First Foundation Inc. Q4 FY2023 Earnings Call

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; James 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.

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 remained strong at both divisions with strong pipelines. The interest rate environment appears to have pivoted with the Fed's fight against inflation nearing its end. While the 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. Multi-family 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, and First Foundation Advisors improved 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 $0.045 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. Pre-tax 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% from the prior quarter. Our net interest margin was 1.36% for the quarter as compared to 1.66% as of September 30, 2023. However, non-interest 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 0.9%, up from the 0.8% reported as of September 30, 2023. Our loans 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 of 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, an increase 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, non-interest-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 3 times. 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 banks' 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 non-performing assets to total assets were 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 remained 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 30th, 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 proudly 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?

Thank you, Scott. I'll begin with our balance sheet and net interest margin. As Scott noted, our net interest margin decreased by 30 basis points during the quarter, dropping from 1.66% in the third quarter to 1.36% in the fourth. We did see a slight improvement in our earning asset yield, which rose from 4.56% in Q3 to 4.62% in Q4, partially offsetting some other impacts. Although loan yields dropped modestly by 3 basis points and the yield on held-to-maturity portfolios remained consistent, the yield on excess cash increased by 74 basis points during the quarter, and the yield on the available-for-sale portfolio improved by 49 basis points. The majority of the increase in the AFS portfolio is attributed to the full-quarter benefit of securities purchased in the third quarter, specifically shorter-dated U.S. Treasuries and Ginnie Mae agency mortgage-backed securities. As I mentioned last quarter, we are eager to leverage opportunities to acquire safe, highly liquid securities offering attractive yields. If we meet our liquidity goals, we will also seek assets that enable us to achieve our long-term interest rate risk profile and mitigate the earnings risk associated with potential short-term rate hikes. Moving to the right side of the balance sheet, I want to highlight the anticipated seasonal reduction in our non-interest-bearing deposit portfolio. As discussed last quarter, customer service costs decreased in line with balances. However, the shift back to interest-bearing liabilities we secured to fill the gap from the runoff negatively impacted the net interest margin in the fourth quarter. The $680 million transition from non-interest-bearing to interest-bearing deposits significantly contributed to the decline in our net interest margin. The remaining decrease in net interest margin was due to higher costs associated with interest-bearing liabilities, which rose by 18 basis points this quarter to 4.19%. Actions taken in the third quarter to pull some of our liability sensitivity benefits forward using puttable advances with the Federal Home Loan Bank led to a 9 basis point improvement in borrowing costs for the fourth quarter. This was offset by a quarter-over-quarter increase in costs for interest-bearing deposits, which went from 4% in Q3 to 4.21% in Q4. Contributing factors included the full-quarter impact of the July rate increase, customer migration to higher-rate products like CDs ahead of anticipated short-term market rate declines, and ongoing competition in the market driving rate expectations, particularly in the retail channel. While our retail relationships have led to slight cost increases, our portfolio's cumulative beta all-in costs have remained below 50%. We are satisfied with the portfolio's performance and believe it continues to be an essential contributor to our long-term success. As we closed the year, we became more optimistic about the rate environment, observing stabilizing trends in asset yields. The average loan yield in December was 4.70%, consistent with the fourth quarter's average, and the yield on the combined securities portfolio, both AFS and HTM, was 3.81%, only slightly lower than the quarterly average of 3.84%. On the right side of the balance sheet, December's interest-bearing liability rates were slightly higher than the quarterly averages due to the use of higher-cost short-term deposits to address decreases in customer service deposits. As the balances in customer service deposits rebuild, we expect interest-bearing deposit and liability costs to decline. After a challenging year, we are pleased with our progress in strengthening our balance sheet. The concentrations in our