Q2 2023 First Foundation Inc Earnings Call
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Greetings and welcome to first Foundation's second 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 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 G. A a P 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 G. A a P financial measures. Please see the company's filings with the Securities Securities and Exchange Commission.
Now I would like to turn the call over to President and CEO Scott Calvin I'll. Please go ahead.
Good morning, and welcome. Thank you for joining today's earnings conference call.
Following the disruption in the financial industry in the first quarter.
We have seen stabilization across the entire banking sector and then the second quarter, we were able to squarely focused on executing against our strategy.
We are extremely proud of the dedication and diligence of our team as we experienced total deposit growth.
Loan portfolio average yield increases and continued strength in our advisory and trust business.
We were able to get our loan to deposit ratio back below 100% and our percentage of insured and collateralized deposits to 88% of total deposits as of June 32023, which we believe is an exceptional number.
Parroting Blake.
For the second quarter, we reported a net loss attributable to common shareholders of <unk>.
$212 3 million representing $3 seven.
Loss of $3 76 per share, including a second quarter 2023 result is a non cash goodwill impairment charge totaling $215 3 million.
Goodwill impairment is a noncash charge.
It has no impact on regulatory capital ratios cash flows liquidity position or the operations of the company and our ability to meet our clients' needs goodwill was evaluated for impairment annually in the fourth quarter, but the drastic.
And the macroeconomic conditions and the fed rate hikes that have negatively impacted our market valuation triggered an updated assessment.
Excluding the impact of the goodwill in part impairment charge and the other adjustments adjusted net income, which is a non-GAAP measure for the quarter totaled $3 7 million or seven cents a share.
Adjusted net income attributable to common shareholders also a non-GAAP measure.
$3 7 million for the second quarter, which excludes the goodwill impairment and other adjustments compared to the $8 3 million for the first quarter of 2023.
Other revenues.
Were $61 1 million for the quarter, a decrease of 13% compared to the 75 for the first quarter due to a decrease in net interest income.
Our adjusted return on average assets, a non-GAAP measure ended the quarter at 1.11% a decrease from the 0.25% in the prior quarter.
Our operations remain stable and we remain confident in our business given.
That we are seeing significant improvement in our deposit and loan profiles as well as stability in our liquidity and credit quality.
As for expectations for the year I truly believe interest rate calls our trough in based on the fact that inflation is cooling and all indications are that the fed is towards the end of the tightening cycle.
This is the case, we should start to see improvements in our balance sheet and earnings.
Related to operational efficiencies during the quarter, we continued to focus on cutting costs, including a small reduction in staff.
Revaluations of all vendor management solutions, and setting travel restrictions to manage cost better.
In the quarter, we had 280000 and severance costs.
Recognized as a result of the reductions in force achieving an estimated annualized cost savings of $2 5 million plus 15% benefits.
Cost saving initiatives, along with the shrinking of the balance sheet remain a key focus and controlling expenses to improve our margin profile.
We have also been working to achieve strategic alignment throughout our business with a significant synergies.
Realize between our banking and wealth management teams that will lead to cost savings by trimming expenses.
Our deposits increased from $10 1 billion in the first quarter to $10 8 billion in the second quarter.
From the $9 5 billion as of June 30 of 2022.
Deposit levels.
No point in the prior quarter and increased by $755 million during the current quarter as our deposit inflows and outflows normalized.
Of the $755 million increase in deposits for the quarter.
Brokered deposits accounted for $318 million, while $437 million were core deposits.
This brings total brokered deposits to 24% of total deposits as of June 32023, compared to the 18, 8% as of March 31 2023.
Whereas core deposits were.
80%.
As of June 32023.
And 81% as of March 31, 2023.
Digital banking channel continued to grow as a source of new depository accounts, while account balances totaling $913 million at June 32023 accounting for over 90%.
Of all new client accounts.
Oh, so deposits increased to $2 85 for the second quarter of 2023 compared to $2 three 8% for the prior quarter and two 8% for the second quarter of 2022.
Insured and collateralized deposits accounted for approximately 88%.
Total deposits as of June 32023, compared to 85% of total deposits as of March 31 2023.
Strong core deposits are very key to every bank in terms of building franchise value and our pipeline of our core deposits remained strong while we continued to make significant strides on that front. We are encouraged by the levels of deposits.
That have continued to return Chris will touch more on this in a minute.
Our loan to deposit ratio has continued to fall.
It was 97 nine as of June 32023, and 93, one as of July 20th 2023.
