FFWM (2020 - Q1)

Greetings, and welcome to the First Foundation's First Quarter 2020 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 of First Foundation Bank; 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. Scott Ka

Hello, and thank you for joining us. We would like to welcome all of you to our first quarter 2020 earnings conference call. We will be providing some prepared comments regarding our activities, and then we will respond to questions. Without question, much has changed since our call in January. The COVID-19 pandemic has altered the course of business for all of us. During this extraordinary time, we have been focused on the health and safety of our employees and our clients, providing excellent client service has been a core value of ours, and we remain committed to offering support to those in need. We participated in the Small Business Administration's Paycheck Protection Program and have been working with many of our clients who have been adversely impacted during this time. Dave will speak in more detail about the remarkable work our team did related to this program. You have heard me say numerous times that our business model is designed to withstand difficult times. First Foundation was founded during a crisis, and as we stand today with our strong capital position and excellent asset quality, we believe we are well positioned to get through this. Before I speak about the details of the strong financial results we reported for the quarter, let me share a bit on where things stand with our continuity planning and preparedness. I want to thank our leadership team and our employees who have done a remarkable job adjusting to the various city, county and state ordinances across our geographic footprint. Our work on this started well before public health orders were issued when we began the precautionary steps to ensure the continuity of our business. This included gathering supplies for the health and safety of our employees and then was quickly and decisively followed by securing the necessary technology for our employees to work remotely, much of which we have already had in place but some of which we had to procure. Along those lines, we transitioned over 65% of our employees to a work from home environment. Given the strength of our technology and the responsiveness of our teams, we were able to do this in less than a week. And it's worth mentioning, we were also able to safely keep all of our branches open. We initiated the physical distancing policies and followed the local ordinances for each location. We also increased the cleanings of public areas and workstations across our branches and corporate offices. We split up our teams to reduce the risk of infection and ensure continuity of services for any single group. During this time, we initiated a ban on all travel, canceled in-person events and began conducting meetings remotely using technologies we already had in place. Given the business did not stop, we relied heavily on our digital technologies. This included our online and mobile banking, remote trading and portfolio management as well as increased digital communications with our clients. We developed resources for clients who have been impacted, including guides for the CARES Act and the information about the various SBA programs, including PPP. Our Wealth Management team began hosting biweekly client webinars about the state of the economy and the markets, and our Trust team move to virtual meetings and digital documentation. The investments we have made in our digital offering have not only enabled us to provide resources to existing clients but allowed us to accommodate new client activity. For example, our online savings account saw 3x the amount of new applications in the month of March. Our website traffic and views to our online content increased by over 200%, and the number of mobile banking users engaging with our app increased by 15%. These resources, coupled with the human touch of our operations team, provide for greater client service, which is so important during times like this. All in all, I'm very pleased with how our digital platforms have helped us maintain services for our clients. As highlighted in the press release, we experienced another strong quarter across key financial metrics at the firm. Obviously, this takes somewhat of a backseat to the other items I mentioned. But I do want to call out a few key metrics. Our earnings for the first quarter were $13 million or $0.29 a share. The earnings represent a 17% increase over the prior year first quarter. Total revenues were $56 million, a 12% increase. And our tangible book value increased and ended the quarter at $11.80. We also declared and paid our first quarter cash dividend at $0.07 per share, and we anticipate the continuation of the dividend in future quarters. And finally, we had a modest buyback of our stock in the amount of $2.8 million during the quarter. Before I hand the call over, let me say, the strength of our bank, namely our loan portfolio and our capital levels, along with our business in general, is directly attributable to our employees and our clients. I couldn't be more proud of our management team, many of whom have been together for a long time and have persevered through several different business cycles. Let me also note, we are evaluating supporting the nonprofit community through charitable sponsorship contributions. As you're aware, we're in the midst of a CFO search. We have had an opportunity to connect with many qualified candidates. We believe we're in the final steps of this process, and we hope to make an announcement soon. I'm always very grateful for our employees and our clients, that is particularly the case today as we work through these unprecedented times. Now let me turn the call over to John Michel.

