First Foundation Inc (FFWM) 2018 Q2 法說會逐字稿

Greetings, and welcome to First Foundation's Second Quarter 2018 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

Speaking in today will be Scott Kavanaugh, First Foundation's Chief Executive Officer; John Michel, Chief Financial Officer; and David DePillo, President of First Foundation Bank.

Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release.

In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, see the company's filings with the Securities and Exchange Commission.

And now, I'd like to turn the call over to Scott Kavanaugh.

Hello, and thank you for joining us. We would like to welcome all of you to our Second Quarter 2018 Earnings Conference Call. As in prior quarters, we will provide some prepared comments and then we will respond to questions.

This was an important quarter for us, marked by strong growth and some unique opportunities to reevaluate where we were with respect to our balance sheet and to build for the future. Heading into the quarter, we were aware of some of the challenges facing our industry, including a flattening yield curve and an increase in deposit cost and employment at record levels.

These challenges however, presented a unique opportunity for us, and we thought about what we could do in this environment to benefit the future of the company. As such, management decided to take several actions with respect to restructuring our balance sheet to better position us for the future. We feel these steps set us up for success well into 2019 and beyond.

In particular, during the quarter, we transferred $645 million of our lower-yielding multifamily loans to loans held for sale. In conjunction with the transfer of loans to held for sale, we are working on a loan securitization. This will afford us the opportunity to remove some of the lower-yielding loans from our portfolio and replenish the securities portfolio with higher yields and lower durations than the mortgage-backed securities that we typically have held in our portfolio. This will also decrease our loan-to-deposit ratio and our commercial real estate concentrations, while creating room on our balance sheet to fund multifamily loans at higher rates.

Furthermore, as you know, banks are required to maintain certain on-balance sheet liquidity. And with the flat yield curve, it has not been advantageous for us to add to our securities portfolio. As a result, our liquidity portfolio has a large cash component. Given the current interest rate environment, we have sold our excess cash at very low yields to maintain that portion of our on-balance sheet liquidity. With the replenishment of our securities portfolio, we will have the ability to allow the excess cash to reduce as we will not need it for our liquidity position. In that [mark], on the loans held for sale, reflect the impact of this restructuring. And we believe this approach sets us up well for the future.

In the quarter, we also charged off some legacy loans related to our C&I portfolio and loans acquired in prior acquisitions. With these charge-offs, we believe we have addressed any credit issues in our portfolio. As previously announced, we completed the acquisition of Premier Business Bank, which now puts us at $6 billion in total assets. We had a tremendous quarter of loan originations with a 27% increase in production as compared to the second quarter of 2017. This was a record quarter for the bank, and we anticipate our loan production estimates for the year to increase from $1.7 billion to $2 billion.

We continue to have very low NPAs across our entire portfolio. We have never experienced a charge-off in the multifamily portfolio in the history of the firm. Revenues for the quarter were strong at $43.2 million, which is an increase of 15% year-over-year. As we continue to be mindful of our net interest margin. And we believe it will improve in future quarters, largely due to the steps that we have taken in this quarter. The acquisition of Community 1st Bank has been fully integrated and we are beginning to realize the benefits from this transaction.

We are truly grateful to serve the new markets from the acquisitions of both Community 1st Bank and Premier Business Bank and look forward to working with our new employees in these regions. We did not execute the ATM this quarter, and we do not anticipate the need to use it in the near future. However, as mentioned in the past, we will always look to maintain flexibility with respect to capital, including our ATM, our holding company borrowing capacity and contemplation of other capital strategies, including a potential stock buyback program.

While John Hakopian is on vacation this week and isn't available to join the call today, I can share with you that the Wealth Management business continues to see success in attracting new clients. And our Wealth Management assets under management are at $4.2 billion. As of June 30, our tangible book value per share was $9.41 and our tangible common equity-to-tangible assets ratio was 7.12%. And at the bank, we continue to maintain our Tier 1 leverage ratio in excess of 8%.

Overall, I am pleased with what we've accomplished this quarter and the first 6 months of this year. Moreover, I am excited about the impact that the restructuring should have on earnings as we look into 2019.

Let me turn the call over to John Michel to discuss our financial results.

Thank you, Scott. I will provide a brief summary of our financial results for the quarter.

