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Edited Transcript of FFWM.OQ earnings conference call or presentation 29-Jan-20 4:00pm GMT

Q4 2019 First Foundation Inc Earnings Call

Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of First Foundation Inc earnings conference call or presentation Wednesday, January 29, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David S. DePillo

First Foundation Inc. - President

* John Avak Hakopian

First Foundation Inc. - President of First Foundation Advisors & Director

* John Matthias Michel

First Foundation Inc. - CFO

* Scott Farris Kavanaugh

First Foundation Inc. - Vice Chairman & CEO

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Conference Call Participants

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* Conor Mcdonnell;Azora Capital;Analyst

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Matthew Timothy Clark

Piper Sandler & Co., Research Division - Principal & Senior Research Analyst

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the First Foundation's Fourth Quarter 2019 Earnings Conference Call. Today's call is being recorded. (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 will 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. Please go ahead.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [2]

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Good morning, everyone. Thank you for joining us. We would like to welcome all of you to our fourth quarter 2019 earnings conference call. We will be providing some prepared comments regarding our activity, and then we will respond to questions.

As highlighted in the press release, 2019 was another great year for First Foundation. Our earnings for the fourth quarter were $15 million or $0.34 a share. For the full year, earnings increased by 31% over 2018 to $56 million or $1.25 per share.

Total revenues were $54 million for the quarter and $212 million for the year, an 11% increase over 2018. Our tangible book value per share ended the year at $11.57, which was a 12% increase during 2019.

At the start of the year, we initiated a cash dividend. And over the course of the year, we are pleased to report that our stockholders enjoyed a payment of $9 million and positive performance on our stock price. As we announced yesterday, we increased that quarterly dividend for the first quarter of 2020 by 40% from $0.05 to $0.07 per share.

Taking a look at our lines of business, our banking operations experienced strong growth as loan production reached $1.9 billion, loans increased by $254 million, and deposits grew by $358 million. Our trust department posted record revenue numbers and assets grew by 20%. Our wealth management business experienced a great year with an increase of $504 million in assets under management and a total AUM at the end of the year was $4.4 billion.

Let me also share some other highlights for the year. We enhanced our digital banking offering, including the digital delivery of our products, providing another source of deposit customers; the increased presence of First Foundation brand across digital marketing channels; and the investment in state-of-the-art technology to better serve our clients. In 2019, we also successfully completed the sale and securitization of $551 million of multifamily loans in the third quarter. This is the fourth such securitization. Since 2015, we have sold $2.1 billion in loans. 2019 saw our launch of our municipal lending department, offering a lending solution for small and midsized municipalities seeking financing for infrastructure projects or other cash needs. We received recognition in the media and in the community for our charitable-giving efforts. This included the revamp of our Supporting our Communities nonprofit initiative to make an even greater impact in the communities we serve.

We appointed 2 new Board members, which increased the diversity and elevated the overall profile of the Board. And several of our team members received industry accolades for their leadership and contributions to the banking and financial services industry. I am so proud of the contributions of our entire team, and I'm grateful to the employees who work hard every day to deliver the amazing results for our clients. Overall, it's been a strong year. I believe the strength of our offerings and the more favorable economic outlook position us well for the year ahead.

And with that, I'll turn the call over to our CFO, John Michel.

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John Matthias Michel, First Foundation Inc. - CFO [3]

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Thank you, Scott. I will provide a brief summary of our financial results for the quarter and year.

Total revenues for the fourth quarter and full year 2019 were 8% and 11% higher, respectively, than for the corresponding periods in 2018. Earnings for 2019 were $56 million, a 31% increase from 2018. For the fourth quarter of 2019, earnings were $15 million, an 8% increase from the prior year.

Fully diluted earnings per share were $0.34 and $1.25, respectively, for the fourth quarter and full year of 2019. Our net interest margin for the fourth quarter and full year 2019 was 2.88% and 2.87%, respectively. The results for the fourth quarter and full year benefited from recoveries on acquired loans of $1.1 million and $4.1 million, respectively.

As a result of the strong earnings, our tangible common equity ratio at the holding company increased from 8% to 8.3% after we paid $9 million of dividends in 2019. We benefited from the decrease in interest rates during the latter half of 2019, resulting in significant decreases in our funding costs. Our overall deposit costs were 1.24% in the fourth quarter of 2019, down from a high of 1.4% in the second quarter of 2019. And our borrowing costs came down from a high of 2.58% in the first quarter of 2019 to 1.8% in the fourth quarter of 2019.

