Earnings Call Transcript - FFWM Q3 2023

Operator, Operator

Greetings, and welcome to First Foundation's Third Quarter 2023 Earnings Conference Call. Today's call is being recorded. Speaking today will be Scott Kavanaugh, First Foundation's President and Chief Executive Officer; Jamie Britton, First Foundation's Chief Financial Officer; and Chris Naghibi, Chief Operating Officer. Before I hand the call over to Scott, please note that management will make certain predictive statements today 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.

Scott Kavanaugh, CEO

Howdy, howdy from Dallas, Texas. Thank you for joining us for today's third quarter 2023 earnings call. The turbulence that rocked the financial industry in the first quarter has largely abated across the entire banking sector. With stability normalizing, we dedicated the entirety of our third quarter to unwaveringly executing our strategic initiatives of improving our loan-to-deposit ratio, increasing overall loan yield, and improving the sensitivity of the loan portfolio against higher interest rates. Although we have made great strides in our achievements, there remains much work to continue to solidify earnings, further reduce our loans-to-deposit ratio, and further decrease the overall sensitivity of our balance sheet. Although there remains much uncertainty with the Fed's fight against inflation and the geopolitical events that recently transpired, management believes this is a troughing quarter for pretax provision net revenue or PPNR, based on the events as we presently know them. If this is the case, we should continue to see improvements in our balance sheet and core earnings. I'm exceptionally proud of the commitment and diligence exhibited by our entire team. From investment management, trust, banking deposits, and lending, our team is dedicated to delivering exemplary results during what I believe to be the most challenging time I've experienced in my professional career. As we reflect upon the last quarter, we are delighted to report continued improvements in our loan-to-deposit ratio, increased average yields on our loan and securities portfolios, and improvements in our capital ratios. For the third quarter, we reported net income attributable to common shareholders of $2.2 million or $0.04 a share for both basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter at $16.19, an increase of $0.07 from the $16.12 at June 30, 2023. Total revenues were $63.8 million for the quarter, an increase of 4.4% from the $61.1 million as of June 30, 2023. Net interest income increased to $52.1 million or by 6.3% as compared to the $49 million as of June 30, 2023. Non-interest income was $11.7 million for the quarter compared to $12.1 million as of June 30, 2023. Our net interest margin was 1.66% for the quarter as compared to 1.51% as of June 30, 2023. Our efficiency ratio was 99.7% during the quarter as compared to 92.5% as of June 30, 2023. Our adjusted return on average assets, a non-GAAP measure, ended the quarter at 0.08%, down from the 0.11% reported as of June 30, 2023. Our loan-to-deposit ratio showed continued improvement, decreasing to 95.1% as of September 30, 2023, from the 97.9% as of June 30, 2023, and 108.4% from September 30, 2022. We remain committed to continuing to improve this ratio through a combination of strategically reducing lower-yielding loan balances and continuing to grow deposits. Our deposit pipeline remains robust as we look into the fourth quarter. We firmly believe that this favorable trend will continue. 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 opportunities that support sustainable growth. Our deposits remained at $10.8 billion in the third quarter versus the second quarter, an increase from the $9.5 billion as of September 30, 2022. Core deposits totaled $8.1 billion for the third quarter. Non-interest-bearing demand deposits accounted for 22% of total deposits as of September 30, 2023 compared to 25% and 37% as of June 30, 2023 and September 30 of 2022. Brokered deposits accounted for 24.6% of total deposits as of September 30, 2023 compared to 20.4% as of June 30, 2023. As I said, our deposit pipeline remains robust heading into the fourth quarter. Our branch network remains key to the success of our deposit strategy. Chris will discuss initiatives we have to expand our core deposits and our branch network. We also continue to see resilience in our digital banking channel. The platform has continued to serve as an invaluable source of new depository accounts, 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 our markets as well as to digitally-forward prospects across the country. We recently completed an upgrade utilizing MANTL for our front-end account opening process. Early indications have shown significantly increased pull-through rates for account opening while requiring less direct involvement from our personnel. We are truly encouraged by this ongoing trend as it reinforces our commitment to providing accessible and convenient banking solutions to our valued clients. We have continued to improve our insured and collateralized deposits to approximately 87% of total deposits as of September 30, 2023 as compared to the 88% as of June 30, 2023. We maintained a strong liquidity position of approximately $4.3 billion as of September 30, 2023. Our liquidity to uninsured and uncollateralized deposits ratio was 3.1 times. Borrowings were $984 million as of September 30, 2023 as compared to $802 million and $1.3 billion as of June 30, 2023 and September 30, 2022. I think it is interesting to note that the average borrowings for the quarter were $587 million compared to the $1.7 billion for the prior quarter. The decrease in average borrowings was due to the continued paydown of additional borrowings which were used to increase on-balance sheet liquidity following the banking industry's events that occurred during the first quarter and into the second quarter. As the deposit levels have stabilized and begun to return to previous levels, some of the additional borrowings were paid down. During the quarter, we added an additional $800 million of term FHLB advances that were puttable. The average cost of borrowing was reduced by over 1% versus the overnight rate. Jamie will provide greater insight to our borrowing activity. Turning to loans, credit quality continues to serve as a crucial differentiator for First Foundation. Our non-performing assets to total assets were 0.1% as of September 30, 2023 as compared to 0.12% as of June 30, 2023. Loan balances were $10.3 billion, a reduction of $302 million for the quarter as compared to $10.6 billion for June 30, 2023. Chris will give a further breakdown of loan activity during the quarter. Looking at our Wealth Management and Trust businesses, although markets have remained volatile, FFA has seen strong performance and secured new client relationships throughout the quarter. First Foundation Advisors had $5 billion in assets under management as of September 30, 2023. This is down $300 million from the $5.3 billion in AUM as of June 30, 2023. The decline was largely due to the volatility in the market. Trust assets under advisement ended the quarter at $1.2 billion as compared to the same in June 30, 2022. Margins for our fee-based divisions remained high, and our new client prospects remain promising for both advisory and trust services as we head into the fourth quarter. In the third quarter, I am pleased that CNBC and Barron's recognized First Foundation Advisors amongst the top wealth advisers in the country. Jamie will provide more detail on the Trust and Advisory businesses. 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 remain steadfast in focusing on the aspects of our business that we can control. And navigating through the ever-changing market conditions, our client-first mentality remains a foundation of our business and core franchise. 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?

