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First Foundation Inc (NASDAQ:FFWM)
Q3 2019 Earnings Call
Oct 23, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to First Foundation's Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

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

Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the Company's performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, see the Company's filings with the Securities and Exchange Commission.

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

Scott F. Kavanaugh -- Chief Executive Officer

Hello, and thank you for joining us. We would like to welcome all of you to our third quarter 2019 earnings conference call. We will be providing some prepared comments regarding our activities, and then we will respond to questions.

As highlighted in the press release, we experienced another strong quarter. Our earnings for the third quarter were $17.4 million or $0.39 a share, an 18% increase over the third quarter of 2018. For the third quarter, total revenues were $57 million and our efficiency ratio was 59.5%. As of September 30, 2019, our tangible book value per share was $11.35. Notable events for the quarter included a loan sale and securitization of $551 million of multifamily loans, the sale of $284 million of lower yielding securities and the purchase of $576 million of securities from the securitization.

I'm very pleased with our ability to complete this fourth securitization, a tool which we intend to continue to utilize going forward. Our banking operations continue to experience growth. Loan originations totaled $486 million in the third quarter and a $1.4 billion year-to-date. Our deposits have grown by $638 million during the first nine months of 2019. Year-to-date, our wealth management business has experienced an increase of $309 million in assets under management and a total AUM ended the quarter at $4.2 billion.

Our trust department has continued to grow with increases of $97 million in assets under management during the first nine months of 2019 and a 35% increase in revenues when compared to the corresponding period in 2018. Pipelines for both wealth management and trust business remain very strong. Our business model, providing banking and private wealth management services allows us to deliver the results like what we announced today. With 20 locations across three states, we serve a wide array of clients, each of whom have unique financial needs that we can help with.

As we head into the fourth quarter, I want to call out a few accolades about the Company. We have consistently been ranked as one of the top banks and wealth managers in Orange County. And we are listed, once again as one of the fastest growing public companies in Orange County. Also for the second time we were named The Orange County Business Journal's Civic 50 which is awarded to the most philanthropic-minded companies in our region. This is a reflection of our culture and our amazing employees doing great work for our community. Overall, it was a great quarter.

And now let me turn the call over to John Michel, our CFO.

John M. Michel -- Chief Financial Officer

Thank you, Scott. I will provide a brief summary of our financial results for the quarter. This quarter, management took the opportunity to restructure our securities portfolio by selling $284 million of lower yielding securities with a weighted average yield of 2.09%. In addition, activities in the quarter included the sale and securitization of $551 million of multifamily loans resulting in a $4.2 million gain. The purchase of $576 million of securities from the securitization with a weighted average yield of 2.46% and lower duration than the securities sold in the quarter.

And the receipt of a $1.2 million refund of the FDIC insurance fees. Total revenue for the third quarter were $57 million, earnings were $17.4 million and earnings per share were $0.39. Year-to-date, total revenues were $158 million, earnings were $41 million and earnings per share were $0.91. Our net interest margin was 2.89% for the third quarter and 2.87% for year-to-date.

Our overall cost of interest bearing liabilities decreased to 1.91% in the third quarter of 2019, as compared to 1.94% in the second quarter as we started to realize the benefits of decrease in short-term interest rates. We experienced net recoveries for the quarter and our ALLL is at 52 basis points of our non-acquired loans. We are refining the required modeling for the implementation of CECL in 2020 and we expect to be able to assess the impact of CECL later in the year.

Including the benefits of the FDIC refund, non-interest expenses for the third quarter of 2019 were $1.3 million lower than the third quarter of 2018, consistent with the seasonal increase of the related deposit balances, customer service costs in the third quarter increased from the second quarter. The effect of this increase in balances was partially offset by a decrease in the related earnings raise.

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

David DePillo -- President

Thank you, John. As kind of mentioned during the third quarter, we originated $486 million of loans. The composition of our loan originations were 57%, multifamily; 31%, commercial; 9%, single family; and 3%, other. For the third quarter, the weighted average interest rate on our loan originations was 4.44%. This reflects the benefit of our diversification into commercial loans. Thus the weighted average by type was approximately 4% for multifamily and about 5.15% for commercial loans.