Our loan yields declined slightly during the year from a high of 4.46% in the second quarter of 2019 to 4.37% in the fourth quarter of 2019. The decrease in the yield on assets from a high of 4.3% in the second quarter of 2019 to 4.07% in the fourth quarter of 2019 was impacted by a higher proportion of lower-yielding cash and securities to total assets.

Due to a focus on reducing costs, noninterest expenses for 2019 were only 2% higher than 2018. In fact, this increase was due to higher customer service costs and a full year of costs related to the acquisition of Premier Business Bank in the second quarter of 2018. As a result of our efforts, our efficiency ratio improved from 64.4% in 2018 to 61.9% in 2019.

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

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David S. DePillo, First Foundation Inc. - President [4]

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Thank you, John. We had a great year at the bank. The emphasis heading into the year was on maximizing scale and efficiency, and I believe we accomplished that, as evidenced by the financial results that we reported.

During 2019, we originated $1.9 billion of loans, a record year for us. Included in that total was a record $712 million of C&I loans. The composition of our loan portfolio in 2019 is as follows: multifamily 53%; C&I, 37%; single-family, 7%; and other, 3%. As of December 31, 2019, our loan portfolio consists of 53% multifamily loans, 21% business loans, 7% nonowner-occupied CRE, 18% consumer and single family, and 1% mining and construction.

The credit quality of our loan portfolio is strong, as evidenced by our low level of delinquencies and our NPA ratio declining to 20 basis points as of December 31. Deposit growth remains strong with $358 million increase in balances in 2019. We experienced $138 million increase at the branch level and $220 million increase in specialty deposits. The growth in our deposit business during the year is also partially attributed to the success experienced in attracting new mass affluent clients through digital channels, branch deposits, including in our digital activities, which was launched in the fourth quarter, totaling $149 million at the end of December. Being able to attract clients via our existing branch network, coupled with our digital delivery capabilities, will continue to set us apart in the industry.

All the success in 2019 could not have been achieved without the great team we have at the bank and all their efforts to support the continued growth of our franchise.

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

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John Avak Hakopian, First Foundation Inc. - President of First Foundation Advisors & Director [5]

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Thank you, David, and good morning. 2019 can be characterized by a strong year for the financial market, especially in U.S. equity. From January to December, the broader markets were up over 30%. Our investment strategy is broadly diversified across asset classes and sectors, and we made many investments that proved to be beneficial for our clients in 2019.

Our overall assets under management increased by $504 million during the year, benefiting from market appreciation as well as the addition of new clients.

Looking into 2020, we believe that economic expansion will continue, albeit more modestly than 2019. And now that growth has stabilized and fears of a recession that we saw early last year have subsided, we feel we are well positioned for the year ahead.

That said, there will be the unpredictability that comes as we enter the heart of an election cycle. We remain confident in our investment philosophy and the resulting exposure across our investment strategies. Our process for delivering sophisticated wealth planning strategies continues to help us uncover additional opportunities to serve our clients, including making introductions to our banking and trust teams.

Our trust department has been instrumental in our ability to build and maintain relationships with our clients, especially for those with nontraditional investment assets. We maintain a strong pipeline and expect to continue to be successful in attracting new clients, while maintaining our focus on serving our existing clients. And like the broader theme you heard from Scott and David, we are leveraging technology to enhance the delivery of our services. Overall, I'm very pleased with our accomplishments in 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Steve Moss with B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [2]

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I want to start off with the mix of commercial originations versus multifamily originations this quarter. And also what your expectations are for 2020 in total originations?

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David S. DePillo, First Foundation Inc. - President [3]

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Let's start with the mix. During the quarter, it was 37% C&I. And our expectation going into next year is our C&I will continue to maintain about the same level of as a percentage, because we do expect some increase in our multifamily. I think the good news for portfolio diversification is since we only sit around 20% in the C&I book, eventually, if we continue to do 37% to 40% of our book, our origination, that book will increase over time. And our expectation is we want to have about 1/3 of our book always in C&I. So we feel really good about that. So our expectations for next year is to do about the same, maybe slightly more, in C&I. And then, overall, I would say we expect a slight increase from the 2019 level. The one positive thing going into the year is our pipelines are very robust.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [4]

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There's a lot of positive things going into the -- into 2020. But yes, we do have a robust pipeline.

