First Foundation Inc. Q1 2023 Earnings Call
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Greetings and welcome to the first Foundation's first quarter 2023 earnings Conference call. Today's call is being recorded speaking today will be Scott Kavanaugh first Foundation's President and Chief Executive Officer, and Kris <unk>, Chief operating officer before I hand, the call over to Scott. Please note that management will make certain predictive.
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 statements 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. Please see the company's filings with the security and Exchange Commission.
First foundation intends to file a proxy statement and related proxy materials with the security and exchange Commission in connection with the company's 2023 annual meetings of stockholders and the company's directors and certain of the executive officers are participants in the solicitation of proxies from our stockholders in connection with the annual meeting.
Colors that first foundation are strongly encouraged to read such proxy statements and all other related materials filed in security and exchange Commission carefully and in their entirely when they become available as they will contain important information about the 2023 annual meeting and I now would like to turn the call over to President and CEO Scott Kavanaugh. Please go ahead Sir.
Yeah.
Good morning, and welcome.
You for joining today's earnings conference call.
Let me start by saying, how humbled I am by the unprecedented events.
In the last quarter.
For me personally this is the toughest period I've experienced in my professional career.
During this history defining quarter for the financial services It services industry.
First foundation team has demonstrated in mens and wavering commitment to our clients and our company.
I want to emphasize the resiliency of our business in the middle of a current the current.
Economic headwinds.
We are a diversified regional financial services company with our scale and our pro proven business model.
Our core business is providing a variety of exceptional financial services to our clients and our core strategy remains strong.
It is the only because every employee at every level of our organization worked so diligently this quarter. The first foundation remains resilient and well capitalized and continues to generate strong sustainable results. Despite the industry challenges.
I cannot thank our employees enough.
Their decision is village illustrated in the financials, we reported despite significant headwinds and I am proud to say that our earnings per share.
For the quarter was 15 cents.
Additionally, we generated $75 million in revenue a 14% sequential decline due to a decrease in net interest income caused primarily by an increase in the interest expense paid on deposits and borrowings.
Net income was $8 5 million for the quarter compared to $17 4 million for the fourth quarter of 2022.
Our adjusted return on average assets ended the quarter at 0.25%.
We are proud of our results now I'd like to take a moment to discuss the recent extraordinary events.
We are currently positioned.
The current banking environment.
As we all know during the first quarter the impact of the Fed's interest rate actions came to a dramatic cat.
We witnessed a bank run and the capital crisis that led to the second largest failure.
Angela institution in U S history, we.
We saw our customers withdraw its staggering 42 billion of deposits from a single institution in record time.
Well established banks.
On themselves and compromised position due to the policy concentrations and dubiously structured securities portfolios.
Abrupt changes by the fed forced the entire banking sector and the regional banks in particular to reevaluate mid quarter every aspect of their business. While also attempting to restore client confidence and belief that deposits were safe.
Quiddity was available.
Charity portfolios, we're diversified and appropriate risk management was in place.
Hindsight is 2020.
And looking back when we started seeing continued signs and the fed's interest rate moves in the last quarter of 2022.
We took proactive steps to mitigate the effects of our business model.
Which served us very well this quarter, we are grateful that those strategic moves allowed us to be what we feel is a step ahead and actively positioning the bank for long term stability and success.
More specifically beginning in October of last year, we implemented a liquidity funding strategy, where members of management met twice a week for an extended period to discuss ways. The organization could begin to increase deposits reduce our loans to dip.
Posit ratio and suspend almost all lending activities.
Our leadership across the organization remains committed to the proactive hard work required chip.
To prepare for and face the challenging interest rate environment.
The great news is that our deposits have stabilized since the March banking crisis.
In the early days, we saw our fair share of outflows in fact, following the collapse in Silicon Valley Bank and others $844 million in deposits left first foundation.
Thinking a sense of institutional safety and without any insurance deposits and all regional banks would be backstopped.
Most of the outflows, we experienced went to top tier global institutions considered too big to fail not to our regional competitors.
However, I am pleased to share that we have fared much better than some banks and we have seen many of the deposit said initially left returned at first foundation once the banking sector stabilized. This is a trend we expect to continue in the coming quarters.
Of the 844 million in outflows, we experience 129 million has since returned to the bank.
We also know that during this time several bank clients moved money from their F. N B Bank accounts to our subsidiary first Foundation advisors and while the money is still coming over.
This total is estimated to be approximately 100 million.
It illustrates the value of our business model and our ability to keep client funds within our enterprise.
<unk> offerings. This is also a reflection of the incredible efforts of our entire organization I read robust platform and the incredible client service delivered this quarter.
We're now seeing net positive days from our deposit channels and retail and online banking have performed particularly well.