As of September 30th, our loan portfolio includes -- including loans held for sale consist of 50% multifamily loans, 20% of which are held for sale, 22% C&I loans, 8% other CRE, 19% consumer and single family, and 1% land and construction. The credit quality of our loan portfolio is strong as we had net recoveries in the quarter and our NPA ratio of 33 basis points. As mentioned before, deposits grew by $638 million for the first nine months of 2018 with branch deposits, increasing by $92 million and specialty deposits increasing by $541 million.

Some of the increases in specialty deposits is attributed to seasonal increases we experienced. Pressure on deposit rates have started to abate and we expect our overall funding costs to decrease at short-term rates -- have decreased and are expected to continue to decrease. Overall, I'm pleased with our results.

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

John Hakopian -- President of First Foundation Advisors

Thank you, David and good morning. During the first nine months of 2019, we experienced positive returns in the market. And while the markets continue to show signs of uncertainty, our investments have performed well, with respect to their benchmarks. As Scott mentioned, our AUM saw an increase of $309 million year-to-date, our robust investment offering continues to help position our portfolios for the uncertainties we faced with respect to the trade war interest rates and other economic factors.

Strategically, we are focusing on leading with our wealth planning offering. This allows us to better serve the client and result in higher retention rates. More and more clients are turning to our team to help with complex financial matters. This affords us opportunities to work closely with our trust department to build and maintain relationships with our clients.

In addition to banking and lending opportunities, our wealth planning team is able to uncover opportunities for both, our insurance and philanthropy services offering. Having these additional resources available for our clients, keeps them within the First Foundation ecosystem. As we look into the final months of the year and into 2020, we remain confident and maintain a strong pipeline and expect to continue to be successful in attracting new clients.

At this time, we are ready for 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] Thank you. Our first question is coming from the line of Steve Moss of B. Riley FBR.

Steve Moss -- B. Riley FBR -- Analyst

Good morning, guys.

Scott F. Kavanaugh -- Chief Executive Officer

Good morning, Steve.

John M. Michel -- Chief Financial Officer

Good morning, Steve.

Steve Moss -- B. Riley FBR -- Analyst

I wanted to start off with the margin here. Nice expansion quarter-over-quarter, obviously securitization and the remix helps, kind of wondering what are your expectations for the fourth quarter? And where is the investment securities yield as of September 30th for the portfolio there?

John M. Michel -- Chief Financial Officer

Yeah, OK. Couple of responses there. This investment securities answer I can provide. It's 3%, Steve, in terms of going forward, our weighted average yield and that's what we expect to be yielding over the next few quarters. On the securities portfolio. The impact of that and the impact of our seasonal runoff of the customer service related deposits, will kind of keep our NIM flat for the next quarter and start -- we start seeing the benefits, especially in next year through this, first, second and third quarter, where as our customer service costs are expected to decrease in the fourth quarter, because we now have floor balances. So the bottom line impact, we're still seeing the benefits. It's just not going through NIM in the fourth quarter.

Steve Moss -- B. Riley FBR -- Analyst

Okay. And then on the customer service side, I guess, perhaps there is even more -- little more of a pickup then on the -- customers on the specialty deposits. I'm wondering if you give us any range for what the potential expense could be in the fourth quarter.

John M. Michel -- Chief Financial Officer

You want the...

Scott F. Kavanaugh -- Chief Executive Officer

He is looking for the answer.

David DePillo -- President

So, we have a couple of dynamic events that, we typically see about, and we are about 20% to 30% run down.

Scott F. Kavanaugh -- Chief Executive Officer

During the quarter.

David DePillo -- President

During the quarter of balances related to deposits. Those will obviously reduce the relative cost, at the same time we haven't modeled in any potential movement by the Fed, if there is a movement, we would have more of immediate reaction during the quarter. So we should have a dual benefit on -- if the both benefits continue as expected. It's hard for us to give you an exact number, but you could probably assume about a 30% balance reduction against the nominal cost and that should be close.