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David S. DePillo, First Foundation Inc. - President [5]

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On all levels. Included in that is, one, about 500 million of those originations were on credit and term loans and not focused in on our occupied CRE, so they weren't necessarily real estate-related. As well as our equipment finance group is approaching $100 million run rate. So that's very strong for us.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [6]

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And Steve, I do want to point out that we have already negotiated to have a securitization.

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John Matthias Michel, First Foundation Inc. - CFO [7]

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Planning on having it.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [8]

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Yes, planning on having it in the third quarter.

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David S. DePillo, First Foundation Inc. - President [9]

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Yes, I would expect that similar timing for this year, in September, for approximately the same level. We typically budget around $500 million to $600 million range...

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [10]

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Yes, $500 million to $600 million. Yes.

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David S. DePillo, First Foundation Inc. - President [11]

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With similar execution.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [12]

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And have you hedged the $500 million of loans classified held for sale? Or how are you thinking about that?

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David S. DePillo, First Foundation Inc. - President [13]

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We would've made a joke, but it probably wouldn't be that funny.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [14]

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No. At this time, We have not hedged anything.

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David S. DePillo, First Foundation Inc. - President [15]

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So good -- I would say, Steve, the good news around that is we have -- what we have available for sale. But we have what is the -- that's our inside book, and then we have our outside book, which is a larger group of loans that we would use for hedging activities. And the range of yield on those is pretty broad. So going into a securitization unlike last year, where we had locked in higher-yielding loans. This year, it's basically non-balance sheet hedge at this point.

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John Matthias Michel, First Foundation Inc. - CFO [16]

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Yes. And the other aspect to hedging, Steve, is that we took on a $500 million 1-year FHLB advance to lock in the rate. So in essence, we kind of have some hedging on balance sheet already.

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John Avak Hakopian, First Foundation Inc. - President of First Foundation Advisors & Director [17]

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Honestly, more towards the securities portfolio.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [18]

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Okay. And then, I guess, in terms of just sticking with the production side of things here, where are you seeing new money yields on both commercial and multifamily loans?

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David S. DePillo, First Foundation Inc. - President [19]

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Well, on the multifamily side, we've been floored out for, I would say, ever because of where the yield curve has been. So our yields have been in the kind of [3 80] range.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [20]

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For the fourth quarter, it was [3 80].

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David S. DePillo, First Foundation Inc. - President [21]

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For a while. So it's come down from earlier locked product, but we're still seeing, even with kind of the volatility, current volatility in the yield curve, we're still -- our pipeline's at about that rate or maybe slightly above.

On the C&I side, it's come down, I would say, consistent with LIBOR. So we're probably down about 75 basis points. But from the beginning of the year to the end of the year, actually, by about 40 basis points. The interesting part for us is, if we look at our business plan, we've kind of modeled current rates all across the board, and it's provided us a consistent projection of NIM going into next year or this year.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [22]

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So basically, a relatively stable margin for 2020?

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John Matthias Michel, First Foundation Inc. - CFO [23]

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Yes. Yes.

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David S. DePillo, First Foundation Inc. - President [24]

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We feel so. I think part of the flatness of what we're experiencing now was the front-loading of securities and some excess cash that we had on the balance sheet from a couple of clients that we've redeployed into loans. But --

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [25]

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And our modeling does not anticipate any increases or decreases in interest rates by the Fed.

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Operator [26]

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

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Matthew Timothy Clark, Piper Sandler & Co., Research Division - Principal & Senior Research Analyst [27]

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Do you happen to have the spot rate on interest-bearing deposit costs at the end of December? Just to give us a sense for going into 4Q.

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John Matthias Michel, First Foundation Inc. - CFO [28]

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I don't have that right in front of me, Matthew. It is -- for the quarter, the rates that we had were still declining slightly. It's going to be a little bit below what we had in the quarter for the quarter percentage, but I don't have the number right in front of me.

