Q4 2023 First Foundation Inc Earnings Call
Greetings and welcome to the first Foundation's fourth quarter 2023 earnings Conference call today's call is being recorded.
Speaker Change: Speaking today will be Scott Kavanaugh, first Foundation's President and Chief Executive Officer, Jamie Brittain first Foundation's Chief Financial Officer.
Chris <unk>: And Chris <unk>, Chief operating officer.
Scott Farris Kavanaugh: 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.
Jamie Brittain: These forward looking statements are made subject to the safe Harbor statement included in today's earnings release.
In addition, some of the discussion may include non-GAAP financial measures.
Jamie Brittain: A more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements and reconciliations of non-GAAP financial measures. Please see the company's filings with the Securities and Exchange Commission.
Jamie Brittain: Well now I would like to turn the call over to President and CEO Scott Kavanaugh. Please go ahead.
Scott Farris Kavanaugh: Good morning, and welcome. Thank you for joining us for today's fourth quarter 2023 earnings call.
Scott Farris Kavanaugh: Although the entire banking industry faced substantial headwinds throughout 2023, I'm extremely proud of the herculean efforts, our entire first foundation team put forth to work together and make the company stronger.
Scott Farris Kavanaugh: I look forward into 2024, I am optimistic that the efforts put forth will continue to improve the loan to deposit ratio increased the overall loan yield and improve the sensitivity of the loan portfolio to changing rates.
Scott Farris Kavanaugh: Our teams at both the RIAA and trust departments were also able to weather a very uncertain outlook in both the stock market and real estate markets.
Scott Farris Kavanaugh: Balance remains strong at both divisions with strong pipelines.
Scott Farris Kavanaugh: The interest rate environment appears to have pivoted with offense fight against inflation nearing its end whether rates stayed higher for longer or short end interest rates start to decline. We believe first foundation is well positioned with our liability sensitive balance sheet.
Jamie Brittain: Most of our fixed rate loans are short duration and continue to ride the curve down.
Jamie Brittain: With each passing quarter.
Jamie Brittain: We still believe the third quarter was a trough quarter as we continue to reposition the balance sheet.
Jamie Brittain: Multifamily remains particularly strong as an asset class and it is showing no signs of weakness.
Jamie Brittain: As I stated earlier I am exceptionally proud of the commitment and diligence exhibited by our entire team from investment management Trust and banking deposits and lending our team is dedicated to delivering exemplary result.
Jamie Brittain: As we reflect upon the last quarter, we are delighted to report increased.
Jamie Brittain: AUM of approximately 200 million for the quarter and first foundation advisors improve VPN or quarter over quarter industry, low NPA ratios and continued improvements to our capital ratios.
Jamie Brittain: For the fourth quarter, we reported net income attributable to common shareholders of $2 5 million or $4 five per share for basic and diluted shares tangible book value, which is a non-GAAP measure ended the quarter at 16 30, an increase of.
Jamie Brittain: <unk> 11.
Jamie Brittain: From the 16 19.
Jamie Brittain: September 32023.
Jamie Brittain: Pre tax pre provision net revenue totaled to half a million dollars compared to the negative 400000 for the third quarter interest income totaled $146 6 million for the fourth quarter of 2023.
Jamie Brittain: Compared to the $144 8 million for the prior quarter.
Jamie Brittain: Net interest income as a percentage of total revenue was 25% for the quarter compared to the 18% from the prior quarter.
Jamie Brittain: Net interest margin was 136% for the quarter as compared to $1 six 6% as of September 32023, However, non interest expense decreased to $55 9 million compared to the.
Jamie Brittain: The $64 2 million in the prior quarter.
Jamie Brittain: Decrease of $8 3 million largely driven by the expected seasonal declines in customer service cost, which was discussed at the last earnings call.
Jamie Brittain: Our efficiency ratio improved to $98 five.
Compared to $99 seven as of September 32023.
Jamie Brittain: Our adjusted return on average assets again, a non-GAAP measure ended the quarter endpoint zero, 9% up from the 0.08% reported as of September 32023.
Jamie Brittain: Our loans to deposit ratio remained relatively flat at 95, 2% as of December 31, 2023 versus $95. One as of September 32023, and $103 five from December 31 of <unk>.
Jamie Brittain: 2022.
Jamie Brittain: We remain committed to continuing to improve this ratio through a combination of strategically reducing lower yielding loan balances.
Jamie Brittain: And continuing to grow core relationship deposits, our deposit pipeline remains robust as we look into the new year.
Jamie Brittain: 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 were early in making extremely difficult decisions to reduce our workforce and terminate projects that were.
Jamie Brittain: Slated for completion.
Jamie Brittain: Deliberate actions and strategic decisions have 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 the opportunities that support.
Jamie Brittain: Port sustainable growth.
