Earnings Call Transcript - FFWM Q1 2020

Operator, Operator

Greetings, and welcome to the First Foundation's First Quarter 2020 Earnings Conference Call. Today's call is being recorded. 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 Kavanaugh, CEO

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, and 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 had already 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 moved 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 three times 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's 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.

John Michel, CFO

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 the interest rate market, especially the existence of a defined yield curve, should result in an increased 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.

David DePillo, President of First Foundation Bank

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 numerous 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 of 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 two 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 the 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 was 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 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.

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 over 20 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, Operator

Your first question comes from the line of Matthew Clark of Piper Sandler.

Matthew Clark, Analyst

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...

David DePillo, President of First Foundation Bank

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

John Michel, CFO

$3 million.

David DePillo, President of First Foundation Bank

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 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.

John Michel, CFO

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

David DePillo, President of First Foundation Bank

Oh, $30 million deferral, yes.

John Michel, CFO

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

Matthew Clark, Analyst

And then just a 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.

David DePillo, President of First Foundation Bank

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, the 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.

Matthew Clark, Analyst

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...

David DePillo, President of First Foundation Bank

We are modeling it with the understanding that John strictly adheres to GAAP, and we are assuming a 2-year statutory life, where the average fee is approximately 3%. We also have some deferred costs related to that, and we expect that about 85% will be repaid after the forgiveness period.

John Michel, CFO

In the third quarter.

Matthew Clark, Analyst

Okay. Regarding reserves and the addition this quarter, there's roughly $2 million related to CECL. What are your thoughts on potential losses? Your loss history has been quite mild, but do you anticipate needing to build some reserves? Does your CECL adjustment this quarter account for the economic decline in April? I assume it does, but I would like to hear your thoughts on reserve levels going forward.

David DePillo, President of First Foundation Bank

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...

John Michel, CFO

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

David DePillo, President of First Foundation Bank

At the start, our allocation was around 45 to 65. By March, we had 50% in Fed stress scenarios and 50% in the more adverse COVID scenarios at that time. There was an update to the baseline COVID projections, and our baseline increased, but it still represented only 83% of the Fed's downside for us. As of March, we were in a position to cover over 100% of that baseline, which is what most people are using for their COVID updates. What we are seeing is that with 0 loss reserves, some level of stress is necessary to justify and maintain what we have on record. So, in a way, we...

John Michel, CFO

Have been very conservative.

David DePillo, President of First Foundation Bank

Yes, we initially had a buffer, while many were mainly considering baseline and historical loss rates. Do we expect more? Likely, since the baseline scenario for everyone has shown a significant increase based on analytics updates from the first quarter. While the specific economic scenarios didn't change much, the actual analytics indicated a noticeable rise from the baseline. Nonetheless, we still have some flexibility within our baseline. We anticipate that the baseline might rise further, and there will be some minimal charge-offs, particularly in certain commercial and industrial relationships. Additionally, we are experiencing growth. Therefore, it is reasonable to expect some additional reserving in the next quarter, roughly aligned with what we've added so far. We perceive this situation in the context of general pandemic modeling, where some economies have been severely impacted while our portfolios have only experienced mild effects. Thus, we foresee a gradual increase, but nothing we consider materially significant to our financial results. If I were to project this, I would likely add reserves in the next quarter, approximately equal to what we have now. Currently, our modeling does not necessitate this, but I think it's prudent to prepare for it.

Matthew Clark, Analyst

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?

John Michel, CFO

In terms of...

David DePillo, President of First Foundation Bank

What was the actual deposit rate at?

John Michel, CFO

Across our groups, we’re probably about 1% on 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 have some fixed going through that. But I don’t have...

David DePillo, President of First Foundation Bank

If you're looking for the...

John Michel, CFO

Most of the cost savings will be realized by the 31st.

Scott Kavanaugh, CEO

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

John Michel, CFO

Third and fourth.

David DePillo, President of First Foundation Bank

Yes. Our general expectation is that, assuming we navigate through this pandemic and return to a state of normalcy, which many analytical models suggest, including a temporary spike in unemployment and a W-shaped recovery, our cost savings by the end of this year and into next year will significantly enhance our margins and returns.

John Michel, CFO

And just, Matthew, we need to be aware of our customer service costs, which had an immediate impact and significantly decreased at the end of the first quarter. This will be reflected in reduced costs moving forward.

Operator, Operator

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

Gary Tenner, Analyst

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?

David DePillo, President of First Foundation Bank

Yes, you heard that correctly. People are often surprised by the requests we receive when the media suggests reaching out to lenders for financial assistance. We have had inquiries from individuals with strong cash flow who are experiencing a few vacancies and are requesting deferrals. However, we don't believe these requests are justified. Like other institutions, we have received some requests, but we differ from larger organizations that may grant these without thorough analysis. We ask for complete documentation, including financial information, and conduct reviews. Anecdotally, in April, the vacancies we've discussed with our borrowers have been relatively minor, with only one or two instances of non-payment. Consequently, we haven't observed a significant impact across most of our markets. While there have been a few cases where a property shows a vacancy rate of 30%, the debt service coverage ratio remains strong, between 1.15 and 1.20. We won't provide relief to those who are still generating positive cash flow. It's a complex situation, but so far, we haven't found any cases that justify deferral. In some instances, a borrower may have weak cash flow from one property but is performing well on others. We believe if they benefit from ownership, earning higher returns, we shouldn't take on the risk of ownership by deferring payments while they earn significantly more than our 4%. We anticipate some disruption in interim cash flows. However, considering new appraisals for new originations, the value impact attributed to COVID-19 is around 1% to 1.5%, which we view as negligible. Given the strong debt service coverage of our portfolios and borrower cash flows, we feel no need to implement blanket 90-day deferrals.

