First Foundation Inc. (NASDAQ:FFWM) Q3 2023 Earnings Call Transcript

First Foundation Inc. (NASDAQ:FFWM) Q3 2023 Earnings Call Transcript October 26, 2023

First Foundation Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $0.03.

Operator: Greetings, and welcome to First Foundation’s Third 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; Jamie Britton, First Foundation’s Chief Financial Officer; and Chris Naghibi, Chief Operating Officer. Before I hand the call over to Scott, please note that management will make certain predictive statements today 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, please see the company’s filings with the Securities and Exchange Commission. And now I would like to turn the call over to President and CEO, Scott Kavanaugh.

Scott Kavanaugh: Howdy, howdy from Dallas, Texas. Thank you for joining us for today’s third quarter 2023 earnings call. The turbulence that rocked the financial industry in the first quarter has largely abated across the entire banking sector. With stability normalizing, we dedicated the entirety of our third quarter to unwaveringly executing our strategic initiatives of improving our loan-to-deposit ratio, increasing overall loan yield, and improving the sensitivity of the loan portfolio against higher interest rates. Although we have made great strides in our achievements, there remains much work to continue to solidify earnings, further reduce our loans-to-deposit ratio, and further decrease the overall sensitivity of our balance sheet.

Although there remains much uncertainty with the Fed’s fight against inflation and the geopolitical events that recently transpired, management believes this is a troughing quarter for pretax provision net revenue or PPNR, based on the events as we presently know them. If this is the case, we should continue to see improvements in our balance sheet and core earnings. I’m exceptionally proud of the commitment and diligence exhibited by our entire team. From investment management, trust, banking deposits and lending, our team is dedicated to delivering exemplary results during what I believe to be the most challenging time I’ve experienced in my professional career. As we reflect upon the last quarter, we are delighted to report continued improvements in our loan-to-deposit ratio, increased average yields on our loan and securities portfolios, and improvements in our capital ratios.

For the third quarter, we reported net income attributable to common shareholders of $2.2 million or $0.04 a share for both basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter at $16.19, an increase of $0.07 from the $16.12 at June 30, 2023. Total revenues were $63.8 million for the quarter, an increase of 4.4% from the $61.1 million as of June 30, 2023. Net interest income increased to $52.1 million or by 6.3% as compared to the $49 million as of June 30, 2023. Non-interest income was $11.7 million for the quarter compared to $12.1 million as of June 30, 2023. Our net interest margin was 1.66% for the quarter as compared to 1.51% as of June 30, 2023. Our efficiency ratio was 99.7% during the quarter as compared to 92.5% as of June 30, 2023.

Our adjusted return on average assets, a non-GAAP measure, ended the quarter at 0.08%, down from the 0.11% reported as of June 30, 2023. Our loan-to-deposit ratio showed continued improvement, decreasing to 95.1% as of September 30, 2023, from the 97.9% as of June 30, 2023, and 108.4% from September 30, 2022. We remain committed to continuing to improve this ratio through a combination of strategically reducing lower-yielding loan balances and continuing to grow deposits. Our deposit pipeline remains robust as we look into the fourth quarter. We firmly believe that this favorable trend will continue. Related to operational efficiencies during the quarter, we have remained laser-focused on cost saving initiatives and proactively shrinking our loan balances.

As you are aware, we are in the early — that we were early in the making of extremely difficult decisions to reduce our workforce and terminate projects that were slated for completion. These deliberate actions and strategic decisions have been instrumental in controlling expenses and managing their impact on earnings. By diligently managing costs and streamlining our operations, we have been able to optimize our resources and capitalize on opportunities that support sustainable growth. Our deposits remained at $10.8 billion in the third quarter versus the second quarter, an increase from the $9.5 billion as of September 30, 2022. Core deposits totaled $8.1 billion for the third quarter. Non-interest-bearing demand deposits accounted for 22% of total deposits as of September 30, 2023 compared to 25% and 37% as of June 30, 2023 and September 30 of 2022.

Brokered deposits accounted for 24.6% of total deposits as of September 30, 2023 compared to 20.4% as of June 30, 2023. As I said, our deposit pipeline remains robust heading into the fourth quarter. Our branch network remains key to the success of our deposit strategy. Chris will discuss initiatives we have to expand our core deposits and our branch network. We also continue to see resilience in our digital banking channel. The platform has continued to serve as an invaluable source of new depository accounts, allowing us to expand our client base, both demographically and geographically across the country. With limited branches across the markets we serve, this product allows easy access to our clients in our markets as well as to digitally-forward prospects across the country.