Jamie Brittain: Our deposits were at $10 7 billion in the fourth quarter versus third quarter balance of $10 8 billion and increased from the $10 4 billion as of December 3rd 31 2022.
Core non brokered deposits accounted for 60% of total deposits as of September 31, 2023.
Jamie Brittain: Following the seasonal run off and the MSR and deposit portfolio noninterest bearing deposits accounted for 14% of total deposits as of December 31 2023.
Jamie Brittain: Our deposit pipeline remains robust heading into the first quarter of 2024.
Jamie Brittain: Our branch network remains key to the success of our deposit strategy, but we also continue to see strength in our digital banking channel the.
Jamie Brittain: The platform has continued to serve as an invaluable source of new and ongoing depository relationships, allowing us to expand our client base, both demographically and geographically across the country.
Jamie Brittain: With limited branches across the markets. We serve this product allows easy access to our clients in the markets as well as to digitally.
Jamie Brittain: Forward prospects across the country.
We continue to search for more ways to reach new and existing clients through this channel.
Jamie Brittain: Our insured and collateralized deposits remained at 87% of total deposits as of December 31, 2023, as compared to 87% as of September 32023.
Jamie Brittain: We maintained a strong liquidity position of approximately 4 billion at December 31, 2023, our liquidity to uninsured and uncollateralized deposits ratio was three times.
Jamie Brittain: Borrowings were $1 4 billion as of December 31, 2023, compared to $984 million and $1 2 billion as of September 32023, and December 31 2022.
Jamie Brittain: Most most of the increase in the quarter was from the Feds Bts P. A new program established to support banks liquidity needs at rates more in line with future expectations for fed funds as opposed to prevailing rates, which in today's embraer.
Environment is accretive to earnings on balance sheet liquidity remained strong at $1 3 billion in cash and cash equivalents and another $1 5 billion in investment securities at the end of the year.
Jamie Brittain: We will continue to look for opportunities to capitalize on market opportunities and position the balance sheet for strength going forward.
Jamie Brittain: Turning to loans credit quality continues to serve as a crucial differentiator for first foundation, our nonperforming assets to total assets were one 5% as of December 31, 2023, as compared to one zero percent.
Jamie Brittain: For September 32023, and one 2% as of June 32023.
Jamie Brittain: Loan balances continued to decrease.
Jamie Brittain: To $10 2 billion, a reduction of $100 million during the quarter as compared to $10 3 billion for September 32023.
Jamie Brittain: As stated previously multifamily remains strong as an asset class and we are not seeing any cracks in the sector.
Jamie Brittain: Chris will give a further breakdown of the loan activity during the quarter.
Jamie Brittain: Looking at our wealth management and trust business.
Jamie Brittain: As seen strong performance and secured new client relationships throughout the quarter the.
Jamie Brittain: The business benefited further as market slightly increase towards the end of 2023 first Foundation advisors had $5 2 billion.
Chris: As of December 32023, this was up $200 million from the $5 billion and AUM.
Chris: As of September 32023.
Chris: The increase was largely due to improvement in the margins.
Chris: <unk> assets under advisement increased during the quarter as well by approximately a 100 million to $1 3 billion as compared to the $1 2 billion noted in September 32023 margins for our fee based divisions remain high and our new client prospects.
Chris: <unk>.
Our is promising for both the advisory and trust services as I have seen in some time as we head into 2024.
Jamie Brittain: It continued to be surprised that the value of both the advisory and trust departments do not seem to be recognized and the value of first foundation stock.
Jamie Brittain: I will close by reiterating my heartfelt appreciation for the incredible efforts and unwavering dedication of our entire team and has been an undoubtedly challenging year, but their hard work and commitment have 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.
Jamie Brittain: However, we do feel that the sentiment has changed and pressures will continue to subside and our commitment to our clients and their financial success is only strengthened over time.
Jamie Brittain: We probably believe that by putting your 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 Jamie.
Jamie Brittain: Thank you Scott I'll start with the balance sheet and our net interest margin as Scott mentioned NIM contracted 30 basis points during the quarter from $1 66 in the third to $1 36 in the fourth there was a slight improvement in our earning asset yields which increased from $4 56 in Q3 to $4 62 in Q4 and parse.
Jamie Brittain: Really offset impacts elsewhere, while loan yields declined modestly three basis points and the held to maturity portfolio yield was unchanged the yield on excess cash increased 74 basis points during the quarter and the yield on the available for sale portfolio improved 49 basis points.
Jamie Brittain: Most of the <unk> portfolios increase was due to the full quarter benefit of securities purchased in the third quarter short dated U S treasuries and Ginnie Mae agency mortgage backed securities.
Jamie Brittain: As I mentioned last quarter, we are open to taking advantage of opportunities to acquire safe highly liquid securities at attractive yields.
Jamie Brittain: To the extent our liquidity objectives are achieved we will also look for assets that help us achieve our desired long term interest rate risk profile and mitigate the earnings risk of future short term rate increases.
