First Foundation Inc

NYSE:FFWM

Earnings Call Analysis

Bank Reports Mixed Q4 Results, Positions for Growth

In Q4, net income reached $2.5 million, or $0.45 per share, increasing tangible book value by $0.11 to $16.30. While pretax pre-provision net revenue improved to $0.5 million, net interest margin (NIM) fell by 30 basis points to 1.36% attributable to a shift from non-interest-bearing to interest-bearing deposits. Despite a decrease in overall net interest income, customer service costs declined, and the company anticipates a reversal of this trend as service deposit balances recover in early 2024. The company expects modest increases in compensation and benefits but is committed to diligent expense control. The effective tax rate is anticipated to stabilize at around 28%. The total risk-based capital ratio improved significantly to 12.27%, indicating a stronger position for future growth.

Net Interest Margin Contraction and Balance Sheet Resilience

The earnings call opened with details on a slight improvement in earning asset yields, from 4.56% to 4.62%, indicating a moderate enhancement in returns from the company's invested assets. Despite this, the net interest margin (NIM) has contracted by 30 basis points, majorly due to the transition from noninterest-bearing to interest-bearing deposits, which increases costs. The financial institution is navigating the complexities of striking a balance between maintaining liquidity and managing interest rate risks. The balance sheet reflects a strategic shift towards lower-risk assets and cautious asset growth. They take pride in the recent enhancement of their liquidity and improved net interest income despite the decline in NIM, signaling adjusted strategies to optimize for a transforming rate environment.

Focused Loan Portfolio Strategy with Emphasis on Quality

The bank is recalibrating its loan portfolio, with a significant decrease in its size from the beginning of the year, aiming for higher asset quality rather than aggressive expansion. Loans are now more concentrated in commercial business loans, with reduced exposure to commercial real estate, signaling a strategic pivot towards diversification and higher credit quality. This approach is expected to gradually increase CECL (Current Expected Credit Losses) reserves, fostering a more conservative stance on future loan practices. The company continues to prioritize adjustable rate and high-quality commercial loans, adjusting lending with an eye towards future market opportunities and existing multifamily loan repricing.

Deposit Composition and Strategic Regional Growth

On the deposits front, the bank is experiencing a shift in its composition, moving towards a larger share of interest-bearing accounts. Geographically, the deposits are well spread between California, Florida, Texas, and other regions. The bank is harnessing technology and proactive branch initiatives to cultivate deeper client relationships, especially focusing on business communities and leveraging its advisory teams' network to organically grow its deposit base. These efforts point to a philosophy rooted in building strong, service-driven customer bonds. Moreover, the bank strategically gears up for potential interest rate changes in the future by focusing less on rates and more on relationship-building and services.

Moderate Growth Amidst Prudent Credit Standards

The bank projects modest growth in their commercial and industrial (C&I) and multifamily loan sectors. Yet, they remain vigilant with credit standards, stating the growth in C&I will not compromise their credit philosophy. Despite some industry players reducing their activity, First Foundation sees potential in the California multifamily housing sector due to its resilience and rent-control policies. The bank maintains cautious optimism, supported by their loan portfolio’s healthy credit quality metrics and low nonperforming assets (NPAs) ratio.

Expense Management and Fiscal Discipline

In terms of expenses, the bank has seen a reduction in client service costs, an effort that will be reciprocated as deposit balances replenish. This demonstrates the bank’s nimble approach to cost controls amid shifting market dynamics. The expense management strategies are coupled with a prudent fiscal approach, as they plan to restore normal levels of compensation and benefits gradually and contingent on improved revenue and profitability, rather than preemptively increasing those costs.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the First Foundation's Fourth Quarter 2023 Earnings Conference Call. Today's call is being recorded. Speaking today will be Scott Kavanaugh, First Foundation's President and Chief Executive Officer; Jamie Britton, First Foundation's Chief Financial Officer; and Chris Naghibi, Chief Operating Officer. 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, please see the company's filings with the Securities and Exchange Commission. And now I would like to turn the call over to President and CEO, Scott Kavanaugh. Please go ahead.

[Scott Kavanaugh, executive]

Good morning, and welcome. Thank you for joining us for today's fourth quarter 2023 earnings call. Although the entire banking industry faced substantial headwinds throughout 2023, I am extremely proud of the Herculean efforts our entire first foundation team put forth to work together and make the company stronger. As I look forward into 2024, I am optimistic that the efforts put forth will continue to improve the loan-to-deposit ratio, increase the overall loan yield and improve the sensitivity of the loan portfolio to changing rates. Our teams at both the RIA and trust departments were also able to weather a very uncertain outlook in both the stock market and real estate markets. Balance remains strong and both divisions with strong pipelines.