Jamie Britton, CFO

Thank you, Scott, and good morning. Before discussing the quarter, I want to express my excitement about joining First Foundation at such a crucial time for the company and the industry. Despite the unprecedented market volatility presenting challenges not seen in a generation, I believe we have the right team to navigate this environment and strengthen our institution for our clients, teams, and communities. I've had the chance to connect with many of our team members over the past few months and have been very impressed. We still have work ahead as we build on First Foundation's success, and I appreciate each of you for your commitment thus far. I look forward to collaborating on the challenges and opportunities we face moving forward. Now, returning to the quarter, I will start with the balance sheet and our net interest margin, which improved by 15 basis points from 1.51% in the second quarter to 1.66% in the third. This improvement was influenced by several factors. Loan yields saw a modest rise of 4 basis points, as did yields on both the available-for-sale and held-to-maturity portfolios, at 76 and 18 basis points, respectively. These yield enhancements, along with shifts in loan mix, led to a 5 basis point increase in our earning asset yield quarter-over-quarter. The 76-basis point improvement in the available-for-sale portfolio yield was aided by new securities purchases, including $400 million of short-dated U.S. treasuries. We also acquired some Ginnie Mae agency mortgage-backed securities, which clarifies the differences in the available-for-sale portfolio's ending and average balances for the period. The complete quarter's benefits from these purchases will be reflected in the fourth quarter. We are maintaining a cautious approach amid the recent volatility at the longer end of the curve, but we are prepared to seize opportunities to buy high-quality securities at favorable yields if they arise. On the right side of the balance sheet, net interest margin saw a benefit from seasonal growth in our non-interest-bearing deposit portfolio, which I'll elaborate on shortly. Additionally, the costs of interest-bearing liabilities rose only 4 basis points despite the full impact of the FOMC's 25-basis point increase in early May and the partial impact of the recent 25-basis point hike at the end of July. On the interest-bearing liabilities, interest-bearing deposit costs increased from 3.72% in the second quarter to 4% in this quarter, partially offset by a reduction in average borrowing balances—some transitioning to broker deposits—and a decrease in borrowing costs, dropping from 5.14% in the second quarter to 4.16% in the third. Our balance sheet continues to be liability-sensitive, but to capitalize on some advantages sooner, we took out additional puttable advances from the Federal Home Loan Bank. As Scott has explained before, the FHLB holds the right to return these to us post-lockout period. In the interim, we can benefit from market expectations of future rate reductions. Since these new advances were added after the midpoint of the third quarter, we expect average borrowing balances to rise in the fourth quarter, along with the available-for-sale portfolio balance's dynamics. As I noted earlier, the quarter's net interest margin benefited from seasonal growth in our non-interest-bearing deposit portfolio. A portion of this portfolio comes from relationships compensated through customer service costs, which increased by $5.7 million or 30% quarter-over-quarter. Moving into the fourth quarter, barring market share capture or relationship growth, we anticipate seasonal trends will continue, leading to a decline from the September 30 period-end balances. Assuming a stable short-term rate environment, customer service costs will decrease in tandem with these balances. This would positively impact quarterly non-interest expenses, although the migration back to interest-bearing liabilities from the balances we will secure to mitigate runoff could negatively affect the fourth quarter's net interest margin. Aside from this dynamic, which is crucial for NIM and net interest income, we expect a stable rate environment to maintain positive momentum in other significant factors. Loans ended the quarter with an average yield of 4.75%, slightly above the quarterly average of 4.73%. However, due to yield enhancements in the securities