Q1 2022 First Foundation Inc Earnings Call
[music].
Greetings and welcome to the first Foundation's first quarter 2022 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 questions. Following the presentation.
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Speaking today will be Scott Kavanaugh, first Foundation's Chief Executive Officer.
Kevin Thompson, Chief Financial Officer, and David the Pillow precedent 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.
[noise] are made subject to the safe Harbor statement, including todays 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 the reconciliations of non-GAAP financial measures see the company's filings with the security and Exchange Commission and now I would like to turn the call over to Scott Kavanaugh.
Hello, and thank you for joining us we would like to welcome all of you to our first quarter 2022 earnings conference call, we will be providing some prepared comments regarding our activities and.
Then we will respond to questions.
Let me start by saying a few words about how proud I am of everyone at first foundation the.
The results we reported today are a testament to the hard work from everyone in our organization.
Past few years have posed some interesting challenges for everyone and yet we continued to generate strong sustainable results quarter after quarter.
This was another great quarter for first foundation.
Fantastic start to the year.
Our earnings for the first quarter were $30 8 million or <unk> 55 per share. This represents a 38% increase over the first quarter of 2021.
Total revenues were $89 9 million for the quarter at 36% increase from the first quarter of 2021.
Tangible book value per share ended the quarter fire and $15 and 21, we.
We declared and paid our first quarter cash dividend of <unk> 11 per share, which we increased last quarter. We also received authorization from our board of directors to purchase up to $75 million of company stock.
The favorable results, we reported today reflect the strength of our institution and our continued positive outlook that our marker model is working very well across the diverse and dynamic markets we serve.
Loan originations continued to be at near record levels with $1 1 billion in new loans for the quarter.
42% of those originations came from CNI.
Mpa's remained low at 16 basis points for the quarter as our lending team does a fantastic job maintaining our high credit standards.
We have established a well balanced loan portfolio that continues to perform very well Dave will touch more on this later in the call.
Deposit profile remains attractive with core deposits at 99% of total deposits.
Deposits increased by $146 million in the quarter and our loan to deposit ratio was 88% at the end of the quarter driven in part by our ability to continue to attract high quality commercial clients.
All of this speaks to the strength of our deposit team.
Our wealth management and trust has continued to provide meaningful contributions to the success of the firm.
Assets under management ended the quarter at $5 5 billion largely due to volatile market conditions in the first few weeks of the year yet rebounded in the last 30 days and to start the second quarter. The all weather portfolios, we manage for our clients fared well.
Yeah.
As the 4% decrease in total asset was less than the 5% decrease in the S&P 500, and the 9% decrease in NASDAQ.
An important part of our wealth management offering.
Our in house investment management capabilities and prayer proud to share that the performance of our mutual funds has been very strong with our total return fund, earning a morningstar five star rating and coming in as a top percentile performing fund for the year.
Even amidst all the volatility and changing market conditions, our pipeline continues to be strong and the demand for our wealth management services is at an all time high.
Last quarter I referenced the many projects we are working on including the acquisition of first Florida integrity Bank, which will be complete when we take the final step of converting our core systems. In May This has been a tremendous effort by the team and I'm So grateful for.
Everyone, who has worked hard to make this happen, including all of our new colleagues in Florida.
We are also now just weeks away from opening the doors of our new branch in Plano, Texas, starting in de Novo branch is never an easy feat, but again our team did an amazing job and we're really pleased at how it turned out it was very exciting to have a retail presence in taxes.
Even as many of these projects near completion, we continue to invest in technology for the benefit of our clients and to enable our employees with solutions they need to meet client demand and provide exceptional client service. We are also investing in our compliance efforts.
Including adding people and systems to ensure we continue to exceed the expectations of regulators and our average changing environment.
In addition to expanding our footprint, adding to our technology stack and the building out of our teams. We have also expanded our product offering. This includes our recently revamped SBA lending offering our expanded investment management offering and of course our efforts.
With Fiserv and 90 day to bring midpoint into banking.