The interest rate environment appears to have pivoted with the Fed's fight against inflation nearing its end. Whether rates stay higher for longer or short end interest rates start to decline, we believe First Foundation is well positioned with our liability-sensitive balance sheet. Most of our fixed rate loans are short duration and continue to ride the curve down with each passing quarter. We still believe the third quarter was a troughing quarter as we continue to reposition the balance sheet.

Multifamily remains particularly strong as an asset class, and it is showing no signs of weakness. As I stated earlier, I am exceptionally proud of the commitment and diligence exhibited by our entire team. From investment management, trust and banking deposits and lending, our team is dedicated to delivering exemplary results. As we reflect upon the last quarter, we are delighted to report increased AUM of approximately $200 million for the quarter at First Foundation Advisors improve PPNR quarter-over-quarter, industry low NPA ratios and continued improvements to our capital ratios.

For the fourth quarter, we reported net income attributable to common shareholders of $2.5 million or $0.45 per share for basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter at $16.30, an increase of $0.11 from the $16.19 at September 30, 2023. We pretax pre-provision net revenue totaled $0.5 million compared to the negative $400,000 for the third quarter. Interest income totaled $146.6 million for the fourth quarter of 2023 compared to the $144.8 million for the prior quarter.

Net interest income as a percentage of total revenue was 25% for the quarter compared to the 18% for the prior quarter. Our net interest margin was 1.36% for the quarter as compared to 1.66% as of September 30, 2023. However, Noninterest expense decreased to $55.9 million compared to the $64.2 million in the prior quarter, a decrease of $8.3 million, largely driven by the expected seasonal declines in customer service costs, which was discussed at the last earnings call. Our efficiency ratio improved to 98.5% as compared to 99.7% as of September 30, 2023. Our adjusted return on average assets, again, a non-GAAP measure ended the quarter at 0.09%, up from the 0.08% reported as of September 30, 2023. Our loan-to-deposit ratio remained relatively flat at 95.2% as of December 31, 2023, versus 95.1% as of September 30, 2023 and 103.5 from December 31, 2022.

We remain committed to continuing to improve this ratio through a combination of strategically reducing lower-yielding loan balances and continuing to grow core relationship deposits. Our deposit pipeline remains robust as we look into the new year. Related to operational efficiencies during the quarter, we have remained laser-focused on cost-saving initiatives and proactively shrinking our loan balances. As you are aware, we were early in making extremely difficult decisions to reduce our workforce and terminate projects that were slated for completion. These deliberate actions and strategic decisions have been instrumental in controlling expenses and managing their impact on earnings. By diligently managing costs and streamlining our operations, we have been able to optimize our resources and capitalize on the opportunities that support sustainable growth.

Our deposits were at $10.7 billion in the fourth quarter versus third quarter balance of $10.8 billion and increased from the $10.4 billion as of December 31, 2022. Core non-brokered deposits accounted for 60% of total deposits as of September 31, 2023. Following the seasonal runoff in the MSR deposit portfolio, noninterest-bearing deposits accounted for 14% of total deposits as of December 31, 2023.

Our deposit pipeline remains robust heading into the first quarter of 2024. Our branch network remains key to the success of our deposit strategy, but we also continue to see strength in our digital banking channel. The platform has continued to serve as an invaluable source of new and ongoing depository relationships, allowing us to expand our client base, both demographically and geographically across the country. With limited branches across the markets we serve, this product allows easy access to our clients in the markets as well as to digitally forward prospects across the country. We continue to search for more ways to reach new and existing clients through this channel. Our insured and collateralized deposits remained at 87% of total deposits as of December 31, 2023, as compared to 87% as of September 30, 2023. We maintained a strong liquidity position of approximately $4 billion at December 31, 2023. Our liquidity to uninsured and uncollateralized deposits ratio was 3x.

Borrowings were $1.4 billion as of December 31, 2023 compared to $984 million and $1.2 billion as of September 30, 2023, and December 31, 2022. Most of the increase in the quarter was from the Fed's BTFP, a new program established to support bank's liquidity needs at rates more in line with future expectations for Fed funds as opposed to prevailing rates, which in today's environment is accretive to earnings.

