Q2 2022 First Foundation Inc Earnings Call
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Greetings and welcome to first Foundation's second 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 your questions. Following the presentation.
If you would like to ask a question at that time. Please press star one on your Touchtone phone.
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Speaking today will be Scott Kavanaugh, first Foundation's Chief Executive Officer.
Kevin Thompson, Chief Financial Officer, and David to Pillow President.
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 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 company's filings with the Securities and Exchange Commission.
And now I would like to turn the call over to Scott Kavanaugh.
Good morning, and welcome.
Thank you for joining our second quarter 2022 earnings conference call.
Today, we will be delivering some prepared remarks, highlighting our activities and accomplishments this quarter at the conclusion of the prepared remarks, we will open the line for questions.
Quarter, we delivered strong results as our business model continues to perform well.
Our earnings for the second quarter were $33 3 million or <unk> 59 per share, which represents a 7% increase over the first quarter of 2022.
Total revenues were $95 2 million for the quarter, a 6% increase from the first quarter of 2022, and a 32% increase year over year.
Our tangible book value per share ended the quarter higher.
You're at $15 61.
We also declared and paid our second quarter cash dividend of <unk>.
<unk> per share.
As you're well aware there are a lot of headwinds facing our industry and the economy right now yet each of our lines of business.
They need to perform well and we have contributed in meaningful ways to this quarter's results.
Our strong financial performance is a testament to the dedication of our employees, who continue to deliver across all areas of the company.
And also with a demonstration of the quality of our clients and our pipeline across banking welcomed.
Wealth management and Trust services.
We continued to strategically build upon our growth story.
Our organic opportunities, while we also capitalize on our recent M&A activities.
Furthermore, core deposits continue to increase so that we remain largely self funded a strategic advantage in the current environment.
The favorable results, we reported today reflect the strength of our institution and our continued positive outlook that our business model is working very well across the diverse and dynamic markets we serve.
Loan originations hit record levels.
Two 2 billion in new loans for the quarter, a truly remarkable feat.
Another highlight in the quarter.
Our impressive balance sheet growth.
You expanded from $10 4 billion to 11 point Tuesday.
We would have even been greater have we not put our excess cash to use.
N P AIDS continue to remain low at 15 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 that later in the call.
Our deposit profile remains diversified and attractive with core deposits at 99% of total deposits.
Pause, it's increased by $581 million for the quarter driven by our ability to continue.
To attract high quality clients from online retail and commercial channels.
All of this speaks to the strength of our deposit team and the attractiveness of our offerings.
Our wealth management and trust business continued to provide meaningful contributions to the firm and had been successful in retaining existing clients and attracting new ones.
Under management ended the quarter at $4 8 billion largely due to market conditions.
Janssen the first months of the quarter.
The all other portfolios, we manage for our clients performed well with respect to their benchmarks, even as the S&P 500, and nasdaq's all significant declines during the quarter. It is times like these that our investor clients safeguard by its more than ever we are actively working.
Each one of them.
We.
<unk> expanded our wealth management and Trust trust offering into Florida with the addition of talented new team members and we are pleased that the initial results we're seeing.
As I mentioned in the past.
Excellent market from private wealth management services, we also secured trust powers.
In both the state of Texas, and the state of Florida, which will allow us to offer a full suite of trust services to clients in these important markets.
Looking more to our expansion efforts the final step in the acquisition of first Florida integrity Bank occurred.
Third when we converted our CT systems in May.
BARDA is now up and running on our industry, leading technology platform and we are successfully working with these new client.
Dave as we work to deepen these relationships and acquire new ones.
Did that and we have already begun discussions with many of our Florida clients and have an uncovered additional ways. We can support them whether it is through additional banking services or wealth planning investment management Trust services.
It's been a tremendous effort by the team.
I am so grateful for everyone, who has worked hard to make this happen faster.
That's really all of our colleagues in Florida.
Texas continues to present them.
Unparalleled opportunity ports. It produces 9% of U S. GDP second only to California, as the nation's largest annual state population growth.
And in 2022, the number of businesses moving and the taxes are on the rise we officially opened the doors to our de Novo branch in the city of Plano, Texas.
Served as a valuable banking center center to serve clients and one of the most business friendly regions as we operate.
