Earnings Call
First Foundation Inc. (FFWM)
Earnings Call Transcript - FFWM Q1 2022
Operator, Operator
Greetings and welcome to the First Foundation's First Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. Speaking today will be Scott Kavanaugh, First Foundation's Chief Executive Officer; Kevin Thompson, Chief Financial Officer, and David DePillo, President. 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, including 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 the 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 2022 Earnings Conference Call. We will be providing some prepared comments regarding our activities, and then we will respond to questions. Let me start by saying a few words about how proud I am of everyone at First Foundation. The results we reported today are a testament to the hard work from everyone in our organization. The past few years have posed some interesting challenges for everyone and yet we continue to generate strong, sustainable results quarter after quarter. This was another great quarter for First Foundation and a fantastic start to the year. Our earnings for the first quarter were $30.8 million or $0.55 per share. This represents a 38% increase over the first quarter of 2021. Total revenues were $89.9 million for the quarter, a 36% increase from the first quarter of 2021. Tangible book value per share ended the quarter higher at $15.21. We declared and paid our first quarter cash dividend of $0.11 per share, which we increased last quarter. We also received authorization from our Board of Directors to purchase up to $75 million of our company's stock. The favorable results we reported today reflect the strength of our institution and our continued positive outlook that our market model is working very well across the diverse and dynamic markets we serve. Loan originations continue to be at near record levels with $1.1 billion in new loans for the quarter. 42% of those originations came from C&I. MPAs remain low at 16 basis points for the quarter as our lending team does a fantastic job maintaining our high credit standards. We have established a well-balanced loan portfolio that continues to perform very well. Dave will touch more on this later in the call. Our deposit profile remains attractive with core deposit at 99% of total deposits. Deposits increased by $146 million in the quarter. And our loan to deposit ratio was 88% at the end of the quarter, driven in part by our ability to continue to attract high-quality commercial clients. All of this speaks to the strength of our deposit team. Our Wealth Management and Trust businesses continue to provide meaningful contributions to the success of the firm. Assets Under Management ended the quarter at $5.5 billion, largely due to volatile market conditions in the first few weeks of the year, yet rebounded in the last 30 days to start the second quarter. The all-weather portfolios we manage for our clients fared well as the 4% decrease in total assets was less than the 5% decrease in the S&P 500 and the 9% decrease in Nasdaq. An important part of our wealth management offering is our in-house investment management capabilities. I'm proud to share that the performance of our mutual fund has been very strong, with our total return fund earning a Morningstar five-star rating and coming in as a top percentile performing fund for the year. Even amidst all the volatility and changing market conditions, our pipeline continues to be strong and the demand for our wealth management services is at an all-time high. Last quarter, I referenced the many projects we're working on, including the acquisition of First Florida Integrity Bank, which will be complete when we take the final step and converting our core systems in May. This has been a tremendous effort by the team and I am so grateful for everyone who has worked hard to make this happen, including all of our new colleagues in Florida. We are also now just weeks away from opening the doors of our new branch in Plano, Texas. Starting a de novo branch is never an easy feat. But again, our team did an amazing job and we're really pleased at how it turned out. It's very exciting to have a retail presence in Texas. Even as many of these projects near completion, we continue to invest in technology for the benefit of our clients and to enable our employees with solutions they need to meet client demand and provide exceptional client service. We're also investing in our compliance efforts, including adding people and systems to ensure we continue to exceed the expectations of regulators in our ever-changing environment. In addition to expanding our footprint, adding to our technology stack, and building out our teams, we have also expanded our product offerings. This includes 1. our recently revamped SBA lending offering, 2. our expanded investment management offering, and of course 3. our efforts with Fiserv and NYDIG to bring midpoint into banking. These additional high-quality financial solutions are enhancements to our already robust offering, and are important as we deepen relationships with existing clients. Many of our clients turn to us for a variety of their financial needs, especially when we're viewed as their primary bank of choice when it comes to their financial life. As we look ahead to a rising rate environment and perhaps even a transitioning economy, First Foundation remains well positioned with a strong balance sheet and excellent credit demand for our services. Is that peak levels and our pipelines across all business lines are very robust. I'm very grateful for all that we have accomplished in the quarter, and 2022 is off to a great start. Now, I will turn the call over to Kevin, our CFO.