portfolio and on-balance sheet cash, our earning asset yields closed the quarter at 4.66%, which is 10 basis points over the quarterly yield of 4.56%. Interest-bearing deposit rates averaged 4.03% in September compared to a 4% average for the quarter and a 3.86% average in June. We are pleased with the enhancements to our balance sheet. While we continue to manage concentrations within our loan portfolio, we grew the balance sheet by $211 million this quarter, from $12.8 billion in the second to $13.1 billion in the third, as we capitalized on opportunities to improve our interest rate position and support near-term earnings. We will keep monitoring the rate environment for chances to transition the balance sheet towards a more sustainable long-term interest rate risk profile and mitigate the earnings risk associated with future short-term rate hikes. Moving to the income statement and net interest income, while we observed a slight drop in average earning assets, a 15-basis point increase in net interest margin generated a $3.1 million or 6.3% rise in net interest income. A reduction in excess liquidity caused a marginal $560,000 decrease in interest income, while the shift to non-interest-bearing deposit balances and a $600 million overall decline in interest-bearing liabilities resulted in a more significant $3.7 million drop in interest expenses. Non-interest income fell by $381,000 this quarter, dropping from $12.1 million in the second to $11.7 million in the third. As Scott mentioned, we experienced a quarterly decline in assets under management, which is the main source of income and contributed to the decrease in fee income. Market volatility and net withdrawals were factors in these quarterly results, but we are very proud of FFA's performance. We continue to gain from new accounts, amounting to $77 million this quarter, while maintaining efficiency and recent improvements in operating margin. Outside of the customer service costs I previously mentioned, other non-interest expense categories totaled $39.5 million for the quarter, compared to $38.5 million in the second quarter. Notably, compensation and benefits, which decreased by $1.4 million this quarter, were at $19.6 million compared to $29.5 million in the third quarter of 2022. This reflects the difficult decisions made earlier in the year, and as Scott noted, highlights our commitment to focusing on improving operating efficiency and controlling discretionary costs as we work toward regaining operating leverage and achieve long-term steady growth in net interest income. Finally, addressing capital and liquidity, our continued management of the loan portfolio led to a 22-basis point enhancement in First Foundation's total risk-based capital ratio, which now stands at 11.98%. Our tangible common equity to tangible asset ratio ended the third quarter at 7%, aligning with peer levels while also providing a strong risk capital balance compared to peers, especially considering our held-to-maturity portfolios' favorable after-tax unrealized loss position of $75.2 million, equating to just 8.2% of tangible equity and only 58 basis points of tangible assets. Moreover, we have bolstered our liquidity position and maintain relatively low levels of uninsured and uncollateralized deposits, which faced the greatest vulnerability during the significant market turbulence we experienced earlier this year. Furthermore, insured and collateralized deposits account for over 87% of total deposits. Cash and cash equivalents of $819 million comprise 6.3% of total assets as of September 30, and our total available liquidity amounts to $4.3 billion, or 3.1 times our uninsured and uncollateralized deposits. We are satisfied with the stability we have achieved in our liquidity position. When factoring in both pledged and unpledged securities, we are comfortable with our current level of on-balance sheet liquidity. We will continue to identify opportunities to enhance our structural interest rate position, but we are confident in our current standing. Before handing it over to Chris for further details on our loan portfolio, deposit portfolio, and initiatives to grow our core deposits and further strengthen our balance sheet, I want to thank our team once again for their dedication to our company. The effort you've put forth this year has made a significant impact, and I look forward to supporting your ongoing success.