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Matthew Timothy Clark, Piper Sandler & Co., Research Division - Principal & Senior Research Analyst [29]

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Okay. And then just the drop in noninterest-bearing deposits, I think you had a similar drop a year ago in the fourth quarter. I guess, what's your expectation for noninterest-bearing deposit growth? Is that fully expected to come back in the first half of the year?

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David S. DePillo, First Foundation Inc. - President [30]

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Yes. We -- it was actually slightly higher than prior years. Typically, it was in the mid-30s...

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John Avak Hakopian, First Foundation Inc. - President of First Foundation Advisors & Director [31]

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It's already building back. There's always a seasonality effect. But those deposits have already started to increase here early in the first quarter.

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John Matthias Michel, First Foundation Inc. - CFO [32]

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Yes. And then we'll have a little bit of a dip in April, and then we'll pick back up through the summer.

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Matthew Timothy Clark, Piper Sandler & Co., Research Division - Principal & Senior Research Analyst [33]

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Okay. And then just, I think, speaking to a slightly higher origination activity this year, I think you had talked about in the past wanting to maintain organic growth in the 10% to 15% range. You obviously did better than that this quarter. But is 10% to 15% kind of the right range to think about for your HFI portfolio?

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David S. DePillo, First Foundation Inc. - President [34]

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Yes, we could, obviously, do more than that if we wanted to, but that's kind of our internal target. Some of it's dependent on payoff rates and other factors, but...

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John Avak Hakopian, First Foundation Inc. - President of First Foundation Advisors & Director [35]

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Yes. I was going to say, I think if you look at the fourth quarter, I think most banks had slightly higher prepayments than anticipated.

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David S. DePillo, First Foundation Inc. - President [36]

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So we can have -- yes.

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John Avak Hakopian, First Foundation Inc. - President of First Foundation Advisors & Director [37]

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The good thing is, is that we have that ability to step up and replenish that.

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David S. DePillo, First Foundation Inc. - President [38]

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And one way we can control our portfolio growth is through the amount of securitization we do as well. We can upsize it if we have excess production to keep our growth rate within the lines of what we expect, or downsizing slightly as well.

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Matthew Timothy Clark, Piper Sandler & Co., Research Division - Principal & Senior Research Analyst [39]

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Okay. And then do you happen to have the balance of your substandard and special-mention loans at the end of the quarter? I know credit's good. I just wanted to get that updated number.

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John Matthias Michel, First Foundation Inc. - CFO [40]

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I don't have it right -- we'll be publishing that. I don't have that again right in front of me.

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John Avak Hakopian, First Foundation Inc. - President of First Foundation Advisors & Director [41]

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It did decline quarter-over-quarter from 32 basis points to 20.

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David S. DePillo, First Foundation Inc. - President [42]

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That was on the NTAs...

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John Matthias Michel, First Foundation Inc. - CFO [43]

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That's the NTAs. NTAs are a little different numbers, so I don't have that right in front of me. So that stuff, we'll make sure we get out for you, Matthew.

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David S. DePillo, First Foundation Inc. - President [44]

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Yes. And I would say, outside of a few anomalies we had that we've been cleaning up in the last quarter, and probably, will continue to clean up in the first quarter. The migration into substandard and, ultimately, the nonaccrual has been very de minimis. And -- but a lot of it's related to smaller acquired assets from the last couple of acquisitions, which we expect as we continue to kind of call and work through those books, that should start to subside as well. So our expectation for credit at this point is to have continued improvement.

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Matthew Timothy Clark, Piper Sandler & Co., Research Division - Principal & Senior Research Analyst [45]

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Okay. And then just last one for me. I know it's a really small number, but just a housekeeping item. The accretion in the quarter and maybe prepay income?

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John Matthias Michel, First Foundation Inc. - CFO [46]

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In terms of the -- what we had in the quarter, which we mentioned, and the number here was about $1 million in recoveries. And that was -- what was kind of interesting about that is over half of that was actually related to a loan that was charged off by a prior company that we -- bank that we acquired. So it was a (inaudible) wasn't anticipated in terms of marks. So it was a recovery we realized in the quarter. So it was about 1.1 for the quarter. And that's mentioned in the press release so you guys can understand the numbers, too.

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David S. DePillo, First Foundation Inc. - President [47]

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And then we had that relatively consistent recovery, but we're fairly aggressive on our charge shops and have had positive recoveries over time on most of them. So I would expect we'll continue to have some recoveries going into this year.

