First Foundation Inc (FFWM) 2018 Q3 法說會逐字稿

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

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

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 would like to turn the call over to Scott Kavanaugh.

Good morning, and thank you for joining us. We would like to welcome all of you to our third quarter 2018 earnings conference call. We will be providing some prepared comments regarding our activities and then we will respond to questions. As highlighted in the press release this morning, we delivered a quarter of strong financial results across key metrics of our business. Our earnings for the third quarter were $14.7 million or $0.33 per share. Total revenues were $55 million for the quarter and $141 million year-to-date. For the quarter, this represents an increase of 43% from the prior year.

Our net interest margin expanded 29 basis points from the second quarter of 2018 to 3.12%, and at the close of the third quarter, our loan-to-deposit ratio was 95.3%, as compared to 106.5% at June 30, 2018. Our efficiency ratio came in at 61.9% for the quarter, and as of September 30, our tangible book value was $9.71.

As many of you know, we announced the remixing of our balance sheet last quarter, which included the sale and securitization of $622 million of our multifamily loans in a Q-Deal with Freddie Mac. We are beginning to see the early benefits of this remix, and we anticipate additional benefits in the fourth quarter and beyond as we bring on new loans at current market rates.

One of the good things about our business is that our balance sheet is more fungible than many other banks, and we anticipate doing another securitization at approximately the same time next year. On the credit front, we continue to maintain our credit standards as evidenced by our low levels of nonperforming assets and a minimal charge-off in the quarter.

With regards to our noninterest income, we continue to increase our revenues from other lines of business. Year-to-date, revenues for Wealth Management and trust increased by $1.6 million and $300,000, respectively. Our Wealth Management arm increased by $93 million in the quarter and ended the quarter at $4.3 billion.

Related to our previously announced merger with Premier Business Bank, full integration is planned to be completed in the fourth quarter. We are very excited about the people who have joined our company and the opportunity that this presents. Overall, it has been a strong quarter and we look forward to and are excited about the opportunities in 2019.

At this point, I'd like to turn the call over to our CFO, John Michel.

Thank you, Scott. I will provide a brief summary of our financial results for the quarter. Diluted earnings per share for the quarter and year-to-date were $0.33 and $0.69, respectively. The results for the quarter were positively impacted by the $1.4 million gain on sale of loans and the recognition of $1.5 million of credit and yield discounts on the payoff on acquired loans, which combined added approximately $0.05 per share to our earnings for the quarter.

Net income for the third quarter in the first 9 months of 2018 was 54% and 14% higher, respectively than the corresponding periods in 2017. Total revenues for the third quarter and the first 9 months of 2018 were 43% and 29% higher, respectively than the corresponding periods in 2017. Loan originations during the first 9 months of 2018 were $1.3 billion.

As a result of our continuing loan production and the acquisition of Premier Business Bank in June, during the last 6 months we have added over $1.4 billion of loans to our portfolio with weighted average yields in excess of 4.5%. During the first 9 months of 2017, deposits have increased by $1.2 billion. As a result of our remix, which includes the sale of $622 million of loans, total assets and total loans decreased during the quarter while we replaced cash held for liquidity purpose with higher yielding securities.

In addition, our FHLB borrowings decreased $431 million during the quarter and stand at $187 million at September 30, 2018. For the quarter and year-to-date, interest-earning assets increased 43% and 36%, respectively. For the quarter, our net yield on interest-earning assets increased as the addition of higher-yielding loans and the recovery of credit yield discounts on the payoff of -- on acquired loans were only partially offset by higher rates on our deposits and borrowings.

The recovery of $1.5 million of credit in yield discounts on the payoff on acquired loans added 11 basis points to our net yield. Our efficiency ratio for the third quarter of 2018 was 61.9%, as compared to 61.1% in the third quarter in 2017 as increases in revenues was offset by higher noninterest expenses. Increases in our noninterest expenses are related to our growth in loans and deposits, including increased staffing, the acquisition of Premier Business Bank in June of 2018, the implementation of upgrades to IT equipment and processing services and higher customer service cost.

I will now turn the call over to Dave DePillo, President of First Foundation Bank.

Thank you, John. We had another strong quarter at the bank. As we continue to grow our loans and deposits, we are not compromising our credit standards and are originating loans at higher rates today than our existing portfolio while we are focusing on growing lower cost deposits. During the third quarter in the first 9 months of 2018, we originated $368 million and $1.3 billion in loans, respectively.

In addition, we added $523 million of loans from the acquisition of Premier Business Bank in June of 2018. And in the third quarter sold $622 million of lower yielding multifamily loans as part of our remix strategy. The composition of our loan originations for the quarter were as follows: multifamily, 53%; C&I, 30%; single family, 14%; land and construction, 2%.