Kevin Thompson, CFO
Thank you, Scott. Earnings per diluted share were $0.55 in the first quarter. The return on assets was strong at 1.18% with a return on tangible common equity of 14.7%. As a result of this good momentum, our tangible book value per share increased to $15.21 in the quarter. These were especially good metrics considering our first quarter generally has higher compensation expenses related to payroll taxes and bonuses. We're carrying some duplicate merger-related expenses until systems conversion in the second quarter. The net interest margin contracted 17 basis points to 3% in the quarter due to high average cash balances from the success we have had in increasing core deposits and from the acquisition of TGR Financial. We've already begun to deploy much of that liquidity with our strong loan growth continuing into the current quarter. We maintained discipline in loan production with the average yield on loans increasing four basis points to 3.84%. At the same time, we were able to maintain our cost of deposits at 15 basis points for the quarter. We transferred $917 million of available-for-sale securities to held-to-maturity during the quarter since we have the intent to hold these securities through maturity. Credit metrics remain strong in all our loan portfolios and the allowance for credit losses for loans decreased slightly to 44 basis points of total loans. This decrease was primarily a result of the payoff of purchased credit deteriorated loans from specific reserves from prior acquisitions. Non-performing assets remain low at 16 basis points to total assets. Asset management fees were strong with revenues of $10.2 million and our Advisory and Trust divisions achieved a combined pre-tax profit margin of 21% in the quarter. Assets under management to FFA ended the quarter at $5.5 billion, while trust assets under advisement of FFP were $1.3 billion. Other income included a $1.1 million gain related to a sale-leaseback transaction. This item is excluded from our efficiency ratio. Our non-interest expense increased due to higher compensation benefits expenses mostly related to a 20.5% increase in average FTE as a result of our acquisition in the fourth quarter. Also contributing were merit increases that were effective at the beginning of the year. As I mentioned earlier, our first quarter generally has seasonally higher compensation expenses related to payroll taxes and bonuses. Finally, until we finish systems conversions of our recent acquisition in the second quarter, we are carrying extra costs associated with duplicate systems and some headcount. The efficiency ratio for the quarter was still strong at 53%. I will now turn the call over to David DePillo.
David DePillo, President
Thank you, Kevin. It was indeed a very successful start to the year for First Foundation. As Scott mentioned, we originated $1.1 billion in loans in the first quarter, another incredible quarter of loan production for us and the most we've ever funded in the first quarter of a year. Our commercial business lending accounted for a solid 42% of originations in the first three months of the year. We funded $482 million in C&I loans, which represents a 90% increase in C&I loans compared to the first quarter of last year. Our ability to continue to diversify our loan portfolio without compromising credit quality is a testament to our entire team. 49% of our C&I loans in the quarter were adjustable commercial revolving lines of credit, which has been a focus of ours over the past few years, shifting the balance sheet to more rate neutral. The remaining C&I originations were comprised of $125 million of commercial term loans, $76 million of public finance loans, $28 million of equipment finance loans, and $15 million of owner-occupied commercial real estate loans. As a percentage breakdown, the composition of our loan originations during the quarter is as follows: Commercial 42%, Multifamily 48%, Single Family 5%, Land and Construction 2%, and Other 3%. We accomplished this without changing our high underwriting standards and the loan pipeline remains very strong heading into the second quarter. It is worth noting that even with a high level of originations in the first quarter, we achieved an average interest rate of 3.36 on originations compared to 3.38 in the fourth quarter, showing only a drop of two basis points. We will start to see additional yield on loan originations going into the second quarter as our rate-locked pipeline funds out and we start funding loans at higher yields as the long end of the curve has continued to rise. As of March 31, our loan portfolio balances held-for-investment consist of 42% multifamily, 29% commercial business loans, 9% non-owner-occupied commercial real estate, 12% consumer and single-family, 2% land construction, and 6% of multifamily loans held for sale. Notably, our commercial business loan balances increased approximately 56% year-over-year, reflecting our continued focus on commercial banking. Our pipeline is very robust due to market conditions. It's also worth noting that our lending activity across our new markets is gaining traction, as we originated $84 million of loans in the quarter in Texas and Florida combined. Both of these markets now make up a combined 17% of total loans. We see great potential going forward. The diverse composition of our loan portfolio coupled with an increasingly diverse geographic makeup positions us well for changing economic conditions. For a bank of our size, we have an incredibly diverse geographic footprint that will benefit us as we can pivot to focus on geographies that are experiencing greater potential for growth, such as Florida and Texas. As we look ahead at our pipeline and loan portfolio, we are evaluating the economic attractiveness of continuing our systematic third-quarter sale. While they have been an important part of our business model in past years, we have elected to defer that sale for now and are contemplating a potentially more attractive strategy of allowing our loan balances to grow. Given our size and current market conditions, we believe that it would be a greater economic benefit by increasing our loan portfolio rather than conducting an agency sale, but we will continue to keep our options open for future sales. Our deposit business also experienced a strong quarter with an increase of $146 million during the first quarter of 2022, ending the quarter at $9 billion, which reflects a 2% growth over the last quarter and a 43% increase compared to the first quarter of 2021. The $146 million of growth in deposits during the first quarter of 2022 included an increase in commercial deposits service group of $27 million, retail branch deposits of $145 million, offset by a slight drop in our online banking deposits of $26 million. It's also worth noting our deposits held steady at 15 basis points, and our loan to deposit ratio has ticked up slightly as we have started to deploy our excess liquidity into loans. All this success in the quarter could not have been achieved without the great team we have in place. I am so grateful for their dedication and hard work. At this time, we are ready to take questions. I will hand it back to the Operator.
