First Foundation Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Jan 2021

[Operator:]

Greetings and welcome to First Foundation's Fourth Quarter 2020 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. Speaking today will be Scott Kavanaugh, First Foundation's Chief Executive Officer; Kevin Thompson, Chief Financial Officer; and David DePillo, President. Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release.

[Scott Kavanaugh:]

Hello and thank you for joining us. We would like to welcome all of you to our fourth quarter and full year 2020 earnings conference call. We will be providing some prepared comments regarding our activities and then we will respond to questions. I'd like to say first and foremost that we had a new format and we worked very hard on it. I hope everybody appreciated the new format. We felt like it was a little more concise and provided numbers a little more in a straightforward manner. As highlighted in the earnings report, we experienced another strong quarter which capped off a great year for First Foundation. Our earnings for the fourth quarter were $22.4 million or $0.50 per share. For the full year, earnings increased by 50% over 2019 to $84.4 million or $1.88 fully diluted earnings per share. Total revenues were $63.1 million for the quarter and $251.3 million for the year, a 19% increase over 2019. We are pleased to report that our stockholders in 2020 enjoyed a payment of $12.5 million in the form of cash dividends. And as we announced in our earnings report this morning, we increased our quarterly dividend for 2021 by 29% from $0.07 to $0.09 per share. Our tangible book value per share ended the year at $13.44, a 16% increase during 2020. Combined with the dividend and the increase in market cap, we are proud to have returned $128 million to our shareholders during 2020 for a total return of 17%. In a year that was marked with uncertainty and macroeconomic challenges, we are extremely pleased at how our team came together to serve our clients and deliver the results that we are reporting today. Taking a look at our business lines, our banking operations experienced strong loan growth as loan production in the fourth quarter hit $715 million and $2.5 billion for the year, while deposits grew in the quarter by $449.6 million and $1.02 billion for the year. Wealth management business saw a strong year both in terms of new clients and positive investment returns in our portfolios. Assets increased by $403 million in the fourth quarter and ended the year at a record $4.9 billion. Our process for delivering sophisticated wealth planning strategies continues to help us uncover new opportunities to serve our clients including making introductions to our banking and trust teams.

[Kevin Thompson:]

Thank you, Scott. Earnings per diluted share of $1.88 in 2020 is a 50% increase over 2019. As a result of this momentum, our tangible book value per share increased 16% to $13.44 in the year. The full year return on assets was a strong 1.26% with a return on tangible equity of 15.5% as our business model has helped us to navigate these uncertain times with great flexibility and success. The net interest margin expanded seven basis points to 3.19% in the quarter as a result of the progress we have made in lowering deposit pricing and maintaining discipline in loan production. In addition, we recognized $1 million of net PPP fee income, which is approximately 26% of the total expected fee income in our PPP loans originated. Excluding the effects of PPP, our NIM increased to 3.13% in the quarter. Loan fundings in the quarter of $715 million were a record for First Foundation with full year fundings of $2.5 billion. The loan yield increased 10 basis points in the quarter to 4.01% as we have maintained strong underwriting discipline and saw some remix in loan fundings towards multifamily production. The cost of deposits decreased from 57 to 41 basis points in the quarter. Our strategy of increasing core deposits has gained traction as our core deposits increased from 75% to 94% in 2020. Total deposits increased by over $1 billion in the year to an all-time high with 39% growth in non-interest-bearing accounts. Credit metrics remained strong in all our loan portfolios and the allowance for credit losses for loans remained essentially flat resulting in an allowance of 50 basis points of loans. This was a result of higher balances in loans held for investment and net charge-offs partially offset by a slight improvement in the economic scenario we utilized for the CECL calculation.

[David DePillo:]

Thank you, Kevin. It was indeed a very successful year for First Foundation. We are seeing the benefits of scale and efficiency as evidenced by the financial results we reported this morning. We are able to accomplish this all, while supporting our colleagues clients and communities during some very challenging times. In 2020 as mentioned we originated $2.5 billion of loans a record year for us. In the year we maintained our focus on our core multifamily business which has performed exceptionally well throughout the pandemic as well as to continue to diversify into high-quality commercial business lines. The composition of our loan originations during the year was as follows

[Operator:]

Thank you. The floor is now opened for questions. Our first question comes from the line of David Feaster of Raymond James.