We recently completed an upgrade utilizing MANTL for our front-end opening process. Early indications have shown fairly significantly increased pull-through rates for account opening, while requiring less of our personnel’s direct involvement. We are truly encouraged by this ongoing trend as it reinforces our commitment to providing accessible and convenient banking solutions to our valued clients. We have continued to improve our insured and collateralized deposits to approximately 87% of total deposits as of September 30, 2023 as compared to the 88% as of June 30, 2023. We maintained a strong liquidity position of approximately $4.3 billion as of September 30, 2023. Our liquidity to uninsured and uncollateralized deposits ratio was 3.1 times.

Borrowings were $984 million as of September 30, 2023 as compared to $802 million and $1.3 billion as of June 30, 2023 and September 30, 2022. I think it is interesting to note that the average borrowings for the quarter were $587 million for the quarter compared to the $1.7 billion for the prior quarter. The decrease in average borrowings was due to the continued paydown of additional borrowings which were used to increase on-balance sheet liquidity following the banking industry’s events that occurred during the first quarter and into the second quarter. As the deposit levels have stabilized and begun to return to previous levels, some of the additional borrowings were paid down. During the quarter, we added an additional $800 million of term FHLB advances that were puttable.

The average cost of borrowing was reduced by over 1% versus the overnight rate. Jamie will provide greater insight to our borrowing activity. Turning to loans, credit quality continues to serve as a crucial differentiator for First Foundation. Our non-performing assets to total assets were 0.1% as of September 30, 2023 as compared to 0.12% as of June 30, 2023. Loan balances were $10.3 billion, a reduction of $302 million for the quarter as compared to $10.6 billion for June 30, 2023. Chris will give a further breakdown of loan activity during the quarter. Looking at our Wealth Management and Trust businesses, although markets have remained volatile, FFA has seen strong performance and secured new client relationships throughout the quarter.

First Foundation Advisors had $5 billion in assets under management as of September 30, 2023. This is down $300 million from the $5.3 billion in AUM as of June 30, 2023. The decline was largely due to the volatility in the market. Trust assets under advisement ended the quarter at $1.2 billion as compared to the same in June 30, 2022. Margins for our fee-based divisions remained high, and our new client prospects remain promising for both advisory and trust services as we head into the fourth quarter. In the third quarter, I am pleased that CNBC and Barron’s recognized First Foundation Advisors amongst the top wealth advisers in the country. Jamie will provide more detail on the Trust and Advisory businesses. I will close by reiterating my heartfelt appreciation for the incredible efforts and unwavering dedication of our entire team.

It has been an undoubtedly challenging year, but their hard work and commitment have played an instrumental role in our continued success. We recognize that there are factors beyond our influence, including the Federal Reserve’s decisions on interest rates. However, we remain steadfast in focusing on the aspects of our business that we can control. And navigating through the ever-changing market conditions, our client-first mentality remains a foundation of our business and core franchise. Our commitment to our clients and their financial success has only strengthened over time. We proudly believe that by putting our clients’ needs at the forefront, we can successfully navigate the challenges of the market and continue to thrive. Now I will turn the call over to Jamie to cover the financials in greater detail.

Jamie?

Jamie Britton: Thank you, Scott, and good morning. Before continuing to discuss the quarter, I’d first like to say how excited I am to be joining First Foundation at such an important time for the company and the industry. Though unprecedented market volatility has presented challenges not faced in a generation, as our most recent results suggest, I believe we have the right team in place to weather the environment and emerge as an even stronger institution for our clients, our teams and our communities. I’ve been fortunate enough to spend time with many of our teammates over the past couple of months, and I’ve been nothing short of impressed. We have more work to do as we continue building on First Foundation’s success, but I want to thank each of you for your commitment so far and say I look forward to working with you on the challenges and great opportunities we have ahead.