We expect great things from this branch and we are pleased at the warm reception, we have received by the community of Plano.
During the quarter, we also repurchased two $5 million.
Stock at a weighted average price of $21 per share management will continue to utilize this stock stock buyback option should it be warranted.
Also we continued to invest in technologies to enhance our operational efficiency, which is as important as ever as we expand and grow our team across multiple states and time zones.
In this tight labor market, we have taken additional steps to ensure our employees are engaged and thriving. This includes offering advanced training for our future leaders hybrid work setup for those who can work remotely ongoing employee recognition.
And constant bench benchmarking.
Salaries to ensure we stay competitive in our markets one of our best asset is our people and we strive to make first foundation and great place for our employees to call.
As we look ahead to a continuing rising rate environment.
And then transitioning economic cycle.
First foundation remains well positioned with a strong balance sheet and excellent credit quality.
Demand for our services is at peak levels.
Pipelines across all business lines are very robust.
I'm very grateful for all that we've accomplished in the quarter and the first half of the year.
I want to conclude my opening remarks by saying how pleased I am with the entire team at first foundation.
I have a group of talented and dedicated professionals, who are very committed to serving clients and building a valuable business. We also have amazing clients, who entrust us with their financial wellbeing.
It's truly an honor to be able to lead this organization and.
And now I'll turn the call over to our CFO Kevin Thompson.
Thank you Scott.
As mentioned earnings per diluted share was <unk> 59 in the second quarter. The return on assets was strong at 124% with a return on tangible common equity of 15, 5% today.
The net interest margin expanded 18 basis points to 318% in the quarter. The NIM increase was driven by our strong loan production as we utilize our excess liquidity and by an increase in the yield on interest, earning assets, which expanded to three 5%.
This was offset partially by an increase in our cost of deposits from 15 to 28 basis points as customer deposit rates have been adjusting to the rising rate environment.
Credit metrics remained strong in all of our loan portfolios the allowance for credit losses for loans increased by 339000 in the quarter to $33 2 million, primarily as a result of increased loan balances offset by the release of specific reserves related to purchase credit deteriorated loans from prior acquisitions.
The reserve ratio decrease from 44% to 37 basis points of total loans.
Our noninterest income for the quarter was $13 4 million driven primarily by wealth management revenues of $7 7 million $2 1 million in trust administration, and consulting fees and the balanced and banking related fees.
Our advisory and trust divisions achieved a combined pre tax profit margin of 24%.
Noninterest expense was $48 8 million for the quarter, which represents a slight uptick of two 5% from the first quarter.
Customer service costs increased by $2 $8 million due to increases in the earnings credit rates paid on the related deposit balances.
We saw a decrease in compensation and benefits, primarily due to merit increases and annual bonus and commission payouts that took place in the first quarter.
The efficiency ratio for the quarter was 57% with.
With strong expense management and the investments we've made in our infrastructure, we continue to realize benefits from operational leverage and efficiencies.
Finally, our effective tax rate for the second quarter was 27, 9% compared to 28, 4% for the prior quarter. We are just beginning to realize benefits from a tax strategy that should continue to grow over the next several years.
I'll now turn the call over to David the pillow.
Hey, Kevin.
Rob mentioned, we originated a record amount of loans with loan originations totaling $2 2 billion for the quarter, which is a 96% increase from the first quarter and a 98% increase year over year looking.
Looking at the breakdown of loans that were originated in the quarter. The percentages are as follows.
Commercial including owner occupied commercial real estate, 51% multifamily, 40% single family, 4% land and construction, 2% and 3% other.
Contributing to loan originations during the quarter, our commercial business Division funded a record $1 2 billion of new commercial loans during the second quarter of 2022, which is a 30% with 30% of those being adjustable commercial revolving lines of credit.
C&I originations included $518 million of public finance loans $289 million of commercial term loans $33 million of owner occupied commercial real estate loans and $32 million of equipment finance loans.
Large increase in public finance loans was driven by an increase in demand for bank loans away from the bond market by public municipalities.
Following dramatic interest rate movements in the second quarter.
We expect this increase in demand to be somewhat temporary given our unique positioning in the channel.
We anticipate heightened originations in this channel through July as we found out.
The majority of the pipeline and return to our historical run rates starting in August our public Finance Division has become a strategic component of our business originations.