These additional high quality financial solutions, our enhancement to our already robust offering and are important as we deepen relationships with existing clients. Many of our clients turn to us for a variety of their financial needs, especially when we are viewed as their primary.
Bank of choice when it comes to their financial life.
As we look ahead to a rising rate environment, and perhaps even a transitioning economy first foundation remains well positioned with a strong balance sheet and excellent credit demand for our services is at peak levels and our pipelines across all business lines are very.
<unk> robust I'm very grateful for all that we've accomplished in the quarter and 2022 is off to a great start now I will turn the call over to Kevin Our CFO .
Thank you Scott.
Earnings per diluted share was <unk> 55 in the first quarter.
The return on assets was strong at $1, one 8% with a return on tangible common equity of 14, 7% as.
As a result of this good momentum our tangible book value per share increased to $15 21 in the quarter. These.
These were especially good metrics, considering our first quarter generally has higher compensation expenses related to payroll taxes and bonuses.
And we are carrying some duplicate merger related expenses until systems conversion in the second quarter.
The net interest margin contracted 17 basis points to 3% in the quarter because of high average cash balances.
The success, we have had in increasing core deposits and from the acquisition of T. J, our financial we have already begun to deploy much of that liquidity with our strong loan growth that continues into the current quarter.
We maintain discipline in loan production with the average yield on loans, increasing four basis points to 384%.
At the same time, we were able to maintain our cost of deposits at 15 basis points for the quarter.
We transferred $917 million of available for sale securities to held to maturity during the quarter. Since we have the intent to hold these securities through maturity.
Credit metrics remained strong in all of our loan portfolios and the allowance for credit losses for loans decreased slightly to 44 basis points of total loans. This decrease was primarily a result of the payoff of a purchased credit deteriorated loans from specific reserves.
From prior acquisitions non.
Nonperforming assets remained low at 16 basis points to total assets.
Asset management fees were strong with revenues of $10 2 million and our advisory and trust divisions achieved a combined pre tax profit margin of 21% in the quarter.
Assets under management at FFA ended the quarter at $5 5 billion, while trust assets under advisement of Ffbe were $1 3 billion.
Other income included a $1 1 million gain related to a sale leaseback transaction. This item is excluded from our efficiency ratio.
Our noninterest expense increased due to higher compensation and benefits expenses, mostly related to a 25% increase in average FTE as a result of our acquisition in the fourth quarter.
Also contributing were merit increases that were effective at the beginning of the year.
As I mentioned earlier, our first quarter generally has seasonally higher compensation expenses related to payroll taxes and bonuses.
Finally until we finished systems conversions of our recent acquisition in the second quarter, we are carrying extra costs associated with duplicate systems and sub some head count.
<unk> ratio for the quarter was still strong at 53%.
I will now turn the call over to David the pillow. Thank.
Thank you Kevin.
Indeed, a very successful start of the year for first foundation.
As Scott mentioned, we originated $1 1 billion in loans in the first quarter another incredible quarter of loan production for us and the most we've ever funded in the first quarter of the year.
Our commercial business lending accounted for a solid 42% of originations in the first three months of the year, we funded $482 million in C&I loans, which represents.
19% increase in C&I loans compared to the first quarter of last year our.
Our ability to continue to diversify our loan portfolio without compromising credit quality is a testament to our entire team.
49% of our C&I loans in the quarter were just from a commercial revolving lines of credit, which continued to be a focus of ours over the past few years and shifting the balance sheet to more rate neutral.
Gaining C&I originations were comprised of $125 million of commercial term loans.
$76 million of public finance loans $28 million of equipment finance loans and $15 million of owner occupied commercial real estate loans.
As a percentage breakdown of our composition of our loan originations during the quarter.
As follows.
Marshall, 42% multifamily, 48% single family, 5% land and construction, 2% and 3% in other way.
We accomplished this without changing our high underwriting standards and the loan pipeline remains very strong heading into the second quarter. In addition, it is worth noting that even with a high level of originations in the first quarter, we achieved a rated.
