First Foundation Inc. (NASDAQ:FFWM) Q1 2023 Earnings Call Transcript

First Foundation Inc. (NASDAQ:FFWM) Q1 2023 Earnings Call Transcript April 30, 2023

Operator: Greetings, and welcome to the First Foundation’s First Quarter 2023 Earnings Conference Call. Today’s call is being recorded. Speaking today will be Scott Kavanaugh, First Foundation’s President and Chief Executive Officer; and Chris Naghibi, Chief Operating Officer. 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 statements, including 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, please see the company’s filings with the Securities and Exchange Commission.

Additionally, First Foundation intends to file a proxy statement and related proxy materials with the Securities and Exchange Commission in connection with the company’s 2023 Annual Meeting of Stockholders and the company’s directors and certain of the executive officers are participants in the solicitation of proxies from our stockholders in connection with the annual meeting. Stockholders of First Foundation are strongly encouraged to read such proxy statements and all other related materials filed in the Securities and Exchange Commission carefully and in their entirety when they become available as they will contain important information about the 2023 Annual Meeting. And I now would like to turn the call over to President and CEO, Scott Kavanaugh.

Please go ahead, sir.

Scott Kavanaugh: Good morning, and welcome. Thank you for joining today’s earnings conference call. Let me start by saying how humbled I am by the unprecedented events over the last quarter. For me personally, this is the toughest period I’ve experienced in my professional career. Yet during this history defining quarter for the financial services industry, First Foundation team has demonstrated immense and unwavering commitment to our clients and our company. I want to emphasize the resiliency of our business in the middle of the current economic headwinds. We are a diversified regional financial services company with a scale and a proven business model. Our core business is providing a variety of exceptional financial services to our clients and our core strategy remains strong.

It is only because every employee at every level of our organization worked so diligently this quarter that First Foundation remains resilient, well capitalized and continues to generate strong, sustainable results despite the industry challenges. I cannot thank our employees enough. Their decision is illustrated in the financials we reported despite significant headwinds, and I am proud to say that our earnings per share for the quarter was $0.15. Additionally, we generated $70.5 million in revenue, a 14% sequential decline due to a decrease in net interest income caused primarily by an increase in the interest expense paid on deposits and borrowings. Net income was $8.5 million for the quarter compared to $17.4 million for the fourth quarter of 2022.

Our adjusted return on average assets ended the quarter at 0.25%. We are proud of our results. Now I’d like to take a moment to discuss the recent extraordinary events and how we are currently positioned, the current banking environment. As we all know, during the first quarter, the impact of the Fed’s interest rate actions came to a dramatic had. We witnessed a bank run and a capital crisis that led to the second largest failure of a financial institution in U.S. history. We saw customers withdraw a staggering $42 billion of deposits from a single institution in record time. Well-established banks found themselves in compromised positions due to the deposit concentrations and dubiously structured securities portfolios. Abrupt changes by the Fed forced the entire banking sector and the regional banks, in particular, to reevaluate mid-quarter every aspect of their business, while also attempting to restore client confidence and believe that deposits were safe.

Liquidity was available, security portfolios were diversified and an appropriate risk management was in place. They say hindsight is 2020. And looking back when we started seeing continued signs on the Fed’s interest rate moves in the last quarter of 2022, we took proactive steps to mitigate the effects of our business model, which served us very well this quarter. We are grateful that those strategic moves allowed us to be what we feel is a step ahead in actively positioning the bank for long-term stability and success. More specifically, beginning in October of last year, we implemented a liquidity funding strategy where members of management met twice a week for an extended period to discuss ways the organization could begin to increase deposits, reduce our loans-to-deposit ratio and suspend almost all lending activities.

Our leadership across the organization remains committed to the proactive hard work required to prepare for and face the challenging interest rate environment. The great news is our deposits have stabilized since the March banking crisis. In the early days, we saw our fair share of outflows. In fact, following the collapse of Silicon Valley Bank and others, $844 million in deposits left First Foundation seeking a sense of institutional safety and without any assurance that deposits at all regional banks would be backstop. Most of the outflows we experienced went to top-tier global institutions considered too big to fail, not to our regional competitors. However, I am pleased to share that we have fared much better than some banks, and we have seen many of the deposits that initially left returned to First Foundation once the banking sector stabilized.

This is a trend we expect to continue in the coming quarters. Of the $844 million in outflows we experienced, $129 million has since returned to the bank. We also know that during this time, several bank clients moved money from their FFB bank accounts to our subsidiary First Foundation Advisors. And while the money is still coming over, this total is estimated to be approximately $100 million. This illustrates the value of our business model and our ability to keep client funds within our enterprise-wide offering. This is also a reflection of the incredible efforts of our entire organization, our robust platform and the incredible client service delivered this quarter. We are now seeing net positive days from our deposit channels, and retail and online banking have performed particularly well.