Benefiting from credit quality with historically.
Loan losses.
So offering and ability to lower our effective tax rate over time, and providing a compelling tax equivalent return.
Looking ahead to overall loan pipeline.
We see continued strong demand.
Heading into the third quarter and onward blending channels.
It is always important to note that we accomplished this record quarter of originations without changing our high underwriting standards as our npa's fell to below 15 basis points for the quarter.
Speaking more specifically about loan yields we achieved a weighted average rate of 373% on originations.
Which increased from the first quarter that was 336%.
This quarter, we started to see the impact of higher rate fundings due to increases in the long end of the yield curve over the past few months.
As of June .
2022.
Our loans held for maturity consist of the following 44% multifamily loans, 35% commercial business loans, 8% non owner occupied CRE, 11% consumer <unk> loans, and 2% land and construction.
Our deposit business also experienced a strong growth.
During the quarter deposits increased by $581 million for the quarter, which is a six 5% increase from the first quarter and an increase of 34, 2% year over year.
Deposit growth during the second quarter of 2022 compared to the first quarter of 2022 was primarily driven by an increase.
$291 million or eight 8% in noninterest bearing demand deposits.
<unk> largely attributed to our commercial deposit service division and an increase in money market and savings accounts of $277 million or 10, 7%, partially attributed to our retail branch and digital bank channels.
Our noninterest bearing deposits accounted for 38% of our total deposit balances are.
Our loan to deposit ratio measured 98, 8% as of June 30, compared to 88, 2% as of March 31.
An 86, 6% as of June of last year. This represents an increase from historical low levels experienced during the past few quarters as we have successfully deployed excess liquidity, but still have a manageable ratio for a bank of our size.
The 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 and I'll hand, it back to the operator.
The floor is now open for questions at this time, if you'd like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that is star one to ask a question, we'll take our first question from Matthew Clark from Piper Sandler.
Hey, good morning, guys.
Good morning morning.
Maybe starting on the <unk>.
Margin.
Do you happen to have the spot rate on interest bearing for total deposits at the end of June .
What's your.
Expectation for the cumulative deposit beta for this cycle.
Scott I can take that first part the spot rate on total deposits dipped into the mid 30 basis point area near the end of the quarter.
Okay.
Yes, Okay and then.
Go ahead.
In terms of beta we are seen as you know an unprecedented increase in the rate environment 10 banks and bank customers are adapting very quickly to that so that.
We're the last rate cycle debate was quite slow on deposits, we're seeing the opposite this time.
Loans as you know take longer to get through a pipeline. So in the last cycle loan betas were much quicker than deposit betas in this particular cycle for all banks, what we're seeing is the opposite and we need a little time for the loan betas and catch up with those deposit betas. So we're seeing pretty good ex exactly Matthew is.
I don't think there's a bank in this country that has not happened in the rates raise rates.
Somewhat similar it's a very competitive environment.
Deposits and I've noted this and reading a lot of the reports that even you have stocked out that deposits have declined that many banks.
So.
Yes.
Expected that the fed will increase rates.
Tomorrow I believe is the next.
Fed rate meeting.
And we will meet shortly thereafter with the beta is off that.
Is anybody's guess.
But I don't think anybody has been through a cycle, where you've seen a 100 basis points or more.
Moons and less than 60 days so.
The answer is as deposit costs will go up by how much we're not exactly sure.
So.
Matthew.
We are benefiting somewhat from our consumer retail channel, especially in Florida, and some of our legacy branches. So those tend to move.
Slower than.
Certainly.
Money available on the margins as we continue to experience.
Large growth.
Marginal deposits will obviously be more expensive, but the.
Debates at our branch level are pretty consistent with what we see in the market.
Okay.
And then just switching over to the loan yields.
A little bit of an uptick, but a nice increase in the news.
Yeah.
Production in terms of rate.
Any update on <unk>.
Pricing in multifamily these days.
We should see kind of an acceleration in loan yields here beginning next year.
So.
The book of business is relatively large and even though we are starting to fund out at higher levels than we have historically, if you look at our current run rates.
It's significantly higher than what we've seen in the past.
That being said as you noted we did have some movement during the quarter on.
Our yields going up which was nice.
