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Edited Transcript of FFWM.OQ earnings conference call or presentation 24-Jul-19 3:00pm GMT

Q2 2019 First Foundation Inc Earnings Call

Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of First Foundation Inc earnings conference call or presentation Wednesday, July 24, 2019 at 3:00:00pm 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. - Executive VP & CFO

* Scott Farris Kavanaugh

First Foundation Inc. - Vice Chairman & CEO

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Conference Call Participants

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* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Donald Allen Worthington

Raymond James & Associates, Inc., Research Division - Research Analyst

* Gary Peter Tenner

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

* Matthew Timothy Clark

Piper Jaffray Companies, 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 First Foundation's Second 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 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.

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

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Thank you. Hello, and thank you for joining us. We would like to welcome all of you to our second 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 this morning, we experienced another strong quarter across key financial metrics of the firm. Our earnings for the second quarter were $12.4 million, a 141% increase over the second quarter of 2018 or $0.28 per share. Total revenues were $51 million for the quarter, an increase of 18% year-over-year. Our efficiency ratio for the second quarter was 63.5%, and our tangible book value per share ended the quarter at $10.94 per share.

I'm very proud of our executive team, our business unit leaders and all of our employees for helping us achieve these results. They all contributed to helping us manage expenses and focus on generating high-quality revenue during the first half of the year. This puts us in a position that I expect to set up for the success for the remainder of the year and beyond.

Our banking operations continued to experience growth. Loan originations totaled $494 million in the second quarter and [$893 million] year-to-date. Our deposits have grown by $211 million. Our industry continues to experience challenges due to the uncertainty in the interest rate environment, including an inverted yield curve, yet our business model allows us to deliver results like what we announced today.

In particular, our multichannel approach to attracting deposits has helped lead us through the challenge. For instance, as retail deposits became more and more expensive in the first half of 2019, we were able to leverage our experience in attracting deposits from other channels, including specialty deposits, which helped generate the results we reported this morning.

As we start to see large money center banks drop rates in the retail channel, we could see retail become attractive again. We will continue to monitor our funding sources and make any adjustments as needed, especially in light of any future decreases in the Fed funds rate. I mentioned the $494 million in loan originations, but I also wanted to call out the fact that we continue to diversify our loan portfolio, namely from the growth in our commercial lending activities. While we still maintain industry-leading capabilities in multifamily lending, we also appreciate that a bank our size should remain relatively diversified. So I am pleased with what we've accomplished. Dave will provide some details on loan origination in a few minutes.

While I'm very proud of our lending activities, I am particularly proud that we continue to have minimal credit concerns as evidenced by our low levels in nonperforming assets, which stands at 25 basis points at June 30. Our Wealth Management business saw positive results in both market appreciation and assets from new clients, and our total assets under management ended the quarter at $4.2 billion. This is a positive rebound from where we were at the end of 2018. Our Trust department also saw a strong quarter of attracting new clients, resulting in an increase in $82 million in assets. Pipelines for our Wealth Management and Trust business look very strong heading into the second half of the year.

And lastly, we paid our quarterly cash dividend of $0.05 per share. Overall, it was a strong quarter.

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

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

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Thank you, Scott. I will provide a brief summary of our financial results for the quarter. Total revenues for the second quarter were $51 million, an 18% increase from the second quarter of 2018. Earnings were $12.4 million and earnings per share were $0.28 for the second quarter of 2019. Year-to-date total revenues were $100.5 million, earnings were $23.7 million and earnings per share were $0.53.

Our net margin was 2.84% for the second quarter and 2.86% for year-to-date. Excluding the effect of our loans held for sale, our net interest margin would have been 2.97% for the second quarter and 3% for year-to-date. The yield on our interest-earning assets increased to 4.30% as the weighted average yield on originated loans continued to be higher than yields on loans in our portfolio. This reflects the benefits of diversification in commercial lending. In addition, we realized $1.3 million of benefits related to credit and yield discounts on the payoff of acquired loans.

Our overall cost of interest-bearing liabilities increased to 2% in the second quarter of 2019 as demand for deposits continued to be strong, resulting in higher rates. Borrowing rates remained relatively flat. Our charge-offs for the quarter were nominal, and our ALLL is at 48 basis points for nonacquired loans. We are in the process of developing the required modeling for the implementation of CECL, and we expect to be able to assess the impact of CECL later in the year.