On balance sheet liquidity remained strong at $1.3 billion in cash and cash equivalents and another $1.5 billion in investment securities at the end of the year. We will continue to look for opportunities to capitalize on market opportunities and position the balance sheet for strength going forward. Turning to loans. Credit quality continues to serve as a crucial differentiator for First Foundation. Our nonperforming assets to total assets or 0.15% as of December 31, 2023 as compared to 0.10% for September 30 2023 and 0.12% as of June 30, 2023. Loan balances continued to decrease to $10.2 billion, a reduction of $100 million during the quarter as compared to $10.3 billion for September 30, 2023. As I stated previously, multifamily remains strong as an asset class, and we are not seeing any cracks in the sector. Chris will give a further breakdown of the loan activity during the quarter. Looking at our Wealth Management and Trust business, FFA has seen strong performance and secured new client relationships throughout the quarter. The business benefited further as markets slightly increased towards the end of 2023.

First Foundation Advisors had $5.2 billion AUM as of December 30, 2023. This was up $200 million from the $5 billion in AUM as of September 30, 2023. The increase was largely due to improvement in the markets. Trust assets under advisement increased during the quarter as well by approximately $100 million to $1.3 billion as compared to the $1.2 billion noted in September 30, 2023.

Margins for our fee-based divisions remained high and our new client prospects are as promising for both the advisory and trust services, as I have seen in some time as we head into 2024. I continue to be surprised that the value of both the advisory and trust departments do not seem to be recognized in the value of First Foundation stock. I will close by reiterating my heartfelt appreciation for the incredible efforts and unwavering dedication of our entire team. It has been an undoubtedly challenging year but their hard work and commitment have played an instrumental role in our continued success. We recognize that there are factors beyond our influence, including the Federal Reserve's decisions on interest rates. However, we do feel that the sentiment has changed and pressures will continue to subside. Our commitment to our clients and their financial success has only strengthened over time. We probably believe that by putting our clients' needs at the forefront, we can successfully navigate the challenges of the market and continue to thrive.

Now I will turn the call over to Jamie to cover the financials in greater detail. Jamie?

[Jamie Britton, executive]

Thank you, Scott. I'll start with the balance sheet and our net interest margin. As Scott mentioned, NIM contracted 30 basis points during the quarter from 166 in the third to $1.36 in the fourth. There was a slight improvement in our earning asset yield, which increased from 4.56% in Q3 to 4.62% in Q4 and partially offset impacts elsewhere. While loan yields declined modestly 3 basis points and the held to maturity portfolio yield was unchanged, the yield on excess cash increased 74 basis points during the quarter, and the yield on the available-for-sale portfolio improved 49 basis points. Most of the AFS portfolios increase was due to the full quarter benefit of securities purchased in the third quarter, short-dated U.S. treasuries and [indiscernible] agency mortgage-backed securities.

As I mentioned last quarter, we are open to taking advantage of opportunities to acquire safe to the extent our liquidity objectives are achieved. We will also look for assets that help us achieve our desired long-term interest rate risk profile and mitigate the earnings risk of future short-term rate increases. Moving to the right-hand side of the balance sheet. I'll first note the expected seasonal decline in our noninterest-bearing deposit portfolio. As discussed last quarter, customer service costs came down with balances, but the mix back to interest-bearing liabilities, which we secured to replace the runoff weighed on the fourth quarter's net interest margin.

The $680 million shift in balances from noninterest-bearing to interest-bearing contributed meaningfully to our quarter-over-quarter decline in NIM. The remainder of NIM decrease was a result of increased interest-bearing liability costs, which rose 18 basis points this quarter to 4.19%. As a result of actions taken in the third quarter to pull some of our liability sensitivities balance benefits forward using footable advances with the Federal Home Loan Bank, fourth quarter borrowing costs improved by 9 basis points. Offsetting this net benefit was a quarter-over-quarter increase in interest-bearing deposit costs which rose from 4% in Q3 to 4.21% in Q4. Factors included the full quarter impact of the July rate increase, client migration to higher rate products such as CDs ahead of a potential decline in short-term market rates and continued competition in the market for balances driving rate combinations, particularly in the retail channel. While our retail relationships have led to modest cost increases this quarter, the portfolio's cumulative beta all-in cost this cycle has remained below 50%.

We remain pleased with the portfolio's performance and believe it continues to be an important driver of our long-term success. As we exited the year, more optimistic about the rate environment, we saw stabilizing trends in asset yields. The December average yield for loans was 470 equal to the fourth quarter's average and the yield on the combined securities portfolio both AFS and HTM was $381, only slightly below the quarterly average of $384 million. On the right-hand side of the balance sheet, December's interest-bearing liability rates were slightly higher than quarterly averages as short high-cost deposits were used to meet declines in customer service deposits.