This is a significant improvement to the 106, 1% as of March 31, 2023. This ratio is now below 100%. We believe this will continue to improve and we look to modestly shrink the balance sheet.
We are adding deposits.
This improvement in liquidity comes primarily from our clients returning with some of the change coming from brokered deposits.
Deposits have been a large focus for us on the frontline and we are continuing to make steady progress.
Many customers who's left in the days following the regional banking panic have returned in large part because of our attractive rates on deposits.
And exceptional client service.
The improvement in the loans to deposit ratio.
A primary focus for us and we continue to monitor and manage this closely.
We continue to have confidence in the markets, we're in notably our new headquarters in Dallas, which continues to be a primary destination.
For many corporations evaluating relocation.
In terms of our deposits by tight we remain balanced among non interest bearing interest bearing money.
Money market and savings in certificates of deposits.
Noninterest bearing demand deposits measured at 25% of deposits as of June 30, compared to 23% as at March 31.
Certificates of deposits accounted for 26%.
Total deposits as of June 32023.
24% as of March 31, 2023.
Borrowings were 976 million as of June 32023, compared to the $2 3 billion and $494 million as of March 31, 2023, and June 32022, respectively.
The decrease in borrowings compared to the prior quarter was primarily due to the paydown of $390 million in variable rate FHL be advances and $900 million and fixed rate <unk> advances.
As deposit levels stabilize and began to return to profit.
Previous levels during the second quarter of 2023 some of these additional borrowings were paid down.
Borrowings have declined further to $584 million as of June July 20th.
2023.
First foundation continues to benefit from rate growing liquidity position.
Our on and off balance sheet liquidity increased to $4 3 billion for the quarter.
To drill into a little bit our on balance sheet liquidity as of June 30 was $926 million in cash and cash equivalents, representing seven 2% of total deposits on balance sheet.
Our off balance sheet consisted of available credit facilities.
$2 3 billion with the federal.
Federal home loan bank.
$900 million with the federal reserve discount window.
And $145 million available and uncommitted credit lines.
The ratio of liquidity to uninsured and collateralized deposits is three three times coverage, which is notable as our liquidity profile continues to be an important differentiator for first foundation.
Looking at our wealth management and trust business, we are close to reaching a historical high for assets under management.
<unk> has seen strong performance and secure new client relationships. This is especially impressive considering the tough times that we have.
And over the.
Previous few years.
We continued to experience meaningful contributions to the firm as evidenced by a combined business unit revenue.
$9 million for the quarter. This includes $7 1 million and investment advisory fees, and $1 9 million and trust administration and consulting fees.
Combined business unit revenue coupled with other recurring sources of noninterest income from our banking unit accounted for 20% of the company's total revenue for the quarter.
Assets under management increased by $100 million during the second quarter to $5 3 billion compared to $5 2 billion at the end of the first quarter Trust assets under advisement ended the quarter at $1 2 billion compared to $1 3 billion as of the first quarter.
But we believe continues to have a very strong pipeline.
We remain well capitalized with a tier one risk based capital ratio of 11, three 4% at quarter end and exceeding all Basel three regulatory requirements to be considered a well capitalized deposit is huge.
Our risk based capital ratios improved this quarter. We also declared an approved subject to regulatory approval, a second quarter cash dividend of <unk> <unk> per share.
Tangible book value per share ended the quarter at $16 12, compared to $16 17 for the prior quarter.
The difference of.
<unk> per share resulted from a <unk> dividend paid to shareholders and three.
<unk>.
I will close by saying again, how appreciative I am for the team's hard work and dedication.
It's been a challenging time.
But I am confident that we are continuing to take all the right measures to rightsize the business and put first foundation on the current path going forward.
We are able to weather these challenging times and emerge with increased deposits, while maintaining our strong liquidity position.
The credit quality of our portfolio remains a key differentiator for us and we continue to grow the wealth and trust business and exceed all minimum regulatory requirements to be considered well capitalized.
Auditory institutions.
All of our risk based capital ratios improved as debt our ratio of uninsured to insured and collateralized deposits.
Which makes us proud of how far we've come in a short period of time.
We recognize that there are aspects of our business, if we can and cannot control.
We can control our revenues and expenses, but we can't control the feds decisions around interest rates, we are focusing on the areas of our business that we can control.
And remaining diligent in mitigating the risk and the aspects we can.
As always client service remains a top priority at first foundation and is what draws clients.
The bank with us.
We remain proactive in helping clients manage all of these important financial decisions from everyday deposits to wealth management solutions.
