Q3 2020 First Foundation Inc Earnings Call
Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Greetings and welcome to the first foundations third quarter 2020 earnings Conference call. Today's call is being recorded at this time all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation. If you 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 queue by pressing the pound key we ask that you. Please pick up your handset to allow optimal sound quality.
Speaking today will be Scott capital first foundations, Chief Executive Officer, Kevin Thompson, Chief Financial Officer, David Depillo, President of first Foundation, and John Hakopian precedent, a first foundation advisors. Please.
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 Steve.
These forward looking statements are made subject to the safe Harbor statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures.
For a 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 Companys filings with the Securities and Exchange Commission and now I would like to turn the call over to Scott Cabinet.
Hello, and thank you for joining us.
I would like to welcome all of you to our third quarter 2020, <unk> earnings Conference call we.
We will be providing some prepared comments regarding our activities and then we will respond to questions.
It was another strong quarter for first foundation or.
Our business model of providing banking private wealth management services has performed very well.
Lending deposit investments well planning and trust services are each contributing in meaningful ways.
Well many other financial service firms have reduced activities due to the shutdown. Our team is used it as an opportunity to gain ground and the markets we serve.
As we continue to find that our clients want to work with a single provider of services, which allows us to build longstanding and meaningful relationships.
It really speaks to the value proposition over for <unk>.
As highlighted in the press release. This morning, we delivered another quarter of strong financial results.
Our earnings for the third quarter were 30.9 million or 69 cents per share a 78% increase over the third quarter of 2019.
Total revenues were 75.3 million for the quarter, an increase of 32% year over year.
Our tangible book value increased to 13.5 cents per share.
Our efficiency ratio for the third quarter improved to 40%.
And 49% year to date as we mentioned on previous calls our target efficiency ratio was 50% for the full year. So we were well on our way to reaching that important metric we.
We also declared and will pay a quarterly cash dividend of seven cents per share and anticipate the continuation of the dividend in future quarters.
Over the last nine months, we have experienced strong loan and deposit growth and this quarter our assets under management increased the free pandemic levels.
Loan originations for the quarter were 414 million and overall deposits have grown by 573 million year to date.
We have also decreased our wholesale deposits by 56% and our federal home loan bank advances, 64% year to date.
Which is a part of the successful repositioning of the liability side of our balance sheet that we've spoken about in the past.
Loan demand remains strong in our markets and our pipeline and credit underwriting continued to be robust.
We successfully completed a securitization.
553 million of multifamily loans, our fifth such deal today, and we are already starting the process for next year securitization.
Our digital platforms continue to perform well, allowing us to deliver products and services to our clients and new and efficient ways as mentioned in the past we have made important investments in this area and are continuing to see a strong payback.
This is highlighted by a year to date growth of over 323% and our online savings channel. This has become a valuable comp complement to our retail offering.
Now our savings clients can engage with us online or in the branch whatever is most convenient for them.
The increase in assets under management for our bright private wealth management business was thanks in large part to our trust business, Our trust offering, which recently eclipsed 1 billion in assets continues to differentiate us against other wealth managers and financially.
As reaffirms.
I also want to say I'm very grateful to our employees, who have worked tremendously hard during these challenging circumstances. We know there is much uncertainty in their own lives with school closures routines being up and did an everyday life put on hold which makes the results we reported today.
That much more meaningful.
It is really a testament to the great work, we have in place here at first foundation.
I would also like to thank all of our clients, who entrust us with their financial needs now, let me turn the call over to our CFO Kevin Thompson.
Thank you Scott with the successful execution of our securitization and the continued momentum of our customer centric model, we experienced strong profitability in the quarter with a diluted EPS of 69 cents per share.
Efficiency ratio decreased to 40% with the return on assets of 1.79% and a return on tangible common equity of 22%.
We completed completed securitization of $553 million of multifamily loans in the quarter as is our practice to do annually, achieving a very healthy $15.1 million gain.
As part of the transaction, we also recognized a mortgage servicing rights of $3.9 million.
Loans held for investment decreased in the quarter due to 513 million of loan balances being transferred to the held for sale category in preparation for a securitization next year.
Absent this transfer loan balances increased slightly in the quarter.
The cost of deposits decreased from 84 to 57 basis points in the quarter and was 48 basis points in the last month.
The quarter.
Our broker deposits have decreased over $670 million or 56% year to date.
Our strategy of increasing core deposits has gained traction as our core deposits increased from 76% to 90% of our deposit base year over year.