Thank you, Scott. The long-term effects of the pandemic on the general economy are uncertain at this time. We continue to closely evaluate the impact of any potential projected loan losses utilizing our CECL stress modeling. We will continue to monitor this as additional information becomes available, and we are prepared to add any additional reserves if necessary. David will provide additional information regarding our loan activities and the strength of our loan portfolio. But let me share a few updates related to our financials. The change in interest rate market, especially the existence of a defined yield curve should result in increased net margin -- net interest margin over time. Being liability sensitive, our financial results will continue to benefit from lower funding costs. We implemented the current expected credit loss standard, otherwise known as CECL, in the first quarter of 2020. While we did not recognize any change in allowance due to the adoption of CECL on January 1, 2020, our provisioning in the current quarter was approximately $2 million higher as a result of our projection of future activity as required under CECL. During the first quarter, our earnings were $13 million or $0.29 per share. Revenues increased to $56 million for the quarter, an increase of 12% when compared to the first quarter of 2019. Our net interest margin for the quarter was 2.92%, an increase of 4 basis points over both the first quarter and fourth quarter of 2019. Our efficiency ratio for the quarter was 59.2%, and our return on tangible equity was 10.1%. I would like to reiterate what Scott said in thanking all our employees for all of the extraordinary contributions they have made in supporting our clients and the company during these challenging times. They have gone above and beyond in making sure we can support the communities we serve as effectively as possible. I will now turn the call over to Dave DePillo, President of First Foundation.

Thank you, John. First, I wanted to reiterate that the safety and well-being of our clients and team members is our top priority. We believe the steps we have taken have allowed our team members to perform their duties, so we can provide our essential services to our clients in a safe manner. We have taken a number of steps to assist our clients adversely impacted by COVID-19. We have participated in the Payment Protection Program, also known as PPP, and today have processed over 200 loans with a balance in excess of $110 million. We have also cleared our backlog of additional applications and anticipate the funding of over 200 additional loans with an aggregate balance in excess of $50 million upon the additional funding of the PPP program by the government. I'm very appreciative to our team members who work day and night to accomplish this task, which is the equivalent of processing a year's worth of our production in 2 weeks. We have also handled hundreds of requests for forbearance and have processed approximately 200 in our small balance equipment finance group and 34 in our commercial lending group. While available, we have not seen any significant need for forbearance in our multifamily portfolio at this time. As with our multifamily portfolio, we have seen requests related to our single-family portfolio and do not expect significant forbearance activity with only a few granted today. Our team is evaluating all requests loan by loan. In this challenging time, I wanted to reiterate some of the items about our credit quality of our loan portfolio. Approximately 85% of our portfolio is secured by real estate. Across all segments, the loan-to-value is low, averaging below 60%. Our debt service coverage ratios in our multifamily and nonowner-occupied commercial real estate are strong. During the first quarter, we were able to resolve outstanding nonaccrual loans, such as our NPA ratio to total assets decreased 14 basis points. We have low exposure to some of the industries hit hard by the pandemic, specifically hospitality, restaurants and construction. In addition, we have no exposure to oil, airlines or the cruise industry. We have implemented additional monitoring activities for our portfolio and our commercial lending team members are focused on monitoring and assisting our existing clients. We have also strengthened our underwriting standards to address any potential issues raised by the current economic environment. Let me now provide some additional comments around our activities during the quarter. During the first quarter, we originated $663 million in loans. The composition of loan originations were as follows: multifamily, 66%; commercial, including owner-occupied commercial real estate, 29%; single-family, 4%; land and construction, 1%. For the first quarter, the weighted average interest rate for our loan originations were 4.01%, multifamily was 3.71%, commercial 4.61%. While we have strengthened our underwriting criteria, pricing has also increased on future loan production across all asset classes, with multifamily pricing in the market as high as 5%. We expect current pricing for our 5-year fixed multifamily product around 4.35% as credit spreads and market dislocations start to normalize. As of March 31, 2020, our loan portfolio, excluding loans held for sale, consists of 49% multifamily loans; 24% commercial loans, including owner-occupied C&I; 18% consumer loans, including single-family; 7% nonowner-occupied commercial real estate; and 2% land and construction. During the quarter, deposits grew by $140 million. We saw growth in both the retail deposits and specialty deposits, while we decreased our level of wholesale deposits. I'm very thankful to our team members who have done an amazing job during these challenging times. Now I'd like to turn over the call to John Hakopian, President of First Foundation Advisors.