[David Feaster:]

Hi. Good morning, everybody.

[Scott Kavanaugh:]

Hi, David.

[David Feaster:]

First of all, I like the new format a lot. I think you guys did a great job and congrats on the expansion into Texas. It's exciting. It makes a ton of strategic sense. I'm just curious, if you could kind of give us a road map maybe a time line for the expansion, just regarding the infrastructure necessary from both a location and personnel perspective. And maybe any impacts you expect on your growth trajectory and just appetites for even M&A to potentially accelerate the build-out?

[Scott Kavanaugh:]

Yes, we're always looking at M&A. The one thing I would say is, Texas is riddled with banks everywhere. And frankly, I hope that there are some opportunities out there. I've already started talking to investment bankers to see kind of what the landscape looks like. But one thing I can say is, is I think if you've been looking at the press, many companies of all different kinds have moved to the Dallas Metroplex area and continue to announce. So, I think, it's a great expansion for us. Frankly, I've already purchased a home. It's under construction and it probably won't be done until April. I'm hoping that we can complete this by the March-April time frame. And I think we'll be holding our Annual Shareholder Meeting, which I think is in May, in Dallas. So we're really optimistic about it. I think, there's a great opportunity just to enhance geographically our expansion in loans, deposits. One of the things I want to do David is, also get our Trust -- Texas Trust powers. And you can't really do that until you have a branch out there, at least one branch. So we're already sending our facilities person, Mark Gordon, out there to try to look around and see if we can find some place to start the expansion. So initially, it's going to be de novo. But I would hope that there is an opportunity to do some type of acquisition.

[Kevin Thompson:]

I would say, David, for financial modeling purposes, we really haven't included much benefit or expense load in 2021 and are really looking at this as -- 2021 as a positioning year as we form teams and start deploying them years beyond. So it's really, for us, a long-term strategy of diversification.

[David Feaster:]

Okay. That's helpful. And then, just any thoughts on growth near term? And maybe – I mean, it's great to see record production in the fourth quarter. What's the pulse of the multifamily market? What are you seeing there? And then just thoughts on C&I. It's great to see the C&I strength in the quarter and maybe just expectations for growth as we're looking out to 2021?

[Kevin Thompson:]

From the multifamily side, I think what we saw was a strong pullback in the market at the end of the first quarter and through the second quarter and then starting to service some of that pent-up demand into the third and obviously into the fourth quarter. There still is a significant pent-up demand in the market for both purchase and refi. We've seen the purchase market come back. So people are – have operated, call it close to a year in this environment. We are one of the most locked down or the most locked down state in the union. However, people have navigated very well and the strength of the product has brought the confidence back. So we – our expectation is 2021 trajectory should mirror what we saw in the fourth quarter which is continued strong demand. We don't necessarily see that dissipating any time in the future. Even though the yield curve has deepened slightly, rates are still on a historical basis very competitive. And obviously for us, the ROE on that is probably higher than it's been since we've seen in quite some time. On the C&I side it's very interesting. It's a tale of the haves and have not. We've been focusing on businesses that have been very successful or reposition themselves through the pandemic and have insulated themselves. We've tended to go a little bit upstream to companies that are a little bit larger that have access to capital and fortified balance sheets. And I think that served us very well. And it's certainly proved itself out in the numbers and we're going to continue to stay diversified and disciplined but our expectation on the C&I side is consistent growth as what we've seen in the latter half of 2020. So also on the residential mortgage side even though that's not a huge business for us, our demand is way outstripping our ability to provide our customer base. So we're adding some additional resources around that. Equipment finance is back to levels that we saw prepandemic and continues to grow. So I would say, we're hitting on all cylinders on the production side and we just don't see anything near term, especially in the fact that with – it appears to be easing restrictions in California as far as the rest of the country on some of the shutdowns and lockdowns our expectations are it could potentially get better from here as well.

[David Feaster:]

Okay.

[Scott Kavanaugh:]

I'll add David that our municipal financing division, we launched that a little over a year ago, it's done incredibly well. And we're very thankful that we got the talent that we have there. And frankly there's – frankly, I don't care whether it's a trust business, assets under management, pipelines, loans ,deposits, I feel like our pipelines are just so robust right now that I'm very optimistic for 2021.