Jamie Brittain: Moving to the right hand side of the balance sheet I will first note the expected seasonal decline in our noninterest bearing deposit portfolio.
Jamie Brittain: As discussed last quarter customer service costs came down with balances, but the mix back to interest bearing liabilities, which we secured to replace the runoff weighed on the fourth quarter's net interest margin this $680 million shift in balances from noninterest bearing to interest bearing contributed meaningfully to our quarter over quarter decline in net.
Jamie Brittain: The remainder of Nims decrease was a result of increased interest bearing liability costs, which rose 18 basis points this quarter to 419%.
Jamie Brittain: As a result of actions taken in the third quarter to pull some of our liability sensitivities balance benefits forward using political advances with the federal home loan bank fourth quarter borrowing costs improved by nine basis points offsetting this net benefit for the quarter over quarter increase in interest bearing deposit costs, which rose from 4% in Q3 to $4 21 in <unk>.
Jamie Brittain: Q4 <unk>.
Factors included the full quarter impact of the July rate increase client migration to higher rate products, such as Cds ahead of a potential decline in short term market rates and.
Jamie Brittain: And continued competition in the market for balances driving rate commendations, particularly in the retail channel.
Jamie Brittain: While our retail relationships have led to modest cost increases this quarter.
Jamie Brittain: Portfolios cumulative beta all in costs. This cycle has remained below 50%. We remain pleased with the portfolio's performance and believe it continues to be an important driver of our long term success.
Jamie Brittain: As we exited the year more optimistic about the rate environment, we saw stabilizing trends in asset yields. The December average yield for loans was 470 equal to the fourth quarter's average.
Jamie Brittain: Equal to the fourth quarter's average and the yield on the combined securities portfolio, both <unk> and HTM was 381 only slightly below the quarterly average of 384.
Jamie Brittain: On the right hand side of the balance sheet decembers interest bearing liability rates were slightly higher than quarterly averages as short high cost deposits were used to meet declines and customer service deposits as.
Jamie Brittain: As the customer service deposits portfolio as balances rebuild interest bearing deposit and liability costs will decline.
Jamie Brittain: After a challenging year, we're pleased with the progress we've achieved on strengthening our balance sheet concentrations in our loan portfolio continued to right size and we continue enhancing our on hand liquidity improving our capital as I've noted before we will continue to monitor the rate environment for opportunities to pivot towards a more sustainable long term interest rate risk profile.
Jamie Brittain: Phil and mitigate the earnings risk of future short term rate increases and I look forward to the progress we'll make in 2024.
Jamie Brittain: Moving to the income statement net interest income, though we saw average earning assets remained stable for the quarter, a 30 basis point decline in net interest margin drove $9 6 million decrease in net interest income of.
Jamie Brittain: A portion of the decline in net interest income as Scott mentioned $8 3 million was offset by the decline in customer service costs, and we would expect this dynamic to play out and reverse as customer service deposit balances begin to return in the first part of 2024.
Unlike the higher than quarterly average funding rates noted for December the opposite was true for customer service costs December expense was approximately $3 million as compared to the quarter. The quarter's monthly average of $5 5 million.
Jamie Brittain: While interest on loans declined $4 2 million from $124 4 million in Q3 to a $122 million in Q4 income on securities and other liquid assets increased by a combined $6 million to $26 4 million the shift in balances out of noninterest bearing deposits drove both higher <unk>.
Average rates and higher average volumes and interest bearing liabilities, which together increased interest expense by $11 4 million.
Jamie Brittain: Again as customer service deposits began their seasonal rebuild higher cost wholesale balances will decline with the net effect being higher customer service expense and lower interest bearing deposit costs.
Jamie Brittain: Wealth and trust related fees declined slightly for the quarter from $8 8 million in Q3 to $8 6 million in this quarter, we decided decline in quarterly average <unk>, but as Scott mentioned AUM increased point to point ending the quarter approximately $200 million higher than at September 30.
Jamie Brittain: We are excited to enter 2024 with momentum in these businesses and continue growing in such an exciting time for the industry. As you know the high growth, Texas, and Florida markets represent significant opportunity for us and we look forward to engaging with our clients and prospects there.
Jamie Brittain: Customer service costs aside other noninterest expense categories totaled $39 5 million for the quarter in line with the $39 5 million reported a quarter ago. We.
Jamie Brittain: We expect compensation and benefits to increase slightly entering the first part of 'twenty four as a result of annual adjustments in tax resets, but we recognize the need to remain diligent on expense growth and continue benefiting from the very difficult decisions made in 2023.
Jamie Brittain: As Scott mentioned several times, we remain laser focused on improving operational efficiency and controlling our discretionary costs. This is imperative as we work to reestablish operating leverage and long term steady growth in net interest income.