We can confidently say that our deposit levels at a trough related to the financial market disruption on March 21st.
Since <unk>.
March 31st we have added 80 million in total deposits across all channels, which speaks to the team and products we have in place.
Throughout this quarter, our team has been proactive in helping clients navigate the uncertainties and restoring confidence in our bank and banking.
System.
The steps we took were instrumental we have been working closely with each deposit relationships to ensure clients understand the options available to them such as pairing their deposit balances adding beneficiary.
Utilizing products, such as insured cash sweeps Ics accounts and strategically repositioning our cows to insure Paul F T I C and coverage.
Related to operational efficiencies during the quarter management and the board made it.
Difficult, but proactive decision to reduce staffing we conducted two reductions in force one in January and one in March resulting in an approximate 15% staff reduction we made this decision in the interest of our shareholders.
US weather the current lending environment.
The positions that were impacted were primarily in ourselves.
Lending and credit divisions, and there was no material impact in the areas of risk operations or client service.
The reductions in force will save approximately 14 million in annualized compensation expenses.
Further I, along with our entire executive management team and support of our aggressive expense management efforts have elected to forgo any cash bonus for the fiscal year 2023.
That's where we reduced about $3 million in annualized executive compensation expenses.
Which would have been realized paid out in February of 2024.
On deposits.
Hi, I'm also pleased to report that our uninsured deposits have decreased significantly at the end of the quarter total insured deposits represented 85%, meaning uninsured deposits represented just 15% of total deposits, which has further improved since.
The quarter and this is well above industry standards, when compared to the 100 largest banks.
It is worth noting that as of April 12, our uninsured deposits were one 1.517 billion slightly below 15%.
Our deposits declined slightly in the first quarter from the $10 4 billion in the fourth quarter of 2022 to $10 1 billion. As a result of the mid March outflows in terms of our deposits by type we were balanced among noninterest bearing interest bearing.
Money market and savings and certificate of deposits.
Our deposits are diversified by geographic distribution, with California, Florida, and Texas, making up the majority of our core business deposits, but other states, making at 23% of the total.
Additionally, our loan to deposit ratio had been heading in the right direction over the past six months falling from 103.5 and 97% just prior to the quotes acute catalyst.
Induced by the back half.
However, following fed actions that caused outflows our loans to deposit ratio moved up to 106.1.
Since then we have successfully recovered deposits and we have already seen our loan to deposit ratio began to decrease as of April 12, our loans to deposit ratio was 105.6 and trending better weekly.
We are constantly monitoring and managing this ratio as a strategic priority.
I would also like to touch on deposit cost to reiterate how thankful I am that we were early when it came.
Two betas in our deposit cost first foundation began raising interest rates and lock step with the Fad last year when fed rates were only 1%. Therefore, our costs are much more in line with where the fed is now and where it is headed now that is.
Not to say that our funding costs will not go up but it is to say that we will not need to adjust our rates abruptly trying to play catch up to the fed.
An issue some of our competitors are currently contending with.
On liquidity.
Next first foundation maintain and continues to benefit from a strong liquidity position our.
Our liquidity position remained at $3 5 billion.
To drill in a little bit our on balance sheet liquidity as of March 31 was $1 3 billion in cash and securities, which helps that helped us get through this tumultuous an unprecedented quarter.
Our liquidity profile has long been an important differentiator for first foundation, providing much needed stability immediately available liquidity exceeds uninsured deposits with a coverage ratio of 223% as of April .
Well.
As of March 31st this includes 1.3 billion in cash and cash equivalents, representing 10% of total assets on the balance sheet.
Bailable credit facilities of $930 million with the federal home loan bank and $843 million with the federal reserve discount window.
$245 million available and uncommitted credit lines.
And a market value of Unpledged securities of $130 million.
On the Securities portfolio, our securities portfolio has a current market value of $1 1 billion for both H T. M. N. A S. That's unchanged from the prior quarter and we ended the quarter with unrealized and unrecognized losses on the portfolio and I.
Only $71 5 million on a tax affected basis.
The average yield of our investment securities portfolio decreased.
Two 2.73%.
Oh increased I'm, sorry increased to $2 seven 3% from two five last quarter.
We also continue to focus on efforts beyond stabilizing and growing our deposits, including managing our loan portfolio, ensuring pristine credit quality, indentified operational efficiencies and reducing expenses, while maintaining our client.
First mentality.
We are rebuilding from a difficult March well, which will take time perfect, perhaps even several quarters and we plan to focus on maintaining margin. So that we are well positioned for 2024.
We believe that we are in a position to expand NIM once the banking and liquidity pressures abate.
Well, let's look at our lines of business in more detail.
As we mentioned in our last quarter, we continued to strategically manage our loan growth.
