah, right AG very close to 12 Yep.
Unfortunately, it wasn't nine or 10, but [laughter].
Okay. Thank you.
Hi, Thanks.
Thank you. This concludes our allotted time for today's question and answer session. I will now turn the call back over to Mr., Scott capital for closing remarks.
Thank you everyone for taking the time today, we certainly appreciate it.
And then an extraordinary period in our time.
Our team has more than Ben up to the challenge I'm. So proud of how everyone has responded and I can't think them enough. We have amazing employees, who are focused on doing great work for client.
We built this company to emphasize client service as a core value and we believe that serves us well in times like this.
Our team has already started looking ahead and preparing for the eventual return to work.
And we are eager eager to get there, but in the meantime, we will continue to do things with their employees in client with safety in mind.
Together, we'll get through this thank you again and have a great remainder of your debt.
Thank you for participating and first foundations first quarter Twentytwenty earnings Conference call you may now disconnect.
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