Q2 2019 Earnings Call
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Good morning Me a piece every conference I'd number.
Its side 165 409.
Again, the eight these have the spelling of every person that screen Sir.
First name Michael I'd see H.A.E.L. last name of television.
M.C.H.A.E.
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Just to confirm your last I mean is this ball about this.
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Correct.
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Our 71 nine to seven eight to nine side.
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I guess I would tell you know how many sir.
Thank you Tim.
Our 2019.
Year to date total revenues were $3.5 million.
Earnings were $23.7 million and earnings per share was were 53 cents.
Our net margin was 284 for the second quarter and 286.
2.86% per year to date.
Excluding the effect of our loans held for sale.
Our net interest margin would have been 2.97% for the second quarter and 3% for year to date.
The yield on our interest, earning assets increased to 4.30% as a weighted average yield on originated loans.
Continued to be higher than yields on loans in our portfolio.
This reflects the benefits of diversification in commercial lending. In addition, we realized $1.3 million of benefits related to credit and yield discounts on the pay off of acquired loans.
Our overall cost of interest bearing liabilities increased to 2% in the second quarter of 2019 as demand for deposits continued to be strong resulting in higher rates.
Borrowing rates remained relatively flat.
Our charge offs for the quarter were nominal and are a triple is at 48 basis basis points for non acquired loans.
We are in the process of developing the required modeling for the implementation of seasonal and we expect to be able to assess the impact of Cecil later in the year.
Compared to the first quarter of 2019 non interest expenses in the second quarter of 2019 decreased by zero point $6 million as seasonal decreases in compensation and benefits more than offset increases in customer service costs.
The change in non interest expenses in the second quarter of 2019 as compared to the second quarter of 2018 were primarily due to acquisition related costs.
Our effective tax rate for the second quarter and year to year to date was 29.1% and 29.4% respectively as compared to our statutory rate of 29.0%.
I will now turn the call over to Dave Depillo President of first Foundation.
Thank you John as Scott mentioned during the second quarter, we originated 494 million in loans the composition of our loan originations are as follows.
Multifamily this 49%.
Commercial Cnine loans was 43% single family, 6% and 2% other.
For the second quarter, the weighted average rate on our loans originated was 477. This reflects the benefit of our diversification into commercial loans.
As the weighted average rate by type was 4.21 per cent for multifamily and 5.37% per c. and I.
As of June Thirtyth, our loan portfolio included.
Our loans held including our loans held for sale consisted of 53% multifamily 20% of which are held for sale.
20%.
Cnine loans.
8% non owner occupied CRT.
18% consumer and single family and 1% mining and construction.
As Scott mentioned, the credit quality of our loan portfolio as strong as evidenced by a low level of delinquencies and our NPL ratio of 25 basis points.
Also mentioned deposits grew by $211 million for the first six months of 2019 as growth in specialty and wholesale deposits was offset by withdrawals of certain acquired deposits.
As of June Thirtyth, 2019, or 20 locations branch network is 42% of our total deposits.
Also as mentioned the industry continues to face pressures on both loans and deposits due to the inverted yield curve.
We are scheduled to complete a loan sale of approximately $600 million during the third quarter. As a reminder, we put our hedge on.
For these loans held for sale as in December of 2018 as of June Thirtyth.
2019, due to the significant decline in interest rates in December the Mark in the hedge was approximately $19.5 million.
This this significant movement in rates and widening of credit spreads.
Could have an adverse impact.
On our expected gain on sale for these loans in the third quarter.
Overall I'm pleased with our results now I would like to turn the call over to John for cocaine, President and first Foundation advisors.
Thank you David and good morning.
In the second quarter, we experienced another solid.
Quarter of positive returns in the market.
Our AUM saw an increase of $145 million during the second quarter and 301 million year to date.
Our performance of our investment strategies that have been solid as they have.
Met or exceed or benchmarks for the year.
We recently expanded our growth component to our investment offering this coupled with our already established value strategy has enabled us to capture additional returns for our clients.