Loan balances remained flat at $10 7 billion compared to the prior quarter loan portfolio average yield to 4.54% in the quarter compared to the fourth quarter Oh, It increased I'm, sorry, 454 in the quarter from the fourth quarter 2000.
'twenty two.
Our fundamentals remain strong with excellent credit quality, notably our credit quality remains pristine and our NPA ratio remained at 13 basis points.
Our total delinquent loans as a percentage of the total loans increased from 0.29% as of December 31, 2020 to 45 basis points as of March 31st 2023.
Our multifamily loan portfolio remains a best in class asset.
Multifamily loans continued to be the strongest performing asset class.
Across all commercial real estate as many of you have heard me say CRE is a very broad category.
Our CRE portfolio is comprised of workforce and essential housing in the form of multifamily apartments located in extremely attractive markets. We think this positions us well in light of potential pending recession or economic downturn and this assay.
Class holds its value compared to other asset classes within the commercial real estate.
Our loan to value of our multi.
Family portfolio remains at less than 55, 2% or.
Our multifamily portfolio is diversified across geographies with the largest concentrations in California, a state with limited housing and rent control and many of the cities we operate in.
We have also been proactive in restructuring some of our multifamily portfolio moving it to weighted average portfolio in line with current market rates.
This will take some time, but we have already started to see the benefits of these efforts.
I am proud to reiterate that we have never taken a charge off in our multifamily loans in the history of this firm and I want to remind everyone that we had very little or no exposure to construction.
Towels or a commercial office space.
While this is a challenging macro economic cycle, we are executing on a very solid business plan and expect the results to follow once they experience a more normalized rate environment.
On NIM.
Net interest income was 58, 8% for the first quarter of 2023 compared to $74 seven.
For the prior quarter interest income increased from $126 million in the fourth quarter of 2022, so $137 million in the first quarter of 2023.
Due to the increase in both average interest, earning asset balances as well as average yields earned on.
Such balances inter.
Interest expense was $78 2 million for the first quarter of 2023 compared to $51 3 million in the prior quarter. This increase was due to the increases in both average interest bearing liability balances as well as interest.
Rates paid on such balances.
Our NIM for the quarter was 1.83% compared to 2.5 or excuse me, 2.45% for the prior quarter, which reflects the interest rate environment and the continued pressure the fed's action from the fed's actions.
We expect this to normalize to pre crisis levels as soon as the fed eases or market conditions settle.
I won't predict the actions of the fed but on a broad basis, we continue to more evenly diversify our portfolio.
Noninterest income of $11 7 million for the first quarter compares to $7 2 million in the fourth quarter of 2022.
Noninterest expense was $59 3 million in the first quarter of 2023.
Compared to 59.8% million excuse me in the prior quarter, our efficiency ratio in the first quarter of 2023 was $84 five compared to $70 nine for the fourth quarter of 2022.
The increase in the efficiency ratio is largely attributable to the after mentioned reduction in net interest income during the quarter.
On the wealth management and trust services side.
Looking at our wealth management and trust business, we continue to experience meaningful contributions to the firm as evidenced by continued business unit revenue of $8 8 million for the quarter. This combined business unit revenue.
With other recurring sources of non interest income from the banking unit accounted for 16% of the company's total revenue for the quarter.
We have also success that's been successful in retaining existing clients and attracting new ones.
It's important to note that FFA, so very little turnover this quarter from existing clients. We continue to experience an inflow of about assets from existing and new clients assets under management increased $200 million in the quarter and ended the quarter at five.
2 billion.
Assets under advisement ended the quarter at $1 3 billion.
Our capital position.
Let me touch on a few more data points before I hand, the call over to Chris.
We remain well capitalized with a tier one risk based capital ratio of 10.82% at quarter end and exceeding all Basel III well capitalized regulatory requirements.
Our tangible book value per share ended the quarter at 16.
<unk> dollars and 17 cents compared to $16 20 per share in the previous quarter.
Which reflected the payment of our fourth quarter's dividend.
We also declared and will pay a first quarter cash dividend at <unk> per share. We are pleased to maintain a dividend in light of the current banking environment.
And while we have to reduce it for the quarter, we expect that we can bring it back to historic levels.
I will close my opening remarks by saying over the last months like many months before it I've had an opportunity to connect and speak with many of our clients and in my conversations I was able to reiterate the strength of working with a regional bank.
Like first foundation.
Among those is having direct access to the leadership and being on a first name basis with us having the ability to connect with us during challenging times to ask questions, There's personal touch and special to the regional banking industry and is why we can.
To choose to why many choose to bank with US. This is evidenced by the successes we are now having in Florida.
As to the leadership of Gerry Richter, and all the relationships the Florida team has built over time.