Jamie Brittain: Our expense to asset ratio, excluding customer service costs compare compares very favorable favorably excuse me to peers and we do not intend to relinquish that advantage.
Jamie Brittain: Continuing down the income statement the income tax provision was a benefit to net income again this quarter, increasing from a $600000 benefit in Q3 to a $2 $3 million benefit this quarter. The main driver for the additional benefit was a decrease in our state blended tax rate, which is a result of our expanding into Florida and Texas.
Jamie Brittain: The non taxable goodwill impairment made for a noisy 2023 but its profitability normalizes, we expect an effective tax rate around 28%.
Jamie Brittain: Moving finally to capital and liquidity, we expect another significant improvement in first foundation Inc's total risk based capital ratio, which we estimate will be 12, 7% or 38 38 basis points higher than Q3, and 98 basis points higher than in Q4 of 2022 level.
Jamie Brittain: This type of improvement is noteworthy and positions us well for growth once the uncertainty around the economic environment subsides.
Jamie Brittain: Our tangible common equity to tangible asset ratio declined slightly to 691 due to this quarter's larger ending balance sheet, which was primarily due to additional risk liquidity.
Jamie Brittain: As I noted last quarter. However, we believe our capital position provides a relatively strong risk capital balance versus peers. When considering first our held to maturity portfolio as favorable after tax unrealized loss position of $56 3 million or only six 2% of tangible equity which is down from $75 two.
Jamie Brittain: Million or eight 2% tangible equity last quarter and second our strengthening liquidity position and relatively continued low levels of uninsured and uncollateralized deposits, which remains which as a reminder are those that proved to be the most vulnerable during times of significant stress as noted are uninsured.
Jamie Brittain: And uncollateralized deposits stand at only 12, 6% of total deposits.
Jamie Brittain: As I mentioned before we're pleased with the stability we've achieved in our liquidity position and we're comfortable with the level of on balance sheet liquidity, we're holding today and confident in our total available liquidity of <unk> uninsured and uncollateralized deposits is more than sufficient to mitigate risk should market volatility return.
Jamie Brittain: I Echo Scott's comments on what great work. The team did for first foundation last year and I share his conviction that we're positioned for success moving forward.
Chris: With that I'll now turn it over to Chris to provide additional detail on our asset loan our asset quality loan portfolio and deposit operations.
Chris: Thank you Jamie good morning, I will be talking to you today and elaborating on our lending our deposits our strategic direction and about the strength of our assets.
Chris: Coming out of a tumultuous 2023, we had a sharp focus on remediated, our fixed rate lending portfolios position as interest rates started to rise.
Chris: As you've heard our goal since that time has been to continue to reduce that exposure and diversify into index plus margin based pricing focused on conservatively underwritten C&I lending, where we prioritize relationships.
Chris: As we do this you can anticipate an increase in our seasonal reserves as a byproduct of the asset class and the historical data which supports it.
Jamie Brittain: We believe this will be a strong step in positioning the company in line with the risk profile of peers.
Jamie Brittain: All of our teams have worked together to manage the strategic direction of our diverse and strong loan portfolio, which as of December 31, 2023 remains composed of 51% multifamily loans down from its height of approximately 54% as of Q3 of 2022, 32% commercial business loans, including <unk>.
Jamie Brittain: Owner occupied commercial real estate and equipment finance compared to approximately 28% as of Q4 of 2022.
9% consumer and single family residents loans, 6% non owner occupied commercial real estate and approximately 2% of land and construction loans, what is not clear in the data when compared quarter over quarter, but is worthy of note is there has been a deceleration in the shrinking of the bank's loan portfolio, which started the year.
Jamie Brittain: At approximately $10 7 billion and is now down to $10 2 billion as of Q4 of 2023, even after seeing a decline of $300 million in the third quarter.
Jamie Brittain: From an operational perspective, we continue to challenge our lending departments and adapt to a heavy focus on asset quality review.
Jamie Brittain: If there are cracks coming in the economy, we want to spot them proactively.
Jamie Brittain: Obviously, we continue to maintain our steadfast cautious yet proactive approach to growing with strong asset quality loan fundings continue to be comprised of primarily high quality adjustable rate <unk>.
Jamie Brittain: SBA and mortgage lending totaling $339 million for the fourth quarter offset by loan Paydowns and payoffs of $444 million in the quarter.
Jamie Brittain: As previously noted our goal continues to be to drive down our commercial real estate exposure and have a greater balance between fixed and variable rate lending as a reminder, over the near term we are taking a cautious protection area lending approach with our existing multifamily portfolio and as a result of the fixed rate portion of the portfolio.
Jamie Brittain: Looking comprise a smaller and smaller percentage of the whole from a historical perspective, we held approximately $5 billion in loans as of fiscal yearend 2020.
