Q3 2023 First Foundation Inc Earnings Call
Today will be Scott Kavanaugh, first foundation's President and Chief Executive Officer.
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Jamie Brittain first Foundation's Chief Financial Officer, and Chris <unk>, Chief operating officer.
Before I hand, the call over to Scott. Please note that management will make certain predictive statements today during today's call that reflect their current views and expectations about the company's performance and financial results.
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These forward looking statements are made subject to the safe Harbor statement included in today's earnings release.
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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 material materially from any forward looking statements and reconciliations of non-GAAP financial measures.
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Please see the Companys filings with the Securities and Exchange Commission.
And now I would like to turn the call over to President and CEO Scott Kavanaugh.
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Hey, Howdy from Dallas, Texas.
For joining us for today's third quarter 2023 earnings call.
The turbulence the roster in financial industry in the first quarter is largely abated across the entire banking sector.
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With stability normalizing, we dedicated the entirety of our third quarter, two unwaveringly executing our strategic initiatives of improving our loan to deposit ratio.
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Increasing overall loan yield and improving the sensitivity of the loan portfolio against higher interest rates.
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Although we have made great strides in our achievements there remains much work to continue to solidify earnings.
Further reduce our loans to deposit ratio and.
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And further decrease the overall sensitivity of our balance sheet.
Although there remains much uncertainty with defense fight against inflation and the geopolitical events that recently transpired management believes this is a trough quarter for pre tax provision net revenue or <unk> or <unk>.
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Based on the events as we presently node.
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This is the case, we should continue to see improvements in our balance sheet and core earnings.
Exceptionally proud of the commitment and diligence exhibited by our entire team from investment management Trust banking deposits and lending our team is dedicated to delivering exemplary results during what I believe to be the most challenging time.
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I've experienced in my professional career.
As we reflect upon the last quarter. We are delighted to report continued improvements in our loan to deposit ratio.
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Increased average yields on our loan and securities portfolios.
And improvements in our capital ratios.
For the third quarter, we reported net income attributable to common shareholders of $2 2 million or four cents a share for both basic and diluted shares tans.
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Tangible book value, which is a non-GAAP measure ended the quarter at $16 19.
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An increase of seven.
From the $16 12 at.
At June 32023.
Total revenues were $63 8 million for the quarter, an increase of four 4% from the $61 1 million as of June 32023.
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Net interest income increased to $52 1 million or by six 3% as compared to the $49 million as of June 32023.
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Noninterest income was $11 7 million for the quarter compared to $12 1 million as of June 32023.
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Net interest margin was 106, 166% for the quarter as compared to $1 five 1% as of June 32023.
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Our efficiency ratio was 99, 7% during the quarter as compared to 92, 5% as of June 32023.
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Our adjusted return on average assets, a non-GAAP measure ended the quarter at 0.08% down from the one 1% reported as of June 32023.
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Our loan to deposit ratio showed continued improvement decreasing to 95, 1% as of September 32023 from the 97, 9% as of June 32023 and 108.
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4% from September 32.
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2022.
We remain committed to continuing to improve this ratio through a combination of strategically reducing lower yielding loan balances.
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Continuing to grow deposits.
Our deposit pipeline remains robust as we look into the fourth quarter. We firmly believe that this favorable trend will continue.
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Related to operational efficiencies during the quarter. We have remained laser focused on cost saving initiatives and proactively shrinking our loan balances as you are aware we are in the early.
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We were early in the making of extremely difficult decisions to reduce our workforce and terminate projects that were slated for completion.
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These deliberate actions and strategic decisions had been instrumental in controlling expenses and managing their impact on earnings by diligently managing costs and streamlining our operations, we have been able to optimize our resources and capitalize on opportunities.
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That supports sustainable growth.
Our deposits remained at $10 8 billion in the third quarter versus the second quarter, an increase from the $9 5 billion.
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September 30th 2022.
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Core deposits totaled $8 1 billion for the third quarter non.
Non interest bearing demand deposits accounted for 22% of total deposits as of September 32023, compared to 25% and 37% as of June 32023, and September 30 of 2000.
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'twenty two.
Brokered deposits accounted for 24, 6% of total deposits as of September 32023, compared to 24 as of June 32023.
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As I said, our deposit pipeline remains robust heading into the fourth quarter. Our branch network remains key to the success of our deposit strategy, Chris will discuss initiatives, we have to expand our core deposits and our branch network.
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Work.
We also continue to see resilience in our digital banking channel.
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The platform has continued to serve as an invaluable source of new depository accounts, allowing us to expand our client base base, both demographically and geographically across the country with limited branches across the markets. We serve this product <unk>.
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Allows easy access to our clients in our markets as well as to digitally forward prospects across the country.
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We recently completed and not great utilizing mantle for our front end opening process early indications have shown fairly significantly increased pull through rates for account opening while we require requiring less of our personnel.
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Correct involvement we are truly encouraged by this ongoing trend as it reinforces our commitment to providing accessible and convenient banking solutions to our valued clients.
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We have continued to improve our insured and collateralized deposits to approximately 87% of total deposits.
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As of September 32023, as compared to the 88% as of June 32023.
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We maintained a strong liquidity position.
Approximately $4 3 billion as of September 32023, our liquidity to uninsured and uncollateralized deposits ratio was three one times.
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Our wings were $984 million as of September 32023, as compared to $802 million and $1 3 billion as of June 32023, and September 32022.
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It is interesting to note that the average borrowings for the quarter were $587 million for the quarter compared to the $1 7 billion for the prior quarter. The decrease in average borrowings was due to the continued pay down of additional borrowings which were used to increase on.
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Balance sheet liquidity following the banking industry's events that occurred during the first quarter and into the second quarter.
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As the deposit levels have stabilized and begun to return to previous levels. Some of the additional borrowings were paid down <unk>.
During the quarter, we added an additional $800 million of term FHL the advances that were portable.
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The average cost of borrowing was reduced by over 1%.
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Versus the overnight rate, Jamie will provide greater insight to our borrowing activity.
Turning to loans credit quality continues to serve as a crucial differentiator for first foundation or.
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Our nonperforming assets to total assets were one zero percent as of September 32023, as compared to one 2% as of June 32023.
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Loan balances were $10 3 billion, a reduction of $302 million for the quarter.