loan portfolio have been appropriately sized, and we continue to enhance our liquidity position, bolstering our capital. As I've noted before, we will keep an eye on the rate environment for opportunities to shift toward a more sustainable long-term interest rate risk profile and mitigate the earnings risk of potential short-term rate increases. I am optimistic about our progress in 2024. Moving on to the income statement and net interest income, although we saw average earning assets remain stable for the quarter, the 30 basis point decline in net interest margin resulted in a $9.6 million decrease in net interest income. A portion of this decline, as Scott mentioned, was offset by a reduction in customer service costs, which amounted to $8.3 million. We anticipate this dynamic will reverse as customer service deposit balances begin to recover in the early part of 2024. Contrary to the higher-than-quarterly average funding rates noted for December, customer service costs actually decreased. The December expense was about $3 million compared to a monthly average of $5.5 million for the quarter. While interest income from loans fell by $4.2 million, from $124.4 million in Q3 to $120.2 million in Q4, income from securities and other liquid assets rose by a total of $6 million to $26.4 million. The shift in balances from non-interest-bearing deposits resulted in higher average rates and volumes in interest-bearing liabilities, collectively increasing interest expense by $11.4 million. As customer service deposits start their seasonal recovery, we expect that higher cost wholesale balances will decrease, leading to higher customer service expenses and lower interest-bearing deposit costs. Wealth and trust fees dipped slightly this quarter, falling from $8.8 million in Q3 to $8.6 million in Q4. Although we saw a decline in quarterly average assets under management, AUM increased point-to-point, ending the quarter approximately $200 million higher than on September 30. We're enthusiastic about entering 2024 with momentum in these businesses and continued growth during this exciting time for the industry. The high-growth markets in Texas and Florida represent significant opportunities for us, and we look forward to engaging with our clients and prospects there. Excluding customer service costs, our other non-interest expenses totaled $39.5 million, matching the previous quarter's amount. We expect compensation and benefits to rise slightly in the early part of 2024 due to annual adjustments and tax resets, but we recognize the importance of being cautious with expense growth and continuing to benefit from the tough decisions made in 2023. As Scott has repeatedly emphasized, we remain focused on improving operational efficiency and controlling discretionary costs. This is critical as we work to regain operating leverage and achieve steady long-term growth in net interest income. Our expense-to-assets ratio, when excluding customer service costs, compares favorably with our peers, and we have no intention of giving up that advantage. Continuing down the income statement, the income tax provision again benefited net income this quarter, increasing from a $600,000 benefit in Q3 to a $2.3 million benefit this quarter. The primary factor for this additional benefit was a reduction in our blended state tax rate, resulting from our expansion into Florida and Texas. The non-taxable goodwill impairment made for a complicated 2023, but as profitability normalizes, we expect an effective tax rate around 28%. Finally, regarding capital and liquidity. We anticipate a significant improvement in First Foundation, Inc.'s total risk-based capital ratio, which we estimate will be 12.27%, an increase of 38 basis points from Q3 and 98 basis points higher than Q4 2022. This improvement is noteworthy and positions us well for growth once the uncertainty surrounding the economic environment subsides. Our tangible common equity to tangible asset ratio dipped slightly to 6.91% due to this quarter's larger balance sheet, primarily from increased liquid risk. However, we believe our capital strength provides a favorable risk balance compared to our peers, especially considering our held-to-maturity portfolios and the favorable after-tax unrealized loss position of $56.3 million, which is now just 6.2% of tangible equity, down from $75.2 million or 8.2% tangible equity last quarter. Additionally, our liquidity position has strengthened, with low levels of uninsured and uncollateralized deposits, which remain a reminder of what can be vulnerable during significant stress. Our uninsured and uncollateralized deposits account for only 12.6% of total deposits. As previously mentioned, we are pleased with the stability we’ve achieved in our liquidity position, and we feel comfortable with our current on-balance sheet liquidity levels. We are also confident that our total available liquidity, which is three times our uninsured and uncollateralized deposits, is more than adequate to mitigate risks should market volatility return. I echo Scott’s remarks about the commendable work the team accomplished at First Foundation last year and am excited for our future prospects. I now turn it over to Chris for further details on our asset quality, loan portfolio, and deposit operations. Chris?

