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Edited Transcript of FFWM.OQ earnings conference call or presentation 23-Oct-19 3:00pm GMT

Q3 2019 First Foundation Inc Earnings Call

Oct 28, 2019 (Thomson StreetEvents) -- Edited Transcript of First Foundation Inc earnings conference call or presentation Wednesday, October 23, 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

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

As highlighted in the press release, we experienced another strong quarter. Our earnings for the third quarter were $17.4 million or $0.39 a share, an 18% increase over the third quarter of 2018. For the third quarter, total revenues were $57 million, and our efficiency ratio was 59.5%. As of September 30, 2019, our tangible book value per share was $11.35. Notable events for the quarter included a loan sale and securitization of $551 million of multifamily loans, the sale of $284 million of lower yielding securities and the purchase of $576 million of securities from the securitization. I'm very pleased with our ability to complete this fourth securitization, a tool which we intend to continue to utilize going forward.

Our banking operations continue to experience growth. Loan originations totaled $486 million in the third quarter and $1.4 billion year-to-date. Our deposits have grown by $638 million during the first 9 months of 2019. Year-to-date, our Wealth Management business has experienced an increase of $309 million in assets under management and a total AUM ended the quarter at $4.2 billion.

Our Trust department has continued to grow with increases of $97 million in assets under management during the first 9 months of 2019 and a 35% increase in revenues when compared to the corresponding period in 2018. Pipelines for both Wealth Management and Trust business remained very strong. Our business model of providing banking and private wealth management services allows us to deliver the results like what we announced today. With 20 locations across 3 states, we serve a wide array of clients, each of whom have unique financial needs that we can help with.

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

Overall, it was a great quarter. And now let me turn the call over to John Michel, our CFO.

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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.

This quarter, management took the opportunity to restructure our securities portfolio by selling $284 million of lower yielding securities with a rated average yield of 2.09%. In addition, activities in the quarter included the sale and securitization of $551 million of multifamily loans, resulting in a $4.2 million gain; the purchase of $576 million of securities from the securitization with a weighted average yield of 2.46% and at lower duration than the securities sold in the quarter; and the receipt of a $1.2 million refund of FDIC insurance fees.

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

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

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

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 had mentioned, during the third quarter, we originated $486 million of loans. The composition of our loan originations were 57% multifamily, 31% commercial, 9% single-family and 3% on other. For the third quarter, the weighted average interest rate on our loan originations was 4.44%. This reflects the benefit of our diversification into commercial loans, as the weighted average by type was approximately 4% for multifamily and about 5.15% for our commercial loans. As of September 30, our loan portfolio includes -- including loans held for sale consist of 50% multifamily loans, 20% of which are held for sale; 22% C&I loans; 8% other CRE; 19% consumer and single-family; and 1% lending and construction.

The current quality of our loan portfolio is strong as we had net recoveries in the quarter and our NPA ratio of 33 basis points. As mentioned before, deposits grew by $638 million for the first 9 months of 2018 with branch deposits increasing by $92 million and specialty deposits increasing by $541 million. Some of the increases in specialty deposits was attributed to seasonal increases we experienced.

Pressure on deposit rates have started to abate, and we expect our overall funding costs to decrease at short-term -- rates have decreased and are expected to continue to decrease. Overall, I am pleased with our results.

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. During the first 9 months of 2019, we experienced positive returns of the market. And while the markets continue to show signs of uncertainty, our investments have performed well with respect to their benchmark.

As Scott mentioned, that our AUM saw an increase of $309 million year-to-date. Our robust investment offering continues to help position our portfolios for the uncertainties we faced with respect to the trade war interest rates and other economic factors. Strategically, we are focusing on leading with our wealth planning offering. This allows us to better serve the client, and results in higher retention rate. More and more clients are turning to our team to help with complex financial matters. This affords us opportunities to work closely with our Trust department and to build and maintain relationships with our clients.

In addition to banking and lending opportunities, our wealth planning team is able to uncover opportunities for both our insurance and philanthropy services offering. Having these additional resources available for our clients keeps them within the First Foundation ecosystem.

As we look into the final months of the year and into 2020, we remain confident in maintaining strong pipeline and expect to continue to be successful in attracting new clients.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from the line of Steve Moss of B. Riley FBR.

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

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

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

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Yes. Okay. A couple of responses that -- there's investment securities answer I can provide. It's 3%, Steve, in terms of going forward, our weighted average yield and that's what we're expecting to be yielding over the next few quarters on the securities portfolio.

The impact of that and the impact of our seasonal runoff of the customer services related deposits will kind of keep our NIM flat for the next quarter, and we start seeing the benefits especially in the next year through this first, second and third quarter. Whereas our customer service costs are expected to decrease in the fourth quarter because we'd have lower balances. So the bottom line impact, we're still seeing the benefits, it's just not going through NIM in the fourth quarter.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. And then on the customer service side. I guess perhaps there's even more -- a little more of a pickup than -- on the customer services -- especially to deposits. Wondering if you could give us any range for what the potential expense could be in the fourth quarter.

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [5]

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You want the...

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

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He's looking for the answer.

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David S. DePillo, First Foundation Inc. - President [7]

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So we had a couple of dynamic events that we typically see about -- somewhere about 20% to 30% rundown.

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

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During the quarter.

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

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

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

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

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [11]

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

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

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Not really.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [13]

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I think those at the peak, that's probably where they're going to stay. So I don't -- in like both Dave and John are saying, we should start to see some declines in those balances. But it's going to range, as I said, from where we are at the end of this quarter, at the high end and then get down 20%, 25%, 30% on the low end.