As compared to $10 6 billion for June 32023.
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Chris will give a further breakdown of loan activity during the quarter.
Looking at our wealth management and trust businesses, although markets have remained volatile FFA has seen strong performance and secured new client relationships throughout the quarter.
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First Foundation's advisors had $5 billion in assets under management as of September 32023.
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This is down $300 million from the $5 3 billion in AUM as of June 32023, the decline was largely due to the volatility in the market.
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Trust assets under advisement ended the quarter at $1 2 billion as compared to the same in June 32022.
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Margins for our fee based divisions remain high and our new client prospects remain promising for both advisory and trust services as we head into the fourth quarter.
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In the third quarter I am pleased that CNBC and Barron's recognize first foundation advisors amongst the top wealth advisers in the country.
Jamie will provide more detail on the trust and advisory businesses.
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I will close by reiterating my heartfelt appreciation for the incredible efforts and unwavering dedication of iron.
Higher team has been and undoubtedly challenging year with their hard work and commitment and played an instrumental role in our continued success. We recognize that there are factors beyond our influence, including the federal reserve's decisions on interest rates.
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However, we remain steadfast in focusing on the aspects of our business that we can control and navigating through the average changing market conditions. Our client first mentality remains a foundation of our business and core franchise.
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Our commitment to our clients and their financial success is only strengthened over time.
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We probably believe that by putting our clients' needs at the forefront we can successfully navigate the challenges of the market and continue to thrive now I will turn the call over to Jamie to cover the financials in greater detail.
And the math.
Jamie.
Thank you Scott and good morning, before continuing to discuss the quarter I'd first like to say how excited I am to be joining first foundation is such an important time for the company and the industry, though unprecedented market volatility has presented challenges not faced in generation as our most recent results suggest I believe we have the right team in place to <unk>.
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Your call is very important to us. Please stay on the line and you'll be transferred to the next available agents.
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Whether the environment and emerge as an even stronger institution for our clients our teams and our communities.
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I've been fortunate enough to spend time with many of our teammates over the past couple of months and I have been nothing short of impressed we have more work to do as we continue building on first foundation success, but I wanted to thank each of you for your commitment so far and say I look forward to working with you on the challenges and great opportunities. We have ahead.
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Okay, moving back to the quarter I'll start with the balance sheet and our net interest margin, which as Scott mentioned improved 15 basis points from 151% in the second quarter to 166% in the third this was influenced by several dynamics loan yields improved modestly four basis points as the yields on both the available for sale.
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And held to maturity portfolio is 76 basis points and 18 basis points respectively.
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When coupled with a mixed shift loans these yield improvements drove a quarter over quarter increase of five basis points in our earning asset yield.
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Contributing to the 76 basis point improvement in the available for sale portfolios yield where new securities purchases $400 million of which were short dated U S. Treasuries. We also purchased some Ginnie Mae agency mortgage backed securities, which helps to explain the difference between the available for sale portfolios period ended period average balances.
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A full quarter benefits of these purchases to our net interest margin will be captured in the fourth.
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We maintain a cautious posture amid recent volatility in the longer end of the curve, but we are open to taking advantage of opportunities to purchase high quality securities at attractive yields should they present themselves.
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On the right hand side of the balance sheet net interest margin benefited from seasonal growth in our noninterest bearing deposit portfolio, which I'll touch on more in a moment and interest bearing liability costs, increasing by only four basis points. Despite the full quarter impact of the <unk> 25 basis point increase in early may and the <unk>.
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The quarter impact of the most recent 25 basis point move here at the end of July.
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On the interest bearing liabilities continued increases in interest bearing deposit costs from 372% in the second quarter to 4%. This quarter were partially offset by not only by a reduction in average borrowings balances some of which didn't move to broker deposits, but also by a decrease in the cost of borrowings which decreased from five.
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One 4% in the second quarter to $4, one 6% in the third.
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Our balance sheet remains liability sensitive but to pull some of the benefit forward, we entered into additional puttable advances with the federal home loan Bank as Scott described in the past the <unk> retains the option to put these back to us once they are lockout periods clear, but in the meantime, we can benefit from the market's expectations for rate reductions in the future.
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Since the new advances were added to the balance sheet. After the mid point of the third as with the available for sale portfolios balance average borrowings balances are expected to increase in the fourth.
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As I mentioned, the quarter's net interest margin improved in part due to the seasonal growth in our noninterest bearing deposit portfolio. As we've discussed previously a portion of this portfolio is from relationships receiving compensation through customer service costs, which increased $5 7 million or 30% quarter over quarter.
And please note that this call is being recorded for training and quality assurance.
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As we move into the fourth quarter outside of market share capture our relationship growth, we fully expect seasonal trends to continue and balances to decline from period end balances at September 30.
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Assuming a stable short term rate environment customer service costs will come down in lockstep with balances. This would benefit quarterly noninterest expense, but the mix back to interest bearing liabilities as a result of the balances we will secure to replace the runoff will weigh on the fourth quarter's net interest margin.
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Now please note that since you're calling Judy as a part of a special promotion with savings line. We are providing you with the 100 dollar Walmart gift card that comes to you from my data that showed so can you. Please confirm your mailing address that we can send you. All this be do along with your 100 dollar Walmart gift card.
Outside of this dynamic which is an important one for the NIM and net interest income we would expect a flat rate environment to maintain favorable momentum on other important factors.
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Loans exited the quarter with the September average yield of 475% only two basis points above the quarterly average of 473%, but due to the yield improvements in the securities portfolio and an on balance sheet cash, earning asset yields closed the quarter at 466% or 10 basis points.
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Interest bearing deposit rates averaged four 3% in September as compared to a 4% average.
For the quarter and our 386% average in June.
We are pleased with the balance sheets improvements, though we continue to manage concentrations on our loan portfolio. We grew the balance sheet by $211 million in the quarter from $12 8 billion in the second to $13 1 billion in the third as we took advantage of opportunities to improve our net our interest rates.
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<unk> and support near term earnings we will continue to monitor the rate environment for opportunities to shift the balance sheet to a more sustainable long term interest rate risk profile and mitigate the earnings risk of future short term rate increases.