Operator, Operator
Our first question is coming from David Feaster with Raymond James.
David Feaster, Analyst
Good morning, everybody.
David DePillo, President
Hi David.
David Feaster, Analyst
I just wanted to follow-up on the commentary about maintaining not doing the securitization and holding that on the balance sheet. Could you just talk through some of the strategy there? And then your ability to continue to maintain the deposit growth to fund, you guys have done on the deposit side has been phenomenal, but how do you think about your ability to continue to fund your strong organic growth, especially as you hold another $500 million each year on the balance sheet?
David DePillo, President
Sure.
Scott Kavanaugh, CEO
David, you want to take the loan side?
David DePillo, President
Yes. The interesting part about our last economics on our loan sales was at a record level; I think it was 4.5 points. But we started to do analysis prior to that saying, where does it really make sense for us to just maintain loans versus selling them into the market? And as you're aware, on an agency sale, we do get the benefit of the one-time gain, but we do have to hold risk-based capital throughout the life of those portfolios. And in a sense, if we earned, say, on average, a couple of percent on sale, are we better off holding 3% plus in our net interest margin going forward? The obvious answer is yes because on average, those portfolios have around a three-year plus average life. Our securitization average life has been about 3.5 years. So rather than a one-time gain, we can gain that spread income. It will diminish us slightly within this year from not having that gain, but next year, we'll have that additional spread income. So we've been evaluating this for quite some time. We will continue to strategically sell whole loans into the market, which doesn't have the same capital issues we face on a risk-based capital for conducting agency-level securitization. This is something we have been contemplating and certainly the gain on sale in this environment would be significantly less than what we saw in prior years. At this point, we've put pencils down on that and whether we do it in the future also depends on issues like funding. But with the overhang of cash, we've had the ability to go out and collect deposits. Given the CPRs on the portfolio, we don't see any near-term funding constraints that would make it less profitable for us to hold those on our balance sheet.
Scott Kavanaugh, CEO
I believe we all agreed, David, that part of the issue involved loans to capital or multi-family to capital ratios, and our clients were exceeding our capacity. That's why we were focusing on securitization, but we feel it's not necessary at this point. Regarding deposits, as we mentioned last quarter, when interest rates were at zero, our loans-to-deposit ratio was in the low 80s, which was impacting our clients. We had to limit some larger clients by either refusing additional deposits or adjusting our relationships. However, as Dave mentioned, we don't foresee any problems there. We believe we have leverage to increase our deposit intake and reconnect with some of our long-term client relationships. Overall, we feel confident that we can meet the demand Dave referenced.
David Feaster, Analyst
That's great. Thinking about how this may impact the margin, the liquidity drag affected the quarter. You've been proactive in managing the balance sheet and utilizing that excess liquidity, which has already led to loan growth surpassing previous levels. As you plan to retain these gains, how do you see the margin evolving in the future? It appears this is likely the lowest point, and we should anticipate margin expansion ahead. Additionally, do you have any insights on updated rate sensitivity considering the balance sheet adjustments you've made with TGRF?