And I would be remiss not taking the moment to publicly recognize our leadership across all regions, who were instrumental in helping us navigate the recent market conditions and who dedicate their careers to serving our clients exceptionally well every single day.
Now I will turn the call over to Chris who will go over our balance sheet.
Thank you Scott.
<unk> mentioned it was a challenging quarter for financial services, but I am so proud of the first foundation team for their dedication to our clients and to the communities, which we serve.
I recently embarked on a listening tour across nearly all of our branches to hear from our employees directly.
It was a great way to see what's working well in areas, where the organization can improve.
Our management team and I simply wanted to connect and renew our commitment to our employees have a productive collaborative culture of teamwork.
Several new key initiatives have grown out of these visits as we look to improve the overall experience for our clients and our internal employees I am confident that we have the right business strategy in place to serve as a best in class Regional Bank.
Moving to our lending operations loan originations were 481 billion for the quarter, which reflects the strategic downturn and slowdown that we have previously spoken about.
Net loan activity over the quarter was decreased by line pay downs and scheduled payments and prepayments.
Looking at the breakdown of loans that we originated in the quarter.
Percentages are as follows commercial business loans, 89% multifamily, 3% single family, 3% land and construction is now at 4% and CRE investment at 1%.
It is always important to note that we accomplished this without changing our high underwriting standards and our M. P. As remained unchanged at 13 basis points for the quarter. This.
This is also reflected in our conservative underwriting standards as evidenced by our Ltvs of 55, 2% for multifamily loans and 55% for single family loans. This highlight the bank's consistent and disciplined lending practices. During these uncertain financial conditions that have been the backbone of our success dating back.
What helped propel us during the great recession.
We have continued to tighten up and improve our underlying credit guidance to ensure the appropriate strength and risk appetite and the climate to come.
We will continue to follow our strategy to pragmatically temper, our loan originations speaking more specifically about our loan yields we achieved a weighted average rate of 7.40% on new originations for the quarter, which compares to $5 seven 2% for new originations in the fourth quarter.
As mentioned as of March 31, 2023, our loan portfolio was comprised of 50% multifamily loans, 32% commercial business loans, 7% non owner occupied commercial real estate, 9% consumer and single family residence loans, and 2% of land and construction loans, which are sold.
<unk> and carefully considered for only our most valued clients are.
Our commercial business portfolio is diversified with no sector.
Comprising more than 30% of the portfolio at 87% of the commercial business portfolio attributable to commercial real estate.
So we are focused on making more adjustable rate loans, which should offset some of the pressures of the current rate environment.
Limited by a variety of factors, including funding constraints as the deposit market remains extremely competitive and liquidity continues to drink in the financial system.
Long with limiting.
Our exposure to higher cost wholesale funding.
The breakdown of our current deposits is as follows money market and savings at 30%.
It just gets a deposit at 24% interest.
Interest bearing demand deposits at 24% and noninterest bearing demand deposits at 22%.
As Scott mentioned, our percentage of insured deposits increased to 85% as of March 31, 2023, and our 85% as of April 12.
Our deposit costs came in at 238% for the quarter and while our future deposit costs are closely tied to the actions of the fed we believe we will not be as sensitive as other banks to future rate increases.
Before I hand, it back over to the operator for Q&A I want to reiterate Scotts comments I'm very grateful for our team's dedication to delivering excellent client service when it matters. Most I can confidently say that we have incredible customers and we continue to be excited about the growth in our future I touched on it several times, but I am very proud of our entire management.
Team and all of our employees.
So many clients and employees have been incredibly generous and thoughtful with their constructive suggestions on how to improve on our delivery of our value proposition of excellent service. We are both committed to listening and executing on these wonderful ideas now more than ever we are aligned and we have been collaboratively working hard day in and day out to accomplish our strategic.
Objectives no matter the environment at this time, we are ready to take questions and I'll hand, it back to the operator.
Thank you Sir at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing star two.
Again to ask a question. Please press star one now we will pause for a moment to allow questions to queue.
Sure.
Okay.
Yeah.
Okay.
Our first question comes from David Feaster Raymond James.
Hey, good morning, everybody.
Hey, How're you doing good morning, he went great.
Maybe just let's start on the deposit side you know appreciate all the color that you gave glad to hear the stability in the improvement.
Imbalances just dropping in mid March you know just just looking at the presentation. It looks like you know a lot of the concern was really in the wake of the bank failures, but I guess with the stability that you're seeing the strength of the balance sheet and available liquidity that you have.
You're starting to see some of that come back, but would you would you expect to see that accelerate especially just given you know opportunities to utilize other you know.
Insurance networks and those types of things and then maybe just touch a bit on the deposit growth strategy near term a more broadly.
