First Foundation Inc (FFWM) 2022 Q1 法說會逐字稿

Greetings, and welcome to the First Foundation's First Quarter 2022 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

Speaking today will be Scott Kavanaugh, First Foundation's Chief Executive Officer; Kevin Thompson, Chief Financial Officer; and David DePillo, President. 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, including 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 the 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.

Hello, and thank you for joining us. We would like to welcome all of you to our first quarter 2022 earnings conference call. We will be providing some prepared comments regarding our activities, and then we will respond to questions. Let me start by saying a few words about how proud I am of everyone at First Foundation. The results we reported today are a testament to the hard work from everyone in our organization.

The past few years have posed some interesting challenges for everyone, and yet we continue to generate strong, sustainable results quarter after quarter. This was another great quarter for First Foundation and a fantastic start to the year. Our earnings for the first quarter were $30.8 million or $0.55 per share. This represents a 38% increase over the first quarter of 2021. Total revenues were $89.9 million for the quarter, a 36% increase from the first quarter of 2021. Tangible book value per share ended the quarter higher at $15.21. We declared and paid our first quarter cash dividend of $0.11 per share, which we increased last quarter. We also received authorization from our Board of Directors to purchase up to $75 million of our company stock.

The favorable results we reported today reflect the strength of our institution and our continuing positive outlook that our model is working very well across the diverse and dynamic markets we serve. Loan originations continued to be at near-record levels with $1.1 billion in new loans for the quarter.

42% of those originations came from C&I. NPAs remained low at 16 basis points for the quarter as our lending team does a fantastic job maintaining our high credit standards. We have established a well-balanced loan portfolio that continues to perform very well. Dave will touch more on this later in the call. Our deposit profile remains attractive with core deposits at 99% of total deposits.

Deposits increased by $146 million in the quarter, and our loan-to-deposit ratio was 88% at the end of the quarter, driven in part by our ability to continue to attract high-quality commercial clients. All of this speaks to the strength of our deposit team. Our wealth management and trust businesses continue to provide meaningful contributions to the success of the firm. Assets under management ended the quarter at $5.5 billion, largely due to volatile market conditions in the first few weeks of the year, yet rebounded in the last 30 days and to start the second quarter.

The all-weather portfolios we manage for our clients fared well as the 4% decrease in total assets was less than the 5% decrease in the S&P 500 and the 9% decrease in NASDAQ. An important part of our wealth management offering is our in-house investment management capabilities. I'm proud to share that the performance of our mutual funds has been very strong with our total return fund earning a Morningstar 5-star rating and coming in as a top percentile performing fund for the year. Even amidst all the volatility and changing market conditions, our pipeline continues to be strong, and the demand for our wealth management services is at an all-time high.

Last quarter, I referenced the many projects we are working on, including the acquisition of First Florida Integrity Bank, which will be complete when we take the final step at converting our core systems in May. This has been a tremendous effort by the team, and I am so grateful for everyone who has worked hard to make this happen, including all of our new colleagues in Florida. We are also now just weeks away from opening the doors of our new branch in Plano, Texas.

Starting a de novo branch is never an easy feat, but again, our team did an amazing job, and we are really pleased at how it turned out. It's very exciting to have a retail presence in Texas. Even as many of these projects near completion, we continue to invest in technology for the benefit of our clients and to enable our employees with solutions they need to meet client demand and provide exceptional client service.

We are also investing in our compliance efforts, including adding people and systems to ensure we continue to exceed the expectations of regulators in our ever-changing environment. In addition to expanding our footprint, adding to our technology stack and the building out of our teams, we have also expanded our product offering.

This includes our recently revamped SBA lending offering, our expanded investment management offering and, of course, our efforts with Fiserv and NYDIG to bring Bitcoin into banking. These additional high-quality financial solutions are enhancements to our already robust offering and are important as we deepen relationships with existing clients.

Many of our clients turn to us for a variety of their financial needs, especially when we are viewed as their primary bank of choice when it comes to their financial life. As we look ahead to a rising rate environment and perhaps even a transitioning economy, First Foundation remains well positioned with a strong balance sheet and excellent credit. Demand for our services is at peak levels, and our pipelines across all business lines are very robust. I'm very grateful for all that we have accomplished in the quarter, and 2022 is off to a great start.