Jamie Brittain: By fiscal year end 2021, we had grown to over $7 billion in loans before peaking at over $10 billion in loans by fiscal year end of 2022, given the relatively short duration of the multifamily asset class and the cash flow focus of most investors, we anticipated future benefit of anticipated repricing activity.
Jamie Brittain: On a long term basis, we need to be and will be more diversified overall on all of our underlying assets as I indicated earlier. This will gradually increase the bank's seasonal reserves as a more balanced portfolio will have a naturally increasing reserve.
Jamie Brittain: For the full year of 2023 behind US, let's take a moment to reflect on the breakdown of loans that we've originated throughout this past year percentages are as follows commercial business loans, 90% multifamily, 2% single family and 2% and other miscellaneous loans at six.
Jamie Brittain: Percent it.
It is always worthwhile to reiterate that 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.
Jamie Brittain: Despite regional pressures and rhetoric around certain geographical challenges in multifamily housing we remain confident in the asset class, particularly our unique workforce housing exposure within the broadly defined sector on previous calls you have heard our teams speak to the value of workforce housing in the face of record low housing.
Jamie Brittain: Ability according to Costar the multifamily market has seen three consecutive quarters of solid demand a dramatic recovery from 2022 supply is still outpacing demand, resulting in a deceleration of rent growth nationally ironically, the market that appear to be the most unstable or the Midwest and the northeast markets.
Jamie Brittain: Which are showing resilience with marginal declines in rent growth, while sunbelt markets are experiencing significant slowing as a reminder, California has a rent controlled state and is where approximately 87% of our multifamily loans are located the bank has limited exposure to the Sunbelt region, the Midwest and the northeast markets while national.
Vacancy rates are rising by over 200 basis points from a record low of four 8% in Q3 of 2021 to seven 3% in Q3 of 2023, the bank's portfolio does not show signs of deterioration where vacancy rates rising over our existing and legacy underwriting standards.
Jamie Brittain: This is likely due to the nature of workforce housing rent controlled versus predominantly types found in the market and the aforementioned regions and newly built properties, which typically only have downside risk, particularly high end luxury apartment units looking at our entire portfolio. If strength is evidenced in both of its continued credit quality.
Jamie Brittain: All of the metrics and the low NPA as to asset ratio for the fourth quarter of 15 basis points compared to 10 basis points from the prior quarter and 13 basis points from year end of 2022, while.
Jamie Brittain: While npa's have ticked up slightly I want to be clear that this stems from two loans specifically neither were multifamily and both were acquired as part of M&A activity and not originated by FSP organically further one of the factoring credit in that business line was completely shut down as part of the underlying acquisition.
Jamie Brittain: That did not fit the credit profile of first Foundation bank. The second loan is a properly margin piece of collateral with no anticipated risk of loss, our underwriting remains largely unchanged and staunchly conservative with weighted average ltvs are 55% for multifamily loans and 54% for single family loans moving.
Jamie Brittain: On to deposit operations.
Jamie Brittain: The bank continues to focus on deeper relationships with our clients, which we believe that when combined with our value proposition of service distinguishes us in the marketplace.
While we still are keeping a close eye on liquidity and funding in the near term we have begun to refocus our core funding growth efforts.
Jamie Brittain: Improvement in funding post contagion period will allow us to allocate more attention to driving down any overdependence on broker deposits and home loan bank advances the breakdown of our current deposits is as follows money market and savings at 30% certificates of deposit 29% interest bearing demand deposit.
Jamie Brittain: That's 27% noninterest bearing demand deposits, 14%.
Jamie Brittain: Our core deposits are diversified geographically with California accounting for 36% of total deposits, Florida at 36% and Texas at 10% outside of its majority, Nevada, Hawaii and other states make up the remaining 18% of the total.
Jamie Brittain: We continue to be pleased with the growth of our digital branches online account opening infrastructure and technology.
Jamie Brittain: <unk> instant account opening and funding with real time risk mitigation and fraud detection is already prepared for deployment into our physical branches. It will initially be utilized for consumer accounts. So that we free up more time to focus on the high touch needs of our business clients and the complexities of their banking relationship as.
Jamie Brittain: As we noted last quarter, we have begun to change the culture of our physical branches to empower and incentivize employees to aggressively grow our granular core retail deposit franchise. They have risen to the challenge of being in the frontline and the backbone of our institution because the growth of our retail channel is integral to our resilience and continued success.
Jamie Brittain: We continue to look at our current technology stack to see where we can both increase efficiency and remove redundancy refresh policies and procedures continued to improve operations as well.
Jamie Brittain: From a timing perspective, we have begun preparing for a changing landscape ahead of a potential rate cut during the 2024 calendar year by strategically de prioritizing marketing based on rate and instead, highlighting relationships community and service a lot is changing about the way, we do business and I would like to thank every single contributor at first.
Jamie Brittain: <unk> for their support and commitment to improving what we do if we learned nothing else from 'twenty to 'twenty. Three it is that we are resilient and we are grateful for our family of team members, who rose to the challenge of a very tumultuous year for the economy I will now hand, the call back to the operator for questions.