Thank you, David, and good morning. Heading into the first quarter, we expected market volatility. But of course, no one expected the pandemic to occur. In early February, we started seeing signs of what the economic impact of a widespread pandemic might look like, and we began making some modest adjustments to our portfolios. A lot of the first shocks to the market that began in those early days of February were driven by what if scenarios as the health agencies, had not yet declared this a worldwide pandemic. But our investment team was listening closely and making adjustments. By mid-March, broader markets were hitting new lows and our portfolio strategists were looking for potential buying opportunities. And while it is always difficult to predict the bottom of any cycle, we knew that some investments were relatively cheap. Some of the broader markets experienced lows of more than 20% off their highs, but our conservative balance portfolios were down less. AUM ended the quarter at $3.9 billion. And while we are never happy about declining AUM, we can say that our investment philosophy to protect against the downside has worked thus far. Things could have been a lot worse. Our entire Wealth Management team has been very resilient through all of this. As Scott mentioned, many of us have shifted to a work from home environment, and we are continuing to make investments and serve our clients without disruption from our new settings. We have replaced in-person meetings with virtual meetings, and we continue to help our clients through this extraordinary time. There have been a lot of changes to retirement planning through the CARES Act, and we have been working with our clients to help them assess how it impacts them. It is worth noting that many of us on the team have been through several economic downturns. And while each one is unique, the common thread through all of them is to provide communication and transparency to our Wealth Management clients. We have done this through an increase in virtual meetings, phone calls, blog posts and webinars. Having built relationships like the ones we have with our investment clients, many of whom have been with us for 20-plus years, helps in times like these. And as the economy returns, we expect to be in a good position to attract new clients. I am so impressed with everyone on our team by their efforts during the past few weeks, and I'm very grateful for all of our clients. We will get through this. At this time, we are ready to take questions, and I'll hand it back to the operator.

[Operator Instructions] Your first question comes from the line of Matthew Clark of Piper Sandler.

Maybe just starting with the loans in deferral. Can you just quantify the dollar amounts in the equipment finance and the commercial lending group, those 234 relationships? Just how much that is on a dollar...

Yes. Because the 200 in the equipment finance are all very small balance, so the amount of the deferral is probably less than...

$3 million.

Yes, $3 million at this point. On the commercial side, it's, I believe, a little over $4 million in total principal balance on those. The majority of these are very small balance, mostly done for -- on the C&I side, mostly for CRA or acquired loans. So these were ones that were directly impacted. And prior to PPP, we felt it prudent to provide, in many cases, a 90-day deferral.

Hey, Dave, that number was probably $30 million. I'm sorry I dropped the 0 and...

Oh, $30 million deferral, yes.

$30 million, actually.

Yes, the deferral. Yes, I'm sorry.

I'm sorry, that was my fault.

And yes, so it's -- and then on the commercial, these were very small loans. So it is -- on those, they're only 90-day deferrals. And our expectation is, with PPP, the majority of that will be collected during the term of the loan.

Okay. And then just similar question around the exposures, the most at risk, the hospitality, restaurants, C&D, just the amount in terms of dollars or percentage of the total portfolio.

Total portfolio for hotels is $40 million secured by real estate and $10 million on other secured, both by real estate and other. So less than $50 million in the hotel. We have received no requests for any sort of forbearance and have reached out to those customers and have no issues. That's related to performance at this point in time. And we have about $25 million as it relates to restaurants. Again, all small balance, majority of which are already in the PPP program either in process of funding or on the list to go through. And I would say if you looked at Moody's high-risk category, we've bucketed, I believe we have about $140 million of what in total the categories in which they consider high risk. But relatively small in relation to our total portfolio.