[David Feaster:]

That's great. That's great, color. And then just like to talk about your rate sensitivity. I mean this rate environment has really played right into your hands, as you've just totally been pretty liability-sensitive but just curious how that may have changed in light of the liquidity build and the deposit remix and impacts of floors? And maybe just how you plan to manage your sensitivity going forward?

[Kevin Thompson:]

This is Kevin. I can start off. And you're right that the sensitivity has changed somewhat in this rate environment as it has for many banks. We are in – at least from an academic perspective, when you shock your interest rate risk scenarios by 100 basis points, 200 basis points, we're liability sensitive. Now that often plays out differently in reality as you have different types of yield curves and the dynamics and we model that as well. From an academic perspective we are a little less liability-sensitive. As a result of some of the changes in mix we are still somewhat liability-sensitive. But we monitor this very closely and really manage the balance sheet in a very flexible way in order to take advantage of different interest rate environments.

[Scott Kavanaugh:]

The one thing I would add also David is we have $100 million of home loan bank advances that mature in April sometime. And our position is, is that that will retire upon maturity. And I think at that point we're -- I'm not sure we'll have any home loan bank advances out. As you've seen a restructuring of our broker deposits is substantially down. So we've been very successful at repositioning the deposit side, and I think you're going to continue to see that into 2021.

[David DePillo:]

And there's -- on the asset side there's probably a few things that affected our relative duration on those and then shortened up certainly from historical levels. One is our portfolios are now starting to season. As you probably noted from 2015 through 2018, 2019 our growth rates were compounded at 30%, 40% and that was relatively unseasoned product in an interest rate environment where it was actually increasing. Now that we've kind of plateaued and we're in our growth rates closer to call it 10%, 12% on the loan portfolio, our CPR against that is relatively increased. So the duration of those assets have shortened, as well as a little more focus and emphasis on C&I has also shortened the duration of the portfolio. So we're, kind of, seeing the benefits on both sides and that plays into Kevin's comment of our interest rate sensitivity has come in from historical levels.

[Kevin Thompson:]

And the last thing I will add is our shift to more core deposits benefits our interest rate profile as well with that relationship based approach.

[David Feaster:]

Okay. So, kind of, taking that all together, it sounds like probably further room for modest core NIM expansion exclusive of PPP?

[David DePillo:]

Yeah. Look I think loan yields are holding up. We've got some room on the deposits. Our strategy is we've loaded up on liquidity. We're effectively going to be deploying that liquidity. Some of that as Scott mentioned is paying down higher cost of deposits in the way of brokered, as well as we still have a few home loan bank advances that are maturing. They're not at the levels and rates we saw before, but it does give us a lot of room. So I would say deploying excess cash for the first quarter on the form of additional fundings and paydown of other borrowings will probably have a near-term impact and then it will be the gradual effect of declining rates as we re-price going forward. Assuming asset yields stay where they're at, we should have some positive impact going forward on NIM.

[Kevin Thompson:]

And all this will depend, of course, on the performance of the yield curve and how prepayments -- how we interact with those over the next few years.

[David Feaster:]

Of course. Thanks everybody.

[Kevin Thompson:]

Thank you.

[David DePillo:]

Thank you.

[Operator:]

Your next question comes from the line of Matthew Clark of Piper Sandler.

[Matthew Clark:]

Hi, good morning all. Can you update us on the remaining amount of net PPP fees that are left just to close the loop on the margin outlook?

[Kevin Thompson:]

Yeah. So we started off with net PPP fees that were being deferred of about $4 million and there's about $2 million left at this point.

[Matthew Clark:]

Okay, great. And on the wealth management pre-tax margins, they were up again nicely to 21% or so. What's the outlook for those margins this year? Can we continue to grind higher, or do you think we kind of stabilize at this level?

[Scott Kavanaugh:]

I think we can grind a little bit higher, but I think historically and largely it's going to be impacted by increases in assets under management. And we've done a lot of things. We've got some new systems in place and that's reduced our need for employee infrastructure. We're still going to need to add an occasional person here or there. But I think with some of that technology that we'll save on the overhead there. But I think it can still -- it still has room to get a little bit higher, but I wouldn't say tremendously higher.