We can confidently say that our deposit levels hit a trough related to the financial market disruption on March 21. And since March 31, we have added $80 million in total deposits across all channels, which speaks to the team and products we have in place. Throughout this quarter, our team has been proactive in helping clients navigate the uncertainties and restoring confidence in our bank and banking system. The steps we took were instrumental. We have been working closely with each deposit relationships to ensure clients understand the options available to them such as pairing their deposit balances, adding beneficiaries, utilizing products such as insured cash sweeps, ICS accounts and strategically repositioning accounts to ensure full FDIC in coverage.

Related to operational efficiency during the quarter, management and the Board made it difficult but proactive decision to reduce staffing. We conducted two reductions in force, one in January and one in March, resulting in an approximate 15% staff reduction. We made this decision in the interest of our shareholders to help us weather the current lending environment. The positions that were impacted were primarily in ourselves, lending and credit divisions and there was no material impact in the areas of risk, operations or client service. The reductions in force will save approximately $14 million in annualized compensation expenses. Further, I along with our entire executive management team in support of our aggressive expense management efforts have elected to forego any cash bonus for the fiscal year 2023.

This will reduce about $3 million in annualized executive compensation expenses, which would have been realized paid out in February of 2024. On deposits, I am also pleased to report that our uninsured deposits have decreased significantly. At the end of the quarter, total insured deposits represented 85%, meaning uninsured deposits represented just 15% of total deposits, which has further improved since the quarter end. This is well above industry standards when compared to the 100 largest banks. It is worth noting that as of April 12, our uninsured deposits were $1.517 billion, slightly below 15%. Our deposits declined slightly in the first quarter from the $10.4 billion in the fourth quarter of 2022 to $10.1 billion as a result of the mid-March outflows.

In terms of our deposits by type, we were balanced among non-interest bearing, interest-bearing, money market and savings and certificate of deposits. Our deposits are diversified by geographic distribution with California, Florida and Texas, making up the majority of our core business deposits, but other states making up 23% of the total. Additionally, our loans-to-deposit ratio have been heading in the right direction over the past 6 months, falling from 103.5% to 97% just prior to the “acute catalyst” induced by the Fed. However, following Fed actions that caused outflows, our loans-to-deposit ratio moved up to 106.1%. Since then, we have successfully recovered deposits, and we have already seen our loans-to-deposit ratio begin to decrease.

As of April 12, our loans-to-deposit ratio was 105.6% and trending better weekly. We are constantly monitoring and managing this ratio as a strategic priority. I would also like to touch on deposit costs to reiterate how thankful I am that we were early when it came to betas in our deposit costs. First Foundation began raising interest rates and lock step with the Fed last year when Fed rates were only 1%. Therefore, our costs are much more in line with where the Fed is now and where it is headed. Now that is not to say that our funding costs will not go up, but it is to say that we will not need to adjust our rates abruptly trying to play catch-up to the Fed and issue some of our competitors are currently contending with. On liquidity, next, First Foundation maintain and continues to benefit from a strong liquidity position.

Our liquidity position remained at $3.5 billion. To drill in a little bit, our on-balance sheet liquidity as of March 31 was $1.3 billion in cash and securities, which helps us — helped us get through the tumultuous and unprecedented quarter. Our liquidity profile has long been an important differentiator for First Foundation, providing much needed stability. Immediately available liquidity exceeds uninsured deposits with a coverage ratio of 223% as of April 12. As of March 31, this includes $1.3 billion in cash and cash equivalents, representing 10% of total assets on the balance sheet. Available credit facilities of $930 million with the Federal Home Loan Bank and $843 million with the Federal Reserve discount window. $245 million available in uncommitted credit lines and a market value of unpledged securities of $130 million.

On the securities portfolio, our securities portfolio has a current market value of $1.1 billion for both HTM and AFS, unchanged from the prior quarter. And we ended the quarter with unrealized and unrecognized losses on the portfolio, had only $71.5 million on a tax effective basis. The average yield of our investment securities portfolio decreased to 2.73% — oh, increased, I’m sorry, increased to 2.73% from 2.5% last quarter. We also continue to focus on efforts beyond stabilizing and growing our deposits, including managing our loan portfolio, ensuring pristine credit quality, identifying operational efficiencies and reducing expenses while maintaining our client-first mentality. We are rebuilding from a difficult March, which will take time, perhaps even several quarters and we plan to focus on maintaining margin so that we are well positioned for 2024.