As the customer service deposits portfolio balances rebuild, interest-bearing deposit and liability costs will decline. After a challenging year, we're pleased with the progress we've achieved on strengthening our balance sheet, concentrations in our loan portfolio continue to rightsize, and we continue enhancing our on-hand liquidity, improving our capital. As I've noted before, we will continue to monitor the rate environment for opportunities to pivot towards a more sustainable long-term interest rate risk profile and mitigate the earnings risk of future short-term rate increases, and I look forward to the progress we'll make in 2024. Moving to the income statement and net interest income, though we saw average earning assets remained stable for the quarter.

The 30 basis point decline in net interest margin drove a $9.6 million decrease in net interest income. A portion of the decline in net interest income, as Scott mentioned, $8.3 million was offset by the decline in customer service costs and we would expect this dynamic to play out in reverse as customer service deposit balances begin to return in the first part of 2024. Unlike the higher the quarterly average funding rates noted for December, the opposite was true for customer service costs. December expense was approximately $3 million as compared to the quarter's monthly average of $5.5 million. While interest on loans declined $4.2 million from $124.4 million in Q3 to $120.2 million in Q4, income on securities and other liquid assets increased by a combined $6 million to $26.4 million.

The shift in balances out of noninterest-bearing deposits drove both higher average rates and higher average volumes interest-bearing liabilities, which together increased interest expense by $11.4 million. Again, as customer service deposits begin their seasonal rebuild, higher cost wholesale balances will decline with the net effect being higher customer service expense and lower interest-bearing deposit costs. Wealth and trust-related fees declined slightly for the quarter from $8.8 million in Q3 to $8.6 million this quarter. We saw a decline in quarterly average AUM, but as Scott mentioned, AU increased point-to-point ending the quarter approximately $200 million higher than at September 30.

We are excited to enter 2024 with momentum in these businesses and continue growing in such an exciting time for the industry. As you know, the high-growth Texas and Florida markets represent significant opportunity for us, and we look forward to engaging with our clients and prospects there. Customer service costs aside, other noninterest expense categories totaled $39.5 million for the quarter, in line with the $39.5 million reported a quarter ago. We expect compensation and benefits to increase slightly entering the first part of '24 as a result of annual adjustments and tax resets, but we recognize the need to remain diligent on expense growth. and continue benefiting from the very difficult decisions made in 2023.

As Scott mentioned several times, we remain laser focused on improving operational efficiency and controlling our discretionary costs. This is imperative as we work to reestablish operating leverage and long-term steady growth in net interest income. Our expense to assets ratio, excluding customer service costs compared very favorably to peers, and we do not intend to relinquish that advantage. Continuing down the income statement, the income tax provision was a benefit to net income again this quarter, increasing from a $600,000 benefit in Q3 to a $2.3 million benefit this quarter. The main driver for the additional benefit was a decrease in our state blended tax rate, which is a result of our expanding into Florida and Texas. The nontaxable goodwill impairment made for a noisy 2023, but as profitability normalizes, we expect an effective tax rate around 28%.

Moving finally to capital liquidity. We expect another significant improvement in First Foundation Inc.'s total risk-based capital ratio, which we estimate will be 12.27% or 38 basis points higher than Q3 and 98 basis points higher than its Q4 2022 level. This type of improvement is noteworthy and positions us well for growth once uncertainty around the economic environment subsides. Our tangible common equity to tangible asset ratio declined slightly to 6.1% due to this quarter's larger ending balance sheet, which was primarily due to additional risk liquidity.

As I noted last quarter, however, we believe our capital position provides a relatively strong risk capital balance versus peers when considering first, our held to maturity portfolio is favorable after-tax unrealized loss position of $56.3 million or only 6.2% of tangible equity, which is down from $75.2 million or 8.2% tangible equity last quarter; and second, our strengthening liquidity position and relatively continued low levels of uninsured and uncollateralized deposits, which as a reminder are those that proved to be the most vulnerable during times of significant stress. As noted, our uninsured and uncollateralized deposits stand at only 12.6% of total deposits.

As I mentioned before, we're pleased with the stability we've achieved in our liquidity position, and we're comfortable with the level of on-balance sheet liquidity we're holding today and confident in our total available liquidity of 3x uninsured and uncollateralized deposits is more than sufficient to mitigate risk should market volatility return. I echo Scott's comments on what great work the team did for First Foundation last year, and I share his conviction that we're positioned for success moving forward.