In June we were.
Getting close to that 4% number, but we were funding out a lot of loans that were rate locked in previous before that dramatic rate increase that we saw so we had to work through those portions of the pipeline.
Current rates on multifamily you've been averaging.
I'd say mid fours right now so.
About 150 basis points higher than what we saw as a trough when rates were significantly lower than our competition was close to 3%. We're at close to four five.
We will start seeing the benefit of that in the third and fourth quarter, but really that really starts to gain momentum going into next year.
As.
We see a larger portion of our overall balances.
So from that perspective.
So net net positive to us the other benefit we're seeing on <unk>.
Rate yields movement is certainly in our commercial book a lot of that is either prime.
Library, so per based and.
We expect to see also settling in in the mid to upper fours, depending on the business line and in some cases.
In 5% to 6% so.
The good news is going into the latter half of the year loan yields should be coming on at a significantly higher rate than what we've seen.
Certainly in the first half of the year.
Yeah.
Okay.
And to hear your loan yield was tracking close to four in June .
So.
Putting it all together is it fair to assume some a little more modest NIM expansion from here and try to hold the line.
With with new loan yields or excuse me loan yield expansion kind of mitigating or offsetting the to deposit increase.
So the way we have kind of seen it right now as you will probably have.
Maybe.
A little bit.
On the comps, but it should start to stabilize and then expand out so yes.
We've already told you we kind of operate in like the three to three and a quarter range.
Near term, we may see a little bit of.
Compression on that.
We're waiting for some of these newer loans.
Tom was just bad has to do it.
But the reality is I think you're fairly accurate.
Okay.
Great and then.
Yes.
Maybe for Kevin.
Can you give us what you're assuming for customer service costs in terms of dollars for this year full year and next year.
Yes, we have forecasted that and it depends on many factors what the federal reserve does another so I don't think Thats something we want to.
Give an exact number on but at the fed is moving quickly and we will find out next Wednesday.
This next move is and it's it really will be the telling factor we like other banks are seeing a strong deposit beta upfront in these moves and we will we will continue.
In this quarter you saw fed increase in mid May in June those still aren't fully baked into our customer service numbers is there is some impact to those and depending on what happens next week.
All of those will play out and we will see an increase in customer service costs over the year wont be 100% beta.
We still have good relationships with these clients we have technology, that's unusual for a bank our size that they couldnt find another banks. So we will manage it well and I think youll see it play out as we talked about in our net interest margin.
So, yes, I think the way we view it as.
When rates are lower efficiency ratio operates at the lower end of the spectrum.
When rates are higher we look closer to what our efficiency ratio would see at a typical commercial bank. So part of it's a trade off.
NIM versus G&A ratio. So we expect some near term pressure on our efficiency ratio over the next couple of quarters, and then I'll kind of subside as our balance sheet growth and earnings kind of lever into that but.
In the next couple of quarters, Youll, probably see it a little more impact certainly than we will see next year and beyond.
Okay, and then just any updated thoughts on the current run rate of noninterest expense.
In the third quarter.
Yes. So you saw that we had other than our customer service costs were actually.
As expected our down a little bit in the first and the second quarter first quarter is our seasonally high area. So we plan to most importantly, keep our efficiency ratio low for the full year to the low mid fifties.
And we will see some increase in that expense line as first of all with customer service, but also as our business mix is expanding rapidly. We do have some investments in employees and other things over time, but maintaining that efficiency ratio in the low to mid <unk> for the year.
Alright, thank you.
Our.
From an employee standpoint.
Trying to be very careful there in this timeframe to make sure that.
We don't want to expand.
Sure Hi, Jen to certain areas stuff that we had built into the budget.
From an employee standpoint or whatever.
Pushing those out if at all possible.
When it comes to compliance BSA those types of things, we will always make sure that.
We have the proper staff to manage that properly.
Yeah.
Our next question comes from Andrew Charles from Stephens.
Hey, good morning.
Good morning.
Yeah. So one congratulations on really phenomenal production quarter this quarter.
Just wanted to kind of get a sense of kind of across across business lines, where we're kind of new loan pipelines were at going into the third quarter and kind of your thoughts on how production volume should trend throughout the balance of this year.
Sure.
If you looked at our run rate in <unk>.