Thank you, Jamie. Good morning. Today, I will discuss our lending, deposits, strategic direction, and the strength of our assets. After a challenging 2023, we focused on improving our fixed-rate lending portfolio as interest rates began to rise. Our goal has been to reduce this exposure and shift towards index plus margin-based pricing, concentrating on conservatively underwritten commercial and industrial lending that emphasizes relationships. Anticipate an increase in our CECL reserves as we transition to this asset class and the supporting historical data. We believe this will better align the Company with the risk profile of our peers. Our teams have collaborated to manage the strategic direction of our diverse loan portfolio, which as of December 31, 2023, is composed of 51% multifamily loans, down from about 54% in Q3 2022, 32% commercial business loans, including owner-occupied commercial real estate and equipment finance, compared to around 28% as of Q4 2022, 9% consumer and single-family residential loans, 6% non-owner occupied commercial real estate, and approximately 2% land and construction loans. It's worth noting that there has been a slowdown in the decreasing size of the bank's loan portfolio, which started the year at around $10.7 billion and has now dropped to $10.2 billion as of Q4 2023, despite a $300 million decline in the third quarter. Operationally, we are continuing to challenge our lending departments to place a heavy emphasis on asset quality review, aiming to identify any economic cracks proactively. We maintain a cautious yet proactive approach to growth while ensuring strong asset quality. Loan fundings mainly included high-quality adjustable rate, commercial and industrial, SBA, and mortgage lending, totaling $339 million for the fourth quarter, offset by loan paydowns and payoffs of $444 million. We repeatedly strive to decrease our commercial real estate exposure, seeking a better balance between fixed and variable-rate lending. In the near term, we are adopting a protective lending stance regarding our existing multifamily portfolio, leading to a progressively smaller fixed-rate portion. Historically, we held approximately $5 billion in loans at the end of fiscal year 2020, growing to over $7 billion by the end of fiscal year 2021, and peaking at over $10 billion by the end of fiscal year 2022. Given the short duration of the multifamily asset class and the cash flow needs of most investors, we see long-term benefits from expected repricing activity, necessitating increased overall diversification of our underlying assets. As previously mentioned, this will gradually raise the bank's CECL reserves as a more balanced portfolio will naturally require an increasing reserve. Having wrapped up 2023, it's a good time to review the loan origination breakdown for the year. The percentages are as follows: commercial business loans 90%, multifamily 2%, single-family 2%, and other miscellaneous loans at 6%. It's important to note that the commercial business portfolio is well-diversified, with no single sector exceeding a third of the portfolio and only 12% exposed to commercial real estate. Despite regional challenges in multifamily housing, we are confident in this asset class, especially within our unique workforce housing segment. Our team has highlighted the importance of workforce housing amidst record-low affordability. According to CoStar, the multifamily market has experienced three straight quarters of solid demand, recovering significantly from 2022. Although supply continues to overtake demand, causing a slowdown in national rent growth, the more unstable markets appear to be in the Midwest and Northeast, which are showing some resilience with minimal rent growth declines. In contrast, Sunbelt markets are facing substantial slowdowns. Notably, California is rent-controlled, where approximately 87% of our multifamily loans are located. The bank has limited exposure to the Sunbelt, Midwest, and Northeast markets. While national vacancy rates have risen over 200 basis points from a record low of 4.8% in Q3 2021 to 7.3% in Q3 2023, our portfolio shows no signs of deterioration or an increase in vacancy rates compared to our existing underwriting standards. This is likely due to the nature of workforce housing, contrasting with the high-end luxury properties that typically have significant downside risks. The strength of our portfolio is evident in its credit quality metrics and a low NPAs to asset ratio for Q4 at 15 basis points, compared to 10 basis points in the prior quarter and 13 basis points at year-end 2022. Although NPAs have increased slightly, this is attributed to two specific loans, neither of which are multifamily and both acquired through M&A rather than originated by First Foundation Bank. One loan was a factoring credit, which has been fully shut down as it did not fit our credit profile, and the other is a properly collateralized asset with no expected loss risk. Our underwriting remains mostly unchanged and conservatively aligned, with weighted average LTVs of 55% for multifamily loans and 54% for single-family loans. Moving to deposit operations, the bank is focused on deepening client relationships, as we believe this, along with our service value proposition, sets us apart in the market. While we are monitoring liquidity and funding closely, we are starting to refocus on growing our core funding. Improvement in funding after the contagion period will enable us to focus on reducing reliance on broker deposits and home loan bank advances. The breakdown of our current deposits is as follows: money market and savings 30%, certificates of deposit 29%, interest bearing demand deposits 27%, and non-interest-bearing demand deposits 14%. Our core deposits are geographically diversified, with California and Florida each accounting for 36% of total deposits, and Texas 10%. The remaining 18% comes from Nevada, Hawaii, and other states. We are encouraged by the growth of our digital branches’ online account opening and technology infrastructure. The instant account opening and funding with real-time risk mitigation and fraud detection is ready for deployment in our physical branches, initially for consumer accounts, allowing us to focus more on the complex needs of our business clients. We are working to change the culture of our physical branches to empower employees to aggressively expand our core retail deposit franchise. They have responded well to the challenge, as retail channel growth is crucial for our resilience and success. Additionally, we are reviewing our technology to enhance efficiency and eliminate redundancy. We are also updating policies and procedures to enhance operations. In light of a possible rate cut in 2024, we are strategically prioritizing relationship-building and service over rate-based marketing. Many aspects of our business are evolving, and I want to thank every member of the First Foundation team for their commitment to improving our operations. If 2023 taught us anything, it is that we are resilient, and we are thankful for our dedicated team members who met the challenges posed by a difficult economic landscape. I will now turn the call back to the operator for questions.