Okay. Great. And then just on the PPP, $110 million that was done, another $50 million in the pipeline. Do you have the kind of average loan size just so we can assume the average origination fee on that book of business? And then your thoughts in terms of how long these might sit on the balance sheet? I assume it's going to be fairly short and you have a limited appetite for 1% coupon. But just...

The way we're modeling it is, as John is a stickler for GAAP as he always has been, we are assuming 2-year -- the actual 2-year statutory life, where the average fee is around 3%. We have some deferred costs against that. And we're assuming that about 85% will pay off after the forgiveness period...

In the third quarter.

In the third quarter, yes.

Okay. And then just maybe on reserves and the addition this quarter, roughly $2 million tied to CECL. I guess what are your thoughts about potential losses? I mean do you think -- I know your loss history has been very benign. But do you think you might have to build some -- I guess does your CECL adjustment this quarter consider the economic deterioration in April? I assume it does, but your thoughts around reserve levels and going forward.

Yes. Sure. Let's walk through it. So day 1 CECL, we had to put approximately 45% in the Fed downside stress scenario in that bucket because the CECL baseline and CECL adverse scenarios were not reflective of the current environment. And the part of the problem that we have is because the richness of the debt service coverage we have in our portfolios, any of those had little impact to our portfolio. So in order to, I would say, justify and sure-up our existing reserves, we had to look to a, I would say, more realistic view of a downside scenario. Day 1 adoption, we had 50% and the Fed stress test still...

That's not day 1 adoption, just so you know. That's...

Well, day 1. Yes.

Day 1 means that we would have to book it differently. So that's why.

0, yes. But our allocation at that point was basically -- yes, that's true, 45 to 65. As of the March date, we had 50% in Fed stress and then 50% in the more adverse COVID scenarios that existed at that time. There was an update to the baseline COVID subsequent to that and our baseline went up. However, it still was only 83% of the Fed downside for us. So as of March, we would have been able to cover over 100% of that baseline, which is the majority of what people are using for their COVID update. So as you've seen, there was some minor day 1 and then the material impact happened on March based on baseline adjustments for the majority of them. And the majority of institutions could maybe cover 40% to 45% of Fed downside from all the disclosures we've seen. Our base if we went off that could cover up to 83% of the old Fed downside. So what we're seeing is, when you have 0 loss reserves, you have to justify some stress in order to amplify and maintain what you have on the book. So we in a sense...

Have been very conservative.

Yes, had a buffer going into this where most were kind of just looking at baseline and some historical loss rates. Would we expect more? Probably in the fact that the baseline scenario for everyone, the steepness of that from the updates that they've gotten in the -- from the first quarter actual analytics. Not necessarily the economic scenarios, but the actual catch-ups on the analytics showed a relatively steep increase from baseline. However, we still have room in our baseline. So what we think is maybe baseline will go up some more. We'll probably have some de minimis charge-offs, obviously, in some of these little C&I relationships. And we have growth. So our expectations are we will have some additional reserving in the next quarter to, I would say, around where we're at, what we've added to date, that would be a reasonable expectation. But we kind of view this more around kind of the general, maybe it's too soon, but pandemic modeling in general, where you've had certain economies in certain areas impacted more significantly and our portfolios are being impacted more benignly. So ours would be a slow gradual potential increase, but nothing we feel is materially significant to the financial results. But if I was trying to model this out, I would probably add reserves in the next quarter, probably equivalent to what we have. We have no basis currently in the modeling to show that. But I think for conservative purposes, I would probably model around that to date.

Okay. That's great color. And then last one for me for now. Just do you happen to have the spot rate on interest-bearing deposit costs at the end of March?

In terms of...

What was the actual deposit rate at?

My -- so we -- across our groups, we're probably about 1% on about -- excuse me, about 75 basis points on money market and savings on a weighted average basis. Our CDs are still higher and our wholesale funding costs, we got some fixed in going through that. But I don't have...

If you're looking for the...

Most of the cost savings -- 31st.

Most of the cost savings won't even take effect until the second quarter and then...

Third and fourth.

The third and fourth will be the most impacted for this year.