Along these lines, we continue to serve our high net worth client base with a mix of in house and third party managers across fixed income equity and alternatives, including real estate, we feel for affirm our size, we have a very comprehensive investment offering.
As a result of all that we do for our clients. Our average fee per household has remained strong even as firms within the industry face increased.
Fee compression, while our average client relationship has increased in size.
We were able to maintain this fee with services like financial planning, which can often times be a value add for our clients and help us.
Finding additional ways to support their goals.
Our Trust Department continues to be instrumental in our ability to build and maintain relationships with our clients.
Several of our largest clients have established relationships at our trust company.
We maintain a strong pipeline and expect to continue to be successful in attracting new clients and feel positive for the rest of the year.
At this time, we're ready to take questions and I'll hand, it back to the operator.
The floor is now open for questions. If you would like to ask a question. Please press Star then the number one on your telephone keypad. If your question has been answered any wish to remove yourself from the queue press the pound key once again to ask a question. Please press star one.
Our first question comes from the line of Matthew Clark of Piper Jaffray.
Hi, good morning.
Hey, Matt good morning.
Maybe just first on the margin.
Can you just give us some additional color as to when you think the securitization will get done and then.
Should we think about that pro forma margin being.
Looking around that to 97, excluding the held for sale do you expect some.
Additional lift there or where pressure going into.
Thank you for Q.
Well the securitization should take place at the end of the third quarter.
That's our anticipation and everything seems like its going smoothly at this point, so I would expect towards the third or fourth week of September we should complete that.
As far as net interest margin.
You know I think it really is kind of first of all I think deposits of kind of trimmed out in terms of pressure.
But.
I will save loan yields.
With as quickly as the yield curve when converted.
Just in six months, we have seen.
Loan yields probably come in 40 basis points and I'll, let Dave weigh in on that in the second.
But.
I think you're going to start to see some of the pressures on deposit costs start to abate.
Especially if the fed decreased as rates start and hopefully next week.
Yes, I would agree with Scott on that 0.1 of the.
Values of Remixing our originations.
Not away from multifamily, but certainly a smaller percentage.
With the decline in rates and funding more off the short end with Cnine loans, you can see that.
Our.
Average rate of origination was actually.
At the approximate same level as it was at year end when rates were much higher so the remixing certainly helps and that'll help over time as we continue to diversify our originations.
Additional benefits.
After we obviously reduce our.
Loans held for sale on this sale is reduction in borrowing costs, which have been historically higher than.
Our funding cost in general on the deposit side.
And then there is potential for.
Due to the recovery of our securities portfolio summary, mixing there with new securities coming on at a.
Significantly higher rates than some that weekend.
Pull off that are already reflected in our mark to market on equity, but the effective yield on those securities does not refer to run through the income statement. So we get we get some benefit from the re mixing their flooring some reliance on wholesale borrowings due to.
Holding those in available for sale so.
With all those.
Activities happening at the same time, it should stabilize our margin going forward.
Yes, that's a good point Dave.
Yes, I do want to make it clear may have to do that.
What Dave talking about is we have put on a lot of securities.
Yes.
Our regulators have requested that we have a little bit more on balance sheet liquidity when interest rates were zero as a result, we put on right. After the capital raise I think in 2015, we put on.
Five to 600 million 15 year pass throughs.
And.
Yes, I think we.
We will probably start to remix some of that.
Around the time that the securitization happened so.
That will be a factor in the third quarter as well.
Okay, Great and then on deposit.
Pricing in deposit costs I mean.
Is the sense that deposit costs will peak in the third quarter here and start to move lower assuming we get a fed cut next week or do you feel like there's going to be a little bit of a repricing lag.
No only trip.
I don't expect that theres going to be a reprising lag I would say.
For the most part clients were pretty quick to react on the on the upside and and.
I think it's fair to say that will react to the downside in a similar fashion.
If the fed decides to move.