Okay, moving back to the quarter, I’ll start with the balance sheet and our net interest margin, which as Scott mentioned, improved 15 basis points from 1.51% in the second quarter to 1.66% in the third. This was influenced by several dynamics. Loan yields improved modestly, 4 basis points, as did yields on both the available for sale and held to maturity portfolios, 76 basis points and 18 basis points, respectively. When coupled with the mix shift loans, these yield improvements drove a quarter-over-quarter increase of 5 basis points on our earning asset yield. Contributing to the 76-basis point improvement in the available-for-sale portfolios yield were new securities purchases, $400 million of which were short-dated U.S. treasuries. We also purchased some Ginnie Mae agency mortgage-backed securities, which helps to explain the difference between the available-for-sale portfolios period end and period average balances.

The full quarter benefits of these purchases to our net interest margin will be captured in the fourth. We maintain a cautious posture amid recent volatility in the longer end of the curve, but we are open to taking advantage of opportunities to purchase high-quality securities at attractive yields should they present themselves. On the right-hand side of the balance sheet, net interest margin benefited from seasonal growth in our non-interest-bearing deposit portfolio, which I’ll touch on more in a moment, and interest-bearing liability costs increasing by only 4 basis points despite the full quarter impact of the FOMC’s 25-basis point increase in early May and the partial quarter impact of the most recent 25-basis point move here at the end of July.

On the interest-bearing liabilities, continued increases in interest-bearing deposit costs from 3.72% in the second quarter to 4% this quarter were partially offset by not only by a reduction in average borrowings balances, some of which did move to broker deposits, but also by a decrease in the cost of borrowings, which decreased from 5.14% in the second quarter to 4.16% in the third. Our balance sheet remains liability sensitive, but to pull some of the benefit forward, we entered into additional puttable advances with the Federal Home Loan Bank. As Scott has described in the past, the FHLB retains the option to put these back to us once the lockout period is clear. But in the meantime, we can benefit from the market’s expectations for rate reductions in the future.

Since the new advances were added to the balance sheet after the midpoint of the third, as with the available for sale portfolio balance, average borrowings balances are expected to increase in the fourth. As I mentioned, the quarter’s net interest margin improved in part due to the seasonal growth in our non-interest-bearing deposit portfolio. As we’ve discussed previously, a portion of this portfolio is from relationships receiving compensation through customer service costs, which increased $5.7 million or 30% quarter-over-quarter. As we move into the fourth quarter, outside of market share capture or relationship growth, we fully expect seasonal trends to continue and balances to decline from period-end balances at September 30. Assuming a stable short-term rate environment, customer service costs will come down in lockstep with balances.

A finance professional at their computer logging into the company’s branded digital banking platform. Editorial photo for a financial news article. 8k. –ar 16:9

This would benefit quarterly non-interest expense, but the mix back to interest-bearing liabilities as a result of the balances we will secure to replace the runoff, will weigh on the fourth quarter’s net interest margin. Outside of this dynamic, which is an important one for the NIM and net interest income, we would expect a flat rate environment to maintain favorable momentum on other important factors. Loans exited the quarter with a September average yield of 4.75%, only 2 basis points above the quarterly average of 4.73%. But due to the yield improvements in the securities portfolio and in on-balance sheet cash, earning asset yields closed the quarter at 4.66% or 10 basis points above the quarterly 4.56% yield. Interest-bearing deposit rates averaged 4.03% in September as compared to a 4% average for the quarter and our 3.86% average in June.

We are pleased with the balance sheet’s improvements. Though we continue to manage concentrations in our loan portfolio, we grew the balance sheet by $211 million in the quarter from $12.8 billion in the second to $13.1 billion in the third as we took advantage of opportunities to improve our net — our interest rate position and support near-term earnings. We will continue to monitor the rate environment for opportunities to shift the balance sheet to a more sustainable long-term interest rate risk profile and mitigate the earnings risk of future short-term rate increases. Moving to the income statement and net interest income, though we saw modest quarterly decrease in average earning assets, a 15-basis point lift in the net interest margin drove a $3.1 million or 6.3% increase in net interest income.

A slight reduction in excess liquidity drove a modest $560,000 decrease in interest income, while the shift to non-interest-bearing deposit balances and the $600 million decline in interest-bearing liabilities overall provided a more impactful $3.7 million reduction in interest expense. Non-interest income declined by $381,000 this quarter from $12.1 million in the second to $11.7 million in the third. As Scott mentioned, we saw a quarterly decline in AUM, being income’s primary source, which contributed to the reduced fee income. Market volatility and net withdrawals were factors in the quarterly results, but we are very pleased with FFA’s performance. We continue to benefit from new accounts, $77 million this quarter, and businesses maintaining its efficiency and recent operating margin improvements.