[Matthew Clark:]

Okay. And then just on reserves at 50 basis points assuming the macro model doesn't change we -- should we expect to stabilize here? Do you think it could drift a little bit lower?

[David DePillo:]

That's – we kind of model around 50. As you've seen, we've kind of vacillated between 48 and 50. Quite honestly, the only probably larger effect, we have are really the securities adjustments that we have from quarter-to-quarter, because we tend to have a little more market sensitivities than our loans do. The models continue to get better. We are increasing our qualitative reserves during the quarter. By and large, given the fact that we've still got a pandemic going on and we're trying to be relatively conservative, but we kind of model around 50 basis points as kind of the low end and then do our best to justify continuing to reserve at that level. Some of it also is mix-related too, as we do more C&I that could have an impact on driving that slightly higher. But I would say, all in all 50 is probably about where I would model it out today.

[Matthew Clark:]

Okay. Great. And last one for me. In other fee income, anything unusual there this quarter that might come out next quarter of the run rate?

[Kevin Thompson:]

There were a few unusual items. We are experiencing higher prepayment fees. So we were about $2.2 million this quarter versus $1.1 million last quarter. And then, we also had a benefit from our MSR or our mortgage servicing right valuation about $300,000.

[Scott Kavanaugh:]

It was a milestone.

[David DePillo:]

Yeah. I would say on the preface, because there's good velocity in the market that will probably be consistent at least for the next several quarters.

[Scott Kavanaugh:]

Yes, I would agree.

[David DePillo:]

And then maybe for the year, but that's the good part about having a little bit of call protection on these loans.

[Matthew Clark:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Steve Moss of B. Riley Securities.

[Steve Moss:]

Hi. Good morning, guys.

[Scott Kavanaugh:]

Good morning, Steve.

[Steve Moss:]

Yeah. Good quarter here. And I guess, just in terms of originations for 2021. I just want to tie that a little further David. Do we think about it staying close to the $2.5 billion number we saw for this year or maybe a bit higher?

[David DePillo:]

Yeah. I would say, $2.5 billion is probably our low end right now. Our expectations are we should have some increase from there. As you know, we typically talk about $1.8 billion to $2 billion. Now we're talking about $2.5 billion plus as kind of a benchmark. But I would say, since the pipelines are starting off strong and we probably won't knock on wood have a freeze up of the market that we saw at the end of the first quarter and in the second quarter you can kind of do the math that $2.5 billion should be kind of at the low end of our expectations, if that makes sense.

[Steve Moss:]

Yes that does. David, then in terms of just expense growth for full year 2021 just kind of curious as to any changes or updated thoughts you guys may have around expenses?

[David DePillo:]

We kind of modeled a little bit higher than – each year. So we're probably looking at – I'll make sure, I don't screw up the math probably about 5% growth on expenses. I think that's about right.

[Kevin Thompson:]

Yeah, that's about right. Well, we do merit increases right at the beginning of the year for employees. So we averaged about 3% around merit increases. We'll have some additional costs associated with additional funding some of those variable costs.

[Scott Kavanaugh:]

New employees.

[Kevin Thompson:]

Yeah, new employees throughout the year, but still experiencing some benefits from the efficiencies we put in place.

[Steve Moss:]

Okay. Great. Thank you very much. That's all for me.

[Kevin Thompson:]

Thank you.

[Scott Kavanaugh:]

Thank you, Steve.

[Operator:]

Your next question comes from the line of Gary Tenner of D.A. Davidson.

[Gary Tenner:]

Thanks. Good morning. On the topic of loan growth for 2021, and I guess for 2022 in a sense, the mix has been pretty stable in terms of production in the last couple of years with commercial business 37%. As you move to Texas or expand to Texas, it would seem to me that maybe, it would initially be maybe easier to grow multifamily in that market. So, how do you think of kind of the mix maybe developing initially with that move?

[David DePillo:]

Yeah. I mean, real estate lending is usually easier to build. However our expectations are we would have a diversified offering consistent to what we're doing in all our other states. The amount that we would expect near term probably we wouldn't have much in the way of adjusting our mix and the fact that because we have such a large base to start on. But yes, I would say, it would probably initially start with real estate and then start layering in C&I and consumer as we go along. But I wouldn't expect it to have a dramatic change in our funding mix.