Now I will turn the call over to Kevin, our CFO.

Thank you, Scott. Earnings per diluted share was $0.55 in the first quarter. The return on assets was strong at 1.18% with a return on tangible common equity of 14.7%. As a result of this good momentum, our tangible book value per share increased to $15.21 in the quarter. These were especially good metrics, considering our first quarter generally has higher compensation expenses related to payroll taxes and bonuses, and we are carrying some duplicate merger-related expenses until systems conversion in the second quarter.

The net interest margin contracted 17 basis points to 3% in the quarter because of high average cash balances from the success we have had in increasing core deposits and from the acquisition of TGR Financial. We have already begun to deploy much of that liquidity with our strong loan growth that continues into the current quarter. We maintained discipline in loan production with the average yield on loans increasing 4 basis points to 3.84%. At the same time, we were able to maintain our cost of deposits at 15 basis points for the quarter. We transferred $917 million of available-for-sale securities to held to maturity during the quarter since we have the intent to hold these securities through maturity.

Credit metrics remain strong in all our loan portfolios, and the allowance for credit losses for loans decreased slightly to 44 basis points of total loans. This decrease was primarily a result of the payoff of purchased credit deteriorated loans from specific reserves from prior acquisitions. Nonperforming assets remained low at 16 basis points to total assets.

Asset management fees were strong with revenues of $10.2 million, and our advisory and trust divisions achieved a combined pretax profit margin of 21% in the quarter. Assets under management at FFA ended the quarter at $5.5 billion, while trust assets under advisement at FFB were $1.3 billion.

Other income included a $1.1 million gain related to a sale/leaseback transaction. This item is excluded from our efficiency ratio. Our noninterest expense increased due to higher compensation and benefits expenses, mostly related to a 20.5% increase in average FTE as a result of our acquisition in the fourth quarter. Also contributing were merit increases that were effective at the beginning of the year.

As I mentioned earlier, our first quarter generally has seasonally higher compensation expenses related to payroll taxes and bonuses. Finally, until we finish systems conversions of our recent acquisition in the second quarter, we are carrying extra costs associated with duplicate systems and some head count. Efficiency ratio for the quarter was still strong at 53%.

I will now turn the call over to David DePillo.

Thank you, Kevin. It was indeed a very successful start of the year for First Foundation. As Scott mentioned, we originated $1.1 billion in loans in the first quarter, another incredible quarter of loan production for us and the most we've ever funded in the first quarter of the year. Our commercial business lending accounted for a solid 42% of originations in the first 3 months of the year. We funded $482 million in C&I loans, which represents a 19% increase in C&I loans compared to the first quarter of last year.

Our ability to continue to diversify our loan portfolio without compromising credit quality is a testament to our entire team. 49% of our C&I loans in the quarter were adjustable commercial revolving lines of credit, which continued to be a focus of ours over the past few years and shifting the balance sheet to more rate neutral. The remaining C&I originations were comprised of $125 million of commercial term loans, $76 million of public finance loans, $28 million of equipment finance loans and $15 million of owner-occupied commercial real estate loans.

As a percentage breakdown, our composition of our loan originations during the quarter is as follows: Commercial, 42%; multifamily, 48%; single-family, 5%; land and construction, 2% and 3% and other. We accomplished this without changing our high underwriting standards and the loan pipeline remains very strong heading into the second quarter.

In addition, it is worth noting that even with a high level of originations in the first quarter, we achieved a rated average interest rate of 3.36 on originations compared to 3.38 in the fourth quarter or only a drop of 2 basis points.

We will start to see additional yield on loan originations going into the second quarter as our rate locked pipeline funds out and we start funding loans at higher yields as the long end of the curve has continued to rise. As of March 31, our loan portfolio balances held for investment consists of 42% multifamily, 29% commercial business loans, 9% nonowner-occupied commercial real estate, 12% consumer and single-family, 2% land and construction and 6% of multifamily loans held for sale.

Of note, our commercial business loan balances increased approximately 56% year-over-year, which reflects our continued focus on commercial banking and our pipeline is very robust due to market conditions. As also noted that our lending activity across our new markets are gaining traction as we originated $84 million of loans in the quarter in Texas and Florida combined.