Outside of customer service costs, which I discussed before, other non-interest expense categories totaled $39.5 million for the quarter as compared to $38.5 million in the second quarter. Importantly, compensation and benefits, which declined by $1.4 million this quarter, was only $19.6 million as compared to $29.5 million in the third quarter of 2022. This is reflective of the very difficult decisions made earlier in the year, and as Scott mentioned, our recognition of the importance of remaining laser-focused on improving operating efficiency and controlling our discretionary costs as we regain operating leverage and long-term steady growth in net interest income. Moving finally to capital and liquidity, continued management of the loan portfolio led to a 22-basis point improvement in First Foundation’s total risk-based capital ratio, which now stands at 11.98%.

Our tangible common equity to tangible asset ratio ended the third quarter at 7%, which is also in line with peer levels, but importantly, provides a relatively strong risk capital balance versus peer when considering first, our held-to-maturity portfolios’ relatively favorable after-tax unrealized loss position of $75.2 million, which is only 8.2% of tangible equity, and only 58 basis points of tangible assets. And second, our strengthening liquidity position and relatively low levels of uninsured and uncollateralized deposits, which proved to be the most vulnerable during the significant market turbulence we saw earlier in the year. Further on these points, insured and collateralized deposits represent more than 87% of total deposits. Cash and cash equivalents of $819 million represent 6.3% of total assets at September 30.

And total available liquidity stands at $4.3 billion or 3.1 times our uninsured and uncollateralized deposits. We are pleased with the stability we’ve achieved in our liquidity position. And when considering both pledged and unpledged securities are comfortable with the level of on-balance sheet liquidity we are holding today. We will continue to monitor for opportunities to improve our structural interest rate position, but we are confident in where we stand. Before turning it over to Chris to provide additional detail and color on our loan portfolio, our deposit portfolio, and the initiatives underway to expand our core deposits and strengthen our balance sheet position even further, I just want to say thank you again to our team and your commitment to our company.

The work you’ve done this year has made a difference, and I look forward to supporting your continued success. Chris?

Chris Naghibi: Thank you, Jamie. Good morning. As Jamie suggested, I will be talking to you today about lending, deposits, and a bit about our strategic direction. While we’ve seen a quarter with lower market volatility in the sector than in the previous two quarters, there is still much to be done. Last year, when interest rates started to rise, we originated more fixed-rate lending than we should have. Our goal is to continue to reduce that exposure and diversify into index plus margin-based pricing focused in conservatively underwritten C&I lending, where we prioritize relationships. We have and continue to make great strides towards this end goal. All of our departments have worked together to manage the strategic direction of our diverse loan portfolio, which as of September 30, 2023, remains composed of 51% multifamily loans, down from its height of approximately 54% as of Q3 2022, 32% commercial business loans compared to approximately 30% as of Q3 of 2022, 9% consumer and single-family residence loans, 6% non-owner-occupied commercial real estate, and approximately 2% of land and construction loans.

From an operational perspective, we have challenged our lending departments to evolve and adapt to the current climate. We have pivoted to focus on what supports both our clients and our operational health, maintaining a cautious yet proactive approach to growing with all eyes on asset quality. The loan yields Jamie referenced were the result of quarterly originations, 91% of which was in the C&I lending space. Loan fundings comprised of primarily high-quality, adjustable rate C&I, SBA, and mortgage lending totaled $245 million, offset by loan payoffs of $546 million in the quarter. Our goal is to continue to drive down our commercial real estate exposure and have a greater balance between fixed and variable rate lending. Over the near term, we are taking a cautious protectionary lending approach with our existing multifamily portfolio.

On a long-term basis, we need to be and will be more diversified overall on all of our underlying assets. Ultimately, this will gradually increase the bank’s CECL reserves as a more balanced portfolio will have a naturally increasing reserve. From a philosophical perspective, I want to highlight that we are a relationship-based bank, borne out of our synergies with our high net worth clients from our partners at First Foundation Advisors. We do not focus on transactions, but rather stickier and more robust relationships. Offering products like margin lines of credit on low leverage portfolios of assets under management can help deepen relationships with the platform while providing additional adjustable pricing and blunt fixed rate interest rate exposure in the portfolio, maintaining a low-risk credit profile.