We believe that we are in a position to expand NIM once the banking and liquidity pressures abate. Let’s look at our lines of business in more detail. As we mentioned in our last quarter, we continue to strategically manage our loan growth. Loan balances remained flat at $10.7 billion compared to the prior quarter. Loan portfolio average yield to 4.54% in the quarter compared to the fourth quarter, — oh, increased, I’m sorry, to 4.54% in the quarter from the fourth quarter 2022. Our fundamentals remain strong with excellent credit quality. Notably, our credit quality remains pristine and our NPA ratio remained at 13 basis points. Our total delinquent loans as a percentage of the total loans increased from 0.29% as of December 31, 2022, to 45 basis points as of March 31 2023.

Our multifamily loan portfolio remains a best-in-class asset and multifamily loans continue to be the strongest performing asset class across all commercial real estate. As many of you have heard me say, CRE is a very broad category and our CRE portfolio is comprised of workforce and essential housing in the form of multifamily apartments located in extremely attractive markets. We think this positions us well in light of potential pending recession or economic downturn as this asset class holds its value compared to other asset classes within the commercial real estate. Our loan-to-value of our multifamily portfolio remains at less than 55.2%. Our multifamily portfolio is diversified across geographies with the largest concentrations in California, a state with limited housing and rent control in many of the cities we operate in.

We have also been proactive in restructuring some of our multifamily portfolio, moving it to weighted average portfolio in line with current market rates. This will take some time, but we have already started to see the benefits of these efforts. I am proud to reiterate that we have never taken a charge-off in our multifamily loans in the history of this firm. And I want to remind everyone that we have very little or no exposure to construction, hotels or commercial office space. While this is a challenging macroeconomic cycle, we are executing on a very solid business plan and expect the results to follow once we experience a more normalized rate environment. On NIM, net interest income was 58.8% for the first quarter of 2023 compared to $74.7 million for the prior quarter.

Interest income increased from $126 million in the fourth quarter of 2022 to $137 million in the first quarter of 2023 due to the increase in both average interest-earning asset balances as well as average yields earned on such balances. Interest expense was $78.2 million for the first quarter of 2023 compared to $51.3 million in the prior quarter. This increase was due to the increases in both average interest-bearing liability balances as well as interest rates paid on such balances. Our NIM for the quarter was 1.83% compared to 2.5 — or excuse me, 2.45% for the prior quarter, which reflects the interest rate environment and the continued pressure that Fed’s — from the Fed’s actions. We expect this to normalize to pre-crisis levels as soon as the Fed eases or market conditions settle.

I won’t predict the actions of the Fed, but on a broad basis, we continue to more evenly diversify our portfolio. Non-interest income of $11.7 million for the first quarter compares to $7.2 million in the fourth quarter of 2022. Non-interest expense was $59.3 million in the first quarter of 2023 compared to 59.8% — $59.8 million, excuse me, in the prior quarter. Our efficiency ratio in the first quarter of 2023 was 84.5% compared to 70.9% for the fourth quarter of 2022. The increase in the efficiency ratio is largely attributable to the aforementioned reduction in net interest income during the quarter. On the Wealth Management and Trust Services side, looking at our Wealth Management and Trust business, we continue to experience meaningful contributions to the firm as evidenced by continued business unit revenue of $8.8 million for the quarter.

This combined business unit revenue, coupled with other recurring sources of non-interest income from the banking unit, accounted for 16% of the company’s total revenue for the quarter. We have also been successful in retaining existing clients and attracting new ones. It is important to note that FFA saw very little turnover this quarter from existing clients. We continue to experience an inflow of assets from existing and new clients. Assets under management increased $200 million in the quarter and ended the quarter at $5.2 billion. Trust assets under advisement ended the quarter at $1.3 billion. Our capital position. Let me touch on a few more data points before I hand the call over to Chris. We remain well capitalized with a Tier 1 risk-based capital ratio of 10.82% at quarter end and exceeding all Basel III well-capitalized regulatory requirements.

Our tangible book value per share ended the quarter at $16.17 compared to $16.20 per share in the previous quarter, which reflected the payment of our fourth quarter’s dividend. We also declared and will pay a first quarter cash dividend of $0.02 per share. We are pleased to maintain a dividend in light of the current banking environment. And while we have to reduce it for the quarter, we expect that we can bring it back to historic levels. I will close my opening remarks by saying, over the last month, like many months before, I’ve had an opportunity to connect and speak with many of our clients. And in my conversations, I was able to reiterate the strengths of working with the regional bank like First Foundation. Among those is having direct access to leadership and being on a first name basis with us and having the ability to connect with us during challenging times to ask questions.

This personal touch is special to the regional banking industry and is why we continue to choose to — why many choose to bank with us. This is evidenced by the successes we are now having in Florida, thanks to the leadership of Garrett Richter and all the relationships the Florida team has built over time. And I would be remiss not taking the moment to publicly recognize our leadership across all regions who are instrumental in helping us navigate the recent market conditions and who dedicate their careers to serving our clients exceptionally well every single day. Now I will turn the call over to Chris, who will go over our balance sheet.

