First Foundation Inc (FFWM) 2019 Q1 法說會逐字稿

Greetings, and welcome to First Foundation's First Quarter 2019 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.

Hey, everyone. I'd like to welcome all of you to our first quarter 2019 earnings conference call. We'll be providing some prepared comments regarding our activities and then we will respond to questions.

As highlighted in the press release this morning, we experienced another strong quarter across key financial metrics of the firm. This comes at a time when our industry is experiencing challenges due to the uncertainty in the interest rate risk environment and an inverted yield curve, which makes me that much more pleased about the results that we announce today.

Our earnings for the first quarter were $11.3 million or $0.25 a share. The $11.3 million represents a 25% increase over the prior year first quarter. Total revenues were $49.5 million for the quarter, a 14% increase. Tangible book value per share ended the quarter at $10.52.

On March 31, our total assets were $6 billion. Banking operations continued to experience growth as evidenced by the $400 million in loan originations and $36 million in growth in deposits. Our Wealth Management business saw positive results in both market appreciation and assets from new clients, and our total assets under management increased by $156 million ending the quarter at $4.1 billion.

Our Trust department saw a strong first quarter of attracting new clients, resulting in an increase of $34 million in assets under management. The Trust department continues to contribute to our Wealth Management business in the form of supporting existing clients and contributing to the new client growth. We declared and paid our first quarterly cash dividend of $0.05 per share. In addition to the business results I mentioned earlier, the growth in our commercial lending activities have contributed to our positive results this quarter.

Specifically, growth of our C&I business helps us diversify our loan portfolio as well as enhance our margin. Dave will touch on that in more detail.

I am very proud of our loan production. I am particularly proud that we continue to have minimal credit concerns as evidenced by our low levels of nonperforming assets, which stands at 27 basis points at March 31.

We continue to see positive results from our recent acquisitions, both in terms of employees who have joined our team and new client opportunities that result from being in these markets.

Overall, it was a very strong start to the year. Let me 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.

Total revenues for the first quarter were $49.5 million, a 14% increase from the first quarter of 2018. Earnings were $11.3 million, an increase of 25% when compared to the first quarter of 2018. And earnings per share were $0.25 for the first quarter of 2019 as compared to $0.23 for the first quarter of 2018.

Our net interest margin for the quarter was 2.88%. Excluding the effect of our loans held for sale, our net interest margin remains fairly stable at 3.02%. The yield on our interest-earning assets increased to 4.27%, as yields on originated loans continue to be higher than yields on loans in our portfolio.

In addition, we realized $1.7 million of benefits related to credit in yield discounts on the payoff of acquired loans. Excluding our loans held for sale, our balance sheet for the first quarter was almost exclusively funded by our deposits. Our borrowings and deposits in the first quarter reflected the rise in short-term interest rates which occurred at the end of the fourth quarter of 2018. As a result, our overall cost of interest-bearing liabilities increased to 1.91% in the first quarter of 2019.

Our charge-offs for the quarter were nominal, and our ALLL remains at 51 basis points for our nonacquired loans. We are in the process of developing the required modeling for the implementation of CECL, and we expect to be able to assess the impact of CECL later in this year.

Our increase in the noninterest expenses in the first quarter of 2019 when compared to the first quarter of 2018 were primarily related to our growth in loans and deposits, the acquisition of Premier Business Bank in June of 2018, higher core processing costs and higher customer service costs.

The increase in noninterest expenses in the first quarter of 2019 when compared to the fourth quarter of 2018 were primarily due to seasonal increases in costs associated with raises, employer taxes and employer contributions to retirement plans.

Our effective tax rate for the quarter was 29.7% as compared to our statutory rate of 29%.

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

Thank you, John. As mentioned, during the first quarter we originated $400 million in loans. The composition of our loan originations were as follows: 50%, multifamily; 36%, C&I; 10%, single-family and 4%, construction. In the first quarter, the weighted average rate on the loans originated was 4.72%. That consisted of 4.43% of multifamily and 5.41% of C&I loans.

As of March 31, our loan portfolio, excluding loans held for sale consisted of 46%, multifamily loans; 21%, C&I; 10%, nonowner-occupied commercial real estate loans; 21%, consumer and single-family and 2%, land and construction.

As mentioned by Scott, the credit quality of our loan portfolio is strong as evidenced by our low level of delinquencies and our NPL ratio of 27 basis points. Deposits grew by 36 million as growth in specialty and wholesale deposits was offset by withdrawals of certain acquired deposits.

As of March 31, our 20-branch location network is 44% of our total deposits. The industry continues to face pressures on both loans and deposits due to the current inverted yield curve.

Overall, I'm very pleased with our results.