Deposits from PPP activity only accounted for $18.5 million of our deposits. This quarter as we are seeing the most of our PPP cut borrowers have already put that money to work to reopen or continue their business.
We were also able to pay off $500 million of FHLB advances in the quarter at a rate of 1.77%, which as Scott mentioned as part of our successful strategy to reposition our liabilities.
The net interest margin expanded seven basis points to 3.03% as a result of the success, we have had and lowering deposit pricing.
Credit metrics remained strong and all our loan portfolios in the allowance for credit losses for loans decreased by 3.9 million, resulting in an allowance of 52 basis points of loans.
This change was largely a result of the decrease in loans held for investment as well as the slight improvement in the economic scenario, we utilized for the Cecil calculation.
With the current interest rate environment, and the increase we have experienced some prepayment speeds in our interest only strips securities.
Increased the allowance for credit losses for investments by 5.7 million.
Which represents the change in expected cash flows on these securities.
Also related to prepayment speeds, we recognized a 1.3 million valuation allowance of mortgage servicing rights.
With strong expense management and the investments we've made in our infrastructure, we are seeing the benefits from improving operational leverage and efficiencies.
We have also begun to take steps to improve our tox profile going forward, including investments in low income housing tax credits municipal lending and other strategies.
I'll now turn the call over to David to fellow precedent of first foundation. Thank you Kevin first I want to reiterate my gratitude to all our employees. Thanks to their efforts we had another great quarter, even with the uncertainty in the market.
As Scott mentioned during the quarter, we originated $414 million of loans, which keeps us on track for another strong year of loan originations.
Related to our securitization of 553 million a month the family loans or total assets decreased for the time being as we opted not to retain lower yielding securities associated with the sale, but rather to use the proceeds to pay down balance of borrowings and fund new originations from our strong pipeline.
Our current looking at our pipeline the current pipeline.
Exceed 700 million and is at peak levels, we expect to have another record year for loan originations.
The composition of our loan originations are as follows smelting family 53%.
Cnine, 37% single family, 9% and 1% another for the third quarter the weighted average interest rate on our loan originations was 3.6%.
I also want to reiterate some items about credit quality in our loan portfolio.
As mentioned our NPL ratio is low at 32 basis point with a slight increase due to in large part a smaller loan portfolio.
Also delinquency rates, which are typically a leading indicator for credit quality have declined significantly from previous quarters.
Again, approximately 82% of our portfolio is secured by real estate.
Across all segments the loan to value of this low averaging below 55%.
And our average.
Debt service coverage ratios for multifamily and non owner occupied commercial real estate remains strong.
As we had mentioned in the last quarter, we have little exposure to industries hit hardest by the pandemic specifically hospitality is restaurants. In addition, we have no exposure to oil and gas aviation are the cruise industries.
Forbearances are down by 58% or 77 million totaling 55% since last quarter, which represents a little over 1% of the loan portfolio.
There are no forbearance than our multifamily consumer and land and construction portfolios and the majority of the Forbearances. We did approve we're three months full payment deferrals.
Classes grew year to date by seven excuse me $573 million, we saw growth in both the retail and specialty deposits.
And our online deposit activity has contributed to the success of our strategy to increase core deposits and as stated before our core deposits grew to 90% of total deposits in the quarter.
I'd like to turn the call over to John Popeo and present, our first foundation advisors.
Thank you David and good morning.
Our assets under management closed the quarter at 4.5 billion.
Our profit margin for the quarter increased to 14% and as we finalize the implementation of our new portfolio accounting system, we expect additional cost savings for 2021 and beyond.
Although there is still uncertainty in the financial markets, our investment strategies have performed well for this for the year, which is quite remarkable given the broader U.S. economy was interest was in recessionary territory. Just six months ago. Good performance is a leading indicator for client retention and new business going forward.
We are seeing a strong pipeline and we expect to continue to be successful in attracting new clients and servicing our existing clients as we close out the year as Scott touched on our Trust Department continues to be instrumental in our ability to build and maintain relationships with our clients.
Each client relationships tend to be larger and more complex relationships. We have also seen an uptick in referrals from into our retail bankers, who are often the first point of contact for clients working with first foundation.
We continue to produce valuable content and advice to help our clients better navigate the various aspects of their financial life.
And Eric and our experienced team of investment in wealth planning professionals provide solutions for some very complex client situations.