Backed out some of the bulge that we had for the municipal Finance group.
You would probably see a run rate that's closer to $1 billion $3 billion to $1 billion in it.
Run rate, which for US has put us on a run rate.
So effectively.
We're almost double what we've seen so the current pipelines continue alright, continuing to show.
Robust demand across all business lines, including multifamily commercial.
Even in some of our more.
More specific.
Smaller lines of business.
Equipment finance.
We are starting to see positive.
In fact from our SBA Division.
Kind of retooled out and revamped it in their pipeline is growing nicely. So.
We will have some benefit from.
Some smaller smaller balance C&I as well so.
Unlike.
Well, we've seen potentially in other slowdowns in the economy.
We expect that to be a little more consumer driven.
At least that's what the market's telling us based on activity.
Should have less of an impact on our commercial customers and the segments that we tend to.
On it as well as the multifamily and CRE sectors that we typically.
See a benefit.
And demand.
Various cycles.
What I would say is we expected a little more of a slow down as rates.
Moved up precipitously from where we saw but.
Given the market activity the demand is still at a very very high level.
Okay.
Great Thats encouraging.
And I guess, maybe could you could you speak to it sounds like still kind of positive loan growth trends could you speak to kind of the growth youre expecting on the other side of the balance sheet do you expect to kind of fully core fund.
This level of loan growth or.
Perhaps you kind of need to go to the broker market for funding in future quarters. Just can you talk to the deposit growth dynamics.
Well I think we have a pipeline that can hold up pretty well I will say that the loan originations that we put forth.
Two quarters in.
And definitely the third quarters trending very favorably as well.
Definitely put a stress on trying to make sure that we stay core funded.
That being said.
Our pipeline is pretty robust on the deposit side.
So I don't think it does.
It's time that we will need to go to the brokered market.
Is it.
If we did have two it would be minimal.
We have I would say.
Between.
Brian .
Livery.
Our online delivery our commercial.
<unk> deposit areas, it will probably keep us out of the higher costing broker market for a while.
Yeah, and as Scott said, there's big opportunities. Unfortunately in this the cycle marginal costs are more expensive. So we don't have the luxury.
Does have our large outsized growth.
Relying on.
Low growth low beta.
Environment, that's some some banks may experience however.
Profit is profit.
And we ran the models and.
We've looked at should we slow down growth or continue to grow on the margin and.
Even though it may have some metrics compression in the near term.
The forecast looks much more favorable to continue with the with a large scale growth.
Got it okay.
And we should still expect kind of no no securitizations this year.
No yes.
Not at this point.
Okay, Great I'll step back in the queue. Thanks for taking the questions.
Yeah.
Yeah.
Our next question comes from David Feaster from Raymond James.
Hey, good morning, everybody.
Good morning, David.
Maybe just I would like to get a sense of the competitive landscape that you see.
Obviously, you guys are taking share, but I'd, especially like to hear your thoughts on some of the newer markets in Texas and Florida. I mean, these are both highly competitive markets.
What are you what are you finding that your competitive advantage.
Allowing you to gain share both on the loan side as well as the new lender side sure.
Let's start with Florida.
Part of our focus has been to.
Refocused and remix some of their activity.
We're a little more heavily focused on non or non owner occupied CRE away from multifamily and.
They certainly add.
Footholds about equal foothold in the commercial business lending. So that continues year to date there are on pace to do about the same as what they did last year plus or minus but what we've seen as we've redirected our efforts and I think youll see in the latter half of the year debt.
There is a.
A strong demand for our multifamily product.
In the Florida as well as the Texas market.
Specifically in Florida, we're gaining good traction so we're seeing.
I would say significant pipeline growth on a relative basis.
Florida, So strong demand for that I would say.
The commercial business lending.
Is.
No more competitive than what we see in California, and some of our other major markets. So I think were given some of the tenure of the originators in the market that we have.
And the legacy of the bank.
We still see demand there. So I think we feel good about the fact that we're still seeing.
Good originations as we kind of retool and fold the organizations together because it does tend to create some level of disruption. So good positive activity there in Texas, it's been.
I would say equally as good as.
As favorable.
Actually all funded and year to date in Texas than we have in Florida, and I think that's a testimony to the teams that we've put in place and Theyre just starting to hit levels of strides. So that's been a little more focused in the C&I side of the business, but we still are seeing good.