Chris Naghibi, COO

Thank you, Jamie. Good morning. As Jamie suggested, I will be talking to you today about lending, deposits, and a bit about our strategic direction. While we've seen a quarter with lower market volatility in the sector than in the previous two quarters, there is still much to be done. Last year, when interest rates started to rise, we originated more fixed-rate lending than we should have. Our goal is to continue to reduce that exposure and diversify into index plus margin-based pricing focused on conservatively underwritten C&I lending, where we prioritize relationships. We have and continue to make great strides towards this end goal. All of our departments have worked together to manage the strategic direction of our diverse loan portfolio, which as of September 30, 2023, remains composed of 51% multifamily loans, down from its height of approximately 54% as of Q3 2022, 32% commercial business loans compared to approximately 30% as of Q3 of 2022, 9% consumer and single-family residence loans, 6% non-owner-occupied commercial real estate, and approximately 2% of land and construction loans. From an operational perspective, we have challenged our lending departments to evolve and adapt to the current climate. We have pivoted to focus on what supports both our clients and our operational health, maintaining a cautious yet proactive approach to growing with all eyes on asset quality. The loan yields Jamie referenced were the result of quarterly originations, 91% of which was in the C&I lending space. Loan fundings comprised primarily of high-quality, adjustable rate C&I, SBA, and mortgage lending totaled $245 million, offset by loan payoffs of $546 million in the quarter. Our goal is to continue to drive down our commercial real estate exposure and have a greater balance between fixed and variable rate lending. Over the near term, we are taking a cautious protective lending approach with our existing multifamily portfolio. On a long-term basis, we need to be and will be more diversified overall on all of our underlying assets. Ultimately, this will gradually increase the bank's CECL reserves as a more balanced portfolio will have a naturally increasing reserve. From a philosophical perspective, I want to highlight that we are a relationship-based bank, borne out of our synergies with our high-net-worth clients from our partners at First Foundation Advisors. We do not focus on transactions, but rather stickier and more robust relationships. Offering products like margin lines of credit on low-leverage portfolios of assets under management can help deepen relationships with the platform while providing additional adjustable pricing and blunt fixed-rate interest rate exposure in the portfolio, maintaining a low-risk credit profile. Regarding risk management, our achievement in maintaining high underwriting standards is not solely a credit risk measure, but a reflection of our organizational culture strength. It shows how deeply our teams understand and resonate with the principles that have always guided us and that we do not sacrifice credit quality. This discipline is why we have been able to reallocate internal talent from originating loans to assisting with portfolio management, asset quality review, and an organic internal cross-referral network. Looking at the breakdown of loans that we have originated so far year-to-date, the percentages are as follows: commercial business loans, 90%; multifamily, 2%; single-family, 2%; and other miscellaneous loans at approximately 6%. It is always worthwhile to reiterate that the commercial business portfolio is diversified with no sector comprising more than a third of the portfolio and only 12% of the portfolio exposed to commercial real estate. Our decision to temper fixed-rate lending, especially in the multifamily segment, should not suggest a lack of confidence in the asset class. In fact, now more than ever, workforce housing is in demand. There is a housing affordability crisis in the United States which cannot be ignored. The Housing Affordability Index just hit a new record low of 90. This means that housing affordability is down approximately 50% since 2021 alone. And since the peak in 2012, housing affordability is down nearly 70%. The cost of buying a home versus renting one is at its most extreme since at least 1996. The average monthly new mortgage payment is 52% higher than the average apartment rent according to CBRE analysis. The last time the measure looked this disconnected to wages was before the 2008 housing crash. Even