Both of these markets now make up a combined 17% of total loans and we see great potential going forward. The diverse composition of our loan portfolio, coupled with an increasing diverse geographic make-up positions us well for changing economic conditions. For a bank of our size, we have an incredibly diverse geographic footprint that should benefit us as we are able to pivot towards focusing on geographies that are experiencing greater potential for growth, such as the case right now for Florida and Texas. As we look ahead at our pipeline and loan portfolio, we are evaluating economic attractiveness of continuing our systematic third quarter loan sale. While they have been an important part of our business model in years past, we have elected to defer that sale for now and are contemplating a potentially more attractive strategy of allowing our loan balances to grow.

Given our size and current market conditions, we believe that it would be a greater economic benefit by increasing in the loan portfolio rather than conducting an agency sale. That said, we will continue to keep our options open for future sales. Our deposit business also experienced a strong quarter with an increase of $146 million during the first quarter of 2022.

To end the quarter at $9 billion, which is -- reflects a 2% growth over the last quarter and a 43% increase compared to the first quarter of 2021. The $146 million of growth in deposits during the first quarter of 2022 included an increase in commercial deposit service group of $27 million, retail branch deposits of $145 million offset by a slight drop in our online banking deposits of $26 million.

It is also worth noting on our deposits held steady at 15 basis points and our loan-to-deposit ratio ticked up slightly as we have started to deploy our excess liquidity into loans. All of this success in the quarter could not have been achieved without the great team we have in place. I am so grateful for their dedication and hard work. At this time, we are ready to take questions. I will hand it back to the operator.

(Operator Instructions)

Our first question is coming from David Feaster with Raymond James.

I just wanted to follow up on the commentary about maintain -- not doing the securitization and holding that on the balance sheet. Could you just talk through some of the strategy there? And then your ability to continue to maintain the deposit growth to fund -- I mean, what you guys have done on the deposit side has been phenomenal, but how do you think about your ability to continue to fund your strong organic growth, especially as you hold another $500 million each year on the balance sheet?

Sure. Dave, you want to take the loan side?

Yes. The interesting part about our last economics on our loan sales was at a record level. I think it was 4.5 points. But we started to do analysis prior to that and saying, where does it really make sense for us to just maintain loans versus selling them into the market. And as you're aware, on an agency sale, we do get the benefit of the onetime gain, but we do have to hold risk-based capital throughout the life of those portfolios. And in a sense, if we earn, say, on average, historically, a couple of percent on sale, are we better off holding 3% plus in our net interest margin going forward?

And the obvious answer is yes because on average, those portfolios have a, call it, around a 3-year plus average life. Our securitization average life has been about 3.5 years. So rather than a onetime gain, we can gain that spread income. It will diminish us a little bit within this year. I'm not having that gain, but next year, we'll have that additional spread income. So we've been evaluating this for quite some time.

We will continue to strategically sell whole loans into the market, which doesn't have the same capital issues that we face on a risk-based capital for doing a agency level securitization. But this is something we have been contemplating, and certainly, the gain on sale in this environment would be significantly less than what we saw in prior years.

So at this point, we've kind of gone pencils down on that. And whether we do it in the future, again, it also depends on issues like funding. But with the overhang of cash we've had and the ability to go out and collect deposits given the CPRs on the portfolio, we don't see any near-term funding constraints that will make it less profitable for us to hold those on our balance sheet.

Yes. I think we're on the size, David, that we all concluded. If you recall, part of it was loans to capital or multifamily to capital ratios. And then our ability to outstrip -- our clients were outstripping our ability, and that's kind of why we were doing that securitization we're of the size now that we don't think we really need that. On the deposit side, I would say that if you recall, I think last quarter, we talked about the fact that we had been -- when interest rates were 0, we had a loan-to-deposit ratio that was in the low 80s, and that overhang was hurting them.

And we actually had to constrain some of our larger clients, either by saying we can't take more deposits or we were tiering their relationships. So as Dave just said, I don't think we're going to have any issues there. We believe that there's levers that we can pull that will allow us to take even greater deposits even go back to some of our long-standing client relationships. So I think we feel pretty good that we can meet the demand that Dave just referred to.

