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First Foundation Inc  (NASDAQ:FFWM)
Q1 2019 Earnings Call
April 24, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to First Foundation's First Quarter 2019 Earnings Conference Call. Today's call is being recorded. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions).

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

Before I hand to call over to Scott, please note that management will make certain predictive statements during today's call that reflect the 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, view the Company's filings with the Securities and Exchange Commission.

And now I would like to turn the call over to Scott Kavanaugh.

Scott F. Kavanaugh -- Chief Executive Officer

Hey, everyone. I'd like to welcome all of you to our first quarter 2019 earnings conference call. We'll be providing some prepared comments regarding our activities and then we will respond to questions. As highlighted in the press release this morning, we experienced another strong quarter across key financial metrics of the firm. This comes at a time when our industry is experiencing challenges, due to the uncertainty in the interest rate risk environment and an inverted yield curve, which makes me that much more pleased about the results that we announce today.

Our earnings for the first quarter were $11.3 million or $0.25 a share. The $11.3 million represents a 25% increase over the prior year first quarter. Total revenues were $49.5 million for the quarter, a 14% increase. Tangible book value per share ended the quarter at $10.52. On March 31st, our total assets were $6 billion.

Our banking operations continued to experience growth as evidenced by the $400 million in loan originations and $36 million in -- growth in deposits. Our wealth management business saw positive results in both market appreciation and assets from new clients. And our total assets under management increased by $156 million, ending the quarter at $4.1 billion.

Our Trust department saw a strong first quarter of attracting new clients, resulting in an increase of $34 million in assets under management. The Trust department continues to contribute to our wealth management business in the form of supporting existing clients and contributing to the new client growth. We declared and paid our first quarterly cash dividend of $0.05 per share.

In addition to the business results I mentioned earlier, the growth in our commercial lending activities have contributed to a positive results this quarter. Specifically, growth of our C&I business helps us diversify our loan portfolio as well as enhance our margin. Dave will touch on that in more detail.

I am very proud of our loan production. I am particularly proud that we continue to have minimal credit concerns as evidenced by our low levels of non-performing assets, which stands at 27 basis points at March 31st. We continue to see positive results from our recent acquisitions both in terms of employees who have joined our team, and new client opportunities that result from being in these markets. Overall, it was a very strong start to the year.

Let me turn the call over to our CFO, John Michel.

John M. Michel -- Chief Financial Officer

Thank you, Scott. I will provide a brief summary of our financial results for the quarter. Total revenues for the first quarter were $49.5 million, a 14% increase from the first quarter of 2018. Earnings were $11.3, an increase of 25% when compared to the first quarter of 2018, and earnings per share were $0.25 for the first quarter of 2019, as compared to $0.23 for the first quarter of 2018. Our net interest margin for the quarter was 2.88%, excluding the effect of our loans held for sale, our net interest margin remains fairly stable at 3.02%. The yield on our interest earning assets increased to 4.27% as yields on originated loans continue to be higher than yields on loans in our portfolio. In addition we realized $1.7 million of benefits, related to credit and yield discounts on the pay off of acquired loans. Excluding our loans held for sale, our balance sheet for the first quarter was almost exclusively funded by our deposits.

Our borrowings and deposits in the first quarter reflected the rise in short term interest rates, which occurred at the end of the fourth quarter of 2018. As a result our overall costs of interest bearing liabilities increased to 1.91% in the first quarter of 2019. Our charge-offs for the quarter were nominal and our ALLL remains at 51 basis points for our non acquired loans. We are in the process of developing the required modeling for the implementation of CECL and we expect to be able to assess the impact of CECL later in this year.

Our increase in the non-interest expenses in the first quarter of 2019 when compared to the first quarter of 2018, were primarily related to our growth in loans and deposits, the acquisition of Premier Business Bank in June of 2018, higher core processing costs and higher customer service costs. The increase in non-interest expenses in the first quarter of 2019, when compared to the fourth quarter of 2018, were primarily due to seasonal increases in costs associated with raises, employer taxes and employer contributions to retirement plans. Our effective tax rate for the quarter was 29.7%, as compared to our statutory rate of 29%.