Regarding risk management, our achievement in maintaining high underwriting standards is not solely a credit risk measure, but a reflection of our organizational culture strength. It shows how deeply our teams understand and resonate with the principles that have always guided us in that we do not sacrifice credit quality. This discipline is why we have been able to reallocate internal talent from originating loans to assisting with portfolio management, asset quality review and an organic internal cross referral network. Looking at the breakdown of loans that we have originated so far year-to-date, the percentages are as follows, commercial business loans, 90%, multifamily, 2%, single family, 2% and other miscellaneous loans at approximately 6%.

It is always worthwhile to reiterate the commercial business portfolio is diversified with no sector comprising more than third of the portfolio and only 12% of the portfolio exposed to commercial real estate. Our decision to temper fixed-rate lending, especially in the multifamily segment, should not suggest a lack of confidence in the asset class. In fact, now more than ever, workforce housing is in demand. There is a housing affordability crisis in the United States which cannot be ignored. The Housing Affordability Index just hit a new record low of 90. This means that housing affordability is down approximately 50% since 2021 alone. And since the peak in 2012, housing affordability is down nearly 70%. The cost of buying a home versus renting one is at its most extreme since at least 1996.

The average monthly new mortgage payment is 52% higher than the average apartment rent according to CBRE analysis. The last time the measure looked this disconnected to wages was before the 2008 housing crash. Even then, the premium peaked at 33% in the second quarter of 2006. There is no state in the United States where housing affordability is worse than California, where seven of the 12 least affordable housing markets are found. California, a rent-controlled state, also happens to be where approximately 88% of our multifamily loans are located. As a reminder, having made a strategic decision years ago to be cautious of financing newly built properties, the bank has limited exposure to the Sunbelt region and even more limited exposure to high-end luxury apartment units.

Newly built properties typically only have downside risk and are also generally less impacted by rent control in states like California. This shift illustrates more than a simple portfolio adjustment. It shows our agility, unity and shared vision with every team member contributing to a refined, collective, strong credit culture. Regarding our multifamily portfolio, its strength is evident in both its credit quality metrics and its low NPA ratio for the third quarter of 10 basis points as highlighted by Scott earlier. As you have come to expect, our underwriting remains staunchly conservative with weighted average LTVs of 55% for multifamily loans and 54% for single-family loans. Additionally, we are seeing the average duration of the portfolio continue to move downward just below three years, which would only further continue to support the repositioning efforts of the diversifying of its underlying assets.

Our deposit growth, particularly in insured and collateralized deposits, mirrors our clients’ trust. The proven high-level personal touch, combined with our strategic stance on rate adjustments, has fostered a deeper relationship with our clients, distinguishing us in the marketplace. Like our lending operations, we have a bifurcated strategic vision. Liquidity and funding have been the focus near term, while over the course of a longer term, we need to drive core funding back up, and we will do that. Now that funding appears to have stabilized, we are pivoting to a campaign where we aggressively look to grow core funding. This will allow us over time to drive down any overdependence on broker deposits and home loan bank advances. It is particularly important that we highlight the entire company’s commitment to bolstering the growth of the bank’s deposit franchise.

From our First Foundation Advisors family to our Trust team, from in-branch tellers to the person that answers the phone when you call the digital branch, it is everyone’s job to collaborate and champion the strength of what this platform can do. The breakdown of our deposits is as follows: money market and savings, 29%. Certificates of deposits, 28%, interest-bearing demand deposits 21%, non-interest-bearing demand deposits, 22%. Our deposits are diversified by geographic distribution with California accounting for 36% of total deposits, Florida at 17%, and Texas at 8%, which makes up the majority of our deposit portfolio with Nevada, Hawaii and other states making up 39% of the total. I’m also pleased to reiterate that our digital branches online account opening process has been completely overhauled to incorporate the latest in Plaid technology for seamless instant account opening and funding with real-time risk mitigation and fraud detection.