With that, I'll now turn it over to Chris to provide additional detail on our asset quality, loan portfolio and deposit operations. Chris?

[Christopher Naghibi, executive]

Thank you, Jamie. Good morning. I will be talking to you today and elaborating on our lending, our deposits, our strategic direction and about the strength of our assets. Coming out of a tumultuous 2023, we had a sharp focus on remediating our fixed rate lending portfolio's position as interest rates started to rise. As you've heard our goal, since that time has been to continue to reduce that exposure and diversify into index plus margin-based pricing, focused on conservatively underwritten C&I lending where we prioritized relationships. As we do this, you can anticipate an increase in our CECL reserves as a byproduct of the asset class and the historical data, which supports it. We believe this will be a strong step in positioning the company in line with the risk profile of peers.

All of our teams have worked together to manage the strategic direction of our diverse and strong loan portfolio. which as December 31, 2023, remains composed of 51% multifamily loans, down from its height of approximately 54% as of Q3 of 2022, 32% commercial business loans, including owner-occupied commercial real estate and equipment finance compared to approximately 28% as of Q4 of 2022.

9% consumer and single-family residence loans, 6% nonowner-occupied commercial real estate and approximately 2% of land and construction loans. What is not clear in the data when compared quarter-over-quarter, but is worthy of note, is there has been a deceleration in the shrinking of the bank's loan portfolio, which started the year at approximately $10.7 billion and is now down to $10.2 billion as of Q4 of 2023, even after seeing a decline of $300 million in the third quarter. From an operational perspective, we continue to challenge our lending departments and adapt to a heavy focus on asset quality review. If there are cracks coming in the economy, we want to spot them proactively. Obviously, we continue to maintain our steadfast cautious yet proactive approach to growing with strong asset quality.

Loan fundings continue to be comprised of primarily high-quality adjustable rate, C&I, SBA and mortgage lending, totaling $339 million for the fourth quarter. offset by loan paydowns and payoffs of $444 million in the quarter. As previously noted, our goal continues to be to drive down our commercial real estate exposure and have a greater balance between fixed and variable rate lending. As a reminder, over the near term, we are taking a cautious protectionary lending approach with our existing multifamily portfolio. And as a result of the fixed rate portion of the portfolio will comprise a smaller and smaller percentage of the whole. From a historical perspective, we held approximately $5 billion in loans as of fiscal year-end 2020. By fiscal year end 2021, we had grown to over $7 billion in loans before peaking at over $10 billion in loans by fiscal year end of 2022.

Given the relatively short duration of the multifamily asset class, and the cash flow focus of most investors, we anticipate a future benefit of anticipated repricing activity. On a long-term basis, we need to be and will be more diversified overall on all of our underlying assets. As I indicated earlier, this will gradually increase the bank's CECL reserves as a more balanced portfolio will have a naturally increasing reserve. With the full year of 2023 behind us, let's take a moment to reflect on the breakdown of loans that we have originated throughout this past year. Percentages are as follows: commercial business loans 90%, multifamily 2%, and single-family 2% and other miscellaneous loans at 6%. It is always worthwhile to reiterate that the commercial business portfolio is diversified with no sector comprising more than 1/3 of the portfolio and only 12% of the portfolio exposed to commercial real estate.

Despite regional pressures and rhetoric around certain geographical challenges in multifamily housing, we remain confident in the asset class, particularly our unique workforce housing exposure within the broadly defined sector. On previous calls, you have heard our teams speak to the value of workforce housing in the face of record low housing affordability. According to [indiscernible] star, the multifamily market has seen 3 consecutive quarters of solid demand. a dramatic recovery from 2022. Supply is still outpacing demand, resulting in a deceleration of rent growth nationally.

Ironically, the market that appear to be the most unstable are the Midwest and the Northeast markets which are showing resilience with marginal declines in rent growth, while Sunbelt markets are experiencing significant slowing. As a reminder, California is a rent-controlled state and is where approximately 80% of our multifamily loans are located. The bank has limited exposure to the Sunbelt region, the Midwest and the Northeast markets, while national vacancy rates are rising by over 200 basis points from a record low of 4.8% in Q3 of 2021 to 7.3% in Q3 of 2023, the bank's portfolio does not show signs of deterioration or vacancy rates rising over our existing and legacy underwriting standards.

This is likely due to the nature of workforce housing, rent controlled versus predominantly found in the market in the aforementioned regions and newly built properties, which typically only have downside risk. particularly high-end luxury apartment units. Looking at our entire portfolio, its strength is evident in both its continued credit quality metrics and the low NPAs to asset ratio for the fourth quarter of 15 basis points. compared to 10 basis points from the prior quarter and 13 basis points from year-end of 2022.