Thank you if you have a question. Please press star one on your telephone keypad to remove yourself from Mchugh simply press Star one again.
Jamie Brittain: Your first question comes from the line of David Feaster, Raymond James Your line is open.
David Feaster: Hey, good morning, everybody.
David Feaster: Hey, David.
Maybe maybe even starting to high level.
David Feaster: No.
David Feaster: The fed's clearly at least.
David Feaster: Seemingly likely to pause near term and that there is an increased likelihood of potential cuts I was just hoping you could help us think about the margin and earnings trajectory, assuming a fed pause and maybe how that could be accelerated with potential cuts.
David Feaster: And just in thinking about the impact of potential thoughts on your financials. I know you talked about bringing a bit of a liability sensitivity forward, but just kind of any thoughts on how quickly you will be able to reprice funding costs, lower and while while earning assets continue to reprice higher.
David Feaster: Well given the fact that we've stated.
Jamie Brittain: In no uncertain terms that we're liability sensitive.
David Feaster: It would obviously.
David Feaster: Fuel our earnings.
David Feaster: Fad were to cut rates.
David Feaster: I think as <unk>.
David Feaster: Stated previously there is probably.
David Feaster: I would say upwards towards $3 billion of liabilities that would reprice immediately.
Speaker Change: If the fed were to cut rates.
Speaker Change: Which would be a substantial savings and frankly ignite earnings back to where they once were.
Speaker Change: If that does not happen and it's a higher for longer scenario.
Speaker Change: Which I don't think it will for various and sundry reasons.
Speaker Change: Yes.
Speaker Change: Then yes it.
Speaker Change: It will be.
Speaker Change: An upward trend.
Speaker Change: <unk> seeing everything improve but obviously it won't be at the same pace as at the <unk> to start cutting rates.
David Feaster: That makes sense.
David Feaster: Yes, no for sure.
Okay. That's helpful and then maybe maybe dig in a bit.
David Feaster: Deeper.
David Feaster: On the loan growth side, obviously production will slow, especially in multifamily.
But you know a lot of multifamily lenders in the market.
David Feaster: I have pulled back as well and there is clearly still demand for that product I'm curious, maybe how do you think about more broadly the trajectory of loan balances at or maybe even in the pace of declines where youre seeing good opportunities today, and maybe are you actually starting to see opportunities on the multifamily side that that makes some sense or is growth primarily going to.
David Feaster: They'll be C&I.
David Feaster: Well I think initially our hope was to continue to do.
David Feaster: A preponderance of C&I and when I say that when you look at last year C&I grew 19%.
Jamie Brittain: It was 90% of our originations.
Jamie Brittain: Yes.
Jamie Brittain: Probably won't be terribly far from that but I will tell you.
We're not seeing.
Speaker Change: Where balances can't grow tremendous layoff the CNI.
Speaker Change: To be honest again, we've all been about credit.
Speaker Change: So.
Speaker Change: Sure.
Speaker Change: We're just not going to participate in a market that we don't believe that the credit is fully aware first foundation should be so that being said, we believe C&I can continue to grow.
Speaker Change: But it is going to be much more modest than.
Jamie Brittain: Relative to.
Jamie Brittain: The current balance that we have on C&I.
Jamie Brittain: Multifamily, yes, there are opportunities there.
Jamie Brittain: I would say the rates right now in that sector. You say that there is a lot of people that had pulled back historically.
Jamie Brittain: First foundation was was big in California, Obviously, JP Morgan the largest.
Jamie Brittain: You add Luther Burbank, who is selling dwarf add your guide.
Jamie Brittain: Homes three debt that now has just entered into an agreement.
Speaker Change: So yes, a lot of players.
Speaker Change: It may be slowed down Chase's not chase is.
Speaker Change: From what we're seeing in the marketplace is still very active.
Speaker Change: <unk>.
Speaker Change: Rates tend to be in the sixes and.
Speaker Change: High sixes.
Speaker Change: Six and three quarters, six and seven eights I think JP Morgan may be priced a little bit more aggressively than that.
And we might dapple.
A little bit.
Speaker Change: That arena, but not to a large enough extent to stop ourselves from that path of getting ourselves back to.
Speaker Change: A more neutral stance on a longer term basis.
Speaker Change: Okay. That's extremely helpful would you expect maybe loan balances to stabilize or probably or maybe continue to see declines in the near term.
Speaker Change: No I think they're going to stabilize.
Speaker Change: And I think it's really imperative since we're talking about loans.
Speaker Change: No.
Speaker Change: Yes.
Speaker Change: We put on too many fixed rate loans in 2022, and everybody knows that but no.
Speaker Change: Most of that was put on in the first and second.
Speaker Change: Excuse me second and third quarter of 2022.