Since its implementation on August 15, we have seen our application abandon rate drop from 53% to 23%, our completed applications grow from 63% to 94%, and our application approval rate increase from 46% to 66%. All of this was accomplished with a fully automated submission rate of 65%, meaning that no manual oversight was needed to create an account and instantly fund it. The second phase of this project will also be a rollout of the same technology into our physical branches, which should prove to create a best-in-class new account opening process, which will also be an elegant, fully digital solution. Additionally, our next focus will be partnering with our esteemed branch employees to aggressively grow our granular core retail deposit franchise, as I noted earlier.

We will ask them to rise to the challenge of being the backbone of our institution because the growth of our retail channel is integral to our resilience and continued success. We will do this by empowering an outbound network of branch managers who will partner with the bank’s product lines to visit clients frequently. The technology we have implemented, combined with refreshed policies and procedures and the careful elimination of redundancies have equipped our teams with the time they need to focus on client outreach. Simply put, we have empowered them to do what they do best, to get out and engage with the community. Before we move to questions, I’d like to take a moment to express my profound gratitude to every member of our team. From those in customer-facing roles to our back-office heroes, it is your commitment, mutual support, and shared aspirations that have not only steered us through recent challenges, but also fortified the very culture that makes us who we are.

I will now hand the call back to the operator for questions.

See also Billionaire David Tepper Doesn’t Like Most Stocks But He Likes These 12 and Duquesne Family Office’s 15 New Stock Picks.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of David Feaster with Raymond James. Your line is open.

David Feaster : Hey, good morning, everybody.

Scott Kavanaugh : Hey, David. Good morning.

David Feaster : Good morning. I was hoping maybe we could elaborate on some of the funding dynamics that you talked about, Jamie. On the shift in the deposit mix, maybe less reliance on some ECR deposits. Could you maybe just elaborate on that trade? And then maybe more broadly, glad to hear the deposit pipeline is strong. Curious just how you think about the deposit outlook. Obviously, there’s a lot of dynamics that have been talked about here and initiatives, but just curious where you’re having the most success immediately and maybe some of the timeline for that branch deposit initiative that you’re working on?

Jamie Britton : Sure. The changes in the third quarter, as I mentioned, primarily in noninterest-bearing deposits. We grew, as we typically have as the seasonal inflows increase to their peak, which usually occurs in October, the customer service costs increase in lockstep with those. But as I mentioned, as we moved into the fourth here, as payments go out to the municipalities for tax purposes and to the insurance companies for annual premiums, we would expect those to decline in the fourth and then start to rebuild again in the first. We moved some of our borrowings to broker deposits in the quarter as well. And as Chris mentioned, we are focusing on our deposit initiatives. Primary focus will be in the retail branches, and so I expect to see some continued growth in the coming year from all of our markets as we attempt to reduce the amount of time in-branch and get out to customers going forward.

I’ll let Chris speak to anything else on the early success or the longer-term timing of the initiatives.

Chris Naghibi : Yeah. David, good to hear your voice as always. The branch network has been what I would call one of the things that we need to really focus on more. It was a little under-focused on in the last several years, largely because we had some of the other initiatives going on. And one of the benefits we had to streamlining our focus, and I guess if you want to pull it out of the contagion period and some of the changes we’ve made, is we’ve been able to really focus on the things that we want to look at. The digital branches rollout of technology was a huge part of that, as you heard. But obviously, getting back to our core values with the relationship focus and bringing bankers with us when we go out on meetings is so imperative to our success.

And I think that puts a face to the name. You get a lot of this collaboration, and I think that really helps bring in deposits. On the lending side, we’ve also helped enable that by requiring things like a deposit relationship on what would otherwise be transactional relationships. Operating accounts, primary banking relationships. It’s really the first question that we ask when we think about the bigger picture of our client relationship and how they can mutually grow with us. We’ve also brought treasury management services downstream, and we’re planning on growing with small businesses in the community that go into the middle market space if you will, that are growing into bigger spaces. And one of the things that we haven’t been able to offer them in the past was treasury management services a la carte, which we’ve also focused on.

All this to say, I expect the growth in the retail physical branches, as Jamie noted earlier as well, to continue to grow. We’re really looking to start the culture and push aggressively now in the fourth quarter. I would expect to see the benefit of that starting Q11.

Operator: Your next question comes from the line of Andrew Terrell with Stephens. Your line is open.

Andrew Terrell : Hey, good morning.

Scott Kavanaugh : Good morning.