While NPAs have ticked up slightly, I want to be clear that this stems from 2 loans specifically, neither were multifamily and both were acquired as part of M&A activity and not originated by FFB organically. Further, One is a factoring credit, and that business line was completely shut down as part of the underlying acquisition as it did not fit the credit profile of First Financial Bank. The second loan is a properly margined piece of collateral with no anticipated risk of loss. Our underwriting remains largely unchanged and substantially conservative with weighted average LTVs of 55% for multifamily loans and 54% for single-family loans. Moving on to deposit operations.

The bank continues to focus on deeper relationships with our clients, which we believe that, when combined with our value proposition of service, distinguishes us in the marketplace. While we still are keeping a close eye on liquidity and the funding in the near term, we have begun to refocus our core funding growth efforts. Continued improvement in funding post contagion period will allow us to allocate more attention to driving down any overdependence on broker deposits and home loan bank advances. The breakdown of our current deposits is as follows: money market and savings at 30%; certificates of deposit, 29%, Interest-bearing demand deposits 27%, noninterest-bearing demand deposits, 14%.

Our core deposits are diversified geographically with California accounting for 36% of total deposits, Florida at 36% and Texas at 10%. Outside of this majority, Nevada, Hawaii and other states make up the remaining 18% of the total. We continue to be pleased with the growth of our digital branches online account opening infrastructure and technology. The seamless instant account opening and funding with real-time risk mitigation and fraud detection is already prepared for deployment into our physical branches. It will initially be utilized for consumer accounts so that we free up more time to focus on the high-touch needs of our business clients and the complexities of their banking relationship.

As we noted last quarter, we have begun to change the culture of our physical branches to empower and incentivize employees to aggressively grow our granular core retail deposit franchise. They have risen to the challenge of being the front line and the backbone of our institution because the growth of our retail channel is integral to our resilience and continued success. We continue to look at our current technology stack to see where we can both increase efficiency and remove redundancy. Refreshed policies and procedures continue to improve operations as well. From a timing perspective, we have begun preparing for a changing landscape ahead of a potential rate cut during the 2024 calendar year by strategically deprioritizing marketing based on rate and instead highlighting relationships, community and service.

A lot is changing about the way we do business, and I would like to thank every single contributor at First Foundation for their support and commitment to improving what we do. If we learn nothing else from 2023, it is that we are resilient, and we are grateful for a family of team members who rose to the challenge of a very tumultuous year for the economy.

I will now hand the call back to the operator for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of David Feaster with Raymond James.

[David Feaster, analyst]

Maybe you start on a high level. The Fed's clearly -- at least seemingly likely to pause near term and that there's an increased likelihood of potential cuts, I was just hoping you could help us think about the margin and earnings trajectory, assuming a Fed pause and maybe how that could be accelerated with potential cuts and just thinking about the impact of potential cuts on your financials, I know you talked about bringing a bit of the liability sensitivity forward, but just kind of any thoughts on how quickly you'll be able to reprice funding costs lower and while earning assets continue to reprice higher?

[Scott Kavanaugh, executive]

Well, given the fact that we've stated in no uncertain terms that we're liability sensitive, it would obviously fuel our earnings if the fab were to cut rates.

I think I've stated previously, there's probably I would say, upwards towards $3 billion of liabilities that would reprice immediately if the Fed were to cut rates, which would be a substantial savings and frankly, ignite earnings back to where they once were. If that does not happen and it's a higher for longer scenario, which I don't think it will for various eccentric reasons, then it will be an upward trend towards seeing everything improve. But obviously, it won't be at the same pace as if the Fed were to start cutting rates. Does that make sense?

[David Feaster, analyst]

Yes. No, for sure. Okay. That's helpful. And then maybe digging a bit deeper Onto the loan growth side. Obviously, production has slowed, especially in multifamily, but a lot of the multifamily lenders in the market have pulled back as well. there's clearly still demand for that product. I'm curious maybe how do you think about more broadly the trajectory of loan balances or maybe even the pace of declines where you're seeing good opportunities today? And maybe are you actually starting to see opportunities on the multifamily side that makes or is growth primarily going to still be C&I?