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Moving to the income statement net interest income, though we saw a modest quarterly decrease in average earning assets of 15 basis point lift in the net interest margin drove a $3 1 million or six 3% increase in net interest income a slight reduction in excess liquidity drove a modest $560000.
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Decrease in interest income, while the shift to noninterest bearing deposit balances in the $600 million decline in interest bearing liabilities overall provided a more impactful $3 $7 million reduction in interest expense.
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Noninterest income declined by $381000 this quarter from $12 $1 million in the second to $11 7 million in the third as Scott mentioned, we saw quarterly decline in AUM fee incomes primary source, which contributed to the reduced fee income.
Market volatility market volatility and net withdrawals were factors in the quarterly results, but we are very pleased with <unk> performance. We continue to benefit from new accounts $77 million this quarter and the business is maintaining its efficiency and recent operating margin improvements.
Outside of customer service costs, which I discussed before other noninterest expense categories totaled $39 5 million for the quarter as compared to $38 5 million in the second quarter, importantly, compensation and benefits, which declined by $1 $4 million. This quarter was only $19 6 million as <unk>.
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This is reflective of the very difficult decisions made earlier in the year and as Scott mentioned, our recognition of the importance of remaining laser focused on improving operating efficiency and controlling our discretionary costs as well.
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Again operating leverage and long term steady growth in net interest income.
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Moving finally to capital and liquidity continued management of the loan portfolio led to a 22 basis point improvement in first Foundation's total risk based capital ratio, which now stands at 11, 98%.
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Our tangible common equity to tangible asset ratio ended the third quarter at 7%, which is also in line with peer levels, but importantly provides a relatively strong risk capital balance versus peer when considering first our held to maturity portfolios relatively favorable after tax unrealized loss position of $75 2 million.
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Which is only eight 2% of tangible equity and only 50 basis 58 basis points of tangible assets and.
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And second our strengthening liquidity position and relatively low levels of uninsured and uncollateralized deposits, which proved to be the most vulnerable. During this significant market market turbulence, we saw earlier in the year.
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Further on these points insured and collateralized deposits represent more than 87% of total deposits.
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Cash and cash equivalents of $819 million represents six 3% of total assets at September 30, and total available liquidity stands at $4 3 billion or $3, one times, our uninsured and uncollateralized deposits.
We are pleased with the stability, we've achieved in our liquidity position.
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And when considering both pledged and Unpledged securities are comfortable with the level of on balance sheet liquidity. We are holding today, we will continue to monitor for opportunities to improve our structural interest rate position, but we and we are confident in where we stand.
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Before turning it over to Chris to provide additional detail and color on our loan portfolio, our deposit portfolio and the initiatives underway to expand our core deposits and strengthen our balance sheet position even further.
I want to say, thank you again to our team and your commitment to our company.
The work you've done this year has made a difference and I look forward to supporting their continued success.
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And please note that the details of this offer will be mailed to you within the next 48 hours or will be physically mailed to you within the next seven to 10 business days subject yard Abdul So I believe that God, which you have it's under your name right you are the authorized signer.
Thank you Jamie and good morning, as Jamie suggested I will be talking to you today about lending deposits and a bit about our strategic direction.
While we've seen a quarter with lower market volatility in this sector, but in the previous two quarters. There is still much to be done last year. When interest rates started to rise we originated more fixed rate lending than we should have our goal is to continue to reduce that exposure and diversify into index plus margin based pricing focused and conservatively underwritten.
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Elizabeth.
Thank you.
C&I lending, where we prioritize relationships.
We have and continue to make great strides towards this end goal all of our departments have worked together to manage the strategic direction of our diverse loan portfolio, which as of September 32023 remains composed of 51% multifamily loans down from its height of approximately 54% as of Q3 2022.
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32% commercial business loans compared to approximately 30% as of Q3 of 2022, 9% consumer and single family residents loans, 6% non owner occupied commercial real estate.
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And approximately 2% of land and construction loans.
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From an operational perspective, we have challenged our lending departments to evolve and adapt to the current climate.
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We have pivoted to focus on what supports both our clients and our operational health, maintaining a cautious yet proactive approach to growing with all eyes on asset quality.
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The loan yields Jamie referenced were the result of quarterly originations, 91% of which was in the C&I lending space.
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Loan fundings comprised of primarily high quality adjustable rate C&I, SBA and mortgage lending totaled $245 million offset by loan payoffs of $546 million in the quarter.
Our goal is to continue to drive down our commercial real estate exposure and have a greater balance between fixed and variable rate lending over the near term. We are taking a cautious protection dairy lending approach with our existing multifamily portfolio.
On a long term basis, we need to be and will be more diversified overall on all of our underlying assets.
Ultimately this will gradually increase the bank's seasonal reserves as a more balanced portfolio will have a naturally increasing reserve.
From a philosophical perspective, I want to highlight that we are a relationship based bank born out of our synergies with our high net worth clients from our partners at first Foundation advisors we.
We do not focus on transactions, but rather stickier and more robust relationships offering products like margin lines of credit on low leverage portfolios of assets under management can help deepen our relationships with the platform, while providing additional adjustable pricing and blunt fixed rate interest rate exposure in the portfolio.
Winning a low risk credit profile.
Regarding risk management, our achievement in maintaining high underwriting standards is not solely a credit risk measure, but a reflection of our organizational culture strength.
It shows how deeply our teams understand and resonate with the principles that have always guided us and that we do not sacrifice credit quality.
This discipline is why we have been able to reallocate internal talent from originating loans to assisting with portfolio management asset quality review and an organic internal cross referral network looking at the breakdown of loans that we've originated so far year to date the percentages are as follows.
Commercial business loans, 90% multifamily, 2% single family, 2% and other miscellaneous loans at approximately 6%.
It is always worthwhile to reiterate the 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.
Our decision to temporary fixed rate lending, especially in the multifamily segment should not suggest a lack of confidence in the asset class in fact now more than ever workforce housing is in demand.
There is a housing affordability crisis in the United States, which cannot be ignored.
The housing affordability index, just hit a new record low of 90.
This means that housing affordability is down approximately 50% since 2021 alone and since the peak in 2012 housing affordability is down nearly 70%.
The cost of buying a home versus renting one is that its most extreme since at least 1996. The average monthly new mortgage payment is 52% higher than the average apartment rent according to CBRE analysis.