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

David DePillo -- President

Thank you, John. As mentioned, during the first quarter we originated $400 million in loans. The composition of our loan originations were as follows; 50% multifamily, 36% C&I, 10% single family and 4% construction. During the first quarter the weighted average rate on loans originated was 4.72%, that consisted of 4.43% of multifamily, 5.41% for C&I loans. As of March 31st, our loan portfolio excluding loans held for sale consist of 46% multifamily loans, 21% C&I, 10% non-owner occupied commercial real estate loans, 21% consumer and single family and 2% land and construction.

As mentioned by Scott, the credit quality of our loan portfolio is strong as evidenced by a low level of delinquencies in our NPA ratio of 27 basis points. Deposits grew by $36 million, as growth especially in wholesale deposits was offset by withdrawals of certain acquired deposits. As of March 31st, our 20-branch location network is 44% of our total assets. The industry continues to face pressures on both loans and deposits due to the current inverted yield curve. Overall I am very pleased with our results.

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

John Hakopian -- President

Thank you, David and good morning. In the first quarter, we experienced strong positive returns in the market. This was a welcome change to the direction that the markets were headed in at the end of the fourth quarter. Given the market results and new client activity or AUM saw an increase of $156 million. This will result in increased revenues in the second quarter. Heading into this quarter, we mentioned we were confident in our investment philosophy. During the first quarter, our portfolios have generally performed at or above their benchmarks as we delivered solid results.

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

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

Questions and Answers:

Operator

Thank you. The floor is now open for questions. (Operator Instructions) And your first question is from Steve Moss of B. Riley FBR.

Scott F. Kavanaugh -- Chief Executive Officer

Good morning, Steve.

Steve Moss -- B. Riley FBR -- Analyst

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

Scott F. Kavanaugh -- Chief Executive Officer

Yeah. Our expectations are from total originations. We should be close to our number for last year -- and previous years has been relatively consistent in the $1.6 billion to $1.8 billion range. We may temper it slightly depending on where the yield curve sits as we progress through the year. A majority of that tempering would be around potentially multifamily depending on where those yields are, either up or down. What we really feel good about is, the pipeline is still strong on all fronts, multifamily pipeline, strong C&I.

We have the strongest pipeline we've ever had, which certainly helps the overall yield on origination and also the majority of those are shorter term adjustable by nature. We do expect to be a little more challenging in the single family area as most originators are accepting yields that are well below what we feel are commensurate with the current market conditions, but as we sit right now, our pipelines are strong and we don't expect much material deviation from our plan as well as what we've done in the past.

Steve Moss -- B. Riley FBR -- Analyst

Okay. That's helpful. And then I saw you guys increased loans held for sale. I just wanted you to give updated thoughts around the size of securitization for the third quarter.

Scott F. Kavanaugh -- Chief Executive Officer

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

John M. Michel -- Chief Financial Officer

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

Steve Moss -- B. Riley FBR -- Analyst

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

Scott F. Kavanaugh -- Chief Executive Officer

Well, it's actually four years of very hard work that we've done in the C&I area and it's -- but it's actually done all across our footprint. We've had very strong demand in our equipment finance group as well they had a very strong quarter, and that's, I believe, three years now, we established our equipment finance. Those typically are smaller ticket to medium sized ticket leasing with about a two-and-a-half to three year duration. And so we really like that product, it's highly granular. We're very efficient at it and the yields are much better than what we're getting on our real estate lending activities.

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

David DePillo -- President

Good. Thanks. Steve, it's obviously most of that adjustable and so I know some people have stated concerns in the past about our interest rate risk and that certainly alleviate some of that.

Steve Moss -- B. Riley FBR -- Analyst

Right. Well, thank you very much guys.

Scott F. Kavanaugh -- Chief Executive Officer

Thank you.

John M. Michel -- Chief Financial Officer

Thank you.

Operator

Thank you. Your next question comes from Matthew Clark of Piper Jaffray.

John M. Michel -- Chief Financial Officer

Good morning, Matthew.

Matthew Clark -- Piper Jaffray -- Analyst

Good morning, Mike. Good morning. Maybe first question on expenses. I think historically you guys have had a 25 or so percentage increase in comp on a linked quarter basis. Seasonally this time only 17%, I assume that's just the lower growth appetite. But was there anything unusual there in terms of reversals or how we should think about the overall run rate at non-interest expense going forward?