Well I'll touch on that first part Chris can speak to.
Kind of our deposit growth strategy on a go forward basis.
But to answer your question, Yes, I do believe.
That a lot of the deposits will come back.
No matter, how you cut it and slice it David.
I think the fed and secretary.
Secretary.
Failed a little bit in the sense of.
At least saying that they would backstop deposits.
And as long as I mean, I think J P. Jamie Diamond at J P. Morgan said, it correctly, which is at the end of the day. This hurts all banks.
And I think there has to be a a bad period for confidence to rebound the regional banks are going to be around they're gonna be supported and.
Firm, we believe that that will happen.
When that happens I think you will see a lot of our deposits come back we have a lot of also decent.
Clients that we're opening up that are newer relationships as well and we continue to work on that but I'll, let Chris talk about.
Some of the deposit strategies that we currently have going on.
So looking back to November when we started to really look at liquidity hard we were actually kind of developing the strategies that we've put in place and we're continuing to put in place over the next several months.
But really there's untapped opportunities and unlimited potential in our current branch network and we focused a lot on small business on middle market business and on the clients that we serve and we also found there are opportunities missed with the digital presence that we have we've got a very large digital presence and online account opening process with her.
Currently revamping with stellar technology.
But in order to to leverage that from a transactional business into a relationship business, which has been the foundation of our model, we need to really kind of tweak the knobs and go after the clients and show them. The customer service that we provide in a way that I think what will actually really help to grow that.
Bring those customers into our model and make the relationship more sticky over time, you can lead with rate, but we found that service can take him a lot farther and then obviously the complexity of the model that we have with wealth advisory side with the truss offerings everything that we offer in aggregate and bring those relationships and keep them in for much longer.
So we're tapping into the digital networks, we're certainly expanding on our our branch focus and I want to see a reconciliation of the branding across the branch model as well as the digital presence, so that our outward and inward and client experience at the same level and caliber of service that means going downstream to small businesses that means focusing on India.
Visuals will always have a focus on our high net worth clients, but I think there is untapped and unlimited potential with those likely sports. So I do expect to see the cadence increase in the months and year to come.
Okay. That's extremely helpful. And then maybe you know could you help us just think about the margin trajectory and how this all plays into that obviously the increase in cash balances and rising.
All borrowings and stuff late in the quarter, probably weighs on the NIM in the short run, but you know as we look out I mean origination yields in the mid sevens.
Opportunity to improve the earning asset mix and deploy that cash it seems like there's a real opportunity for expansion and you alluded to that you know kind of in the back half of the year, but I was just hoping maybe you could help us think through the margin trajectory you know here in the second quarter and then you know how things might look in the back half of the year.
Stabilizing some of these deposit initiatives play out.
Yeah I'm glad you asked that question because the reality is we added almost $500 million of bonds last quarter and if you saw it was a dramatic jump and the weighted average coupon on the loans, we funded from the previous quarter to this quarter.
I think Chris.
That said you know a 570 versus 740 <unk>, you're talking 170 180 basis point increase.
And.
Look first and foremost it's liquidity liquidity liquidity liquidity.
And that's that's why you've seen the balance sheet.
Stay pretty pad, but I think the trajectory that we've been talking about the last several quarters getting more into straight adjustables are little more C&I balancing out so that we're not as exposed to fixed rate.
Lending as we had been previously.
I think it's the right.
Answer.
I personally believe that if we haven't trough.
We are about to trough in terms of net interest margin and I believe it will expand back out and it'll be for all the reasons that you see how we're performing right now by being able to increase our loan yields.
Deposits are as as.
As we said in the.
The prepared remarks.
We believe that.
Well I mean, our betas were pretty fast in the early going and I think we got criticized pretty hard for it.
But now that rates are up around 5%.
You know we've experienced most of that beta change already so.
So as Chris was basically saying look you know we're already there on the deposit side and if the fed increases certainly our deposit costs will go up.
We'll go up much more modestly than than we believe our competitors will do.
I think we're really in a pretty good position to start to expand NIM.
I would say in the latter half of this year and and you know as the liquidity issues abate, which I feel like they've already largely done.
And then we'll be in a position to start.
Correcting that NIM and hopefully even sooner rather than later.
Okay that makes sense and helpful color and then maybe just let's touch on originations and loan growth you know not not surprised to see the slowdown in multifamily you know we've kind of talked about that you know originations primarily driven by the commercial business segment, just I'm curious what you're seeing there.
Or where are you, where you know where are new loan yields today are they just kind of still in that that mid sevens and just how is demand in that segment, where are you seeing good opportunities and just your overall appetite for growth I mean would you expect just continued remix funding up you know basically replacing maturing loans with new originations that or.
Or just curious how you think you know the loan portfolio might shake out.