Interest rate of 336 on originations compared to 338 in the fourth quarter are only a drop of two basis points.
We will start to see additional yield on loan originations going into the second quarter as our rate locked pipeline funds out and we start funding loans at higher yields as long into the curve has continued to rise.
As of March 31, our loan portfolio balances held for investment consists of 42% multifamily Tony.
29% commercial business loans, 9% non owner occupied commercial real estate, 12% consumer and single family, 2% land and construction and 6% of multifamily loans held for sale.
Of note our commercial business loan balances increased approximately 56% year over year, which reflects our continued focus on commercial banking and our pipeline is very robust due to market conditions.
So noted that our lending activity across our new markets are gaining traction as we originated $84 million of loans in the quarter in Texas and Florida combined.
Both of these markets now make up a combined 17% of total loans and.
And we see great potential going forward.
The diverse composition of our loan portfolio, coupled with an increasing diverse geographic makeup positions us well.
Well for changing economic conditions for a bank of our size, we Avenue credibly diverse geographic footprint that should benefit us as we are able to pivot.
Towards focusing on geographies that are experiencing greater potential for growth.
It is the case for right now for Florida and Texas.
As we look ahead.
And our pipeline and loan portfolio, we are evaluating economic attractiveness of continuing our systematic third quarter loan sale.
Well they have been an important part of our business model in years past, we have elected to defer that sale for now and are contemplating a potentially more attractive strategy of allowing our loan balances to grow.
Given our size and current market conditions, we believe that it would be a greater economic benefit by <unk>.
Creasing.
On the loan portfolio.
<unk> rather than conducting an agency sale.
That said, we will continue to keep our options open for future sales.
<unk> business also experienced a strong quarter with an increase of $146 million during the first quarter of 2022.
To end the quarter at $9 billion, which reflects a 2% growth over the last quarter and a 43% increase compared to the first quarter of 2021, the $146 million of growth in deposits. During the first quarter of 2022 included increase in commercial deposit service group of $27 million retail branch dip.
Positive of $145 million offset by a slight drop on our online banking deposits to $26 million.
It is also worth noting on our deposits held steady at 15 basis points and our loan to deposit ratio ticked up slightly as we have started to deploy our excess liquidity into loans.
All of this success in the quarter could not have been achieved without the great team. We have in place I am so grateful for their dedication and hard work at this time, we are ready to take questions I will hand, it back to the operator.
Thank you Sir at this time, if you would like to ask a question. Please press star and one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing the pound key.
Thank you. Our first question is coming from David Feaster with Raymond James.
Hey, good morning, everybody Hey, David.
I just wanted to.
Follow up on the commentary about.
<unk> maintained and not.
And not doing the securitization, then and holding that on the balance sheet.
Could you just talk through some of the strategy there.
And then your ability to continue to maintain the deposit growth to fund I mean, what do you guys have done on the deposit side has been phenomenal, but how do you think about your ability to continue to fund strong organic growth, especially as you hold another 500 million each year on the balance sheet sure.
I'm going to take the loan side.
Yes.
The interesting part about.
Our last.
Economics on our loan sale was at a record level I think it was four five points, but we started to do analysis prior to that at the same or does it really makes sense for us to just maintain loans versus selling them into the market and as you are aware on an agency.
Sale, we do get the benefit of the one time gain but we do have to hold.
Risk based capital throughout the life of those portfolios and in a sense.
If we earn say on average historically.
<unk> percent on sale.
Are we better off holding 3% plus and our net interest margin going forward and the obvious answer is yes.
Yes, because on average those portfolios have a.
Call it around a three year average life, our securitization average life has been about three and a half years, so rather than a onetime gain we can gain that spread income will diminish us a little bit within this year of not having that gain but next year, we'll have that additional spread income.
So we've been evaluating this for quite some time.
We will continue to strategically sell.
Our whole loans into the market, which doesn't have the same capital.
Issues that we face on a risk based capital for doing a agency level securitization, but.
This was something we had been contemplating and certainly the gain on sale.