Our pipelines remain strong and consistent with prior periods. The credit quality of our loan portfolio is strong as evidenced by our low level of delinquency and our NPA ratio at 0.24%. As of September 30, our loan portfolio consists of 49% multifamily loans, 18% business loans, 10% nonowner-occupied commercial real estate, 21% consumer and single-family loans, and 2% of land and construction.

Deposit growth remains strong at $1.2 billion increase in balances for the first 9 months of 2018, $478 million of which came from the acquisition of Premier Business Bank. The remaining increase of $748 million was due to increases across our entire platform, including branches, specialty deposits and our wholesale channel.

As of September, 30, 2018, our 20 branch locations account for 46% of our total deposits. We anticipate to continue to improve our efficiencies over time due to our increased scale, and as we complete the remaining system integration of Premier Business Bank in the fourth quarter of 2018.

I would now like to turn the call over to John Hakopian, President of First Foundation Advisors.

Thank you, David, and good morning. As Scott mentioned, our assets under management increased $93 million and ended the quarter at $4.3 billion. Year-to-date, we've added $195 million in assets under management from new clients as we continue to be successful in our business development efforts.

Year-to-date, due to increases in our total revenue, our gross margin increased to 14%. As we look at the current financial market, we've seen an uptick in volatility, which should further demonstrate the merits of our investment philosophy and support our strategy to invest for the long term. We maintain a strong pipeline and expect to continue to be successful in attracting new clients while maintaining our focus on servicing existing clients.

At this time, we are ready to take questions, and I'll hand it back to the operator.

(Operator Instructions) Your first question is coming from the line of Matthew Clark with Piper Jaffray.

Can you break down your deposits by channel? Just kind of quantify how much you have in wholesale? How much do you have in specialty? And then what the related cost is on both? And what the new rates are -- come in at?

Yes. In terms of breakdown, as Dave mentioned, 46% of our deposits are at the branch level. We don't have the breakdown between the rates right in front of us here, Matt, so I'd have to get back to you on that in terms of breakdown between the different groups.

I can kind of give you a sense of directionally where we're heading. We do have continued growth in specialty, however, we're focusing on areas that are low costing currently compared to our existing higher cost of segments that we've had in the portfolio traditionally, ones that are less sensitive to Fed rate moves and more as an accommodation to those types of clientele. At the branch level, although we run a few deposit specials here and there, we've been very happy with the lag in the cost of funds in the -- at the branch level as those deposits are much more granular and continue to be very granular. So as we continue to grow our branch network, now we're up to 20, roughly half of our deposit base as John mentioned, that will continue to grow. And our expectations for next year is to grow approximately 50-50 between the 2 channels.

Yes. Certainly, the acquisitions have really benefited us in a rising interest rate environment, while we've got these additional branches. I have been very pleased with the growth in those branches, and quite honestly, it doesn't take a lot to actually move the needle when you have 20 offices.

I think the bigger issue for us is, as we're aggregating our securitization loans, we were a little more dependent on wholesale borrowings which over the last year have the -- rate of increase on those have much further outpaced than the increase that we've had on the deposits or the cost side. So not been dependent on holding borrowings will certainly help the -- and will help going forward.

Okay. And you may have mentioned it during your prepared remarks. But the weighted average rate on new business, new loans?

Well, right now, we have benefited from the medium end of the curve being fairly robust from what we've seen in prior years. But if you just take roughly a 3% benchmark 5 year and add a couple of hundred basis points, plus or minus, we're certainly -- our retail offerings typically to the Street or over 5%. And that's just on the multifamily side, a little bit less on residential, but certainly higher on the C&I side. We're prime 1-plus typically on that. So again, across the board, our weighted average yield on assets coming on the books today are certainly a lot greater than they were even 2 to 3 months ago.

Okay. And then just as it relates to the margin. I guess how do you -- just -- is there some additional benefit from the recent restructuring still to come through the numbers? Or was that largely played out? Just want to get your sense if you think so...

Well, I think so. I think we're going to get additional benefit as we add more loans. And I think what we are also trying to get across is, you'll probably see us do another securitization next year. So we'll be a little bit in the aggregation mode again. But we're putting on some pretty decent coupons right now. And I think we will continue to see some benefits. Largely, I would say the remix was very successful in my opinion. And probably a majority of it has largely played out.

In terms of the securities themselves, they weren't put on till the very end of the quarter, so the benefit from the securities are replacing the cash that we had held before. Secondly the reduction in the borrowings occurred during the quarter during the quarter, and at the end of the quarter, we were able to pay it down significantly. So those 2 aspects would be benefits for us in future quarters, the both, the yield and the securities, and the yield, the lower debt offerings. And obviously, there'll be some other counter pressures with rising interest rate.