Good demand and good penetration on.
Multifamily so.
We will continue to see.
Our product being successful in those markets, Texas is unique in the fact that.
The agencies came in several years ago with <unk>.
It's kind of the small balanced product and really started to gain significant market share and our product competes very well against the agency. So it's a model that we've seen across the country. So we've been able to kind of push our product into the market yet.
Good visibility and good demand for it.
Starting to see some of the fruits of that labor pay off so I would say net net bulk markets seem to be going in a positive direction and a lot of market acceptance.
Okay.
Through our pipelines the other day.
We kind of had some numbers of what Florida.
This low quality.
Yes, yes, I would say.
From a pipeline standpoint.
Scene.
Extremely good growth.
And those markets and the momentum.
Is certainly.
With over $100 million in each market.
Several hundred million dollars in each market is yes, yes.
Current pipeline, but that was just one channel alone so right.
Just wanted to flavor.
Okay.
We're actually seeing some decent Ann Rhoads.
And to both Texas and Florida.
That's great and maybe just kind of take it all of this growth commentary together I mean like this.
It sounds like this was not just a pull forward of demand that this is true core demand and market share gains could you just help us maybe think about how to think about net organic growth going forward just given the combination of new hires market expansion pipeline growth as well as expectations for potentially slow in payoffs and pay downs.
Just as we put all this together how do you think about organic growth going forward.
To be quite good.
David.
Yes, M&A is nice, but I think if you look back at the history of first foundation and you will see the transactions. We've done none of them have amounted to enough to really other than possibly first Florida integrity.
To really grow the balance sheet tremendously.
I think it's a real testament to our team.
So we have gone from a $1 1 billion dollar origination quarter to $2 2 billion and we have a third quarter, that's shaping up nicely.
If we did nothing but grow organically I think you would continue to see the balance sheet.
Expand.
At a greater growth pace than most banks in this country. So.
They've put together on the lending team.
And the team that we have out there and all of those markets.
Just shows that we can step up to the plate and continue to fund a pretty high pace paces.
We would expect.
Low to mid twenties on our loan growth rate.
For next year and that slows down slightly in the outer years because.
The denominator.
Is larger but we're not.
Forecasting.
Significant growth beyond what we're achieving today, but.
We're probably looking at kind of a mid twenties loan book organic growth year over year.
Yeah.
Incredible.
And then maybe just touching on something else that I know you guys have been working on just wanted to get an update on the <unk> partnership where we are with that rollout. Obviously the partnership has gone extremely well you know theres been some volatility in crypto, but just curious.
We are there and.
Any updates you can provide.
Sure.
Okay.
We're now to the point where the.
The.
Workflows.
Deleted the integration is ready to go and we're now doing an internal employee pilot.
Kind of our first test on a go live basis.
Everything's kind of on track I would say, we delayed a few months given all the activity that we had going along in relation to.
Integrating.
<unk> into our.
Our environment, but.
We've got an internal beta going and then our next will be a public beta.
And that should be rolling out shortly after our internal beta and then <unk>.
After that it'll be a go live.
And as specifically bitcoin related and.
Despite the compression in bitcoin prices over time, we still believe there is.
Good consumer demand.
For customers to work through their trusted bank to access the the big coin markets and we also believe that this blockchain technology is very important.
Having our legacy systems have the ability to plug in to this modern technology that works differently will be really important for banking going forward.
Honestly, David I would say that.
You've seen some bankruptcies and other things recently.
I think there's been positioning that.
Whenever clients coins were out there werent their coins I I think this.
Would make it even stronger for people to want to work through their trusted bank.
Then through our company, but they don't know what happens in turbulent times like what we're seeing right now.
So I'm actually very optimistic on this.
Yes.
Very good point, Scott and the fact that some of these exchange bankruptcies year deemed an unsecured creditor and went through their user agreements. It was you didn't really have a perfect and interest in <unk>.
Asset <unk>.
Thought you had.
In this case you have.
Hi.
Unilateral right through cold storage to access.
Your ownership position. So the fact that it's going to bank rails and it's.
Probably the.
Industry standard for cold storage.
So to your point, Scott, who would be an advantage to the market given the turbulence.