then, the premium peaked at 33% in the second quarter of 2006. There is no state in the United States where housing affordability is worse than California, where seven of the 12 least affordable housing markets are found. California, a rent-controlled state, also happens to be where approximately 88% of our multifamily loans are located. As a reminder, having made a strategic decision years ago to be cautious of financing newly built properties, the bank has limited exposure to the Sunbelt region and even more limited exposure to high-end luxury apartment units. This shift illustrates more than a simple portfolio adjustment. It shows our agility, unity, and shared vision with every team member contributing to a refined, collective, strong credit culture. Regarding our multifamily portfolio, its strength is evident in both its credit quality metrics and its low NPA ratio for the third quarter of 10 basis points as highlighted by Scott earlier. As you have come to expect, our underwriting remains staunchly conservative with weighted average LTVs of 55% for multifamily loans and 54% for single-family loans. Additionally, we are seeing the average duration of the portfolio continue to move downward just below three years, which would only further continue to support the repositioning efforts of the diversifying of its underlying assets. Our deposit growth, particularly in insured and collateralized deposits, mirrors our clients' trust. The proven high-level personal touch, combined with our strategic stance on rate adjustments, has fostered a deeper relationship with our clients, distinguishing us in the marketplace. Like our lending operations, we have a bifurcated strategic vision. Liquidity and funding have been the focus near term, while over the course of a longer term, we need to drive core funding back up, and we will do that. Now that funding appears to have stabilized, we are pivoting to a campaign where we aggressively look to grow core funding. This will allow us over time to drive down any overdependence on broker deposits and home loan bank advances. It is particularly important that we highlight the entire company's commitment to bolstering the growth of the bank's deposit franchise. From our First Foundation Advisors family to our Trust team, from in-branch tellers to the person that answers the phone when you call the digital branch, it is everyone's job to collaborate and champion the strength of what this platform can do. The breakdown of our deposits is as follows: money market and savings, 29%; certificates of deposits, 28%; interest-bearing demand deposits, 21%; non-interest-bearing demand deposits, 22%. Our deposits are diversified by geographic distribution with California accounting for 36% of total deposits, Florida at 17%, and Texas at 8%, which makes up the majority of our deposit portfolio with Nevada, Hawaii, and other states making up 39% of the total. I'm also pleased to reiterate that our digital branches online account opening process has been completely overhauled to incorporate the latest in Plaid technology for seamless instant account opening and funding with real-time risk mitigation and fraud detection. Since its implementation on August 15, we have seen our application abandon rate drop from 53% to 23%, our completed applications grow from 63% to 94%, and our application approval rate increase from 46% to 66%. All of this was accomplished with a fully automated submission rate of 65%, meaning that no manual oversight was needed to create an account and instantly fund it. The second phase of this project will also be a rollout of the same technology into our physical branches, which should prove to create a best-in-class new account opening process, which will also be an elegant, fully digital solution. Additionally, our next focus will be partnering with our esteemed branch employees to aggressively grow our granular core retail deposit franchise, as I noted earlier. We will ask them to rise to the challenge of being the backbone of our institution because the growth of our retail channel is integral to our resilience and continued success. Before we move to questions, I'd like to take a moment to express my profound gratitude to every member of our team. From those in customer-facing roles to our back-office heroes, it is your commitment, mutual support, and shared aspirations that have not only steered us through recent challenges but also fortified the very culture that makes us who we are. I will now hand the call back to the operator for questions.