That being said I'm starting to see anecdotal nodes.
Of less pressure on deposits already so.
That's where I think yes.
I think you have seen it be if not the second quarter definitely in the third quarter.
Okay, and then just a data.
Go ahead Im sorry.
Yes, I think just to Echo Scott's comments.
Because we are relatively liability sensitive.
And more than 50% of our deposits are not in.
What we would call traditional retail are laddered time deposits.
We definitely will get the benefit.
Quicker on or reprice with fed movement, but we're already seeing.
Lower rates on the wholesale basis, starting to push through.
Okay and then just.
Shifting gears to the loan growth.
Well above your.
Think targeted range of 10% to 15% this quarter it into capital ratios a little bit.
Should we expect kind of the growth the pace of growth to return to that 10% to 15% range or or not.
Matt I would.
Yes in terms of 10% to 15% that was year over year. So we always kind of pick up before we have the sale. Once we do the sale and you look at that the effect after the sale that 10% to 15%. We still think is a good guide so you're going to have a pick up in the third quarter because of the loan sale then loan sale happens when you look at year over year, the 10% to 15% is still a good guide.
On total assets of the balance sheet. They you may weigh in though on.
Loans.
Yeah I think.
Part of the.
The precipitous decline in interest rates, we have been holding rates fairly good on the multifamily side, but it has impacted.
The amounts of which we would fund traditionally during the second quarter. So.
However.
Because of.
The re next we are seeing.
More significant volumes of seeing high that's offset that.
I would expect that.
We would probably be slightly lower in the third and potentially slightly lower in the fourth quarter from the second quarter run rate, but still in that $1.6 billion to $1.8 billion.
Total funding range, but as John John mentioned, typically if we originate a billion six 2 billion eight and we have.
$600 million of sale.
Including our traditional.
Repayments of loans.
That will have net growth of somewhere between.
Six to 800 million, net which would be that 10% to 15%.
Range.
Great.
And then just a couple small ones for me just on other other fees.
Up in the quarter to 2 million or anything.
In that number.
Just we continue to have strong results both in the advisory side.
As you heard Scott say the AUM went up so we continue to expect to have increases there, but on the trust side and the loan fees continued to have positive impacts.
So you'll see a little bit impact because we did acquire.
PBB last year, one of the impacts of that is they have a more retail focus deposit franchise up in the in certain areas and they have to have a little bit higher deposit fees, so a little bit of everything.
Really strong trust growth, yes, I will tell you Matthew I really feel like that.
Okay, and the Trust Department are working as well together as I've ever seen and the opportunities that are coming.
On board for both.
Companies is tremendous so I am Super Super delighted at how well, it's working and I'd Echo Scott's comments I think our quantity in our pipeline as well as the quality of the potential relationships both look solid right now.
Great. Thanks.
Your next question comes from the line of Andrew Liesch of Sandler O'neill.
Good morning, guys.
Hey Hunter.
Just on the deposit growth during the quarter.
Big inflows in noninterest bearing accounts, just kind of curious what was there anything specific driving that.
Just to stick with that.
Growth in some of our specialty deposits on the mortgage.
The mortgage servicing rights tend to grow during the summer.
And then they decline when they have for the tax payments in the fall late fall and.
You're getting into the winter, so that's a cyclical and expected.
Level of increase that we have and we expected to decrease in the fourth quarter Gotcha.
Are these accounts have a customer service fees associated with them and the operating expense line.
Yes, they do so then presumably with the fed rate hike.
With those fees then go down here. So it's something we're going to cut next week just as much as they went up we would expect them to go down and as you get the benefits of it though.
Right.
I'm actually not that that covers all the questions I had all step back.
Thank you thanks, Andrew.
Your next question comes from the line of Steve Moss of B. Riley FBR.
Hi, good morning, guys.
Hi, good morning.
I apologize for hopping on late here, but did want to touch on the scene I growth for the quarter obviously.
Large mix of the.