Last time to measure look this disconnected to wages was before the 2008 housing crash even than the premium peaked at 33% in the second quarter of 2006.
There is no state in the United States, where housing affordability is worse than California, where seven of the 12 least affordable housing markets are found California, a rent controlled state also happens to be where approximately 88% of our multifamily loans are located.
As a reminder, <unk>.
And the portfolio of maintaining a low risk credit profile.
We made a strategic decision years ago to be cautious of financing and newly built properties.
Regarding risk management, our achievement in maintaining high underwriting standards is not solely a credit risk measure, but a reflection of our organizational culture strength.
Bank has limited exposure to the Sunbelt region, and even more limited exposure to high end luxury apartment units newly.
Newly built property is typically only have downside risk and are also generally less impacted by rent control in states like California.
It shows how deeply our teams understand and resonate with the principles that have always guided us and that we do not sacrifice credit quality.
This shift illustrates more than a simple portfolio adjustment it shows our agility unity and shared vision with every team member contributing to a refined collective strong credit culture.
This discipline is why we have been able to reallocate internal talent from originating loans to assisting with portfolio management asset quality review and an organic internal cross referral network looking.
Regarding our multifamily portfolio its strength is evident in both its credit quality metrics and it's low NPA ratio for the third quarter of 10 basis points as highlighted by Scott earlier.
Looking at the breakdown of loans that we've originated so far year to date the percentages are as follows.
<unk> business loans, 90% multifamily, 2% single family, 2% and other miscellaneous loans at approximately 6% it.
As you've come to expect our underwriting remains staunchly conservative with weighted average ltvs are 55% for multifamily loans and 54% for single family loans.
It is always worthwhile to reiterate the 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.
Additionally, we are seeing the average duration of the portfolio continue to move downward just below three years, which would only further to continue support the repositioning efforts of the diversifying of its underlying assets.
Our decision to temper fixed rate lending, especially in the multifamily segment should not suggest a lack of confidence in the asset class in fact now more than ever workforce housing is in demand.
Our deposit growth, particularly in insured and collateralized deposits mirrors, our clients' trust the proven high level personal touch combined with our strategic stance on rate adjustments has fostered a deeper relationship with our clients distinguishing us in the marketplace like.
There is a housing affordability crisis in the United States, which cannot be ignored.
The housing affordability index, just hit a new record low of 90.
This means that housing affordability is down approximately 50% since 2021 alone and since the peak in 2012 housing affordability is down nearly 70%.
Like our lending operations, we have a bifurcated strategic vision liquidity and funding has been the focus near term while over the course of a longer term, we need to drive core funding back up and we will do that now that funding appears to have stabilized. We are pivoting to a campaign, where we aggressively look to grow core funding this will allow us over.
The cost of buying a home versus renting one is at its most extreme since at least 1996. The average monthly new mortgage payment is 52% higher than the average apartment rent according to CBRE analysis.
<unk> to drive down any overdependence on broker deposits and home loan bank advances.
Last time the measure look this disconnected to wages was before the 2008 housing crash even than the premium peaked at 33% in the second quarter of 2006.
It is particularly important that we highlight the entire company's commitment to bolstering the growth of the bank's deposit franchise.
From our first foundation advisors family to our trust team from in branch tellers to the person that answers the phone when you call. The digital branch. It is everyone's job to collaborate and champion the strength of what this platform can do the breakdown of our deposits is as follows money market and savings, 29% certificates of deposits 28%.
There is no state in the United States, where housing affordability is worse than California, where seven of the 12 least affordable housing markets are found California, a rent controlled state also happens to be where approximately 88% of our multifamily loans are located.
As a reminder, having made a strategic decision years ago to be cautious of financing and newly built properties.
Interest bearing demand deposits, 21% non interest bearing demand deposits 22%.
<unk> has limited exposure to the Sunbelt region, and even more limited exposure to high end luxury apartment units newly.
Our deposits are diversified by geographic distribution with California, accounting for 36% of total deposits, Florida at 17% and Texas at 8%, which makes up the majority of our deposit portfolio with Nevada, Hawaii, and other states, making up 39% of the total.
Newly built property is typically only have downside risk and are also generally less impacted by rent control in states like California.
This shift illustrates more than a simple portfolio adjustment it shows our agility unity and shared vision with every team member contributing to a refined collective strong credit culture.
I'm also pleased to reiterate that our digital branches online account opening process has been completely overhauled to incorporate the latest in <unk> technology for seamless instant account opening and funding with real time risk mitigation and fraud detection since its implementation on August 15th we have seen our application abandon rate drop.
Regarding our multifamily portfolio its strength is evident in both its credit quality metrics and it's low NPA ratio for the third quarter of 10 basis points as highlighted by Scott earlier.
As you've come to expect our underwriting remains staunchly conservative with weighted average ltvs are 55% for multifamily loans and 54% for single family loans.
<unk> from 53% to 23% are completed applications grow from 63% to 94% and our application approval rate increase from 46% to 66%. All of this was accomplished with a fully automated submission rate of 65%, meaning that no manual oversight was needed.
Additionally, we are seeing the average duration of the portfolio continue to move downward just below three years, which would only further to continue support the repositioning efforts of the diversifying of its underlying assets.
Our deposit growth, particularly insured and collateralized deposits mirrors, our clients' trust.
To create an account and instantly funded the second phase of this project will also be a rollout of the same technology into our physical branches, which should prove to create a best in class New account opening process, which will also be an elegant fully digital solution <unk>.
The proven high level of personal touch combined with our strategic stance on rate adjustments has fostered a deeper relationship with our clients distinguishing us in the marketplace like.
Like our lending operations, we have a bifurcated strategic vision liquidity and funding has been the focus near term while over the course of a longer term, we need to drive core funding back up and we will do that now that funding appears to have stabilized. We are pivoting to a campaign, where we aggressively look to grow core funding this will allow us over.
Additionally, our next focus will be partnering with our esteemed branch employees to aggressively grow our granular core retail deposit franchise as I noted earlier, we will ask them to rise to the challenge of being the backbone of our institution because the growth of our retail channel is integral to our resilience and continued success.
We will do this by empowering and outbound network, our branch managers, who will partner with the banks product lines to visit clients frequently.