In this environment would be significantly less than what we saw in prior years. So at this point.
Gone principled stand on that and whether we do it in the future again also depends on issues like funding.
But with the overhang of cash we've we've had and the ability to go out and collect deposits.
Given the CPR on the portfolio, we don't see any near term funding constraints that will.
Make it less profitable for us to hold those on our balance sheet.
Yes, I think were of a size.
David.
We all concluded.
If you recall part of it was.
Loans to capital our multifamily to capital ratios and then our ability to outstrip our clients were outstripping our ability.
And Thats kind of why we were doing that securitization wherever the size now that we don't think we really need this.
On the deposit side I would say that if you recall I think glass.
<unk>, we talked about the fact that we had been when interest rates were zero.
<unk>.
We had a loans to deposit ratio that was in the low eighties.
And that overhang was was hurting them and we actually had to constrain some of our larger clients either by saying, we can't take more deposits or we were tearing their relationships. So as Dave just said I don't think were going to have any issues there.
We believe that.
There is levers that we can pull that will.
Allow us to take and greater deposits, even go back to some of our longstanding client relationships.
I think we feel pretty good that we can meet that demand.
That Dave just referred to.
That's great and then kind of just thinking about how that might translate into the margin.
Obviously, the liquidity drag have weighed on the quarter.
You guys have been active managing the balance sheet and deploying that excess liquidity and with accelerating loan growth already above.
You guys have done in the past given that you're going to retain those I guess, how do you think about.
The margin as we look forward.
And whether I guess this would obviously it seems like it's going to be the trough and that we should see expansion going forward and then just any thoughts on updated rate sensitivity in light of some of the balance sheet moves that you've made with TG RF.
Yes.
I would say you got two things going on right now.
Yeah.
<unk> is going to increase rates here in the next week or so.
All accounts are that it's going to be a 50 basis point increase that's going to put a constrain on any bank that at some point client relationships are going to come back and start to demand or request that their interest rates be taken up.
That being said one of our biggest issues.
As always been in the last year or so we've had such an excess.
Liquidity that we have.
That has hurt our margin.
As Dave just mentioned.
Loan demand is still incredibly strong we're putting it to work I think we started the.
Our ended the last quarter to 82% or 83% were at 88 at the end of this quarter.
We hope to even have a higher loans to deposit ratio.
But Dave do you want to talk too sure.
The loan side and how the yields.
Where you expect to say yes.
Thanks.
Looking at looking at our NIM like you say this should be the trough as we deployed a significant amount of cash.
And we will continue through this quarter.
Will rebound I think we will have a nice rebound in the second quarter and maintaining that margin going forward.
As you know.
The Big issue is the good news for US is the long into the yield or middle to long into the yield curve at adjust relatively early so as we have burned through our our lower yielding pipeline since start to fund out at higher rates in many cases on average probably a 100 basis points.
Fire than what we're doing.
In the last several quarters.
We're going to start to see the effect on that on maintaining and potentially expanding margin.
So having a very robust pipeline.
At higher rates and continuing to build that pipeline at higher rates.
Well, hopefully offset any pressure, we see on the funding side of the balance sheet, but as Scott says if the fed continues to move significantly.
And aggressively.
There will be.
Pressure and will all depend on what happens with the.
In the middle of the long into the curve, but the good news is we fund assets at such a rate, we're able to remix our portfolio yield.
I would say faster than most most banks account yes.
I'll add that in the last rate cycle deposit betas were quite slow as Youll remember it seems like the fed is moving very quickly and youre, saying that the bank liquidity decrease fairly quickly as well so the deposit betas in this scenario may move a little quicker than we've seen so.
So we have a bit of that headwind for all banks I think competition could remain tight as Scott mentioned and then also depends on how the bond market Digest these rate increases and how the yield curve looks and how this will perform but we are we have trended slightly more asset sensitive we're still slightly liability sensitive.
In the first year, and then asset sensitive in the second year and are in our kind of scholastic academic modeling.