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Operator [48]

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

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [49]

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I just wanted to get some color on some operating expense line items. It looks like you got some of the benefit this quarter of lower rates on customer service costs. Is that pretty fully baked into the fourth quarter number, with forward fluctuation more volume-driven?

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John Matthias Michel, First Foundation Inc. - CFO [50]

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Yes. So the fourth -- when we're looking forward in terms of this, the fourth quarter number, assuming rates don't change, will be consistent with what we expect in the future for the fourth quarter. It is cyclical. We expect to see benefits in the first 3 quarters. We'll have a little bit higher volume, but a lot lower cost compared to the first 3 quarters of 2019. So we're expecting decreases in total overall customer service cost between 5% and 10%, probably mostly in the first 3 quarters.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [51]

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Okay, great. And to clarify, the FDIC rebate, that was a third quarter event. And fourth quarter was a normalized run rate for that...

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John Matthias Michel, First Foundation Inc. - CFO [52]

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Yes, we did have -- we had none in the fourth quarter.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [53]

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Okay. Is there any projected for first quarter? Or are you -- have you utilized...

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John Matthias Michel, First Foundation Inc. - CFO [54]

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We're done. We got everything, and it was done in the third quarter.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [55]

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Okay. And then just one last expense item here. On the personnel line, lower despite really strong production on the lending side in the quarter. So just any thoughts on kind of how that works out?

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John Matthias Michel, First Foundation Inc. - CFO [56]

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Yes. A couple of factors is just going through and doing year-end reconciliations of our accruals and making sure that we're in line with what we kind of resulted. We had -- interesting, being as large a company as we have, we have little higher levels of turnover, so anticipated processes in terms of bonuses and everything that we kind of forecast in the year. When people leave and we replace them, the levels of those dollars kind of benefited us in the fourth quarter. I also want to remind you that the impact we have in the first quarter of our seasonality. For example, last year between the payroll taxes, 401(k) match and raises, the difference between the fourth quarter of 2018 and the first quarter of 2019 was $2 million. So we're going to have a similar type of increase for payroll taxes, timing and 401(k) match and raises increase in customer service cost besides other items.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [57]

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Gary, this goes all the way back to 2015 when we raised capital. And that was we were going to have a heavy buildup of an employee base based on compliance and everything, systems that we needed in place. And we did all that. And I know a lot of people were concerned that when does that stop? I think last year was a pretty good example that we're to a point where we really don't need a lot more infrastructure. Even as we continue to grow, we think that it will be minimal in terms of employee growth.

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David S. DePillo, First Foundation Inc. - President [58]

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Yes. And I think to Scott's point, when we talk about scale and efficiency, we put the infrastructure in place, including our IT infrastructure, to grow well past the $10 billion and could support on our platform. Similar institutions are running at over $50 billion. So all of the (inaudible) expenses over the last 4 or 5 years, we're starting to see those benefits. But on the employee side, we don't necessarily need to add employees to grow over the next...

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John Matthias Michel, First Foundation Inc. - CFO [59]

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Yes. No. Just incremental.

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David S. DePillo, First Foundation Inc. - President [60]

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Which hopefully will drive better efficiency.

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John Matthias Michel, First Foundation Inc. - CFO [61]

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Yes. We expect the trend, the positive trends and efficiency ratios to continue.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [62]

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All right, great. I appreciate the color there. And then just in terms of time deposit repricing, say, over the first half of the year. Can you give us a sense of your dollars that are repricing and the rates on the maturing time deposits?

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John Matthias Michel, First Foundation Inc. - CFO [63]

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On the time deposits? In terms of the impact of that, we probably are expecting maybe a 10 to 20 basis point decrease in our average cost because we've repriced a lot. We don't have a heavy load of CDs that are longer term. So we'll see some decrease in those costs, primarily on the CD, the money market and the savings accounts. Those type of rates are probably at market now because we adjust them.

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Operator [64]

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(Operator Instructions) Your next question comes from the line of Conor Mcdonnell with Azora.