Scott Kavanaugh, CEO
I would say there are two key factors at play right now. The Federal Reserve is expected to raise rates in the next week or so, likely by 50 basis points. This will put pressure on banks as clients may begin to request higher interest rates. Additionally, one of our ongoing challenges over the past year has been excess liquidity, which has negatively impacted our margins. However, our loan demand remains very strong, and we are actively utilizing that capacity. We finished the last quarter with a loan-to-deposit ratio of about 82% or 83% and have since improved to 88%. We aim to increase our loan-to-deposit ratio even further. Dave, would you like to address this?
David DePillo, President
Sure.
David Feaster, Analyst
What are your expectations regarding the loan yield?
Scott Kavanaugh, CEO
Yeah, I think looking at, looking at our now like you said, this should be the trough as we deployed a significant amount of cash and will continue through this quarter, will rebound. I think we will have a nice rebound in the second quarter. Maintaining that margin going forward is the big issue. The good news for us is the long end of the yield or middle to long end of the yield curve adjusts relatively early. As we have burned through our lower yielding pipeline since we start to fund out at higher rates on average probably 100 basis points higher than what we're doing in the last several quarters. We're going to start to see the effect on maintaining and potentially expanding margin. So having a very robust pipeline at higher rates and continuing to build up by point at higher rates will hopefully offset any pressure we see on the funding side of the balance sheet. But as Scott says, if the Fed continues to move significantly and aggressively, there will be pressure and it will all depend on what happens with the middle of the long end of the curve. The good news is we fund assets at such a rate that we're able to remix our portfolio yield. I would say faster than most banks can.
David DePillo, President
I will add that in the last rate cycle, deposit betas were quite slow as you'll remember. It seems like the Fed is moving very quickly, and you're going to see bank liquidity decrease fairly quickly as well. Still, that passive betas in this scenario may move a little quicker than we've seen. So we have a bit of that headwind for all banks, I think. Competition could remain tight, as Scott mentioned, and then also depends on how the bond market digests these rate increases and how the yield curve looks, and how this will perform. But we are, we have trended slightly more asset sensitive. We're still slightly liability sensitive in the first year and then asset sensitive in the second year in our kind of scholastic academic modeling.
David Feaster, Analyst
Okay, that's helpful. And then you guys are working on a ton of really exciting things. I was just hoping that you could maybe expand on some of the new offerings that you talked about, the SBA and investment management, what exactly are you working on there? And then just any updates on the NYDIG partnership and where we are with that roll out has obviously gone well, you've already written up that investment, but just curious as you've gotten deeper into that partnership, have you started to identify other opportunities and seeing any additional benefits from that relationship?
Scott Kavanaugh, CEO
David, you want to take the SBA?
David DePillo, President
Sure. As a bank strategically, we've been involved in SBA 7A lending for, I would say, the last five or six years. But growing that to a larger, more significant footprint has always been aspirational for us. Due to some merger-related issues that were going on, there were some available resources in the market that we were able to take advantage of. So we opportunistically have hired a new best production and are adding additional sales force to expand those offerings across our entire footprint and really our Florida operation never really had a viable 7A option. We certainly haven't really exploited that in Texas and we're now expanding in California. So we see that as a significant growth area for us within our suite of commercial products. On the front of expansion, what we would consider more of our fintech initiatives, the NYDIG relationship is obviously significant and important for us to prove out the concept that Bitcoin can be facilitated through traditional bank rails and not necessarily in a less secure environment like the majority of those transactions are happening today. We're very close to achieving our rollout on that product. We're working with our regulators to make sure they're comfortable and coming to the finish line on that. Given where our platform is and our strategic relationship with our core provider, there are significant opportunities not only on the deposit side but also additional fee income side that we continue to explore together, which is heavily focused on providing services to fintechs that are looking for strategic bank partnerships. That market is very robust, deep, and it's very exciting. So we're looking beyond just the crypto world and are exploring a lot of opportunities that there are very few banks taking advantage of today, and we feel that's going to be a great growth area for us going forward.
Scott Kavanaugh, CEO
On the investment management front, David, we have added our first employee as a relationship manager in Florida. We have also successfully received our trust powers in Florida. I think our branch here in Texas opens in less than two weeks at this point. Our employees are going through training right now, and we're in the final stages of getting them launched, at which time we will be seeking trust powers in Texas. I believe we're about to onboard our first trust relationship in Florida, and we've received quite a few requests for proposal on investment management. Every one of those leads has come out of First Florida Integrity or TGR. We are highly encouraged by that relationship that we've already established with the folks in Florida. We are off to a great start, being able to do ancillary business both on the investment management and trust side. By the way, when we did all the modeling of our two companies coming together, we never contemplated having any of those relationships in place, nor did we think they would have an impact monetarily. So it only further adds to the benefits of having done that transaction.