Originations for the quarter just wondering.
How sustainable is that going forward.
And you know the other part being as it relates to multi family loans given significantly lower rates.
Is your total originations origination guidance, assuming basically lower multifamily originations for the second half of your if we hold on here.
Steve Yeah, we covered this a little bit earlier before you jumped on and.
Those are in line with the other questions that we had on origination. So are the run rate is a little bit higher than most people probably thought through the first half of the year.
And.
Our expectations for the full year were still in line with that 1.6 to 1.8 billion that we've traditionally experienced multifamily what's a smaller percentage than traditionally we see and part of that is.
Being very selective on on the market due to lower interest rates, but we are able to hold our our weighted average it's just straight.
On that to hire them.
Our expectations given current market the.
On the sea an ice side.
But our expectations going forward is multifamily could be lower.
For the rest of the year, depending on what happens in that middle end of the curve and we continue to be cautious around booking loans at significantly lower rates.
After four years of.
Building, our CNS franchise, we've really started to see some.
Great traction across the footprint, including our corporate banking group that has booked some.
Nice.
Larger relationships in the second quarter.
The as you know that business can be a little bit.
Well, we have we use the technical term lumpy.
We had a.
It's a great second quarter third quarter could be a little bit less than could finish up with a stronger fourth quarter, but.
I think the organic momentum of our CNS franchise is put us in a position to have a more diversified funding mix.
Not only for this year, but.
For next year and beyond.
Okay.
What specific industries are you seeing loan growth in the CNS space.
It's pretty much across the board we don't.
Tend to focus.
Heavily in any specific industry tied so it could be from.
Manufacturing distribution service scene.
We've had a little.
Some in the.
Specialty finance area.
General finance, a little bit in the construction.
We tend to be a little more.
Concentrated in California around construction and construction services, however in the second quarter.
A significant portion of the originations were away from that sector. So.
We can provide some additional portfolio breakdowns in the future to show you the level of diversification and I think thats something were relatively proud of.
Which should have some good idea.
Black Okay.
Concentration in any specific one type of area or it we've included some agriculture as well.
It was.
Very diverse but.
That's helpful and then on.
Expenses here just on the comp line I know it always comes down after the first quarter, but seems like it came in more.
And what I was thinking just kind of wondering how we think about expenses into the third quarter.
Yeah in terms of going through that and we've made a lot of effort.
Across the board here trying to manage expenses and obviously our base expenses. The compensation. So you can see by the council that Weve basically remained flat for this year.
We continue to focus on those efforts in going forward, obviously in the second quarter.
In terms of the expectations regarding cost there shouldn't be any significant changes in the third or fourth quarter, primarily but obviously the first quarter of next year, you'll have that seasonality impact of it.
The obviously, we benefited from that in the second quarter, but there is really no unusual items.
In the.
Second quarter numbers, the only other minor benefit is that because we originated a little bit more loans and the type of loans that we had a little bit more of deferred costs.
I am under Fas 91 rules.
But it wasn't very significant.
Alright, Thank you very much.
Once again, if youd like to ask your question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Gary Tenner of D.A. Davidson.
Thanks, Good morning.
Hey, good morning.
Scott in your prepared remarks, you mentioned or maybe as John Im sorry, the mark on the hedge related to the pending loan sale and that would impact the gain.
Quantify what your expectations would be as it is today at least in terms of again I wondered whether or not you are.
Ask that question.
So I think it's actually I think it was.
Hey, just on them.
Yeah. So.
There's been relatively few deals that have been done I know that there is a deal that was either price today or tomorrow, we should start to get some feedback off that but.
You know we've had.
We've had some roll off of some of the loans, we build the bad loan.
But I still think we'll make some profit it's just a function of do we think it's going to be 1% I think the answer is.
It could be glass.
So just to give you a little bit of color when we.
Priced out the transaction and when you initially put the hedge on.
Indicatives credit spreads were.
Wider than.
What we experienced historically and we thought that was.