It's really more about maintaining the balance sheet as is.
So I wanted to say.
We just got an update.
Wanna say Theres, probably 50 60 million that is projected to pay off in the next month to six weeks.
We'll replace that with higher yielding stuff I was just looking at a payoff report there was.
I don't know $22 million loan that paid off at 4.5% $16 million alone that was four in a quarter, we probably had 10 or $12 million paid off with three handles on the coupon somewhere between three and a half and $3 75.
So we're gonna take that opportunity to.
Modestly.
Replace some of those yields, but again I'm going to go back and reiterate how important it is to think about liquidity first and then you know but I.
I think.
Yes.
Causes basically.
Got to really be determined on what the fed's actions are.
And what you know the banking crisis looks like as we continue to you know.
Our progress.
Yeah that makes sense.
It can be pretty powerful appreciate all the color. Thanks everybody.
Thank you Dave Thanks Man.
Yeah.
Our next question comes from Gary Tenner D. A davidson.
Thanks, guys good morning.
I get questions.
So on the on the deposit growth.
Since March 21st I apologize if I missed this it was that all four as opposed to any additional use of borrower or excuse me brokered funds or anything.
Well, we've continued to enhance using brokered, but what we referred to in our commentary was all court.
Okay.
Okay and then.
In terms of the on the balance sheet cash liquidity, you're at 10% of assets you know at the end of March versus 5%.
Five two.
8% is probably where you've been historically, what how long do you think you hold on to the excess liquidity, even if it's if it's not usually a negative to NII obviously.
There was a NIM pressure there. So curious how long do you think you hold on to that.
Well it is negative.
Anytime you hold cash and you sell it.
There's a bid ask spread so its costing first foundation additional revenue the longer that it says there you know I've been reluctant for.
18 months, probably almost two years to add to the securities portfolio for exactly the reasons that bankers are being criticized today, which is having a bunch of fixed rate assets on the books in and having rising interest rates. So we havent added Securities Inc.
Some time.
You know in discussions with our regulators.
Yeah, and I don't I don't really mind sharing that with you know I think the regulators comfort zone is that you have in excess.
Of.
I think it and it depends on the bank's anywhere from 10 to 12 or higher percent on balance sheet liquidity, whether that's in securities or cash or whatever we normally would not carry this much cash, but I believe in the current economic environment. It makes all the sense.
In the world to carry the cash until we feel comfortable so we've started tearing down a little bit in the last two weeks are on balance sheet cash and we will continue to do so.
But you know we continue to have ongoing dialogue dialogues with our regulators.
To make sure that we have ample cash both on and off balance sheet and it's been very helpful. In discussions with the FDIC and the Federal Reserve Bank.
To have availability.
Both.
Both government agencies.
And we monitor that very closely by the way I forget what they call that program to be T P H or <unk>.
We whatever the program is we have I think we access the thousand dollars make sure it works.
So we really haven't accessed.
Those lines yet.
So you know.
It's in place and ready to roll should we need it but the reality is.
Up to now we haven't we haven't utilize that.
That answer your quiet I appreciate that.
Yes. It does Scott Thanks, and then last question for me.
Noticing the Florida franchise continues to be a really nice source of net funding. If my numbers are right about $2 2 billion in deposits versus about 1 billion one of loans.
From a pricing perspective, and just kind of deposit availability and success is there any.
Chris I Wonder if you could kind of characterize the differences between Florida, and California from a from a FERC first foundation.
Perspective.
I don't know that there's any differences I will say you know as far as rates go.
And that's probably one thing when rates were at 1% or one and a half or even 2%.
I think at 5%.
I don't know of any clients that I personally talked to that don't pay attention to Google or or Yahoo, and know where rates are I think I think the phone calls that a lot of banks are getting today.
You know about hey, I noticed.
You know yields are cropping up there and I need more we don't we haven't gotten many of those because our betas have been high.
But I you know when I said I wanted to give a shout out to Florida.
I really meant that we had a rocky start.
I think I've told most people that in the past.
But we empower the folks in Florida.
And they've.
They've done an amazing job as are all our people, but I you know.
We did have a rocky start there and they've done an amazing job.
Gary I'll add a little more color as well, so obviously with the influx of Florida and I would say the general kind of feel that Florida is more of a business friendly state.
That certainly helps a lot of the direction of where the company is going to focus on C&I business and we have this extremely well season.
<unk> in the banking community, there, who really are well known and admin ratio into that community and strategically if that acquisition and those relationships kind of dovetail into our model well. So the growth was not unexpected it was just a little bit slower because we had to embrace culture.
One last point that I would say is you know we were.
Planning on expanding in Texas, a lot more until we saw every.
You know the Fed's action plans and what happened and we curtailed a lot of that.