John M. Michel -- Chief Financial Officer

Yeah, 30% would be, beginning the quarter, the end of the quarter, so the average balance won't go down as much during the quarter. And the first quarter will continue to see the benefits of that. But the rates as Dave said are lower in the fourth quarter than they were for the full third quarter. So, won't have...

Steve Moss -- B. Riley FBR -- Analyst

That helps. And then were the specialty deposits elevated this quarter just because of the refi way that we saw here?

David DePillo -- President

Not, really.

Scott F. Kavanaugh -- Chief Executive Officer

No. I think those at the peak that's probably where they're going to stay. So you know, I don't -- like both Dave and John are saying we should start to see some declines in those balances, but it's going to range, as I said, from where we are at the end of this quarter, at the high end and then dip down 20%, 25%, 30% on the low end.

John M. Michel -- Chief Financial Officer

There is a couple of events, Steve, the effects, some of the specialty deposits are outside of the mortgage related.

Steve Moss -- B. Riley FBR -- Analyst

Right.

Scott F. Kavanaugh -- Chief Executive Officer

Servicing assets. So we did experience growth away from that and that was a pretty significant chunk. We, additionally did have growth in both balances and not just build up of taxes and insurance from existing pools of loans. So, we had net increases. So some of it could be attributed to that, but I think it was additional excess deposits that were sitting on the system that we are able to -- because of our relationships, able to pick up, the quarter. Again, I think a little bit of, more of it, but, dual.

Steve Moss -- B. Riley FBR -- Analyst

That's helpful. And then one last question from me. Originations for the quarter were definitely stronger than I was expecting. Wondering what your expectations are for the fourth quarter pipeline, and any color you can give around another good quarter on the commercial lending side as well.

David DePillo -- President

Yeah. We expect another strong quarter and consistent with the third quarter, maybe depending on year end spending, some of that could get pushed into January, but pipelines continue to be strong on both sides of the business, even though we are holding fairly, judiciously on our rates, historic, getting a lot of demand. So our expectations are, we should have a strong fourth quarter. And on the C&I side, some of that is seasonal, but I would still expect to have a strong fourth quarter. We have a good strong pipeline, some of that again is when it funds out. But so far it's on both sides looking strong.

Steve Moss -- B. Riley FBR -- Analyst

All right. Thank you very much guys.

David DePillo -- President

Thanks, Steve.

Operator

Our next question comes from the line of Andrew Liesch of Sandler O'Neill.

Andrew Liesch -- Sandler O'Neill -- Analyst

Good morning, everyone.

Scott F. Kavanaugh -- Chief Executive Officer

Good morning, Andrew.

Andrew Liesch -- Sandler O'Neill -- Analyst

So, you've completed some of the securities book remixing and restructuring and -- how, what should we, thinking about the size of the securities portfolio going forward. Should it be near this billion dollar level side you also brought on that $500 million of funding of FHLB funding, was that to support the -- maybe the planned securitization next year? Or was that also to bring on some liquidity for the securities, just kind of curious like how we should be looking at the securities book [Speech Overlap].

Scott F. Kavanaugh -- Chief Executive Officer

It was a little bit. Yeah, I think you're going to see the securities portfolio probably well, if you noticed year trends in the past. We've kind of built up during the securitization and then, we don't really do much throughout the remainder of the year. So I would see those balances, decline based on whatever prepayment experiences we received. So I think we were on balance sheet liquidity probably close to 20% at the end of the year or into this quarter. Some of that was cash from a client that we expect will go out, if you just look at the securities portfolio, it was about 18% on balance sheet liquidity. I think, yeah, we would like to maintain on balance sheet liquidity of around 14%. So, it should be 14%, 15%, so to the extent that prepays continue just to pay off throughout the year and then, wouldn't be surprised if we wind up based on next year's securitization buying around securities.