Okay. That's helpful. And then you guys are working on a ton of really exciting things I was just hoping that you could maybe expand on some of the new offerings that you talked about the prepared remarks with the SBA and the investment management, what exactly are you working on there and then just any updates on the <unk> partnership and where we are with that rollout.
It's obviously gone well you've already written up that investment, but just curious as you've gotten deeper in that partnership are you starting to identify other opportunities and seeing any additional benefits from that relationship.
Hey, you know what I'll take the SBA.
Sure.
Yes.
Bank strategically.
<unk>.
<unk> been involved in five of 470 <unk> lending for the last I would say five or six years.
But growing that to a larger more significant footprint is already spend aspirational for us.
Because of some merger related.
Issues that were going on there is.
Some available resources in the market.
We were able to take advantage of so we opportunistically are hired.
Our new head of SBA production and are adding additional sales force to expand those offerings across our entire footprint and really.
Our Florida operation never really had a.
Buyable option.
Certainly havent really exploited that in Texas, and and we're now expanding that in California, So we see that as.
Okay.
Significant.
Growth area for us within our sweet commercial suite of products.
On the front of.
Expansion of our what we would consider more of our Fintech initiatives. The NIAID relationship obviously has a significant and important for us to prove out the concept that <unk>.
<unk> can be facilitated through traditional bank rails.
Not necessarily in a less secure environment that.
The majority of those transactions are happening today.
We are very close to achieving our rollout on that product we are working with our regulators to make sure they're comfortable in.
Kind of coming to the finish line on that but there is.
Given where our platform is and given our strategic relationship with our core provider. There is significant opportunities not only on the deposit side, but additional fee income side that we continue to explore with them.
That is heavily focused on providing services to fin techs that are out there that are really looking for strategic bank partnerships and.
That that market is very robust deep.
And it's very exciting so we're kind of looking beyond just the crypto world and are exploring a lot of opportunities that.
There's very few banks that are really taking advantage of it today.
We feel thats going to be a great growth area for us going forward.
On the investment management front.
David.
We have added.
Our first employee.
As it relationship manager in Florida.
We have also successfully received our trust powers in Florida.
I think our branch here in taxes opens in less than two weeks at this point.
Our employees are going through training right now.
And the final of getting that launched at which time, we will be seeking trust powers and taxes.
So I believe we're about to onboard our first trust relationship in Florida.
And we received.
Quite a few.
Our request.
<unk> proposal on investment management.
And.
Every one of those leads has come out of first Florida integrity or T Jr.
So we're highly encouraged by.
Sure.
That relationship that we've already got working with with the folks in Florida.
So we're off to a great start.
Being able to do ancillary.
Business, both on the investment management and trust side.
And by the way when we did all of the modeling of of <unk>.
Our two companies coming together never did we contemplate having any of those relationships in place nor would it have an impact monetarily.
<unk> only further adds to the benefit of having done that transaction.
That's great great color everybody. Thank you.
Thank you Dave Thank you.
Thank you. Our next question will come from Matthew Clark with Piper Sandler.
Hey, good morning, gentlemen.
Good morning.
Maybe just to close the loop on.
The loan and deposit growth.
Yes, I guess I'm trying to get a sense for what youre budgeting in terms of deposit growth for the year, obviously trailed the strong loan growth. This year. It sounds like the pipeline is pretty strong as well and you've got some flexibility to take a loan to deposit ratio up further but.
I'm trying to get a sense for.
How youre thinking deposit growth might come through for the balance of the year.
Final Matthew because frankly the reality is.
We have been curtailing deposit growth because we've had such an overhang of deposits.
Last quarter I believe very close to it on average we had about $1 billion two of excess deposits, which was a lot that day.
They needed to put to work in and we're going to wind up putting it to work but.
It's one of those things at the same time, where you've got the fed increasing rates in all of those things going on.
Right now, we're kind of turning the spigot back on but we also don't want to be at 80% loans to deposit ratio.
It has had a dramatic effect on our net interest margins.
One of the other.
Issues, we faced in the first quarter is typically our seasonal runoff.