Advocating market conditions.
Client first mentality is the key to our business and core franchise and has only gotten stronger now.
Now I will turn the call over to Chris.
And we will go over the portfolio in more detail.
Thank you Scott as Scott mentioned, we are happy to see the stabilization in the financial services sector. Following one of the most challenging quarters in recent history.
Moving to our lending operations.
As of June 32023, our loan portfolio is comprised of 50% multifamily loans, 33% commercial business loans, 9% consumer and single family residential loans, 6% non owner occupied commercial real estate and 2% of land and construction loans, which are selectively.
And carefully considered for our most valued clients below portfolio composition did not change materially from the first quarter of 2023.
Loan portfolio average yield increased to $4 six 9% in the second quarter compared to $4 five 4% in the prior quarter and $3, 86% in the second quarter of 2022, respectively.
Average yields on new loan fundings were 790% in the second quarter compared to 740% in the prior quarter and 373% in the second quarter of 2022, respectively.
We have continued to strategically tempered loan originations and loan originations were $474 million for the quarter, which were primarily high quality adjustable rate C&I SBA and mortgage lending.
Loan balances decreased to 10 $6 billion as of June 32023.
Third to $10 $7 billion as of March 31, 2023, an increase $1 $6 billion or 18% compared to $8 9 billion as of June 32022.
Loan fundings totaled $474 million offset by loan payoffs of $559 million in the quarter.
Our net loan activity over the quarter was decreased by line pay downs and scheduled payments and prepayments are cost of funds is stabilizing which is moving our loan portfolio in the right direction.
Looking at the breakdown of loans that we've originated so far year to date. The percentages are as follows commercial business loans, 91% multifamily, 3% single family, 2% and other investments at 4%.
We have significantly decreased the number of multifamily originations this year as a part of our strategy to hold fixed rate lending or.
Our commercial business portfolio is diversified with no sector comprising more than a third of the portfolio and only 12% of the portfolio exposed to commercial real estate.
It is always important to note that we accomplished this without changing our high underwriting standards and our NPA has decreased to 12 basis points for the quarter. This is also reflected in our conservative underwriting standards as evidenced by our Ltvs are 54% for multifamily loans and 49% for single family.
New loans.
This highlights the banks high credit quality conservative underwriting and disciplined lending practices. During these uncertain financial conditions, we have maintained an appropriate risk appetite.
We continue to temper, all fixed rate lending and multifamily and for the most part in single family and remained focused on making adjustable rate loans, including C&I MSR and SBA.
These are upper tier credit instruments that give us good deposit opportunities are higher yielding C&I straight adjustable loans are helping to offset our fixed rate loans.
Let's pivot to multifamily.
Although we have been originating far fewer multifamily loans, our multifamily loan portfolio remains a significant proportion of our loan portfolio and remains a best in class asset.
Family loans continue to be the strongest performing asset class across all commercial real estate.
Our loan to value ratio of our multifamily portfolio has fallen to 54% our multifamily portfolio is diversified across geographies with the largest concentration in California.
We have also been proactive in restructuring some of our multifamily portfolio moving it to a 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 defaulted on a multifamily loans in the history of this firm and I want to.
Mind, everyone that we have very little to no exposure to construction hotels or commercial office space.
Our credit quality remains pristine and our NPA ratio decreased to 12 basis points, our total delinquent loans as a percentage of total loans decreased to 0.16% as of June 32023 from 0.45% as of March 31, 2023, maintaining good credit quality.
Is the cornerstone of our business model as Scott mentioned, our percentage of insured and collateralized deposits increased to 88% as of June 32023.
An increase from the 85% as of last quarter and we're pleased to see continued growth in our insured and collateralized deposits.
Our deposit costs increased two to eight 5% for the second quarter compared to 238% for the prior quarter and 0.28% for the second quarter of 2022.
Unlike many other banks that were defending their low rates on deposits, we were willing to move client funds of commiserate with how the fed was moving rig an important distinction as people have realized they can make money on their deposits. Therefore, our deposit costs have already reflective of the current economic environment, whereas other banks.
Have or will have to play catch up to the fed.
The breakdown of our current deposits is as follows money market and savings, 29% certificates of deposit 26% interest bearing demand deposits of 21% noninterest bearing demand deposits, 25% are the positive diversified geographic distribution with California accounting for 36% of total deposits.
Florida at 19% and Texas at 9%, which makes up the majority of our deposit portfolio and other states, making up 32% of the total.
Moving to NIM net interest income was $49 million for the second quarter of 2023 compared to $59 million for the prior quarter.