Mid last year.
But at some point.
Just like he talked to me, Chris just talked about in Florida, and the opportunities there taxes.
From our perspective is wide open.
Even though we have some pretty good relationships.
Not pretty good I would say great relationships.
Think it's wide open and it's something that we really need to get ourselves geared up to move forward.
This thing to taxes.
Yeah.
All right. Thanks, guys appreciate it.
Thank you.
Our next question comes from Andrew Trail Stevens.
Hey, good morning.
All right.
Maybe on the margin just to start I appreciate all the commentary around some of the deposits and the cost can you help us out maybe with the the spot cost of deposits either interest bearing our total at the end of the period and then do you have the monthly margin and in the month of March.
Hi.
Yeah, I'm going to rely on Amy for that but I wanted to say the month of March NIM was about $1 64.
Amy you know with the spot cost was at the end of the quarter.
Amy stepped away.
Spot cost at the end of the quarter was $2 38.
Sure.
The average deposit costs.
So that was the average South Dakota.
Yeah.
When he gets back will.
Kitchen that number okay, okay that works.
And then on the.
Okay, I think 250 to $2 52 to 52, there you go okay perfect.
I appreciate it.
And then on the expense side.
I think you mentioned it might have been if I have it in my notes by $14 million of relief on the expense run rate from some of the actions taken over the past couple of quarters, I guess I'm trying to get a sense of how much.
There are 3 million <unk>.
Executive bonus.
We've agreed not to okay.
Okay.
A lot of moving parts can you help us out with kind of thinking about an expense run rate.
Going into the second quarter.
Okay.
So I think I mean can you talk about how the expense management run rate will be.
Correct Yeah.
Yes, I think you can see that pretty much what we've done this quarter. The only differences as those annualize figures that we saw from the previous months or cause to be carried forward. So I don't think there'll be a tremendous amount of detail.
A lot of the.
Oscar it's weren't taking taken until late March or.
Mid March.
So you know, it's obviously going to be reduced from an employee standpoint.
As Amy back I hate that yes, yes, Scott I'm here, Amy Yes, so what do you think.
Yeah.
Yes, so by looking at it and you know in the next few quarters are compensations and benefits will definitely when we all benefit from the AR with that'd be.
<unk> had in March right, so on an annualized basis.
And we're definitely looking a poly is 3 million 4 million downward on the compensation and benefits line.
I mean, that's what I'm talking about per quarter.
Per quarter.
Hum.
Everything else remain pretty consistent as we continue to love, you know and and see where we can minimize and.
Our cost our expenditures on operational costs.
But as we move to 2024.
Definitely you know continue to pesticides downward and our operational expense.
Okay.
Appreciate the color there that's helpful.
And then for the deposit growth I think.
Kind of a corner that you might have reference have you seen the ECR related deposit balances build back since quarter end.
Well, yes, and no I mean this is typically a cyclic catalog cyclicality point that is at the lowest point.
And around April .
With tax payments.
But they they to be quite candid they have held pretty firm.
You know, we did see even though we brought back some of the balances.
We've seen tax payments both a.
Property taxes.
And federal and state tax.
Go out of the bank a little bit.
But our msr's are starting to build their balances back. So the two months that are probably the two low points or April and October .
Okay.
And if I can sneak one more in there around just the dividend.
I was hoping to maybe get some incremental color on kind of what prompted the dividend change and then what would you view this as kind of temporary and understanding kind of the glide path for for margin and profitability improvement moving forward I guess should we expect the dividend to kind of walk back half as that occurs and is there a targeted payout ratio you're looking at.
So obviously with the reduction in net income.
And you know to the point that we felt that we werent.
Sufficiently covering.
In discussions with the regulators as every bank is having in this country.
Capital preservation is of utmost importance.
And the Regulators' eyes, and frankly in my eyes as well.
So we felt that it was necessary to reduce from the 11th quarter did the two since quarter that gives us about a 2025% coverage ratio.
No.
So we feel that that sample.
Yes. This is temporary and yes, we will get back as our NIM starts to expand back in and we feel comfortable.
That we've got ample income coming in to cover the dividend, we will bring that back at what point does it get back to 11 cents.
Hard to say.
But my predictions right about NIM expanding.
In the latter half of this year, then we will modestly.
Bring the dividend back up with that.
Understood. Okay. Thank you for the time.
Thank you.
Yeah.
Our next question comes from Adam Butner Piper Sandler.
Okay.
Hey, good morning, everybody. This is Adam on for Matthew Clark.
Hi.
Just switching over to the.
The deposit side I appreciate the color.
So.
During the quarter and in March there were about 450.
50 million in outflows in deposits and about 120 came back to the bank before quarter end.