Chris Naghibi : Thank you, Scott. As Scott mentioned, it was a challenging quarter for financial services. But I am so proud of the First Foundation team for their dedication to our clients and to the communities which we serve. I recently embarked on a listening tour across nearly all of our branches to hear from our employees directly. It was a great way to see what’s working well in areas where the organization can improve. Our management team and I simply wanted to connect and renew our commitment to our employees of a productive, collaborative culture of teamwork. Several new key initiatives have grown out of these visits as we look to improve the overall experience for our clients and our internal employees. I’m confident that we have the right business strategy in place to serve as a best-in-class regional bank.

Moving to our lending operations. Loan originations were $481 million for the quarter, which reflects the strategic downturn and slowdown that we have previously spoken about. Our net loan activity over the quarter was decreased by line paydowns and scheduled payments and prepayments. Looking at the breakdown of loans that we originated in the quarter, the percentages are as follows: commercial business loans, 89%; multifamily, 3%; single-family, 3%; land and construction is now at 4%; and CRE investment at 1%. It is always important to note that we accomplished this without changing our high underwriting standards. And our NPAs remain unchanged at 13 basis points for the quarter. This is also reflected in our conservative underwriting standards as evidenced by our LTVs of 55.2% for multifamily loans and 55% for single-family loans.

This highlights the bank’s consistent and disciplined lending practices during these uncertain financial conditions that have been the backbone of our success dating back to what helped propel us during the great recession. We have continued to tighten up and improve our underlying credit guidance to ensure the appropriate strength and risk appetite in the climate to come. We have continued to follow our strategy to pragmatically temper our loan originations. Speaking more specifically about our loan yields, we achieved a weighted average rate of 7.40% on new originations for the quarter, which compares to 5.72% for new originations in the fourth quarter. As mentioned, as of March 31, 2023, our loan portfolio is comprised of 50% multifamily loans, 32% commercial business loans, 7% non-owner-occupied commercial real estate, 9% consumer and single-family residence loans and 2% of land and construction loans, which are selectively and carefully considered for only our most valued clients.

Our commercial business portfolio is diversified with no sector comprising more than 30% of the portfolio and 87% of the commercial business portfolio attributable to commercial real estate. So we are focused on making more adjustable rate loans, which should offset some of the pressures of the current rate environment. We are limited by a variety of factors, including funding constraints as the deposit market remains extremely competitive and liquidity continues to drain from the financial system, along with limiting our exposure to higher cost wholesale funding. The breakdown of our current deposits is as follows: Money market and savings at 30%. This gives a deposit of 24%, interest-bearing demand deposits at 24% and noninterest-bearing demand deposits at 22%.

As Scott mentioned, our percentage of insured deposits increased to 85% as of March 31, 2023, and are 85% as of April 12. Our deposit costs came in at 2.38% for the quarter. And while our future deposit costs are closely tied to the actions of the Fed, we believe we will not be as sensitive as other banks to future rate increases. Before I hand it back over to the operator for Q&A, I want to reiterate Scott’s comments. I am very grateful for our team’s dedication to delivering excellent client service when it matters most. I can confidently say that we have incredible customers and we continue to be excited about the growth in our future. I’ve touched on it several times, but I am very proud of our entire management team and all of our employees.

So many clients and employees have been incredibly generous and thoughtful with their constructive suggestions on how to improve on our delivery of our value proposition of excellent service. We are both committed to listening and executing on these wonderful ideas. Now more than ever, we are aligned and we have been collaboratively working hard day in and day out to accomplish our strategic objectives, no matter the environment. At this time, we are ready to take questions, and I will hand it back to the operator.

Q&A Session

Operator: Our first question comes from David Feaster, Raymond James.

David Feaster: Hi, good morning. Maybe just one — let’s start on the deposit side. I appreciate all the color that you gave. Glad to hear the stability and the improvement in balances since troughing in mid-March. Just looking at the presentation, it looks like a lot of the concern was really in the wake of the bank failures. But I guess with the stability that you’re seeing, the strength of the balance sheet and available liquidity that you have, you started to see some of that come back. But would you expect to see that accelerate, especially just given opportunities to utilize other insurance networks and those types of things? And then maybe just touch a bit on the deposit growth strategy near term more broadly.