Andrew Terrell : Maybe just to start, I wanted to get a sense on the loan yield side, just how the new origination yield of 8.3%, how they compare with the yield on the payoffs and paydowns you saw this quarter? And then just how much in quarterly loan payoffs and paydowns you expect over the next 12 months?

Jamie Britton : Most of the payoffs that we saw during the quarter were also in the C&I category, and so I would say that the loan payoffs were similar to what we saw in the new payment yields for C&I. I believe —

Scott Kavanaugh : No. There was a pickup of something.

Jamie Britton : We’ll get back to you on that. But the answer was, I would say seasonally some of the multifamily loans or the lower-yielding loans. I would say the CPRs the last several months, there in the summer months, were slower. We’re starting to see not significant but a bit of a pickup in terms of payoff requests. We think that will continue. And of course, as we look into the fourth quarter, the yields are still in that 8.30-8.40 range for the C&I stuff that we’ve got going forward, which a lot of that is going to be tied to the deposit flows as well that we talk about when we talk about a pretty healthy pipeline of deposits.

Andrew Terrell : Yeah, that’s kind of where I was going with it. It looked like the C&I payoffs were kind of heavy this quarter. To the extent C&I balances are more stable, and we see maybe a little pickup in the multifamily and single-family paydowns, you should see more tailwinds to loan yields in coming quarters. Is that fair?

Scott Kavanaugh : Yeah. If you look back at prior years, and of course, this one is different just in the sense that rates have risen a lot. But if you look at the prepayments or refinancing activity in multifamily, it’s always been extremely slow heading into October. And it’s usually around mid-October, November, December that you start to see activity in the multifamily pick back up. Plus, we’ve got an initiative that we’re really working on right now to try to roll some of the lower coupon multifamily. That’s starting to take root in terms of the repositioning of some of the lower yields on that multifamily. We’ve identified, I would say probably $300 million, $400 million of what we think are good assets to reposition and we’re starting to reach out to those borrowers. And we’re initially having good success in talking to those. But again, you won’t see that activity until probably late November, December and heading into the first quarter.

Andrew Terrell : Great. I really appreciate all the color there, Scott. And then last one for me. I know the customer service cost expense can be a little difficult to model sometimes. Just hoping you can help us out with maybe what you’re expecting in terms of customer service cost expense in the fourth quarter?

Scott Kavanaugh : What I’ve tried to — I think we’ve said it in prior years, and this year, I don’t believe to be any different. There’s usually somewhere around 20%, 25% of those MSR deposits that tend to flow out due to taxes and insurance payments. So, largely, like California, tax payments are coming up mid-November. You’ll see a bulk of those deposits, which is what Jamie was talking about that tend to flow out. The fourth quarter typically has a decline in balances. The peak has ended in the third quarter. It’s still — I can tell you so far during the quarter, it’s held pretty steady. But I don’t believe this quarter is going to be any different in the sense that we should start to see seasonality pick up and some of those deposits be used for tax payments like I said. I would anticipate somewhere between 20% and 25% of those deposits to decline. And then, obviously, back in January, you’ll start to see those balances build again.

Andrew Terrell : Okay, great. Thank you for taking the question. I appreciate it.

Scott Kavanaugh: Yeah, you bet.

Operator: Your next question comes from the line of Adam Butler with Piper Sandler. Your line is now open.

Adam Butler : This is Adam on for Matthew Clark.

Scott Kavanaugh : Hi, Adam.

Adam Butler : I appreciate the commentary just now about the customers’ service costs. If I could just tag along on the total expense number, I appreciate the disclosure of average FTEs down right around 20% in the third, during the third quarter. Just to get a sense, what is your appetite to cut more expenses going forward given just some of the headwinds?

Jamie Britton : Well, we’ll continue to look for opportunities to drive efficiency for sure. We’ve already had three riffs, which as you can imagine, was pretty challenging, so we will continue to look for opportunities to reduce cost. But near term, I’d expect fourth quarter expenses ex customer service costs to remain at or around current levels from Q3. And then going forward, we’ll continue to pivot as we can, depending on what happens with the rate environment and the balance sheet going forward. But at this point, we have no plans to do any future riffs, but we’ll continue to focus on operating efficiency just as we always have. If you look at our non-interest expense as a percentage of average assets ex customer service costs relative to peer, we are a very efficient shop, and we pride ourselves on that, and we’ll continue to do everything we can to maintain that or improve it going forward.