The spreads are very advantageous for us on these securitizations. I'm frankly surprised that the spreads have been a little bit wide on some of these securitizations. So we're able to lock in 3.5-ish [Phonetic] year durations. As you saw with yields of about 2.54% given where the market is today. So with, regards to the home loan bank advance. Yes, there was a little bit to lock in against the securities portfolio. But quite honestly, we saw an anomaly in home loan bank advances. I think at the time that we lock that in, I think the average daily rate to borrow was like 2.35% and we were able to lock it in at 1.77% for a one year term, that's pretty good.

David DePillo -- President

Yeah. And that was right before the repo prices going to hit. So you could at, I guess you could look at one or two ways. One is lock in against our securities portfolio or kind of an on balance sheet hedge of our available for sale pipeline either way. As Scott mentioned, we didn't strategically necessarily do it for either or it was taken advantage of an anomaly in the markets at a period of low interest rates, timing was good. I guess.

Scott F. Kavanaugh -- Chief Executive Officer

Yeah.

David DePillo -- President

And it be like achieving...

Andrew Liesch -- Sandler O'Neill -- Analyst

Yeah. Yeah. So, with these loans are moved to held for sale is the plan for another securitization in the third quarter, next year.

David DePillo -- President

Yeah. I think at this point, as we mentioned, demand for product is still strong. We've been, it is just around our delivery and trying to keep our rates within a specific range. But even with that, our expectations are that we would originate more loans than we could, our balance sheet and the $500 million is a good benchmark number, it may be slightly more on depending on how much more we originate. But I would say, a low point, it's probably $500 million at this point.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. And then just one last question, just, it looks like non-performers went up a little bit, just any color behind that? What drove that?

Scott F. Kavanaugh -- Chief Executive Officer

It's kind of interesting, we really only have two larger non-performing loans. Outside of that we have zero REO now and very, very small balance, C&I relationships, that we typically do for CRA purposes, that are in that balance. But it's typically -- it's two relationship. One is a legacy cash secured line of credit that was done, that's kind of litigation. We actually earn a return on that based on the existing securities that collateralized, it's just stuck in litigation.

David DePillo -- President

And manage that portfolio.

Scott F. Kavanaugh -- Chief Executive Officer

Yeah, we actually manage it as well. So we're waiting for that to come to fruition. The other one is land secured. It's a legacy one, that was done several years ago. And it's a low 33% loan to value. It's just, and if you -- then getting there -- it's actually the school trying to get their enrollment and other activities up. So we feel well secured on both of those -- outside of those two relationships, there is really de minimis NPAs and really the pipeline is -- have troubled out that they are very immaterial.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. Thank you for the color. That covers all my questions.

Scott F. Kavanaugh -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Matthew Clark of Piper Jaffray.

Matthew Clark -- Piper Jaffray -- Analyst

Hey, good morning.

David DePillo -- President

Good morning.

Scott F. Kavanaugh -- Chief Executive Officer

Good morning, Matthew.

Matthew Clark -- Piper Jaffray -- Analyst

Can you help us, I guess I'm a little surprised, you're not going to see some margin relief here in the upcoming quarter, after you unloaded those lower yielding assets. And just maybe, give us a little more color there and then just help us with the progression next year. It sounds like you expect some relief in the first quarter next year, but again you're going to be carrying loans in held for sale for another securitization, which I thought would have been somewhat of a drag, but maybe just help us, is this 3% kind of a, still a bogey for you all next year or not.

John M. Michel -- Chief Financial Officer

Yeah. In terms of what happens is, is bottom line, we're going to make more money absolute dollars. This is all a percentage thing in place in our balance sheet. We're going to make more money on the top line, we're going to make more money on the bottom line, because our customer service costs are going to go down. So when you look at the bottom line, in fact, it's still there, it's just an anomaly both one, because we have more securities yielding at 3%. It brings down the average. It's a percentage, but we make more money and also from the perspective of the non-interest bearing deposits, that we pay customer service costs, as they roll off in their seasonality will replace those with borrowings or other deposits that bear interest. So those will affect the NIM. But bottom line will be at a lower cost. And so, we will still benefit from it. So in the fourth quarter, we will see the benefits from it, to the bottom line, but it won't be a NIM. As we stabilize that we will see the benefits going forward in the first and second quarter, and we expect that 3% target in next year is not -- is very reachable.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. And then did you happen to have the purchase accounting accretion number off hand, I know it's not a lot, but I just like to have it.