Gary Tenner, Analyst

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

John Michel, CFO

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

Gary Tenner, Analyst

Dollars. That makes a lot more sense.

David DePillo, President of First Foundation Bank

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

Gary Tenner, Analyst

Yes, that makes a lot more sense. Can you discuss the timing of the CD maturities and provide insight into the maturity rates and the projected rate benefit as of today?

Scott Kavanaugh, CEO

We generally keep most of our certificates of deposit under one year. Our approach with brokered CDs is to ladder them out, so they can have terms of 3 months, 6 months, or 1 year. As these CDs mature, we assess whether we should reinvest in broker deposits. Recently, there has been a decrease in broker deposits. After the last Federal Reserve rate cut, broker deposits stayed high but are now starting to decline, which may lead us to consider using some brokered CDs. Overall, I would say we don't rely heavily on brokered CDs, but we do use them from time to time.

John Michel, CFO

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.

Gary Tenner, Analyst

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?

Scott Kavanaugh, CEO

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 two, utilize them a little bit. But it's still a little early to determine how much we'll use of that.

John Michel, CFO

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

Operator, Operator

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

David Feaster, Analyst

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?

David DePillo, President of First Foundation Bank

As anticipated, with rates falling sharply in the first quarter, there was a rush from borrowers primarily focused on refinancing and some cashout options. In the first quarter, we had approximately 75% refinances and 25% purchases, showing a clear dominance in refinancing activity. Our pipeline entering the second quarter was robust and remains so. However, the market experienced some instability once everyone realized the situation might be worse than expected, leading to many lenders being overwhelmed with forbearance requests. In response, several key players in our market offloaded their pipelines, returning deposits, which caused some disruption. We, like other lenders, reviewed our pipeline and reassessed it. Some of the rush to secure more favorable financing lacked adequate information, so we removed those applications. We then instituted more stringent underwriting requirements in anticipation of potential short-term collection losses, such as necessitating that one year of payments, whether amortizing or interest-only, be held in an account by the lender, along with assessing higher vacancy rates. This process eliminated about $75 million from our pipeline, but we still expect to see significant activity in the second quarter. April and May should remain strong; however, June may see a slight decline as participants adjust to the market's new conditions. Due to the uncertainty, many purchase transactions are now on hold or facing delays. Refinances have also slowed as people adapt to the changing rate environment. We anticipate modestly lower originations in June, July, and August, with a return to more normal levels expected in the latter part of the third quarter and a resumption of standard originations by the fourth quarter. Overall, we are likely to achieve our target of approximately $1.2 billion for the year.

Scott Kavanaugh, CEO

Just multifamily.

David DePillo, President of First Foundation Bank

It was operating at a significantly higher rate, as you could see, and we were likely on track to reach around $1.6 billion. While we don't engage much in construction or similar activities, we did put some projects on hold or significantly... We haven't added new construction in a while. The good news is that the production we are planning to add is looking favorable. Although we initially anticipated a coupon rate of 4.75% to 5%, we are now realistically targeting a benchmark of around 4.35% for our 5-year products due to the stabilization of credit spreads and other market factors. Our prepayment rates were previously very high due to a rush to market, but they've slowed significantly in April. From the beginning of April to the end, the volume of borrowers proposing to pay off their loans dropped to a quarter of our initial estimates across all asset classes. Consequently, we've adjusted our CPRs down. Thus, we expect our balance sheet growth to persist even with reduced origination volumes in the latter part of the second and third quarters, primarily because CPR will also decelerate. Additionally, we have corrected one of our IO strips that was operating at a very high rate. In a couple of quarters, we anticipate that all agencies will return to a more normal pace of securitization, with prepayments slowing down considerably. Even in April, prepayment levels appeared minimal compared to previous periods. I'm not sure if that was helpful.

Scott Kavanaugh, CEO

Yes. I want to emphasize, David, that you should be aware of a temporary fluctuation in June, the second quarter, due to the PPP loans, with most of them likely expiring. This will create an unusual cycle.

David Feaster, Analyst

Absolutely. Considering all of that, it seems that loan yield is likely to remain flat or possibly increase slightly. Deposit costs are still decreasing. The net interest margin should continue to grow from here, and given the timing of these factors, does that sound accurate? Do you believe we can ultimately exceed 3% by the end of the year?

Scott Kavanaugh, CEO

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

David DePillo, President of First Foundation Bank

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.

Scott Kavanaugh, CEO

1.77, yes.

David DePillo, President of First Foundation Bank

Yes. What's overnight today, 30?