Interest income increased from $137 million in the first quarter to $145 million in the second quarter of 2023 due to increases in both average interest, earning asset balances as well as average yields earned on such balances.
Interest expense was $96 3 million for the second quarter of 2023, compared with $78 2 million for the prior quarter.
This increase was due to increases in both average interest bearing liability balances as well as average rates paid on such balances.
Our NIM for the second quarter was $1 five 1% compared to 183% for the prior quarter, which reflects the interest rate environment and the continued pressure by the fed action.
We will continue to strategically shrink the balance sheet slightly to regain profitability.
Noninterest income was $12 1 million for the second quarter compared to $11 $7 million in the first quarter and $13 $4 million in the second quarter of 2022.
Noninterest expense was $272 $8 million in the second quarter, which included $215 3 million and a goodwill impairment charge.
<unk> goodwill impairment charges noninterest expense was $57 $5 million in the second quarter compared to $59 3 million for the first quarter and $48 $8 million for the second quarter of 2022.
Our efficiency ratio for the second quarter was 92, 5% compared to 84, 5% for the first quarter.
The increase in the efficiency ratio is largely attributable to the aforementioned reduction in net interest income during the quarter.
As the ratio is a measure of noninterest expense to revenue net interest income plus noninterest income on an adjusted basis compensation and benefits were $21 million in the second quarter of 2023 compared to $25 3 million in the first quarter and $27 $6 million in the second quarter.
A 2022.
The decrease in compensation and benefits as a result of efforts to maximize efficiency and optimize the workforce in the face of slowing loan growth and higher interest expense now, let's briefly touch on our securities portfolio.
Our security portfolio totaled $1 billion with HTM of $815 million and <unk> of $201 million down from $1 $1 billion from the prior quarter.
The allowance for credit losses for investments was $8 5 million for the quarter compared to $12 $3 million in the prior quarter and $11 2 million for the second quarter of 2022, the decreases from the prior quarter were primarily due to the reversal of $4 million in allowances for credit losses recorded on.
Interest only strips securities that were fully written off during the quarter results, resulting in a net income statement impact of only $15000 investor.
The investment securities portfolio average yield decreased to 239% in the quarter compared to $2, 73% in the prior quarter.
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Okay.
Okay.
Our first question comes from David Feaster with Raymond James. Please go ahead.
Hi, good morning, everybody.
Hey, good morning.
I'm doing great congratulations on a great quarter nice to see the stock reacting.
Favorably just I did just want to touch on.
Maybe some of the deposit trends that you guys saw in the quarter.
And if you could help us understand maybe how flows trended you touched on it Scott a bit.
Some of the clients coming back but.
Maybe just help us understand kind of how flows were in the quarter.
And your thoughts on on <unk>.
Deposit growth going forward it sounds like this.
The trends that you saw maybe we saw growth later in the quarter and it's actually persisted here in the third quarter with your point that borrowings or continuing to pay down just.
Curious what youre seeing out there.
Yes, so we were very fortunate.
We've got great clients.
Of course I think.
After the failures at several banks out there.
A lot of people got skittish.
Uh huh.
Did a reactionary thing by moving out, but I think as time went by and if people had a chance to think about things somewhat to the larger banks that aren't paying.
Well.
At times.
Trying to think about it.
Started returning some of their deposits.
Many of them never truly withdrew all their balances they withdrew a big portion.
And so they started bringing back some of those deposits.
Over a period of time, they have continued to grow wallet, while at the same time.
Okay.
Yes.
A pretty good pipeline building.
Other deposits and.
I will say David to the extent that.
We are doing any lending so I'm going to go ahead and touch on that.
We're really requiring.
Or.
Severely locating to add to deposit relationships. So our pipeline is really pretty healthy I think August there'll be good.
We've got some relationships I think are going to come in the September timeframe.
I would.
Caveat that.
The difference between quarter end in July 20th that we talked about that was pretty strong.
Growth in.
You know it.
<unk> would temper the growth in say on an annualized basis, you won't see 70% growth, but I will tell you.
Scott.
Deposit trends are going to continue.
Higher loan balances are going to continue to shrink our goal is to continue to pay off any borrowings that we have out there and get to a point.
Yeah.
That.
Sure.
We're in a position where our borrowings are less.
And then obviously, we will start focusing on <unk>.
Brokered reducing broker deposit balances I, probably should add.
During just recently, maybe a couple of weeks ago.
We took $100 million and.
Went out five years.