Lot of our large relationships. So the fact that we even had positive growth in our commercial depository services. This is a testament to <unk>.
Rich those relationships are usually that's a negative.
During this time of year.
So going into those balances will start rising and well be available to offset some of the excess funding that we contemplate going into the second quarter, so but she always.
Have noted.
Our ability to generate assets has never been an issue our ability to maintain it.
Deposit growth has always been our biggest issue and it will continue to be.
Our biggest challenge going into this increasing rate cycle, however, having no real wholesale exposure.
Unlike years past and having.
Solidified.
Our presence in the commercial deposit side of the business over the last several years has really put us in a position for large scale growth and the deposit side that we can as Scott had mentioned, we can moderate and temporary as needed. So we feel good about.
Even with that.
Our expectations of even a much higher fundings.
And lack of appliance sales, we feel good about our ability to keep our deposit growth somewhat commensurate.
To your point, yes.
To your point, we were 90, where 99% core funded right now in the last cycle of high interest rates, we were at 70% core funded and having to borrow on the margin. So I think to your point, we're in a much different position than we were.
The last time around and we have a different luxury that we just didnt have last time.
Yeah.
Yes, okay great.
And then just on expenses, maybe for Kevin does seem like there is some excess in there.
And seasonality that should come out in the upcoming quarter, you got cost saves to from the deal.
Right.
$44 $45 million.
Seems like the right run rate going forward, but I wanted to make sure I'm kind of in the ballpark.
Yes, some expenses are seasonal and there are excess expenses from the <unk>, probably about $1 million or so from the merger and this quarter. However.
You do need to anticipate that we will have growth going forward and as for expanding quickly.
We will have growth both in our production areas as well as our support areas to support to support this growth engine. So we do anticipate our expenses increasing.
Through the year, but our efficiency ratio remaining in the low 50% area.
Okay. Okay.
Yes.
And then Kevin while I have you just trying to hone in on our core margin.
Jeff and I know the accretion contribution in the quarter from the deal if any.
And any other kind of unusual recoveries or anything like that that might.
And hence that reported margin yes.
Yes, you bet the accretion income in the quarter was 330000.
And of course, we talked in the release about the sale leaseback benefit of $1 1 million.
We had a an MSR adjustment down of about 200000.
Those are all the unique item that would be gone through.
Our margin Oh, not through Mark Youre talking margin I'm sorry.
That's okay I'll take those I mean, we got the we got the one one but the 200 than helpful.
Really if youre just talking margin I apologize if I misunderstood your question it really just be the accretion income.
The recovery.
ACO that's right.
Okay, and then Scott just on M&A.
Discussions of late and the prospect for maybe getting something done in Texas to kind of provide you that infrastructure that you might need.
Yes, while we still continue to look in areas across the country.
I would say that every bank stocks has gotten beat up a little bit.
It seems like it's gotten a little quieter there was quite a bit of activity. When I think all bank stocks were trading higher.
But a lot of that has tailed off.
Sure.
Right now.
Im not hearing much out of taxes.
But we continue to look across Texas, Florida, California anywhere that we think would be additive and we continue to focus on so.
We're looking for opportunities but.
Our.
Stock value has depreciated, a little bit relative to tangible book value.
So I think that may be creating a bit of a muted scenario for M&A.
Understood. Thank you.
Thank you. Our next question comes from Steve Moss with B Riley Securities.
Hey, good morning, guys.
Okay.
Maybe just circling back to Dave to your comments about loan yields here.
<unk> up about 100 basis points was that across the board or are more specific to multifamily.
Commercial real estate, just kind of curious there.
I think it's.
Kind of an average of 100 basis points is really across all product lines.
So.
Multifamily was in.
The low threes.
And that's now in the low to mid fours depending on.
Where the yield curve is day in and day out but.
We have seen kind of a 100 basis points rise on it on new.
New pipeline.
Coming in and Thats pretty much been across the board.
The good news is.
With the rate increases coming in.
We are going to.
We get the benefit of that.
Segment of our C&I portfolio.