John M. Michel -- Chief Financial Officer

It was nominal in the quarter, couple of, we are kind of picking up on a monthly basis, probably $50,000 to $100,000, we didn't have any large items. So we -- in prior quarters we've had one or two large items. So we always disclosed it.

David DePillo -- President

The coverage there.

John M. Michel -- Chief Financial Officer

Now we're just doing the normal amortization of those things. And it's nominal maybe $50,000 to $100,000 a month depending on the loans.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then just on non-interest expense and the run rate, if you look back to last year, you had a little bit of relief in the fourth quarter on the comp line. Can you just remind us of the seasonality in that line? Is there is any, any other reason in the first quarter, but I'm not sure about the fourth [Phonetic].

John M. Michel -- Chief Financial Officer

Yeah. The first quarter has the job, so what happens is basically as we near the end of the year, people start reaching their caps on taxes, caps on 401k contributions, things like that. And so those percentage decline. Now the big decline is really the second and third quarter, the fourth quarter, you see a little bit smaller decline. And going through it that they obviously impact is going to be going from the fourth quarter to the first quarter of next year, you'll see a large increase. And then again, it will start tapering off.

From a staffing perspective as you can see by the head count, we're keeping controls on our costs and making sure that any hires we do are substantiated and justified. So I think we've done a real good job over the last year and a half of focusing on making sure that we have an efficient operation. And I think you can see that when you see the continuing trend on the efficiency ratios. And so we see that continuing to improve next year.

Scott F. Kavanaugh -- Chief Executive Officer

And one thing, I would definitely emphasize is, we are looking everywhere to try to make sure that we are maintaining our cost controls.

David DePillo -- President

And I would say that we've made a significant investment in -- on technology and infrastructure, four years ago, and we're starting to see all of the benefits as, if we have a lot of room for growth without a need for our significant investments in technology and or additional staff to support that growth.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Scott F. Kavanaugh -- Chief Executive Officer

Thanks.

Operator

[Operator Instructions] Our next question comes from the line of Gary Tenner of DA Davidson.

Gary Tenner -- DA Davidson -- Analyst

Thanks. Good morning. I just had couple of quick questions, first on the loan production yields in the third quarter have -- where did those come in? I know they compare to the yields on what you produced in the second quarter.

David DePillo -- President

I think the weighted average was 4.76%.

Scott F. Kavanaugh -- Chief Executive Officer

In the second quarter?

David DePillo -- President

In the second quarter.

Scott F. Kavanaugh -- Chief Executive Officer

And 4.44%...

David DePillo -- President

Yeah, 4.44% [Phonetic], are the majority of the decline well, there was actually a slight decline in some of the C&I yields. I think it was 5 in a quarter previously and was by 15 this quarter. Multifamily came down a little over 20 basis points during the quarter. The good news is with the mix and kind of the natural floors, we put on multifamily, our expectations -- new origination yields will be in this range for the foreseeable future. It's still net improvement to our overall portfolio yield, which is important to us, but that was kind of the mix for and the decline from the previous quarter.

Gary Tenner -- DA Davidson -- Analyst

Okay, thanks. And then with regard to the FDIC credit, this credit you took this quarter represent the entire credit you expect or would it be carryover into the fourth quarter?

Scott F. Kavanaugh -- Chief Executive Officer

No, that represents the entire credit.

Gary Tenner -- DA Davidson -- Analyst

Perfect. Thank you.

Scott F. Kavanaugh -- Chief Executive Officer

Thanks.

David DePillo -- President

Thanks.

Operator

And at this time there appears to be no further questions. I would like to turn the call back over to Mr. Scott Kavanaugh for any additional or closing remarks.

Scott F. Kavanaugh -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Scott F. Kavanaugh -- Chief Executive Officer

John M. Michel -- Chief Financial Officer

David DePillo -- President

John Hakopian -- President of First Foundation Advisors

Steve Moss -- B. Riley FBR -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Gary Tenner -- DA Davidson -- Analyst

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