On the with the home loan bank advance that saved us about 120 basis points.
In.
Interest cost that really was not born out in the second quarter.
And I will be more realized starting in the third quarter.
And we did another.
200 million with the federal home loan bank.
That reduced our interest expense I believe.
Total of 170 basis points.
So that should help also reduce.
Our interest costs on a go forward basis.
That's extremely helpful and maybe let's let's let's dig in into that a bit. So we got the fed hike yesterday right and so if we are assuming that that deposit costs do stabilize here that that the fed pauses could you help us maybe think through.
Where roll off rates are on the on the.
Loan portfolio, obviously, new loan yields you talked about in the 17 nineties, but just.
Again, the pace of roll off in the next 12 months in and we're roll off rates are and just trying to get a sense of the asset repricing side, and basically where NIM could trough and how to think about the pace of expansion going forward as deposits costs stabilize and we continue to reprice higher.
Well I'll I'll touch a little bit on on.
Some of the yields that we're putting on last quarter I believe like you said the average yield coming on with 790.
That has since improved and I.
The average yield.
Going on is about 8% quarter to maybe slightly higher.
Overall.
And of course that will go higher just like.
Some of the deposit costs will but.
I said I think.
Initially you know.
Some of the deposits will go up.
Commensurate.
I think youre going to see betas for us trend down.
Relative to what you've seen in prior quarters, which is hugely important for US which is also why I think there's going to be trough, but with the <unk>.
Yields are that are coming on are coming on at higher levels.
But I think in terms of pay offs right now I would tell you.
Some of the multifamily stuff seasonality wise.
Some of the multifamily start to slow down on the prepayments.
Still seeing some three and a half $3 75.
Coupons pay off and I know people find that astounding, we just had a two and five eight single family payoffs.
The portfolio.
Historically, we've had somewhere between 550 600 million pay off.
Summer months do tend to slow down and then do you see activity pick back up.
Eight in August early September and I think you'll see a string of prepayments picked back up.
That will pick back up including some of the multifamily.
But I would expect.
I think this quarter from a funding perspective will be slightly less than what we did last quarter.
But.
But I think the payoffs that'd be about Samsung.
Say, a little bit more shrinkage in the loan balances this quarter, Chris you want to add.
I think that covers it perfectly the seasonality aspect is really interesting what I'll also add is if youre looking at project forward there are a little bit of growth historical growth.
Rate considerations to think about there.
We grew exponentially in the last several years that are in that you're gonna see more payoffs coming due from industrial rate mortgage loans that are on the multifamily book, particularly as we enter into 2024.
Okay.
Okay. That's helpful.
And then maybe just staying on the multifamily side, Chris you touched on it a bit but.
It feels like maybe there's some misperceptions out there when I talked to you know.
Investors on on on multifamily and differences in rent control versus non rent control and just the health of the multifamily market maybe on the West coast.
Could you maybe just expound on kind of what you were talking about whats youre seeing out there what youre hearing from clients and just any other commentary on the multifamily book and.
And the health that.
The health of from a credit perspective on those loans.
Yes. Thank you for asking the question I mean, if this is something we spend a lot of time on and.
I don't want to as far as to say, we are subject matter experts on it but we spent a lot of time and effort and energy really understanding the behavioral economics and the implications of the nuanced based business, but multifamily in different regions and markets that we're in.
Only I believe five rent controls states truly.
California, being one of them and with such a majority of our multifamily properties in that space rent control offers the benefits. If you will of acting as a buffer upward and downward in price. It almost gives you a little bit of stability.
For real rudimentary explanation the income approach of its value is really what drives multifamily, particularly workforce multifamily housing, which is the preponderance of our portfolio.
Because of that driven path. Most people are unwilling to move to have to re rent at a much higher rental ready for assembly, such where the property somewhere else and as a result of the high interest rate market. It's economically unviable for most people who are renting right now to pivot over to homeownership unless they completely leave the state and because of the slowdown we're seeing both in <unk>.
I can get it out of the state on some level and because of the construction units coming on line largely in the Sunbelt region being high end luxury deliveries or workforce housing is actually not seeing any impact whatsoever as a matter of fact, the numbers remain to be strong and this is echoed in the data provided by Moody's analytics, which are all of them recently as well as what we're seeing.
The portfolio trending now.
Does that answer the question.
That's super helpful. That's Super helpful. Thank you.
The next question comes from Andrew <unk> with Stephens. Please go ahead.
Hey, good morning.
Good morning.
Chris if I could go back to some of the.