Compared to the first quarter of 2019, noninterest expenses in the second quarter of 2019 decreased by $0.6 million as seasonal decreases in compensation and benefits more than offset increases in customer service costs. The change in noninterest expenses in the second quarter of 2019 as compared to the second quarter of 2018 were primarily due to acquisition-related costs. Our effective tax rate for the second quarter and year-to-date was 29.1% and 29.4%, respectively, as compared to our statutory rate of 29.0%.

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

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

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Thank you, John. As Scott mentioned, during the second quarter, we originated $494 million in loans. The composition of our loan originations are as follows: Multifamily was 49%, commercial C&I loans was 43%, single-family 6% and 2% other. For the second quarter, the weighted average rate on our loans originated was 4.77%. This reflects the benefit of our diversification into commercial loans as the weighted average rate by type was 4.21% for multifamily and 5.37% for C&I.

As of June 30, our loan portfolio included our loans held -- including our loans held for sale consisted of 53% multifamily, 20% of which are held for sale; 20% C&I loans; 8% nonowner-occupied CRE; 18% consumer and single-family; and 1% [land] and construction.

As Scott mentioned, the credit quality of our loan portfolio is strong as evidenced by our low level of delinquencies and our NPA ratio of 25 basis points. Also mentioned, deposits grew by $211 million for the first 6 months of 2019 as growth in specialty and wholesale deposits was offset by withdrawals of certain acquired deposits. As of June 30, 2019, our 20 location branch network is 42% of our total deposits. Also as mentioned, the industry continues to face pressures on both loans and deposits due to the inverted yield curve.

We are scheduled to complete a loan sale of approximately $600 million during the third quarter. As a reminder, we put a hedge on for these loans held for sale as in December of 2018. As of June 30, 2019, due to the significant decline in interest rates in December, the mark on the hedge was approximately $19.5 million. This significant movement in rates and widening of credit spreads could have an inverse impact on our expected gain on sale for these loans in the third quarter. Overall, I'm pleased with our results.

Now I would 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. In the second quarter, we experienced another solid quarter of positive returns in the market. Our AUM saw an increase of $145 million during the second quarter and $301 million year-to-date. Our performance of our investment strategies has been solid as they have met or exceeded our benchmarks for the year. We recently expanded our growth component to our investment offering. This coupled with our already established value strategy has enabled us to capture additional returns for our clients.

Along these lines, we continue to serve our high net worth client base with a mix of in-house and third-party managers across fixed income, equity and alternatives, including real estate. We feel for a firm our size, we have a very comprehensive investment offering.

As a result of all that we do for our clients, our average fee per household has remained strong even as firms within the industry face increased fee compression, while our average client relationship has increased in size. We are able to maintain this fee with services like financial planning, which can oftentimes be a value-add for our clients and help us find additional ways to support their goals. Our Trust department continues to be instrumental in our ability to build and maintain relationships with our clients. Several of our largest clients have established relationships at our Trust company. We maintain a strong pipeline and expect to continue to be successful in attracting new clients and feel positive for the rest of the year.

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 the line of Matthew Clark of Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [2]

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Maybe just first on the margin. Can you just give us some additional color as to when you think the securitization will get done? And then should we think about that pro forma margin being in and around that 2.97%, excluding the held-for-sale, do you expect some additional lift there or pressure going into 3Q, 4Q?

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [3]

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Well, the securitization should took place at the end of the third quarter. That's our anticipation and everything seems like it's going smoothly at this point. So I would expect towards the third or fourth week of September, we should complete that.

As far as net interest margins, I think it really is kind of -- first of all, I think, deposits have kind of trimmed out in terms of pressure, but I will say loan yields with as quickly as the yield curve went inverted, just in 6 months, we've seen loan yield probably come in 40 basis points. And I'll let Dave weigh in on that in a second. I think you're going to start to see some of the pressures on deposit costs start to abate, especially if the Fed decreases rates starting, hopefully, next week.

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

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Yes. I would agree with Scott on that point. One of the values of remixing are originations, not away from multifamily, but certainly as a smaller percentage. With the decline in rates and [funding] more off the short end with C&I loans, you could see that our average rate of origination was actually at the approximate same level as it was at year-end when rates were much higher. So the remixing certainly helps and that will help over time as we continue to diversify our originations. Additional benefits after we obviously reduce our loans held for sale on this sale is reduction of borrowing costs which have been historically higher than our funding costs in general on the deposit side.