Gives me relatively.
Conservative in our estimate of a net.
At 1% gain however.
Because.
Due to Scott's comments on.
Relatively few transactions the indicative spread credit spreads on the road of Traunches appear to be much wider than what we originally estimated.
However, there isn't that many transactions in the market as Scott has mentioned so we're still waiting for.
More transactions to view that but given some of the indicative credit spreads out there that are significantly wider than what we originally model and that primarily that the biggest impact.
Additionally, the other impact would be.
In the pricing of the I O.
Spread.
The Io strip will.
Tend to be larger given out.
The relative coupon on the loans, so that could have at a bigger discount than.
Originally expected.
But.
In all honesty, it's still a little bit of a question Mark area.
As we felt that it was prudent to bring up the point that.
We don't have the clarity that we wouldnt necessarily like at this point.
Okay Fair enough and then kind of further to that someone is still gets done by the end of the third quarter would your intent would be to fill the bucket again thats held for sale before year end for yeah. I don't know if you were on the phone call earlier, but.
I think our intention as we will refill our.
On balance sheet liquidity pocket.
To a certain degree, but I think at the same time.
We intend to at least at this moment to remix some of those securities.
You know.
Take some of the 15 year pass through that had been sitting on the balance sheet.
And and.
Moved those off and make room for more of this particular deal in terms of the digital loans themselves. We would plan on putting some loans held for sale either as in the third quarter or fourth quarter, because basically the rules under Freddie Mac is we have to weigh the year's worth the seasoning and so we basically got a year's worth of production ready for the next deal in 2020.
Okay, great. Thanks, guys.
Thank you.
Your next question comes from the line of Don Worthington of Raymond James.
Thank you good morning, everyone.
Hey, Doug just to maybe more.
General question on deposit pricing, but you mentioned that.
The specialty deposits.
Helped you.
Relative to a weaker flows and the retail branches.
What's the just general difference in pricing between.
Which you have to pay for specialty deposits versus retail.
Oh.
In terms of the specialty deposits, they're going to be more closely aligned.
To current market rates out there. So if you look at an incremental rate.
For new retail deposits there, we're trying to track them and we're going to be attracting them at those rates, but from a historical perspective, the deposits that we already have in our branches on the increase in those have been pretty nominal.
James on that type of specialty deposits, we have all the time from MSR is to.
Contract retention to Asia away I would say that some of the title escrow MSR that type of stuff.
Do tend to be.
They tend to be quicker at reacting to fed increases.
And therefore.
That's our point that should react to the downside when the fed starts to reduce rates pretty quiet well.
So theres either.
This likely be five and other things that we're taking on that are substantially less than.
You know on the on the.
Mark.
I would say on average our specialty book.
Ken do average at or below the marginal cost of our retail and I think Thats why Scott said that there was some de emphasis at the branch level of competing on the margin.
Or.
What we would consider more more volatile deposits on the retail side of it so we're trying to run.
We effectively ran off some of that higher costing more volatile replaced it with specialty but on the margin.
And.
There's competitors out there that.
At a retail basis or operating rates that are higher than what we are gathering on the specialty side and.
On the specialty side, we don't have all the costs and it infrastructure.
To raise deposits.
If and to a branch on average cost you about 1% and effective gionee.
To take advantage.
Our specialty deposits for that same rate as impotently lower on a DNA basis. So it's a lot more efficient for us even with consistent rates to raise on the specialty side, there's just a lot more efficient and to Scott's point.
It is more rate sensitive on the way down so we get the immediate effect.
Cover reprice.
Okay, great. Thank you.
Thank you.
This concludes today's question and answer session I will now turn the call back over to Mr. slot half an hour for closing comments.
Thank you everyone for taking the time today, we certainly appreciate it.
Overall, we are pleased with our results and look forward to speaking to you next quarter.
Have a great remainder of your day and thank you again.
Thank you for participating and first foundations second quarter 2019 earnings Conference call you may now disconnect.