[Scott Kavanaugh, executive]

Well, I think initially, our hope was to continue to do a preponderance of C&I. And when I say that, when you look at last year, C&I grew 90%. It was 90% of our originations. And it probably won't be terribly far from that. But I will tell you we're not seeing where balances can grow tremendously off the C&I. To be honest, again, we've all been about credit. And so we're just not going to participate in a market that we don't believe that the credit is fully where First Foundation should be. So that being said, we believe C&I can continue to grow, but it's going to be much more modest than relative to the current balance that we have on C&I, multifamily, yes, there are opportunities there. I would say the rates right now in that sector.

And you say that there's a lot of people that have pulled back. Historically, First Foundation was big in California. Obviously, JPMorgan, the largest, you had Luther Burbank, who's selling to WaFd. You've got Home Street that now has just entered into an agreement. So yes, a lot of players have maybe slowed down. Chase is up Chase is -- from what we're seeing in the marketplace is still very active. Rates tend to be in the 6s and high 6s. 6 3/4, 6 7/8. I think JPMorgan may be priced a little bit more aggressively than that. And we might dabble a little bit in that arena, but not to a large enough extent to stop ourselves from the path of getting ourselves back to a more neutral stance on a longer-term basis.

[David Feaster, analyst]

Okay. That's extremely helpful. Would you expect maybe loan balances to stabilize or probably -- or maybe continue to see declines in the near term?

[Scott Kavanaugh, executive]

No, I think they're going to stabilize. And I think it's really imperative since we're talking about loans. We put on too many fixed rate loans in 2022, and everybody knows that. But I mean, most of that was put on in the first and second -- excuse me, second and third quarter of 2022. That's just around the corner from being a full 2 years of seasoning just on that product. And Jamie was talking to me the other day, and we were talking about, I think we've got $1.5 billion or so of multifamily repricing Guys, that's 1.5 years away. It's really not that far away from a lot of the stuff repricing. So when we tell you guys, it's short duration, it's really more short duration than I think the Street seems to be thinking that it is. So I just think that's -- I don't know. It's something I think is important to note.

[Christopher Naghibi, executive]

Yes. If I may add more color. There's also other impetus and motivation for the traditionally cash flow-focused investor and multifamily to refinance a loan that the market doesn't always consider. Keep in mind that they have their fixed portion, they also have their prepay periods. But a lot of times, when they convert from interest only to principal and interest, they are very highly motivated to refinance that debt back into an IO product. So you'll see a lot more activity than I think the market expects because of their cash flow focus.

[David Feaster, analyst]

That's a really good point. And maybe just last 1 for me. You alluded to it a bit, Chris, but touching on the branch deposit growth initiatives that you guys have been working on. It sounds like you've had some success I'm just curious where we stand there. Could you maybe quantify how that's going so far and think about the opportunities from that as we look forward? And just other deposit -- core deposit growth initiatives.

[Christopher Naghibi, executive]

Yes. So one of the things I think we all can attest to is that during the contagion period, we spent some time focusing on what the behaviors were of our customers and our clients and coming out of it, we took it as an educational experience. So we knew that our clients really believed in the relationship of the institution and wanted to grow with us. So some of the things we're doing. I don't know how detailed you want the answer here. We're certainly taking treasury management services and diving into the community and smaller business as opposed to larger community businesses. We're looking at more of a culture, and I wouldn't say driven on sales, but certainly more of an outbound culture. Keep in mind, everybody in the banking sector was defensive in the first quarter and second quarter of the year, protecting their core deposits. But now we're on the offensive.

We're going out and doing those things. And a lot of the infrastructure you hear me talking about in the narrative is built around giving people the ability to have more time back to go out and grow the business. We're also really kind of tapering down -- we can't be the bank for everyone. So we're trying to focus on the things that we are very, very experienced at and skilled at. Relationship-based businesses, growing small community businesses and being within kind of that space, obviously, partnering with our First Foundation Advisors team, which has access to a lot of clients who have businesses who have growth who have scale and that partnership combined with us being out more will just grow organically.

[Operator]

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

[Gary Tenner, analyst]

A couple of things to ask about. I missed some of the detail, I think, on the BTFP borrowing. I mean, obviously, you haven't utilized that at all through the third quarter. So maybe talk about the kind of decision there and what that rate is for the fixture you picked up?

[Jamie Britton, executive]

Thanks for the question, Gary. Appreciate it. We're currently at around [ 481 ], I believe, was the rate at which we locked and that was relatively late in the fourth quarter. So we would expect that to last for another year. The thinking on that as we saw customer service deposits leave and accelerate through the fourth quarter, we're looking for options to basically replace that funding with short cost-effective funds. And we have been I guess, encouraged to test our lines, encouraged to use the Fed. And so when putting it all together, BTFP made sense for that. it is an option. We do obviously have the ability to keep that and use it to maintain funding as other, say, broker deposits most of which are maturing over the next year become due. But I guess that was the general thinking. Does that answer it?