Scott Kavanaugh : Yeah. Adam, I would just add, as you can imagine with three riffs and as many layoffs that were experienced, as Jamie said, it was extremely tough. But that being said, we’re running about as efficiently as we can… [technical difficulty]

Operator: There are no further questions at this time. I turn the call back to Scott Kavanaugh for closing remarks. Ladies and gentlemen, we are experiencing some technical difficulties. Please stand by. [Technical difficulty] Thank you for standing by. Chris, you may resume your conference.

Chris Naghibi : Andrew [ph], I don’t know if that answers your question. Are you still there? Essentially, the bottom line is that no more riffs and continue to improve cost efficiencies when and where we can. We’ve been looking pretty aggressively to look at everything across the platform from just a cost approach to make sure that we do the best we can. But that is going to be an ongoing process throughout the next year as much as it was for the first three quarters of this particular year.

Adam Butler : Okay. Can you guys hear me? I don’t know if —

Chris Naghibi : Yeah, I can hear you.

Adam Butler : Okay. Great. And then just moving on to — I don’t know if this is something that you would elaborate on, but in the reconciliation table you called out $250,000 in professional service costs. I was just trying to get a sense for what that was for, if you would provide some comments on it.

Chris Naghibi : Yeah. I’ll let Jamie speak to that when he gets back on. But it was $250,000, right? Yeah, so I’ll let him speak to that when he joins the call back with Scott, but I’m sure that he has some commentary and some color on it. I’m not 100% updated on it.

Jamie Britton : Sorry. I guess we got cut off somehow.

Chris Naghibi : There you go. Adam asked about the reconciliation table we have, there’s a $250,000 customer service cost, and he wanted to know if there’s any clarity we could provide.

Jamie Britton : What are you talking about?

Chris Naghibi : Professional services.

Jamie Britton : Give us just a second to get caught up. We were a little caught off guard that our phone somehow got cut off.

Scott Kavanaugh : It was related to driver.

Jamie Britton : It’s from the activist fees, Adam.

Adam Butler : Okay. Understood. And then just a housekeeping question. I was just wondering if you guys had a spot rate on either the interest-bearing or total cost of deposits as of the end of the quarter in September?

Jamie Britton : I do. The interest-bearing deposits averaged 4.03% in September.

Adam Butler : Okay, great. Those are all my questions. I appreciate the time. Thank you.

Jamie Britton : You bet.

Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner: Thanks, good morning, guys. I wanted to just ask a follow up on the customer service-related deposit costs. And I wonder if you could elaborate more specifically on the amount of deposits that are subject to those or that drive that cost and maybe confirm the percentage of those maybe made up of MSR-related deposits, if it’s not all of them.

Scott Kavanaugh : About $1.2 billion in total MSR deposits.

Gary Tenner: And does that — I mean, is there another — is that just a percentage of the total deposits that drive that line? Or is there something else in the mix as well?

Jamie Britton : Yeah, Gary, this is Jamie. We also have 1031 and other clients in —

Scott Kavanaugh : Title, escrow.

Jamie Britton : Yeah, and that’s another $400 million or $500 million.

Gary Tenner: Okay, great. Thank you. And then a question just on kind of the loan outlook as it relates to kind of the prospective runoff of multifamily say through 2024. Obviously, there’s planned or scheduled amortization, then there would be some payoffs. But assuming an 8% to 10% decline in that book through 2024, is that reasonable? Or is there a large delta plus or minus to that do you think?

Chris Naghibi : We are going to work as hard as we can to keep those relationships, migrate them to market rates as they reset over the next year or two or three. We’re hoping to expand relationships where we can as well to bring in operating accounts and other deposits. There could be some variability based on those efforts. But I think you’re generally in the ballpark of what we’d expect for runoff if they chose to refinance elsewhere as their rate resets come due.

Gary Tenner: Thanks very much.

Chris Naghibi : You bet.

Operator: This concludes our Q&A for today. I turn the call back to Scott Kavanaugh.

Scott Kavanaugh : Great. Thank you. Thank you, everyone, for attending today’s conference call. We look forward to seeing you in the fourth quarter earnings call as well. Thank you. Have a great remainder of your day.

Operator: This concludes today’s conference call. You may now disconnect.