Through the through the pandemic, we have found ways to connect with clients using virtual technologies that we already had in place with a significant portion of our team's still working remotely. This approach has proven to be very efficient for us and has created more flexibility for our clients I.
Im very pleased with how our team has been able to operate.
This year.
At this time, we are ready to take questions and I will hand, it back to the operator.
Thank you at this time I would like to remind everyone. If you would like to ask a 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 queue press the pound key.
Our first question comes from the line of Matthew Clark of Piper Sandler.
Hi, good morning.
Good morning Rich.
Hi, John.
Maybe just starting on the gain on sale this quarter.
Gain on sales a lot higher than I think we previously expected. This was what drove that related increase I guess, how much of it was the margin and how much of that might have been hedging related if any.
Well the hedge costs was slightly less than in.
Last year.
It was about 13.8 million I think if I remember correctly landed about 12 12.
Well, okay and.
Frankly, our.
Margins.
Proved to be a little better than we had initially thought early on when we were modeling.
We have modeled spreads I think it's slightly over 100 on each one of our two.
Two one and APC too and I think they came in at like 61, and 71 or 62, and 72 very close to that so.
So a little bit was margin.
And what about was the hedging costs was slightly less than the year. Previously also the value of the strip was significantly higher than what we had forecasted.
Okay.
And then on the.
On the reserves.
On loans held for investment.
Down a little bit linked quarter, let's see the reasons in the release, but can you give us a sense for what your reserve is on non commercial real estate and multifamily maybe just the CLP portfolio isolate that.
Kevin if you can bring that up.
Yes, you bet, it's segregated into various categories, but typically it's anywhere between one and 2% yes.
Yes. It is.
About 1.3% over only on those portfolio.
Okay.
Okay and then.
On the core NIM up.
Largely in line with expectations real Sthree.
For at least the reported NIM.
I guess what are your thoughts on the NIM trajectory from here can that continue with.
With funding costs continue to come down.
And also do you have the impact of PPP and purchase accounting accretion and any other kind of prepayment fees in the margin. This quarter GPP is really not a factor at this point.
We're amortizing the fees associated with the PPP over a two year.
Period, what did we say so and Thats brands about this quarter is about four basis four basis point drag on the NIM. So funding cost as you said are continuing to come down I think we can continue to increase our margin.
There has been pressure on loan origination yields as well.
We've obviously been able to save more on the funding costs than we have.
With loan yields coming down.
But I think we can continue to see.
I think.
You know.
We should be I think previously we had stated we would maintain a NIM above three and we feel confident that thats still the case and.
Maybe get up as high as 310 Phase 315, Weve. Its September was a lot higher than the end of quarter number.
Due in large sales effect that we had a significant portion of borrowing throwing off.
And at 3.67, our average yield of new assets going on that should be kind of a.
The low point for new assets coming on so you can kind of do the math with funding cost on the margin relatively low it should be relatively easy to stay there yes 3.67.
Yes, and you had asked about accretion income that's really immaterial standpoint, not really impacting we don't have much of anything left on accretion and that's right and just to correct something I'd say, it's more around 1% the cnine impact to our credit reserve.
Okay.
Okay, and then just the uptick in non accruals what drove that this quarter and whats the plan for resolution.
It's really more of a downturn and loans.
The loan portfolio overall was the majority of the uptick so there was a fair this quarter a fee growth until.
Loan said had ticked over 90 days.
We don't expect any loss from those one is.
Going to be resolved.
Momentarily the properties for sale by the owner and that will be completed.
There's approximately $7 million of residential mortgage relationship that our expectations as it may go to sale or being reinstated and that would happen.
This month, one way or the other outside.
Outside of that.
The expectations are as.
As the loan portfolio builds that number on some racial will come down but it was.
Primarily residential related with just a handful of.
Properties the.
But if you look at our delinquency pipeline you could see that there's not much on the horizon.
Yes.
Your next question.
Justin comes from the line of David Feaster of Raymond James.
Hi, good morning, everybody.
Hi.
I just kind of wanted to get.
Most of the market.
I'm glad to hear the originations are improving and the pipeline is holding up really well just curious what you're seeing out there it sounds like pricing is pretty tight.
Just curious.
Your thoughts on the market across the board multifamily and core.
Core commercial and what you're seeing.
Multifamily the velocity of the market has certainly picked up tenants protein levels. We saw in the first quarter when we originated.
At record levels that we've seen and I think just from an indication of our pipeline.