That's great. And then kind of just thinking about how that might translate into the margin. Obviously, the liquidity drag weight on the quarter. You guys have been active managing the balance sheet and deploying that excess liquidity and with accelerating loan growth already above what you guys have done in the past, given that you're going to retain those. I guess how do you think about the margin as we look forward? And whether -- I guess this would obviously -- seems like it's going to be the trough and that we should see expansion going forward. And then just any thoughts on updated rate sensitivity in light of some of the balance sheet moves that you've made with TGRF?

Yes. Well, I would say you've got 2 things going on right now. The Fed is going to increase rates here in the next week or so. All accounts are that it's going to be a 50 basis point increase. That's going to put a constraint on any bank that at some point, client relationships are going to come back and start to demand or request that their interest rates be taken up. That being said, one of our biggest issues has always been in the last year or so. We've had such an excess liquidity that we have and that that has hurt our margin. As Dave just mentioned, our loan demand is still incredibly strong. We're putting it to work. I think we started the -- or ended the last quarter at 82% or 83%. We're at 88% at the end of this quarter. We hope to even have a higher loan-to-deposit ratio. But Dave, do you want to talk to the loan side and how the yields would you expect to see?

Yes. I think looking at our NIM, like you said, this should be the trough as we deployed a significant amount of cash and will continue through this quarter will rebound. I think we'll have a nice rebound in the second quarter and maintaining that margin going forward is the big issue. The good news for us is the long end of the yield -- or middle to long end of the yield curve had adjust relatively early. So as we have burned through our lower-yielding pipelines and start to fund out at higher rates, in many cases, on average, probably 100 basis points higher than what we were doing in the last several quarters.

We're going to start to see the effect on that on maintaining and potentially expanding margin. So having a very robust pipeline at higher rates and continuing to build that pipeline at higher rates will hopefully offset any pressure we see on the funding side of the balance sheet.

But as Scott says, if the Fed continues to move significantly and aggressively, there will be pressure and will all depend on what happens with the middle to long end of the curve. But the good news is we fund assets at such a rate, we're able to remix our portfolio yield, I would say, faster than most banks can.

Yes. I'll add that in the last rate cycle, deposit betas were quite slow, as you'll remember. It seems like the Fed is moving very quickly, and you're starting to see bank liquidity decrease fairly quickly as well.

So the deposit betas in this scenario may move a little quicker than we've seen -- so we have a bit of that headwind for all banks, I think competition could remain tied, as Scott mentioned. And then also depends on how the bond market digests these rate increases and how the yield curve looks and how this will perform. But we are -- we have trended slightly more asset sensitive. We're still slightly liability sensitive in the first year and then asset sensitive in the second year in our kind of scholastic academic modeling.

Okay. That's helpful. And then you guys are working on a ton of really exciting things. I was just hoping that you could maybe expand on some of the new offerings that you talked about in the prepared remarks. With the SBA and the investment management, what exactly are you working on there? And then just any updates on the NYDIG partnership and where we are with that rollout, it has obviously gone well, you've already written up that investment. But just curious as you've gotten deeper in that partnership, are you starting to identify other opportunities and seeing any additional benefits from that relationship?

David, do you want to take the SBA?

Sure. As a bank strategically, we've been involved in 504 and 7(a) lending curve for the last, I would say, 5 or 6 years. But growing that to a larger, more significant footprint as it's been aspirational for us. Because of some merger-related issues that were going on, there is some available resources in the market that we were able to take advantage of. So we opportunistically have hired a new head of SBA production and are adding additional sales force to expand those offerings across our entire footprint.

And really, our Florida operation never really had a viable 7(a) option. We certainly haven't really exploited that in Texas, and we're now expanding that in California. So we see that as a significant growth area for us within our commercial suite of products.

On the front of expansion of our -- what we would consider more of our fintech initiatives. The NYDIG relationship, obviously, is significant and important for us to prove out the concept that Bitcoin can be facilitated through traditional bank rails and not necessarily in a less secure environment that a majority of those transactions are happening today.

We are very close to achieving our rollout on that product. We're working with our regulators to make sure they're comfortable and kind of coming to the finish line on that. But there's -- given where our platform is and given our strategic relationship with our core provider, there's significant opportunities, not only on the deposit side, but additional fee income side that we continue to explore with them that is heavily focused on providing services to fintechs that are out there that are really looking for strategic bank partnerships. And that market is very robust, deep and it's very exciting. So we're kind of looking beyond just the crypto world and are exploring a lot of opportunities that there's very few banks that are really taking advantage of it today. And we feel that's going to be a great growth area for us going forward.