Kind of been sitting.
Lower base.
At a fairly low rate so.
But I would expect.
Kind of on average.
About 100 basis points higher on new new funding coming in.
And that will start in the latter part of the second quarter as we can.
Gradually worked through the rest of.
Some of our lower yielding pipelines.
Okay. That's helpful and just maybe on the variable rate just kind of curious what.
What percentage of portfolio, we've seen a large chunk of the C&I portfolio is variable rates kind of what percentage of total loans, perhaps as variable rate. These days.
<unk>.
Last time I looked I.
Thought it was 19%, yes, $17, 19% that's right.
And thats been increasing.
But yes, it's about 19% currently.
And that excludes <unk>.
Those loans that have a fixed period, yes.
<unk> translate into variable over time and in this rate environment, we will probably see more of those graduate to the variable period over time.
Okay. That's helpful. And then in terms of originations here, obviously very strong quarter here just kind of you guys indicated pipeline strong just kind of curious any updated thoughts as to how youre thinking about total originations for 2022.
Well.
First quarter was stronger than expected second quarter will be.
Our stronger than expected.
Third quarter.
We will probably be a little bit of an adjustment period one is.
Clients get used to new rates and we go through the normal summer time, So, we'll probably see that kind of dipped to kind of historical levels and then we expect fourth quarter will probably.
Typically is our strongest quarter so.
At this point.
Looking at.
$4 5 billion is probably a low end for us.
For the year.
The current run rate so.
But based on current demand we just.
Could be could be higher.
Alright.
On the wealth management and trust side of the business.
I hear you guys in terms of good asset generation here.
Curious is this a good run rate.
For the fees there if there was anything onetime in nature.
So I think the fees on average are still between 60 and 65 basis points.
That's always a reasonable measure I think in terms of how you look at things.
Obviously the markets have melted down.
And that has in fact is our absolute balances.
Not necessarily on the trust side near as much as on the.
<unk> side.
Our pipeline still remains robust but.
I think if I were to look back at past times, where the markets have had pretty big Downdrafts.
We go from.
Being trying to bring in new business and we're always trying to do that but there is also a real emphasis.
On Colombia clients.
You know on the fact that the markets are down 10%.
So.
We spend an extraordinary amount of time.
I'm trying to say I guess is when you look at <unk> in normal times.
There is a lot you are able to spend a lot more time.
Focusing on generation of new assets in a time like this you are probably spending an equal amount of time.
Conversing with clients that <unk> had for years.
Just trying to.
Talk them through what the markets are doing they've done an incredible job and they put out a lot of commentary.
Walking through whats going in the marketplace with clients, but.
That's why you see the decline from five 7% to five five and then recently in the start of this quarter, there's been a downdraft again, but that being said were still adding a fair amount of new business, but we're also wanting to make sure stuffs.
Stuff's not going out the back door either.
Okay, great. Thank you very much for taking my questions. Thanks Casey.
Thank you. Our next question comes from Gary Tenner with D. A Davidson.
Thanks, Good morning, Hey.
Hey, Shlomo.
Want to ask on the SBA initiative are you thinking of that as a flow business for gain on sale or is that going to be more of a portfolio.
As you grow that.
So we've modeled it.
Kind of what you would traditionally see which is.
A little more sales as we build it.
So maybe 50% in the market.
We curtail it after a year or so back down to about 25% going to market, but.
After I think three years.
The majority of it will be retained so the way we look at it as we want it not to be an earnings drag as we build it.
And.
Having a little bit of gain on sale offset some of that operational cost.
Which.
We will kind of get us to that net profitability fairly quick and then we'll start curtailing the sales down and use it more as a traditional portfolio product.
That makes sense yeah.
Yes. It does thank you.
And then two just on.
On the on the.
Annual excuse me the annual securitization that that youre not going to do this year.
Did I hear right that even if you securitize it and I didn't realize that you have to actually allocate.
Capital to it for the life of the asset even after you securitize. It so there's not really an impact other than not getting the upfront gain.