Thank you. Your first question comes from David Feaster of Raymond James. Your line is open.

Hi. Good morning, everybody.

Hi, David.

Good morning.

Good morning.

Starting at a high level, the Federal Reserve appears likely to pause in the near term, with an increased possibility of future cuts. I would appreciate your insights on the earnings margin trajectory assuming a Fed pause and how this could be impacted by potential cuts. I'm also interested in your thoughts on how quickly you could lower funding costs while earning assets continue to rise.

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 Fed were to cut rates. I think I've stated previously, there is 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 and sundry reasons, then it'll 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?

Yeah. 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 you know a lot of multifamily lenders in the market have pulled back as well, and 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 some sense, or is growth primarily going to still be C&I?

Initially, our goal was to focus heavily on commercial and industrial lending. Last year, C&I lending grew by 90%, accounting for 90% of our originations, and we expect to maintain a similar share. However, the potential for significant growth in C&I balances is limited. We are cautious about entering markets where we feel the credit conditions aren't aligned with our standards. While we believe C&I can grow, it will be at a more modest rate compared to our current balances. There are opportunities in the multifamily sector, but many lenders have reduced their activity. Historically, First Foundation was strong in California, with competitors like J.P. Morgan and others also involved. While many players have slowed down, Chase remains active. Current rates are in the sixes and high sixes, with J.P. Morgan being slightly more aggressive on pricing. We may explore some opportunities in this area, but not to a degree that would divert us from achieving a more neutral long-term position.

Okay. That's extremely helpful. Would you expect loan balances to stabilize, or do you think we may continue to see declines in the near term?

No, I think they're going to stabilize.

Okay.

I think it's really important to discuss loans. We issued too many fixed-rate loans in 2022, which is widely recognized. Most of these loans were issued in the second and third quarters of that year, meaning we are nearing two years of seasoning for that product. Recently, Jamie and I discussed that we have about $1.5 billion in multifamily loans repricing soon. This represents a year and a half, and a lot of the repricing is approaching quickly. When we say it's short duration, we mean it's genuinely shorter than many in the market seem to believe. I think it's essential to highlight this point.

And Scott, let me provide some additional insight, sorry, David.

Go ahead.

Yeah. Let me add more color. There's also other impetus and motivation for the traditionally cash flow focused investor in multifamily to refinance the loan that the market doesn't always consider. Given in mind 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 I think the market expects because of their cash flow focus.

That's a really good point. And maybe just the last one 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 thinking about the opportunities from that as we look forward, and just other core deposit growth initiatives?