Now I'd like to turn over the call to John Hakopian, President of First Foundation Advisors.

Thank you, David, and good morning. In the first quarter, we experienced strong positive returns in the market. This was a welcome change in the direction that the markets were headed in at the end of the fourth quarter. Given the market results and new client activity, our AUM saw an increase of $156 million. This will result in increased revenues in the second quarter.

Heading into this quarter we mentioned we were confident in our investment philosophy. During the first quarter, our portfolios have generally performed at or above their benchmarks as we delivered solid results.

Our Trust department continues to be instrumental in our ability to build and maintain relationships with our clients. We maintain a strong pipeline and expect to continue to be successful in attracting new clients for the remainder of 2019.

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

(Operator Instructions) And your first question is from Steve Moss of B. Riley FBR.

Good quarter here on originations. Just kind of wondering if I -- how the pipeline looks, and what do you expect for full year originations, if there is any update there?

Look, our expectations are -- from total originations we should be close to our number for last year and previous years has been relatively consistent in the $1.6 billion to $1.8 billion range. We may temper it slightly depending on where the yield curve sits as we progress through the year. The majority of that tempering would be around potentially multifamily, depending on whether those yields are either up or down. What we really feel good about is the pipeline is still strong on all fronts, multifamily pipeline front. C&I, we have the strongest pipeline we've ever had, which certainly helps the overall yield on origination. And also, the majority of those are shorter, term-adjustable by nature. We do expect it to be a little more challenging in the single-family area, as most originators are accepting yields that are well below what we feel are commensurate with the current market conditions that's -- as we said right now, our pipelines are strong. That we don't expect much material deviation from our plan as well as what we've done in the past.

Okay, that's helpful. And then I saw you guys increased loans held for sale. Just wanted to get updated thoughts around the size of the securitization for the third quarter?

It's going to be consistent with -- between $500 million and $600 million, which is what we've stated in the past and is consistent with the hedge that we currently have in place. So to the extent that we really deviate from the original plan is really more based around like CRA-type loans and stuff like that, but it's moving along pretty smoothly.

Yes, I would say the last 12 months, $600 million, the current loans held for sale kind of reflects around that execution. But as Scott says, it could be anywhere between $500 million and $600 million, depending on where we're at, at the end of second quarter going into third quarter while we're getting ready for execution.

Okay, that's helpful. And you know, C&I loans, going back to that, with regard to originations it was strong this quarter, and you mentioned, the pipeline remains very strong. Just wondering where you're seeing the demand for C&I loans these days?

Well, it's actually 4 years of very hard work that we've done in the C&I area and it's actually been all across our footprint. We've had very strong demand in our equipment finance group as well. They had a very strong quarter and that's, I believe, 3 years now?

Yes.

Since we established our equipment finance. So this is typically our smaller-ticket to medium-sized ticket leasing with about a 2.5- to 3-year duration. And so we really like that product. It's highly granular. We' very efficient at it and the yields are much better than what we're getting on our real estate lending activities.

As far as other C&I activities, our corporate banking group is -- which deals with some of the larger transactions, we expect good traction in local markets within California. And then just generally, our C&I groups that are in the field have picked up volumes consistent with our expectations. So this is kind of a 4-year plan, that's starting to come to fruition, and we expect it to continue to grow commensurate with our other originations.

And the good thing, Steve, is obviously, most of that's adjustable. And so I know, some people have stated concerns in the past about our interest rate risk, and that certainly alleviates some of that.

Our next question comes from Matthew Clark of Piper Jaffray.

Maybe first question on extensive -- I think historically, you guys have had a 25-or-so percentage increase in comp on a linked quarter basis. You know, seasonally, this time only 17%. I assume that's just the lower growth appetite, but was there anything unusual there in terms of reversals? Or -- and you know, how we should think about the overall run rate that's noninterest expense going forward?

There wasn't anything unusual in the first quarter that was significant at all. As you can see, when compared to the fourth quarter, almost all that increase was in the comp and benefits line, which is the seasonal items I mentioned before. So on a go-forward basis for the rest of the year, we'll have less pressure on the comp and benefit lines and some increases on the other lines. So we expect it to remain relatively flat for the rest of this year and then jump in the first quarter of next year.

Okay. Great. And then on the NIM. I think if you strip out the $1.7 million you get a NIM closer to 2.77%. I know that includes the loans held-for-sale. But just trying to think through the margin outlook in the upcoming quarter, and then when its securitization's done in the third -- can you just talk through kind of your expectations around the margin over the next couple of quarters?