Okay. Thanks, a ton of sense.
Thanks, everybody.
Thank you.
Our next question comes from Steve Moss from B Riley Securities.
Good morning, good morning.
Just maybe following up on.
On expense.
I heard Scott mentioned, pushing some things out kind of curious if that impacts any.
Of your hiring plans in Texas and Florida.
What thoughts you may have there.
Well.
No I mean to the extent that we find people.
Good production people.
<unk> continued to expand in the marketplace, we will not step back end and refrained from hiring people.
We'll always continue to try to expand into additional marketplaces as we deem necessary.
So I don't want to give that impression.
But there are initiatives.
Some on the technology side, just some on the.
Hiring side, where.
Instead of going through the normal channels.
We can.
Live without having to have that added employee.
For another six months or something so the answer is where we're trying to manage expenses as best we can.
But we're going to continue to expand in the marketplaces look.
It all depends on the teams that you find out there and I'll say that first foundation.
Had some great opportunities to higher production people and we have not slowed that process down at all.
And I think again it shows to the Testament of.
How the balance sheet has grown.
But that being said.
I think.
The management team.
Is it to shareholders.
Try to manage expenses as fast as possible there in a time where that.
That's giving us great uncertainty.
I would say Steve outside of our recent.
Expansion in SBA.
Really haven't.
Contemplated any.
Significant ramp up of new business lines or anything that would have a longer payback period. So.
When we talk about kind of managing expenses.
Do we need that absolute additional higher on the margin or are those nice to haves or is there a way to create.
Additional efficiencies around our processes to create scale and growth I think going through.
Conversion down in Florida, and getting all of those new customers onboard it put a lot of pressure on us to to get through that gauntlet and now that kind of subsided at the end of this quarter. So.
Customers are now.
By and large.
Converted to our mobile and desktop platforms and are now integrated into the company.
That did create a little bit of near term pressure on some of our key.
Current staff as well as our staffs and in the market.
So.
The expectations are now that we're kind of through that we can look for more efficiencies in other operations and then to Scott's comments in his opening remarks, we're constantly looking at refining.
Our business model to create efficiencies where.
We may not have seen.
Opportunities before but we are going through a lot of refinement right now some of that is technology driven through some of our AI and robotics.
To get rid of a lot of manual processes. Some of it is just getting rid of paper and processes that have been around for a while that way.
All are always challenging so.
Comment upon us too.
Become more efficient over time, and we're certainly dedicated to do that.
Okay. That's helpful. And then just on the reserve here.
Full decline loan loss reserve ratio, just maybe any color you can give around the inputs or the assumptions.
So it's kind of interesting we held our baseline model constant this quarter last quarter, we shifted a little more to downside risk just because of the <unk>.
Part of the economy, and Kevin Correct me, if I'm wrong or <unk> 55 base.
45, downside that's wrong and.
And Moody's modeling.
The results of that keep coming.
Coming back more positive every quarter and in the business lines. So we focus on the.
The metrics keep getting better and better so I would say that although we thought we would probably have.
A little bit of provision we have been getting some nice recoveries.
On the purchase impaired loans that we acquired previously so.
But all the metrics are coming back as good or better than what we've seen so.
We're still trying to balance that how much.
Qualitative reserve, we can continue to maintain.
And we kind of every quarter kind of just model around a baseline percentage of where we ended up in the quarter before so that's kind of where we are.
Or it's coming out but.
All of the metrics.
And correct me if I'm wrong nothing showed any negative decline based on the new production in the existing portfolio. That's right. The economic scenario is trending nicely that may change, we're able to.
For you some conservative measures because of the interest rate environment and the.
The value chain issues in the economy et cetera, but we're very comfortable with the approach we've taken.
Great. Thank you very much guys I appreciate all the color. Thanks, Steve.
Our next question comes from Gary Tenner from D. A Davidson.
Thanks, Good morning.
Gary Hey, I wanted to ask about the C&I portfolio of the $2 6 billion at quarter end, what amount of that is prime LIBOR or a chauffeur based and then was there any delays in repricing over the course of the second quarter, whether it be floors or just timing of refreshing.
I don't have the and we can probably get that for future calls Gary.
See there's been a significant shift in our C&I portfolio from historical from kind of term.