And then there is a potential for, due to the recovery of our securities portfolio, some remixing there with new securities coming on at a significantly higher rate than some that we can pull off that are already reflected in our mark-to-market on equity. But the effective yield on those securities does not run through the income statement. So we get some benefit from the remixing there, lowering some reliance on wholesale borrowings due to holding those in the available for sale. So with all those activities happening at the same time, it should stabilize our margin going forward.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [5]

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Yes. That's a good point, Dave. I do want to make it clear, Matthew, that what Dave's talking about is we have put on a lot of securities. Our regulators requested that we have a little bit more on balance sheet liquidity when interest rates were 0. As a result, we put on -- right after the capital raise, I think, in 2015, we put on about $500 million, $600 million of 15-year pass-throughs. And I think we will probably start to remix some of that around the time that the securitization happens. So that will be a factor in the third quarter as well.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [6]

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Okay. Great. And then on deposit pricing and deposit cost. I mean is the sense that deposit costs will peak in the third quarter here and start to move lower, assuming we get a Fed cut next week? Or do you feel like there's going to be a little bit of a repricing lag (inaudible)

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [7]

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No. I don't expect that there's going to be a repricing lag. I would say for the most part, clients were pretty quick to react on the upside, and I think it's fair to say they will react to the downside in a similar fashion if the Fed decides to move. That being said, I'm starting to see anecdotal notes of less pressure on deposits already. So that's where I think you have seen a peak. If not in the second quarter, definitely in the third quarter.

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David S. DePillo, First Foundation Inc. - President [8]

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Yes. I think just to echo Scott's comments. Because we are relatively liability-sensitive and more than 50% of our deposits are not in, what we would call, traditional retail or laddered time deposits. We definitely will get the benefit quicker on a reprice with Fed movement, but we're already seeing lower rates on the wholesale basis starting to push through.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [9]

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Okay. And then just shifting gears to the loan growth, well above your, I think, targeted range of 10% to 15% this quarter eat into capital ratios a little bit. Should we expect the growth -- the pace of growth to kind of return to that 10% to 15% range or not?

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [10]

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Matthew, in terms of the 10% to 15%, that was year-over-year. So we always kind of peak up before we have the sale. Once we do the sale and you look at the effects after the sale that 10% to 15% we still think is a good guide. So you're going to have a peak up in the third quarter because of the loan sale, when the loan sale happens. When you look at year-over-year, that 10% to 15% is still a good guide.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [11]

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Yes, on total assets of the balance sheet. Dave, you may weigh in now on loans.

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David S. DePillo, First Foundation Inc. - President [12]

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Yes. I think part of the [precipitous] decline in interest rates, we have been holding rates fairly good on the multifamily side, but it has impacted the amount of which we would fund traditionally during the second quarter. So -- however, because of the remix, we are seeing more significant volumes of C&I that's offset that. I would expect that we would probably be slightly lower in the third and potentially slightly lower in the fourth quarter from the second quarter run rate, but still in that $1.6 billion to $1.8 billion total funding range. But as John mentioned, typically, if we originate $1.6 billion to $1.8 billion and we have $600 million [of sale], including our traditional repayments of loans that will have net growth of somewhere between $600 million to $800 million net, which would be that 10% to 15% range.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [13]

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Great. And then just couple small ones from me. Just on other fees, up in the quarter, a few million. Anything unusual in that number?

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [14]

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Just we continue to have strong results both in the adviser side. As you heard Scott say, AUM went up. So we continue to expect to have increases there. But on the Trust side and the loan fees continue to have positive impact. Also you'll see a little bit of impact because we did acquire PBB last year. One of the impacts of that is they have a more retail focused deposit franchise, up in the -- certain areas, and they have a little bit higher deposit fees. So a little bit of everything. Really strong Trust growth.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [15]

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Yes, we'll tell you, Matthew, I really feel like that FFA and the Trust department are working as well together as I've ever seen and the opportunities that are coming on board for both companies is tremendous. So I am super, super delighted at how well that's working.