You kind of roll on roll off dynamics on the loan portfolio I guess, if I if I take.
Some of the commentary there in terms of new originations in the rate that's coming on and call. It a low eight territory and then the payoffs if those stay around the same level, maybe a bit elevated but are coming off at a call. It high three low foreign territory I mean, if you take those two together it implies.
Yeah.
15 basis point lift in loan yields per quarter, just from like assuming no real changes in the interest rate environment or no more moves from the fed.
And as Youre looking through the model does that does that make sense to you that Mike in a static environment loan yields could could go up kind of 10 to 15 basis points per quarter, just with no fed changes.
I'm sure Sally will want to opine on this we spent a lot of time looking at that same question, but yes. The short answer is is that that's about where we pegged it as well and that is actually what we believe will be the plan, which is why we've been very methodical and pragmatic about the paydowns and putting new loans on the books and Thats the business strategy, Scott No I would agree with that and I would say.
Hey.
If.
I'm right and Theres seasonality, where there's a few.
Fewer payoffs on the multifamily during the summer months I believe that will pick up in the in the fall in and.
Winter months and I think.
You could see even slightly better improvements.
Month to month.
Okay got it.
And then on the deposit front do you have what the spot cost of deposit was.
Exiting the second quarter, neither interest bearing with a total <unk>.
Amy do you have that.
Yes.
Good morning, Seth.
Looking at the spot right.
Weighted average rate on the on the deposits you are looking at about.
<unk> 72.
For the quarter.
Yeah.
So that was the 372 weighted average interest bearing costs for the quarter or do you have that equivalent number at June 30th at the end of the quarter.
Or where it's at to start July .
When you look at $1 58.
And 158 for the quarter for the journey.
And thats like net interest.
Let me see yes 386.
83.
Okay.
Got it so I guess what.
Youre coming in at 386, but taking your commentary.
Scott around the reduction in borrowings.
The cost of funds could potentially be flattish in the third quarter or maybe even down in and taking them out with kind of your.
The loan commentary I mean, we should see a pretty meaningful lift in the margin heading into the third quarter is that right.
I believe so those trends are all heading in the right direction, Yeah, that's what I think.
Okay, and then I have one more on the operating expense line item.
Just weighing together some of the actions you've taken over the past quarter.
In terms of the head count reduction just.
And then also the customer service costs that were up this quarter I would assume might lift a little more into the third quarter, but overall just.
Where do you see customer service costs, adding them in the overall operating expense line item do you have a good guide for that in the third quarter.
Amy you want to.
Yes.
Well go ahead and answer that question and then I'll talk about the risks.
Well.
Well, because well Scott just mentioned the risks that we are where we're going.
In the first two quarters.
We're really looking at projecting kind of annualize and benefits in the third quarter, So compensations and benefits will definitely project.
They get all coming down a little bit in the third quarter, and even a little bit more in the fourth quarter.
Sure.
Yeah, Occupancies and other professional costs is it's it's got to be remain steady.
Customer service costs, we do expect a little bit higher probably just due to the reason.
That increase.
So I'll, let you know.
It probably will net to a very minimal increase in the third quarter.
The third rift that we did Andrew.
Whereas recent.
It's less than I think it was about two weeks ago.
So really we saw no benefit in the second quarter from the third graph.
You know as you guys know this and I'm going to state the obvious which is it's not something we wanted to do.
It's something.
That we needed to do in order to navigate our way through this situation.
But it should be impactful, we continue to find some programs.
Initiatives other things that we back burner or cancelled all together that don't.
Don't seem all that meaningful but.
40, Grand a month or whatever.
Those start adding up.
Okay.
So we continue to look for any cost saves we can.
Yeah, Okay I appreciate the color there and if I could ask one more Scott just on the on.
On the dividend and it does feel like we've hit maybe an inflection point in earnings taking some of the commentary here together the dividend is obviously.
A lot lower today, but just as the earnings profile improves over time, how are you thinking about the dividend rising should it be I guess in line with that or will it be kind of sporadic I guess can you can you help us think about how the dividend should improve from here.
Yes praveen.
<unk> backed nims starts increasing which we believe that's going to that is its trough.
As our earnings continue to grow we will do.
Doing analysis of the dividend and make sure that.
Right.
We have the support.
To increase the dividend, but it is fully within.
My one team to <unk>.
Bring the dividend back to where it was.
Post this <unk>.
Mayor that I'll call it.
No.
I think as you know I guess, what I'm, saying is yes.
We did the prudent thing by bringing the dividend from <unk> 11 cents down too but.