Speaker Change: It's just around the corner from being a full two years of seasoning just on that product and then.
Speaker Change: Jamie.
Jamie Brittain: Jamie was talking to me the other day and we were talking about I think we've got a $1 billion five or so of multifamily and re pricing.
Jamie Brittain: Yes.
That's a year and a half of what it is.
Jamie Brittain: It's really not that far away from.
A lot of this stuff repricing and so when we tell you guys is short duration is really more short duration.
Jamie Brittain: The street seems to be thinking that it is.
Jamie Brittain: So I just think as add on notes something I think is important to note.
Jamie Brittain: And Scott It may add some great.
Jamie Brittain: I'm sorry.
Jamie Brittain: Yes, if I may add more color Theres also other impetus and motivation for the traditional cash flow focused investor in multifamily to refinance alone that the market doesn't always consider keeping.
Jamie Brittain: Keep in mind the other fixed portion. They also have their prepay periods, but a lot of times when they convert from interest only to principal and interest. They are very highly motivated to refinance that debt back into an io product. So.
Jamie Brittain: So youll see a lot more activity I think the market expects because of their cash flow focus.
Jamie Brittain: That's a really good point.
Jamie Brittain: And maybe just last one for me.
Jamie Brittain: You alluded to it a bit Chris but touching on the branch deposit growth initiatives that you guys have been working on it sounds like you've had some success I'm just curious where we stand there could you maybe quantify it.
Chris: How that's going so far in and think about the opportunity.
Chris: From that as we look forward.
Chris: And then just other deposit core deposit growth initiatives.
Chris: Yes, so one of the things I think we all can attest to his address the contagion period.
Jamie Brittain: We we spent some time focusing on what the behaviors of our customers and our clients and coming out of it we took it as an educational experience. So we knew that our clients really believed in the relationship of the institution and wanted to grow with us. So some of the things we're doing I don't know how detailed you want the answer here, we're certainly taking treasury management services and diving into the community and smaller <unk>.
Jamie Brittain: As opposed to larger community businesses, we're looking at more of a culture and I wouldn't say driven on sales, but certainly more of an outbound culture keep in mind everybody in the banking sector was defensive in the first quarter and second quarter of the year protecting their their core deposits, but now we're on the offensive, we're going out and doing those things and a lot of the infrastructure you hear me talking about it narrowed.
Jamie Brittain: <unk> is built around giving people the ability to have more time back to go out and grow the business. We're also really kind of tapering down we can't be the bank for everyone. So we're trying to focus on the things that we're very very experienced and skilled at relationship based business is growing small community businesses and being within kind of that.
Jamie Brittain: That space, obviously partnering with our first foundation advisors team, which has access to a lot of clients, who have businesses, who have growth who have scale and a partnership combined with us being out more we'll just grow organically.
Jamie Brittain: Very helpful. I appreciate it thanks everybody.
David Feaster: Thank you David.
David Feaster: Your next question comes from the line of Gary Tenner with D. A Davidson your line is open.
David Feaster: Thanks, Good morning, everybody.
David Feaster: Morning.
Gary Peter Tenner: Couple of things to ask about I missed some of the detail I think on the beach ft borrowing I mean, obviously you had it.
Gary Peter Tenner: <unk> utilized that at all through the third quarter. So maybe talk about the decision there.
Gary Peter Tenner: What that.
Gary Peter Tenner: As for.
Gary Peter Tenner: For the fixture and you picked up.
Jamie Brittain: Hey, Thanks for the question Gerry appreciate it we're currently at around 481 Billy.
Jamie Brittain: Believe was.
Jamie Brittain: The rate at which we locked in that was relatively late in the fourth quarter. So we would expect that.
Jamie Brittain: The last four for another year.
Jamie Brittain: The thinking on that as we as we saw customer service deposits leave and accelerate through the fourth quarter.
Jamie Brittain: We're looking for options.
Jamie Brittain: Basically replace that funding with sure.
Jamie Brittain: Cost effective funds and we have been.
David Feaster: I guess encouraged that test our lines encouraged to use the fed and so putting it all together <unk> made.
Jamie Brittain: It made sense for that.
Jamie Brittain: It is an option we do obviously you have the ability to keep that and.
Jamie Brittain: And use it.
David Feaster: To maintain funding as other as a broker deposits.
David Feaster: Most of which are maturing over the next year.
David Feaster: Become due but I guess that was the general thinking does that does that answer it.
Yes, no. That's helpful. I appreciate it in terms of the customer service deposits or the MSR deposits I mean.
David Feaster: Was the decline this quarter it seemed larger magnitude certainly then if you look at prior years to kind of what that deposit line looks like so was it a larger magnitude decline was there something unusual that was within that.
David Feaster: Yes, it was a little bit more than we had anticipated I believe one client in particular.
David Feaster: It was probably one of our larger depositors.