And then the advisory business 100, or roughly $100 million of that come back at quarter end too and that accounts for about how happy hour.
Yes.
Yeah, I want to be clear on that Adam.
What flowed over to FSA.
Largely was put into a structured treasure.
Treasury or other type of security fixed income security.
Balances for our clients that they felt were.
Hum.
Yielding.
Frankly, with the short end of the curve treasuries were yielding more than most.
Most of the deposits were in the country.
It's not uncommon for us to get out of those conversations because we have the wealth advisory arm, but we can recommend that rather than leave institution to chase mined somewhere else. We can keep them in the company and that happens throughout the month, that's not just to leave and come back situation, yeah, but but to be fair. All I'm trying to say is most of those are in ladder.
Maturities and we believe at some point in time that will return to.
Deposit.
But currently I would I would tell you they're in treasuries that are latter it out a year to two years.
Okay that makes sense and then since since April and I think that $80 million and deposit increase was of course I'm, assuming that that was recovery from the outflow as well.
I was just trying to get a sense of that remaining roughly 850 million do you assume that comes back throughout the remainder of the year.
We do.
So you know there I mean in those first and then issue a couple of days most people were shooting and asking questions later.
You know I will tell you and Chris and I following up in and frankly, a lot of our employees following up with clients.
All of them pretty much said the same thing we love you, but we'll see.
When things stabilize.
Where does that mean you know your guess is probably as good as ours, but.
But I do believe that we have great relationships with it with even the folks that left.
I don't blame them for maybe being a little bit scared.
Because I I wish.
The board of Governors have maybe taken a little stronger stance to say they went back.
Stop regional banks deposits.
But I do believe we will get those back I believe confidence has to be built.
It takes about two or three months of experience kind of a service or institutions that went to some of them went to certain executions that are probably not as strong as they thought so as they go through that lifecycle and experiencing the value proposition of other brands typically come back because we can give them things that they need and they want.
Okay, that's great to hear and then.
Yes.
Briefly touch on some credit.
Metrics.
You mentioned it on the call, but I was curious.
You May have mentioned that you don't have any office CRE exposure is that correct.
Yeah, we're not we've never really been in that space anything that we may have in that space likely came from the acquisition very very de minimis relative to our entire portfolio.
Okay, Great and then one other.
On the hotel side I think we have two loans, yes, maybe.
Maybe a handful with the acquisition of Florida.
We have no office space.
<unk> strip centers no mall.
I mean, when you think about the commercial real estate.
We tend to focus on owner occupied.
Owner occupied multifamily.
That's really the focus.
And for Us.
If you look back over history, especially 089 and 10.
You saw delinquencies and defaults in the 11 basis point range, which was by far and away the lowest category.
And the commercial real estate.
Let me give you an idea going switching from dental now the margin on the extra risk that you would take for we think all of those different types of commercial real estate concentration of multifamily with only incremental so you were taking on additional risk for a very relatively small return on rate and we've never been one to sacrifice credit quality for rate.
Okay I appreciate the color there and then just briefly touching on one more thing I saw I saw that delinquency loans increased about <unk>.
16 million $16 5 million during the quarter was I was just curious if you could touch on the nature of that increase any commentary there.
Yes, that's related to.
Single family loans increase, but a very high net worth.
Or are they had some issues and where theyre going to bring us below current they've already made.
She felt issues yeah. They are unreasonable due to those health issues, but.
Other than working through their financial manager I'm, not expecting any challenges or losses.
Okay.
Perfect Great to hear those those were my questions. Thank you guys very much.
Yeah. Thank you.
We have no further questions in the queue at this time I would now like to turn the call back over to today's speakers.
Yeah, Vincent this quarter, where humbling for many banks, including US we saw the negative impacts of the actions by the fed Fortunately for all our stakeholders, we took decisive and immediate action and we were not caught flat footed.
I want to leave you with few key points to takeaway from the quarter. We are proud of our financial performance for the quarter given the extraordinary events across the industry and believe we are well positioned.
Our deposit base remains strong.
Positives have overwhelmed overwhelmingly chosen to return we will also have grown our percentage of insured deposits and are working closely to ensure clients have the maximum coverage.
Sure.
We have a strong liquidity position that gives us confidence in navigating uncertain times.
Port Arthur.
Securities portfolio allows us to actively manage our interest rate risk and gives us flexibility on our balance sheet.
And finally, we believe once we emerge from this liquidity Crunch and bank will emerge as the leader given our credit quality.
Very pleased that our entire team responded and believe we are well positioned to weather. This current crisis ready to emerge as a leader among our regional bank peers.
As a reminder, our earnings report and Investor presentation can be found on the Investor Relations section number web site.
Thank you and have a great remainder of your day.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Okay.
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