It's exceeding what even we thought going into the fourth quarter, where we would say reaching capacity in our current production environment.
Through year end.
The velocity of the market.
As we think is a really good thing it led to.
It will lead to a little bit higher sales.
Our rate than we thought we would experience we didnt think the snap back would hit US this quickly which will lead to higher prepayment fees.
Fees earned over the next few quarters.
It did impact our Io strips that Kevin had mentioned because we run those said.
CPR rates that are higher than what we've experienced in the last quarter, but in line with.
Higher.
Oracle rates that we are experiencing the latter half of last year into the first part of this year.
So multifamily is very robust competition is there pricing in the market how does I think solidified at this point, we feel good about.
Our expectations are we're going to stay about where were at over the next foreseeable future.
On the CN I side.
We've really picked up in a couple areas our corporate banking group is doing very well.
As well as our public Finance group equipment Finance is picked back up again.
That's really.
Pipelines are at levels, we haven't seen in quite some time and our what we would call our core see an eye and business banking is picking back up.
As well, so and interestingly enough.
Single family, which is one of our smaller areas.
We're now experiencing huge demand on that side as everyone I think in the industry as experience that so it's pretty much been across the board and that's kind of when you add all the components together.
We should see originations next year at levels, certainly well in excess of this year.
Okay. That's that's that's good color and just you guys always kind of staying on this macro topic you guys always have a really good pulse on the on the broader landscape. So I just wanted to get your thoughts on some of the pending legislation, specifically prop 13, and profit 22, and the implications on CRD multi band.
Only in California.
Yes, 15 is kind of an interesting one.
Certainly would have some impact but less than it would in the multifamily because most of the CRT that we lend on.
It doesn't have a historically low legacy tax space on it so.
Not a lot of companies that we do industrial owner occupied have.
Kind of a old prop 13 basis. So we don't see a tremendous effect, even if it did pass for that on the rent control.
It's kind of.
It's one way or the other there is already some rent control ordinance or add more of the state level. The state obviously doesn't want to see that pass in order because a delegate that to the local community level, So and there's a fear that rents would increase dramatically.
Across the board because of that so we're we feel good either way, we don't anticipate a passing but we don't see it having a material impact if it does pass it will probably just put a little more pressure on on ramps in a lot of these markets that are already well below market.
And again some of the areas that have had more social impact such as San Francisco.
Where you've seen rented creation again, we don't really lend them.
Those properties. So this has been kind of the south of market Tech boom.
Where they were renting efficiency in studio units for.
4000, now those are 3000, so it looks like a dramatic decrease but compared to the average rent that we get in the city in the surrounding area.
We don't see much impact so we're kind of watching the legislation.
We don't really bottom line is really don't expect much of any impact.
In the foreseeable future.
Okay. That's good color and then just you guys have done such a tremendous job managing expenses.
So as we look forward I mean, do you think you got opportunity to kind of offset some of these inflationary pressures in kind of keeps cost stables in those 30 to 31 million level are there any upcoming investments may be on the tax line.
Just to keep up with new hires or anything that might put pressure just any thoughts on on the expense side.
So obviously technology has always.
In evolving.
Item for us and we probably have 60.
Some on projects some of which don't cost a lot some of which costs a little bit more our technology spend for next year, including capital items that we're expecting to be slightly less than this year. So we don't really see.
A huge impact to that and I think a lot of our front loading.
In the last five years absorbed the majority of that cost.
Employees side, we've been holding run around 500 employees.
There is a few opportunities that come with significant revenue opportunities as well. So again, we don't see the impact so could it go up marginally we always plan for it to go up marginally year over year.
Somewhere between five and 10% is kind of our range but.
That being said they behave in the last.
Two years I think we've held pretty constant and 500 employees. So we're very cognizant of.
Human capital and expenses and.
We're really trying to manage to that side of the equation.
Okay. That's helpful. Thanks, guys.
Thanks, David.
Your next question comes from the line of Steve.
Right.
Hey, good morning, guys.
Good morning.
Just to tie up the origination.
David I think you mentioned the pipeline $700 million you.
You did about a billion 7 billion so far year to date. So when we think about this shaking out in the two four to two $5 billion nation range for this year.
It could be as high as that.
We're probably on the looking around to three.
To to four.
At 700 million there is always some I wouldn't say fall out but delayed so some of that could bleed into the first part of next year anyway.
So we typically apply about an 80% on rate to that so you're probably looking if we hit two five.