But I believe as our revenues.
Start on the way back up you will see us.
Look to increase that dividend commensurately.
And in alignment with what.
The revenues.
Understood. Okay. Thank you for taking the questions and congrats on a good quarter.
Thank you.
The next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning.
Good morning.
So lots of questions asked and answered.
Just as you talk about Scott the further decline in borrowings that you flag through July 20th is there any.
A shift in kind of the on balance sheet cash liquidity from that or is that really just a function of deposit inflows being used to pay down some borrowings.
It was really a well we did.
Bring our on balance.
Balance sheet cash from one 3 billion in the first quarter.
Down to 600 million $700 million whatever the number was I think it was 790 or whatever.
In the second quarter and of course that was used to pay down.
The deal was.
We had.
<unk> provided additional collateral to the federal Reserve Bank.
And to the federal home loan bank to get additional borrowings and to be honest.
I think it was important for us in the initial days of <unk>.
Those few banks that failed to carry an abundance of on balance sheet cash.
But as we had additional borrowings that we could tap into which frankly are quicker than you could sell.
All securities or anything else, we just didn't we felt that as everything stabilized in the marketplace that we didn't need to be at a $1 three on balance sheet cash. So we brought it back down to.
A more manageable level in my mind and by the way that saves about 700000 in interest expense.
That we would otherwise be footing to carry a bunch of on balance sheet cash that frankly, we don't think we need Gary will continue to monitor that.
And.
If.
If it's warranted.
We will either increase or decrease.
On balance sheet cash.
Pending on events.
<unk>.
Could create either challenges or benefits to us.
So we're trying to take a closer eye to say where should on balance sheet cash be and especially relative to our ability to tap into the home loan bank and the Federal Reserve Bank.
<unk>.
The first quarter I guess is what I'm trying to say I think it was prudent at the $1 three I think where we're at right now is prudent for where how I feel like the environment is today.
Okay. Appreciate it and then in terms of your commentary about.
You know probably still some decline in loans.
From here, if I heard that right.
Sense of where loan balances may bottom out and are you thinking about in terms of kind of a target loan deposit ratio. How do you kind of think about triangulating around.
Loan balance versus funding.
Sure.
I don't know that we've set a number.
But the.
Total loan should be yet.
As you know we've cut back on multifamily lending, it's almost nonexistent.
I would tell you it is nonexistent the only things that we truly are focused on his equipment finance SBA.
And truly adjustable C&I production.
Single family.
The multifamily all which tend to be more fixed rate nature.
Anything else, we're just not really looking to do at this time. So the answer is it's going to continue to shrink.
We're hyper focused on the loans to deposit ratio, which is also key im proud of the fact that we brought it down as of July 20 to $93 one.
I want to continue to bring that number down.
Where is that I don't even know have an answer for that but you know my objective in the near term is 90%.
Yeah, I wouldn't be surprised if we.
Even.
The strike to get at a little lower than that over.
Period.
I appreciate it.
You flagged in your comments, the 100 million if it shall be term events, the five year events like that.
720, and then you mentioned 200 million more that reduces.
Your cost by about 170 basis points, how long is that fixture.
That particular, one with a different structure.
It was.
A five year portable six months.
So the home loan bank has the right to put it back to us in six months.
I think now is the perfect time to do it given the backdrop of the fed pretty much being done with raising rates.
You know if.
The street right on expectations for the fed rate cycles.
You know.
That was put on at a <unk>.
62, I believe Gary.
So it was a five year political six months, so it would be portable.
I'd like to think of it as a call.
But put a bullet Jamie.
Okay, Great and then my last question.
Obviously, the focus over the last four months by investors has been pretty squarely on deposits.
But there are questions, obviously around asset quality for the industry overall and you know as it relates to first foundation, obviously your allowance is.
Pretty low on a relative basis of 30 basis points of loans, even if you assume multifamily is a zero loss asset that translates to 60 basis points and the rest of the portfolio. So if you could talk a little bit about the allowance as it relates to the to the non multifamily portfolio and comfort with that level you're at.
Yeah, Chris Yeah, It's a great question and one we have spent a lot of time thinking about obviously.
Having started the bank, but the loss history that we have we have to rely a lot on the outside data for seasonal and stress testing purposes.
We run a combination of scenarios with Moody's analytics being the backdrop for that.
And the other scenarios are weighted for their baseline and severe adverse case scenario as well as the potential upside obviously as you would imagine we've been weighted much heavier towards the severe adverse scenario and taken a more conservative approach and that's really reflected in the overall number.