On the investment management front, David, we have added our first employee as a relationship manager in Florida. We have also successfully received our trust powers in Florida. I think our branch here in Texas opens in less than 2 weeks at this point. Our employees are going through training right now and we're on the final of getting that launched at which time we will be seeking trust powers in Texas. So I believe we're about to onboard our first trust relationship in Florida. And we received quite a few requests for proposal on investment management.

And every one of those leads has come out of First Florida Integrity or TGR. So we're highly encouraged by that relationship that we've already got working with the folks in Florida. And so we're off to a great start of being able to do ancillary business, both on the investment management and trust side. And by the way, when we did all the modeling of our 2 companies coming together, never did we contemplate having any of those relationships in place nor would it have an impact monetarily. So it only further adds to the benefits of having done that transaction.

Our next question will come from Matthew Clark with Piper Sandler.

Maybe just to close the loop on the loan and deposit growth. What -- I guess I'm trying to get a sense for what you're budgeting in terms of deposit growth for the year, obviously trailed the strong loan growth this year. It sounds like the pipeline is pretty strong as well. And you've got some flexibility to take the loan-to-deposit ratio up further. But trying to get a sense for how you're thinking deposit growth might come through for the balance of the year?

It's a fine line, Matthew, because frankly, the reality is we've been curtailing deposit growth because we've had such an overhang of deposits. I mean -- last quarter, I believe very close to it on average, we had about $1.2 billion of excess deposits, which was a lot that they needed to put to work, and we're going to wind up putting it to work. But it's one of those things that, at the same time where you've got the Fed increasing rates and all those things going on. Right now, we're kind of turning this picket back on but we also don't want to be at 80% loan-to-deposit ratio because it has had a dramatic effect on our net interest margins.

One of the other issues we faced in the first quarter is it's typically our seasonal runoff in a lot of our large relationships. So the fact that we even had positive growth in our commercial's depository services is a testament to how rich those relationships are. Usually, that's a negative during this time of year. So going into those balances will start rising and be available to offset some of the excess funding that we contemplate going into the second quarter.

So -- but as you always have noted, our ability to generate assets has never been an issue. Our ability to maintain deposit growth has always been our biggest issue, and it will continue to be our biggest challenge. Going into this increasing rate cycle.

However, having no real wholesale exposure unlike years past and having solidified our presence in the commercial deposit side of the business over the last several years has really put us in a position for large-scale growth in the deposit side that we can -- as Scott had mentioned, we can moderate and temper as needed. So we feel good about even with expectations of even much higher fundings and lack of loan sales, we feel good about our ability to keep our deposit growth somewhat commensurate.

Back to your point, I mean, to your point, we're 99% core funded right now. In the last cycle of high interest rates, we were 70% core funded and having to borrow on the margin. So I think to your point, we're in a much different position than we were the last time around, and we have a different luxury that we just didn't have last time.

Yes. Okay. Great. And then just on expenses, maybe for Kevin. It does seem like there's some excess in there and seasonality that should come out in the upcoming quarter, you got cost saves too from the deal. $44 million, $45 million seems like the right run rate going forward, but I want to make sure kind of in the ballpark.

Yes, some expenses are seasonal, and there are excess expenses from the -- probably about $1 million or so from the merger in this quarter. However, you do need to anticipate that we will have growth going forward in -- as we're expanding quickly, we'll have growth both in our production areas as well as our support areas to support this growth engine. So we do anticipate our expenses increasing through the year, but our efficiency ratio remaining in the low 50% area.

Okay. Okay. And then Kevin, while I have you, just trying to hone in on a core margin. Do you have to know the accretion contribution in the quarter from the deal, if any? And any other kind of unusual recoveries or anything like that, that might enhance that reported margins?

Yes, you bet. The accretion income in the quarter was $330,000. And of course, we talked in the release about the sale/leaseback benefit of $1.1 million. We had an MSR adjustment down of about $200,000. Those are all the unique items that…

No, no, [down through] our margin.

Oh, not through -- you're talking margin, I'm sorry.