I think it's going to remain pretty stable. If you saw what happened during the third quarter of last year, it significantly popped back up. And I think you'll see a similar trend of once those loans are securitized in our balance sheet, then I think you'll see NIM jump back out probably more towards where we reflected without those loans being held for sale. So we're still contemplating a little bit maybe restructuring some of our security portfolio. We haven't finalized what we're going to do there yet. But if that's so, I think that too would benefit net interest margins as well.

Yes, I think as Scott explained, if you looked at our, what we consider our core bank and interest margin, it's been relatively flat, you know around 3%. As we lever up for securitization in terms to drag it down in the first, second and into the third quarter, it -- once we facilitate the transaction, and it pops back up to the core level in-line.

This is our first time to actually report minus the [symbol], and I hope it's beneficial, because I think there's been confusion in the past about the fact that you see NIM compress and then get back out. So honestly what we're trying to do is show what it looks like without that tool, as we do these throughout the year, so that you can get a more stable picture of what we think NIM's going to look like.

And I think the last thing was on the demand -- NIM expectations, now that we've said it, and the short-term interest rates are relatively stable, there's going to be a lot less pressure on their funding costs from the perspective, especially on our wholesale borrowings. And so we're not expecting it to go, increase as significantly as they have over the past year when we had 4 rate increases.

Right. And stable commentary on the NIM in the upcoming quarter, I assume would be off at 2.77%, not to 2.88% before it pops?

That would be the expectation -- would be off the 2.77%, which excludes it. However, I will give you a warning -- is that the reason we don't emphasize that much anymore is we've had 3 quarters where we've had roughly between $1.5 million and $2 million in recoveries. So it's getting to be less of an unusual item.

Yes. Okay. And then just on the gain on sale in the third quarter. Is it still -- you still think roughly 1% on what securitized?

I think that's reasonable at this point, 1% net of cost is kind of what we are tracking at.

But will be less than 2%.

Yes. You know some of it is going to be related in the credit spreads at the time of execution, but the market seems to be behaving fairly well.

Okay. And just on the tax rate going forward, it's bouncing around in a range. Is 29% still good?

29% is a reasonable number. We don't have a lot of benefits in the past. We've had benefits from exercise of stock options and stock grants. Also, some of the other implications of the new tax law are related to nondeductible expenses. Are going to keep our pressures is, it's really not going to be dropping below -- the expectations below to 29% for the rest of the year.

Did you buy back any stock in the quarter?

No.

Your next question comes from Andrew Liesch of Sandler O'Neill.

The margin that you referenced to 3.02%, did that include that yield benefit on the payoff of the acquired loans?

Yes.

Okay. And then I just had a follow-up question on your C&I growth this quarter. Do you guys require -- maybe not on the equipment leasing, but on the commercial business customers, do you require they bring over their deposit relationship as well, which could then add some noninterest-bearing accounts?

Yes. Typically the reason that we're facilitating the full relationship. Sometimes we lead with credit, but in most cases we require a deep linking business. So I would say, unless it's a pure ABL play, where there is minimal deposits, we usually are getting about a 30% to 35% of self-funding ratio, sometimes higher, sometimes lower, but yes, that contemplation is full banking relationship.

Okay. Very good. And then could you just touch briefly on why nonperformers went up a little bit this quarter? It looks like it may have grown $16 million from $12 million. What may have driven that?

Yes. Basically, it's the continued resolution of our acquired loans. Over 40% of our nonperforming assets are acquired loans. As these loans mature we got through a process. One of the things that we do is we don't keep on extending these things out 90 days. We resolve them. And so we have loans almost -- a portion of the acquired loans are just matured. So they're past 90 days, because they're matured, not because they're not paying. And so we just go through the process of working them out. And because it's new relationships, sometimes it takes a little longer than that.

(Operator Instructions) And your next question is from Gary Tenner of D.A. Davidson.

Just a quick question on the customer service costs, which I think had been described as being more related to the deposit strategy over time. With the Fed at pause, does that help that cost stabilize? Or is it purely a volume function?

It'll hold it pretty steady.

We'll hold the rate steady if we increase our deposits. So those are a little bit seasonal. So we have some expectations that during the second and third quarter they increase and then the fourth and the first quarter, they decrease a little bit. So that'll have an impact, but the impact will all be based on volume, not rate is our expectations.

Yes. Again, a lot of it's related to tax, payments and other things that will affect the seasonality. But yes, the rate should be relatively stable. That said, hopefully it's keeping at the -- not farther. Hopefully going the other way at some point.

Okay. So just to clarify, in the past it was going higher because of the combination of volume and rate. Now it should -- it'll be a volume story?

Yes. That's correct.

We have no further questions at this time. I will turn the call back over to Mr. Scott Kavanaugh for closing remarks.

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

Thank you. This does conclude today's conference call. You may now disconnect.