And then if you look at -- although, we are more of an intermediate arm lender. We tend to have a higher CPR in those portfolios. And anywhere from 12% to 15% of the portfolio naturally will turn year-over-year, which will benefit anywhere from 75 to 100 basis points higher based on current rates. Plus the fact that if we do another securitization of approximately the same size, that could be anywhere between another 10% and 15% of our loans remixing at higher rates. So anywhere between 20% to 30% of our loan portfolio can turn year-over-year at higher rates, which certainly helps maintain spreads even if we have continued pressure on the short end of funding cost.

Honestly, I think this goes back to what I said in the prepared comments about having a very fungible balance sheet. Having a large percentage of multifamily in the portfolio, I think we've demonstrated clearly now in previous years and even this year. In previous years, it was selling loans to financial institutions. This year, it was the securitization. And so I think it shows in a rising interest rate environment that we have more than just 1 option at our hand that we have multiple options. And I don't think that's necessarily the case for every bank in this country.

Our next question is from Steve Moss with B. Riley FBR.

This is actually Zach Weiss filling in for Steve this morning. I would appreciate any color or outlook on loan growth that you all have right now?

So our pipelines our really strong, and our expectations are that we're going to probably originate as much as we did last year. I think the unique situation that we have is, we've far outpaced our ability of the balance sheet assets at any level above probably what we have done through 0.5 year, let alone 0.75 year. So our expectations are, we should finish the year probably closer to exactly what we did last year, maybe a little bit higher. As we've indicated year-over-year, our third quarter is always a cyclical downturn in originations for us due to the summertime, just lack in demand during the period. Second quarter and fourth quarters are usually our largest. So we anticipate -- our pipelines are strong. We'll have a really strong fourth quarter and then there is -- our expectations are next year should be as good or better than what we did this year. So I don't see any slowdown in loan growth at this point. We are, by the way, getting very good traction in our C&I channel. That's been almost 4-year build-out for the bank. We're really starting to see good traction in that on good quality C&I. In a time where C&I is very competitive, we're getting good quality at where we feel this respectful rates in the market, and our other channels just continue to push along, we're definitely having room for growth, and we still have capacity in our channels. So that's always a good sign.

All right, that's helpful. And then in terms of expenses, is this level right here for the third quarter a good run rate? Or should we see any further improvements or cost reductions from the recent acquisition?

You know we have core systems integrations that will be completed in the fourth quarter. We just actually completed the first leg of that this weekend. So we still have some overhang of additional staffing that will be with us through the end of the year. And a little bit into the first part of next year. I can tell you this that, given our platform and what we've added, our expectations is, we shouldn't see material growth in our G&A expense, especially around our headcount. So we should see some benefit from that. We have very little on the way of new hires coming on, but I think the current run rate is probably reasonable.

Yes, it's reasonable. There is always 2 things that are cyclical in nature. One is on the customer service costs sides that we tend to have the balances and deposits go down during the winter months. So the costs related to the customer service costs are expected to go down over the fourth quarter and first quarter. On the other side of the coin, as consistent with past years, in the first quarter, we always get hit: one, with raises; and two, with larger proportion of our taxes, employer taxes, because of the payouts and the bonuses. So it's rather substantial number significantly higher than fourth quarter, and then it smooth out through the years, yet again, decreasing into the fourth quarter. So that's something that's cyclical, and you can look at the last 5 years and you can see that kind of percentage change on that side. So those are the 2 driving things, and then as Dave mentioned, the completion in the fourth quarter of the conversion will allow us to continue to have some cost saves going into next year.

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

Just a question John, the $1.5 million or so of the payoffs from the acquired loans -- should we be assuming some level of payoff every quarter benefiting the margin or are these just more one-off in nature?

These are more one-off in nature. I can tell you that actually 1/3 of that cost was from a loan that we acquired in 2015. Other activity is -- just depends on the PCI loans. So these are the purchase credit impaired loans that, when they picked up, that we have reserves on. This isn't the normal amortization of the loss of discount. The $1.5 million is actually on purchase credit impaired loans. So that's rather significant. That's what drives the number, but there is no predictability to it. It's just the loans perform and payoff, at an earlier time or when they're supposed to, then we'll receive some benefits on reserves we set aside. But there's no guarantee, and I can tell you that I have no predictability over the last 4 levels that we have.

And then just on credit. No real questions there or any concerns, but I'm curious if you're seeing anything in the market that's giving you guys any concern. Any underwriting weakness anywhere? Or anything that's giving you guys some positive going forward?