Operator, Operator

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

David Feaster, Analyst

Hey, good morning, everybody.

Scott Kavanaugh, CEO

Hey, David. Good morning.

David Feaster, Analyst

Good morning. I was hoping maybe we could elaborate on some of the funding dynamics that you talked about, Jamie. On the shift in the deposit mix, maybe less reliance on some ECR deposits. Could you maybe just elaborate on that trade? And then maybe more broadly, glad to hear the deposit pipeline is strong. Curious just how you think about the deposit outlook. Obviously, there's a lot of dynamics that have been talked about here and initiatives, but just curious where you're having the most success immediately and maybe some of the timeline for that branch deposit initiative that you're working on?

Jamie Britton, CFO

Sure. The changes in the third quarter, as I mentioned, primarily in non-interest-bearing deposits. We grew, as we typically have as the seasonal inflows increase to their peak, which usually occurs in October, the customer service costs increase in lockstep with those. But as I mentioned, as we moved into the fourth here, as payments go out to the municipalities for tax purposes and to the insurance companies for annual premiums, we would expect those to decline in the fourth and then start to rebuild again in the first. We moved some of our borrowings to broker deposits in the quarter as well. And as Chris mentioned, we are focusing on our deposit initiatives. The primary focus will be in the retail branches, and so I expect to see some continued growth in the coming year from all of our markets as we attempt to reduce the amount of time in-branch and get out to customers going forward. I'll let Chris speak to anything else on the early success or the longer-term timing of the initiatives.

Chris Naghibi, COO

Yeah. David, good to hear your voice as always. The branch network has been what I would call one of the things that we need to really focus on more. It was a little under-focused on in the last several years, largely because we had some of the other initiatives going on. And one of the benefits we had to streamline our focus, and I guess if you want to pull it out of the contagion period and some of the changes we've made, is we've been able to really focus on the things that we want to look at. The digital branches rollout of technology was a huge part of that, as you heard. But obviously, getting back to our core values with the relationship focus and bringing bankers with us when we go out on meetings is so imperative to our success. And I think that puts a face to the name. You get a lot of this collaboration, and I think that really helps bring in deposits. On the lending side, we've also helped enable that by requiring things like a deposit relationship on what would otherwise be transactional relationships. Operating accounts, primary banking relationships. It's really the first question that we ask when we think about the bigger picture of our client relationship and how they can mutually grow with us. We've also brought treasury management services downstream, and we're planning on growing with small businesses in the community that go into the middle market space if you will, that are growing into bigger spaces. And one of the things that we haven't been able to offer them in the past was treasury management services a la carte, which we've also focused on. All this to say, I expect the growth in the retail physical branches, as Jamie noted earlier as well, to continue to grow. We're really looking to start the culture and push aggressively now in the fourth quarter. I would expect to see the benefit of that starting Q11.

Operator, Operator

Your next question comes from the line of Andrew Terrell with Stephens. Your line is open.

Andrew Terrell, Analyst

Hey, good morning.

Scott Kavanaugh, CEO

Good morning.

Andrew Terrell, Analyst

Maybe just to start, I wanted to get a sense on the loan yield side, just how the new origination yield of 8.3% compares with the yield on the payoffs and paydowns you saw this quarter? And then just how much in quarterly loan payoffs and paydowns you expect over the next 12 months?

Jamie Britton, CFO

Most of the payoffs that we saw during the quarter were also in the C&I category, and so I would say that the loan payoffs were similar to what we saw in the new payment yields for C&I.

Scott Kavanaugh, CEO

No. There was a pickup of something.

Jamie Britton, CFO

We'll get back to you on that. But the answer was, I would say seasonally some of the multifamily loans or the lower-yielding loans. I would say the CPRs the last several months, there in the summer months, were slower. We're starting to see not significant but a bit of a pickup in terms of payoff requests. We think that will continue. And of course, as we look into the fourth quarter, the yields are still in that 8.30-8.40 range for the C&I stuff that we've got going forward, which a lot of that is going to be tied to the deposit flows as well that we talk about when we talk about a pretty healthy pipeline of deposits.