Earnings for the quarter of $5.1 million or $0.12 per share were impacted by the following: $3.8 million of cost related to the acquisition of Premier Business Bank; a balance sheet restructuring charge of $1.5 million; and $2.1 million of additional provision for loan losses related to $3.5 million of charge-offs. As a result of the acquisition of Premier Business Bank, we acquired $523 million of loans and $478 million of deposits. Excluding the deposits acquired from Premier Business Bank, during the first 6 months of 2018, deposits increased $700 million -- $711 million due to increases in specialty deposits, wholesale deposits and branch deposits.

Loan originations during the first 6 months of 2018 were $971 million. As part of our balance sheet restructuring that Scott mentioned, we transferred $645 million of loans held -- loans to loans held for sale with the intention of securitizing these loans, and to mitigate against the increases in interest rates on these loans, we entered into a swap. For the second quarter, we recognized a mark-to-market decrease on our loans held for sale of $3.7 million and a $2.2 million gain on the value of the swap. This restructuring is expected to benefit our future interest margins as we replaced lower-yielding loans and cash holdings with higher-yielding loans in securities.

We anticipate that we will complete the planned securitization during the third quarter. While our earnings were impacted by the items previously noted, revenues continued to increase. Net interest income increased by over 30% for both the second quarter and first 6 months of 2018 when compared to 2017.

Total revenues for the second quarter and first 6 months of 2018 were up 15% and 21%, respectively, when compared to 2017. For both the quarter and year-to-date, interest-earnings assets increased by over 33%, primarily driven by growth in our loan portfolio. The benefit of these increases were partially offset by decreases in our net interest rate spread, which were primarily due to increases in cost of our interest-bearing liabilities. This reflects the impact of increasing market rates for both deposits and borrowings.

The higher provision for loan losses was to replenish the ALLL or the $3.5 million of charge-off, resulting in an ALLL of 53 basis points on the loans [originating] on our platform as of June 30. Year-over-year increases in our noninterest expenses are primarily related to acquisitions of Premier Business Bank and Community 1st Bank and higher customer service costs. The effective tax rate for the first 6 months of 2018 was 27.1% as compared to a statutory rate of 29.0%.

And now, I would like to turn the call over to David DePillo.

Thank you, John. As Scott mentioned, we had a record quarter of loan production. We had $551 million in new originations. And our weighted average yield on those loans was 4.51%, which was significantly higher than our current loan portfolio yield. In addition to these loans, along with the loans acquired from Premier Business Bank, results in current pricing for over 20% of our loan portfolio. Composition of our loan originations for the quarter was: multifamily, 70%; single family, 12%; commercial and industrial loans, 16%. Charge-offs during the quarter related to our legacy commercial relationship and our relationship acquired in a prior acquisition, loans that would not bid our current lending parameters. The current quality of our remaining portfolio is strong, and we do not believe that there is any significant credit issues in our portfolio. Our loan-NPA ratio remains low at 18 basis points.

As of June 30, 2018, we got $4.9 billion in loans, including loans held for sale, which consists of 54% multifamily loans, 16% business loans, 10% nonowner-occupied commercial real estate, 18% consumer and single-family loans, 2% land and construction.

Deposit growth remained strong with $1.2 billion increase in balances, $478 million of which came from the acquisition of Premier Business Bank. The remaining increase of $711 million was due to increases across our entire platform, including branches, specialty deposits and wholesale. We have completed the integration of Community 1st Bank with cost savings in excess of our initial expectations.

We are excited about the opportunities presented by the acquisition of Premier Business Bank and we expect to complete the integration of their operations by the first quarter of 2019.

At this time, we are ready to take questions. And I will hand it back to the operator.

(Operator Instructions) So our first question comes from the line of Steve Moss of B. Riley FBR.

I'm going start off on the margin here. Obviously, a lot of moving pieces. Kind of wondering if you could give us expectations around the margin going forward once the balance sheet restructuring is complete?

So I think the margins are either going to stay flat or possibly even go up as a result of our restructuring. Dave, John, you guys have anything?

I think because the securitization is contemplated to take place at the end of the third quarter, you're probably not going to see a lot of movement during the quarter. Part of that is in relation to the swap that we put on as well. So there may be some flattening in the third quarter. And then we should see it start to increase gradually from fourth quarter and beyond.

Yes. And then obviously, there is continued pressure from the interest rate environment we're in. Assuming that the fed maintains a relatively stable environment, we feel that there'll be opportunities for improvement in the future. Obviously, if there's significant increases with -- it may impact us negatively.

Okay. That's helpful. And then, on the increasing guidance on the origination pipelines, wondering if you could share little color as to what's driving that?

Go ahead, Dave.