John M. Michel -- Chief Financial Officer

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

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Great. And then on the NIM, I think if you strip out the $1.7 million, you've got the NIM closer to 77%. I know that includes the loans held for sale. But just trying to think through the margin outlook in the upcoming quarter and then when the securitization is done in that third, can you just talk through kind of your expectations around the margin over the next couple of quarters?

John M. Michel -- Chief Financial Officer

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

Scott F. Kavanaugh -- Chief Executive Officer

Yeah. So I think that's got a point. If you look at our, what we consider our core bank, and interest margin, it's been relatively flat around 3%. As we lever up for securitization, it tends to drag it down in the first, second and into the third quarter that once we facilitate the transaction and it pops back up to the core level in line.

John M. Michel -- Chief Financial Officer

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

Scott F. Kavanaugh -- Chief Executive Officer

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

Matthew Clark -- Piper Jaffray -- Analyst

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

John M. Michel -- Chief Financial Officer

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

Matthew Clark -- Piper Jaffray -- Analyst

Yeah. Okay. And then just on the gain on sale in that third quarter, is it still -- you still think of roughly 1% on what's securitized?

David DePillo -- President

Hey, this is reasonable at this point, 1% net of cost is kind of what we're trying again.

John M. Michel -- Chief Financial Officer

What we (ph) -- last year.

Scott F. Kavanaugh -- Chief Executive Officer

Some of it (multiple speakers) this is kind deeply related and our credit spreads at time of execution, but the market seem to be behaving fairly well.

Matthew Clark -- Piper Jaffray -- Analyst

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

John M. Michel -- Chief Financial Officer

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

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Did you buyback any stock in the quarter?

Scott F. Kavanaugh -- Chief Executive Officer

No.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Great. Thanks.

Scott F. Kavanaugh -- Chief Executive Officer

Thank you, Matthew.

Operator

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

Andrew Liesch -- Sandler O'Neill -- Analyst

Good morning guys.

Scott F. Kavanaugh -- Chief Executive Officer

Hi.

John M. Michel -- Chief Financial Officer

Good morning.

Andrew Liesch -- Sandler O'Neill -- Analyst

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

John M. Michel -- Chief Financial Officer

Yes.

Andrew Liesch -- Sandler O'Neill -- Analyst

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

Scott F. Kavanaugh -- Chief Executive Officer

Yes. Typically the reason that we're facilitating there is a full relationship, sometimes where they lead with credit, but in most cases we require deep think in the business. So I would say, and Liesh should (ph) say, pure ABL played where there's minimal deposits, usually getting about a 30% to 35% self funding ratio sometimes higher, sometimes lower. But, yeah, that contemplation is core banking relationship.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. Very good. And then, could you just touch briefly on why non performers went up a little bit this quarter. It looks like, I mean, around $16 million from $12 million, what may have driven that?

John M. Michel -- Chief Financial Officer

Yeah. Basically it's the continued resolution of our acquired loans, over 40% of our non-performing assets are acquired loans. As these loans mature, we go through the process of one of the things that we do is we don't keep on extending these things out 90 days, we resolve them. And so we have loans, almost that's an even portion of the acquired loans that are just maturing, so they're past 90 days, because they're matured not because they're not paying. And so we just go through the process of working them out and because it's new relationships, sometimes it takes a little longer than that.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. Great. That covers all my questions. Thanks so much.

Scott F. Kavanaugh -- Chief Executive Officer

Thank you.

Operator

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

Gary Tenner -- D.A. Davidson -- Analyst

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

John M. Michel -- Chief Financial Officer

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

David DePillo -- President

Yeah. Again a lot of it's related to tax payments and other things that will affect the seasonality. But yeah, the rate should be relatively stable. That hopefully, as (multiple speaker) come farther, hopefully going the other way at some point.

Gary Tenner -- D.A. Davidson -- Analyst

Okay. So just to clarify in the past, it was going higher because of the combination of volume and right now it should still be volume, sorry.

John M. Michel -- Chief Financial Officer

Yeah. That's correct.

Gary Tenner -- D.A. Davidson -- Analyst

Perfect. Thank you.

Operator

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

Scott F. Kavanaugh -- Chief Executive Officer

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

Operator

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

Duration: 24 minutes

Call participants:

Scott F. Kavanaugh -- Chief Executive Officer

John M. Michel -- Chief Financial Officer

David DePillo -- President

John Hakopian -- President

Steve Moss -- B. Riley FBR -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

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