Jamie Brittain: And they did take a.
Jamie Brittain: Some of their deposits to redeploy equally amongst other banks since then or.
Jamie Brittain: <unk> balances as.
David Feaster: <unk> started to grow back with the seasonality plus we've also seen multiple clients bring additional balances back.
David Feaster: So far in the first part of this quarter.
David Feaster: So.
Jamie Brittain: I think youll see a rebound.
Speaker Change: Maybe not fully equal to the runoff, but probably close to it.
Speaker Change: Okay, and I think as part of that kind of goes into the question about the expense line as well I think in addition to just the dollar amount being lower I think you had mentioned that you were able to reduce the rate paid.
Jamie Brittain: So I'm just wondering.
Jamie Brittain: How you were able to kind of push that through given.
Jamie Brittain: No change currently the rate environment.
Jamie Brittain: Well as the MSR portfolio Thats, the higher cost of of the overall customer deposit portfolio and so as those leave the blended rate does come down we havent made a ton of modifications on a client by client basis.
Jamie Brittain: The rates will the overall rate will come back as the higher cost MSR deposits return, yes to be clear Gary.
Jamie Brittain: These relationships and there is many banks in this country that have these types of deposit balances.
Jamie Brittain: It's all fed decision furred driven.
Jamie Brittain: To the extent that the fed increases rates stays flat or goes down.
Jamie Brittain: Those deposits will reflect based upon.
Jamie Brittain: With the fed does.
Jamie Brittain: Okay. No I appreciate that so I may have missed I may have misunderstood. Your earlier comments. It was really more about the mix of deposits that have I think base locally.
Jamie Brittain: As we had to shift.
These ECR type balances into.
Jamie Brittain: Interest bearing deposits.
What Jamie was trying to convey is.
Jamie Brittain: Our actually our the cost itself was slightly lower on a blended basis.
Jamie Brittain: And exiting the year, just I know theyre not.
Jamie Brittain: Identical to interest bearing deposits, but exiting the year because those balances were lower are heading lower through the quarter. The monthly run rate on expenses for December was $3 million and so I think as you're thinking about costs going into the first part of 'twenty four.
Jamie Brittain: Those will come back up.
Jamie Brittain: As the customer service deposits return.
Jamie Brittain: The cost is going to start at the run rate from December as opposed to sort of an average rate for the for the fourth quarter as a whole.
Jamie Brittain: Great.
Jamie Brittain: And absent of that.
Jamie Brittain: Second quarter, probably a little more kind of normalized level.
Jamie Brittain: Second quarter for sure.
Jamie Brittain: Slowly.
Jamie Brittain: Okay I appreciate that and then I guess, one more just in terms of the expense line, excluding the customer service costs.
Jamie Brittain: Some commentary obviously a lot of heavy lifting this year or this past year with regard to controlling expenses and reducing costs.
Where do you.
Jamie Brittain: Anticipate that.
Jamie Brittain: Your line again ex the customer service costs in 2024 versus 23.
Jamie Brittain: At least maybe versus the fourth quarter run rate is a better way to think about it.
Jamie Brittain: Yes, as I mentioned, you are going to see a little bit of a reset in the compensation and benefits line going here into the first as we as we hit the.
Jamie Brittain: The annual salary adjustments for our teammates and just the normal tax adjustment period. The other expense lines I think are relatively.
Jamie Brittain: Stable from where they were on the fourth quarter the.
Jamie Brittain: The fourth quarter run rate.
Jamie Brittain: Let's see.
Jamie Brittain: I think as you as you get into the year, one thing to keep in mind just in conjunction with some of.
Jamie Brittain: The more difficult decisions that we that we made in two.
Jamie Brittain: <unk> 2023.
David Feaster: You may recall, one of the line items was reduced incentive and compensate in compensation benefit expense for for our teammates as a whole and so as profitability normalizes I would expect that to return to more historic levels and so you may see a slight tick up in.
David Feaster: <unk>.
David Feaster: In the right outside of just normal normal growth with business activity in the balance sheet.
David Feaster: As that as that right sizes back to more historical levels, but it is important to note that we are.
David Feaster: As we said remain laser focused on that and that will rise in conjunction with with revenue and profitability overall going forward is not something that we're just baking into our plan, we'll take a measured approach to bringing that expense back in.
David Feaster: Okay. So in other words youre not accruing for that out of the jump in the first quarter youre going to wait to see.
The revenue and profitability improved.
David Feaster: Ryan correct, yes, Okay, alright, great. Thank you very much.
David Feaster: Thank you Eric Thank you.
David Feaster: That is all the time, we have for the question and answer session. This will conclude today's conference call. We thank you for joining you may now disconnect your lines.
David Feaster: [music].
Yes.
David Feaster: Yes.
David Feaster: Yes.
David Feaster: Okay.
David Feaster: [music].
David Feaster: Thanks.