I'd say, that's about what we expect to do next year. So.
But some of it is timing.
Borrowers and just getting it through our system, but.
As you can see we're going to be up probably.
At least what's that 15% from prior year.
Great.
Okay and then on.
Interest bearing liability cost just kind of curious where costs were at quarter end relative to the average of 90 Bips.
They were settling down into the mid Seventys at quarter end.
[music].
And.
Last question for me on capital here, just kind of curious capital moved nicely higher here Profitabilities stronger.
What are your thoughts with regard to maybe a possible buyback.
Okay.
Yes, it could be put into place I think it really depends on the reaction to.
Our.
Earnings and.
Banks have struggled recently and I think if if our stock declines and.
And we start trading either below book value or near book value I would say the chances are pretty strong we will continue our buyback.
Alright, Thank you very much good quarter.
Thank you.
Once again, if you would like to ask a question. Please press.
Your next question comes from Gary Tenner of D.A. Davidson.
Thanks, Good morning.
Hi, Good morning, Hey, a question on balance sheet management I think the last couple of years when you've done this the securitization you've retained the securities.
Sure as you pointed out you did not.
It looks like you may have put a little bit of additional securities on over the course of the third quarter. So I'm just kind of.
Here is how you're thinking about balance sheet mix.
So we had we bought.
Yes, we bought about 58 million of our own securitization.
Hey, just to show that we wanted to participate in our own securitization.
Frankly, I think these are some of the best yielding mortgage backs out there in the marketplace.
We are expected to keep about 12% on balance sheet liquidity and we are starting to get a little bit low and I think we felt some need to just buy a little bit too.
Maintain.
On balance sheet liquidity that being said, we're right now we're selling cash we've been so successful in raising deposits that.
I think when you combined cash were closer to 18%.
On balance sheet liquidity, which is stronger than we necessarily want.
Todd.
We have a look at what was the yield on it if you look to the yield last year. It was about 3% to 70 270. So the yield on the securities was significantly higher in loan opportunities at the time weren't that much greater because of cost of funds on the margin was pretty high what was the yield on the left.
One person about one coverage. So we feel if we can book loan said.
3.5% or greater and we expect to do that.
Putting securities on a 1% doesn't make a lot of sense and if we didnt have a pipeline as strong as we do and the ability to replace assets that quickly.
We may have kept more yeah, I think we may have lean towards the securities portfolio more but.
The reality is we see more opportunities on the loan side than we do.
The security side at this moment frankly.
I've said this in the past and I'll say it again.
We have to stay very plain vanilla on our securities portfolio, we deem that to be a liquidity portfolio.
And not an investment portfolio so.
We could have bought some municipal bonds or sub debt or other things that the old way more.
But if you look at March Thirtyth of this year.
Couldn't find to bid on any of that stuff.
And you know.
We're using it as a liquidity portfolio.
Okay. Thank you and then.
On the origination trends I might my recollection was that the.
Trends in the back part maybe in June for the second quarter had gotten quite a bit stronger. So was there any hey am I remembering that I guess, but be was there anything over the course of the third quarter that.
Kind of drew.
The headwinds on on production.
So if you kind of step back we had a record first quarter.
Interest rates are starting to come down and people are taking advantage of that and the pandemic and really around the time of the locked down it was when the markets kind of retracted and when I say markets not only.
Lenders, but also borrowers took a step back to say, we don't know what's going to happen, although that was relatively short lived.
Around 60 days, but thats really when you build.
Your pipeline for the third quarter during the second quarter. So it was probably a couple of hundred million below what we thought we would have done in a normal course of business, but because of the low in the market of pandemic that kind of impacted us in the third quarter, it's kind of interesting that Penn.
Demand is now catching up in the fourth quarter. So.
I would say.
[music].
The majority of it was pandemic related and then Theres always a little bit alone Summertime anyways just people go away.
Well.
Now locked themselves in their houses.
But there is typically less demand in the summertime, but mostly pandemic related.
Okay got it thanks guys.
Thank you that was our final question I will now return the call to management for any closing comments.
Thank you everyone for taking the time today, we certainly appreciate it.
Where additional resources about what we covered on today's call you can view or an investor presentation, which is located on our investor relations portion of our corporate website.
Overall, we're pleased with our results and we look forward to speaking with you next quarter. Thank you again and have a great remainder of your day.
Thank you for participating and first foundations third quarter 2020 earnings Conference call. You May now disconnect your lines and have a wonderful day.
[music].