David Feaster, Analyst
That's great, great call, everybody. Thank you.
Kevin Thompson, CFO
Thank you, Dave.
Scott Kavanaugh, CEO
Thank you.
Operator, Operator
Our next question will come from Matthew Clark with Piper Sandler.
Matthew Clark, Analyst
Good morning, gentlemen. Maybe just to close the loop on the loan and deposit growth. I'm trying to get a sense for what you're budgeting in terms of deposit growth for the year. Obviously trailing the strong loan growth this year, it sounds like the pipeline's pretty strong as well, and you've got some flexibility to take a lot of deposit ratios up further, but trying to get a sense for how you're thinking deposit growth might come through for the balance of the year?
Scott Kavanaugh, CEO
Matthew, frankly the reality is we've been curtailing deposit growth because we've had such an overhang of deposits. I mean, last quarter, I believe very close to it, on average, we had about $1.2 billion of excess deposits, which was a lot that they needed to put to work, and we're going to wind up putting it to work. It's one of those things that at the same time, with the Fed increasing rates and all those things going on, right now, we're turning the spigot back on. But we also don't want to be at an 80% loans to deposit ratio because that has a dramatic effect on our net interest margins.
David DePillo, President
One of the other issues we faced in the first quarter is that typically, we experience seasonal runoff in a lot of our large relationships. So the fact that we even had positive growth in our commercial depository services is a testament to how rich those relationships are. Usually, that's a negative during this time of year. As far as going into those balances, we'll start rising and be available to offset some of the excess funding that we contemplate going into the second quarter. But as you have always noted, our ability to generate assets has never been an issue. Our ability to maintain deposit growth has always been our biggest issue, and it will continue to be our biggest challenge going into this increasing rate cycle. However, having no real wholesale exposure unlike in years past and having solidified our presence in the commercial deposit side of the business over the last several years has really positioned us for large-scale growth in the deposit side that we can moderate and temper as needed. So we feel good about even with expectations having much higher fundings and lack of loan sales, we feel good about our ability to keep our deposit growth somewhat commensurate.
Scott Kavanaugh, CEO
We are currently 99% core funded, which is a significant improvement from the last cycle of high-interest rates when we were only 70% core funded and had to rely on borrowing. This time, we are in a much stronger position and have advantages that we didn't have before.
Matthew Clark, Analyst
Yes. Okay. Great. And then just on expenses, maybe for Kevin. It does seem like there's some excess in there in seasonality that should come out in the upcoming quarter. You got cost savings too from the deal. $44 million, $45 million seems like the right run rate going forward? But I want to make sure, I'm kind of in the ballpark.
Kevin Thompson, CFO
Yes. Some expenses are seasonal and there are excess expenses from the app, probably about a million or so from the merger in this quarter. However, you do need to anticipate that we will have growth going forward in as we're expanding quickly. We'll have growth both in our production areas as well as our support areas to support this growth engine. So we do anticipate our expenses increasing through the year, but our efficiency ratio remaining in the low 50% area.
Matthew Clark, Analyst
Okay. And then Kevin, while I have you, just trying to hone in on a core margin. Do you happen to know the accretion contribution in the quarter from the deal, if any? And any other kind of unusual recoveries or anything like that might enhance that reported margins?
Kevin Thompson, CFO
The accretion income in the quarter was $330,000. We also discussed the sale-leaseback benefit of $1.1 million in the release. There was an MSR adjustment down of about $200,000.
Matthew Clark, Analyst
It's okay. I'll take those. I mean, we got the 11, but the 200 is helpful for.
David DePillo, President
Really. If you're just talking margin, I apologize. I misunderstood your question. It really just be the accretion income.
Kevin Thompson, CFO
Yeah, the recovery is through ACL.
Matthew Clark, Analyst
Okay. And then Scott, just on M&A. Your discussions of late and the prospect for maybe getting something done in Texas to kind of provide you with that infrastructure that you might need.