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John Avak Hakopian, First Foundation Inc. - President of First Foundation Advisors & Director [16]

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Yes, and I'd echo Scott's comments. I think our quantity and our pipeline as well as the quality of the potential relationships both look solid right now.

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Operator [17]

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

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [18]

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The standard -- the deposit growth here in the quarter, big inflows in noninterest-bearing accounts. Just kind of curious what -- was there anything specific driving that?

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [19]

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Just the cyclical growth in some of our specialty deposits. The mortgage servicing rights tend to grow during the summer and then they decline when they have the tax payments in the fall -- late fall and beginning into the winter. So that's a cyclical and expected level of increase that we have, and we expect it to decrease in the fourth quarter.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [20]

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Got you. Are -- do these accounts have customer service fees associated with them in the operating expense line?

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [21]

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Yes, they do.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [22]

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So then presumably with the Fed rate cut, would those fees then go down here assuming we get a cut next week?

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [23]

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Just as much as they went up, we would expect them to go down and as you get the benefits of it, so.

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Operator [24]

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

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [25]

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I apologize for hopping on late here. But did want to touch on the C&I growth for the quarter. Obviously, large mix of the originations for the quarter. Just wondering how sustainable is that going forward. And the other part being, as it relates to multifamily loans, given significantly lower rates, is your total origination guidance, assuming basically lower multifamily originations for the second half of the year, if we hold them here?

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David S. DePillo, First Foundation Inc. - President [26]

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Steve, yes, we covered this a little bit earlier before you jumped on and those are in line with the other questions that we had on originations. So the run rate is a little bit higher than most people probably thought through the first half of the year, and our expectations for the full year are still in line with that $1.6 billion to $1.8 billion that we've traditionally experienced. Multifamily was a smaller percentage than traditionally we see and part of that is being very selective on the market due to lower interest rates, but we're able to hold our weighted average interest rate on that, to higher than our expectations given current markets.

On the C&I side -- but our expectations going forward is multifamily could be lower for the rest of the year depending on what happens in that middle end of the curve, and we continue to be cautious around booking loans at significantly lower rates. After 4 years of building our C&I franchise, we've really started to see some great traction across the footprint, including our corporate banking group that has booked some nice larger relationships in the second quarter. As you know that business can be a little bit, we use the technical term, lumpy. We had a great second quarter. Third quarter could be a little bit less and could finish up with a stronger fourth quarter, but I think the organic momentum of our C&I franchise has put us in a position to have a more diversified funding mix, not only for this year but for next year and beyond.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [27]

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Okay. And what specific industries are you seeing loan growth in the C&I space?

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David S. DePillo, First Foundation Inc. - President [28]

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It's pretty much across the board. We don't tend to focus heavily on any specific industry type. So it could be from manufacturing, distribution, servicing. We've had some in the specialty finance area, general finance, a little bit in the construction. We tend to be a little more concentrated in California around construction and construction services. However, in the second quarter, a significant portion of the originations were away from that sector. So we can provide some additional portfolio breakdowns in the future to show you the level of the diversification, and I think that's something we're relatively proud of which...

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [29]

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Yes, that's a good idea.

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

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The lack of concentration in any specific 1 type of area or -- we've included some agriculture as well. It is very diversified.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [31]

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That's helpful. And then on expenses here, just on the comp line. I know it always comes down after the first quarter, but seems like it came in more than what I was thinking. Just kind of wondering how we think about expenses into the third quarter.

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

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Yes. In terms of going through that, we've made a lot of efforts across the board here of trying to manage expenses, and obviously, our [basic] expenses [is] compensation. So you can see by the [count]that we've basically remained flat for this year. We continue to focus on those efforts in going forward. Obviously, in the second quarter in terms of the expectations regarding costs, there shouldn't be any significant changes in the third or fourth quarter primarily, but obviously the first quarter of next year you'll have that seasonality impact of it. Obviously, we benefited from that in the second quarter, but there is really no unusual items in the second quarter numbers. The only other minor benefit is that because we originated a little bit more loans and the type of loans that we had a little bit more of deferred costs under FAS 91 rules. But it wasn't very significant.

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Operator [33]

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(Operator Instructions) Your next question comes from the line of Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [34]

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Scott, in your prepared remarks you mentioned -- or maybe it was John, I'm sorry, the mark on the hedge related to the pending loan sale and that would impact the gain. Could you quantify what your expectations would be as of today at least in terms of the gains?