But we feel really strongly about our portfolio look.
Our credit portfolio.
As been very conservative for a long period of time, and we don't really sacrifice credit quality for rates, which is really the interest rate risk position that we were that led us to where we're at today, even the C&I lending that we've done has been equally as conservative and strong underwriting characteristics are there.
Do we expect to see some degradation over time, possibly but that's accounted for with the stress test and are equally as conservative approach. So we do feel confident that the numbers are more than enough to backstop, our position and we're just not seeing the degradation in the credit cycle yet.
We're hopeful that as we continue to look at this business, we're maintaining our credit standards. The same degree and I don't expect there to be a challenge, but overtime you may see that number increase as the C&I space of the model gross well if you will I want to be clear about that Gary.
As multifamily pays off and we put on more C&I or just we put on more C&I.
There is no doubt that our loan loss reserves will increase as a result.
So.
Yeah no.
And looking across you know we've had some piece of data that is.
Take it away.
Theres been some additions.
Net debt there is not a doubt in my mind that as we continue to put on C&I lending, which obviously you are going to require more loan loss reserves, you will see that percentage grow it.
It grew this quarter.
Not a lot, but it grew a little bit this quarter, but you also had a shrinkage of the loan portfolio as well.
Great. Thanks, guys I appreciate the.
Yes.
Thank you.
Yeah.
The next question comes from Adam Butler with Piper Sandler. Please go ahead.
Hey, good morning, everybody.
I'd like to just.
And just a follow up on the <unk>.
On expenses.
I know that the customer service Department line is sourced from earnings credit rates on non interest bearing deposits I was curious if you could ask if you could answer a few questions surrounding that.
The proportion of the noninterest bearing growth this quarter was tied to those rates.
What proportion of current noninterest bearing or tied to those rates and with the price that right now.
Well be.
Noninterest bearing deposits only went from 24 point something that 25.
So.
Whatever the increase was.
My bet would be that a majority of that.
Would be in that sector.
That we pay credit Suisse.
Okay.
When you further.
I also was just curious if we look at the forward curve and we'd get about 100 basis points and cuts next year could you see some relief in that expense line.
And I'm trying to get a SaaS offering.
Sure I'm trying to tell everybody that when it comes to those types of deposits.
You know when we have fed rate increases it is pretty much basis point for basis point.
When we have fed decreases, which you know a lot of people are starting to point to that it is also basis points one basis point.
So to the extent that the fed reduces rates you will see a commensurate drop basis point for basis point.
Fed drops rates should they do so.
Okay, great that's good to hear and.
Just a housekeeping item.
What is a good tax rate to expect going forward.
Amy.
You're really looking at an effective tax rate is about 16.
<unk>.
Annualized so it really depends on.
Net income before tax you know, how we're going to do it.
And third quarters, and fourth quarter, but as of today, we're projecting about effective tax rate of about 14.
Okay, Great. Those are all my questions congrats on the good quarter.
Thank you.
It appears there are no further questions at this time I will now hand, it back over to Scott Kavanaugh for any additional remarks.
We continue to work through some of the challenges stemming from the disrupt.
Disruption in the financial industry earlier in the year and we are encouraged by the quick rebound in the market.
And our business I would like to use the analogy that we are a big ship and we are starting to finally turn we are thank you thankful for the continued support of our stockholders as they continue to believe in our long term strategy during a pivotal pivotal time.
For the industry demonstrated by electing all 10 of the company's nominees for the board of directors and our 2023 annual meeting while rejecting the actavis nominee by a substantial margin.
Going into the back half of the year, we are more focused than ever on growing deposits remaining selective on loans.
Indentified efficiencies, reducing expenses and continuing to serve our clients well.
We have a strong liquidity position that provides financial flexibility limited exposure to uninsured deposits and a securities portfolio that allows us to actively manage our interest rate risk and gives us balance sheet flexibility we.
We are able to get personalized attention to our clients and they remain our first foundation per door.
Priority as a regional bank, we remain nimble and able to provide first class White glove service to our clients. We are proud of the continued resiliency by our team and the loyalty of our customers and we navigate through this challenging macroeconomic environment.
There have been a lot of people that have stood up and gone above and beyond for first foundation and I look forward to well.
We will accomplish in the second half of 2023 and into 2024 as a reminder, our earnings report and Investor presentation can be found on the Investor Relations section of our website.
Thank you and have a great remainder of your day.
Yeah.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Mhm.
Hum.
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