Scott Kavanaugh: Well, I’ll touch on the first part. Chris can speak to kind of our deposit growth strategy on a go-forward basis. But to answer your question, yes, I do believe that a lot of the deposits will come back, no matter how you cut it in slice that, David, I think the Fed and Treasury Secretary failed a little bit in the sense of leasing that they would backstop deposits. And as long as — I mean, I think Jamie Dimon at JPMorgan said it correctly, which is at the end of the day, this hurts all banks. And I think there has to be a bit of period for confidence to rebound that regional banks are going to be around, they’re going to be supported and I firmly believe that, that will happen. And when that happens, I think you will see a lot of our deposits come back.

We have a lot of also decent clients that we’re opening up that are newer relationships as well and we continue to work on that. But I’ll let Chris talk about some of the deposit strategies that we currently have going on.

Chris Naghibi : So looking back to November when we started to really look at liquidity cards, we were actually kind of developing the strategies that we’re going — we put in place, and we’re continuing to put in place over the next several months. But really, there’s untapped opportunities and unlimited potential in our current branch network. And we focus a lot on small business, on middle market business and on the clients that we serve. And we also found that there were opportunities missed with the digital presence that we have. We’ve got a very large digital presence, an online account opening process, which we’re currently revamping with seller technology. But in order to leverage that from a transactional business into a relationship business, which has been the foundation of our model, we need to really kind of tweak some knobs and go after the clients and show them the customer service that we provide in a way that I think will actually really help to grow that and bring those customers into our model and make the relationship more sticky over time.

You can lead with rate, but we found that service can take them a lot further. And then obviously, the complexity of the model that we have with the wealth advisory side with the trust offerings, everything that we offer in aggregate can bring those relationships in and keep them in for much longer. So we’re tapping into the digital networks. We’re certainly expanding on our branch focus. And I want to see a reconciliation of the branding across the branch model as well as the digital presence so that our outward and inwards in client experience is the same level and caliber of service. That means going downstream to small businesses that means focusing on individuals. We’ll always have a focus on our high worth clients, but I think there’s untapped and unlimited potential with those clients moving forward.

So I do expect to see the cadence increase in the months and year to come.

David Feaster: Okay. That’s extremely helpful. And then maybe could you help us just think about the margin trajectory and how this all plays into that? Obviously, the increase in cash balances and rising borrowings and stuff late in the quarter probably weighs on the NIM in the short run, but as we look out, I mean, origination yields in the mid-7s. Opportunity to improve the earning asset mix and deploy that cash, it seems like there’s a real opportunity for expansion and you alluded to that kind of in the back half of the year. But I was just hoping maybe you could help us think through the margin trajectory here in the second quarter and then how things might look in the back half of the year as things stabilize and some of these deposit initiatives play out?

Scott Kavanaugh: Yes, I’m glad you asked that question because the reality is we added almost $500 million of loans last quarter. And if you saw, it was a dramatic jump in the weighted average coupon of the loans we funded from the previous quarter to this quarter. I think Chris said 570 versus 740, and you’re talking 170, 180 basis point increase. And look, first and foremost, its liquidity, liquidity, liquidity. And that’s why you’ve seen the balance sheet stay pretty pad. But I think the trajectory that we’ve been talking about the last several quarters getting more into straight adjustables, a little more C&I balancing out so that we’re not as exposed to fixed rate lending as we have been previously, I think it’s the right answer.

I personally believe that if we haven’t troughed, we are about the trough in terms of net interest margin. And I believe it will expand back out, and it will be for all the reasons that you see how we’re performing right now by being able to increase our loan yields. Deposits are — as we said in the prepared remarks, we believe that — I mean, our betas were pretty fast in the early going, and I think we got criticized pretty hard for it. But now the rates are up around 5%, we’ve experienced most of that beta change already. So as Chris was basically saying, look, we’re already there on the deposit side. And if the Fed increases, certainly our deposit costs will go up, but it will go up much more modestly than we believe our competitors will.

So I think we’re really in a pretty good position to start to expand NIM, I would say, in the latter half of this year. And as the liquidity issues abate, which I feel like they’ve already largely done, then we’ll be in a position to start correcting that NIM and hopefully even sooner rather than later.

David Feaster: Okay. That makes sense and helpful color. And then maybe just, let’s touch on originations and loan growth. Not surprised to see the slowdown in multifamily. We’ve kind of talked about that. Originations primarily driven by the commercial business segment. Just I’m curious what you’re seeing there. Where are new loan yields today? Are they kind of still in that mid-7s? And just how is demand in that segment? Where are you seeing good opportunities and just your overall appetite for growth? I mean would you expect just continued remix funding up basically replacing maturing loans with new originations? Or just curious how you think the loan portfolio might shake out.