That's okay. I'll take those. I mean we got the $1.1 million, but the $200,000 is helpful for (inaudible).

Really -- if you're just talking margin, I apologize if I misunderstood your question, it would really just be the accretion income -- the recovery is to ACO. That's right.

Okay. And then, Scott, just on M&A, your discussions of late and the prospect for maybe getting something done in Texas to kind of provide you that infrastructure that you might need?

Yes. Well, we still continue to look in areas across the country. I would say that ever since bank stocks have gotten beat up a little bit. It seems like it's gotten a little quieter. There was quite a bit of activity when I think all bank stocks were trading higher, but a lot of that has tailed off. Right now, I'm not hearing much out of Texas, but we continue to look across Texas, Florida, California, anywhere that we think would be additive and we continue to focus on.

So we're looking for opportunities, but our stock value is depreciated a little bit relative to tangible book value. So I think that may be creating a bit of a muted scenario for M&A.

Our next question comes from Steve Moss with B. Riley Securities.

Maybe just circling back to Dave, to your comments about loan yields here. The 100 -- up about 100 basis points, was that across the board or more specific to multifamily and commercial real estate? Just kind of curious there.

I think it's kind of on average, 100 basis points is really across all product lines. So multifamily, say, it's in kind of the low 3s and that's now in the low to mid-4s, depending on where the yield curve is day in and day out. But we have seen kind of that 100 basis point rise on new pipeline that's coming in. And that's pretty much been across the board. The good news is with the rate increases coming in, we are going to get the benefit of that segment of our C&I portfolio that's kind of been sitting LIBOR-based at a fairly low rate. So -- but I would expect kind of on average about 100 basis points higher on new fundings coming in. And that will start in the latter part of the second quarter as we kind of gradually work through the rest of some of our lower-yielding pipelines.

Okay. That's helpful. And just maybe on the variable rate, just kind of curious what percentage of portfolio. I'm assuming a large chunk of the C&I portfolio is variable rates kind of what percent of total loans perhaps is variable rate these days?

The last time I looked, I thought it was 19%.

Yes, 17% to 19%. Yes, that's right.

And that's been increasing. But yes, it's about 19% currently.

And that excludes the -- those loans that have a fixed period -- these translate into variable over time and in this rate environment, we'll probably see more of those graduate to the variable period over time.

Okay. That's helpful. And then in terms of originations here, obviously, a very strong quarter here. Just kind of you guys indicated the pipeline strong. Just kind of curious, any updated thoughts as to how you're thinking about total originations for 2022.

Well, first quarter was stronger than expected. Second quarter will be much stronger than expected. Third quarter will probably be a little bit of an adjustment period, one as clients get used to new rates and we go through the normal summertime. So we'll probably see that kind of dip to kind of historical levels. And then we expect fourth quarter will probably -- typically is our strongest quarter. So at this point, we're looking at the $4.5 billion is probably a low end for us for the year given the current run rate. So -- but based on current demand, we just could be higher.

All right. And on the wealth management and trust side of the business, I hear you guys in terms of good asset generation here. Just curious, is this a good run rate for the fees there, if there's anything one-time in nature?

So I think the fees on average are still between 60 and 65 basis points. That's always a reasonable measure, I think, in terms of how you look at things. Obviously, the markets have melted down, and that has affected our absolute balances, not necessarily on the trust side near as much as on the FFA side. Our pipeline still remains robust. But I think if I were to look back at past times where the markets have had pretty big downdrafts, we go from being -- trying to bring in new business, and we're always trying to do that. But there's also a real emphasis on calling clients on the fact that the markets are down 10%.

So we spend an extraordinary amount of time. All I'm trying to say, I guess, is when you look at FFA in normal times, there's a lot -- you're able to spend a lot more time focusing on generation of new assets and a time like this, you're probably spending an equal amount of time conversing with clients that you've had for years, just trying to talking through what the markets are doing. They've done an incredible job, and they put out a lot of commentary walking through what's going on in the marketplace with clients.

But that's why you see the decline from 5.7 to 5.5. And then recently, in the start of this quarter, there's been a downdraft again, but that being said, we're still adding a fair amount of new business, but we're also wanting to make sure stuff is not going out the back door either.

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

So I wanted to ask on the SBA initiative. Are you thinking of that as a flow business for gain on sale? Or is that going to be more of a portfolio as you grow that?