Medium term lending to more.
Straight adjustable.
In previous quarters, we were running about a 70 30 that was a little bit shifted this quarter because of the municipal finance area, which tends to be medium term to longer.
So typically we are running about 70 30, if you exclude the owner occupied.
As far as floors a lot of those.
Because we've grown the portfolio.
Up fairly significantly during times, where Florida became.
Much more important that we're not burning through a lot of floors on that side, but.
We will have some.
We need to burn through.
The prime.
Our book right now and I don't think we have the statistics in front of Us Kevin <unk>.
Historically, a lot of it was prime base because they were smaller.
Two medium sized credits are.
Our larger credits are LIBOR based and a lot of those have.
Had floors in place for a while so we're getting the kind of the direct benefit of.
Of.
The movements subsequent to the previous moves by the fed So I think we're going to see some more positive momentum.
Probably in the latter half of the year and going into next year.
We start to cycle through and we shifted away from LIBOR.
Sulfur base now so I guess long story short I don't have the metrics in front of me to give you that breakdown today about $1 billion of our portfolio is very variable rate most of that so far in prime.
Okay. Thanks for that and then on the on the funding side to revisit that a bit I mean, obviously.
This quarter, you were able to really use the liquidity on the balance sheet to fund the match loan growth you had even even at a slower pace of net growth, let's say in the third quarter, Although a challenge certainly as always can be a good quarter.
You would need to effectively double the pace of deposit growth versus what it was in the second quarter to kind of fund that dollar for dollar and keep that at one deposit ratio in the ballpark where it is so.
To be clear, you're suggesting your different channels can support that amount of deposit growth without resorting to a wholesale market or otherwise.
Yes.
Too far out in the future on that but I would say in the third quarter.
I feel fairly positive.
We can fund.
Fund that with <unk>.
Deposit et cetera in our pipeline.
I will say deposits tend to be sometimes lumpy stack that we thought would hit in the second quarter Didnt hit in the second quarter.
I am optimistic that will hit in the third quarter.
And that it could be that.
You know we have to have some reliance empire.
And.
Something last core.
Provided that our loan growth continues at a torrid pace.
It's been a.
I think what Scott's alluding to is typically in the fourth quarter, we have some seasonality around.
Some of our commercial deposits that tend to run down during <unk>.
A lot of the MSR related deposits, where people are paying their taxes.
That's historically, where we see that there may be a need to kind of plug that gap for us.
Short period of time, and then those balances build back up but.
We are.
There is plenty of deposits in the market available they are more expensive at the margin so.
It will cost us more to fund.
At the margin but.
Sure.
There is.
Some of the channels that were taken advantage now that we don't necessarily want to go into on a call.
Give us.
<unk> opportunities than some of the others that are available and certainly seem to be cheaper than anything in the wholesale side of the business.
Well I appreciate that.
Those thoughts and then so to put that all together I guess in a sense.
The balance sheet growth is certainly going to drive at least.
Certainly drive pretty robust NII growth.
But it seems reasonable to think we may be possibly at the peak NIM for this rate cycle here in the second quarter is that.
Yes.
And you'd be thinking of.
I would say.
Again, we're somewhat range bound, but yes, I would say that growth on the margin.
Could have some impact there.
Near term, but we expect it to kind of normalize again, we always expect to normalize between three and three in a quarter. We we don't know where the fed is going.
I continue to.
Increase we've modeled.
Looked at the sensitivity around that if we.
See the economy slow down rapidly and the fed.
Turns turns of course, and obviously that creates a lot more tailwind.
So we kind of run.
Typical forward curves based on market information.
And based on that.
Future periods margins start to expand out, but yeah I would say.
Maybe a little bit of near term.
But within a range.
Thanks very much.
Okay.
This does conclude our allotted time for today's question and answer session. I will now turn the call back over to Mr. Scott, Kevin <unk> for closing remarks.
Thank you again for participating in today's call.
And just would like to take a moment to thank all of the first foundation employees.
The hard work that they have put forth in the last several quarters.
Especially the integration of first Florida integrity as.
As we entered the second half of 2022.
I am optimistic about the opportunities ahead of us.
Thank you and have a great remainder of your day.
This does conclude today's program. Thank you for your participation you may now disconnect.
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