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Conor Mcdonnell;Azora Capital;Analyst, [65]

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Just want to quickly follow-up on the net interest margin outlook. I guess, I'm trying to figure out kind of the puts and takes around the stable margin given the liquidity deployment and some of the decline in the CD costs and why maybe there's not a slight upward bias to the margin.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [66]

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I think you'll probably see some slight upper movement in the net interest margin. I mean, we had an opportunity when we did the securitization last year, we had the opportunity to sell about 300 million of 15-year mortgage-backed securities that was yielding [2 08], and we moved those into our own product that was yielding closer to [2 50]. And as I had mentioned earlier, we kind of stabilized the home loan bank advance against that to kind of lock in that type of return.

The reason why we did that -- and you won't see us increase the security balances anymore. The anticipation is, is that through prepayments, you'll see those balances go down. The fact is we would normally probably keep our on-balance sheet liquidity. It may be definitely lower levels, maybe 15%-ish. But the reality is these are great yielding assets with a lower duration than the 15-year mortgage backs, and we took advantage of that.

So I think as those continue to prepay, obviously, you'll see the margin. And then like John said, and some of the deposits that we had were mid-quarter last year. And so you'll start to see, and we're looking at average balances. So I think as you look to the first quarter and full second quarter you'll see some slight reduction in the cost of funds.

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John Matthias Michel, First Foundation Inc. - CFO [67]

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Yes, the cost of funds is a positive impact. One of the things is, is that the originations of our loan, the weighted average interest rate, is below what our portfolio is. So there'll be a little pressure on the loan side also. That's kind of why we're expecting it to be stable or slightly up.

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David S. DePillo, First Foundation Inc. - President [68]

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So our kind of expectations for next year is to have an increase in our net interest margin from where we ended. Our aspirational kind of guidance would be close to 3%. Some of that is dependent on where the yield curve is. If it is flat to negative, could have some impact on that. But we've always kind of guided that kind of 2.85% to 2.95% is the range within this kind of interest rate environment. We think we're going to be at the higher end of that range, maybe get close to 3%.

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Conor Mcdonnell;Azora Capital;Analyst, [69]

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Okay, perfect. I guess, what -- in thinking about the 3%, I mean, what would be the drivers to push towards the upper end that maybe I need to think about?

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David S. DePillo, First Foundation Inc. - President [70]

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Well, I think if interest rates stay relatively stable, deposit costs...

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [71]

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Are continuing to decline. You're going to see runoff in the securities portfolio, which are obviously the lesser yielding of all of our earning assets. So I think just those things alone, if everything else stays status quo, that's where you're going to see some of the movement upwards towards the 3.

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David S. DePillo, First Foundation Inc. - President [72]

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And also depending on where loan yields are slightly lower, we could securitize some of our lower-yielding loans at similar gains and be able to affect it that way as well. So we've got a very flexible balance sheet, and that's the one thing that we've always kind of prided ourselves. We can maneuver relatively quickly in order to reposition ourselves year-over-year. And I think we've done that over the last few years, setting ourselves up for the interest rate environment that we're in.

But if we get a 50-basis-point steepening of the yield curve, then we'll earn a lot more and it will be a light lighter. But we're not planning on that at this point.

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Conor Mcdonnell;Azora Capital;Analyst, [73]

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Got it. That's very helpful. I appreciate it. And one more, if you don't mind. Just on the expenses, I think you gave a pretty good color on where the first quarter looks like it's going to shake out. If I look at first quarter kind of on a year-over-year basis, it's kind of implying about low single-digit growth year-over-year. Is that sort of a reasonable level to think about expenses going into 2020?

And maybe if you could talk about the efficiency ratio and where you think that might shake out?

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John Matthias Michel, First Foundation Inc. - CFO [74]

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I think from the perspective that you're -- so we expect the growth in the balance sheet, as we mentioned earlier, to be in the 10-plus range. We expect our costs to not increase as much as that to help us and improve our efficiency ratio being at 61% for the year. As we get through for the full year, we expect to be closer to -- we have a 5 -- and a front digit for that, be in the 50s, the high 50s, in 2020 because of that leverage that we get from the size that we are.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [75]

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And remember, the asset manager does not have a great efficiency ratio per se. So at the bank, it will be much more efficient.

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John Matthias Michel, First Foundation Inc. - CFO [76]

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At the bank, it's already in the 50s.