Yes. So our -- I guess our general premise is, assuming which is a big assumption for everyone, that we work our way through this pandemic and everyone gets back to a level of normalcy as reflected in most of the analytical models, which is kind of artificially high unemployment, have a W recovery on most of these models with some protracted unemployment, our cost saves going into the end of this year and next year will provide pretty substantial increases to our margins and returns.

And just, Matthew, one thing that we be aware of our customer service cost, that was an immediate impact and that was -- definitely came down substantially at the end of the first quarter and will be reflected in reduced costs on a go-forward basis.

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

A couple of follow-up questions. First, in terms of the comment, I think David may have mentioned it, regarding the request for deferrals on multifamily. It sounds like you had received some but you did not approve any. Did I hear that correctly?

Yes. You would be amazed what people ask for when the news media says go talk to your lender, they have free money. We've had requests where people have substantial still positive cash flow, but they had a few vacancies so they want a deferral. We didn't feel those were deemed justified. So I think the -- I think like every other institution, we've had, had some requests. But unlike large institutions that may grant those because they don't have a systematic way to analyze it, we do request full packages, receive financial information and review. I would say, anecdotally, in April, the vacancies that we have talked to our borrowers around have been relatively benign in large, maybe 1 or 2 here where people aren't paying rent. So we haven't seen a significant impact in the majority of our markets. Having said, we have had a few cases where someone has an effective vacancy of 30%. However, their debt service coverage ratio is still 1.15 to 1.20 on an actual basis. We're not going to provide relief with someone who's positively cash flowing. So it's kind of an interesting situation, but we haven't had any to date where we felt comfortable. And in some cases where they could have the muted cash flow on one property, they're significantly positively cash-flowing on others. And we feel that if they have the benefit of ownership, they get 30% compounded returns and we get 4%. We don't want to assume the ownership responsibility by deferring payments when we're only earning 4% and they're still maybe earning 15% to 20%. So this -- so our expectation are there will be some disruption in the interim cash flows. But to put it in perspective on new appraisals coming in on new originations, where there is an imputed loss to lease now by appraisers for COVID-19, it's had about maybe 1% to 1.5% value impact, which we feel is immaterial. So again, given the strength of our debt service coverage of the portfolios and our cash flow of our borrowers, we just aren't compelled to just do blanket 90-day deferrals.

Great. Appreciate the color. Regarding the buyback, I think 2.8 million shares this quarter, if I heard that correctly?

No, $2.8 million. It was like [ 280,000 ] shares.

Dollars. That makes a lot more sense.

Yes. We were lucky we only got 280,000 shares, not 2.8 million.

Yes. Okay. That makes a lot more sense. And then in terms of the timing of the CD maturities, can you kind of talk through those and maybe what the maturity rates are and your -- as of today, what kind of the projected rate benefit was...

We generally keep most of our CDs under 1 year. So we -- our practice on brokered CDs is to ladder out those CDs, they can be anywhere from 3 months, 6 months, 1 year. And as they mature, we evaluate whether it's -- whether we should or shouldn't put broker deposits back on. Here recently, there's been a decline in broker deposits. Broker deposits remained high after the last fed rate cut. They're starting to trend back down, and we might employ using some brokered CDs. But overall, I mean I would say we don't have a real reliance on brokered CDs, but we do use them periodically.

And then nonbrokered CDs, we expect them to roll off. Again, the terms we have on those don't exceed 1 year. So over the next 6 months, you're going to see most of them reprice out to current market rates.

Okay. Excellent. In terms of the PPP, I don't know if this was asked previously, are you going to use the fed liquidity facility to fund those? Or are you going to fund them yourself? How are you thinking about that?

We're evaluating. We have been approved for that facility. And I believe the Home Loan Bank is rolling out on Monday a competing facility, which we're evaluating as well. So we'll probably, between the 2, utilize them a little bit. But it's still a little early to determine how much we'll use of that.

The rates on those facilities so far have been pretty reasonable.

Okay. Great. And then one last question for me. In terms of the customer service costs, does the first quarter represent the full impact of the lower rates? Or is that kind of pro rata for the timing of the restructuring...