Scott Kavanaugh: It’s really more about maintaining the balance sheet as is. So I want to say we just got an update. I want to say there’s probably $50 million, $60 million that is projected to pay off in the next month to six weeks. We’ll replace that with higher-yielding stuff. I was just looking at a payoff report. There was, I don’t know, a $22 million loan that paid off at 4.5%, $16 million loan that was 4.25%. We probably had $10 million or $12 million that paid off with three handles on the coupon somewhere between 3.5% and 3.75%. So we’re going to take that opportunity to modestly replace some of those yields. But again, I’m going to go back and reiterate how important it is to think about liquidity first. And then — but I think the pause is basically going to really be determined on what the Fed’s actions are and what the banking crisis looks like as we continue to progress.

David Feaster: That makes sense. I can pretty powerful. Appreciate all the color. Thanks everybody.

Operator: Our next question comes from Gary Tenner, D.A. Davidson.

Gary Tenner: Good morning. A couple of questions. So on the deposit growth, since March 21, I apologize if I missed this, is that all four as opposed to any additional use of borrowed or, excuse me, brokered funds or anything?

Scott Kavanaugh: Well, we’ve continued to enhance using brokered, but what we referred to in our commentary was our core.

Gary Tenner: Okay. Okay. And then in terms of the on-balance sheet cash liquidity, you’re at 10% of assets at the end of March versus 5%, and that 5% to 8% is probably where you’ve been historically. What — how long do you think you hold on to the excess liquidity, even if it’s not usually negative to NII? Obviously, there is a NIM pressure there. So curious how long you think you hold on to that.

Scott Kavanaugh: Well, it’s negative. Any time you hold cash and you sell it, there’s a bit at spread. So it’s causing First Foundation additional revenue, the longer that it sits there. I’ve been reluctant for 18 months, probably almost two years to add to the securities portfolio for exactly the reasons that bankers are being criticized today, which is having a bunch of fixed rate assets on the books and having rising interest rates. So we haven’t added securities in quite some time. In discussions with our regulators, I don’t really mind sharing this. I think the regulator’s comfort zone is that you have in excess of, I think — and it depends on the banks anywhere from 10% to 12% or higher percent on balance sheet liquidity, whether that’s in securities or cash or whatever, we normally would not carry this much cash.

But I believe in the current economic environment, it makes all the sense in the world to carry the cash until we feel comfortable. So we’ve started paring down a little bit in the last two weeks, our on balance sheet cash and we will continue to do so. But we continue to have ongoing dialogues with the regulators to make sure that we have ample cash, both on and off balance sheet. It’s been very helpful in discussions with the FDIC and the Federal Reserve Bank to have availability in both government agencies, and we monitor that very closely. By the way, I forget what they call that program, the BTPH or whatever the program is, we have — I think we access the $1,000 to make sure it worked. So we really haven’t accessed those lines yet. So it’s in place and ready to roll should we need it.

But the reality is it’s up to now, we haven’t utilized that. Does that answer your question?

Gary Tenner: I appreciate that. Yes, it does, Scott. And then last question for me. Just noticing the Florida franchise continues to be a really nice source of net funding, if my numbers are right, about $2.2 billion of deposits versus about $1.1 billion of loans. Just from a pricing perspective and just kind of deposit availability and success, is there any — first, I wonder if you could kind of characterize the differences between Florida and California from a First Foundation perspective?

Scott Kavanaugh: I don’t know that there’s any differences. I will say as far as rates go, it’s probably one thing when rates were at 1% or 1.5% or even 2%. I think at 5%, I don’t know if any clients that I personally talk to that don’t pay attention to Google or Yahoo! and know where rates are. I think the phone calls that a lot of banks are getting today are about, hey, I noticed yields are cropping up there, and I need more — we don’t — we haven’t gotten many of those because our betas have been high. But when I said I wanted to give a shout-out for Florida, I really meant it. We had a rocky start. And I think I’ve told most people that in the past. But we empowered the folks in Florida, and they’ve done an amazing job. As has all our people, but I — we did have a rocky start there, and they’ve done an amazing job.

Chris Naghibi : And Gary, I’ll add a little more color as well. So obviously, with the influx of Florida and I would say the general kind of feel that Florida is more of a business-friendly state, I think that certainly helps a lot of the direction of where the company is going, focusing on C&I in business. And we have this extremely well-seasoned leadership in the banking community there who really are well known and ingratiated into that community. And strategically, that acquisition and those relationships kind of dovetailing to our model well. So the growth was not unexpected. It was just a little bit slower because we had to embrace culture.

Scott Kavanaugh: And one last point that I would say is we were planning on expanding in Texas a lot more until we saw the Fed’s action plans and what happened. And we curtailed a lot of that, call it, mid last year. But at some point, just like he talked — that Chris just talked about in Florida and the opportunities there, Texas, from our perspective is wide open. Even though we had some pretty good relationships or not pretty good, I would say, great relationships. I think it’s wide open. And it’s something that we really need to get ourselves geared up to move forward in the state of Texas.