<unk> to drive down any overdependence on broker deposits and home loan bank advances.
It is particularly important that we highlight the entire company's commitment to bolstering the growth of the bank's deposit franchise.
The technology, we have implemented combined with refreshed policies and procedures and the careful elimination of redundancies have equipped our teams with the time they need to focus on client outreach simply put we have empower them to do what they do best to get out and engage with the community.
From our first foundation advisors family to our trust team from in branch tellers to the person that answers the phones. When you call. The digital branch. It is everyone's job to collaborate and champion the strength of what this platform can do the breakdown of our deposits is as follows money market and savings, 29% certificates of deposits 28%.
Before we move to questions I'd like to take a moment to express my profound gratitude to every member of our team from those in customer facing roles to our back office heroes. It is your commitment mutual support and shared aspirations that are not only steered us through recent challenges, but also fortified the very culture that makes us who we are I will now hand, the call back to the operator for questions.
Interest bearing demand deposits, 21% non interest bearing demand deposits 22%.
Our deposits are diversified by geographic distribution with California, accounting for 36% of total deposits, Florida at 17% and Texas at 8%.
<unk>.
Thank you.
I would like to ask a question press star followed by the number one on your telephone keypad.
<unk> makes up the majority of our deposit portfolio with Nevada, Hawaii, and other states, making up 39% of the total.
Your first question comes from the line of David Feaster with Raymond James Your.
Im also pleased to reiterate that our digital branches online account opening process has been completely overhauled to incorporate the latest in <unk> technology for seamless instant account opening and funding with real time risk mitigation and fraud detection.
Your line is open.
Hey, good morning, everybody.
Hey, David Good morning.
Good morning.
Hoping maybe we could elaborate on some of the funding dynamics that you talked about Jamie.
The shift in the deposit mix, maybe less reliance on some ECR deposits could you maybe just elaborate on that trade and then maybe more broadly glad to hear the deposit pipeline strong curious just how you think about the deposit outlook. Obviously, there is theres a lot of dynamics that have been talked about here and initiatives.
Its implementation on August 15th we have seen our application abandon rate dropped from 53% to 23% are completed applications grow from 63% to 94% and our application approval rate increase from 46% to 66%. All of this was accomplished with a fully automated some.
But just curious where you are having the most success immediately and maybe some of the timeline for that.
Mission rate of 65%, meaning that no manual oversight was needed to create an account and instantly funded the second phase of this project will also be a rollout of the same technology into our physical branches, which should prove to create a best in class New account opening process, which will also be an elegant fully digital solution.
Branch deposit initiatives that Youre working on.
Sure.
The changes in the third quarter as I mentioned.
Primarily in noninterest bearing deposits, we grew as we typically have as.
As the seasonal inflows increase to their peak, which usually occurs in October.
Additionally, our next focus will be partnering with our esteemed branch employees to aggressively grow our granular core retail deposit franchise as I noted earlier, we will ask them to rise to the challenge of being the backbone of our institution because the growth of our retail channel is integral to our resilience and continued success we.
The customer service costs increase in lockstep with those but as I mentioned as we move into the fourth year as payments go out to the municipalities for tax purposes and to the insurance companies are annual premiums, we would expect those to decline in the fourth.
We will do this by empowering and outbound network, our branch managers, who will partner with the banks product lines to visit clients frequently.
And then start to rebuild again.
The technology, we have implemented combined with refreshed policies and procedures and the careful elimination of redundancies have equipped our teams with the time they need to focus on client outreach simply put we have empower them to do what they do best to get out and engage with the community.
In the first we moved some.
Our of our borrowings to broker deposits in the quarter as well.
And as Chris mentioned, we are we are focusing on our deposit initiatives primary focus will be in the retail branches and so I would expect to see some continued growth in.
Before we move to questions I'd like to take a moment to express my profound gratitude to every member of our team from those in customer facing roles to our back office heroes. It is your commitment mutual support and shared aspirations that are not only steered us through recent challenges, but also fortified the very culture that makes us who we are I will now hand, the call back to the operator for questions.
The coming year from from all of our markets as we are.
Attempt to reduce the amount of time and branch and get out to customers going forward.
Thank you if you would like to ask a question press star followed by the number one on your telephone keypad.
Let Chris speak to anything else on the on the early success of that are the longer term timing of the initiatives.
Your first question comes from the line of David Feaster with Raymond James Your.
Yes, Hey, David good good to hear your voice as always.
Your line is open.
The branch network has been what I would call one of the things that we need to really focus on more so a little under focused on in the last several years largely because we had some of the other initiatives going on and one of the benefits we had to streamlining our focus and I guess, if you want to pull it out of the contingent period in some of the changes. We've made is we've been able to really focus.
Hey, good morning, everybody.
Hey, David.
Good morning.
Maybe we could elaborate on some of the funding dynamics that you talked about Jamie.
The shift in the deposit mix, maybe less reliance on some ECR deposits could you maybe just elaborate on that trade and then maybe more broadly glad to hear the deposit pipeline strong curious just how you think about the deposit outlook. Obviously, there is theres a lot of dynamics that have been talked about here and initiatives.
And the things that we want to look at so the digital branches rollout of technology was a huge part of that as you heard but obviously getting back to our core values with our relationship focus and bringing bankers with us when they go out on meetings. So imperative to our success and I think that that puts a face to the name you get a lot of this collaboration and I think that really helps bring in deposits.
But just curious where you are having the most success immediately and maybe some of the timeline for that.
Branch deposit initiatives that Youre working on.
On the lending side, we've also help enable that by requiring things like a deposit relationship on what would otherwise be transactional relationships operating accounts primary banking relationships. It's really the first question that we ask when we think about the bigger picture of our client relationship and how they can mutually grow with US. We've also brought treasury management services downstream.
Sure.
The changes in the third quarter as I mentioned.
Primarily in noninterest bearing deposits, we grew as we typically have as.
As the seasonal inflows increased to their peak, which usually occurs in October.
And we are planning on growing with small businesses in the community that go into the middle of the middle market space. If you will that are growing into the bigger spaces and one of the things that we haven't been able to offer them in the past was Treasury management services Ala Carte, which we've also focused on so all of this to say I expect the growth in the retail physical branches as Jamie noted earlier as well to continue to grow.