No, it's probably 1/3 of that period was -- reflects the fall, the first 2 months did not. So it kind of had the impact in March. So from that perspective -- again, that's cyclical. So as our balances do increase during the year, you're just going to see more costs because of the balances. But the rate are probably 30% of what they were, 35% of what they were at the peak a year ago.

Yes. And then I would just point out, as the -- just like as the brokered CDs will mature and we'll roll those to lower rates, if you'll recall, we had $0.5 billion of Home Loan Bank 1 year advance, I believe it was put on at 1 77 in September.

And matures in September.

And matures in September, and that will roll...

In the fourth quarter.

In the fourth quarter to, obviously, a much lower rate.

Your next question comes from the line of David Feaster of Raymond James.

Originations were really strong in the first quarter. Just curious how your pipelines trended early in the second quarter? And I guess just how are conversations with clients going, what's the pulse? And maybe just net expectations for loan growth in the near term?

Sure. So as expected with rates precipitously dropping in the first quarter, there was a little bit of rush by borrowers to the market, mostly around rate and term and some cashout refinances. So first quarter, we ran about 75% refi, 25% purchase. So definitely a little more dominating there. Pipeline going into the second quarter was extremely strong as well and still is. However, we had the market dislocation when everyone figured out, well, this may be worse than we thought. And we saw other lenders who were being inundated at rates for forbearance. And I mean a lot of other asset classes pull out of the market more or less and kind of flipped to asset management. So some of the major players in our market kind of like flushed out their pipelines and actually returned deposits and other things. So created a little bit of disruption. So what we did with -- like other lenders, is we went back through our pipeline and we underwrote it. Some of those were rushed to get in for more favorable financing that really didn't have, I would say, the greatest information on. We got rid of some of those. And then started to require some additional underwriting enhancements. In anticipation, there may be some near-term collection loss, i.e., adding a requirement for 1 year of payments, whether amortizing or interest selling, to be held in an account by lender, and higher vacancies and so on and so forth. It flushed out probably about $75 million of our pipeline between those items, but still is maintaining fairly significant for the second quarter. May and June should be strong. July starts -- or excuse me, April and May are strong. June starts to fall off a little bit as people are trying to get their bearings back in the market. And what we saw was, because of uncertainty, a lot of the purchase transactions either are on hold or people are delaying. Refinances have slowed down as people start to get used to, I would say, the new norm for rates. So we expect probably lower originations in June, modestly lower originations in July and August, and then starting to get back to normalcy in the latter part of the third quarter and then what we would consider more normal originations in the fourth quarter. What does that mean? We'll probably do what we expected, probably about $1.2 billion for the year.

Just multifamily.

Just multifamily. It was running at a much higher rate, as you could see, going -- we were probably on a rate to do probably $1.6 billion.

Not that we do a lot of construction or other things, but we did put on hold or strongly...

We have not added a new construction in quite some time. But I would say the good news for us is the production that we will be adding, although we were, I would say, frothing at the prospect of a 4.75% to 5% coupon, we're realistically -- with credit spreads and other things settling down, which is good for the market, we're looking at doing probably closer to 4.35% is kind of our benchmark 5-year. So even with lower volumes with higher rates and lower prepays -- our prepays were running, I would say, at the top of the chart because of the rush to market. That has slowed down dramatically in April significantly. From our estimates at the beginning of April to the end of April, it was 1/4 of what we originally had borrowers proposing to pay off along all asset classes. So we've ran our CPRs down. So the bottom line is our balance sheet growth will probably still be there even with some reduced originations in the latter part of the second and third quarter, but primarily because CPR is going to slow down as well. And as you noticed, we trued up one of our IO strips because it was running at a rate that was significantly high. And a couple of quarters from now, I'm sure we're going to see on all the agencies back to the securitization we did, the prepaid is going to slow down dramatically. And even in April, they look de minimis compared to previous periods. I don't know if that was helpful.

Yes. And the only thing -- other thing I'd say, David, is make sure you understand that you're going to have a blip here in the June, the second quarter, because of the PPP loans, and then probably most of them rolling off. So it's going to be a kind of an unusual cycle.