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David S. DePillo, First Foundation Inc. - President [14]

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There's a couple of events, Steve, that affects us. Some of the specialty deposits are outside of the mortgage-related servicing assets. So we did experience growth away from that and that was a pretty significant chunk. We additionally did that growth in bulk balances and not just a buildup of taxes and insurance from existing pools of loans, so we had net increases. So some of it could be attributed to that, but I think it was additional excess deposits that were sitting in the system that we're able to -- because of our relationships, they all pick up not in the quarter. Again, I think of it as more of a dual...

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [15]

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

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David S. DePillo, First Foundation Inc. - President [16]

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Yes. We expect another strong quarter and consistent with the third quarter, maybe depending on the year-end funding. Some of that could get pushed into January. But pipelines continue to be strong on both sides for the business even though we're holding fairly judiciously on our rates. We still are getting a lot of demand. So our expectations are we should have a strong fourth quarter.

And on the C&I side, some of that is seasonal, but I would still expect to have a strong fourth quarter. We'd have a good strong pipeline. Some of that, again, is when it funds out. But so far, it's on both sides looking strong.

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Operator [17]

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Our 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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So you completed sort of this securities book remixing and restructuring. I mean how -- what should we be thinking about the size of the securities portfolio going forward? Should it be near this $1 billion-level set you also brought on? That $500 million of funding of -- FHLB funding? Was that to support the -- maybe the planned securitization next year? Or was that also to bring on some liquidity for the securities? Just kind of curious like how we should be looking at the securities...

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

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

Yes. The spreads are very advantageous for us on the securitizations. I'm frankly surprised that the spreads have been a little bit wide on some of these securitizations. So we're able to lock in 3.5-ish year duration, as you saw with yields of about 2.54 given where the market is today.

So with regards to the home loan bank advance, yes, there was a little bit to lock in against the securities portfolio. But quite honestly, we saw an anomaly in the home loan bank advances. I think at the time that we locked that in, I think, the average daily rate to borrow was like 2.35%. And we were able to lock it in at 1.77% for a 1-year term. That's pretty good.

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David S. DePillo, First Foundation Inc. - President [20]

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

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

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Yes. That'll be...

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

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Yes, yes. So would -- these loans are moved to held for sale as planned for another securitization in the third quarter next year?

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David S. DePillo, First Foundation Inc. - President [23]

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

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [24]

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

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David S. DePillo, First Foundation Inc. - President [25]

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It's kind of interesting. We really only have 2 larger nonperforming loans outside of that. We have 0 REO now and a very small balance. C&I relationships that we typically do for CRE purposes is that -- are in that balance. But it's two relationships. One is a legacy cash-secured line of credit that was done that's kind of in litigation. And we actually earned a return on that based on the securities that collateralize it. It's just stuck in litigation.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [26]

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And managed that portfolio.

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David S. DePillo, First Foundation Inc. - President [27]

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Yes. We actually managed it as well. So we're waiting for that to come into fruition. The other one is land secured. It's a legacy loan that was done several years ago, and it's a low 33%. So loan-to-value, it's just an issue of them getting there. It's actually like school, trying to get their enrollment and other activities up. So we feel well secured on both loans. Outside of those two relationships, there's really de minimis NPAs. And really the pipeline of troubled assets are very immaterial.

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Operator [28]

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Our next 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 [29]

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

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [30]

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

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [31]

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

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

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It was nominal in the quarter. A couple of -- we are kind of picking up on a monthly basis probably $50,000 to $100,000. We didn't have any larger items. So in prior quarters, we had 1 or 2 large items so we always disclosed it.

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [33]

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The coverage there.

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [34]

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

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [35]

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Okay. And then just on noninterest expense and the run rate. If you look back to last year, you had a little bit of relief in the fourth quarter on the comp line. Can you just remind us of the seasonality in that line if there is any? I know there isn't in the first quarter but not -- I'm not sure about the fourth.

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [36]

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

From a staffing perspective, as you can see by the headcount, we're keeping controls on our costs and making sure that any hires we do are substantiated and justified. So I think we've done a really good job over the last 1.5 years of focusing and making sure that we have an efficient operation. And I think you can see that when you see the continuing trends on the efficiency ratios. And so we see that continue to improve next year.

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

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

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

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And I would say that we made a significant investment in technology and infrastructure 4 years ago. And we're starting to see -- one of the benefits is we have a lot of room for growth without a need for significant investments in technology and/or additional staff to support that growth.

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Operator [39]

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(Operator Instructions) Our 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 [40]

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I just have a couple of quick questions. First on the loan production yields in the third quarter, have -- where did those come in? And how do they compare to the yields on what you produced in the second quarter?

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David S. DePillo, First Foundation Inc. - President [41]

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So I think the weighted average was 4.76%

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Scott Farris Kavanaugh, First Foundation Inc. - Vice Chairman & CEO [42]

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Which? In the second quarter?

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David S. DePillo, First Foundation Inc. - President [43]

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In the second quarter.

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [44]

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Right. And 4.44.

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David S. DePillo, First Foundation Inc. - President [45]

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Yes, 4.44 are the majority of the decline -- well, there was actually a slight decline in some of the C&I yields. I think it was 5.25%, previously, it was 5.15% of this quarter. Multifamily came down a little over 20 basis points during the quarter. The good news is with the mix and kind of the natural floors we put on multifamily, our expectations are new origination yields, hopefully, in this range for the foreseeable future. Still, net improvement to our overall portfolio yield, which is important to us. But that was kind of the mix in the decline from the previous quarter.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [46]

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Okay. And then with regards to the FDIC credit. This credit you took this quarter represent the entire credit you expect or would there be carry over into the fourth quarter?

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John Matthias Michel, First Foundation Inc. - Executive VP & CFO [47]

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No. That represents the entire credit.

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Operator [48]

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

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

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Operator [50]

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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.