[Gary Tenner, analyst]

Yes. No, that's helpful. I appreciate it. In terms of the customer service deposits or the MSR deposits, I mean, was the decline this quarter it seemed larger magnitude, certainly than if you look at prior years to kind of what that deposit line looks like. So was it a larger magnitude decline? Was there something unusual within that.

[Scott Kavanaugh, executive]

Yes. It was a little bit more than we had anticipated. I believe 1 client in particular was probably 1 of our larger depositors. And they did take some of their deposits to redeploy equally amongst other banks. Since then, our balances have started to grow back with the seasonality, plus we've also seen multiple clients bring additional balances back so far in the first part of this quarter. So I think you'll see a rebound that's maybe not fully equal to the runoff, but probably close to it.

[Gary Tenner, analyst]

Okay. And I think as part of that kind of goes into the question about the expense line as well. I think in addition to just the dollar amount being lower, I think you had mentioned that you're able to reduce the rate paid. So just wondering how you're able to kind of push that through given the no change currently in the rate environment?

[Jamie Britton, executive]

Well, as the MSR portfolio, that's the higher cost of the overall customer deposit portfolio. And so as those leave, the blended rate impact does come down. We haven't made a ton of modifications on a client-by-client basis. So the rates will -- the overall rate will come back as the higher cost MSR deposits return.

[Scott Kavanaugh, executive]

Yes. To be clear, Gary, these relationships, and there's many banks in this country that have these types of deposit balances it's all Fed decision -- Fed driven. So to the extent that the Fed increases rates or stays flat or goes down, it's -- those deposits will reflect based on what the Fed does.

[Gary Tenner, analyst]

Okay. No, I appreciate that. So I may have misunderstood your earlier comments. It was really more about the mix of deposits that.

[Scott Kavanaugh, executive]

Yes, as we had to shift from these ECR type balances into interest-bearing deposits. I think what Jamie was trying to convey is are -- actually, our -- the cost itself was slightly lower on a blended basis.

[Jamie Britton, executive]

Right. And exiting the year, just -- I know they're not identical to interest-bearing deposits. But exiting the year because those balances were lower -- or heading lower through the quarter, the monthly run rate on expenses for December was $3 million. And so I think as you're thinking about costs going into the first part of '24, while those will come back up as the customer service deposits return, the cost is going to start at the run rate from December as opposed to sort of an average rate for the fourth quarter as a whole.

[Gary Tenner, analyst]

Right. And absent of that second quarter, probably a little more kind of normalized level?

[Jamie Britton, executive]

Second quarter, for sure. Absolutely.

[Gary Tenner, analyst]

Okay. I appreciate that. And then if I guess 1 more, just in terms of the expense line, excluding the customer service costs, I know there's some time, obviously, a lot of heavy looking this year or this past year with regard to controlling expenses and reducing costs. Where do you kind of anticipate that line, again, ex the customer service costs in 2024 versus '23? Or at least maybe versus the fourth quarter run rate? Is it a better way to think about it?

[Jamie Britton, executive]

Yes. As I mentioned, you are going to see a little bit of reset in the compensation and benefits line going here into the first as we hit the annual salary adjustments for our teammates and just the normal tax adjustment period. The other expense lines, I think, are relatively stable from where they were on the fourth quarter run rate. Let's see. Yes. I think as you get into the year, 1 thing to keep in mind, just in conjunction with some of the more difficult decisions that we made in 2023. You may recall 1 of the line items was reduced incentive and compensation or benefit expense for our teammates as a whole.

And so as profitability normalizes, I would expect that to return to more historic levels. And so you may see a slight tick up in the rate outside of just normal growth with business activity in the balance sheet as that rightsizes back to more historical levels. But it's important to note that we are, as we said, remain laser-focused on that, and that will rise in conjunction with revenue and profitability overall going forward is not something that we're just baking into our plan, we'll take a measured approach to bringing that expense back in.

[Gary Tenner, analyst]

Okay. So in other words, you're not accruing for that out of the jump in the first quarter, you're going to wait to see the revenue and profitability improve.

[Jamie Britton, executive]

Right.

[Scott Kavanaugh, executive]

Correct. Yes.

[Operator]

That is all the time we have for the question-and-answer session. This will conclude today's conference call. We thank you for joining. You may now disconnect your lines.