The customer service costs increase in lock step with those but as I mentioned as we move into the fourth year as payments go out to the municipalities for tax purposes and to the insurance companies or annual premiums, we would expect those to decline in the fourth.
We are really looking to start the culture and push aggressively now in the fourth quarter I would expect to see the benefit of that starting Q1.
And then start to rebuild again.
In the first we moved some.
Okay.
Our of our borrowings to broker deposits in the quarter as well.
Your next question comes from the line of Andrew <unk> with Stephens. Your line is open.
And as Chris mentioned, we are we are focusing on our deposit initiatives.
Our primary focus will be in the retail branches and so I would expect to see some continued growth in the coming year from from all of our markets as we.
Hey, good morning.
Morning.
Maybe just to start I wanted to get a sense on on the loan yield side, just how the new origination yield of eight 3%.
<unk> tend to reduce the amount of time in branch and get out to customers going forward.
How would that compare with the yield on the payoffs and Paydowns you saw this quarter.
Let Chris speak to anything else on the on the early success of that are the longer term timing of the initiatives.
Then just how much in quarterly loan payoffs and Paydowns do you expect over the next 12 months.
Yes, Hey, David good to hear your voice as always.
Most of the most of the payoffs that we saw during the quarter were also in the C&I category.
The branch network has been what I would call one of the things that we need to really focus on more so a little under focused on in the last several years largely because we had some of the other initiatives going on and one of the benefits we had to streamlining our focus and I guess, if you want to pull it out of the contagion period in some of the changes. We've made is we've been able to really focus.
So I would I would say that.
Loan payoffs were similar to what we saw in the new payment yields for C&I believe.
There was a pickup something we will.
I'll get back to you on that but the answer wise.
And the things that we want to look at so the digital branches rollout of technology was a huge part of that as you heard but obviously getting back to our core values with the relationship focus and bringing bankers with us when they go out on meetings is so imperative to our success and I think that that puts a face to the name you get a lot of this collaboration and I think that really helps bring in deposits.
<unk>.
I would say seasonally.
Some of the multifamily.
Loans or the lower yielding loans.
I would say the CPR as the last several months during the summer months were slower.
On the lending side, we've also help enable that by requiring things like a deposit relationship on what would otherwise be transactional relationships operating accounts primary banking relationships. It's really the first question that we ask when we think about the bigger picture of our client relationship and how they can mutually grow with US. We've also brought treasury management services downstream.
Sorry to say.
Not significant but a bit of a pickup in terms of pay off requests. So we think that will continue.
And of course.
As we look into the fourth quarter.
The yields are still in that $838 40 range.
And we are planning on growing with small businesses in the community that go into the middle of the middle market space. If you will that are growing into the bigger spaces and one of the things that we haven't been able to offer them in the past was Treasury management services Ala Carte, which we've also focused on so all of this to say I expect the growth in the retail physical branches as Jamie noted earlier as well to continue to grow.
For the C&I stuff that we've got going forward, which a lot of that is going to be tied to the deposit flows as well that we talk about when we talk about.
And pretty healthy pipeline of deposits.
We're really looking to start the culture and push aggressively now in the fourth quarter I would expect to see the benefit of that starting Q1.
Yes, Okay, and so that's kind of where I was going was it looked like the C&I payoffs for kind of heavy this quarter. So.
Okay.
To the extent C&I balances are more stable and can we see maybe a little pickup in the multifamily and single family Paydowns, you should see more tailwind as to loan yields in coming quarters is that fair.
Your next question comes from the line of Andrew <unk> with Stephens. Your line is open.
Hey, good morning.
If you look back at prior years and of course. This one is different just in the sense that rates have.
Turning.
Maybe just to start I wanted to get a sense on the loan yield side, just how the new origination yield of eight 3%.
Have risen a lot.
But if you look at the prepayments or refinancing activity in multifamily, it's always been extremely slow.
How that compare with the yield on the payoffs and pay Downs you saw this quarter and then just how much in quarterly loan payoffs and Paydowns you expect over the next 12 months.
Heading into October and its usually around mid October November December that you start to see activity in the multifamily pick back up.
Most of the most of the payoffs that we saw during the quarter were also in the C&I category and so I would I would say that.
Plus we've got an initiative that we're really working on right now to try to roll some of the lower coupon multifamily.
Loan payoffs were similar to what we saw in the new payment yields for C&I believe.
That's starting to take root.
In terms of the repositioning of some of the lower yields on that multifamily we've identified.
There was a pickup.
Thanks.
We will get back to you on that but the answer was.
I would say, probably three or $400 million of what we think are.
I would say seasonally.
Some of the multifamily loans or the lower yielding loans.
Im good assets to reposition and we're starting to reach out to those borrowers.
I would say the CPR for the last several months during the summer months were slower we're starting to see.
Yes.
Initially, having good success and talking to those.
But again, you wont see that activity until.
Not significant but a bit of a pickup in terms of pay off requests. So we think that will continue.
Probably.
Late November December.
Heading into the first quarter.
And of course.
As we look into the fourth quarter.
Great I really appreciate all the color there Scott.
<unk> are still in that $838 40 range.
And then last one for me I know that.
For the C&I stuff that we've got going forward.
The customer service cost expense can be a little.
A lot of that is going to be tied to the deposit flows as well that we talk about when we talk about.
Difficult to model some times just.
Hoping you can help us solid maybe what youre, what youre expecting in terms of.
Customer service cost expense in the fourth quarter.
And pretty healthy pipeline of deposits.
What I've tried to.
I think we've said it in prior years and this year I don't believe to be in a different there is usually somewhere around 2025%.
Yes, Okay, and so that's kind of where I would go as it looked like the C&I payoffs were kind of happy this quarter or so.
To the extent C&I balances are more stable and can we see.
Those MSR deposits that tend to flow out due to taxes and insurance payments.
Maybe a little pickup in the multifamily and single family.
Downs, you should see more tailwind as to loan yields in coming quarters is that fair.
So.
Largely like California.
If you look back at prior years and of course. This one is different just in the sense that rates have.
Tax payments are coming up in November.
So youll see.
A bulk of those deposits, which is what Jamie was talking about that tend to flow out.
Have risen a lot.
But.