Scott Kavanaugh, CEO
While we still continue to look in areas across the country, I would say that ever since bank stocks have gotten beaten up a little bit it seems like it's gotten a little quieter. There was quite a bit of activity when I think all banks' stocks were trading higher. But a lot of that has tailed off. Right now I'm not hearing much out of Texas. But we continue to look across Texas, Florida, California, anywhere that we think would be additive we continue to focus on. So we're looking for opportunities, but our stock value has depreciated a little bit relative to tangible book value. So I think that may be creating a bit of a muted scenario for M&A.
Matthew Clark, Analyst
Understood. Thank you.
Operator, Operator
Thank you. Our next question comes from Steve Moss with B. Riley Securities.
Steve Moss, Analyst
Good morning, guys.
Scott Kavanaugh, CEO
Morning, Steve.
Steve Moss, Analyst
Maybe just circling back to Dave to your comments about loan yields. They are up about a 100 basis points. Was that across the board or more specific to multifamily and commercial real estate? Just kind of curious there.
David DePillo, President
I think it's kind of on average, a 100 basis points is really across all product lines. So multifamily, say, within kind of the low three's and that's now in the low to mid fours, depending on where the yield curve is day-in and day-out. But we have seen kind of a 100 basis points rise on new pipeline that's coming in. The good news is, with the rate increases coming in, we are going to get the benefit of that segment of our CNI portfolio that's kind of been sitting libor based at a fairly low rate. I would expect on average about 100 basis points higher on new funding coming in. That will start in the latter part of the second quarter as we gradually work through the rest of some of our lower-yielding pipelines.
Steve Moss, Analyst
That's helpful. And just maybe on the variable rate, just curious what percentage of the portfolio, assuming a large chunk of the C&I portfolio is variable rates, 4% of total loans perhaps is variable rate these days?
David DePillo, President
Last time I looked, that was 19%.
Scott Kavanaugh, CEO
Yeah, 17% to 19%.
David DePillo, President
That's right. And that's been increasing but it's about 19% currently. To add on that, hope that excludes those loans that have a fixed period if that these trends translate into variable over time. And in this rate environment, we'll probably see more of those graduate to the variable period over time.
Steve Moss, Analyst
That's helpful. And then in terms of originations here, obviously a very strong quarter here. You guys indicated the pipeline is strong. Just curious any updated thoughts as to how you're thinking about total originations for 2022?
David DePillo, President
The first quarter was stronger than expected. The second quarter is expected to be even stronger. The third quarter may involve some adjustments as clients acclimate to new rates and we enter the typical summer slowdown, likely resulting in a dip to historical levels. We anticipate the fourth quarter, which is usually our strongest, will reflect this trend. At this stage, we estimate a low end of $4.5 billion for the year based on the current run rate, with the possibility of exceeding that depending on demand.
Steve Moss, Analyst
All right, on the wealth management and trust side of the business, I hear you guys in terms of good asset generation here. Is this a good run rate for the fees there or if there's anything onetime in nature?
Scott Kavanaugh, CEO
I believe the fees are still averaging between 60 and 65 basis points, which is a reasonable measure. The market has declined, impacting our overall balances, particularly on the FFA side more than on the trust side. Our pipeline remains strong, but in times of significant market downturns, we shift our focus from attracting new business to engaging with long-term clients and discussing market developments. Our team has done a great job providing insights to clients about the current market conditions, which is reflected in the decrease from 5.7 to 5.5. Although there was another market decline at the start of this quarter, we are still acquiring a good amount of new business and also ensuring that we are retaining existing business.
Steve Moss, Analyst
Okay. Great. Thank you very much for taking my questions.
David DePillo, President
Thanks, Steve.
Scott Kavanaugh, CEO
Thanks, Steve.
Operator, Operator
Our next question comes from Gary Tenner with D.A. Davidson.
Gary Tenner, Analyst
Guys, good morning.
Scott Kavanaugh, CEO
Hey, Gary.
Gary Tenner, Analyst
Hey. So I wanted to ask on the SBA initiative. Are you thinking of that as a flow business for gain on sale or is that going to be more of a portfolio as you grow that?
David DePillo, President
So we've modeled it kind of what you would traditionally see, which is a little more sales as we build it. So maybe 50% in the market and then we curtail it after a year or so down to about 25% going to market. But I think after three years, the majority of it will be retained. So the way we look at it is we want it not to be an earnings drag as we build it. Having a little bit of gain on sale offset some of that operational costs will get us to net profitability fairly quick, and then we'll start curtailing the sales down and use it more as a traditional portfolio product. That makes sense?