That's correct.
Correct.
And we do if we do whole loan sales.
The market.
We don't have to hold requisite capital. So if we do some.
More timely sales.
If needed.
It won't have any impact on risk based capital.
Going forward.
Okay. That's helpful. Thank you and then my last question on my end.
You talked a little bit about expenses.
Can you talk about a.
Customer service costs.
As you know, we're getting obviously or what we think is pretty obviously frontloaded rate hikes is there a kind of quicker and steeper inflection on that line item.
As rates go up.
Yes.
Got it.
<unk>.
While we experienced some of our larger clients expect more of a fed funds tied relationship so as the fed moves.
We have.
Our model then that we're going to move somewhat commensurate.
Some of the the average relationship will lag fairly well, but some of the larger ones don't.
So we have.
Modeled in some.
Higher betas on.
On some of the bigger clients. So our expectations are that line.
The line item will grow over the year.
Do you.
We don't really.
Give model guidance on that we don't but its definitely these are more sophisticated clients with a higher beta than others won't be 100% beta.
We still have good relationships, there, but expect a higher beta.
The good news is that.
Compared to wholesale funding.
If we have higher betas that it'll be much cheaper source of money.
Okay.
But even if you don't.
Provided specific detail can you give us kind of the amount of deposits that are kind of reflected in that line item that we could model whatever deposit beta assumptions will be watching or pass through assumptions.
Typically.
Yes, typically what we it's been around $1 billion.
Funding that we've kind of had higher sensitivity to.
So you kind of drive it at that.
Alright, thank you.
Once again, if you would like to ask a question. Please press star and one on your Touchtone phone.
Our next question comes from Andrew <unk> with Stephens.
Hey, good morning, good morning, Andrew.
Hey, just back to the last point on customer service costs, I think I heard you about $1 billion or so of deposits.
You had kind of pay expenses that line item is that relatively similar to I guess the balance back in 2018 2019, maybe we could use that as a proxy.
Yes.
A little bit higher at this point back in those days.
Those core relationships.
<unk> I think it was about even.
Okay.
Got it alright.
And then I wanted to ask one just a follow up.
75 million buyback authorization.
It sounds like the growth outlook is really robust I guess with that in mind should we view the buyback thats more of just kind of nice to have out there to take advantage of any kind of volatility or.
Maybe Scott could you just speak to the appetite for maybe getting more active in the buyback at these levels.
Yes, well.
Just on our modeling, which was done higher than where the last time I look that we were trading we felt that it was very accretive.
To earnings.
No.
Did the sub debt offering we have some excess capital.
All along felt.
That we trade at last multiples compared to our peers.
And we're prepared to defend and.
Yes.
I think it becomes very additive so.
We want to.
Just say look were.
Yes, I think it will be active.
As long as the stock price tends to be at this level or lower so.
We are prepared to act on it.
What we're going to do.
Okay.
Helpful. I appreciate it.
Last one maybe for Kevin just any updated expectations on tax rate for this year.
Yes, you've seen we've had some really good benefits in our tax rate over time as we have growth outside of California, We will see.
Tax rate decrease we have other strategies going on increasing our low income housing tax credits, we have our new fully portfolio, we inherited from our acquisition.
And there.
There are other strategies that we have and are working on but the.
Biggest driver is loan growth outside of California, and we are seeing that in our pipeline. So we will see it tick down it won't be a huge moves but over the next several years, we will see it gradually move down.
Okay.
That's it for me. Thank you for taking my questions.
Thank you. Thank you.
Thank you. This concludes our allotted time for today's question and answer session I will turn the call back over to Mr. Scott Kavanaugh for closing remarks.
Thank you again for participating in today's call very proud at how we've started this year all our business lines are doing exceptionally well and I'm very pleased about our ability to generate strong and stable results for our stakeholders. As a reminder, our earnings report and Investor presentation.
<unk> can be found on the Investor Relations section of our website.
And have a great remainder of your day.
Thank you ladies and gentlemen. This concludes today's event you may now disconnect.
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