Absolutely. So kind of taking all that together, so it sounds like loan yield is probably flat to maybe up a little bit. Deposit costs continuing to decline. The NIM should actually probably continue to expand from here, just thinking about the timing of some of this stuff, is that fair? And do you think we can ultimately get back north of 3% in the -- by the end of the year?

Yes. We agree with what you're saying. And yes, we believe we can get back above 3%.

And if you look at where we'll be at the end of the year going into next year, we're going to get additional benefit. Like Scott said, we have a large FHLB advance I think that thing's at 1 75.

1 77, yes.

Yes. What's overnight today, 30?

30. 30 basis points.

$2.5 billion. That's a pretty big chunk of savings right there.

Yes. So basically, you're going to see second, third and fourth quarter continued improvement quarter-by-quarter as our funding cost repriced.

Okay. That's helpful. Last one for me. Just any updates on the securitization in September? Any thoughts on increasing the size? Or how do you think about gain on sale, just given everything that's happening in the market?

Sure. Well, as usual, we typically hedge our transactions. So we have hedged a portion of our securitization going in, and there's some disclosure on that. We were, I would say, somewhat nervous about credit spreads with the market dislocation. There has been some market pricing that has indicated those credit spreads have come back dramatically and would put us in line with our original estimate of credit spreads. So our anticipation is still hit the market. We're starting that process now. And expectations, unless the world falls apart,

September.

We will hit our normal time period. As far as gain on sale, we've always put in a proxy of about 1%. And as far as upsizing, there's probably not a need to do it at this point, given the fact that we still want to show some balance sheet growth. So we're going to just kind of target that $0.5 billion number as our proxy, which is kind of where our available-for-sale pool is today. But we do have the option. Our outside pool is very large, we could do significantly larger or do slightly smaller. The economies of scale kind of diminish below, I would say, 4 50-ish is kind of where the inherent costs get a little prohibitive. But I would say our estimate of gain right now based on the market is relatively conservative. There could be some upside, but you never know what credit spreads in the market given the environment we're in.

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

I just want to circle up on the margin, flesh out perhaps a little bit further in terms of timing, getting over that 3% margin here. Just given that -- I hear you have a meaningful decline here this quarter and even more in the next quarter, but it feels like that spread is widening up pretty meaningfully. Combined with noninterest bearing, it could be over 3% margin in the second quarter. Is that fair or maybe a little bit too high?

I think in the second quarter, one of the things you have to contemplate to is you're putting on all these PPP loans with the interest rates substantially below what the yield on the portfolio is. So the second quarter will be a little muted because of that. The benefit on the funding side, you'll start seeing in terms of our repricing of the deposits. Again, one of the big differences is not something that doesn't run through the NIM, which is our customer service cost. We expect to see benefits there, so bottom line. So the second quarter is -- we expect to see improvement, but it may be a little muted because of the PPP program.

And also I think we -- some of our multifamily pipeline that was built during the first quarter when rates were...

A little bit lower. Yes, [ fund that through ].

Were under pressure, those will fund that. So we're not going to really see the benefit of large multifamily rates probably until the after the -- yes.

Third and fourth quarter, yes. So from that perspective -- but you'll continue to see -- from our perspective, when we look at it, we see a nice continuing improvement for the third and fourth quarter, as we mentioned, because of other repricings that we have.

Okay. That's fair and helpful. And then in terms of the, I guess, co-housekeeping items, do you guys have any more interest-only strips remaining on balance sheet? Just kind of curious about that.

We do. We do have interest-only strips that we own, some from the first 2 deals and a couple from the last deal we did. The evaluation we did in terms of going through this, we obviously looked at every single strip we had to make sure. This was -- the one that we did a write-down on was from 2016. And just the level of prepayments over the last 6 months, as you can imagine, for the fourth quarter and the first quarter were so substantial that you just weren't going to have the revenues coming in on those loans going forward. But the other strips, because they're relatively new and also because, especially strips we just did, are still protected by prepayment penalties. The cash flows we have from them are very strong and they're actually exceeding what our projections were.

That's helpful. And what was the balance on the total interest-only strips?

It's probably about $25 million right now.