So we've modeled it kind of what you would traditionally see, which is a little more sales as we build it. So maybe 50% in the market. And then we curtail it after a year or so back down to about 25% going to market. But after, I think, 3 years, the majority of it will be retained. So the way we look at it is we wanted not to be an earnings drag as we build it and having a little bit of gain on sale offset some of that operational cost, which will kind of get us to that net profitability fairly quick, and then we'll start curtailing the sales down and use it more as a traditional portfolio product. Does that make sense?

Yes, it does. And then to just on the annual -- excuse me, the annual securitization that you're not going to do this year -- did I hear you right that even if you securitized it, and I didn't realize is that you have to actually allocate capital to it for the life of the asset even after you securitize it. So there's not really an impact other than not getting the upfront gain?

That's correct.

That's correct. So -- and we do -- if we do a whole loan sales into the market, we don't have to hold requisite capital. So if we do some more timely sales, if needed, it won't have any impact on risk-based capital going forward.

Okay. That's helpful. And then last question on my end. You talked a little bit about expenses. Can you talk about customer service costs as we're getting, obviously, or what we think is pretty obviously front-loaded rate hikes. Is there a kind of quicker and steeper inflection on that line item as rates go up?

Yes. We've -- what we experienced is some of our larger clients expect more of a Fed funds type relationship. So as the Fed moves, we have modeled in that we're going to move somewhat commensurate. Some of the -- the average relationship will lag fairly well, but some of the larger ones don't. So we have modeled in some of higher betas on some of the bigger clients. So our expectations are that, that line item will grow over the year. We don't really give model guidance on that.

We don't. But it's definitely -- these are more sophisticated clients with a higher beta than others. It won't be 100% beta. We still have good relationships there but expect a higher beta.

The good news is it's compared to wholesale funding, even if we have higher betas, it will be much cheaper source of money.

Even if you don't kind of provide specific detail, can you give us kind of the amount of deposits that are kind of reflected in that line item that we could model whatever deposit beta assumptions that we want to or pass through assumptions.

Typically, yes, typically, what we -- it's been around $1 billion of funding that we kind of had higher sensitivity to kind of drive it off [that].

(Operator Instructions)

Our next question comes from Andrew Terrell with Stephens.

Just back to the last point on customer service costs. I think I heard you about $1 billion or so of deposits you'd kind of pay expense to that line item. Is that relatively similar to, I guess, the balance back in 2018, 2019? Just maybe we could use that as a proxy?

It's a little bit higher at this point. Back in those days as far as those core relationships collectively.

I think it was about even.

Yes. Got it. All right. And then I wanted to ask on just -- I thought the $75 million buyback authorization. It sounds like the growth outlook is really robust. I guess with that in mind, should we view the buyback as more of just kind of nice to have out there to take advantage of any kind of volatility or maybe Scott, could you just speak to the appetite for maybe getting more active in the buyback at these levels?

Yes. Well, based on our modeling, which was done higher than where the last time I looked that we were trading, we felt that it was very accretive to earnings. As you know, we did the sub debt offering, we have some excess capital. We've all along felt that we trade at less multiples compared to our peers, and we're prepared to defend it.

And I think it becomes very additive. So I want to just say, look, we're -- I think it will be active as long as the stock price tends to be at this level or lower. So we're prepared to act on it. That's what we're going to do.

Okay. Very helpful. I appreciate it. Last one maybe for Kevin. Just any updated expectations on tax rate for this year?

Yes. You've seen we've had some really good benefits in our tax rate over time as we have growth outside of California, we'll see our tax rates decrease. We have other strategies going on, increasing our low-income housing tax credits. We have our new BOLI portfolio we inherited from our acquisition. And there are other strategies that we have and are working on. But the biggest driver is loan growth outside of California, and we are seeing that in our pipeline. So we'll see it tick down. It won't be huge moves. But over the next several years, we'll see it gradually move down.

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 again for participating in today's call. I'm very proud of how we've started this year. All our business lines are doing exceptionally well, and I'm very pleased about our ability to generate strong and stable results for our stakeholders. As a reminder, our earnings report and investor presentation can be found on the Investor Relations section of our website. Thank you, and have a great remainder of your day.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.