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [35]

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I wondered whether or not [you were] going to ask that question...

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [36]

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I think it was actually a [general comment.]

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [37]

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Yes. So there's been relatively few deals that have been done. I know that there is a deal that was either priced today or tomorrow. We should start to get some feedback off that. But we've had some roll off of some of the loans. We feel that loan -- but I still think, we'll make some profit. It's just a function of, do we think it's going to be 1%. I think the answer is it could be less.

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

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So just to give you a little bit of color, when we priced out the transaction and when we initially put the hedge on, indicative credit spreads were wider than what we experienced historically, and we thought that was relatively conservative in our estimate of -- a net 1% gain. However, because -- due to Scott's comments on relatively few transactions, the indicative spread, credit spreads on [the road] of tranches appeared to be much wider than what we originally estimated. However, there isn't that many transactions in the market as Scott has mentioned, so we're still waiting for more transactions to view that. But given some of the indicative credit spreads out there, they're significantly wider than what we originally modeled and that's primarily the biggest impact. Additionally, the other impact could be in the pricing of the I/O spread -- the I/O strip will tend to be larger given the relative coupon on the loans. So that could have a bigger discount than originally expected.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [39]

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But, you know, in all honesty, it's still a little bit of a question mark, Gary. And as we felt that it was at least prudent to bring up the point that we don't have the clarity that we would necessarily like at this point.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [40]

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Okay. Fair enough. And then kind of further to that, assuming this deal gets done the end of the third quarter, would your intent be to fill the bucket again of held-for-sale before year-end for [2019?]

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [41]

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Yes. I don't know if you were on the phone call earlier, but I think, our intention is we will refill our on-balance-sheet-liquidity bucket to a certain degree, but I think, at the same time, we intend at least at this moment to remix some of the securities to take some of the 15-year pass-throughs that have been sitting been on the balance sheet and move those off and make room for more of this particular deal.

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [42]

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And in terms of just the loans themselves, we would plan on putting some loans held for sale either at the end of the third quarter or fourth quarter because basically, the rules under Freddie Mac is we have to weigh the year's worth of seasoning, and so we basically, we got a year's worth of production ready for the next deal in 2020.

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Operator [43]

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Your next question comes from the line of Don Worthington of Raymond James.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [44]

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Just maybe more a general question on deposit pricing. But you mentioned that the specialty deposits helped you relative to weaker flows in the retail branches. What's the just general difference in pricing between what you have to pay for specialty deposits versus retail?

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [45]

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In terms of the specialty deposits, they're going to be more closely aligned to current market rates out there. So if you looking at incremental rates. For new retail deposits they're -- we're trying to track them and we're going to be attracting them at those rates. But from a historical perspective, the deposits that we already have in our branches, the increase in those have been pretty nominal.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [46]

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It depends on the type of specialty deposits. We have all kinds from MSRs to contract retention to HOAs. I would say that some of the title escrow, MSRs that type of stuff do tend to be -- they tend to be quicker at reacting to Fed increases, and therefore, that's our point that it should react to the downside when the Fed starts to reduce rates pretty quick as well. So -- but there's other types of deposits like EB-5 and other things that we're taking on that are substantially less than on the mark.

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

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I would say, on average our specialty book tends to average at or below the marginal cost of our retail, and I think that's why Scott said that there was some de-emphasis at the branch level of competing on the margin for what we would consider more volatile deposits on the retail side of it. So we're trying to run -- we effectively ran off some of that higher costing, more volatile, replaced it with specialty. But on the margin, and there's competitors out there that at a retail basis are offering rates that are higher than what we're gathering on the specialty side.

And on the specialty side, we don't have all the cost and infrastructure to raise deposits. If a branch on average costs you about 1% in effective G&A, to manage our specialty deposits for that same rate is infinitely lower on a G&A basis. So it's a lot more efficient for us even with consistent rates to raise on the specialty side, it's just a lot more efficient. And to Scott's point, it is more rate-sensitive on the way down, so we get the immediate effect of a reprice.

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Operator [48]

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This concludes today's question-and-answer session. I'll now turn the call back to over to Mr. Scott Kavanaugh for closing comments.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [49]

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

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Operator [50]

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Thank you for participating in First Foundation's Second Quarter 2019 Earnings Conference Call. You may now disconnect.