Scott Kavanaugh, CEO

30. 30 basis points.

David DePillo, President of First Foundation Bank

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

Scott Kavanaugh, CEO

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

David Feaster, Analyst

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?

David DePillo, President of First Foundation Bank

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, 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.

Operator, Operator

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

Stephen Moss, Analyst

I want to touch on the margin and clarify the timing of achieving over a 3% margin. I understand there was a significant decline this quarter and expectations for an even larger drop next quarter, but it seems like the gap is expanding considerably. If we include noninterest-bearing factors, could we see a margin exceeding 3% in the second quarter? Is that a reasonable expectation or perhaps too optimistic?

John Michel, CFO

In the second quarter, it's important to consider that we are adding PPP loans with interest rates significantly lower than the yield on our portfolio. As a result, the second quarter may be somewhat subdued. You will start to notice the benefits on the funding side through our repricing of deposits. A key point to note is that this does not affect the net interest margin, which includes our customer service costs. We anticipate seeing benefits there as well. Overall, while we expect to see improvement in the second quarter, it may be slightly tempered by the impact of the PPP program.

David DePillo, President of First Foundation Bank

I think some of our multifamily pipeline that was built during the first quarter when rates were substantially below what the yield on the portfolio is.

John Michel, CFO

A little bit lower. Yes, fund that through.

David DePillo, President of First Foundation Bank

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...

John Michel, CFO

Yes, for the third and fourth quarter, we anticipate a nice continuing improvement due to other repricings that we have in place.

Stephen Moss, Analyst

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.

John Michel, CFO

We do have interest-only strips that we own, some from the first two deals and a couple from the last deal we did. In our evaluation, we looked at every strip to ensure accuracy. The write-down we recorded was from 2016. Over the last six months, the level of prepayments has been substantial, particularly for the fourth and first quarters, leading to low revenues from those loans going forward. However, the other strips, being relatively new and especially the ones we just completed, are still protected by prepayment penalties. The cash flows from them are strong and actually exceeding our projections.

Stephen Moss, Analyst

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

John Michel, CFO

It's probably about $25 million right now.

David DePillo, President of First Foundation Bank

The original interest-only strip was just over $12 million and has amortized down to about $5 million. Due to the prepayments, which are predicted based on historical data using external valuation services, we anticipate a significant slowdown in prepayments. However, the modeling relies on past trends. In six months, if we reassess, we may observe adjustments due to reduced prepayments. This situation primarily revolves around the timing and any rapid prepayments that specifically affected this case.

Stephen Moss, Analyst

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?

Scott Kavanaugh, CEO

Probably not a lot. Unlike last year when rates were good and spreads were wide, we decided to shift out of some of our 15-year paper to take advantage of the wider spreads and lower durations. This year, we're likely more inclined to do so. Additionally, our liquidity ratio is currently around 15%, while we aim to maintain 12%. Therefore, we are likely above our necessary liquidity levels. Given these factors, we are evaluating our options, but we probably won't add much, if anything.

Stephen Moss, Analyst

Yes, that's helpful. For my last question, I wanted to ask about the gain-on-sale margin. David, you mentioned that a 1% proxy is still reasonable. I just want to confirm that I understood that correctly, considering the hedge you implemented.

David DePillo, President of First Foundation Bank

Yes. The expectation is that the hedge will continue to function effectively in relation to credit spreads. The key factor is the direction of our credit spreads, which have fluctuated but have returned to previous levels. Most of the negative information appears to be already priced into the market.

Scott Kavanaugh, CEO

Last year, when we put a hedge in place, it at one point resulted in a $26 million loss. By the time we closed everything out, our hedge resulted in a loss of about $21 million, and our economics were roughly what we had previously modeled and communicated to you. Overall, I believe we are in a strong position, and we are confident that a 1% outcome is still achievable.

Operator, Operator

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

Matthew Clark, Analyst

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?

David DePillo, President of First Foundation Bank

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%?

John Michel, CFO

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

David DePillo, President of First Foundation Bank

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.

Matthew Clark, Analyst

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.

John Michel, CFO

Yes. Due to the changes in accounting under CECL, we did not see an increase in accounting as we classified all of that as normal amortization of deferred fees. Therefore, there were no significant recoveries from any acquired loans.

Matthew Clark, Analyst

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?

David DePillo, President of First Foundation Bank

I can follow up on that. I don't have that chart in front of me, but it mainly includes other arts, entertainment, and recreation. There are a few other categories that they consider retail trade. I can provide you with the breakdown, but it essentially aligns with Moody's classifications under their C&I module. It's well diversified and would fall under those NAICS Codes.

Matthew Clark, Analyst

Yes. What you just mentioned are the largest categories.

David DePillo, President of First Foundation Bank

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

Matthew Clark, Analyst

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

Scott Kavanaugh, CEO

I want to say it was around 11. Yes, very close to 12.

David DePillo, President of First Foundation Bank

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

Operator, Operator

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.

Scott Kavanaugh, CEO

Thank you, everyone, for taking the time today. We certainly appreciate it. It's been an extraordinary period and 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.

Operator, Operator

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