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Operator [77]

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Your next question is a follow-up from Steve Moss with B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [78]

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Just 2 more follow-ups for me. I don't think CECL is brought up. I was just kind of wondering what the expected impact would be.

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John Matthias Michel, First Foundation Inc. - CFO [79]

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I actually know that answer. So our expectations are that we, in the first quarter, we will have an additional charge somewhere between $1 million and $3 million. We're continuing to refine that as we go through the analysis from the 12/31 balances. So the range is $1 million to $3 million. Right now, it will probably be tighter by the time we file the K.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [80]

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Okay. And then, I guess, there's going to be a day 2 impact given the formulaic nature. Probably you'll have to have some higher level of provision for...

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John Matthias Michel, First Foundation Inc. - CFO [81]

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It's probably not going to be that much significantly because we're pretty close. I mean, if you look at $1 million in '20, it's a 5% difference. It's really not going to impact our average. We had a pretty high level in relation to our actual losses under the old modeling. So the impact of CECL is not -- we don't expect to be significant. Obviously, the expectation would be whatever we end up with CECL as a percentage of the portfolio is probably going to be pretty consistent going forward, barring any unforeseen changes in the economic scenarios. But that's kind of -- as we go forward, we see that. And that's not much different from what we've done in the past.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [82]

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Okay, that's helpful. And then just on the expected tax rate for 2020, it was a little more -- a little higher this quarter than I think by most people...

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John Matthias Michel, First Foundation Inc. - CFO [83]

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Yes, we're reconciling it for year-to-date and quarters and going through that especially. The overall rate for all of 2019 was 29.3%. We expect, because of some of the tax advantage activities we're doing, that it will come down closer to 29% -- 29.3% in 2020, and then hopefully continue to go down as we look for other tax advantaged investments in the future. But the projection right now for 2020 is 29%.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [84]

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Okay. And then, I guess, just one last one here. Just wondering what -- is there any change in the M&A environment or what you guys are seeing for M&A activity these days?

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [85]

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Still pretty quiet. Very optimistic in terms of that expectations will get closer together between buyer and seller. But I think right now, and it's funny because I just had this conversation yesterday with someone, and I think expectations are still pretty wide between where we're trading versus where a nonpublic company thinks they should sell.

And so I'm -- we'll see. I think some people are starting to show signs of fatigue and maybe realigning their thoughts. But it's still early, so we'll see. But at some point, people have to, I think, readjust their thinking if they're willing to be acquired.

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David S. DePillo, First Foundation Inc. - President [86]

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Yes, it's kind of interesting, Steve. We're approaching one ROA and we have a high growth rate in earnings. And if we take a monetized institution that's probably at 0.5, 0.6 ROA, modest to flat growth, and they still want 2x book, it's pretty hard to make that accretive over time for us. So we're kind of a victim of our own circumstance of -- yes, victim of success of having higher growth in earnings and now hitting hurdle rates of returns that most of the people that are for sale aren't achieving, and it just makes it really tough.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [87]

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Yes, I think -- and I think given this environment, I mean, the proposition for us is, as Dave started to allude to, I mean, we made $1.25 this year, and your consensus is $1.44 for next year. I don't know that many banks out there are experiencing the same type of growth rates that First Foundation is. But if there is a proposition to be made for another bank, is that they can hook their pony to a wagon that's maybe got a little more steam behind it. We've been fortunate enough to have very strong tangible book value growth the last several years. And I tell people, even though the actual sale may not be 2x booked, if we're successful in doing the same growth as we've been able to experience the last several years, they'll get their 2x number.

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Operator [88]

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

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [89]

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So I wanted to point out, we recently changed our slide deck, and that can be reviewed on our Investor Relations portion or segment of our website. So I would strongly encourage any investor that has seen kind of our old standard, to me, it seems like it's a lot different, and I think it would be valuable to take a look at that.

But in my closing remarks, I'll just say, as of today, and given the current environment, I am very optimistic in our business plan looking forward.

While things are obviously subject to change based on market conditions, I believe we have a strong management team, and I am forever thankful for all of our employees. Everyone on the team is working hard to create an excellent client experience, and we are committed to delivering strong results for shareholders.

Thank you again for participating in today's call, and have a great remainder of your day.

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Operator [90]

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Thank you. This concludes today's conference. You may now disconnect.