Gary Tenner: Okay, guys. Appreciated.

Operator: Our next question comes from Andrew Terrell, Stephens.

Andrew Terrell: Hey, good morning. Maybe on the margin, just to start. I appreciate all the commentary around some of the deposits and the cost. Can you help us out maybe with the spot cost of deposits, either interest-bearing or total at the end of the period? And then do you have the monthly margin in the month of March?

Scott Kavanaugh: Yes. I’m going to rely on Amy for this, but I want to say the month of March NIM was about 1.64%. Amy, do you know what the spot cost was at the end of the quarter?

Chris Naghibi: Amy stepped away. Spot costs at the end of the quarter was 238 for the average deposit cost.

Andrew Terrell: I mean that was the average of the quarter. You have the…

Scott Kavanaugh: When Amy gets back, we’ll get you that number, okay?

Andrew Terrell: Okay. That works. And then on the…

Chris Naghibi : 252.

Scott Kavanaugh: 252.

Andrew Terrell: Okay. Perfect. I appreciate it. And then on the expense side, I think you mentioned — I might have bit of — have it on my notes, right, $14 million of relief on the expense run rate from some of the actions taken over the past couple of quarters. I guess I’m trying to get a sense of how much of that are…

Scott Kavanaugh: $3 million of executive bonus that we’ve agreed not to take.

Andrew Terrell: Okay. Just with a lot of moving parts. Can you help us out with kind of thinking about an expense run rate going into the second quarter?

Chris Naghibi : So I think — I mean, you’re talking about how the expense management run rate will be?

Andrew Terrell: Correct. Yes.

Chris Naghibi : Yes. I think you can see that pretty much in what we’ve done this quarter. The only difference is those annualized figures that we saw from the previous month will just be carried forward. So I don’t think there will be a tremendous amount of deviation.

Scott Kavanaugh: A lot of the cost cuts were taken until late March or mid-March. So it’s obviously going to be reduced from an employee standpoint. Is Amy back, I hate this.

Amy Djou: Yes. Yes, Scott, I’m here.

Scott Kavanaugh: Yes. So what do you think?

Amy Djou: Yes. So by looking at it in the next few quarters, our compensation and benefits will — definitely will benefit from the risk that we had in March, right? So on an annualized basis. And we’re definitely looking at probably a $3 million to $4 million downward on the compensation and benefits line. And I mean that’s what I’m talking about per quarter. And everything has remained pretty consistent as we continue to love e-mail and see where we can minimize our costs, our expenditures, our operational costs. But as we move to 2024, we’ll definitely continue to have the slight downward in our operational expense.

Andrew Terrell: Okay. I appreciate the color there. That’s helpful. And then for the deposit growth, I think since kind of the quarter that you might have referenced, have you seen the ECR-related deposit balances build back since quarter end?

Scott Kavanaugh: Well, yes and no. I mean this is typically a cyclicality point that is at the lowest point in and around April with tax payments. But they — to be quite candid, they have held pretty firm. We did see — even though we brought back some of the balances, we’ve seen tax payments, both property taxes and federal and state tax go out of the bank a little bit. But our MSRs are starting to build their balances back. So the 2 months that are probably the 2 low points are April and October.

Andrew Terrell: Okay. And if I could sneak one more in there around just the dividend. I was hoping to maybe get some incremental color on kind of what prompted the dividend change. And then would you view this as kind of temporary and understanding kind of the glide path for margin and profitability improvement? Moving forward, I guess, should we expect the dividend to kind of walk back up as that occurs? And is there a targeted payout ratio you’re looking at?

Scott Kavanaugh: So obviously, with the reduction in net income to the point that we felt that we weren’t sufficiently covering — in discussions with the regulators as every bank is having in this country, capital preservation is of utmost importance in regulators’ eyes and, frankly, in my eyes as well. So we felt that it was necessary to reduce from the $0.11 quarter to the $0.02 quarter. That gives us about a 20%, 25% coverage ratio. So we feel that that’s ample. Yes, this is temporary. And yes, we will get back. As our NIM starts to expand back and we feel comfortable that we’ve got ample income coming in to cover the dividend, we will bring that back. At what point does it get back to $0.11, that’s hard to say. But my prediction is right about NIM expanding in the latter half of this year, then we will modestly bring the dividend back up with that.

Andrew Terrell: Understood. Okay, thanks for the time.

Operator: Our next question comes from Adam Butler, Piper Sandler.

Adam Butler: Hey, good morning, everybody. This is Adam on for Matthew Clark. Just switching over to the deposit side. I appreciate the color. So during the quarter and in March, there were about $450 million in outflows in deposits and about $120 million came back to the bank before quarter end. And then the advisory business saw roughly $100 million of that come back at quarter end too and that accounts for about half the…

Scott Kavanaugh: Well, if you go over to — yes, I want to be clear on that, Adam. What flowed over to FFA largely was put into structured treasury or other type of security, fixed income security balances for our clients that they felt were yielding, frankly, with the short end of the curve, treasuries were yielding more than what most deposits were in the country.