Yes. One thing we can all agree on is that during the contagion period, we took time to analyze our customers' and clients' behaviors, which we viewed as a valuable learning experience. We recognized that our clients value their relationship with our institution and are eager to grow alongside us. We're actively focusing on treasury management services, particularly for smaller community businesses rather than larger ones. We're adopting a culture that emphasizes outreach rather than just sales. It's important to note that the banking sector was quite cautious in the first and second quarters, protecting core deposits, but now we’re taking a more proactive approach. We’re engaging in activities that bolster our growth. Much of the infrastructure I’ve discussed aims to free up time for our teams to foster business development. We're narrowing our focus because we can't serve every type of client. Instead, we're concentrating on areas where we have significant experience and expertise, particularly in relationship-driven business that supports small community enterprises. We're collaborating closely with our First Foundation Advisors team, which connects us with clients who have growth potential. This partnership, along with our increased presence, should support organic growth.

Very helpful. I appreciate it. Thanks, everybody.

Thank you, David.

Thanks, David.

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

Thanks. Good morning, everybody.

Good morning.

Good morning.

Hi. A couple of things to ask about it. I missed some of the detail on the borrowing. I mean obviously, you hadn'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.

Hey, thanks for the question, Gary. I appreciate it. We're currently at around four eighty-one 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 deposit leave and accelerate through the fourth quarter, we are looking for options to basically replace that funding with short cost-effective funds. And we have been I guess encouraged that test our lines, encouraged to use the Fed. And so when putting it all together, it 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, and most of which are maturing over the next year come due. But I guess that was the general thinking. Does that answer it?

Yeah. No, that's helpful. I appreciate it. In terms of the customer service deposits or the investor deposits, I mean was the decline this quarter? It seems 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?

It was a bit more than we anticipated. I believe one client in particular was one of our larger depositors, and they took some of their deposits to redistribute among other banks. Since then, our balances have started to grow back with the seasonality, and we've also seen multiple clients return additional balances so far in the first part of this quarter. I think you'll see a rebound that may not fully match the run-off but will be pretty close to it.

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 were able to reduce the rate paid. So just wondering how you were able to kind of push that through given no change currently to the rate environment.

As the MSR portfolio comprises the higher cost of the overall customer deposit portfolio, the blended rate decreases as those deposits exit. We haven't made many changes on an individual client basis, so the overall rate will increase again as the higher cost MSR deposits come back.

Yes. To clarify, these relationships involve many banks in the country that hold these types of deposit balances. It all depends on the Fed's decisions. Therefore, whether the Fed raises rates, keeps them stable, or lowers them will influence those deposits accordingly.

I appreciate that. Sorry, I may have misunderstood your earlier comments. It was really more about the mix of deposits that impacted the overall.

No, I think as we had to transition from these ECR type balances into interest-bearing deposits, Jamie was trying to convey that the cost itself was slightly lower on a blended basis.

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 run rate from December as opposed to average rate for the fourth quarter as a whole.

Great. And absent of Fed cut and second quarter probably a little more kind of normalized level.

Second quarter for sure. Absolutely.

Okay. I appreciate that. And then if I guess one more, just in terms of the expense line excluding the customer service costs, I know there's some comments, obviously, a lot of heavy lifting this year over this past year with regard to controlling expenses and reducing costs. Where do you anticipate that line again ex the customer service costs in 2024 versus '23? All these may be versus the fourth quarter run rate is a better way to think about it.

Yeah. As I mentioned, you are going to see a little bit of a 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.

Yeah. I think as you get into the year, one thing to keep in mind just in conjunction with some of the more difficult decisions that we made in 2023, and you may recall, one 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 right sizes back to more historical levels. But it's important to note that we are, as we said, remaining laser-focused on that, and that will rise in conjunction with revenue and profitability overall going forward. It's not something that we're just baking into our plan. We'll take a measured approach to bringing that expense back in.

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

Right.

Correct. Yeah.

Okay, all right. Great. Thanks very much.

Thank you.

Thank you.

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 line.