So that original IO strip was a little over $12 million. It had amortized to about $5 million. And then because of the prepays -- unfortunately, when you model them, you have to model it based on historical data because we used outside valuation services. So we know prepays are going to slow down dramatically, but they have to go off historical. So some of that, if we reevaluate it 6 months from now, some of that would probably go away with lower prepays. So it's just kind of a timing issue and any acceleration of prepays that impacted that one specifically.

Great. That's helpful. And then just on the securitization in the late third quarter here, how should we think about how much you guys are thinking of retaining on balance sheet?

Probably not a lot. Unlike last year when rates were pretty good and spreads were wide, we decided to shift out of some of our 15-year paper and take advantage of the wider spreads, lower durations. This year around, we're probably more apt. And here's the other thing, the liquidity ratio for us is running about 15% right now. And we try to maintain 12%. So I would say we're probably over where we really need to be from a liquidity standpoint. So I think kind of given those factors, we're kind of -- we're evaluating it, but we probably won't add much, if any.

Yes. Okay. That's helpful. And the last one for me, just in terms of a gain-on-sale margin. I think, David, you said a 1% proxy is still reasonable. Just kind of what -- given the hedge you put on, just kind of want to make sure that I heard that correctly.

Yes. The -- that would anticipate that the hedge would still basically work the way it has been consistently in credit spreads. I guess the key is where our credit spreads are going to be. They've widened out. They've come back. But we're about where we were, and I think most of the negative information is in the market...

Look, last year, when we put a hedge on, at one point it was $26 million upside down. And our economics -- I think at the time that we closed out everything, our hedge was about $21 million in a loss and our -- yes, and our economics were about the same as what we had modeled and told you guys. So I think we're in a pretty good position. We -- I'll just say, we feel confident that 1% is still realistic.

Your next question is a follow-up from Matthew Clark of Piper Sandler.

I just had a few quick ones. Do you happen to have where your C&I reserves stood, C&I reserves as a percentage of that portfolio?

I don't have the table actually in front of me, but I would say we're pretty consistent with the industry. Where were we, over 1%?

Yes, it's definitely over 1% in terms of going through that. But just...

Yes. I just don't have that available. Let me try to pull it up.

Yes. Okay. We can get back to you, Matt. Yes, we'll give it to you. We'll be disclosing that obviously in the Q.

Yes. Okay. And then just in net interest income, the amount of accretion and recoveries, I think it was $1.1 million last quarter. I just wanted to know what was it.

Yes. We -- because of the change in the accounting under CECL, we really didn't have any in terms of an increase in accounting because, basically, we classified all those as normal amortization of deferred fees. So there was no significant recoveries at all from any acquisition acquired loans.

Okay. And then just on the $140 million of loans that are high risk, you gave us the $50 million of hotels, the $25 million of restaurants, can you just give us the remaining balance?

I can -- I can follow-up with that. I don't have that chart in front of me, but it's basically other arts, entertainment and recreation. There's a few other categories that they consider retail trade. I can give you the breakdown, but it's basically Moody's segregation under their C&I module. But it's very well dispersed, it's just would fall into those NAICS Code.

Yes. What you just mentioned are the largest categories.

Yes. Yes, those are the only material ones where we have, I would say, larger balances in for us. But...

Okay. And then the weighted average price at what you bought back, the stock this quarter?

I want to say it was like 11. Yes, right at -- very close to 12.

Yes. Unfortunately, it wasn't 9 or 10, but...

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

Thank you, everyone, for taking the time today. We certainly appreciate it. It's been an extraordinary period and our time -- our team has more than been up to the challenge. I am so proud of how everyone has responded, and I can't thank them enough. We have amazing employees who are focused on doing great work for our clients. We built this company to emphasize client service as a core value, and we believe it serves us well in times like this. Our team has already started looking ahead and preparing for the eventual return to work, and we are eager to get there. But in the meantime, we will continue to do things with our employees and clients with safety in mind. Together, we'll get through this. Thank you again, and have a great remainder of your day.

Thank you for participating in First Foundation's First Quarter 2020 Earnings Conference Call. You may now disconnect.