Andrew Terrell, Analyst

Yeah, that's kind of where I was going with it. It looked like the C&I payoffs were kind of heavy this quarter. To the extent C&I balances are more stable, and we see maybe a little pickup in the multifamily and single-family paydowns, you should see more tailwinds to loan yields in coming quarters. Is that fair?

Scott Kavanaugh, CEO

Yeah. If you look back at prior years, and of course, this one is different just in the sense that rates have risen a lot. But if you look at the prepayments or refinancing activity in multifamily, it's always been extremely slow heading into October. And it's usually around mid-October, November, December that you start to see activity in the multifamily pick back up. Plus, we've got an initiative that we're really working on right now to try to roll some of the lower coupon multifamily. That's starting to take root in terms of repositioning some of the lower yields on that multifamily. We've identified, I would say probably $300 million, $400 million of what we think are good assets to reposition and we're starting to reach out to those borrowers. And we're initially having good success in talking to those. But again, you won't see that activity until probably late November, December and heading into the first quarter.

Andrew Terrell, Analyst

Great. I really appreciate all the color there, Scott. And then last one for me. I know the customer service cost expense can be a little difficult to model sometimes. Just hoping you can help us out with maybe what you're expecting in terms of customer service cost expense in the fourth quarter?

Scott Kavanaugh, CEO

What I've mentioned in previous years, and I believe this year is no different, is that typically about 20% to 25% of the MSR deposits tend to flow out due to taxes and insurance payments. For example, in California, tax payments are due in mid-November, which is when we see a significant portion of those deposits leaving, as Jamie mentioned. The fourth quarter usually sees a decline in balances since the peak occurred in the third quarter. So far in this quarter, balances have remained relatively stable, but I expect this quarter will follow the usual seasonal pattern where we see some deposits used for tax payments. I anticipate a decline in those deposits between 20% and 25%. Then, we can expect to see those balances start to increase again in January.

Andrew Terrell, Analyst

Okay, great. Thank you for taking the question. I appreciate it.

Scott Kavanaugh, CEO

Yeah, you bet.

Operator, Operator

Your next question comes from the line of Adam Butler with Piper Sandler. Your line is now open.

Adam Butler, Analyst

This is Adam on for Matthew Clark.

Scott Kavanaugh, CEO

Hi, Adam.

Adam Butler, Analyst

I appreciate the commentary just now about the customers' service costs. If I could just tag along on the total expense number, I appreciate the disclosure of average FTEs down right around 20% in the third, during the third quarter. Just to get a sense, what is your appetite to cut more expenses going forward given just some of the headwinds?

Jamie Britton, CFO

Well, we'll continue to look for opportunities to drive efficiency for sure. We've already had three riffs, which as you can imagine, was pretty challenging, so we will continue to look for opportunities to reduce costs. But near term, I'd expect fourth quarter expenses ex customer service costs to remain at or around current levels from Q3. And then going forward, we'll continue to pivot as we can, depending on what happens with the rate environment and the balance sheet going forward. But at this point, we have no plans to do any future riffs, but we'll continue to focus on operating efficiency just as we always have. If you look at our non-interest expense as a percentage of average assets ex customer service costs relative to peer, we are a very efficient shop, and we pride ourselves on that, and we'll continue to do everything we can to maintain that or improve it going forward.

Scott Kavanaugh, CEO

I would just add that given the recent layoffs and restructuring, it has been quite challenging. However, we're operating with maximum efficiency.

Operator, Operator

There are no further questions at this time. I turn the call back to Scott Kavanaugh for closing remarks.

Scott Kavanaugh, CEO

Great. Thank you. Thank you, everyone, for attending today's conference call. We look forward to seeing you in the fourth quarter earnings call as well. Thank you. Have a great remainder of your day.

Operator, Operator

This concludes today's conference call. You may now disconnect.