[Scott Kavanaugh:]

The one thing I will say about multifamily in the Metroplex area is, it's a little more fragmented in lending patterns than it is here in California. Currently, I think JPMorgan Chase has not even landed in the Metroplex. So we're hoping that that may be a small benefit to being in the marketplace. As you know they're a very formidable lender out here in the state in California.

[Gary Tenner:]

Great. And then -- sorry actually that was my only other question. Everything else was answered. Thank you.

[Scott Kavanaugh:]

Hey, thank you.

[Operator:]

Your next question comes from the line of David Chiaverini of Wedbush Securities.

[David Chiaverini:]

Hi, thanks. Good morning, a couple of questions for you. I guess first on that last point about Texas. How aggressive do you guys plan to be in terms of the de novo expansion there? Are we talking one to two branches per year for the next couple of years? Just talk about the pace of growth there.

[Scott Kavanaugh:]

I think initially it's going to be one and we may put another one. Right now, we're trying to pick a location that we think will be a reasonable location. That would probably be in the areas where most of the companies seem to be moving to. So that could be like Westlake, Southlake, Plano some of those areas. As you know I mean we only have 21 branches total. So it's not like we're going to be branch-heavy in the state of Texas. We're still going to continue to work on our digital channel and those types of things.

[David DePillo:]

Which is a great point Scott. We have experienced some decent deposit growth already in the state of Texas through our digital delivery channel. I don't have the statistics in front of us, but I think it's one of our larger major metro markets from gathering deposits digitally. So this will be more of a support de novo bricks and mortar around that digital channel.

[Scott Kavanaugh:]

The only thing I would say is, I think any time we've ever expanded into a new marketplace for us, I think we've always done a good job of making sure that we have proven people that understand the marketplace. And I don't think this is going to be any different than anywhere else. We're going to look to try to hire people that have been in these markets for years. And we think we can help somebody bring in a fair amount of production off that. But I am hugely optimistic. I'm with Dave, when Dave says it's -- that this year, I wouldn't count on much of it affecting either our balance sheet or revenue. But I think in the outer years 2022 and 2023 I think it can have a pretty substantial impact.

[David Chiaverini:]

And will there be much in terms of tax savings? Clearly Texas is more tax-friendly than California. Can you talk about that?

[David DePillo:]

The tax savings we will definitely realize as we have loan production within Texas. That's what really drives it and what will be subject to the safe tax rates of Texas which are much better than California where most of our loan production is today.

[Kevin Thompson:]

Yes. Just to give you a little bit of update. We have 27.5 million of -- or 588 clients already in Texas under our digital channel currently.

[David Chiaverini:]

Great. And you also mentioned about getting the -- after you get at least one branch up and running you'll be able to do -- have the Texas Trust powers. Can you talk about what capability that brings for you guys and compare that to California trusts?

[Scott Kavanaugh:]

Yes, sure. So as you know we actually have three trust powers right now. We have Hawaii, Nevada and California. And the population in the state of Texas is massive. Frankly, our Nevada Trust the assets represent about 40% of the total assets -- around 40% of the total assets that are under advisement for the Trust department. So where we're seeing a lot of -- I mean, we continue to work with CPAs and attorneys and the drafting of documents. But I will say that through First Foundation Advisors and their relationship with Charles Schwab we've been able to capitalize because Schwab does have trust powers, but they're a lot more simple and we're willing to handle and do handle much more complex cases. So I think we can gain a fair amount of traction there as we started to see here in California and Nevada.

[David Chiaverini:]

Great. Thanks very much.

[Operator:]

This concludes our allotted time for today's question-and-answer session. I will now turn the call back to Mr. Kavanaugh for closing remarks.

[Scott Kavanaugh:]

Thank you, everyone. I'm so proud of what we accomplished in 2020 and I'm very excited about the year ahead. There are great opportunities related to our geographic expansion and I'm pleased to see the investments in technology pay-off. Everyone on the team is working hard to deliver an excellent client experience and we are committed to producing strong results for shareholders. We believe we've built a valuable franchise and look forward to the year ahead. As a reminder, our earnings report and investor presentation can be found on our Investor Relations website. Thank you again for participating in today's call. Have a great remainder of your day.

[Operator:]

Thank you. That does conclude First Foundation's fourth quarter 2020 earnings conference call. You may now disconnect.