If you look at the prepayments or refinancing activity in multifamily, it's always been extremely slow.
So the fourth quarter.
No.
Typically has a decline in balances.
Heading into October and its usually around.
The peak is ended in the third quarter, it's still I can tell you. So far during the quarter has held pretty steady, but I don't believe this quarter is going to be any different.
Mid October November December that you start to see activity in the multifamily picked back up.
Plus we've got an initiative that we're really working on right now to try to roll some of the lower coupon multifamily.
In the sense that we should start to see seasonality pick up in and some of those deposits be used for tax payments like I said, I would anticipate somewhere between 20% and 25% of those deposits to decline in <unk>.
That's starting to take root.
In terms of the repositioning of some of the lower yields on that multifamily we've identified.
I would say, probably three or $400 million of what we think are.
Obviously back in January Youll start to see those balances build again.
Good assets to reposition and we're starting to reach out to those borrowers.
Okay, great. Thank you for taking my questions I appreciate it.
Yes.
Yes, you bet.
Initially, having good success and talking to those.
Your next question comes from the line of Adam Butler with Piper Sandler.
Again, you won't see any of that activity until probably.
Your line is now open.
Hey, good morning, everybody. This is Adam on for Matthew Clark.
Late November December.
Hey, Adam.
Heading into the first quarter.
I appreciate the commentary just now about.
Great I really appreciate all the color there Scott.
Customers surface costs, if I could just tag along on that total expense number.
And then last one for me I know that.
I appreciate.
Customer service cost expense can be a little difficult to model sometimes just.
The <unk>.
Disclosure of average Ftes down right around 20%.
Hoping you can help us out with maybe what youre, what youre expecting in terms of.
Third during the third quarter.
Customer service cost expense in the fourth quarter.
But just to get a sense what is your appetite.
What I've tried to do.
Cut more expenses going forward.
I think we've said it in prior years this.
Just some of the headwinds.
This year I don't believe to be in a different there is usually somewhere around 2025%.
While we will continue to look for opportunities to drive efficiency for sure we've already had three ribs, which as.
Those MSR deposits that tend to slow out due to taxes and insurance payments.
<unk> was pretty pretty challenging.
So we will continue to look for opportunities to reduce cost, but near term I would expect fourth quarter expenses X customer service cost to remain.
So largely like California tax.
Tax payments are coming up in November.
So youll see.
A bulk of those deposits, which is what Jamie was talking about that tend to flow out.
At or around current levels.
From Q3.
And then going going forward.
So the fourth quarter.
We'll continue to.
To pivot as we can defer.
No.
Typically has a decline in balances.
Depending on what happens with the rate environment and.
At the peak.
And the balance sheet going forward, but at this point, we have no plans.
<unk> ended in the third quarter.
Phil I can tell you so far during the quarter has held pretty steady, but I don't believe this quarter is going to be any different.
To do any future risks.
We'll continue to focus on operating efficiency, just as we always have.
If you look at our our noninterest expense as a percentage of average assets.
In the sense that we should start to see seasonality pick up in and some of those deposits be used for tax payments like I said.
X customer service cost relative to peer.
We are.
A very efficient shop.
I would anticipate somewhere between 20% and 25% of those deposits to decline and then.
Ian ourselves on that and we will continue to do everything we can to maintain that are approved going forward, yes, Adam I would just add.
Obviously back in January Youll start to see those balances build again.
As you can imagine with three risks and us.
Sure.
Okay, great. Thank you for taking my questions I appreciate it.
As many.
Layoffs that were experienced as Jamie said it was extremely tough.
Yes, you bet.
Your next question comes from the line of Adam Butler with Piper Sandler.
But that being said.
<unk>.
Your line is now open.
We're running about as efficiently as we can.
Hey, good morning, everybody. This is Adam on for Matthew Clark.
Okay.
I appreciate the commentary just now about.
Customers surface costs.
I could just tag along on that total expense number.
I appreciate.
Okay.
The <unk>.
Disclosure of average Ftes down right around 20%.
Third during the third quarter.
But just to get a sense what is your appetite.
There are no further questions at this time I'll turn the call back to Scott Kavanaugh.
Cut more expenses going forward given.
<unk> remarks.
Just some of the headwinds.
While we will continue to look for opportunities to drive efficiency for sure we've already had three ribs, which as.
Okay.
Ladies and gentlemen, we are experiencing some technical difficulties. Please standby.
As you can imagine was pretty pretty challenging.
Okay.
So we will continue to look for opportunities to reduce cost, but near term I would expect fourth quarter expenses X customer service cost to remain.
Yeah.
At or around current levels.
From Q3.
And then gone going forward.
We'll continue to.
Pivot as we can.
Depending on what happens with the rate environment and.
And the balance sheet going forward, but at this point, we have no plans.
To do any future.
<unk>.
We'll continue to focus on operating efficiency just as we always have if you look at our our noninterest expense as a percentage of average assets.
Sure.
X customer service cost relative to peer.
We are a very efficient shop, and we pride ourselves on that and we will continue to do everything we can to maintain that or improve going forward, yes, Adam I would just add.
Yeah.
As you can imagine with three risks and us.
Sure.
As many.
Layoffs that were experienced as Jamie said it was extremely tough.
But that being said.
<unk>.
We're running about as efficiently as we can.
Okay.
There are no further questions at this time I'll turn the call back to Scott Kavanaugh.
<unk> remarks.
Okay.
Thank you for standing by Chris You May resume your conference.
Okay.
Andrew I don't know if that answered your question are you still there.
Ladies and gentlemen, we are experiencing some technical difficulties. Please standby.
Essentially the bottom line.
Is that no more risk and continue to improve our cost efficiencies when and where we can we've been looking pretty aggressively to look at everything across the platform from registered cost approach to make sure that we do the best we can.
Yeah.
But that that is going to be an ongoing process throughout the next year as much as it was for the first three quarters of this of this particular year. So.
Yes.
Okay, maybe all the way from you guys here me I don't know if I can hear you.
Okay, Okay great.
And then just moving on to <unk>.
I don't know if this is something that you would elaborate on but.
And in our reconciliation table you call out 250000 professional service costs I was just.
Trying to get a sense for what that was score if you would provide some.
Comments on it.
[music].