Gary Tenner, Analyst
Thank you. Regarding the annual securitization that you won't be doing this year, did I understand correctly that even if you were to securitize, you would still need to allocate capital to it for the entire life of the asset, even after securitization? So essentially, there isn't much impact aside from not receiving the upfront gain?
Kevin Thompson, CFO
That's correct.
David DePillo, President
That's correct. So if we do all loan sales until the market, we don't have to hold requisite capital. So if we do some more timely sales, if needed, it won't have any impact on risk-based capital going forward.
Gary Tenner, Analyst
Okay, that's helpful. Thank you. And then for my last question, you mentioned expenses. Can you elaborate on customer service costs as we’re clearly seeing front-loaded rate increases? Is there a quicker and sharper increase in that area as rates rise?
David DePillo, President
Yes. What we experienced as some of our larger clients expect more of a Fed funds tied relationships. So as the Fed moves, we have a model that we will move somewhat commensurate. Some of the average realized rates tend to lag fairly well, but some of the larger ones will ramp down. So we have modeled in some of the higher betas on some of the bigger clients. Our expectations are that line item will grow over the year. Do we don't really give modeled guidance on that?
Kevin Thompson, CFO
We don't, but it's definitely these are more sophisticated clients with a higher beta than others. It won't be 100% beta. We still have good relationships there, but we expect a higher beta. The good news is that compared to wholesale funding, even if we have a higher beta, that will be much cheaper than wholesale money.
Gary Tenner, Analyst
Even if you don't provide specific detail, can you give us kind of the amount of deposits that are reflected in that line item that we could model whatever deposit betas onto that we want to or pass-through assumptions?
David DePillo, President
Typically, it's been around a billion dollars of funding that we've kind of had prior sensitivity to drive it up there.
Gary Tenner, Analyst
Thank you.
Operator, Operator
Our next question comes from Andrew Taro with Stephens.
Andrew Taro, Analyst
Hey, good morning.
David DePillo, President
Morning, Andrew.
Andrew Taro, Analyst
Back to the last one on customer service costs. I think I heard you about a billion or so of deposits. You'd kind of pay expense outline item. Is that relatively similar to the balance back in 2018/2019? Maybe we can use that as a proxy?
David DePillo, President
It was a little bit higher at this point back in those days as far as those core relationships collectively.
Kevin Thompson, CFO
And I think it was about even.
Andrew Taro, Analyst
I noticed the $75 million buyback authorization and the growth outlook appears strong. With that in mind, should we consider the buyback as a way to take advantage of any market volatility? Scott, could you share your thoughts on the willingness to be more active with the buyback at this level?
Scott Kavanaugh, CEO
Based on our modeling, which shows a stronger position than before, we believe this will positively impact our earnings. As you're aware, we conducted a subordinated debt offering and have some excess capital. We have consistently observed that our trading multiples are lower than those of our peers, and we are ready to defend that position. I think it adds significant value, so I want to emphasize that we will be active as long as the stock price remains at this level or lower. We're prepared to take action, and that is our plan.
Andrew Taro, Analyst
Very helpful. I appreciate it. Last one maybe for Kevin, just any updated expectations on tax rate for this year?
Kevin Thompson, CFO
Yes. You've seen we've had some really good benefits in our tax rate over time. As we have growth outside of California, we'll see our tax rate decrease. We have other strategies going on, including an increase in our loans, some housing tax credits, and our new Foley portfolio we inherited from our acquisition. There are other strategies that we are working on. But the biggest driver is loan growth outside of California, and we are seeing that in our pipeline. So we will see it tick down. It won't be a huge move, but over the next several years, we'll see it gradually move down.
Andrew Taro, Analyst
That's it for me. Thank you for taking my questions.
David DePillo, President
Thank you.
Scott Kavanaugh, CEO
Thank you.
Operator, Operator
Thank you. This concludes our allotted time for today's question-and-answer session. I will turn the call back over to Mr. Scott Kavanaugh for closing remarks.
Scott Kavanaugh, CEO
Thank you again for participating in today's call. I'm very proud of how we started this year. All our business lines are doing exceptionally well, and I'm very pleased about our ability to generate strong and stable results for our stakeholders. As a reminder, our earnings report and investor presentation can be found on the Investor Relations section of our website. Thank you, and have a great remainder of your day.
Operator, Operator
Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.