Sorry. The general demand has been across the board. We've had stronger-than-expected multifamily originations, even in what would be considered one of our peak quarters, usually the second and fourth quarter are typically the strongest. But we are seeing our C&I platform really start to take hold and our pipeline is very strong there and we're starting to seek fundings out of that. And then actually had stronger-than-expected single-family production. So I would say it's across the board. And it's just a, I would say, a maturation of our platform in general.

Agreed.

Okay. That's very helpful. And then, I guess last one for me. On the expenses, a little bit higher than what I was looking for. Obviously, there's a lot noise here with PBB coming on. Wondering what the third quarter outlook is?

I think from the perspective of our expenses going forward, we're not having any significant changes in our basic overall structure. We still have some interest rate sensitivity on the customer service costs. But other than that, we feel there's a pretty stable environment for expenses. Going forward, we're not anticipating adding significant amounts of people other than the people that were acquired through the acquisition of PBB.

And then I would say we still have a little bit of cost savings to be realized on Premier Business Bank due to the fact that most of the operational integration will be in the fourth and first quarter of next year. So we have some folks that we've retained through those integration periods. So we're probably a little heavier on folks because of that.

Yes. Just remember, PBB was in this for 1 month and they'll be in for 3 months in the second -- third quarter.

Your next question comes on the line of Gary Tenner of D.A. Davidson.

So you've highlighted the yield on new production. I -- unless I missed it. Did you comment on the yield of the loans that were moved to held for sale for the securitization? I know they're lower yielding but more specifically?

They were below 4%.

It's 3.81% to be exact.

Scott?

Scott. The actual -- the pool turned out to be 3.81%. So about 70 basis points below what we're currently producing at.

Okay. And if memory serves, the cost of the securitization would be about 1%. So the yield on the resulting securities will be about 2.80%. Is that accurate?

I think we're going to get some improvement on that. What is it about? 80 basis points or so, Dave?

Yes, it's close to that. We're finalizing some of the cost. But with the fees associated with it, it's -- high 2s is probably a good range for [ATM].

Okay. And last question as it relates to that. Will there be any amount of the $645 million that does not funded its way back in the form of securities you're going to -- will any be sold in the process?

Yes.

Yes. We contemplate about half of that would go to market in normal course.

So if you look just look at the balance sheet, Gary, we've been selling -- it's has been increasing about $7 million to $8 million a month due to payoffs on the mortgage-backed securities. So it was getting up towards $300 million, over $300 million that we were selling in cash. And after the last fed increase, it was actually costing us money to sell cash every day. And obviously, beats up your net interest margins at the same time. So we'll probably increase the securities back towards 15% of on-balance sheet liquidity and then let it drain down from there.

And our -- oh, go ahead.

Sorry, I was just going to ask, as it relates to the half that you think will be sold to market through the securitization. What type of gain or fee would you receive on that?

Because of the way we've structured the transaction, we think it'll be net neutral.

Yes, Gary, that's why we put the swap in place to basically maintain that offset in case where interest rates move.

Which they have.

Yes. We were fortunate to put the swaps on at a time where interest rates dipped down. So as interest rates have risen, it's certainly benefited us. I think the imbalance you see in the current quarter was just some residual access cost that relate to the pool itself. So that shouldn't -- it should be net neutral going forward. All things being equal.

Your next question comes from the line of Matthew Clark of Piper Jaffray.

Just want to double check on the margin outlook. How many rate increases you're assuming maybe for the rest of this year?

Our current modeling is showing 2 more increases this year. And I think we have modeled 2 more increases in all of 2019.

Okay, great. And then on the loan yields. I know up just a couple basis points from the first quarter. Wanted to double check to see if maybe mark-to-market ran through there and may be negatively impacted the loan yields...

No.

Just trying to get the sense for any (inaudible) for the quarter end...

No. I'd say...

The only thing that weighed down our loan yield would probably be -- we had a nice production of residential mortgages, which tend to be lower than our average. So we gave up probably a few basis points because of our larger-than-expected single-family production. Nothing other than that. We'll ram through that yield.

As we continue to go through the increasing, you can still see the positive trend on the loans. We would expect that to be significantly changed. As Scott mentioned, as we reprice not only our existing loans but also reprice the -- put in the $500 million of loans we acquired from PBB at current rates effectively. So that's a pretty significant increase. I mean with the largest portfolio we have, quarterly originations sometimes moves it by basis points rather than 10 or 20 basis points.

Yes. But the 4.51% is impacted slightly by our residential mortgages, which was 12% of the production of the overall.