Yeah, I'll, let <unk>.
I'll, let Jamie speak to that when he gets back on but it was a it was 250000 right.
Okay.
Yeah, So I'll, let him speak to that one when he joined the call back with Scott, but.
I'm sure that he has some commentary some color on it I'm not 100% up to date on what that is.
Okay, all right Jamie.
Yes, sorry, I guess, we got cut off somehow.
Adam asked about the reconciliation table, we have there's a $250000 customer service cost and he wanted to ask if there was any clarity we can provide.
What are you talking about.
Professionals professional services.
Yes.
Give us a second to get caught up we were.
Hello caught off guard that our firm somehow.
The driver.
Yes.
From the Actavis.
<unk>.
Adam Okay.
Understood.
And then just.
Housekeeping question I was just wondering if you guys had a.
Okay.
Thank you for standing by Chris You May resume your conference.
The spot rate on either the interest bearing or total cost of deposits as of the end of the quarter in September.
Andrew I don't know if that answers. Your question are you still there.
Essentially the bottom line.
I do.
Is that no more risk and continue to improve our cost efficiencies when and where we can we've been looking pretty aggressively to look at everything across the platform from registered cost approach to make sure that we do the best we can.
The interest bearing deposits averaged 403 in September.
Okay great.
Those are all my questions I appreciate the time thank you.
But that that is going to be an ongoing process throughout the next year as much as it was for the first three quarters of this in this particular year. So.
You bet.
Your next question comes from the line of Gary Tenner with D. A Davidson your line is open.
Thanks, Good morning, guys.
Okay, maybe all the way from you guys here me I don't know if I can hear you.
I wanted to just ask a follow up on the customer service.
Okay, Okay great.
Related deposit costs and I Wonder if you could elaborate.
And then just moving onto <unk>.
More specifically on the amount of deposits that are subject to those.
Don't know if this is something that you would elaborate on but.
Or that drive that cost it and maybe.
And in our reconciliation table you call out 250000 professional service costs I was just.
Confirm but the percentage of those maybe made up of MSR related deposits, if it's not all of them.
Trying to get a sense for what that was score if he would provide some.
That $1 billion too.
Comments on it.
And total MSR deposits.
Yeah, I'll, let <unk>.
Let Jamie speak to that when he gets back on but it was a it was 250000 right.
And does that I mean is there another is that just a percentage of the total deposits that drive that line or is there something else in the mix as well we also have.
Yes.
Yeah, So I'll, let him speak to that one when he joined the call back with Scott, but.
I'm sure that he has some commentary some color on it I'm not 100% up to date on what that is.
Yes, Gary This is Jamie we also have 10 31 and other.
Okay, all right Jamie.
Other clients in title and escrow.
Yes, sorry, I guess, we got cut off somehow.
And that's another four or $500 million.
So Adam asked about the reconciliation table, we have there's a $250000.
Okay alright, thank you.
Customer service costs and he wanted to ask if there was any clarity we can provide.
And then a question just on kind of the loan outlook as it relates to kind of the perspective runoff of multifamily shape through 2024.
What are you talking about.
Professionals to the professional services.
Obviously theres planned scheduled amortization.
Yes.
Yes.
And then there would be some payoffs, but as assuming an 8% to 10% decline in that book through 2024 is that is that reasonable or is there a <unk>.
Give us a second to get caught up we were.
Hello caught off guard that our firm somehow.
Related to driver.
Large delta plus or minus about.
From the Actavis.
We are going to work as hard as we can to keep those relationships migrate down to market rates as they as they reset.
Okay.
Adam Okay.
Understood.
And then just a housekeeping question I was just wondering if you guys had.
Over the next year or two or three.
Our spot rate on either the interest bearing or total cost of deposits as of the end of the quarter in September.
We're hoping to expand the relationships, where we can as well to bring in operating accounts and other deposits.
So there could be some variability based on those efforts, but I think your general.
I do.
The interest bearing deposits averaged 403 in September.
Generally in the ballpark of what we'd expect for a run off.
Okay great.
Those are all my questions I appreciate the time thank you.
If they chose to to refinance elsewhere as their rate resets come due.
You bet.
Your next question comes from the line of Gary Tenner with D. A Davidson your line is open.
Okay. Thank you very much.
You bet.
This concludes our Q&A for today I'll turn the call back to Scott Kavanaugh.
Thanks, Good morning, guys.
I wanted to just ask a follow up on the customer service.
Great. Thank you. Thank you everyone for attending today's conference call. We look forward to seeing you in the fourth.
Related deposit costs and I Wonder if you could elaborate.
More specifically on the amount of deposits that are subject to those.
Fourth quarter earnings call as well. Thank you have a great remainder of your day.
Or that drive that cost it and maybe.
This concludes today's conference call you may now disconnect.
Confirm but the percentage of those maybe made up of MSR related deposits, if it's not all of them.
That $1 billion too.
And total MSR deposits.
And does that I mean is there another is that just a percentage of the total deposits that drive that line or is there something else in the mix as well we also have.
Yes, Gary This is Jamie we also have 10 31 and other.
Other clients in title escrow, yes.
And that's another four or $500 million.
Okay, great. Thank you.
And then a question just on kind of the loan outlook as it relates to kind of the perspective runoff of multifamily shape through 2024.
Obviously, there is planned and scheduled amortization.
And then there'll be some payoffs, but is this assuming an 8% to 10% decline in that book through 2024 is that is that reasonable or is there a <unk>.
Large delta plus or minus about the event.
We are going to work as hard as we can to keep those relationships migrate down to market rates as they as they reset.
Over the next year or two or three.
We're hoping to expand our relationships, where we can as well to bring in operating accounts and other deposits.
So there could be some variability based on those efforts, but I think your general.
Generally in the ballpark of what we'd expect for a run off.
If they chose to to refinance elsewhere as their rate resets come due.
Okay. Thanks very much.
You bet.
This concludes our Q&A for today I'll turn the call back to Scott Kavanaugh.
Great. Thank you. Thank you everyone for attending today's conference call. We look forward to seeing you in the fourth.
<unk> fourth quarter earnings call as well. Thank you have a great remainder of your day.
This concludes today's conference call you may now disconnect.
Yeah.
This concludes today's conference call you may now disconnect.