Chris Naghibi : It’s not uncommon for us to get network conversations because we have the wealth advisory arm that we can recommend that rather than the leading institution to chase mine somewhere else, we can keep them in the company and that happens throughout the month. That’s not just a leave and come back situation.

Scott Kavanaugh: Yes. But to be fair, all I’m trying to say is most of those are in latter maturities. And we believe at some point in time that will return to — as a deposit. But currently, I would tell you they’re in treasuries that are laddered out a year to two years.

Adam Butler: Okay. That makes sense. And then since April, I think that $80 million in deposit increase was core. So I’m assuming that, that was a recovery from the outflow as well. I was just trying to get a sense of that remaining roughly $150 million, do you assume that comes back throughout the remainder of the year?

Scott Kavanaugh: We do. So the — I mean, in those first initial couple of days, most people were shooting and asking questions later. I will tell you and Chris and I following up, and frankly, a lot of our employees following up with clients. All of them pretty much said the same thing. We love you, but we’ll see you when things stabilize. What does that mean? Your guess is probably as good as ours. But I do believe that we have great relationships with even the folks that left. I don’t blame them for maybe being a little bit scared because I wish the Board of Governors have may be taken a little stronger stance to say they would backstop regional bank’s deposits. But I do believe we’ll get those back. I believe confidence has to be built.

Chris Naghibi : It takes about two or three months of experience kind of the services institutions that went to. Some of them went through sort of execution that are probably not as strong as they thought. So as they go through that life cycle and experiencing the value proposition of the brand, they typically come back because we can give them things that they need and they want.

Adam Butler: Okay. That’s great to hear. And then just briefly touch on some credit metrics. I think you mentioned it on the call, but I was curious that you may have mentioned that you don’t have any office CRE exposure. Is that correct?

Chris Naghibi : Yes. We’re not — we’ve never really been in that space. Anything that we may have in that space likely came from an acquisition and is very, very de minimis relative to our entire portfolio.

Scott Kavanaugh: On the hotel side, I think we have two loans, maybe a handful with the acquisition of Florida. We have no office space, very few strip centers, no malls. We — I mean, when you think about the commercial real estate, we tend to focus on owner-occupied, non-owner-occupied multifamily. That’s really the focus of our impetus. And if you look back over history, especially ’08, ’09 and ’10, you saw delinquencies and defaults in the 11 basis point range, which was by far and away the lowest category in the commercial real estate space.

Chris Naghibi : Let me give you an idea going — stretching from then till now the new margin on the extra risk that you would take for what we think are those different types of commercial real estate, then our concentration in multifamily was only incremental. So you were taking on additional risk for a very relative small return on rate and we’ve never been one to sacrifice credit quality for rate.

Adam Butler: Okay. I appreciate the color there. And then just briefly touching on one more thing. I saw the delinquency loans increased about $16 million, $16.5 million during the quarter. I was just curious if you could touch on the nature of that increase, any commentary there.

Chris Naghibi : Yes. That’s related to single-family loans that had increased, but it’s a very high net worth borrower. They had some issues and they’re going to bring the long current, they’ve already made one payment, health issues, yes. They were unreachable due to those health issues. But other than working through their financial manager, I’m not expecting any challenges or losses in the current time.

Adam Butler: Okay, perfect. Great to hear. Those were my question. Thank you guys very much.

Operator: We have no further questions in the queue at this time. I would now like to turn the call back over to today’s speakers.

Scott Kavanaugh: The events of this quarter were humbling for many banks, including us. We sold the negative impacts of the actions by the past. Fortunately, for all our stakeholders, we took decisive and immediate action and we were not cost flatfooted. I want to leave you with a few key points to take away from the quarter. We are proud of our financial performance for the quarter given the extraordinary list across the industry and believe we are well positioned. Second, our deposit base remains strong as depositors have overwhelmingly chosen to return. We will also have grown our percentage of insured deposits and are working closely to ensure clients have the maximum coverage. Third, we have a strong liquidity position that gives us confidence in navigating uncertain times.

Fourth, our securities portfolio allows us to actively manage our interest rate risk and gives us flexibility on our balance sheet. And finally, we believe that once we emerge from this liquidity crunch, our bank will emerge as a leader given our credit quality. I’m very pleased that our entire team responded and believe we are well positioned to weather this current crisis and ready to emerge as a leader among our regional bank peers. 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.

Operator: This does conclude today’s program. Thank you for your participation. You may disconnect at any time.