Well obviously, there is sort of few very, very large players in our market one of which is the largest bank around, and they're actually holding their credit standards extremely strong. I think in general, what we're seeing is lenders that are more cautious today than they were a year ago or 2 years ago because we -- everyone feels we're somewhere at the latter end of the cycle. We're not sure if there is a major correction 2 years out, 1 year out, 3 years out, but it's certainly -- it's not '09 going into a '10 year of growth. So I think, everyone in the market is more cautious. Our LTVs are at historical lows at origination. Part of that is, there is less cash flow spread around over higher interest cost. We're seeing our C&I clients be a little bit more cautious around excessive borrowings due to the fact that they've seen the cost of borrowings almost double in the last few years, given that most of them were borrowed at the short end. And then on the residential side, we are seeing a little bit of slowdown in the appreciation and asking prices in the market, but our average LTVs are in the 50s on that book of business as well. So there's a lot of room to follow still. I would say lenders are little more cautious, which they are moderating the market, and this is what we like to see. What we aren't participating in is people chasing yield in other asset classes that tend to get a little overheated when you are towards the middle to the latter part of a growth cycle. So we're going continue to focus on our core growth which is our markets here in multifamily, our continued cautious growth in the C&I world, and then our traditional client support in the consumer side. But outside of the few anomalies, we've seen from other people reporting credits that are now starting to show weakness. We're not seeing competition going down a rabbit hole, so to speak, on credits.

Our next question comes from the line of Gary Tenner with D.A. Davidson.

Just wanted to ask about balance sheet management and capacity with these securities portfolio, growth this quarter with the proceeds of the securitization. Is that number, the near $800 million kind of where you like to maintain it? Or as you think about utilizing cash flows from the portfolio to fund future loan growth? How do you think of the balance there in terms of using the cash?

Well as you know the regulators expect all banks to keep a certain percentage of liquidity. I'll say that we kept it -- with this -- we obviously believed in the loans that we had securitized through Freddie on the Q-Deal. And quite honestly, I did not add to the securities portfolio in the last 2 years, because the yield curve actually almost 3, I guess, because the yield curve was so flat. I have always stayed pretty simplistic by just buying 15-year pass-throughs. And so as the yield curve flattened out, it didn't make sense to put on 7-year duration mortgage-backed securities yielding with a 2 handle. So as a result, this was a great opportunity for us to be able to replenish the securities portfolio. But what I would say, Gary, is, expect to see that drop back down over the course of time. One of the things I did not want to do, and what we realized was during the quarter, if you look at last quarter's balance sheet, we were selling approximately $350 million in cash. Well, we were selling that at a loss. And that hurt net interest margins obviously a lot. So I think we seized on an opportunity to be able to put on some securities of what we thought were good yield, and now you'll see that as prepays come in month-to-month, you'll see that circle back down.

Okay. And just as a reminder, the incremental securities put on from the securitization are about 100 basis points lower than the loan yield would have been on the like assets?

No. It's actually less than that, about 80.

It is less than that. Yes. Well, that WACC on the loans was 3.81%. The effective yield on the securities was 3.20%.

Yes, so 69.

60. But you got to remember, Gary, we were selling cash at [190] or [195].

Yes, the way we look at it is, if you're -- it's the replacement of securities, short duration, about 3.5 years with the 3.20% effective yield which is -- it's pretty hard to find that in the market anywhere. It's been there extremely high cash flow.

Our next question comes the line of Don Worthington with Raymond James.

Just following up a little bit on the discussion of getting traction in the C&I sector. What's the average loan size of your C&I book, and any sector concentrations there?

Yes. I would say, we would consider ourselves mid-market and below, and when I say mid-market, we touch mid-market, I would say at the lower end. The average size of our loans were a few million dollars. We do have some larger relationships. So we're really -- by adding a small balanced program through a product called Mirador at our branch level, adding SBA 7(a) along with 504 over the past several years. And then now having a traditional, what I would say, more of a community-bank focus on C&I, our granularity is fairly good. So sector-wise, we're about as diversified as you could probably hope for with, I would say, a little bit of concentration around real estate services just because California tends to be a little more focused around real estate services. But we don't have any, I would say, concentration in one specific area. It's a very broad-based book, and we monitor it very closely from that perspective. So it's anywhere from service manufacturer all the way to pure real estate services, and then we have very little on the way of agriculture.

Manufacturing.

We have obviously, some manufacturing within California. We actually have some in Hawaii and a little bit in Nevada as well.

And geographically, it's pretty diversified also. It's not concentrated in any one area in California.

Yes.

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

Thank you, everyone, for taking the time today. We certainly appreciate it. Overall, we are pleased with our results and look forward to speaking with you next quarter. Have a great remainder of your day, and thank you once again.

This concludes today's conference call. You may now disconnect.