Okay. And then just on capital. It sounds like there's no appetite or immediate appetite to do -- to tap the ATM. So just give us your updated thoughts on capital TCE here down to 7.12%. I'm sure you can probably let that go a little bit lower. But just want to get your updated thoughts on kind of your more constraining -- more constraint capital ratios and your capital -- overall capital management planning there?

I would just say that with some of the restructuring that we're doing, I just don't think that we're going to have to tap into the ATM at this point, which is a good thing. I'd say that, but on the other hand, we're growing at a pretty rapid clip. And I would -- I think that's a great thing. But based on where we're seeing our projections, yes, at the holding company, it's 7.12% and can tick on down towards 7%. And I don't think we need to tap the ATM. Unless there's some type of acquisition, and in which case, we may have to do some type of capital raise.

Great. And then just on that point, just your updated thoughts on M&A?

Looking away, I have to say it's been fairly quiet. There were a couple of deals announced earlier this year. And I thought, "aha, this is going to be an opportunity for us." Some have come up that are on the smaller size. And quite honestly, I think where we're at, being at $6 billion now, some of the smaller acquisitions -- the cost remains the same whether it's a $200 million acquisition or $2 billion acquisition, the cost pretty much are the same for us. And so we've just decided that if we're going to spin the bullet, we'd like to see a larger deal.

And I think we've completed 2 now fairly recently. We're going to do the final throws of planning for the integration of operations for Premier Business Bank. So things are in a good spot. And so we have enough organic growth opportunity. Right now, we don't really feel we need an acquisition. If -- like Scott says, if one that comes along, that makes sense for us. We'll certainly consider it.

I mean, just to put things in perspective. I think sometimes -- I mean, our loan portfolio is about $5.5 billion and we did $550 million of loan originations in 1 quarter, 10% of our balance sheet. I think that's unbelievable. So Dave's right. Organically, we've got the production. We don't have to do an M&A but if one comes along, all I'm saying is, that I just think it needs to be one of more significance than a couple of hundred million.

(Operator Instructions) Your next question comes from the line of Andrew Liesch of Sandler O'Neill.

You have answered my questions already. But you guys had been selling some loans every quarter. Are those going to continue or is the securitization going to be it and then do you -- plan is to retain the rest of your production?

Securitization will take care of any reason. The only reason why we off-balance sheet some of the loans that we had, was to keep our commercial real estate percentages in line with what we feel the regulators wanted to see. So the reality is, we have a production that's incredibly strong. And we'd rather keep an on-balance sheet than sell it. But given that fact, we've -- I think in prior messaging, we've relayed that $650 million is about that concentration. So this will resolve a lot of that issue and give us a lot of runway to be able to put back on as we've all described at higher rates and allow ourselves that ability to be able to work back into -- getting back up towards $650 million.

I would just add that as production increases, we may contemplate in following years to do more securitization. They're a little more efficient, albeit a little bit more lumpy since we tend to only do them once a year. So there could be a contemplation if production continues to keep our -- Scott said, just to keep our concentrations within limits.

Your next question comes from the line of Don Worthington of Raymond James.

John, do you have an updated outlook for the tax rate? I think last quarter you said maybe 29%, excluding any...

Yes. So our tax rate is in stable at 29% from a statutory perspective. We continue to give some benefits from exercise or granting of stock ramps or stock options. As mentioned in the press release, those are the kind of the significant impacts we have. Don't expect any other significant items to be affecting it. One of the reasons that the current quarter is a little bit lower percentages because we just had a lower base from that perspective. The amount of the impact of the benefits from the stock option exercise and stock grants was consistent with the prior quarter.

Okay. And then any color on the -- say, the cost or term of wholesale funding that you're getting these days?

In terms of -- our primary source of wholesale funding is the FHLB advances. And they tend to move in lockstep with the fed rate increases. So one of the things that we've consciously done is try to reduce our reliance. If you look at our FHLB advances today in proportion to our overall funding, still seeing a significant decrease and reliance on that. And that's purposeful just to kind of reduce some of that net interest rate risk that's inherent in that. So we've utilized other resources, some of which is more fixed rates, CDs type things, that allows us a lot more stability in our future interest expense.

This concludes our allotted time for today's question-and-answer session. I will turn the call back over to Mr. Scott Kavanaugh for closing remarks.

Thank you for taking the time today, and we've certainly appreciated it. We look forward to speaking with you next quarter. Have a great remainder of the day. Thank you.

Thank you for participating in today's conference call. You may now disconnect.